Preliminary Results Announcement
Year Ended 28 February 2004
N Brown Group plc, the Manchester based direct home shopping, financial services and fulfilment company, today announces its preliminary results for the 52 weeks to 28 February 2004.
Highlights:
- Catalogue ranges expanded and marketing re-focused to drive growth in sales and market share
- Turnover up 2.9% to £470.5m (2003: £457.3m)
- Profit before tax, goodwill amortisation and operating exceptional items £49.1m (2003: £54.8m)
- Profit before tax £31.0m after impairment charges of £17.5m relating to write-down of fixed assets and goodwill in Teleview and Eunite, and £0.6m goodwill amortisation
- Total dividend per share for the year maintained at 5.84p
Sir David Alliance CBE, Chairman, said:
"The Group has outperformed the home shopping sector in what continues to be an extremely competitive retail environment. We are refocusing our product ranges, tightening credit limit policies, streamlining costs and improving sourcing to drive growth in sales and earnings."
Alan White, Chief Executive, added:
"We are in the process of transforming N Brown to become a more focused, multi-channel home shopping retailer. In particular, we are excited by the prospect of the launch of the television shopping channel and the opportunities within online retailing. Our emphasis on the core product ranges is beginning to reap rewards, and we are pleased with the progress made in revitalising the catalogues. Catalogue presentation is improving, and marketing is being focused on the niche areas where we believe our strengths lie."
For further information please contact:
N Brown Group plc
On the day: 0207 554 1400
Alan White, Chief Executive Thereafter: 0161 238 2202
Dean Moore, Finance Director
Gavin Anderson & Company
Liz Morley / Charlotte Stone / Louisa Hollins Tel: 020 7554 1400
Website : www.nbrown.co.uk
CHAIRMAN'S STATEMENT
Introduction
The year ended 28 February 2004 was one of transition, change and adjustment as the group concentrated on improving its competitive position in its core business while cutting out some lower profitability activities. New channels to market, notably the internet, telemarketing and a new joint-venture television shopping channel, will, we believe, result in new orders while improvements in the fashionability of our product ranges and presentation have already made our catalogues much more appealing.
These, and many other measures put in place by an active management team which has reviewed every aspect of our business over the year, will enable us to respond successfully to the ever increasing competitive pressure and the changes which are occurring in the way customers shop today.
Our overall aim is to be the leading direct marketing company for destination shopping, developing specific product niches for the 35+ age group. In the past year we have made good progress towards achieving this and we are continuing to implement the strategy this year with energy and commitment.
Group turnover for the year ended 28 February 2004 was up 2.9% at £470.5m, although profit before tax, operating exceptional items and amortisation of goodwill was down 10.5% at £49.1m, as highlighted in the group profit and loss account. The financial strength of the business, with net assets of £246.6m and interest cover of 9.0 times pre operating exceptional items and amortisation of goodwill, enables the final dividend to be maintained at 5.84p per share.
Home Shopping
Turnover from home shopping was up by 3.0% at £452.9m, with operating profit before amortisation of goodwill and operating exceptional items down 10.9% at £51.0m. The key issues behind the results were the detrimental impact of the postal strike in Autumn 2003 and a reduction of 1.6% in the rate of gross margin due to an increased proportion of sales from discounted activities and higher charges for bad debts.
Our key initiative has been to increase the level of fashionability of our product ranges in order to improve customer response rates. Customer choice has been extended, presentation improved within the catalogues and overlap of product ranges between the different catalogue brands tightened. The result has been a gradual strengthening of core product ranges and a slowly increasing share of overall sales from the more profitable main catalogues.
Credit is an important element of our customer proposition and the average interest bearing balance has increased significantly in recent years. We started to see some signs of increasing arrears early in the second half and we have taken corrective action by tightening up the credit limit policy across the board to avoid customers becoming over-indebted. This will impact on sales growth but should bring down the ratio of bad debts to sales next year. During the year we have increased bad debt provisions by £4m which accounts for half the reduction in the rate of gross margin.
The postal strike during October 2003 severely disrupted mailing patterns, particularly in the South East region, at a crucial point in the season. Whilst most of our deliveries are made by our own couriers, catalogue mailings and statements are handled by Royal Mail. The result was a significant loss of business, which we partially recovered in the pre-Christmas period by introducing a number of promotional discounts and free gifts, but these had a detrimental impact on both gross margin and marketing costs.
We have continued to be successful in increasing sales per customer, with a 4% uplift for established customers, including further success from pro-active order building and telemarketing activity. Our challenge is to increase the number of active customers on the database. Recruitment was more effective than the previous year resulting in a 5% increase in new customers. The established base however has seen a 2% decline.
We expect the expanded product ranges to drive higher response rates but we are also undertaking a range of promotional activities to stimulate response from non-orderers, including new catalogue formats and focused telemarketing and email campaigns.
The outlook for home shopping in its widest context is strong but there will continue to be a gradual shift from catalogues to digital media such as the internet and television shopping channels. Our e-commerce sales have been tremendously successful and have almost doubled to £28m during the year. We are now looking to exploit the ability of more of our customers to place their orders online as this results in higher order values, reduced operating costs and increased loyalty.
To participate in the growth of television shopping we have formed a joint venture with Northern & Shell Network Limited (which owns the Express group of newspapers) to create the Express Shopping Channel which will offer a wide range of merchandise. This venture, which will broadcast on digital television from Autumn 2004, will have initial start up losses but is planned to be profitable before the end of its second year.
As part of the strategic review of the group's activities we have concluded that the Teleview television rental business cannot produce an acceptable return on the capital invested, as the combination of lower retail prices and the wider availability of credit has made rental increasingly uncompetitive. We are presently seeking the optimum exit route, but this decision has given rise to an exceptional charge of £9.0m in this year's results.
Financial Services
First Financial provides financial services, primarily to our home shopping customer database. Operating profit was £2.4m, down from £2.7m the previous year. This was due to a reduction in second half income arising from changes implemented in the home shopping business which affected warranty income and the level of unsecured loans made. We still believe that there is strong growth potential in financial services, and we are reviewing opportunities to launch a credit card and expand into secured lending.
Board Appointments
I am delighted to welcome two new directors to the board. Dean Moore joined as our new group finance director in December 2003, and John McGuire has recently taken up the role of non-executive director and chairman of the audit committee. John has extensive knowledge of the banking and financial services sector, and succeeds Robert Youngjohns who gave us excellent service over 4 years before he was promoted to a post in the United States.
Outlook
We have made a number of improvements to the business in the last year but the retail environment is more competitive than ever. Sales for the first 10 weeks of the new financial year are level with the same period last year. We are continuing to make progress in the areas where we have clearly focused product offers. Sales of clothing and footwear are up by 2% but the reduced credit exposure is resulting in home and leisure sales being down by 5%.
We aim to develop the group by broadening our channels to market, and identifying product ranges and customer groups where we can establish a competitive edge, and where the demographic trends are most favourable.
The Autumn 2004 catalogues have a revised format and contain product range extensions which I believe will deliver further progress. We are excited by the prospect of the launch of the television shopping channel and the opportunities within online retailing. We continue to significantly outperform the home shopping sector, and I would like to thank our dedicated workforce for their contribution during another testing year for the group.
Sir David Alliance, CBE
12 May 2004
CHIEF EXECUTIVE'S REVIEW
Introduction
We are pleased to have further increased our market share of the home shopping sector. However, there are a number of challenges we have to overcome to re-establish a firm growth path for the business. In particular over the past year the catalogue home shopping business has continued to be under pressure due to the structural changes taking place in customers' shopping habits, especially from the increasing penetration of the supermarkets and value retailers and the wider availability of credit. Our progress in meeting these challenges was not helped in the autumn by the postal strike which disrupted mailings in our peak trading period.
We have an excellent customer database and a number of focused selling propositions but we also need to expand our channels to market, further develop our product ranges and improve our marketing to customers. During the year we have taken a number of initiatives to drive these changes.
Home Shopping
Turnover from our core home shopping activities was up by 3.0% for the year at £452.9m. Operating profit before goodwill amortisation and operating exceptional items reduced to £51.0m, although this still represents a margin of 11.3%. The principal reason for this fall is a lower rate of gross profit resulting from a reduced proportion of sales at full margin and a higher rate of bad debt. We have already taken steps, which are outlined in more detail later, which will reverse these trends.
Customers
The numbers of new customers recruited during the year improved by 5% due to a more promotional style of merchandise advertisements in newspapers and magazines and a significant increase in activity from brochures inserted within these publications. Sales per established customer rose by a healthy 4% but the overall number of these customers fell by 2%. The expansion of the number of catalogue pages and improvements to their presentation and promotion, as well as making our clothing and footwear ranges more appealing, are all designed to reverse the declining customer base trend.
Sales from our younger titles rose by 3% to £101m. The best performance came from Simply Be, which is targeted at the confident woman in the 35-45 age bracket with larger sizes in fashionable styles, where sales increased by 35% to £24m.
The mid-life titles, targeted at the 45 plus market, still represent 64% of total home shopping sales and increased revenues by 1% to £290m. Within this category the core J D Williams titles were flat year on year but Premier Man and our subsidiary company in Ireland had sales increases of over 10% on the back of strong recruitment performances.
House of Stirling, our door-to-door selling operation, continued its geographical expansion into the Midlands, resulting in a 30% increase in sales to £33m. We are investing in collections support for the field force to increase the proportion of debt collected each week thereby reducing the level of arrears, which has risen during the year.
Products
Our policy during the year has been to focus on the development of those ranges where we believe we have a strong selling proposition. We are delighted with increases in the second half of almost 5% for ladieswear, 18% for footwear and 8% for menswear, the latter after almost two years of declining sales.
These sales increases reflect the changes made to the composition of the catalogues in both Autumn Winter 2003 and Spring Summer 2004, where we have added a number of new pages but more importantly have expanded the choice of styles and price architecture.
Part of the increase in styles has come from in-season purchasing which allows new lines to be interspersed with existing products in our monthly leaflet programme. This allows us to compete more effectively with the high street retailers, whose ranges change frequently, and we are now seeing evidence that the new lines are outperforming those which were already in the main catalogues.
Whilst the Far East will remain our core sourcing region we are increasing the proportion of merchandise purchased from Eastern Europe and Turkey where we can buy reasonably small quantities on short lead times, affording us more opportunity to introduce ranges in-season as appropriate.
Home and leisure sales were up by 3% for the year, but growth slowed in the second half as we tightened the overall credit limit policy and eliminated interest free credit options for higher priced furniture and electrical items in the Home Essentials brochure, which proved to have an unacceptably high rate of bad debt. We will continue to sell these items but on interest-bearing terms; we still see opportunities to expand the ranges of product in the home and leisure segment and will be trialling ranges of occasional furniture and ornaments as well as craft and hobby products in our Autumn 2004 catalogues.
Channels to Market
The mix of demand played a significant role in influencing the rate of gross margin achieved for the year as a whole. Sales from full margin activities, such as catalogues and major leaflets, were down by 2% whereas sales from markdown and promotional offers rose by 12%, reflecting the importance of incentives and discounts for today's value conscious customers. This is also being seen in catalogue sales where multi-item offers are performing strongly.
We are also moving to increase the frequency of catalogue distribution, whilst eliminating a number of smaller leaflets, which we believe will give a better return on our marketing investment. In addition we are changing our marketing promotions to drive customers back to their catalogues with gifts and discounts, rather than increasing the number of leaflets.
Home shopping sales are increasingly being generated by positive action rather than passive order taking. During the year we increased the level of incremental sales generated by order building over the telephone by 25%. Similarly, the outbound telemarketing team increased sales by 5%, primarily from customers who had not placed an order up to that point.
E-commerce is playing an ever-increasing role in the business. Sales via the websites for our catalogue brands increased by 87% to £28m during the year. The first £1m demand week was achieved at the end of November and the upward momentum is being maintained. The greatest penetration of internet sales is on our youngest brand, Simply Be, where over 30% of sales are on-line.
The main stimulus to on-line ordering is still printed catalogues but we are now seeking to exploit the opportunities which e-commerce provides. We hold over 500,000 e-mail addresses which allows us to contact these customers at very low costs with special offers, and increasingly we see the opportunity to test new products and ideas cost–effectively on-line before investing in printed material. Consequently our strategy is to collect more of our customers' e-mail details as a powerful direct marketing tool.
Our websites to date have largely been a service for our existing customers. During the year we have been adding website addresses to our recruitment advertisements and we will increase the level of on-line recruitment, concentrating on our focused selling propositions of size and fittings in clothing and footwear.
Catalogue shopping has been suffering recently from its relative lack of flexibility in range and pricing compared with the ‘fast fashion' prevalent on the high street. E-commerce is another way in which we can quickly react to customers' needs 24 hours a day, 7 days a week. In addition customers who order on-line have higher average order values, greater loyalty and lower costs to service.
Another channel which has similar dynamic characteristics is television shopping which has now grown into a £500m marketplace, and is forecast to grow quickly in the next few years. To participate in this sector we have entered into a 50:50 joint venture with Northern & Shell Network Limited (which own the Express group of newspapers) to set up the Express Shopping Channel. We believe there is an excellent match of our respective skill sets. Northern & Shell have the studio facilities and programme-making expertise, plus the media vehicles to drive customers to our channel, whilst we will be responsible for the product offer and customer service from point of order to delivery. Inevitably there will be modest start up losses as we establish the infrastructure for the channel but we expect to be in profit by the end of the second year.
Financial Income
The availability of flexible credit for our customers has been one of the mainstays of our home shopping proposition. During 2003 we recognised that, due to the greater availability of credit in the near and sub prime markets from the major credit card companies, we were seeing the proportion of our sales on credit starting to diminish slightly.
We are increasing our marketing efforts to promote the availability and benefits of our credit proposition but recognise that the long term trend favours credit cards, an area where we have ambitions of our own.
We continually monitor the profitability of each part of our business, whether it be customers, products or offers utilising the vast array of data in our computer files. We identified a rising arrears position in the autumn and have taken decisive action to tackle the situation. Firstly, we have selectively reduced customers' credit limits where we perceived we were running an above average risk. Secondly, we recognised that although the long-term interest free offer on the higher value home and electrical products in our Home Essentials brochure was stimulating strong levels of demand, it was also generating arrears levels above our expectations. Consequently we have significantly changed the product and credit offer from Spring 2004.
Service and Costs
The quality of service expected by our customers rises each year. I am delighted that during the year we have delivered improved standards of performance in order and enquiry handling and in the speed of delivery of parcels to customers. This is reflected in our internal customer satisfaction surveys which show a pleasing upward trend. The number of couriers we employ has risen to 1,200, handling 65% of total parcel deliveries. This has mitigated the impact of the 20% rate increases imposed by third party carriers, which caused distribution costs to rise by 5.2%.
Total overhead costs for the group rose by only 3.2% but with continuing deflation in our core product ranges it is essential we exert stringent cost control. We will be focusing on improvements to the supply chain and seeking to reduce costs in our customer contact centres in the coming year.
Teleview
Teleview has been building a rental fleet since 1996 comprising televisions, video recorders and other consumer electronic goods with a net book value of £16m. Whilst it is a low cost operator with one centralised call centre and a small number of regional depots we have concluded that, due to the continuing trend for customers to buy rather than rent as selling prices continue to fall in real terms each year, we will be unable to deliver an acceptable rate of return on capital. Consequently we are looking to dispose of the business, and in the current year we have incurred an impairment charge of £9.0m to reflect the likely realisable value of our investment.
Fulfilment
Zendor, which provides home shopping solutions for multi-channel retailers, has increased its operating profit before goodwill amortisation and operating exceptional items to £0.8m, from £0.3m last year, although turnover has fallen slightly to £8.9m as a result of realigning the client portfolio to focus on higher margin contracts. The level of third party interactive revenue no longer supports the remaining unamortised goodwill of £7.6m, which has been written off as an exceptional charge this year, together with £0.9m of redundant assets.
There continues to be a high level of interest in Zendor's fulfilment services as more retailers move online. We continue to discuss opportunities to partner with logistics and software companies to allow Zendor to take advantage of the buoyant market.
Financial Services
First Financial sells financial products, such as personal loans, warranties and insurances, mainly to our existing customer base. Turnover for the year increased by 8.3% to £8.7m but there was a significant slowdown in the second half. This was planned due to our more cautious approach in loan underwriting as we felt many customers were already near the limit of their ability to repay.
This was manifested by an increase in arrears both from home shopping debtors and the personal loans portfolio. In addition we saw a significant reduction in the sale of warranties as the credit changes in the core business reduced sales of warrantable products by 10%.
Despite this slowdown we still see financial services as a key area for development. The market is growing most strongly in credit cards and secured lending and we continue to pursue opportunities in these areas to augment our existing range of products.
Management Team
We have seen a number of positive changes to the home shopping board this year. Dean Moore has joined as Group Finance Director, John Hinchcliffe as Marketing Director and Keith Risk as Logistics Director. They all have extensive knowledge of the retail sector and have settled in very quickly, and I believe they will enable us to continue outperforming our competitors.
Head Office Move
During the year we have migrated the business, excluding our call centre and warehouse activities, from its long-established base at Dale Street to a modern freehold office environment at nearby Griffin House at a net cost of £18m. This major project, which included moving our computer centre, has been achieved without disruption to the business and creates an excellent platform for future development.
Summary
The year under review has been one of transition for the group as we revise our business model to reflect the changing buying habits of our customers. We have eliminated some low profitability activities and are re-focusing on those product ranges where our comprehensive size and fittings offer targeted primarily at the middle-aged woman, give us a competitive advantage. We also see opportunities to service more affluent customers with targeted offers as home delivery becomes more widely accepted following the rise of on-line shopping.
Printed catalogues and leaflets will remain at the core of our home shopping business, albeit in varied formats and increased frequency, but a growing proportion of our orders will now be generated through e-commerce, telemarketing and our newly formed television shopping channel, where we can respond to events more quickly. This multi-channel approach, allied with our established database segmentation skills, will enable us to compete more effectively in the future.
Finally I would like to congratulate our Chairman, Sir David Alliance CBE, on his appointment as a life peer, a fitting tribute for a long and successful business career which I am sure will prove invaluable experience in the House of Lords.
Alan White
12 May 2004
N Brown Profit and Loss Accounts February 2004
