Edited Transcript of BWNG.L earnings conference call or presentation 25-Jun-20 10:59am GMT

In March, we said that our adjusted profit before tax would be lower than the previously guided range of GBP 70 million to GBP 72 million due to the need to assess the wider macroeconomic implications impacting the IFRS 9 bad debt provision model. Today, we’re announcing an adjusted profit before tax of GBP 59.5 million. This is lower, both because of the aforementioned IFRS 9 assessment but also an increase in stock provisioning. Rachel will walk you through the first quarter in more detail, but the group was able to secure amended and increased financing facilities to provide significant headroom to trade through these challenging times.

Turning, therefore, to our revenue performance in the year. In line with our strategy, revenue declined in the year as we continue to remove unprofitable marketing expenditure. We grew digital revenue in Womenswear by 5.5% and by 5.5% in Menswear, with Simply Be and Jacamo displaying good growth in the year. 85% of revenue was digital driven by much improved penetration at JD Williams and Ambrose Wilson.

Financial Services revenue declined 2.7%. Regulatory change led to a smaller debtor book and, hence, lower interest income. Admin fees were also lower in the year.

Turning to product gross margin. Product gross margin was down 290 basis points in the year. This was lower than guidance due to the stock provision taken at the year-end, which reflects discontinued brands and lower apparel sales. The main driver of lower product gross margin was the highly promotional retail market. The margin was also lower due to an increase in Home sales in the year, which are generally lower margin; and less international revenue, which typically had a higher margin.

The Financial Services gross margin was 390 basis points lower in the year. As expected, we benefited from a favorable movement in the IFRS 9 bad debt provision. However, this was offset by an increase in the level of write-offs, recognizing the ongoing improvement in the quality of the underlying debtor book. We had a small benefit from operational cost savings in the year related to our legacy U.S. business. Therefore, the drivers for the decline in the Financial Services gross margin were a lower profit from one-off sales of debt during the year and a lower rate of recoveries from regular debt sales driven by a lower market rate than last year.

EBITDA. EBITDA declined by 16.6% in the year. The decline in the product gross profit of GBP 41.7 million was counterbalanced by significant improvements in the operating cost base. Marketing expenditure declined 13.8% in the year as we moved out of unprofitable channels and focused on improving the efficiency of our spend. We made good progress this year, but there is still opportunity in this cost line, and Steve will talk about more — about this later.

Warehouse and fulfillment expenditure declined by 7%, and this was predominantly due to lower volumes. Our admin and payroll costs were 6.9% lower, largely driven by continued head office efficiencies.

I’m pleased to report an 80% reduction in exceptional costs in the year. The customer redress deadline has now passed. At the half year, we made a provision of GBP 25 million to cover the spike in claims at the end of the PPI deadline. This was reduced at year-end by GBP 2.1 million as the final amount of customer redress was less than envisaged, resulting in a GBP 22.9 million charge for the full year. We also incurred a GBP 3.8 million exceptional charge in relation to our strategy review. This is a combination of both redundancy and consultancy costs as well as the stock write-off from discontinued brands.

Our long-running legacy VAT partial exemption matter with HMRC is now largely concluded, and the credit of GBP 3.1 million reflects the actualization of previously estimated cost disallowances.

And with that, I will hand over to Rachel.

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Rachel Izzard, [3]

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Thank you, Craig. I’m pleased to have joined N Brown, and I’m excited about executing our refreshed strategic plan. I accelerated joining the business to ensure I hit the ground running when I formally become CFO next week. Now Craig has run you through the full year results, so let me give you the highlights of what was certainly an eventful quarter.

Our business operations were confronted with the pandemic at the start of the quarter, and our agile business model enabled us to take swift and decisive actions to ensure that we remain both profitable and cash generative. There was a sudden and immediate impact to our retail trade, which we highlighted in our announcement on the 23rd of March.

Now over the quarter, we were able to balance some of that wider retail impact with our Financial Services income and our new Home offer. We were also able to materially reduce costs in the quarter, and these efficiencies offset more than 80% of the gross margin impact and future bad debt provisioning. This balance of options in the business and active management has driven cash generation. And as of the 19th of June, net debt is now down 9.9% versus the year-end. So working with our supportive lenders combined with that business action has ensured we have sufficient liquidity, working capital headroom and covenant flexibility to trade and manage effectively.

So turning to trade in the quarter. As you can see from the top left chart, there was an immediate and sudden impact from the thresholds and then the actual U.K. lockdown. Now since the lows of March when apparel sales were down as much as 75%, we have seen a steady recovery in demand returning. We were able to balance some of the impact from weaker apparel sales with a significant increase in demand for our Home & Gift offer as lockdown was introduced. That demand for Home & Gift has remained strong and was boosted by the launch on the 1st of April of our new stand-alone brand, Home Essentials, a real digital pivot to accelerate the go-live of a minimum viable product despite working remotely. This meant we could take advantage of that strength of customer demand. Now Steve will give more details later on that successful launch and the exciting opportunity it gives us.

To summarize on trading, you can see our revenue trends have steadily improved, with the RNS on the 23rd of March highlighting retail demand down more than 40% year-on-year, then the RNS on the 19th of May moving that down to 25%, and our last 3 weeks of trading being down 21%.

In terms of wider COVID business actions, our absolute first priority from the outset of the pandemic was the health and safety of both our colleagues and our customers. We benefited from the structural acceleration to online shopping, and you can see 91% of our retail sales in the quarter were digital, a real step change. Now we took immediate and decisive action to continue trading with our customers and ensure a continuous supply of goods whilst at all times complying with government guidelines. And our resolute focus on treating our loyal financial customers fairly continued. Now at the same time, we adopted a more prudent lending approach to new customers. And overall, we’re monitoring collections closely across our entire customer loan book, and they continue to perform in line with last year.

Moving on to management of the cost base. The group has a strategic focus on improving the efficiency of its cost base, and Steve will give more details on this later. We continued with significant progress made in the last financial year and delivered a 43% reduction in our operating costs in the first quarter of this year. This is further evidence of the agility in the N Brown business model now. The efficiency savings were made up in marketing as well as the entire cost base. But that hasn’t been a blanket reduction in costs. We have taken the opportunity to structurally pivot. For example, social media as a proportion of our marketing spend had more than doubled this quarter versus this time last year. Now that efficiency focus also extended to stock, which has been tightly managed collaboratively with our suppliers, and that’s ensured no material stock overhangs coming into this year despite the COVID shock.

On the 19th of May, we announced new amended financing facilities. The chart shows you how our headroom has increased materially from the start of the financial year. And what’s pleasing to us is that’s driven by both the cash generation in the quarter and the access to new facilities. So even in a worst-case scenario, we have significant headroom. Now the headroom isn’t expected to be utilized, but of course, it’s a sensible precaution during this period of uncertainty, and it gives us confidence to trade through.

As part of the amended financing facilities, we also amended the customer loan book securitization facility to mitigate the COVID-19 volatility risk. Now as a reminder and to help inform the understanding of how our net debt moves, the securitization debt is secured by a charge over certain eligible customer receivables, which is without recourse to any of the group’s other assets. It’s a maximum of GBP 500 million, and the amount that is drawn depends on the level of eligible customer receivables at any one point in time. So that naturally moves up and down flexibly with the level of our lending. Looking ahead, there’s material room available to grow our loan book in a managed way, supporting our customer credit proposition.

Now turning to outlook and guidance for this financial year. Since the initial significant impact of COVID-19 on product revenue, trends have continued to improve. Financial Services revenue has been impacted by the effects of COVID-19 on our markets.

Product gross margin pressure is expected to continue due to mix and that highly promotional retail market, and Financial Services gross margin will decline due to previously guided regulated pressures and an increase in bad debt provisioning due to the impact of COVID-19.

Now our strong operating cost efficiency will continue, and the full year cost savings are expected to offset more than 75% of the gross margin decline, with bad debt provisioning movements being the primary driver negatively affecting EBITDA.

Finally, we expect our cost mitigation and significant reductions in CapEx and exceptional costs to drive improved cash generation in FY ’21. This will result in net debt under GBP 400 million by the end of the year compared to GBP 497 million at the end of FY ’20. And as previously announced, we will not pay a dividend this financial year.

Looking ahead, Steve will outline how we will move on to the accelerate phase of our strategic plan. And to give some financial context to that, we wanted to link it to a refreshed disclosure to reflect the evolution of our business to a full digital retailer. Starting this financial year, we will begin reporting digital KPIs to reflect that fact that we are now a digital business. We’ll also continue to provide further awareness of our retail and Financial Services businesses and their beneficial relationships as well as progress as we execute on our strategic plan.

I’ll now hand over to Steve to take you through our exciting future.

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Stephen Johnson, N Brown Group plc – CEO, Member of Executive Board & Executive Director [4]

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Thank you, Rachel. Today, I’m excited to be talking to you about our refreshed strategy. In the last 6 months, we have faced 2 significant challenges: firstly, the impact of the industry-wide financial services regulation, which we announced in January; and more recently, COVID-19. Despite these headwinds, I am pleased with the strategic progress we have made over the last 18 months. We have strategically restructured our business and have made significant steps in the transformation from being a traditional retailer to a true digital retailer, which takes us towards building sustainable long-term value.

We closed our entire store estate and focused on developing our digital proposition. Today, 91% of our customers are digital. We now have a larger addressable market and a set of focused brand and product strategies. That’s a really solid platform to work from.

Our business has come a long way over the past 18 months, and I’m truly pleased with what we have achieved and where we are positioned. We are a top 10 U.K. digital clothing and footwear retailer serving customers in an underserved market. Our markets are large, are in structural growth, and importantly, our refreshed strategy will increase the addressable market which we serve.

Our Financial Services offering enables us to offer our customers a convenient way to shop and engenders loyalty. We’ve also invested in our digital capabilities, increasing our digital penetration. We have demonstrated in the current market the agility and flexibility of our cost base, and I would like to thank all of our colleagues for their fantastic commitments over the last 3 months. Truly outstanding.

So why do N Brown exist? I’m really proud to represent a business with a significant amount of U.K. customers who are ignored by many retailers. Fundamentally, inclusivity and our desire to serve the underserved are key to our existence. We serve these customers across 3 key areas: plus size, underserved credit and more mature customers, all of whom our proposition caters to. We are already #1 for women’s wear sizes 20 plus, and we believe we can gain share in this growing market. We also have a long history of serving the underserved credit market. Today, 80% of our customers are from C, D and E socioeconomic groups. Almost 50% of our credit customers are not in work due to retirement or unemployment, and just over 1/3 of our credit customers are over 60 years of age. Whilst we are committed to keep serving these core customers, we recognize that there is a further opportunity in serving a broader range of customers.

Finally, our customers are more mature than the general market. We have an expertise in serving and supporting an older customer base, which as the U.K. population ages, we believe, gives us an opportunity to grow in this market as well. So without N Brown, 11 million customers would have fewer options available to them.

Since I became CEO 18 months ago, our strategic approach has evolved. And I consider there are 2 phases to this. The restructure phase ran from FY ’18 to FY ’20, in which we identified and began addressing numerous factors which have been holding the business back and contributing to poor performance. This phase is now complete.

The COVID-19 crisis has had an unprecedented impact on all businesses, and ours is no exception. Our focus this year is now to move as fast as we can to the accelerate phase, improving the business to weather the impact whilst ensuring we are on the strongest possible footing to benefit from our refreshed strategy. I’m excited to have this opportunity to introduce you to the next phase of our strategic growth plan today.

Over the past 18 months, we have identified the key factors which have contributed to poor performance. Our strategic plan addresses these issues, and many of the solutions are already in flight. Our growth opportunities were limited by our addressable markets and promotional activity, so our refreshed strategy extends our addressable market and updates our product architecture to put us back on a strong growth trajectory.

Our Financial Services product was not understood clearly by the market, so we are improving our credit offer to make it more relevant to our target customers. We had a significant brick-and-mortar footprint as a reputation as a catalog retailer. We have closed our entire store estate and now only recruit customers digitally. To do this has required a significant investment in our digital and technology capabilities, and we have made considerable progress on this front. The organization was complex and costly, and we’ve now significantly simplified the business and continue to build an efficient and sustainable cost base.

We discussed earlier the swift and decisive actions we have taken to improve the business this year as we manage through COVID-19. We have already demonstrated in Q1 the resilience and agility of our business model. The improvement actions that we have taken and continue to focus on this year have set the foundations for our accelerate phase of growth.

So having talked through our transformational journey and where N Brown is today, I’m now going to talk to our future and our refreshed strategy. Today, we launched our accelerate phase driven by a clear strategic framework and 5 growth pillars that have been developed to reflect the focus of the business and the external environment: distinct brands to attract broader range of customers, improved product to drive customer frequency, new home offering for customers to shop more across categories, enhanced digital experience to increase customer conversion and flexible credit to help customers shop. These growth pillars will be underpinned by our people and culture, data and a sustainable cost base appropriate for a digital retailer.

Turning to the first pillar. We have identified a need for distinct brands to attract a broader range of customers. In terms of our approach, we undertook a thorough review of the market in which we operate, which highlighted that we serve a specific set of customers well but that we need to extend our reach to a broader set of customers to drive growth. To do this, we have redefined our brand architecture to give each brand real clarity of proposition and appeal in our chosen markets. This approach quadruples our addressable market within apparel and also provides a distinct home offering, all of which brings the opportunity to drive significant sales growth. We will reduce our existing brand portfolio with the remaining brands either becoming product brands within our rationalized portfolio or being gradually wound down.

Today, as you can see on the left-hand side of the page, we have 9 apparel brands and 1 niche off-line home brand. We will move to 4 core apparel brands: Simply Be, Jacamo, Ambrose Wilson and JD Williams; and 1 new mainstream digital home brand, Home Essentials.

Simply Be is an online fashion and beauty brand for plus-size women. We believe Simply Be is uniquely placed to deliver relevant fashion and fit expertise to a community of women who wish to celebrate their curves. The target customers are plus-size women aged 25 to 45 with a trend-led attitude to fashion who choose credit to help them shop.

Jacamo is an online fashion brand for plus-size men. Unlike many of the mixed gender retailers in this space, Jacamo is focused singly on men and is a brand committed to delivering style, consistent fit and size inclusion. The target customer is a plus-size man aged 25 to 50 with a trend-led attitude who chooses credit to help them shop.

JD Williams provides an online boutique experience, showcasing fashion and home products. You can shop at the same high street shops as everyone else or you can look for something different. Our customer wants the latter. JD Williams will evolve to become a multi-brand boutique which recognizes and inspires the individuality that exists in every mature woman. The target customer is a 45- to 65-year-old woman who is a credit user with a less trend-led attitude to fashion.

Ambrose Wilson is a fashion-led brand supported by home, available on and off-line that truly values mature customers. While so much of the high street fashion is moving into younger, faster fashion, Ambrose Wilson serves the customer who seeks quality, consideration and elegance in the every day. The target customer is a woman aged 65 plus who is a credit chooser with a value-for-money fashion need.

Home Essentials is a stand-alone one-stop home brand focused on modern homeware and enabled by a credit offering. We are building a home and living story that will provide complete room solutions that are both established and affordable. The target customer is young families with children at home.

We have great products in the business today, and we are now focused on making sure each brand develops its own distinct product underwriting with product designed for their specific target customer, delivering the right trends at the right time. Along with this, we are focused on improving the quality of our garments even further. On menswear, we are working closely with suppliers to ensure consistent fit across all garments, including working brands such as [Hype]. We are already proud of our fit specialism, and we’ll continue to invest in this alongside fabric to deliver great quality and well-fitting clothes for our customers. These initiatives to create better, more relevant product will help to drive customer loyalty, underpinning our future growth.

Another part of improving our product proposition is renewing our good, better, best architecture. We are increasing the mix of in-house design ranges across Womenswear, Menswear and Home. And in parallel, we are reviewing the branded products we work with to have a better curated range, which extends to the best elements of our proposition.

On Simply Be, we are moving from 50% of the range designed in-house to 70%. This will be underpinned by well-defined, adaptable and responsive pricing criteria. We are starting to measure our performance versus good, better and best. And from this autumn, we will flex our buying against this performance. These changes will drive order frequency whilst ensuring improved customer loyalty.

We’ve made huge progress with our sourcing strategy over the past 18 months, including reducing the base by 50% to make the most of the suppliers we work with. There are 2 key points on our sourcing agenda, the first being to increase the mix of U.K. and European sourcing, which will increase our flexibility and our speed to market. This is important as we focus on trend-led products, particularly for Simply Be and Jacamo.

The second point is our approach to sustainability. We are focused on a clearly defined road map to deliver enhanced sustainability. And I’m pleased to say that we are launching a fully sustainable denim range on Jacamo in September. This will be followed by other important initiatives. We realized that alongside the rest of the retail industry, we have a long way to go, but this is a critical step in the right direction.

Although N Brown has historically sold home product, it has always been done through our primarily fashion-focused websites and hasn’t had a clear proposition. We’ve addressed this with the launch of a stand-alone website, Home Essentials, in a growing market with a clear proposition and a target market. Let me expand on these on the next slide.

Home Essentials represents the biggest single opportunity in our brand portfolio in terms of growth, with the credit user home market worth GBP 15 billion. Home Essentials have been created to appeal to young families who look for affordability and wants to dress their homes, living with soft furnishings and backed by a full home offering. We are also evolving our credit offering to be relevant and competitive versus the wider home market and support the customers’ desire for affordability.

Launching the Home Essentials stand-alone brand back in April has been one of N Brown’s success stories so far this year. Clearly, launching a brand that is significant at any time but having just gone into lockdown with all of our teams operating remotely for the first time, this felt like a particularly significant achievement. Lockdown has given Home Essentials exposure to new customers from the outset. It’s already contributing to the sales of the group and has seen good growth in demand since launch.

Moving on to talk about some digital capabilities and investments. A strategic priority is the delivery of a new front-end website which will deliver a range of benefits, including improved SEO and conversion rates. This is important because our current natural search ratings are poor, and there is significant scope for improvement. We’ve taken a mobile-first design principle following the market trend for increased sales through mobile devices. The new website will deliver a range of customer benefits, including better search, along with size and fit recommendations. Simply Be will be the first brand to benefit from this, with other brands following shortly thereafter.

We have a range of other projects in the pipeline all focused on delivering benefits for our customers and progressing N Brown with a digital-first mentality. This includes a refresh of our warehouse management system to support better delivery, new product information management systems bringing better quality information about our product to the websites and a range of activities to support our service proposition.

Our credit proposition is a key differentiator for us, enabling customers to shop through inclusive lending whilst providing appealing, convenient and personalized integrated offers to customers. The regulatory backdrop is challenging, but we are adopting and evolving our proposition for the future. N Browns credit proposition is to us what NextPay is to Next. Our investment in data analytics is supporting better lending decisions at application and through the customer life cycle.

This slide demonstrates why credit is so important to our business and why it is key to our strategy that we expand our credit proposition. Customers who use our credit proposition spend more and are more loyal than cash customers, shopping 5.25x more frequently. Many of our credit customers are long-standing, with 54% of the base having been part of the book for 4 years or more. Many of these customers have grown their available balances and so have greater purchasing power than newer customers. We are prioritizing keeping these customers engaged and trading as they represent the most valuable part of our customer base.

To continue to support our Financial Services business and build credit penetration with new customers, we need to offer a broader range of credit products. A strategic priority is the delivery of a new financial services platform that will support a multi-product digital credit proposition, helping us compete with other popular market standard offerings. In addition to driving incremental retail demand, it will increase credit penetration through appealing to a broader, more affluent range of customers, in line with our brand strategy. It will also drive business and cost efficiencies within the organization.

So where does this strategy take us? At the core of the strategy is quadrupling our total addressable market from GBP 5.5 billion today to GBP 21.6 billion in the future. We will expand on our current heartland by targeting 3 new areas: firstly, trend-led plus-size customers that prioritize affordability; secondly, nonplus-size customers that prioritize affordability; thirdly, customers who prioritize quality. This unlocking of new customer groups will create a major opportunity to return N Brown to sustainable long-term growth.

Our growth pillars are underpinned by 3 key enablers. The first of these is our people and culture. Over the past 18 months, we’ve made significant changes to the executive and senior leadership team. Around the executive, we’ve welcomed 3 new members since the start of 2020, and I’m delighted to have their fresh thinking, new skills and energy around the table. Within the senior leadership team, almost 1/3 are new joiners within the past 18 months, bringing with them key skills and experience to progress our journey as a digital retailer.

To list a few skills, we have introduced more data science, risk, cybersecurity, design and user experience experts to really drive our digital growth. We already have great talent in the business, and I’m really pleased with the talent we’ve brought into the organization and feel we now have the right team to drive the success of the group as we enter the next phase of our journey.

Data is our second enabler. The 18 months are focused on putting in place foundations, including building out a new internal data science function, developing customer lifetime value models to drive average order value and average order frequency as well as improved forecasting. We are now building out our data architecture, enhancing our cloud-based data lake, building out our data warehouse and leveraging our use of AWS to drive faster decision-making through the business.

Our final enabler is our cost base. As part of the review of our strategy, we undertook a 0 benchmarking exercise, which revealed that while our overall cost base was broadly in line with peers, there are significant opportunities for our cost base to be moved forward. Historically, our market expenditure has been significantly higher than peers. Our spend has been inefficient and, in many cases, unprofitable. This is changing.

Investment in natural search will practically eliminate spend on pay-per-click over time, while spend on paper will continue to decline. Marketing spend will be focused on more efficient and effective channels to drive lower cost of acquisition and engender loyalty. This is a significant opportunity for us to develop a sustainable cost base fit for a leading digital retailer.

So where does this strategy place N Brown in 3 years’ time? We will be a retail-led business with strong brands operating in structurally growing markets. Our improved product will drive increased frequency from our customers, and we will continue to attract new customers. The investment in digital capabilities will create a great customer experience, further driving loyalty and frequency. Our FS capability will be transformed with a new platform, offering broader, more relevant products, and importantly, the impact of the recent regulatory changes will have been absorbed.

So in summary, in the last few years, we have taken significant action in restructuring our business towards and rectifying issues of the past. And in the last 3 months, we have taken swift and decisive steps to improve the business in the current unprecedented trading environment. This has resulted in sufficient liquidity, working capital headroom and covenant flexibility to manage effectively in current circumstances. We have refreshed our strategy to unlock significant addressable market potential in the future based on our 5 deliverable pillars, underpinned by N Brown’s enablers. Finally, we have identified various initiatives that we believe could further accelerate the significant longer-term potential of the business.

We are excited about the future of N Brown and look forward to delivering our new strategic plan for the benefit of all stakeholders. Thank you for listening.