Interim Results Annoucement For the Six Months to 30 August 2003

Press Release

By: Zendor
16 October 2003

N Brown Group plc, the Manchester based direct home shopping, financial services and fulfilment company, today announces its interim results for the six months to 30 August 2003.

Highlights:

Sir David Alliance CBE, Chairman, said:

“We are pleased with the evidence of real signs of recovery over the first half, which demonstrate that the temporary halt to growth at the end of last year is being addressed and the measures taken to drive performance improvement are starting to bear fruit.

“We are confident that the significant efforts of the management team over the past year mean the business is well positioned to continue its recovery over the course of the second half and beyond.”

Alan White, Chief Executive, added:

“The first half of this year has continued to be challenging for the whole home shopping market.We are improving our sourcing and expanding the product offering with more fashionable ranges. As customer attitudes and needs continue to evolve, the flexibility of N Brown’s model and ability to exploit all channels to market, combined with focused marketing efforts, will drive the return to growth in the core home shopping business.”

CHAIRMAN’S STATEMENT

The group results for the first six months to 30 August 2003 show turnover up by 2.2% to £231.0m, but operating profit is down by 5.7% to £28.0m. Whilst there are real signs of recovery the situation identified in the business in the second half of last year continued into the first half of this financial year. Profit before tax and goodwill amortisation of £25.3m and earnings per share of 6.1p are both down by 7.7%. The interim dividend has been maintained at 1.74 pence per share in anticipation of a better trading performance in the second half.

Home Shopping

Home shopping has been the most challenged sub-sector of retailing recently and our turnover growth of 2.0% to £223m represents an outperformance against our peer group.

Operating profits have fallen by 8.8% to £26.4m, recovering from the levels seen in the second half of last year when they were 20% down. The main reason for the dip in profits is a 0.9% reduction in the gross margin rate to 54.9%, which is the result of the changing mix of business. One element of this has been a trend in recent seasons that the proportion of non-catalogue activity has been growing, with customers’ orders derived from a number of pro-active contacts in addition to the main catalogue mailings. These include the monthly mailings programme, where sales were up 4%, and by up-selling through order building and outbound telephony, where sales rose by 15%. In addition, our e-commerce business continues to advance with revenues doubling in the period to over £14m.

This mix of activities demonstrates the flexibility of our business to adapt to the changing attitudes and needs of our customers, but the gross margin is lower in aggregate than we achieve from our main catalogues where sales are down by 4%. A great deal of work and effort has been put into rebuilding the competitive attractions of our main catalogues, including changes to the product, pagination and presentation, the impact of which should be seen in future seasons.

The catalogues targeted at customers in the 30 to 45 age range continue to exhibit good growth, with Simply Be increasing sales by 30% to £12m, of which 25% is from orders placed on-line. Sales from our core mid-life customers in the 45 to 65 age range were level with last year. Recruitment activity improved with a 4% increase in new customers which will help to drive sales in future periods. Despite this extra recruitment activity our marketing costs rose by only 2% as a result of improved database segmentation techniques.

Sales from ladieswear were just ahead of last year in aggregate with the hot summer boosting sales from separates, leisurewear and sportswear but adversely impacting sales of coats, dresses and knitwear. Footwear, one of our core product areas, bounced back with an 8% increase but menswear declined by a further 6%. Home and leisure product sales rose by 5%, with electrical products increasing in value by 18%.

House of Stirling, our door-to-door selling operation, continued to advance with sales up 35% to £14m as it increased both its geographic coverage and sales penetration. The partnership with Securicor Omega has started well and has kept our increase in distribution costs down to 7.7% despite rate increases for home delivery by our third party carriers of around 20%.

Financial Services

First Financial, our dedicated financial services business, has had a strong first half with lending volumes up and the rate of bad debts gradually reducing. This has resulted in turnover of £4.4m, up 34%, and operating profits ahead by 65% at £1.8m. Brokered services, which is the long established part of the business, continue to provide the bulk of the profits but we are building a direct personal loan book where advances increased by 29% and which contributed operating profits of £0.6m. Total advances outstanding now exceed £22m and we continue to explore other financial products, such as credit cards and secured lending, to extend our portfolio.

Fulfilment

Zendor, which provides home shopping solutions for third party clients, saw its turnover decline by 10% to £3.7m but made a small operating profit compared with a loss of £0.1m last year. The focus of the division has been on profitable contracts, from existing and new clients, and we are in discussion with a number of potential strategic partners to capitalise on the many opportunities available in the fast growing e-commerce and home delivery channels.

Balance Sheet

Net assets have increased by 9% to £258m and gearing is at 56%, compared with 42% last year. Total capital expenditure in the half was £17m. In addition to £3m expenditure on operating systems and a £1m investment in television rental assets for Teleview, £13m has been incurred on the purchase of a freehold refurbished office building in Manchester to which we will move in the first quarter of 2004, and which will deliver a much improved, but still low-cost, working environment. The total net capital expenditure for this move is anticipated to be £18m.

Working capital has increased with the earlier intake of Autumn merchandise boosting stock levels by 27%, which are delivering higher first time service levels for our customers. Debtors are up by 14% at £344m due to the high rates of growth in First Financial and House of Stirling’s debtors on top of the growth in home shopping customer balances.

Prospects

Our strategy is to deliver growth from our target market by bringing our product ranges ever more up-to-date and refreshing them with in-season purchasing, increasingly from European markets.

The Autumn Winter 2003 catalogues have restored the wide range of choice our customers expect, especially in those areas where we have unique selling propositions, such as larger sized clothing, lingerie and footwear. The expanded Spring Summer 2004 catalogues will see significant changes, both by introducing more fashionable styles into the product range and by adopting a more contemporary style of presentation. The arrival in September of two new home shopping directors in marketing and logistics, John Hinchcliffe and Keith Risk, both with significant home shopping experience, will help to drive future growth. We have also strengthened the customer service management team to improve our service which is increasingly important for customer retention.

Sales in the first six weeks of the second half are up by 2% for home shopping and for the group. We hope to see further recovery as the season progresses, and we expect a positive response from our customers to the developments in our Spring Summer 2004 catalogues.

Sir David Alliance,
CBE
16 October 2003

Zendor, where everything matters...