N Brown PLC - Interim Results

Press Release

By: Zendor
09 October 2007

INTERIM RESULTS ANNOUNCEMENT SIX MONTHS ENDED 25 AUGUST 2007

N Brown Group plc, the internet and catalogue home shopping company, today announces its interim results for the 26 weeks to 25 August 2007.

Highlights:

Alan White, Chief Executive, said: “We are pleased to announce a strong and sustained performance for the half year across all our customer and product groups. We have expanded our existing catalogues and midseason mailings and launched four new catalogues this year which have seen very encouraging results thus far. There are huge opportunities to grow our internet sales as more and more customers shop online. Sales for the first six weeks give us confidence that we will deliver a good performance in the second half.” Lord Alliance of Manchester, CBE, Chairman, added: “In recent years we have been focusing on improving our customer service, product ranges, and the quality of the catalogues. We have also continued to develop our channels to market, especially the internet, which is now at the heart of our business. We have an experienced and devoted team and, with the encouraging start to the second half, I have every confidence that we will continue to perform strongly.”

For further information please contact:
N Brown Group plc
Alan White, Chief Executive On the day: 0207 554 1400
Dean Moore, Finance Director Thereafter: 0161 238 2202
Website : www.nbrown.co.uk
Gavin Anderson & Company
Fergus Wylie / Clotilde Gros Tel: 020 7554 1400

CHAIRMAN’S STATEMENT

Group

Group revenue from continuing operations for the 26 weeks to 25 August 2007 is up by 13.6% to £290.6m and operating profit is up by 17.7% to £41.2m. Profit before tax is up by 17.5% to £34.3m and, incorporating the return of value to shareholders and associated consolidation of share capital in February 2007, earnings per share from continuing operations are up by 28.9% at 9.14p. The directors are proposing an interim dividend of 2.65p, up 21.0% and covered 3.5 times. Net debt at 25 August 2007 stood at £202.3m (2006, £105.3m) following the £80m return of value to shareholders in March 2007 and a £15m special contribution to the pension fund, which now has a deficit of only £7.9m (2006, £32.2m). Net interest payable on borrowings was £7.1m, covered 5.8 times. Gearing was 93% (2006, 41%) on net assets of £217.8m (2006, £255.3m).

Home Shopping

Home shopping turnover rose by 14.2% to £286.8m, or by 10.6% on a like-for-like basis and operating profit is up by 16.8% to £41.0m. One of the strengths of our business model is the ability to have a wide range of merchandise on offer at all times to meet the customer’s needs whatever the weather. The strange weather patterns in the first half did influence sales trends, with strong spring sales followed by a weaker summer period and then a good start for our autumn product ranges. It is therefore encouraging to report that once again we saw good progress in all our major customer and product groups, complemented by new catalogue launches and further improvements in customer service and our operating efficiency.

Customers

Turnover from our core midlife brands, targeted at customers aged 45-65, accounted for 68% of total home shopping sales, increasing by 14% to £196m. Within this group there were strong performances by JD Williams, Shoe Tailor, Fifty Plus, Oxendales in Ireland and Premier Man. In addition Gray & Osbourn, which was acquired on 30 June 2006, delivered sales of £12m compared with £2m in the two months post-acquisition last year, representing an underlying like-for-like sales growth of 13%. Our younger titles, targeting customers aged 30-45, increased sales by 18% to £78m with strong performances from Fashion World and, especially, Simply Be where sales were up by a further 33%. The catalogues targeted at customers over 65 years of age had sales of £13m, level with last year. The total number of active established customers rose by 3% and there was a further 6% increase in the average spend per customer. These statistics demonstrate that we are winning an increasing share of our customers’ total expenditure through improvements to our product ranges, catalogue and website presentation, and our service standards. Sales from customers recruited during the first half rose by 9% as we continued to target our campaigns on our unique selling propositions which produce higher quality customers with greater lifetime values.

Product Ranges

Turnover growth was evident in all our major product groups. Ladieswear saw a sales increase of 19% to £167m with strong increases in both casual clothing and from the trend towards smarter, more tailored, outfits. The number of lines and the range of sizes and fittings has continued to increase to give our customers a greater choice whatever their size and shape. Footwear sales have risen by 10%, the expansion of the styles appealing to our younger customers being particularly important. This is also a major factor behind the 17% increase in sales of menswear to £21m, although this category still only accounts for 10% of our total clothing sales at present. Home and leisure sales rose by 5% to £66m, representing 23% of total sales, with the electrical and household textile ranges being particularly strong. Online Sales

E-commerce is at the heart of our business strategy. During the period online sales have risen by 40% to £73m and now represent over 25% of all sales compared with 21% last year. This is due to a number of factors. More customers, whatever their age, are selecting the internet as their channel of choice, and we are encouraging this trend by a continuous improvement programme for our website functionality and a growing number of internet-only product offers. The result is that we have increased online order values to over 25% above those of telephone orders through proactive cross-marketing within our portfolio of over forty websites, each of which represents a product or customer niche. These higher order values, and the bypassing of the contact centre, also help to drive significant operational cost efficiencies.

Gross and Operating Margins

The rate of gross margin of 55.5% (2006, 56.5%) has remained in line with that at the full year, and was better than expected for two reasons. The mix of products was favourable and the increasing proportion of younger customers did not have as much impact on the rate of bad debt as we had anticipated. Changes to our credit scoring and credit limit policies have resulted in a planned increase in the rate of bad debts over the last 18 months because they produce incremental sales for little additional marketing cost, thereby boosting profitability. Our credit policies remain conservative relative to the revenue generated by customers who pay on deferred terms. Operating costs in home shopping have risen by only 10.6%, well below the rate of sales growth, with efficiencies arising in both distribution and selling and administrative costs due to the growth of internet sales and the continuing cost reduction programme. Consequently we have seen a further rise of 0.3% in the home shopping operating margin to 14.3% (2006, 14.0%). The service provided to our customers has continued to improve. The £10m project to construct bulk and hanging garment warehouses at our Hadfield site was completed successfully in May. This has helped to deliver record levels of productivity in the distribution centres and speeded up the time taken for despatch of customers’ orders. Improvements to our product specifications have delivered a 0.3% reduction in the rate of goods returned by customers. The combination of all our service enhancements has resulted in a 10% reduction in enquiries to our contact centre, which will also aid customer retention in the future.

Zendor

Zendor, our fulfilment services business, has delivered an operating profit of £0.2m, compared with an interim loss of £0.1m last year. Revenue of £3.8m was below last year’s £4.6m, but new contracts which have started recently for Woolworths, Peacocks and Reiss, together with a strong prospect pipeline, should improve the situation going forward.

Borrowing Facilities

The group has committed borrowing facilities of £320m until 2012, of which £243m were utilised as at 25 August 2007. The primary facilities are a £200m securitisation programme through an HSBC A-1/P1 rated conduit which has no exposure to the US sub-prime mortgage market and has a matching standby facility, and £120m of bilateral loans from HSBC and Royal Bank of Scotland. In addition at 25 August 2007 the group had cash balances of £40m. Current Trading and Outlook Group sales for the six weeks ended 6 October 2007 on a like-for-like basis are up by 11.1% on the same period last year. We have launched two new catalogues this autumn: • Marisota is targeted at middle-aged women who have not previously been home shoppers who we can now attract to our clothing ranges by featuring the variety of sizes, lengths, colours and fittings available. • Jacamo aims to increase our share of the menswear market by targeting men aged 30 to 45 with a range of clothing which includes a high branded content available, often exclusively to us, in the larger chest and waist sizes. The early results from these new initiatives are very encouraging and together with the successful launches in spring of Simply Yours (an upmarket lingerie catalogue) and Simply Be Home (a selection of home and leisure products which appeal to our younger customers), are demonstrating that we can attract new customers to our business utilising a combination of direct response television, public relations activity and search engine advertising, coupled with a compelling product proposition. These initiatives are investments for the future whereas the results for the second half will be dependent on the success from expanding our existing catalogues and mid-season mailings, the largest of which will be our upgraded Christmas Gifts catalogue. External factors, such as the dispute between the Royal Mail and the Union of Communication Workers and general economic conditions, may influence consumer spending patterns. However we believe the age and socio-demographic distribution of our customer base gives our business resilience in the event of a downturn. The results achieved in the first half, coupled with the encouraging trading in the second half to date, give the board confidence that the management and staff can deliver another strong performance for the year as a whole.

Lord Alliance of Manchester, CBE 9 October 2007

Zendor, where everything matters...