Investment Column: N Brown is well insulated from credit crunch

Northern Foods; Carluccio's
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The Independent Online

Our view: Hold

Share price: 215p (-1.5p)

N Brown, the internet and home shopping group, bucked the retail gloom yesterday with an impressive set of profits and sales.

Strong sales of larger-sized designer ranges from TV celebrities, such as Gok Wan, the fashion guru, and Caryn Franklin, a presenter on The Clothes Show, helped lift N Brown's group pre-tax profits by 19.6 per cent to £40.8m. The retailer is also being helped by the fact its target customer, a 57-year old woman who wears a size 18 dress, is not under the same financial pressure as other retailers' younger shoppers.

For the 26 weeks to 30 August, the group's sales jumped by 12.6 per cent to £322.8m. Alan White, the chief executive of N Brown, says that so far there has not been any marked deterioration in the rate of bad debts among its core customers during the credit crunch. However, N Brown is lengthening the period after which it offers customers extended credit terms.

Indeed, the trading environment for N Brown will get tougher from now. However, it has proved nimble in growing customer numbers beyond its core segment. Over the past six months, brands targeted at under 45-year-olds delivered the fastest rate of growth, with a 21 per cent sales uplift to £94m.

Furthermore, its e-commerce sales, which grew by 45 per cent over the half-year, now account for just under one third of total sales, and are only likely to strengthen over the next year.

N Brown's shares have fallen substantially in the past 12 months and trade on a price to earnings ratio of 9.9 for its 2009 financial year. While its shares are likely to continue to be buffeted by the storm forecast to hit general retailers over the next year, N Brown looks well protected from the chill winds of the credit crunch. Hold.

Northern Foods

Our view: Hold

Share price: 59.25p (-1.25p)

The UK's leading supermarkets have said that the credit crunch is boosting sales of frozen food, as customers switch to cheaper food and seek to preserve it. The trend is certainly helping Northern Foods, which manufacturers Goodfella's Pizza and sells many other products to UK retailers.

Its frozen division delivered total revenues up 10.2 per cent and underlying sales up 4.1 per cent for the 26 weeks ended 27 September. It has also shown itself to be in tune with the British public's taste buds by ramping up sales of Fox's biscuits, following a hefty advertising campaign from the spring.

But a clearer indication of Northern Foods' ability to battle the credit crunch was its overall underlying sales, which grew by 3.9 per cent. The underlying sales were boosted by a 5.6 per cent uplift in average selling prices passed on to retailers, although volumes fell by 1.7 per cent. The City generally prefers volume-based growth over price, but Northern Foods has accepted the plaudits for recovering all its input costs. Furthermore, Stefan Barden, Northern Foods' chief executive, attributes the fall in volumes to it exiting non-core contracts in its last financial year, and stressed it has been robust about protecting its margins.

Northern Foods certainly faces a tough final quarter and 2009, as do all food suppliers. The expected slowdown in UK grocery sales next year will not help its cause, but its shares, which have taken a battering in the past year, may not have much further to fall. Given that Northern Foods' shares trades on a 2009 price to earnings ratio of just under 10, there are cheaper shares to be snapped up, but so far Northern Foods has been able to respond quickly enough to the worst the credit crunch can throw at it. Hold.

Carluccio's

Our view: Hold

Share price: 82.5p (+4.5p)

Carluccio's, the Italian restaurant-cum-delicatessen group, is hoping it can buck the consumer slowdown. Yesterday's trading update, ahead of preliminary results to be published in early December, shows turnover for the year to September up by 21 per cent, despite the effect of an unseasonably wet summer on a chain that makes a quarter of its money from pavement tables. The group is debt free and cash generative. It opened six new branches in the past year and has another two on the stocks, and has just signed a franchise deal with Landmark Group, the Middle East retail behemoth, that will see the region's first Carluccio's open next year.

Simon Kossoff, the company's managing director, says the above-expectation turnover illustrates the strength of its business model – which includes breakfast and late afternoon menus as well as the delicatessen shops, giving it an edge over its restaurant-only rivals. But the company also acknowledges consumer behaviour is impossible to predict in the febrile economic climate and trading conditions will remain challenging. On balance, hold.

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