Shares in online fashion retailer N Brown Group (LSE: BWNG) are crashing today after the company warned of new legal problems. The BWNG share price has now fallen by almost 20% over the last month, although the stock is still up by 58% over the last year.
I’ve been keeping an eye on this stock as a potential value buy, but I’m concerned by today’s news. In this piece I’ll look at the risks and rewards on offer and explain why I can still see some attractions in this business.
New legal worries
N Brown is currently involved in a legal case with German insurer Allianz over historic sales of PPI insurance. The company offered PPI to its credit customers until 2014.
The case with Allianz is complex and the company says it isn’t able to estimate the likely costs it will face. However, Allianz is now expanding the scope of its claim against N Brown.
The insurer believes that if it’s successful, the new element of the claim alone could be worth up to £36m. That’s equivalent to last year’s operating profit for the whole business.
In addition to this, N Brown faces potential liabilities from the existing part of the claim. Added together, my view is that the risks posed by this legal action could keep the BWNG share price under pressure for some time yet.
A bargain share?
Although this legal case is a concern, N Brown shares already trade on a low price-to-earnings ratio of eight. I reckon the current share price factors in some bad news already. If the group’s ongoing turnaround is successful, then I can see some value in the stock at current levels.
The company has refocused its portfolio on core brands such as JD Williams and Simply Be. CEO Steve Johnson has also launched a new Home Essentials brand, which has helped lift the mix of homewares sold from 29% to 41% last year. I think this could be a profitable area of growth.
A £100m fundraising in 2020 also allowed the company to repay most of its debt, leaving the business with a much stronger balance sheet.
BWNG share price: insider buying
I can see another reason to be optimistic, too. The Alliance family, who founded N Brown, still owns more than 50% of the company’s shares. Recently, the family has been buying more shares.
This suggests to me that they’re confident in the company’s turnaround plan and expect better times ahead.
That’s my view too. Although I’m uncomfortable with the company’s legal liabilities, I’m sure these will be resolved in time. I don’t expect them to be unmanageable. At current levels, N Brown shares are priced at book value — unusually cheap for a retailer.
Buying the shares would give me part-ownership of an online retailer with sales of over £700m and a profitable consumer finance operation.
If CEO Steve Johnson can update the company’s brands and return them to growth, I think the BWNG share price should be much higher in a couple of years’ time. Although this situation isn’t without risk, I see N Brown shares as a speculative buy for me today.
