N Brown Group (LSE: BWNG) is a share that’s really got the bit between its teeth right now. As I type, it’s trading just off eight-month highs struck in the wake of forecast-beating financials released last week, but it’s a stock which I’m not prepared to countenance right now.
Why? Well, the murky outlook for the UK retail sector as the Brexit problem drains consumer spending power and shopper confidence, that’s why. Latest data from the British Retail Consortium illustrated these conditions perfectly as it announced total non-food sales in the three months to April fell 0.2%, flipping from the 12-month average increase of 0.2%.
Sales stresses to persist?
So what can we deduce from N Brown’s final results unpackaged in late April? Adjusted pre-tax profit for the 12 months to February came in better than expected at £83.6m, up from £81.6m in fiscal 2018 and this defied expectations that it’d slip year-on-year to around £80m, prompting that aforementioned share price spurt.
However, in my humble opinion this was certainly no reason to break out the bubbly. I’m far more concerned by news that product sales fell 5.6% in the period, a result that caused revenues at group level to drop 0.8%. It was only another strong sales performance from its financial services arm which stopped the retailer’s top line from plummeting.
That said, I expect the resilience of its credit division to provide just a temporary sticking plaster as a tough economic environment and intense competition amid Britain’s clothiers dials up the pressure for N Brown’s core operations.
City analysts expect the Jacamo and Simply Be owner to pay another 7.1p per share dividend for the year to February 2020, a forecast that creates a chunky 5% yield. This predicted payout doesn’t move me, though, given that the number crunchers are expecting earnings to keep sinking (a 2% drop is currently tipped for this year).
So forget about the big yield and cheap valuation, illustrated by N Brown’s forward P/E ratio of 6.7 times. It’s a company whose share price is in danger of moving sharply lower again and it should be avoided, in my opinion.
I’d much rather use any cash earmarked for this business and plough it into Redrow (LSE: RDW).
The homebuilder also carries a 5% dividend yield for the current fiscal year to June, underpinned by City predictions of more earnings growth (of 4%, to be exact), and if recent evidence on the health of the housing market last week is anything to go by, the FTSE 250 firm appears in great shape to keep thriving beyond the immediate future.
As well as Barratt putting out another great set of trading numbers, data from Halifax showed property prices jumped 5% year-on-year in the three months to April, the strongest rate of growth since February 2017. These developments follow on from Redrow’s brilliant interims of February in which it advised of record revenues and profits, and so it comes as no surprise I’m expecting another blowout release when numbers for the full fiscal year come out.
Oh, and right now Redrow provides better value than N Brown too, illustrated by its prospective P/E ratio of 6.5 times. So give the clothes retailer a miss and buy into the builder, I say, a company I expect to keep paying big dividends for many years ahead.
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Royston Wild owns shares of Barratt Developments. The Motley Fool UK has recommended Redrow. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.