N Brown cash leakage explained

8 Comments

• 
  bob February 9, 2012 at 2:10 pm

  Provision (charge or balance?) as a % of sales isn’t the best indicator. Do they publish the provision balance as % of the debt?

  The high interest rate is a moral concern although with potential for good returns on the asset but the risk of non-payment in poor economic environment is not great. Store cards are one of the 1st item of credit to get non-payment. These days…. even before mobile contracts (which young things regard as non optional).

  I also noticed in the annual accounts that a substantial chunk of debt is due to be renewed in Jan ’12.

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  • 
    Richard Beddard February 9, 2012 at 5:06 pm

    Hi Bob. Thanks for your comment. It does, in the financial review. The bad debt provision was 8.7% of gross debtors, down from 9.5% in 2010.

    The report contains a little detail about how the company tightened credit terms and asked for deposits on high priced items because of bad debts during the recession, which reduced sales but improved gross margins.

    I’m not familiar with accounting for bad debt, so I’d be interested to know why the balance as a % of debt is a better measure than charge as a % of sales and for that matter why N Brown uses the latter primarily.

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• 
  Nate Tobik February 9, 2012 at 5:38 pm

  Richard,

  Not an expert on bad debt at all but a data point worth considering. I’d look at the financials of UK credit card companies as a comparison.

  I remember looking at Discover card a few years back when they owned Goldfish (maybe they still own it?) which was a higher interest rate credit card in the UK. If I remember correctly 5% was the non performing holders. So in light of that 8% is a bit higher which might indicate poor borrower quality?

  Just a thought

  Nate

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  • 
    Richard Beddard February 9, 2012 at 5:40 pm

    Thanks Nate.

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• 
  Neonomic February 9, 2012 at 6:57 pm

  Richard, I’ll attempt to answer your question about why bad debt as a % of balances is a better than % of sales.

  In summary, the difference is stock versus flow. Stock the total amount of lending and flow is the lending sales. Bad debt comes from the stock (ie the lending you have already done) and bad debt rates change over time. For example, bad debt rates on stock increase rapidly during recessions but as lenders tighten up the lending criteria at the same time they acquire the lower volume of higher quality lending at the same time (so bad debt of sales performance is better than bad debt of stock). Lenders have to hold capital against the stock rather than the flow.

  So, bad debt as % of balances is best because it tells you about the quality of the full asset base.

  I know nothing about this business so can only speculate why they report how they do!

  Does this answer it?

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  • 
    Richard Beddard February 9, 2012 at 7:02 pm

    Yes it does. Thank you It may also explain why they use sales as the benchmark!

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    • 
      Neonomic February 9, 2012 at 7:07 pm

      Pleasure. Generally in normal times bad debt of stock at around 10% is fairly normal for unsecured lending.

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  bob February 16, 2012 at 3:10 pm

  Neonomic covered it nicely. A question of stock verse flow. The levels of new business distort the metric.

  For a comparison, check out Next for their bad debt provision (mature business in similar area).

  Regarding the debt that, I assume, was renewed. I wonder if the rate changed?

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