Simply Be owner N Brown has warned that its costs will be higher in the coming years after a “disappointing” ruling in its long-running dispute with the taxman.
Marketing costs are likely to be between £6 million and £9 million higher from 2020 due to irrecoverable VAT.
Shares in N Brown were trading 2% lower on Tuesday morning.
The company has argued that its marketing expenditure principally relates to the sale of goods, which is VAT standard-rated, rather than financial services, which is VAT exempt.
The judge sided with HMRC, however, finding that the group is also in effect marketing financial services when it is marketing goods.
But it was also ruled that the marketing costs should not be split based on financial services turnover. Both parties must now propose how to split marketing costs going forward, meaning a proportion of VAT will be irrecoverable.
Analysts at Peel Hunt downgraded their expectations for the group’s future earnings, and said the outcome was likely to create “further pressure” on cost inflation.
“The likely outcome here is that N Brown will ultimately have to either cut back on marketing activity in future years, or deliver further cost savings in order to maintain EBIT margins, which would imply a negative turnover impact [to the extent that marketing is cut],” they said.
It comes towards the end of a rocky year for N Brown, which has seen a change in both chairman and chief executive in the period.
Former CEO Angela Spindler left abruptly in September, just a few months after Tesco veteran Matt Davies took over as chairman. Steve Johnson is acting as CEO while the company searches for new leadership.
The retailer also announced that it would close up to 20 stores in June, blaming weaker footfall on the high street.