* Says full-year results to be in line with expectations
* Says bad debt charges increase due to young buyers
* Gross margin falls 1.5 percentage points
* Shares down 5.3 percent
(Adds CEO interview, analyst comment, background, detail)
By Catherine Bosley
LONDON, Jan 15 (Reuters) - British mail order shopping firm N Brown said on Thursday sales had increased by 8.8 percent in the 19 weeks to January 10, but that margins weakened as the company struggled to claw back money owed by customers.
Demand for discount items has helped retailers such as Brown weather the downturn that has beset many UK retailers, who are suffering from a decline in discretionary spending.
Sales growth at Brown, whose catalogue titles include Simply Be, Oxendales and Viva La Diva, is among the highest for UK retailers in the Christmas period, exceeding the 4 percent jump reported by fellow budget clothing outlet Primark.
The British Retail Consortium has said like-for-like retail sales in December experienced their sharpest drop on record.
Brown, which also sells household goods ranging from pet food to sofas, said its pre-tax profit for the full year would be in line with the 82.5 million pounds ($120.6 million) expected by analysts.
"Trading is slightly ahead," said John Stevenson, a retail analyst with KBC Peel Hunt in London.
"The concern ... will remain the bad debt, but the company continues to micro-manage it extremely well," he said. "Their customer base is generally older, less reliant to a certain extent on the job market and mortgages."
N Brown, which also sells life insurance, loans and product warranty cover, said the 8.8 percent increase in sales reported applied to both like-for-like sales and total revenue.
The retailer said a 1.5 percentage point fall in its gross margin was entirely due to the rising cost of bad debts.
Half of the deterioration stemmed from an increase in the number of younger shoppers in their 30s and 40s, who have a higher credit risk than Brown's traditional client base.
The other half occurred because Britain's sharp economic downturn meant collection agencies were focused on recovering more lucrative mortgage and credit-card debt rather than the relatively small amounts of money due to retailers, Brown said.
"The situation is likely to endure until we are through the economic downturn, so we will be increasing the scale of our internal debt collection activity," the company said.
Credit Suisse and Arbuthnot had expected margins for the second half of 2008-09 to decline by 1 percentage point or less.
YOUNGER CUSTOMER BASE
Shares in the company were down 5.3 percent at 201.75 pence by 1203 GMT, underperforming a 1.7 percent fall for the FTSE's index of medium-sized companies.
But Brown, whose average customer is a 57-year-old woman, said the fastest sales growth was coming from the younger customers it has been trying to attract.
"Those are the customers who are most Internet savvy," Chief Executive Alan White told Reuters, adding that Internet sales, which are cheaper to process, increased by 34 percent in the period and now account for 35 percent of the group total.
KBC Peel Hunt's Stevenson said a rising number of customers in their 30s and 40s should not become a major problem for Brown's debt collection, and profits would likely rise next year.
"It's one of the few retailers we actually see growth for," he said.
Brown also said it had invested 1 million pounds ahead of the launch of its Simply Be catalogue in Germany in February.
"The pound's on the floor so I think the attraction of their product will be certainly great enough," Stevenson said.
The firm said its financial position remained stable, with a banking facility of 320 million pounds secured until March 2012.
(Editing by Paul Hoskins and Rupert Winchester)