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Frasers Group - acquires Dave Whelan fitness and gym assets

Sophie Lund-Yates, Equity Analyst | 24 August 2020 | A A A
Frasers Group - acquires Dave Whelan fitness and gym assets

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Frasers Group plc ORD GBP0.10

Sell: 706.00 | Buy: 707.00 | Change 10.00 (1.44%)
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Frasers Group has acquired assets relating to Dave Whelan Sports Limited's (DW) gym and fitness business, for an initial cash amount of £37m. An additional £6.9m could be paid, depending on the final number of leasehold interests Frasers acquires. The transaction includes certain DW stock, but not business names or intellectual property.

These assets have been bought from DW's administrators. For the financial year ended 31 March 2019, DW made a loss of £20.1m.

Frasers Group said the deal will support its existing gym and fitness club portfolio, and is consistent with its elevation strategy.

The shares were unmoved following the announcement.

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Our View

Lockdown inevitably knocked the Sports Direct owner's revenue. But the overall picture was better than we feared.

One reason for this is simply that the group sells sports gear, which was popular with those doing home workouts. After all we were a lot more likely to grab a new pair of sports leggings online than we were a new outfit for the office. This will have bridged some of the revenue gap, and coupled with well controlled costs meant underlying cash profits didn't make for too ugly a read.

We also note that "normality" is said to be resuming now things are opening back up. But while it's a relief to see the core business in a stable, if somewhat lacklustre, position, long-term sustainable growth rests on the transformation plan.

Prior to the pandemic, Frasers was working to turn around its eclectic mix of acquired retailers. Among them are largely unloved names from up and down the UK high street like House of Fraser, GAME and Jack Wills. It now also owns a chunk of Hugo Boss, and the Dave Whelan fitness and gym assets are the latest addition to the portfolio.

Mike Ashley's vision is to become a "multi-brand, multi-category" retail powerhouse. The problem is, it's not immediately clear how all these high street pieces fit into the puzzle. Making a coherent, and lucrative, whole out of them is going to take a lot of time. And money. Investors shouldn't hold their breath when it comes to dividends. But given Ashley owns over 63% of the shares, what he says goes regardless of any bugbears.

The group's turnaround plan, the "Selfridges of Sport" initiative, calls for new freehold 'flagship' stores, displaying products in a more flattering environment. That should allow the group to improve its relationship with key brands like Nike and Adidas, allowing it to charge more for its products.

The new format seemed to doing well - although, possibly due to the challenging retail environment, it's hard to see definitive evidence of that in the numbers. Underlying profits are being driven by self-help measures like cost cutting too. At some point the group needs these swankier stores to contribute more meaningfully to group performance.

The group has headroom in the financial terms set by its lenders, so we don't have concerns over liquidity. The priority now is how Mike Ashley's grandiose vision for Frasers' future gets off the ground. In the meantime, the core existing retail operation is likely to continue to drag on group performance. Overall, the plan has merit, but the story now needs to be about executing it. Investors will need to be prepared to stomach a rocky ride to see if that happens.

Frasers key facts

  • Current 12m forward Price/Earnings ratio: 15.4
  • Ten year average 12m forward Price/Earnings ratio: 15.1
  • Prospective yield: 0%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Full Year Results (results don't include the impact of acquisitions or exchange rates unless otherwise stated) 20 August 2020

Revenue of £4.0bn was 6.9% up on last year, but once the impact of exchange rates and acquisitions are stripped out revenue fell 12.6% to £2.9bn. That reflects the impact of lockdown store closures in the UK and Europe, which was partially offset by a better performance in the Premium Lifestyle business. Underlying cash profits (underlying EBITDA) were flat at £354.4m.

The group expects underlying EBITDA to increase 10 - 30% in the current financial year.

Continued uncertainty means no final dividend has been declared and the share buyback programme has been suspended.

The core UK Sports Retail division saw revenue fall 14.6% to £1.8bn, thanks to store closures during lockdown. The closures helped keep operating costs down, with these falling 12.1%. Including the impact of the GAME UK acquisition operating costs rose 2.1% to £660.0m.

Despite the lower costs, reduced sales meant underlying cash profits fell 15.1% to £239.6m. Prior to lockdowns the group said cash profit growth was positive.

The Premium Lifestyle division posted an 18.6% rise in revenue, reaching £242.8m. Acquisitions had a significant impact on the division's reported results though, with revenue reaching £722.0m including acquisitions and the impact of exchange rates. Premium Lifestyle was also helped by a good response at new digital stores and increased online shopping.

Cash profits almost tripled to £39.3m, but the heavy costs associated with acquisitions in the period meant cash profits were just £4.5m once acquisitions are included.

European retail revenues were down 15.6% to £497.9m, for the same reasons as the UK Sports Retail business. Despite this, EBITDA rose to £57.1m from £26.7m as Covid-19 meant operating costs were lower, and the group was released from provisions in Austria following the sale of some property.

Frasers Group is continuing with its elevation strategy and plans to invest over £100m in this area. That will encompass increased spending on things like digital mirrors and enhancing the customer experience. The group also acknowledged the success of its strategy depends on good relationship management with key brands like Nike and Adidas, which can be "challenging". Frasers now has around a 10% stake in Hugo Boss.

On a reported basis, which includes a new accounting policy which changes the way leases are categorised in company accounts, free cash flow was £92.2m. Net debt fell £12.5m to £366.0m.

Frasers also reached a commercial settlement with the Belgian Tax authority relating to €674m of disputed VAT, and penalties have been settled for an "immaterial amount".

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.