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Frasers Group - upgrades full year guidance

Sophie Lund-Yates, Equity Analyst | 10 December 2020 | A A A
Frasers Group - upgrades full year guidance

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Frasers Group plc ORD GBP0.10

Sell: 697.50 | Buy: 698.50 | Change -1.00 (-0.14%)
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Revenue fell 11.2%, excluding the impact of exchange rates and acquisitions, to £1.9bn in the first half. That was largely driven by declines in Sports Retail revenue, following temporary store closures.

Despite the revenue declines, underlying cash profits (underlying EBITDA) rose 18.8% to £226.3m. That reflects strong trading since stores reopened, growth online and operating cost savings.

The stronger trading means Frasers Group has upgraded the bottom end of full year guidance. It now expects underlying EBITDA to rise 20% - 30%.

The shares rose 14.7% following the announcement.

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Our View

We have to hand it to Frasers Group, half year results were better than we expected.

The second round of lockdowns didn't hurt the group as much as we feared, and crucially, trading since stores reopened is said to be strong. The group is helped by the fact it sells sports gear. After all, we're a lot more likely to grab a new pair of sports leggings than a new outfit for the office at the moment.

This helps bridge some of the revenue gap. But we've been even more impressed by the uptick in underlying cash profits - that's certainly not something every retailer can boast at the moment. As well as cost savings, this is coming from growth in the online business, and the protection of all-important gross margins.

We can't knock this progress, and think it gives Frasers a stronger foundation to allow it to propel long-term growth. But sales are still lack-lustre, and turning that around depends 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, Mulberry, Dave Whelan fitness and gym assets, and Mike Ashley's now eyeing up the collapsed Arcadia brands, Topshop and Dorothy Perkins. Debenhams is on the watch list too.

The supposed plan 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 "elevation strategy" calls for new freehold flagship stores, displaying products in a more flattering, and digitally integrated, 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.

These new format stores seem to be resonating well, but as yet they don't contribute enough to group performance to move the dial. At some point the group needs these swankier stores to contribute more meaningfully.

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

  • Price/Earnings ratio: 18.0
  • 10 year average Price/earnings ratio: 15.4
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. 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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Half Year Results (figures exclude the impact of exchange rates and acquisitions unless otherwise stated)

The core UK Sports Retail (57% of group revenue) division saw revenue fall 12.6% to £1.1bn, because of store closures. All stores in England have been open since 2 December, and there has been a good performance from the online business. Gross margins rose, from 43.2% to 44.4%, which together with operating efficiencies meant underlying EBITDA rose 7.5% to £156.8m.

The Premium Lifestyle division posted a 0.7% fall in revenue, but including the acquisitions of Jack Wills and, revenue was up 4.8% to £320.4m. A lower volume of concession sales in House of Fraser meant gross margins fell to 47.0%, compared to 51.5% in 2019. Underlying EBITDA rose from a loss of £5.5m, to +£18.9m. This was helped by new Flannels store openings, cost savings and business rate relief from the government.

European retail revenues fell 12.3% to £352.0m, again this was driven by store closures. The group was unable to recoup enough costs to stop profits falling faster than revenue, and underlying EBITDA fell 24.1% to £24.9m. Rest of World retail revenue fell 14.5% to £77.1m, and underlying EBITDA was £10.4m, compared to a loss of £2.5m last year.

Wholesale & Licensing saw underlying EBITDA fall to £11.0m from £16.3m.

The group continues to invest in its Elevation strategy, and says its relationship with key brands is improving, including: "Nike for Sports Direct, Burberry for Flannels, and Hugo Boss for House of Fraser".

The group stated it has around a 10% holding in Hugo Boss shares, and 37% of Mulberry.

Underlying free cash flow was £252.6m, compared to £162.3m last year. Net debt fell almost £116m to £250.1m during the half.

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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 Refinitiv. 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.