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Frasers - post-covid improvements drive confidence

Laura Hoy, Equity Analyst | 21 July 2022 | A A A
Frasers - post-covid improvements drive confidence

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Frasers Group plc ORD GBP0.10

Sell: 886.50 | Buy: 888.00 | Change 0.50 (0.06%)
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Full year organic revenue rose 31.2% to £4.7bn, excluding the impact of exchange rates. This reflected the reopening of stores, which drove growth across all segments bar Rest of World Retail.

Profit before tax was up from £8.5m to £366.1m, driven by improved revenue, new FLANNELS stores and growth online in premium lifestyle. This offset a £227m charge relating to the reduction in value of property assets. It also excludes the cost of the Studio Retail Limited acquisition, which is expected to reduce profits before tax by £5-£10m.

The group expects full year underlying profit before tax between £450m and £500m.

Shares were up 8.0% following the announcement.

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Our view

Frasers' growth this year is largely down to the re-opening of shops after last year's lockdowns. However, "conservative" guidance for 30%+ underlying profit growth suggests the group's making positive progress on its strategy shift.

The so called "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, securing the newest products. Early signs from a couple of recently built flagship stores look promising, but as yet they don't contribute enough to group performance to move the dial. Lots of stores still need upgrading if the format is going to contribute more meaningfully.

On top of the execution risk that comes with a move of this magnitude, Frasers is up against a very challenging backdrop. The structural decline in bricks-and-mortar shopping, is a force to be reckoned with.

The decision to take on extra high-street names including House of Fraser, GAME and Jack Wills only makes Frasers' exposure to the struggling sector more acute. Department stores in particular are facing the brunt of the issues - particularly unsavoury lease agreements and falling footfall. All-said, the group's relying on a resurgence in high street activity for its multi-brand high-street powerhouse plan to pay off. The addition of Missguided shows intent on the digital side too, though it's inclusion won't mean too much for the financials just yet.

The cost of living crisis is another concern. Frasers has some protection in the form of low-cost Sports Direct and it's also pushing into Luxury with its FLANNELS acquisition, a pocket of retail that should be relatively insulated. However we're mindful that we haven't see the full impact on consumer sentiment and with inflation still climbing it's a key risk to the group's forecast.

The group has headroom in the financial terms set by its lenders, so we don't have concerns over liquidity. Frasers could be considered by those that believe in the long-term success of large-scale bricks and mortar retail. Despite higher expected earnings, markets aren't valuing those earnings as highly as they were last year. The group now trades reasonably below its longer-term price to earnings ratio, which looks more appropriate.

Frasers key facts

  • Price/Earnings ratio: 12.8
  • 10-Year Average Price/Earnings: 16.2
  • Prospective dividend yield (next 12 months): 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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Full Year Results

Store re-openings post-lockdown meant UK Sports Retail sales rose 31.2% to £2.6bn. Higher-margin sales at Sports Direct expanded to make up a greater proportion of revenues, which helped gross margins rise from 42.1% to 43.5%. Underlying profits before tax were £201.8m compared to a £12.8m loss. The store estate grew by 2 locations to 808.

Premium Lifestyle revenue increased 43.6% to £1.1bn thanks to new FLANNELS stores, growth online and post-lockdown store re-openings. Property-related write-downs more than doubled to £103.5m, but this was more than offset by strong revenue growth and the segment swung from a £7.8m loss to underlying profits before tax of £10.5m. The store estate remained at 179 locations.

Post-covid re-openings meant European Retail revenue was up 33.4% to £790.2m. A more favourable mix of products sold meant gross margins improved from 39.0% to 42.7%, which helped underlying profit before tax rise to £88.6m from a £51.3m loss. The store portfolio rose by 3 locations to 489 stores.

Revenue in Rest of World Retail fell 1.6% to £150.3m as a strong performance in Malaysia was offset by weakness in the US. Improved inventory management in the US helped gross margins rose from 41.9% to 51.0%, which fed through to a £20.5m increase in underlying profits before tax to £32.7m.

Wholesale & Licencing revenue was up 9.7% to £168.1m, reflecting a weaker performance last year due to covid. Changes in the mix of products in the US meant gross margins were down from 44.0% to 37.5%. Together with the impact of Goodwill charges related to acquisition costs, this meant underlying profits before tax fell 43.4% to £11.2m.

Free cash flow fell from £249.3 to £53.7m, reflecting the impact of the SRL acquisition and an increase in inventory. This fed into an increase in net debt to £1.0bn from £971.6m.

Find out more about Frasers shares including how to deal

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.


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