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Frasers - acquiring Missguided's intellectual property

Frasers has bought Missguided's intellectual property for a total cost of £20m, after Missguided announced it had fallen into administration.

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Frasers has bought Missguided's intellectual property for a total cost of £20m, after Missguided announced it had fallen into administration. Around 8 weeks after the deal completes, Missguided's expected to operate as a standalone business within Frasers Group.

Frasers CEO, Michael Murray, said: "We are delighted to secure a long-term future for Missguided, which will benefit from the strength and scale of FG's platform and our operational excellence. Missguided's digital-first approach to the latest trends in women's fashion will bring additional expertise to the wider Frasers Group."

The shares rose 1.5% following the announcement.

View the latest Frasers Group share price, charts and how to trade

Our view

The positive news for Frasers is that the recovery looks well underway. The lower end of guidance would equal the groups previous record high for profit. But the structural issues faced by bricks and mortar retailers continue. And Frasers has taken another hit to the value of its assets in the first half, amounting to £135.3m.

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 won't move the dial much.

To its credit, the so called "elevation strategy" is a good idea. The plan 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.

In our view, the largest risk at present is that of execution - the risk of the strategy shift going wrong, or simply falling flat. It's not going to be an easy task for Mike Ashley's son-in-law-cum-new-CEO to keep things in check. We question if Michael Murray has the right tools to keep the group on course in such challenging conditions. As current head of Elevation, he certainly knows his way around Frasers, but his retail-sector tenure is shorter than we'd like. It's also worth noting that investors aren't being paid to wait and see if plans come good, with no dividend on offer. Mike Ashley retains significant control over Frasers shares.

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. Last year we didn't think markets had fully priced in the mounting short-term challenges, but that has since changed. 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

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.

Half Year Results (9 December 2021)

Half-year revenue increased by 23.6% to £2.3bn. That reflected gains in all divisions except Rest of World Retail. Underlying profit before tax increased 61.7% to £186.8m as stores reopened and the group lapped last year's lockdown-impaired results.

The group expects full-year adjusted profit before tax between £300-£350m. However, management warned this is dependent on no ''substantial lockdowns imposed in the UK''.

The board has decided not to declare an interim dividend.

UK Sports Retail revenue grew 27.6% to £1.4bn. Performance was driven by the reopening of stores and the comparative period being impacted by lockdowns. Increased inventory write-downs and strong sales of less-lucrative console sales in GAME UK meant gross margins fell from 44.4% to 43.8%. This didn't offset the stronger revenue though, and underlying profit before tax rose 111.2% to £117.4m.

Revenue grew 33.6% to £427.9m in Premium Lifestyle, which includes Flannels, Jack Wills and House of Fraser. New Flannel stores, growth online and a favourable comparative period being the main contributors. Gross margins were up slightly to 47.7%. Despite this, underlying profit before tax swung from a profit of £26.3m last year, to a loss of £9.7m. This was largely due to impairment charges, where the group has reduced the value of some property and other assets.

The group also said: ''It should be noted that despite year on year trading improvements in the House of Fraser business, business rates in their current form continue to be a significant and disproportionate cost to House of Fraser.''

European revenue was up 13.6% to £399.8m, 18.4% excluding acquisitions and on a currency neutral basis. Gross margins improved from 41.7% to 43.7%, as the group sold a higher proportion of more lucrative products. Underlying profit before tax was up 220.5% to £60.9m as stores reopened with particularly good performance in The Republic of Ireland.

Rest of World revenue fell 14.9% to £65.6m largely due to restrictions in Malaysia. Underlying profit before tax was up from £7.7m to £14.3m.

The group recognised a non-cash impairment charge of £135.3m, as the value of its assets were reduced, reflecting ongoing challenges in the retail sector.

Free cash flow rose £165.3m to £384.5m, reflecting higher operating profits. Net debt decreased from £250.1m to £24.3m. However, this doesn't include items such as month end supplier payments and payroll costs because of timings.

The group said it remains ''cautious with a number of well publicised macroeconomic headwinds on the horizon in the form of but not limited to cost increases, supply chain issues and potential squeezes on consumer spending power. There is also still the risk that Covid-19 measures could adversely affect outlook and we are now seeing restrictions return, including lockdowns in Europe.''

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 1st June 2022