Frasers' half-year revenue rose 4.4% to £2.8bn, largely as a result of acquisitions made in the last 12 months. Underlying revenue grew by just 0.8%.
Underlying profit before tax grew 12.6% to £303.8mn. This uplift was driven by gross margin improvements as the group's product mix shifted towards more lucrative items.
Net debt, including lease liabilities, rose from £1.2bn to £1.3bn. Free cash flow improved from £140.5mn to £216.0mn.
The group is "confident" it can achieve its full-year underlying profit before tax guidance, expected to land in the £500-550mn range.
The shares were broadly flat following the announcement.
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Our view
Frasers' revenue growth continues to be fuelled by acquisitions of other brands. Despite this, Sports Direct remains the main event, accounting for more than half of the total revenue. With a strong first-half profit print, we think the group's full-year £500-550mn guidance looks well within reach.
The group's so-called "elevation strategy" is well underway. It calls for new flagship stores to display products in a more flattering and digitally integrated environment, which is helping to strengthen its relationships with major global brands. The likes of Nike and Adidas have even gone as far as to name Sports Direct as a key partner. And other brands like The North Face, Columbia and Salomon have recently been brought into the fold too, which should help boost sales.
This stronger relationship aids the group's ability to secure new and exclusive items from these brands, which can be used to lure more customers into stores. It's this shifting product mix towards higher-end items which is boosting gross margins. We're impressed by the early signs from the new flagship stores, but lots more still need upgrading if the new format is to contribute more meaningfully.
We should mention that there's a decent amount of execution risk that comes with a move of this magnitude. The structural decline in bricks-and-mortar shopping is a force to be reckoned with. And department stores in particular are facing the brunt of the issues - particularly unsavoury lease agreements and falling footfall.
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 and Gieves & Hawkes acquisitions - pockets of retail that should be relatively insulated. But it's a challenging backdrop, and retailers tend to get hit hard when consumers tighten their purse strings.
Increased automation at warehouses is set to improve efficiencies and lead to a 5-15% reduction in inventory levels. We expect that to free up some cash which can be funnelled into growing other areas of the business, or used to fund more acquisitions with further expansion in Europe high on the group's priority list.
The risks surrounding the retail sector are driving negative market sentiment. And likely due to its high-brick-and-mortar store exposure, Frasers is trading at the bottom end of its peers. We struggle to get too excited about the company at the moment, preferring other names in the sector.
Frasers key facts
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