Frasers Group plc (FRAS) ORD GBP0.10
HL comment (5 August 2021)
Full year revenue fell 8.4% to £3.6bn, reflecting declines in all divisions except Premium Lifestyle. Excluding the effect of exchange rates and acquisitions, revenue fell 11.4%. On the same basis, underlying cash profits (EBITDA) rose 16.9% to £390.8m thanks to cost savings and government support. However, the pandemic means the value of Frasers assets has been lowered, including these charges, pre-tax profit was down to £8.5m, from £143.5m.
Frasers warned there must be ''concerns about the stability of some retailers'' and believes there's a ''probable risk'' of further lockdowns. No final dividend will be paid as the group priorities investment in its Elevation strategy.
Mike Ashley will step down as CEO, with the role transitioning to Michael Murray over the course of the 2022 financial year.
The shares fell 2.4% following the announcement.
The Sports Direct owner is in a difficult position.
The group has been struggling to grow outside its core UK sports retail operation for some time now. And the pandemic has added weight to that already tough situation. The structural issues faced by bricks and mortar retailers are well documented, and Frasers has taken a £316m hit to the value of its assets, which hurts profits.
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.
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. These new format stores seem to be resonating well, 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.
We're also pleased the controversial decision to buy a 16.4% stake in fellow struggling retailer Hugo Boss seems to be paying off. And the group has done a good job of controlling costs, and increasing online sales, which means cash profits have surprised us in a good way.
But while the ship may have steadied following the rolling lockdowns of the last 18 months, risk remains. The largest in our view is execution risk - 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 Fraser shares.
The group has headroom in the financial terms set by its lenders, so we don't have concerns over liquidity. Investing in Frasers could be the right move for those that believe in the long-term success of large-scale bricks and mortar retail. With the challenges and uncertainty that persists though, success is not guaranteed, and we note the current above-average valuation doesn't reflect those concerns.
Frasers key facts
- Price/earnings ratio: 20.0
- Ten year average Price/earnings ratio: 15.9
- 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.
Full year results (revenue figures ignore exchange rates and the effect of acquisitions)
UK Sports Retail revenue fell 14.6% to £2.0bn, reflecting store closures. There was some pent up demand when stores reopened, and online sales grew. Gross margins improved 1.5 percentage points because the products sold were more lucrative than normal. Operating costs were down just over 20% because of costs savings and Government schemes. Underlying cash profits (EBITDA) rose 22.8% to £279.2m.
In Premium Lifestyle, which includes Flannels, Jack Wills and House of Fraser, sales rose 1.4% to £735.6m, driven by online and new Flannels stores. Gross margins improved as a lower proportion of sales were discounted. Operating costs were also lower, again thanks to government help and lower store costs, so underlying EBITDA was £53.9m up from £4.5m.
Frasers expects to close more House of Fraser stores as business rates come back into effect.
Store closures meant revenue fell 20.5% to £615.2m in European Retail. Operating costs increased in this division, meaning underlying EBITDA fell over 90% to £4.1m. Operating efficiencies helped underlying EBITDA swing from a £6.8m loss to profit of £25.6m in the Rest of World business. Revenue was £152.7m (2020 174.2m).
The group recognised a non-cash impairment charge of £316m, as the value of its assets were reduced, reflecting ongoing challenges in the retail sector.
Underlying free cash flow rose to £427.8m, up from £263.1m, reflecting the higher underlying EBITDA. Net debt fell £117.1m to £248.9m.
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 disclosure for more information.
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