Frasers Group finds it tough going in first half

Through the prism of the long term, Frasers Group (LSE:FRAS) has exposure to a number of areas which could flourish, but for the time being the going remains tough.

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Frasers Group is a busy business. Stakes in other retailers, financial services and property investments sit alongside its core retail offering, which itself has several strands. This gives some diversity in terms of different units being able to pick up some of the slack elsewhere, but ultimately the group relies largely on its retail business. Here, the environment has been challenging and the group expects much of the same for the remainder of its financial year.

Nearer term, the current clouds which are overhanging the retail sector has weighed on performance. Consumer sentiment is patchy at best, retail sales are under pressure and the general economic backdrop has lessened consumer propensity to spend. That being said, cost savings and synergies of £10.3 million have been achieved as a result of previous warehousing automation and by the streamlining of previous acquisitions, despite the incremental costs of £50 million resulting from the previous Budget in minimum wage and National Insurance requirements.

At the headline level, a 5% rise in overall revenues to £2.58 billion in the 26 weeks ended 26 October included a 42.8% jump from the International business, which accounts for 28% of the group number. Half-year adjusted pre-tax profit of £290.9 million represented a decline of 2.8%, although Frasers has reaffirmed its guidance for the year as a whole, expecting to land in a range of £550-600 million. Although unchanged, the range had previously been £575-625 million, and would compare to £560.2 million last year.

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Yet on the face of it, there should be reasons for optimism as the group has highlighted. Frasers is geographically diverse and announced acquisitions in South Africa and the Nordics in the period, as well as new partnerships in Australia, the Middle East and Malta. This is in addition to investments in and partnerships with global names such as Nike, Adidas and Hugo Boss (where the group has a 25.2% stake), all of which add some margin protection. This “Elevation Strategy”, which aims to enhance its appeal through more digitally integrated and flattering displays of its products is also gaining traction, especially given some of its tie-ups with those household names.

In terms of the business more generally, there are also plans to diversify income streams further, such as its Frasers Plus credit operation. The group has outlined an ambitious goal of £1 billion in sales, £600 million in credit balances, a yield in excess of 15% and over two million customers in the longer term. While the operation is in its early stages and represents less than 2% of group revenues, there are now 1.1 million active customers, with Frasers Plus accounting for 20% of UK online sales in the period.

Elsewhere, there are mixed signs. Its Premium Lifestyle line, which is responsible for 17% of group sales, saw a revenue decline of 3.7%, although gross margin improved by 4.1% and profit from trading by 9.2% to £61.5 million. Sports Direct in the UK continues to do much of the heavy lifting, although remaining under pressure, while the Flannels business returned to sales growth in the period.

Other factors are at play, with the broader debate around consumers switching to online and away from traditional physical stores continuing and as yet unsolved. Several Board changes announced in September put pressure on stability and continuity, although the November announcement of the acquisition of Braehead Shopping Centre in Glasgow, Scotland’s largest retail and leisure destination, could prove to be a positive development.

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Frasers is making a good fist of dealing with a notoriously difficult environment, but its outlook comments are unsurprisingly cautious for the remainder of the year. The shares have largely recovered from a previous precipitous drop following the profit downgrade, having now fallen by 4% over the last year, as compared to a gain of 4.7% for the wider FTSE250.

Over the last two years the shares are down by 20%, which should in theory leave some positive room for manoeuvre on valuation grounds. Even so, while the market consensus has nudged slightly higher of late to a cautious buy, investors remain mindful that there are perhaps rather better opportunities elsewhere in the sector.