Frasers’ first half revenue fell by 8.4% to £2.5bn, driven by declines in its retail operations. Growth at Sports Direct was not enough to offset planned scale-backs in businesses including Game UK and the Premium Lifestyle division, where store numbers have more than halved to 37 units.
Underlying profit before tax fell by a slower 1.5% helped by the increased contribution of Sports Direct to the revenue mix, cost savings, and efficiency gains from the introduction of warehouse automation.
Free cash flow fell from £210mn to £169mn, driven by higher internal investment. Share purchases of listed companies such as Boohoo and Hugo Boss and Australia’s Accent Group rose 142.6% to £449mn, contributing to a £383mn increase in net debt to £831.3mn.
Frasers noted weaker consumer confidence leading up to and following the UK Budget and has reduced its pre-tax guidance range to £550-£600mn, a fall of 4% at the mid-point.
The shares were down 12.4% in early trading.
Our view
Investors were caught a little off guard by Frasers’ downgraded outlook for the year. There’s little place to hide when shoppers tighten their purse strings. But to put things in context, the group’s still expecting modest growth at the bottom line, further building upon the impressive improvements in profitability achieved over the last few years.
Increased automation at warehouses has helped dampen the impact of lower sales on both profits and cash flows. The group remains well-placed to invest in growth initiatives such as the Frasers Plus membership platform, which looks to have got off to a strong start.
Further acquisitions are also on the cards, with the most recent activity seeing the group expand the reach of its Sports Retail division into Africa, where the category is forecast to outgrow more mature markets.
The group's so-called "elevation strategy" is helping to drive growth at the core Sports Direct business. 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. 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. Store numbers have been coming down across the portfolio, reflecting a focus on quality over quantity. But the structural decline in bricks-and-mortar shopping remains a force to be reckoned with.
Frasers has some protection in the form of low-cost Sports Direct. It’s also staying the course with its plans to integrate luxury names into its offering, but it’s a part of the market that remains challenged.
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. While the group is making some steps to modernise its operations, we struggle to get too excited about the company, preferring other names in the sector.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Frasers management of ESG risks is average.
Frasers Group has board-level responsibility for ESG issues but doesn't align its reporting practices with leading standards. It also discloses a weak environmental policy and whistleblower program. Executive compensation isn't explicitly tied to ESG performance targets.
Frasers key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. 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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