Frasers bounces back

High street retail in the age of Covid is riddled with uncertainty. Retail group Frasers (FRAS), which owns brands such as House of Fraser, Sports Direct and Jack Wills, posted robust revenue and profit growth in its half-year results against restriction-scarred comparatives. But it also lodged £135m of impairments against property assets due to the impact of the pandemic and its traditionally bemoaned business rates.

Brick and mortar sales were turbocharged after sites reopened post-lockdown. UK sports retail sales, the group’s revenue driver, were up by 28 per cent to £1.4bn. Premium lifestyle sales become the group’s second biggest revenue generator, driven by the surging Flannels brand – analysts at RBC Capital Markets described this is “a significant growth opportunity”.

A lot depends on the trading environment. If we are plunged back into tougher restrictions on the back of the Omicron variant, the top line could struggle, despite the group’s growing online business.  The “elevation” strategy, however, looks like a solid foundation for long-term growth. This focuses on flagship stores, and digital fulfilment capabilities – that the new flagship Flannels stores are trading ahead of expectations is a positive sign. On fulfilment, a 1 million square foot warehouse is in the works in Germany to support its online business.

Consensus forecasts give earnings per share of 41p for fiscal year 2022, rising to 46p for 2023, with the shares trading on a 12-month forward price to earnings ratio of 18 times. The valuation looks undemanding given the group’s growth prospects and brands. We think that Frasers looks, for now, like it can weather the storm around the retail. Buy.

Last IC View: Buy, 463p, 10 Dec 2020