Frasers lifts itself above high street gloom

Mike Ashley, the founder and majority shareholder of retail group Frasers (FRAS), may now have handed over operational control of the business to son-in-law Michael Murray, but the freewheeling trader spirit he embodied still seems alive and well.

For instance, it’s only been six weeks since the company’s first half ended and in the intervening period it has rescued Savile Row tailor Gieves and Hawkes, upped its holding in designer label Hugo Boss to around 34 per cent – mainly through the sale of put options – bought homewares brand Amara Living, and paid £15.8mn for the Coventry Building Society Arena. It then served tenant Coventry City Football Club with an eviction notice, only to sign a short-term licence agreement with the club a week later.

The first three deals make some sense, but why the company should get involved in the last is unclear. It is already facing a big enough challenge in taking upmarket a sprawling a retail empire that encompasses discount sports shops, department stores and fashion boutiques just as a recession looms.

Murray’s ‘elevation strategy’ seems to be working so far, with the rollout of its Flannels stores helping to bump up revenue at its premium lifestyle arm by 25 per cent year-on-year, making it the fastest-growing part of the business. Unlike in other parts of the group, the bulk of this growth was organic, too.

The group’s gross margin fell by 270 basis points, though, to 42 per cent, which it said was partly due to cost of goods inflation and maintaining higher stocks, as well as the lower margin made by the recently-acquired online retailer Studio and the cost of shutting more House of Fraser stores.

Despite the tougher trading environment, the company maintained guidance given six months ago that it will make an adjusted pre-tax profit of between £450mn-£500mn, which at the top end would represent a 45 per cent uplift on the £345mn earned last year.

Frasers' share price fell by 9 per cent on these figures, but is still up 15 per cent year to date. The shares trade at 11.8-times consensus forecast earnings, well below their five-year average of 16.5-times.

The company will have to fight for customers as disposable incomes weaken but it sources keenly, prices keenly and will no doubt be in the running to pick off more prized assets if competitors throw in the towel. Buy.

Last IC View: Buy, 736p, 10 Dec 2021