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String of acquisitions reveals Frasers' confidence

The retail company seems to be defying the odds with its results and buying spree
August 24, 2022
  • Frasers' shares up 25 per cent after results
  • But inflation could prove problematic

Inflation is forecast to hit at least 13 per cent, consumer confidence is at rock bottom and the retail sector continues to struggle with its transition from offline to online. Yet Frasers Group (FRAS) is flying. A recent surge means the company's shares are up 7 per cent this year, at a time when a broader index of FTSE 350 retailers' shares are down more than 30 per cent.

Despite operating in one of the worst trading environment a retail business could imagine, the company said in a recent full-year trading update that in the year to 24 April it had swung from a £78mn pre-tax loss to a £297mn pre-tax profit on revenue that climbed by 30 per cent.

With valuations currently depressed in the sector, it is also picking up assets on the cheap. Last week, it launched an all-cash bid for MySale after building a 29 per cent stake in June. The 2p a share offer for the lossmaking Australian fashion marketplace values its remaining shares at £13.6mn – a 60 per cent premium to the price prior to Frasers' June stake-building, but well below the £1-plus level they traded at five years ago. The company also acquired online fast fashion brand Missguided from administrators in June, which it is merging with a competitor, I Saw It First, picked up a month later. On top of that, it has also made a “strategic investment” in Hugo Boss.

Historically, the engine of the company has always been its core brand: Sports Direct. The budget sports retailing arm is where the entire business started back in 1982 when it was called Mike Ashley Sports – named after its famous founder and majority shareholder, who handed over the chief executive's position in May to his son-in-law, Michael Murray.

The success of the brand comes from its operational efficiency. Products are sold at rock bottom prices, with a tight rein kept on supply chain costs. Picking up other brands cheaply and integrating them allows it to make a higher profit margin than other sports retailers. Around half of Sports Direct's sales are now from brands it owns, according to RBC Capital Markets.

This love for acquiring brands – the group now owns 36 of them – is sometimes stronger than its desire to maintain physical assets. It has picked off stores after buying Debenhams assets from liquidators and House of Fraser from administrators, but has been happy to hand the keys back on scores of others. A sale-and-leaseback deal on company-owned retail parks agreed earlier this month brought in another £205mn of cash, useful not least as a way of bolstering all-important working capital.

As that suggests, branding is not everything. Some decisions are operational. The low-ball offer to buy MySale - the deal was pitched at a 26 per cent discount to the previous day's closing price - disguises how central the Australian flash sale website could be to the running of its business. The company not only offers access to the Australian market but an outlet to offload unsold European stock due to the “counter seasonality between the European and Australian climates”. In other words, those winter coats Frasers couldn’t shift in the UK in December will go for a discount in Australia in June.

Not all is rosy for Frasers, though. Analysts have stressed the need for investor caution in the face of inflationary pressures. RBC observed that Frasers sources 75 to 80 per cent of its product in US dollars and that this is hedged in most cases for the next 12 to 24 months, but as that rolls off it will be affected by sterling weakness.

The UK economy tipping into a recession is unlikely to help, either. The growth of Sports Direct – which the company said in its results was largely responsible for its gross margin increase – has been a success story for the company as cost of living rises continue to bite, but RBC casts doubts on Frasers’ ability to scale its luxury brands beyond London if the economic situation worsens.

It is also worth noting that Ashley himself is rarely far from the headlines. According to the Mail on Sunday, the former Newcastle United owner is pursuing a legal case against Morgan Stanley in a dispute over margin calls he faced on Hugo Boss options.

Although he has handed over the top job to Murray, his 69 per cent shareholding means he will continue to cast a big shadow.