Shares in Frasers (FRAS) firmed 2% to a five-year high of 721p on Thursday as the Mike Ashley-controlled retail conglomerate reported a sharp rise in first half profit.
With the Sports Direct-to-House of Fraser owner’s stores having traded strongly since reopening from lockdowns, Frasers felt confident enough to reinstate adjusted pre-tax profit guidance for the year to April 2022. The company is now steering the market to expected adjusted pre-tax profit of between £300 million and £350 million, prompting Liberum Capital to upgrade its estimates.
Frasers’ stores rebounded strongly after reopening from the last UK lockdown in March 2021 and online sales continued to grow in the half to 24 October 2021.
Combined with gross margin gains, this drove adjusted pre-tax profit 62% higher to £187 million on group revenue up 23.6% to £2.34 billion, as sales sprinted ahead in both the UK sports retail and premium lifestyle divisions.
ELEVATED PROPOSITION
Despite prevailing uncertainties, Frasers is pressing ahead with its successful ‘Elevation No Limits’ strategy by investing in its store estate and digital and fulfilment capabilities.
‘We opened our new Sports Direct flagship store on Oxford Street in London to great acclaim in June,’ insisted non-executive chairman David Daly, ‘and have recently opened two Flannels regional flagship stores at Meadowhall in Sheffield and at Leicester Fosse Park. Both are performing above expectations.’
The company said its performance remains strong ‘in both our store estate and online’, although Frasers remains cautious with ‘macroeconomic headwinds on the horizon in the form of but not limited to cost increases, supply chain issues and potential squeezes on consumer spending power.’
The group also warned there is ‘still the risk that Covid-19 measures could adversely affect outlook and we are now seeing restrictions return, including lockdowns in Europe.’
Notwithstanding these risks, Frasers reckons it can achieve a full year adjusted profit before tax in the £300 million to £350 million range, ‘on the proviso there are no substantial lockdowns imposed in the UK, particularly over the important Christmas period.’
THE LIBERUM VIEW
Following the results, Liberum Capital raised it full year 2022 pre-tax profit forecast by 6.6% to £323 million, in line with the midpoint of management’s new guidance.
‘This reflects a stronger top line than we had envisaged, following the first half outturn, and we also take confidence from the fact that we are now a month and a half post the 24 October period end (thus a good way into peak trading), which management will have factored in when considering its new guidance. Our net debt forecast improves, assuming a year end position broadly in line with that reported at half-year.’
The broker believes Frasers’ strategic foundations ‘are now firmly in place driving yet another impressive set of results, which are standout considering the current environment.
‘We raise our target price to 900p (from 850p) and believe the current valuation looks cheap when consider the strong momentum, cash generation and a potential sum-of-the-parts factoring in core UK Sports, the value building within Flannels, the strategic stakes (Hugo Boss, Mulberry) and the other key brands (including Everlast).’
