The Motley Fool

The Frasers share price is rising. Is this FTSE 250 stock a good investment?

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Arrow descending on a graph portraying stock market crash
Image source: Getty Images.

FTSE 250 stock Frasers Group (LSE: FRAS) has seen its share price soar 158% in the past year. It owns the Sports Direct brand along with House of Fraser, Flannels, Evans Cycles and more. But the high costs of running physical stores means traditional retail is under pressure compared to e-commerce. Does this mean Frasers is at a disadvantage and a poor long-term investment? Here are my thoughts.

What’s been happening with Frasers Group?

Frasers has a £2.7bn market cap and earnings per share are around 18p. This gives it a price-to-earnings ratio of approximately 27. I think this indicates a share on the expensive side, particularly as it has several challenges ahead.

5 Stocks For Trying To Build Wealth After 50

Markets around the world are reeling from the coronavirus pandemic… and with so many great companies trading at what look to be ‘discount-bin’ prices, now could be the time for savvy investors to snap up some potential bargains.

But whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. And if you’re 50 or over, we believe these stocks could be a great fit for any well-diversified portfolio.

Click here to claim your free copy now!

The most recent budget did nothing to ease Frasers’ troubles and boss Mike Ashley called business rates relief measures “near worthless” for large retailers. He even said he’s rethinking some store plans due to the high business rates.

Frasers’ acquisition strategy is at the heart of its approach to growth. In fact, it bought Evans Cycles out of administration in 2018, followed by Jack Wills and Psyche. The group also has a 37% stake in Mulberry and 10% in Hugo Boss, and it recently bought a Wigan retail park.

But it’s not always easy. The FTSE 250 group noted its interest in purchasing Peacocks, but missed out. It also failed to buy long-term target Debenhams, as well as Topshop in which it was rumoured to be interested.

Nevertheless, these disappointments highlight how the group is always on the lookout for new acquisitions to help scale its business. And Ashley has made no secret of the fact he wants to bring luxury brands to the high street under the Frasers banner.

This is great in theory, but company debt considerably outweighs its cash. I think this could pose a challenge to securing future acquisitions on favourable terms.

The company also has other challenges to deal with in keeping its existing companies afloat. At Evans Cycles, it’s implementing drastic cost-cutting measures. This includes slashing 300 jobs.

Will the Frasers share price thrive in 2021?

The pandemic and subsequent lockdowns have brought it a world of challenges. While Frasers is still making decent returns online, it has considerable overheads to consider on the bricks and mortar side. In early December, the company projected a double-digit rise in underlying EBITDA for FY21. But as the government announced the current lockdown, its guidance had to be pulled, which was very disappointing for shareholders.

For most of Frasers’ stores, this lockdown is due to end on 12 April, but it’s unfortunately led the group to draw an impairment charge of over £100m.

However, with the vaccine rollout making excellent headway, the future is looking a little brighter. I think Frasers Group should begin its recovery as pent-up demand for shopping sees footfall return through the summer. Analysts are largely bullish on its future revenues, and the Frasers share price is up 11% year-to-date.

But would I buy Frasers as a long-term investment? There’s no doubt billionaire Mike Ashley is a go-getting business owner, but he’s made mistakes as well as good deals over the years. 

All in all, I’m wary of the bricks and mortar retail market in the current economic environment. Therefore, I don’t have any plans to invest in Frasers Group. There are other stocks I prefer.

For regular stock market investing ideas and help choosing the best shares to buy now, sign up to The Motley Fool today.

FREE REPORT: Why this £5 stock could be set to surge

Are you on the lookout for UK growth stocks?

If so, get this FREE no-strings report now.

While it’s available: you'll discover what we think is a top growth stock for the decade ahead.

And the performance of this company really is stunning.

In 2019, it returned £150million to shareholders through buybacks and dividends.

We believe its financial position is about as solid as anything we’ve seen.

  • Since 2016, annual revenues increased 31%
  • In March 2020, one of its senior directors LOADED UP on 25,000 shares – a position worth £90,259
  • Operating cash flow is up 47%. (Even its operating margins are rising every year!)

Quite simply, we believe it’s a fantastic Foolish growth pick.

What’s more, it deserves your attention today.

So please don’t wait another moment.

Get the full details on this £5 stock now – while your report is free.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

Renowned stock-picker Mark Rogers and his analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply click below to discover how you can take advantage of this.