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.
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.
