Frasers Group (LSE: FRAS) is a company the market loves to hate. Formerly known as Sports Direct, the company’s founder and former CEO, Mike Ashley, has a bit of a bad reputation, but it’s hard to deny the man knows what he’s doing.
From humble beginnings to a global giant
Frasers began life from a single store in 1982. Over the following four decades, Ashley steered the group through multiple challenges and economic environments while taking advantage of other companies’ problems to grow the business.
In the 2000s Frasers went on an acquisition spree, snapping up sporting brands such as Dunlop, Slazenger, Karrimor and Kangol from distressed sellers for knockdown prices (Dunlop was later sold to a Japanese firm in 2016 for several multiples of the purchase price). These brands have become an important part of the business, and ultimately give Sports Direct a competitive advantage over peers.
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One of the trickiest parts of retailing is agreeing terms with suppliers, especially when those suppliers are international giants. By acquiring its own brands, the firm removed the issue of dealing with pushy suppliers and it gained more control over its finances.
With its control over the supply chain, Frasers was (and still is) able to keep costs low and beat other retailers on price. And Ashley doubled down on this growth formula in the years before his departure as CEO.
In 2013, it acquired fashion retailer Republic after it went into administration, adding 116 stores to its footprint. Then in 2017, the group paid $101m for US retailers Bob’s Stores and Eastern Mountain Sports from their parent group after it filed for Chapter 11 bankruptcy protection.
In 2018, the group acquired House of Fraser after it entered administration, and then Evans Cycles, which had also entered administration. Other deals completed in recent years include Jack Wills and DW Sports Fitness.
Frasers acquisition spree has helped the company grow
These are just the largest acquisitions the company has completed over the years. While it might seem as if Frasers has been throwing its money around, there’s a method in the madness. It costs a lot of money and time to build a retail brand, but most retailers don’t succeed. So, why bother wasting time and money to build a brand if you can just buy one on the cheap?
Ashley’s approach to running a successful retailer has been very similar to the way an investor might pick stocks. An investor will look for the best companies that they understand, and try to buy a basket of these businesses at knock-down prices. Even if one or two don’t work out, the odds are that the majority will produce attractive returns.
Ashley has built a basket of sport-retail focused businesses on the cheap and while some might not work out, the odds are the group as a whole will.
No matter what you think about Ashley, it’s difficult to deny that this approach has worked. Over the past decade the stock has yielded a total return of 9.8% a year, only slightly below the 10.4% a year produced by Next (LSE: NXT), which in my view is one of the best-run retailers in the country.
The company is moving on to the next stage of growth
Ashley was replaced as CEO by Michael Murray in May of this year. Leaving aside the fact that Murray is Ashley’s son-in-law and received £21m in consultancy fees before he took over, as well as being in line for a bonus of as much as £100m, he is now in charge of leading the company into the next stage of its growth.
He’s trying to shift the focus away from its image of a low-cost sporting goods retailer, towards a luxury brand. To that end, the business is investing heavily in its luxury brand, Flannels, which is opening several huge stores across the UK focusing on men’s, women’s and junior designer clothing, footwear and accessories.
For example, Flannels opened a huge new luxury store in Liverpool this year, the first of its kind in the city and one of the largest luxury investments in the UK. This is an extension of the group’s long-standing strategy profiting from opportunities (in this case a city) other retailers are overlooking.
There are some corporate governance issues around Murrary’s appointment and pay, but it seems as if shareholders are already seeing some results from this very expensive manager.
Following a bumper trading performance for the 52 weeks to 24 April, Frasers is now projecting adjusted profit before tax of between £450m and £500m for the next financial year, up from £366m. The so-called “Premium Lifestyle” side of the business is proving to be a huge success with revenue for the period up 43.6% mainly due to the new luxury Flannels sites.
As the company’s profits boom, it’s investing hundreds of millions of pounds in new warehousing facilities, and automation. It’s also funding new facilities in markets such as Europe, which could be a key engine of growth over the next couple of years. And as always, Frasers is looking for acquisitions to improve its footprint and customer offering. Considering the general economic backdrop, it looks as if the business is going to have plenty of options.
The stock’s valuation is not too expensive considering its prospects
At present, Refinitiv analyst estimates have the company reporting earnings per share of 57p for its 2023 financial year. That suggests a forward price/earnings (p/e) multiple of 13.2, which seems neither particularly expensive nor particularly cheap. However, these numbers do not yet reflect the company’s upbeat forecasts for the year ahead. As such, I wouldn’t be surprised if we see an upward revision in earnings estimates over the coming days. While the company does not offer a dividend, it has a history of returning cash to investors with share repurchases.
Frasers might have a mixed reputation, but there’s no denying the company’s approach works. The group stands out in the incredibly crowded retail sector for its value investing-like approach and growth in a changing market. As it gears up for its next phase of growth, investors might want to take notice.
Rupert is the Deputy Digital Editor of MoneyWeek. He has been an active investor since leaving school and has always been fascinated by the world of business and investing.
His style has been heavily influenced by US investors Warren Buffett and Philip Carret. He is always looking for high-quality growth opportunities trading at a reasonable price, preferring cash generative businesses with strong balance sheets over blue-sky growth stocks.
Rupert was a freelance financial journalist for 10 years before moving to MoneyWeek, writing for several UK and international publications aimed at a range of readers, from the first timer to experienced high net wealth individuals and fund managers. During this time he had developed a deep understanding of the financial markets and the factors that influence them.
He has written for the Motley Fool, Gurufocus and ValueWalk among others. Rupert has also founded and managed several businesses, including New York-based hedge fund newsletter, Hidden Value Stocks, written over 20 ebooks and appeared as an expert commentator on the BBC World Service.
He has achieved the CFA UK Certificate in Investment Management, Chartered Institute for Securities & Investment Investment Advice Diploma and Chartered Institute for Securities & Investment Private Client Investment Advice & Management (PCIAM) qualification.
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