Frasers Group Shares Sink 9% Despite Profits Jump. What’s Going On?

The Frasers Group share price tanked on Thursday even as it announced robust half-year financials results.

The owner of the budget Sports Direct chain of shops was last trading 9% lower today at 815p per share.

Revenues at the FTSE 100 business rose to £2.64 billion in the 26 weeks to 23 October. This was up 12.7% year on year and driven by sales growth across the group.

Consequently, pre-tax profits jumped 53% from the same 2021 period, to £284.6 million.

However, Frasers Group shares have fallen on market concerns that sales could be set to sink.

Acquisitions Boost Sales

Revenues at Frasers Group’s core UK sports retail operations rose 11.6% in the six months to October, to £1.53 billion.

However, sales were boosted by the acquisition of sports chain Studio Retail at the start of the 2022. Without this, sports retail sales would have ducked 3.1%.

Excluding acquisitions, disposals and changing exchange rates, revenues at group level would also have risen by a far-more modest 3.9% year on year.

Sales at its Premium Lifestyle unit rocketed 24.7% between May and October, to £533.5 million. Brands here include House of Fraser, Flannels and Jack Wills. International retail turnover meanwhile rose to £492.2 million, up 5.8%.

Market Worries

Frasers Group commented that “whilst the macroeconomic environment is clearly challenging and the backdrop for the coming year is hard to predict with any certainty, we have strong strategic and trading momentum behind us.”

As a result the business said it remains “confident” in its adjusted pre-tax profit forecast of between £450m to £500m for financial 2022. Profits on a comparable basis rose 38.8% in the first half, to £267.1 million.

Still, the market is worried that sales volumes could sink next year and that rounds of heavy discounting will be required to support the top line. The Centre for Retail Research this week forecast that UK retail sales volumes will slump 3.3% in 2022 “and will continue to fall in 2023.”

Frasers Group also saw costs increase strongly in the first half. Cost of sales rose to £883.8 million from £768.1 million a year earlier.

Gross margin meanwhile dropped 2.7% year on year, to 42%. This was because of “mix effects (from the acquisition of Studio Retail, the disposal of the US retail businesses and House of Fraser store closures), a strong prior year comparative of full price trading, cost of goods inflation, and a maintained inventory provision percentage in the current period,” the company said.

“Hard to Predict”

Analyst Susannah Streeter of Hargreaves Lansdown said that today’s half-year update “shows there are still deep pockets of resilience in the fashion retail sector, as shoppers’ spending holds up, particularly on ranges viewed as offering value.”

She added that “while other department store chains have disappeared, House of Fraser stores continue to be the lynchpin of shopping centres while Sports Direct shops remain a pull on the high street, helped by the engine of e-commerce sales.”

However, Streeter noted that the company remains immune to the recessionary conditions that are intensifying, adding that “it will be hard to predict what 2023 will bring.”