Frasers Group PLC (LSE:FRAS), the retail conglomerate, is facing some storm clouds ahead, according to RBC Capital Markets, which sees better options elsewhere in retail.
On the plus side, RBC reckons Flannels, the luxury retail format Mike Ashley’s retail group is rolling out, could have more than 100 stores in the UK and a strong online presence.
“We have worked with our data science team, RBC Elements, using population and income data from the UK ONS to analyse the number of UK districts which could potentially be candidates for a Flannels store. We see upside potential to Frasers' store target of c.100 stores; however, we note that the luxury brands will want to maintain exclusivity, with often only one point of distribution per area, which means Frasers will be limited in terms of where it can open stores,” RBC said.
“We estimate Flannels now makes up over half of the sales of its Premium Lifestyle segment; however, the outlook looks more challenging for House of Fraser, which is operationally leveraged to a consumer downturn,” it added.
The broker has revised its forecasts for the next two fiscal years – the group’s fiscal year ends in late April – down by 2-4% to reflect its assumption of slightly lower top-line growth and gross margin.
The stock is trading on a small discount to the sector but does not pay a dividend, preferring to spend the money on buying back shares.
“We value it at 675p using a combination of a DCF [discounted cash flow] and sum-of-the-parts analysis,” said RBC, which has an underperform rating on the shares, which currently trade at 653p.