Mike Ashley's Frasers Group PLC (LSE:FRAS) has been upgraded by RBC Capital Markets, though its share price target has been cut to 750p from 850p.
Analysts at City arm of the Canadian bank believe the owner of House of Fraser, which is holding its AGM today, is relatively resilient during the current consumer downturn due to its exposure to low-price sports retailing via its Sports Direct chain and growth from its more upmarket Flannels stores.
Sales in Flannels, which Ashley snapped up in 2017, constitute most of the sales of its 'premium lifestyle' segment and have remained resilient, the RBC analysts said, on track to achieve a £2bn gross sales target by 2026.
Sports Direct, meanwhile, has a 30% share of the UK sports retail market, with its lower pricing offering consumers a chance to trade down or switch between brands, and while it is a mature business, it is cash generative, said RBC.
The analysts noted that six years ago, the group switched from a “pile it up, sell it cheap merchant” and embarked on a so-called elevation strategy.
This, the analysts said, led to stronger relationships with brands and means it is now less exposed to US dollar sourcing headwinds, with two-thirds of revenues coming from third-party branded sales, compared to 50% a decade ago.
However, RBC reduced its profit before tax forecasts for the coming years by 3-8% due to lower sales and margin assumptions for UK sports retail, partly offset by higher margin assumptions for Flannels, which puts it at the lower end of Frasers’ guidance of £450mln-£500mln.
If Frasers’ achieves £500mln in pre-tax profits, it will achieve one of the two requirements that could see new chief executive Michael Murray bag £100mln worth of shares in a bonus, the other requirement being hitting a £15 price target.
The executive bonus scheme is being voted on at today’s AGM.