Shares in Frasers (FRAS) rose 9 per cent after the retailer reported a 13 per cent increase in annual adjusted pre-tax profit, with the £545mn posting at the top end of its guidance range.

The performance was driven by Sports Direct, with trading profits up 3 per cent at the UK sports retail arm. Profits were flat at the premium lifestyle unit (which includes businesses such as House of Fraser, Flannels and Jack Wills), and down 15 per cent at international retail. 

Gross margin climbed from 42.9 per cent to 43.3 per cent, with a 250 basis point increase at UK sports retail offset by falls elsewhere. 

The slight revenue contraction was driven by a 3 per cent drop at UK sports retail (which contributes over 50 per cent of total revenue) because of “planned declines” at Game UK and Studio Retail. Premium lifestyle revenue fell 1 per cent, no surprise given the softness seen in the wider luxury market, while international retail revenue was up 3 per cent. 

Along with the revenue decline, the non-repeat of derivative fair value gains and higher investment and finance costs drove the drop of a fifth in statutory pre-tax profit. 

Something to watch is management’s ambition to grow the financial services arm to over £1bn in revenue, with a target of £600mn balances with a yield of over 15 per cent from 2mn customers at the Frasers Plus buy now, pay later offering. The company announced a partnership with THG (THG) in June that will let the latter’s customers use Frasers’ technology platform. 

Management guided for an adjusted pre-tax profit of £575mn-£625mn for financial year 2025. The shares trade hands at 8 times forward consensus earnings, a notable discount to the 5-year average of 14 times. Buy. 

Last IC view: Buy, 818p, 9 Dec 2022