Frasers Group (LON: FRAS) has been in the headlines of late following its decision to propose a share scheme that could lead to a £100m payout for its expected new CEO, Michael Murray. He is the future son-in-law of majority shareholder, Mike Ashley, and has previously worked for the firm on a consultancy basis.
The £100m payout would be made if the company’s share price rises from its current 665p level to trade in excess of 1500p for a period of 30 consecutive trading days prior to October 2025. According to the firm, the target is ‘suitably challenging, but achievable’.
Retail sector changes
Clearly, appointing a relatively inexperienced CEO could be viewed as representing a substantial risk for Frasers Group. Some investors may feel that a candidate with greater experience could more reliably steer the company through what remains a highly uncertain, and rapidly evolving, UK retail industry.
Indeed, the sector is experiencing a drastic shift from in-store to online sales that has been accelerated by the pandemic. Today, 26% of all UK retail sales are conducted online. This compares to 19% shortly before the pandemic and a figure of just 6% a decade earlier, which suggests it represents a long-term trend.
Although Frasers Group is seeking to scale its digital sales, it remains a predominantly bricks and mortar business. Evidence of this can be seen in its recent financial performance, with revenue declining by 8% and pre-tax profit falling by 94% in the 2021 financial year as a result of store closures caused by Covid-19 lockdowns. By contrast, many of its more digitally-focused peers faced less disruption and experienced more resilient financial performance during the pandemic.
As such, the company may be relatively exposed to short-term threats such as a return to containment measures prompted by the emergence of new Covid-19 variants. Moreover, it may face long-term challenges caused by an ongoing shift from in-store to online sales that is well established in the UK and, increasingly, across Europe and the wider global economy.
Meanwhile, the firm’s improving efficiency in response to the pandemic, such as through a reduction in operating costs of almost 17% in the 2021 financial year, could support margins over the medium term. In addition, its strategy to improve the appearance of its stores, such as through the £10m refurbishment of its Oxford Street store, could resonate with consumers.
Frasers Group Outlook
Frasers Group is understandably not providing financial guidance at the present time. It, and the wider UK retail sector, faces a highly uncertain period that may cause significant volatility in its financial performance over the near term.
However, its dependence on stores rather than online sales may count against it over the coming months and years, as consumers increasingly shift their spending to digital channels. Moreover, a relatively inexperienced management team could represent an additional risk within a rapidly evolving retail sector.
As such, other FTSE 350 retailers appear to offer superior long-term growth strategies that could equate to stronger share price performance over the long run.
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