Frasers Group (LSE:FRAS), the FTSE 100 retailer, has put in place a generous incentive scheme for its chief executive. Michael Murray will receive a £100m bonus if he can get the share price to £15 by October 2025.
With the stock currently changing hands for £7, Murray needs to more than double the company’s value for him to qualify for his enormous payout. If he succeeds, a £10,000 investment made today would become £21,429.
But it’s not going to be easy. He somehow needs to increase the company’s market cap by around £3.7bn.
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I don’t think that’s possible through organic growth alone.
Growing nicely
Between 2018 and 2022, the company grew its revenue and operating profit by 43% and 52% respectively.
It also increased its profit before tax by a factor of four.
That’s an impressive performance and, during this time, the company’s share price increased by 78%.
The revenue growth was achieved principally through the expansion of Sports Direct, and the purchase of some distressed brands such as House of Fraser and Debenhams.
| Revenue by division | 2018 (£m) | 2022 (£m) | Change (%) |
| UK sports retail | 2,182 | 2,640 | +21 |
| European sports retail | 637 | 790 | +24 |
| Rest of the world retail | 192 | 150 | +63 |
| Premium lifestyle | 162 | 1,057 | +652 |
| Wholesale and licensing | 186 | 168 | -10 |
| Total | 3,359 | 4,805 | +43 |
Shopping list
The company’s appetite for buying companies and brands remains unsatiated. It recently stated that “driving growth through strategic investments is a core part of Frasers’ DNA“.
It’s been on a spending spree in recent times, quietly building up stakes in a number of other retailers. Four of the six are in the fashion sector but the other two — Currys and AO World — are in the business of selling consumer electronics.
The group now has interests in clothing, footwear, sofas, bicycles, televisions, computers, and video games.
| Stock | Last purchase | Ownership (%) | Value of shareholding (£m) |
| Currys | 22 June 2023 | 9.4 | 57 |
| boohoo | 19 June 2023 | 5.0 | 21 |
| ASOS | 15 June 2023 | 10.6 | 50 |
| AO World | 12 June 2023 | 18.9 | 92 |
| Hugo Boss | 6 January 2023 | 3.9 | 16 |
| Mulberry Group | 19 November 2020 | 36.8 | 56 |
Few know whether the company intends to increase some or all of these positions further, with a view to launching a full takeover bid.
Personally, I think it’s going to have to buy at least one of them if its share price is to double by October 2025.
Valuation
Frasers expects to make a profit before tax of £450m-£500m in its 2023 financial year. We’ll know whether it achieved this later in July.
If the mid-point is realised, this would give a price-to-earnings (P/E) ratio of approximately 6.5. This compares favourably to JD Sports, which is valued at around 10 times’ earnings.
Even with a P/E ratio of 10, and a profit at the top end of expectations, the company would have a market cap of ‘only’ £5bn. It therefore needs to find another £1.9bn of value elsewhere. In my opinion, this is only possible with a major acquisition.
Although the company generated £628m of cash from its operating activities in 2022, I think it would have to raise more money if it were to increase significantly one (or more) of its strategic investments.
With borrowings around 2.5 times’ operating profit, and Mike Ashley — whose wealth is largely derived from his 70% shareholding — unlikely to be able to participate in a meaningful way, some creative solutions will be required.
But that’s why they pay Murray the big bucks!
Final thought
I already own shares in Frasers — I like the fact that the chief executive’s incentive means his interests are aligned with mine.
Although I’m cautiously optimistic that the stock will reach £15 by the autumn of 2025, there’s no guarantee. But I doubt there’s a harder working boss in the FTSE 100, given how much is at stake.
