Not that long ago, if I were to say the names Sports Direct International and Mulberry, it would conjure up very different images.
On the one hand, you had a mainly bargain basement-style sports and clothing retailer, known for cheap prices and distinctive red and blue branding. On the other, a high-end designer company known for its handbags.
They are almost diametrically opposed firms in most people’s eyes, so it may have been a shock to hear that Frasers Group (LSE: FRAS), as Sports Direct is now known, is tying itself up with Mulberry much more closely via a stake buy.
Moving upmarket
This shift towards a more upmarket brand is no longer, of course, at least for those of us following the Sports Direct/Frasers story, a surprise. Indeed, the renaming of the parent company to Frasers signalled a move to diversify away from cheap sporting goods (though they of course still make up the foundation of its business). It took on a derivative of the House of Fraser name, the takeover of which caused major problems for it given the weak state of the business.
So what is behind the Mulberry link-up? A statement from the company said: “A key strategic priority for Frasers is the elevation of our retail proposition and building stronger relationships with premium third-party brands,” Frasers has bought a 12.5% stake in Mulberry, hinting that it may undertake more “strategic investments” in the future.
Unfortunately for Frasers, a number of strategic investments it has made so far have not necessarily worked out well, most notably Debenhams (in which it lost its entire stake) and Goals Soccer Centres. That said, Mulberry is a significant supplier of House of Fraser, with concessions in its stores, and so Frasers’ investment is perhaps more in line with business-as-usual than it may first appear.
And its share price seems to have benefited from its move upmarket of late. It closed at 464.60p on Friday, up from 272.60p a year ago. But can it continue to rise from here? If its upmarket move works, it should do. But there have been some other issues affecting the share price too.
Bye, bye tax man
January did see some good news relating to one of them, with the Belgian tax authority concluding most of its investigation into a tax dispute that had delayed Sports Direct’s full-year results last July. The results of the investigation seem to suggest that the correct amount of tax had been paid, but “the documentation provided and process followed were incorrect”.
This certainly removes a cloud of risk that has been overshadowing Frasers for some time, as the potential tax liability the firm may have suffered amounted to about three times its annual profits. That said, there are still questions being raised about the company’s financial audits.
The Financial Reporting Council, the UK audit regulator, has in fact taken the company to court to gain access to documentation it had provided its then accountant Grant Thornton, with specific relevance to its 2016 audit of the business.
I think Frasers’ moves towards strategic investments may work out for the firm, and the Belgian tax case news is all good. But I still think there is a lot of risk surrounding the company so I still see it as too risky for now.