Down 23% in a year, is Frasers Group a FTSE 250 bargain?

I like a bargain share in the FTSE 250 as much as the next investor.

After tumbling 23% in a year, retailer Frasers Group (LSE: FRAS) now sells on a price-to-earnings ratio of just nine.

That sounds fairly cheap, so should I buy?

Tough business, tough economics

I have some reservations as soon as I hear of a ‘cheap’ British retailer because I have been burnt so many times before.

Retail is a very competitive industry and even well-known brands with large customer bases can suddenly run into difficulties due to things like changing customer tastes and misjudging seasonal volumes when the weather changes.

Frasers is an odd business

Frasers has a wide range of retail operations and in its most recent financial year reported revenues of £5.5bn. That is a pretty big number for a business built on flogging badminton rackets and trainers. However, it was a 1% fall from the prior year.

Profits fell 21% year on year but still came in at over half a billion pounds. Frasers’ net margin was 9.2%, which is much better than many high street rivals.

But I find Frasers Group quite strange.

Is it a retailer? Is it a retailer that is trying to build up stakes in other retailers that could potentially become long-term takeover targets? Is it an investment group trying to snap up undervalued shares?

With its combination of wholly owned retailers like Sports Direct and stakes in firms from fast fashion firm boohoo to luxury handbag maker Mulberry, Frasers Group strikes me as an odd combination of retailer and activist investor.

I think this share could be a bargain

I do think the current Frasers Group share price could be a bargain.

The FSTE 250 company is solidly profitable. I think boohoo has untapped potential at its current value (I am a shareholder myself) and reckon the same is true for Mulberry.

But what is the strategy in all of this?

Running a discount sports retailer is already a consuming task. I wonder whether Frasers Group’s management has the necessary time and expertise to get profitably into the sort of investor activism it has done with its large boohoo stake.

Buying value shares and lobbying for boardroom change is a very different game to piling sports kit high and flogging it cheap.

I’m sticking to the Warren Buffett approach

Frasers Group has long been less than fully understood in parts of the City. That may help explain why the share price looks like a potential bargain.

But in fact I also am not sure that I properly understand the logic of the business model. Frasers Group owns some strong brands but in many cases they are heritage brands whose best days may be behind them in the absence of costly marketing support.

Meanwhile, buying shares in boohoo has so far unhappily been like trying to catch a falling knife for me. I see that as a risk for Frasers Group too. It could end up owning substantial stakes in weak businesses instead of using that capital to grow its own, proven retail operations.

Like Warren Buffett, I prefer to stick to what I understand when I invest. There are some FSTE 250 companies that fit that bill but Frasers Group is not among them. I will not be investing.