Currys given more time as profit to exceed forecasts

Currys (LSE:CURY) remains a work in progress, although further signs of incremental improvement point towards some light at the end of the tunnel.

The group is maintaining its strong focus on factors within its control and it continues to bear down on costs, where there have been additional savings in several of its expenditure lines, such as capex, depreciation, and debt and interest payments.

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At the same time, its sale of the Greek business remains on track to complete before the end of its fiscal year and probably during this quarter. The disposal is expected to result in net proceeds of £156 million, which is largely likely to be used to reduce the group’s current net debt position of £129 million.

As such, Currys therefore expects to have a net cash position by the end of its financial year, while also giving it some extra flexibility with regards to a further reduction of the pension deficit. There could even be a surplus which could result in the return of a dividend payment, although given the overall constraints on the business as a whole, this is perhaps rather less of a priority for now.

The business as a whole is facing a difficult economic backdrop in each of its region, where consumer discretionary spend is being allocated on an increasingly selective basis. This does not bode well given the group’s focus on consumer electronics and now that the peak festive season has ended, any weakening of demand as customers rein back from festive purchases could provide additional headwinds.

Part of the strategy is for the group to continue to hone its offerings ahead of an improvement in consumer confidence, but the timing of such a pivot is particularly difficult to forecast in the current environment.

Even so, there are factors which play into the group’s favour, not least of which is its omnichannel offering. Currys previously noted that its model continued to bear fruit, and indeed two-thirds of customers prefer to shop in store, partly as a result of the expert advice available on a face-to-face basis. This can also lead to a longer relationship with the customer as well as the potential of cross-selling. 

Indeed the company’s focus on additional services continues to offset some of the trading weakness elsewhere. In this reporting period, credit adoption rose to a record 20.6% which was an improvement of 2.4% on the previous year, with the group now serving 2.2 million active credit customers. Its Care & Repair adoption also rose by 1.7%, while its foray into mobile continued apace, with 1.6 million subscribers now on board following year-on-year growth of 29%.

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Elsewhere in the UK business there was a mixed picture at the basic level, with like for like sales declining by 3% over the period. Currys nonetheless heralded robust profits over this core period, given its stable gross margin and continued cost savings.

Strong sales of mobile were offset by weakness in TV and computing. It remains to be seen whether the focus on higher margin returns while backing away from less profitable sales, which should put a solid building block in place, reaps the required rewards.

Elsewhere, the Nordics region, a particular thorn in the side for Currys which accounts for around 40% of overall revenues, showed some signs of marginal improvement in the period. Like for like sales were again down by 2%, but this was an improvement from the 6% decline reported at the half-year stage. The group attributed the improving trend to a better balance of sales and margin, with gross margin up strongly. However, again there were mixed signals, with a pickup in Norway offset by some weakness in Finland, while at the product level strong sales of domestic appliances were held back by weaker trends in TV.

The outlook guidance was generally upbeat, with adjusted pre-tax profit for the year of between £105 million and £115 million, ahead of current market expectations of £104 million. 

Further out, the group is targeting earnings margin of 3%, with cash costs expected to decline sharply in 2024/2025 as the overall cost focus intensifies.

Currys had previously reiterated its wish to continue its momentum in the UK, repair the Nordics operation and strengthen its balance sheet, and further progress is being made in some or all of those objectives.

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There is little question that much still needs to be done to repair the previous damage to the share price. Over the last year the shares have declined by 24%, as compared to a marginal dip of 0.1% for the wider FTSE250 index and over the last two years have fallen by 56%. As such, the shares remain cheap versus historical valuations and, similar to the half-year update, the price has reacted strongly to the potential for improvement in opening trade.

Investors have not given up the ghost on the recovery story, and the market consensus of the shares as a 'hold' implies that there is still some patience for Currys to recover its retail poise.