Currys shares fly out of the traps

Currys (LSE:CURY) has been working hard on managing those levers under its control, and a return to form in the Nordics region is an additional bonus.

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The Nordics account for around 41% of group revenues and so its performance is material on the group impact. For some time, the region had been the main thorn in the side for Currys, but there are real signs now that an emerging turnaround may be in place.

Revenue growth there of 7% in the half-year ended 1 November compared to the previous year was accompanied by adjusted earnings of £35 million, up 94%. The improvement was achieved partly by improving consumer sentiment, but also by the group’s efforts to focus on more profitable sales alongside some ongoing tight cost control.

The balance of the business comes from the UK & Ireland, where there was also some demonstrable improvement. Revenues increased by 6%, underneath which was a spike of 35% in New Categories sales, albeit from a low base. This was achieved despite the concerns echoed by many retailers of the Budget fallout, and where previously Currys had estimated an additional £32 million in annual costs. This will inevitably lead to some product price rises, while also increasing the possibility of lower investment and hiring, as well as increased automation and offshoring. Indeed, the group conceded that while progress had been made on cost savings, these were insufficient to fully offset the “government-driven cost inflation”.

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More positively, Currys continues to target higher margin revenue streams which also bring recurring income, such as its mobile plans, Care and Repair, credit provision and protection plans. The mobile business saw an increase of 21% taking the subscriber base to over 2.4 million as the pricing point offered clearly resonated with the more cost-conscious consumer, while its credit adoption numbers rose by 1.6% to 23.3%.

The group’s omnichannel offering continues 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.

At the headline level, there are signs of a business which is in good shape. Overall revenues increased by 8% to £4.23 billion, and adjusted pre-tax profit surged by 144% to £22 million. Free cash flow increased by 68% to £84 million, and net cash by £26 million to £133 million. Some of its more recent headroom was enabled by the sale of its Greece for net proceeds of £156 million which, coupled with temporarily reduced capital expenditure, lifted net cash and free cash flow.

Indeed, the group now plans to maintain at least £100 million of net cash to manage the working capital cycle while at the same time having reduced the pension deficit to just £16 million from a previous £403 million.

In addition, the former announcement of a £50 million share buyback programme was proof if it were needed of a business which is on a sound financial footing. The programme has now seen £30 million completed, while the group recently reintroduced dividend payments and declared an additional interim which takes the projected yield to 1.8% which, while pedestrian, marks another step forward for shareholder returns.

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Of course, Currys cannot guarantee an unfettered run in growing its business. Quite apart from the ongoing repair work being undertaken in the Nordics business, the outlook for the economy is currently unstable, which could crimp consumers’ propensity to spend, especially on discretionary items such as computing. Even so, the group is currently in its peak trading period where trading is in line, and Currys has reiterated its guidance for the full year, where it previously estimated pre-tax profit of £170 million, further growth in its higher margin recurring revenue services and 2.5 million mobile subscribers.

The shares may have drifted over the last few months as the retailer has been caught up in some of the negative updates from elsewhere and lower consumer confidence, but this update has led to the shares flying out of the traps.

Prior to this spike, the shares had risen by 37% over the last year compared to a gain of 7.6% for the wider FTSE250, and by 153% over the last two years. Such gains have not resulted in the valuation becoming stretched, and with this reassuring update now in the bag, the market consensus of the shares as a strong buy on prospects will almost certainly remain intact.