Interactive Investor

Currys shares slump following some ugly numbers

15th December 2022 08:09

Richard Hunter from interactive investor

It's been a tough year for the electricals chain and there are some ugly numbers in these first half results, although management has an explanation. Our head of markets has the details.

Despite Currys (LSE:CURY) having made some progress on its UK operations, there is little dressing up some ugly numbers within this half-year release.

At the headline level, a goodwill impairment of £511 million arising from the previous Dixons Carphone merger was recognised, resulting in a pre-tax loss of £548 million as compared to a profit of £48 million the year previous. However, even stripping this out on an adjusted basis, pre-tax profit still declined by 17% in the period. 

The International business, which currently accounts for 49% of overall revenues, is the main culprit. In the Nordics region in particular (42% of overall revenues), new entrants to the space have relied on heavy discounting of goods to announce their arrival, partly driven by excess stock which they are now selling at basement (and virtually unprofitable) prices. In turn, Currys has had to react by eroding its margins, and a decline of 94% in earnings over the period is the resultant outcome.

More positively for that region, Currys considers the situation to be temporary, on the basis that the level of discounting is simply not sustainable. It points to a region which is healthy and wealthy, and where its presence has a long track record of growth in sales and profit, such that when the market normalises, the return to profitability will be marked.

UK sales account for 51% of overall revenues, and the picture painted here is rather more promising. The previously announced cost savings target of £300 million is on track, allowing the group to absorb some of the inflationary pressures being faced. Adjusted profit rose by 25% in the period, and the group’s Omnichannel strategy is bearing fruit, remaining something of a competitive advantage.

The ability for consumers to take face-to-face advice from experts is a primary reason for the group making two-thirds of its sales in store, yet without impacting on an online market share which remains largely intact at 32%. The model also promotes the ability to cross-sell and upsell some of its other offerings, such as recycling, Care and Repair and the provision of credit services.

At a group level, Currys retains some flexibility with access to credit facilities of £676 million, despite a swing to a net debt position of £105 million. Operating cash flow has also taken a hit of 54%, but the overall health of the balance sheet has allowed the dividend to be maintained, where a yield of 4.8% is a strong attraction to income-seekers.

Even so, the company has reduced its outlook for full-year pre-tax profit to be in the region of £100 to £125 million, from a previous range of £130-150 million.

Even prior to today’s negative response to the update, the share price reaction to the challenges on the table had been a decline of 47% over the last year, as compared to a drop of 15% for the wider FTSE250.

There are pockets of hope, particularly in the UK business, although the timing of a normalisation in the Nordic markets is difficult to predict. The company is therefore remaining cautious about the immediate outlook, which is in line with a divided market consensus of a hold, indicating that investors are not quite ready to buy in to any recovery story.

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