Interactive Investor

Profit upgrade triggers rally at Currys

15th May 2023 10:02

Richard Hunter from interactive investor

A share price rally following this trading update barely makes a dent in losses suffered since March and over the past six years. Our head of markets assesses the situation and studies events on Wall Street.

A brief but positive update has provided some respite for a beleaguered share price, with a profit upgrade propelling the shares higher.

Even so, Currys (LSE:CURY) may be winning the battle but it has a considerable way to go to win the war.

The Nordics region in particular remains under pressure. The Nordics account for over 40% of group revenues, where 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. This may prove to be a temporary backdrop, but in the meantime like-for-like sales have dropped by 10%.

More positively, the UK & Ireland business, which is responsible for half of group revenues, is expected to show a sharp improvement in earnings, even though like-for-like sales have dipped by 7%.

Targeted cost savings and margin improvements are helping the picture, while the group’s omnichannel offering, including 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 a strong online market share. 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.

As such, guidance for pre-tax profit has been increased to between £110 million and £120 million from a previous £104 million, while net debt is likely to be at the lowest end of the previously estimated range of £100 million to £150 million.

Even so, the early share price pop does little to repair the damage previously wrought, with the shares down by 33% over the last year, as compared to a dip of 3.6% for the wider FTSE250, and having declined by 75% over the last five years.

The upgrade is a welcome relief for embattled shareholders, although the market consensus of the shares as a 'hold' indicates that most investors are not yet willing to buy into any recovery story.

Market snapshot

US markets finished last week lower, with overarching economic and debt ceiling concerns overpowering any positive sentiment from what could be the end of the interest rate hiking programme for now.

A well-watched consumer sentiment index fell to a six-month low, despite some readings from earlier in the week suggesting that both inflation and the labour market could be starting to show the  strain from the Federal Reserve’s aggressive hiking policy.

As thoughts now turn to the depth of any potential recession, company earnings were at least broadly positive for the reporting season, albeit against a low bar of expectations. In the year to date, the main indices have nonetheless moved ahead, with the Dow Jones up by a marginal 0.5%, the S&P500 by 7.4% and the Nasdaq by 17.4%.

UK markets shrugged off global concerns in early trade, with the FTSE100 pushing higher.

Miners were in focus following a move by the Chinese authorities aimed at boosting growth in its recovery, prompting a return to a risk-on approach within the sector. The news also provided a small boost to shares with a larger exposure to the region, such as HSBC Holdings (LSE:HSBA), Prudential (LSE:PRU) and Burberry Group (LSE:BRBY) ahead of its full-year numbers on Thursday.

The premier index may not have recouped its record highs from February, but nonetheless has posted a gain of 4.3% in the year to date.

An average dividend yield of 3.7%, exposure to stocks with pricing power to ward off the worst of inflationary spikes, and a raft of sectors with stable earnings, continue to invite the attention of overseas investors searching for the twin requirements of capital growth and income.

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