Currys: a firm with a potentially bright future in store

Currys has posted an update which is positive on any number of fronts, and its confidence for future prospects has been mirrored by a strong market reception to the numbers.

At a group level, the release is generally promising. Revenues increased by 1% to £3.92 billion, while adjusted pre-tax profit of £9 million compares with a loss of £16 million in the corresponding period. Adjusted earnings also rose by 52% to £41 million and the group has maintained investment and marketing spend in an effort to drive sales higher.

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Currys (LSE:CURY) is currently in its peak trading period, for which it is trading in line with expectations. While the full results of the “Golden quarter” will not be known until early in the new year, the group could well have piqued some investor interest with its mention of some promising signs in the adoption of its artificial intelligence (AI) computing products. Rising demand for AI laptops, where Currys has an estimated 75% market share, is proving to be an early highlight of the period and the outcome will be eagerly awaited. This is in addition to its earlier statements that it is in the formative stages of trialling AI improvements and demystifying the potential for customers, in conjunction with partners such as Microsoft and Accenture.

The Nordics region has been a particular thorn in the side for Currys and since it accounts for around 40% of overall revenues, the impact on the group is material. There are some signs of recovery here, however, with a 2% decline in like-for-like revenues but a 50% improvement in adjusted earnings to £18 million suggesting some stabilisation. With the group growing market share within a generally weak consumer environment, it continues to keep a tight control on costs, such as reducing its marketing spend in the region and to increase gross margins.

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In the UK and Ireland, the group has echoed the concerns of many retailers following the measures announced in the Budget. Currys estimates an additional £32 million in annual costs, which 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. The group anticipated some of these headwinds and plans are in place to mitigate the additional costs and, in the meantime, increased revenues of 6% in this period imply that some of the heavy lifting may already have taken place.

Indeed, Currys is now targeting 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 continues to grow apace, with an increase of 32% taking the subscriber base to two million as the pricing point offered clearly resonated with the more cost-conscious consumer. In addition, its credit adoption numbers rose by 1.4% to 21.7%, with active customers rising 15% to over 2.4 million. 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.

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More broadly, Currys had previously recognised the need to strengthen its balance sheet and liquidity. The sale of its Greek business for net proceeds of £156 million was a major boost which, coupled with temporarily reduced capital expenditure, lifted net cash in the period to £107 million from a previous debt position of £129 million, while free cash flow rose by 46% to £50 million. The improvement in fortune has led to calls for the return of a dividend, where the company proposes to announce confirmation of such a payment by the middle of next year at the latest.

The group has maintained its guidance for the full year despite the Budget headwinds, some of which has resulted in its trimming capital expenditure by around £10 million. Quite apart from the potential boost from the peak trading period, Currys has shown a resilience which derives from its clear attraction as a tech-friendly environment for consumers.

Even prior to the hot reception which the update has received in early trade, the shares had risen by 72% over the last year, as compared to a gain of 12% for the wider FTSE 250, although the shares remain down by more than 30% over the last three years. As such, the valuation remains undemanding and with a potentially bright future in store, the market consensus of the shares as a buy will likely remain intact.