Currys recovery runs into profit taking after annual results

Currys (LSE:CURY) previously identified a number of problem areas and the progress it has made since makes for encouraging reading, especially on prospects.

The Nordics region was a particular thorn in the side for Currys and, since it accounts for around 40% of overall revenues, the impact on the group was material. While revenue fell by 3% in the year ended 27 April 2024, still suffering from the aftershock of a market which had been overstocked and by higher inflation and interest rates, there has been significant progress.

The company has improved gross margin and market share, streamlined the unit where appropriate and this has resulted in adjusted earnings spiking by 135%.

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At the same time, the UK business has also seen a soft consumer environment given the similar backdrop of high inflation and interest rates, as well as skittish consumer sentiment, especially for higher cost items. A decline of 2% in revenues and 16% in adjusted earnings nonetheless saw growth in the gross margin, with the performance boosted by more targeted cost savings.

More promisingly, the group 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.

In the period, its credit adoption numbers rose by 2.4% to 20.1%, with active customers rising 17% to 2.3 million. Mobile subscribers grew 34% to 1.8 million in something of a standout performance as the pricing point offered clearly resonated with the more cost-conscious consumer.

The group’s omnichannel offering (store, mobile, and online) 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 also 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 at the end of the year to £96 million from a previous debt position of £97 million, while free cash flow rose by £174 million to £82 million.

The improvement in fortune has led to calls for the return of a dividend, which the company proposes to fulfil at some point over the next year should the prevailing conditions continue. Indeed, the group’s outlook comments expecting further profit and free cash flow growth should enable this to happen.

The adjusted pre-tax profit of £118 million was an improvement of 10% over the corresponding period and was towards the top end of the group’s previous guidance of between £115 and £120 million, itself representing a profits upgrade announced at the trading update in May. Overall revenues of £8.5 billion were down by around 4% but in line with estimates, while trading for the new financial year is in line with an improving trend. 

The company has also reiterated its previous stance on the huge potential in the development of AI powered technology, where it is in the early stages of trialling improvements and demystifying the potential for customers, in conjunction with partners such as Microsoft and Accenture. Alongside the group’s unique offering of face-to-face advice, such progress could both strengthen and complement the overall offering as Currys strives to create “customers for life”.

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The share price has risen by 44% over the last year, as compared to a gain of 12.4% for the wider FTSE250 index. While much of this outperformance relates to the bid approaches earlier this year which eventually came to nothing, the scale of the turnaround at Currys should not be underestimated.

The initial market reaction suggests some profit taking after a six-month run which has seen a rise of 49%, but the group is nonetheless clearly on track towards a return to form. In the meantime, the valuation is not stretched on a historical basis even at these levels, with the share price remaining down by 38% over the last three years despite the recent spike in performance. Even so, the market consensus has recently strengthened, recognising the strides Currys is making and now comes in at a 'buy'.