Currys rewarded with 10% share price surge

Currys (LSE:CURY) is making progress in a challenging environment both at home and abroad, while also taking actions to underpin the group’s financial position.

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 has been material. Revenues fell by 6% in the six months to 28 October, still suffering from the aftershock of a market which has been overstocked, leading to extremely heavy discounting from competitors who had been selling at basement (and virtually unprofitable) prices, leaving Currys on the sidelines.

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Consumer confidence and demand remains weak in the region given higher inflation and interest rates, although the dip in sales compares to an expected decline of 12%. In addition, an improvement of 1.9% to the gross margin provides some hope that the area is now finally in recovery mode.

For the UK business, half-year revenues declined by 3% against an expected drop of 5%, in part due to the group’s decision to focus on profits rather than the volume of sales. Of particular note was the increase in what Currys describes as recurring and sustainable cash flows, namely its provision of additional services.

Credit adoption rose by 3.3% in the period, Care and Repair by 3.4%, while the mobile business added 200,000 subscribers, taking the total to 1.5 million. At the same time, the business is focusing on higher margin returns while backing away from less profitable sales, which should put a solid building block in place.

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.

In terms of product, sales have held up reasonably well in view of an uncertain economic backdrop, although the weaker demand for both consumer electronics and computing is a reflection of the fact that consumer discretionary spending is under pressure.

The sale of the Greek business is expected to complete in the first quarter of next year, resulting in net proceeds of £156 million. Given the group’s current net debt position of £129 million, Currys therefore expects to have a net cash position by the end of its financial year, while also giving it some extra flexibility with regards to a further reduction of the pension deficit. There could even be a surplus which could result in the return of a dividend payment, although given the overall constraints on the business as a whole, this is perhaps rather less of a priority for now.

Currys has also borne down on costs and capital expenditure as it attempts to engineer financial stability and a strong platform for growth. A free cash outflow of £10 million represented an improvement of £76 million from the previous period, and the group’s two year ambition of annualised cost savings of £300 million is well on track, currently at £240 million and expected to hit the target by the end of the reporting year.

As such, the overall numbers show some improvement although there is further work to be done. An adjusted pre-tax loss of £16 million is all but flat against the previous period’s £17 million, while the 7% decrease in revenues to £4.16 billion is fractionally higher than the expected £4.14 billion. With the potential of a partial recovery in the Nordics region over the coming months, there is further scope for improvement, although for the time being the group is leaving its full-year guidance unchanged.

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Much has been done, but much remains to do. The group has stated that it wishes to continue its momentum in the UK, repair the Nordics operation and strengthen its balance sheet, and in this period has begun to achieve some or all of those objectives.

As such, the share price has reacted strongly to the potential for improvement, while on a valuation basis, the shares remain cheap by historical standards. Even so, today’s bounce cannot mask the fact that the shares have lost 32% over the last year, as compared to a decline of 1.8% for the wider FTSE250, and are down by 63% over the last two years.

The market consensus of the shares as a 'hold' could see some upward revision, although there will still be those investors who wish to remain on the sidelines until any recovery becomes entrenched.