Currys shares plunge after results dividend shock

Despite a strong performance by the UK business, the Nordics region remains a thorn in the side for Currys. Our head of markets analyses annual results.

The traditional fanfare which accompanies full-year results is markedly absent in this release from Currys (LSE:CURY) as it battens down the financial hatches.

The results are something of a curate’s egg, summarised with no holds barred in the very title of the report, “Strengthening UK&I offset by poor Nordics performance”. The comment captures the group’s difficulties in a nutshell, and even within the UK business which accounts for most of group revenues, there are hurdles which are far from being overcome.

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At a group level, there are pockets of optimism. Adjusted pre-tax profit for the year ended 29 April of £119 million was at the upper end of the group’s guidance, although it also represented a decline of 38% from the previous year. This was achieved despite a decline in like-for-like sales of 7% and in revenues of 6%, with cost savings and reduced capital expenditure boosting the overall return.

Adjusted earnings in the UK unit, which accounts for 53% of overall revenues, rose by 45% through a combination of tight cost control, an improvement to gross margin and a significant increase in credit services. Those consumers who are choosing to buy discretionary technology items are increasingly using Currys’ lending facilities, and this revenue stream alone is now responsible for 17.7% of overall sales. 

Elsewhere within the UK business, the Care and Repair offering continues to show promise and currently houses some 14 million protection plans. The mobile business is also seeing the benefit of an appealing venture with Three, adding £221 million of income over the period.

These various strands of the business are underpinned by the group’s omnichannel offering including the ability for consumers to take face-to-face advice from experts. This remains a primary reason for the group making two-thirds of its sales in store, yet without impacting on a strong online market share, while also promoting the ability to cross-sell and upsell some of its other offerings, such as recycling, Care and Repair and the provision of credit services.

The Nordics region is proving to be a particular thorn in the side for Currys at present. The unit accounts for 40% of overall revenues and has seen a rapid deterioration in consumer spending. This has resulted in the market being overstocked, leading to extremely heavy discounting from competitors who are selling at basement (and virtually unprofitable) prices, leaving Currys on the sidelines. The group expects that the situation will abate, without being able to put a timeframe on a return to normality. In the meantime, unable to pass on much of the costs of inflation to consumers and with lower sales, adjusted earnings for the region declined by 82% in the period.

The group remains relatively robust at a balance sheet level and aims to continue to bolster this position. However, more immediate hits have come in the form of a non-cash impairment of £511 million to the goodwill line following the previous merger of Dixons Carphone. The group has also suffered a general drain of cashflow, while the current net debt position of £97 million compares with net cash of £44 million the previous year.

Currys is looking to stem such leakages, with a two-year reduction to pension scheme contributions, and with the surprising if prudent announcement that the final dividend will not be paid. The previous yield of 5.9% was clearly an attraction to some investors, and its removal lessens the overall attraction of the stock.

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Currys has held up its hands in this release and the shares have taken a further pounding as a result. The initial 10% drop follows a 21% dip in the share price over the last year, as compared to a decline of just 1% for the wider FTSE250 index, leaving the shares down by 61% over the last two years.

The group may have longer-term plans to return to a concentration on growth, but in the meantime much of any progress seems to have come from trimming general expenses and lessening such investment in the future. The market consensus of the shares as a 'hold' reflects an unwillingness for investors to commit to the possibility of a sustained recovery any time soon.