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Currys - on track for guidance, outlook uncertain

Laura Hoy | 15 December 2021 | A A A
Currys - on track for guidance, outlook uncertain

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Currys plc Ordinary 0.1p

Sell: 64.20 | Buy: 64.40 | Change -0.45 (-0.69%)
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Currys reported revenue of £4.8bn, flat year-on-year at constant exchange rates. Growth in the international business was offset by a drop in UK & Ireland.

Underlying operating profit also unchanged, at £91m. Cost reductions and a higher mix of store sales helped profits in UK & Ireland improve but was offset by lower Nordic profits as costs increased.

Management expects industry-wide supply chain issues to persist. Market demand is also softening in the run-up to Christmas and the "immediate outlook has become more uncertain" considering new variants. Despite that, guidance remains unchanged for full-year adjusted profit before tax of £160m.

The group declared an interim dividend of 1.00 pence per share, and a £75m share buyback to begin January 2022.

The shares were down 7.8% following the announcement

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Our view

Half-year results were more about managements commentary than the numbers themselves. Warnings about a slower Christmas period, ongoing supply chain pressures and the risk of lockdowns suggest the group's momentum could start to slow heading into the new year.

Persistently high inflation also threatens to topple the recovery. If consumers have less disposable income, big-ticket items like new TVs and washing machines typically move to the bottom of the shopping list.

But Currys managed to make lemonade out of lemons over the past 18 months, building out its online presence.

The pandemic provided a huge boost to online shopping - an area Currys had lagged, but where it's been forced to up its game. That's a logistical triumph in itself, and despite the return of in-store traffic, online sales are still well above 2019 levels. This highlights the value of innovations like ShopLive, which allow customers to get video help from Dixons experts at home. Face-to-face advice is a key competitive advantage, so preserving it was crucial in surviving the pandemic. It could come in handy if variant concerns keep people from venturing out in the months ahead as well.

The downside to online sales is they're not as profitable and the return of higher-margin store sales has proven to be a benefit in the first half. With operating margins thin - at 2.0% overall, the resurgence of lockdown fears is a genuine concern. If stores are forced to shut, or consumers simply stay away for a period of time, that'll put pressure on margins again as the group would be more reliant on online sales.

Longer-term the group has its attractions. The aim is to outdo online rivals by offering a top-tier face-to-face service and multiple product categories under one roof. Customers won't mind paying more if they get a bit of help from a friendly and knowledgeable store assistant.

The group's closed all standalone Carphone Warehouse stores, which are now to be integrated into Dixons and Currys PC World, hopefully improving sales at larger sites while cutting costs. The end of minimum volume commitments with mobile networks improves flexibility and has freed up considerable cash. Going forward mobile should be a smaller but less capital intensive and hopefully profitable business.

This strategy is paying dividends so far. We'd been concerned that once more normal life resumed, customers would fail to show up at Currys stores in any real numbers. This hasn't happened, with pent up demand for in-person help boosting half-year sales. Covid-19 also may have created long term structural growth opportunities too. Home working looks like it's here to stay in some form, which should be good news for those in the business of selling home office and tech equipment.

So confident is the group, it's starting a share buyback programme, and expects to end the year with a rather remarkable £100m net cash on the balance sheet. This is quite the about-turn for a retailer we were seriously worried about a year ago, although of course there are no guarantees.

A reinforced balance sheet gives the group room to manoeuvre and has allowed it to restart the dividend. The group boasts stronger foundations than many retailers emerging from the pandemic, which helps the long-term investment case. But there are plenty of short-term headwinds. Demand softening in the run up to Christmas, supply chain pressures and the potential for more lockdowns mean there could be some volatility ahead.

Currys key facts

  • Price/Earnings ratio: 9.0
  • 10 year average Price/Earnings ratio: 11.1
  • Prospective dividend yield (next 12 months): 3.6%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Half Year Results (constant currency)

UK & Ireland revenue fell 4% to £2.5bn, with a 3% drop in like-for-like sales (LFLs). Strong performance from domestic appliances was offset by an expected drop in mobile . Store sales were up 28% as shops reopened. Online sales fell 12 percentage points to make up 43% of overall sales, but remained above 2019 levels. The shift to higher margin store sales meant underlying operating profit was £23m, up from £10m last year.

In the Nordics, revenue grew by 3% to £2.0bn with LFLs declining 1%. Online sales rose 9%, to make up 24% of overall sales. Domestic appliances and gaming performed well. Increased costs and a shift to lower margin online sales meant underlying operating profits fell £17m to £57m.

Revenue in Greece increased 15% to £280m, with LFLs up 8%. Two new stores in Cyprus performed well and sales were up in all categories. Online sales grew 11% and contributed 8% of total sales. Underlying operating profit increased £4m, to £11m, in part due to the strong performance of new insurance products offsetting rising costs.

Group free cash flow of £185m was down from £499m last year, due to an expected decline in working capital inflow over the half. Currys ended the half with net cash of £250m, compared to £269m last year.

Find out more about Currys shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.

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