Currys thumped by higher gilt yields

Currys (CURY) didn’t do too well out of the market chaos in the aftermath of Liz Truss and Kwasi Kwarteng’s mini-Budget. The electrical retailer’s shares slumped by 8 per cent after it revealed a £511mn impairment charge over the Dixons and Carphone Warehouse merger in 2014 “as a result of the sharp increases in UK gilt yields around our period end”. The market was also unhappy with another cut in full-year guidance – management now forecasts adjusted pre-tax profit before of £100mn-£125mn, down from the previous range of £125mn-£145mn, and lower capex of around £120mn.

This was a challenging half for the retailer across its markets. Half-year revenues fell by 10 per cent in the UK and Ireland and by 4 per cent in the Nordics against last year, and in total were 6 per cent below pre-pandemic levels, as consumers hit by inflationary pressures cut back on discretionary spending. The only uplift in the half came in Greece, the company’s smallest market, where sales rose by 5 per cent.

The overall cash profit margin fell by 11 per cent, while the adjusted international margin collapsed by 94 per cent. Currys blamed the latter on the impact of “competitors’ heavy discounting” of excess stock. Its own inventory levels were up by 11 per cent. The poor international performance drove a 54 per cent contraction in operating cash flow and an £86mn free cash outflow.  

Given the bad news, it would be easy to forget that Currys enjoys a market-leading position in the electricals sector. According to RBC Capital Markets analysts, the company has around three times Amazon’s (US:AMZN) share in the UK. But Third Bridge consumer electronics analyst Lara Martinez warned that “John Lewis can potentially win market share from Currys because [it has] a much better in-store experience and a more sophisticated online platform”. 

Numis analysts said that “some of the worse case scenarios have been avoided given the UK performance and dividend retention, but forecast risk remains elevated, and the longevity of declines and extent of profit recovery in the Nordics is critical to the health of the business”. The shares trade at seven times forward earnings according to consensus FactSet forecasts – Currys still looks undervalued given its market-leading position and long-term operating margin prospects. But as with retail peers, the short-term is increasingly uncertain, despite hopes of a Christmas boost over the company's peak trading season. Hold. 

Last IC view: Hold, 72p, 07 Jul 2022