Costly price wars with rivals fighting to take market share have caused Currys to come unstuck overseas, but the risk of heavy discounting is one that also needs to be managed closer to home.
Guidance for its adjusted pre-tax profits this year has been cut to between £100 million and £125 million, against a previous range of £125 million to £145 million. The retailer is more dependent than ever on Christmas sales after swinging to an adjusted loss of £17 million during the first half of the year.
The electricals chain is battling falling spending from cash-strapped consumers, an impact amplified by the boom in demand for televisions, laptops and games consoles during the pandemic. Its shares have followed suit, sliding almost 75 per cent since the start of this year. But against Currys’ own history and relative to the rest of the sector, those shares are not yet in bargain territory.
Adjusted for the cut to profit guidance, the shares trade at eight times forward earnings. Yes, that’s a discount to an average multiple of ten recorded since the Dixons/Carphone tie-up, but then the outlook for consumer spending is also a lot worse.
Operations in the Nordic countries and Greece, formerly lucrative markets, are at the centre of Currys’ troubles. Rivals that overexpanded in the wake of the pandemic have been selling goods at aggressive discounts. In the hope of maintaining market share, Currys has been drawn into the competition. The result? Like-for-like sales have declined by 6 per cent and margins have suffered even more, almost entirely wiping out profits for that business over the first half of the year.
Currys argues that such discounting is unsustainable. That might be true, but there is no timeline for when it will cease to hinder the group’s margins and the effects aren’t merely in the shorter term. A 3 per cent operating margin target, cut from 4 per cent earlier in the year, has been pushed back by another 12 months to 2025. How Currys fares over the peak Christmas trading season will determine how well margins in the UK and Ireland business hold up this year.
Like-for-like sales have continued to slide in recent months, down 10 per cent year-on-year, yet stock levels have increased. At £1.75 billion, inventory was £170 million higher than at the same point in 2021. The supply chain disruption that sapped stock levels this time last year is one explanation, as is the higher cost of goods. But it leaves Currys at risk of needing to shift more goods at a discount, particularly if Christmas isn’t a bumper season.
Offering consumers the chance to buy on tick might be one way of encouraging sales. About 17 per cent of customers bought on credit, ahead of a target of 16 per cent by the end of the next financial year and up from 12.4 per cent last year. The question is whether bad debts pile up; thus far the retailer has “not seen any building problems in the book”.
Investing more in stock and the drain of the international business sapped cash generation. The result? A free cash outflow of £86 million and a swing to a net debt position of £105 million, against net cash of £250 million last year. The plan is to get debt below £100 million by the end of April.
The company is 18 months into a £300 million savings plan, which boosted adjusted profits for the UK and Ireland division in recent months, but the likelihood of more margin erosion in overseas markets and the risk of ebbing sales domestically means cost reductions might barely touch the sides for Currys as a whole. The risk of the retailer cutting its guidance again remains high.
ADVICE Avoid
WHY Declining sales and weaker margins overseas raises the risk the company will miss profit guidance
Serco
The parting note from Rupert Soames, Serco’s chief executive, is another bump to profit guidance this year, but his real legacy is turning the outsourcer from a City pariah to one that has firmly convinced the market it has a stable path to increase earnings.
Underlying profits are expected to be about £235 million this year, £5 million higher than previously expected and £40 million up on initial guidance issued this time last year. Generating greater volumes of work out of existing contracts as well as benefiting from big wins in the American and British defence sectors have put the group on track to lift profits year-on-year, despite the remnants of test-and-trace work fading.
Soames has stripped back the focus to government contracts in five sectors — including defence, health and immigration and justice — and the four regions of Britain, the United States, Asia Pacific and the Middle East. The company has been steered away from lossmaking contracts.
The result? It is in a much stronger financial position. The balance sheet was secure enough for dividends to be reinstated at the start of last year, with another rise in the payment to 3.04p forecast for this year. Free cashflow is forecast to be £140 million this year. Net debt remains below a target range of between one and two times adjusted earnings, at a multiple of only 0.8. That leaves room for more acquisitions or special shareholder returns. A £90 million share buyback programme is now complete and the new management team will make a decision on whether to repeat share purchases next year.
Over the past five years, the stock has delivered a total return of almost 65 per cent relative to a negative 6 per cent from the FTSE 250, the mid-cap index of which it is a constituent. The shares are still up almost 12 per cent since the start of this year despite the wider market sell-off. Yet the stock remains inexpensive at just under 12 times forward earnings, a discount to a five-year average multiple of 17. That leaves room for the shares to continue their ascent if Soames’ successor can keep the group on course.
ADVICE Buy
WHY Inexpensive considering the improved margins
