While the present-day incarnation of Currys (CURY) is a technology products specialist selling everything from whizzy gadgets to white goods, the retailer’s origins can be traced back to 1884 when one Henry Curry founded the Curry Cycle Co bicycle-building business.

In 1984, Dixons Retail acquired Currys and thirty years later, ‘Dixons Carphone’ was formed through a complex merger between Dixons and mobile phone chain Carphone Warehouse.

A name change to Currys ensued in 2021 with the Currys PC World, Carphone Warehouse and Team Knowhow brands consolidated under one strong brand, ‘Currys’.

After benefiting from the pandemic-induced pull-forward of spend on TVs, laptops, printers and household appliances engendered by the pandemic, the post-Covid backdrop has been tougher for Currys.

Persistent inflation and rising rates have put the squeeze on consumers’ discretionary spending, and the retailer has faced stiff headwinds in the hitherto healthy and wealthy Nordics. Earnings have fallen to cyclical lows as cost-of-living pressures dissuade hard-pressed consumers from splurging on new gadgets.

However, the unloved shares sparked higher on results (14 December 2023) for the seasonally-weaker first half to 28 October, which finished before Currys’ peak Christmas period but showed a dramatically narrowed statutory loss, margin improvement in the domestic business and a profit rebound in the Nordics, where Currys trades as Elkjop.

Group EBIT (earnings before interest and tax) rose 7% to £31 million, ahead of the £25 million called for by Liberum Capital and giving management the confidence to reiterate year-to-April 2024 guidance, suggesting the Christmas trading period was off to a solid start.

BROAD-BASED ADVANTAGES

With the air fryer, gaming console and smart watch seller executing against a credible turnaround strategy, Shares jumped at the chance to chat to chief executive Alex Baldock, who previously garnered plaudits from sector-watchers for driving the digital transformation of Shop Direct (now known as Very) from a catalogue retailer into Britain’s second biggest e-commerce pure-play before being recruited by Currys.

Since the consumer environment remains tough, and the £571.9 million cap operates on thin margins in a cut-throat market, Shares was keen to learn what the chief executive thinks are Currys’ key competitive advantages.

‘We sell technology which the customer finds exciting, but equally, people can find tech confusing, so they need help,’ enthuses Baldock. ‘Help is valued in this market in a way it isn’t in every retail sector, and Currys is best-placed to help because of the assets we’ve got that nobody else has.’

In the UK and internationally, Currys is ‘the market leader with around a quarter or more of the market’, explains Baldock. ‘80% of UK households are Currys customers, so that’s a good starting position,’ he continues, and customers want to shop for technology through a mixture of online and bricks-and-mortar stores.

Currys ‘has got both, and at scale. And we’ve got the supply chain, logistics and service operations that sit beneath that. This is a fine margin sector, and the barriers to entry for somebody to come in and do what we do at scale are prohibitively high.’

The ambitious boss asserts that Currys ‘has assets that nobody else is going to get close to, whether it’s the credit services to help customers afford things or the installation services to help get them started, or the repairs, the recycling at the end-of-life, or our own mobile network with over 1.5 million subscribers and counting’.

But for Baldock, the final piece of evidence that Currys has an advantaged model is that market leaders in every developed market in the world ‘look a lot like us, whether it’s Best Buy (BBY:NYSE) in the US, FNAC Darty (FNAC:EPA) in France or JB Hi-Fi (JBH:ASX) in Australia, they are all the scale, omnichannel specialist market leader’.

NORDIC NIGHTMARE NEARS ITS END

A tough market backdrop and inflationary pressures meant UK & Ireland like-for-like sales were down 3% in the first half and EBIT declined by 40% to £15 million, but this masked gross margin improvement and the delivery of cost savings.

Also, as Baldock noted in the results statement, profits were in line with expectations thanks to a focus on ‘more profitable sales and growing the services that drive margins and customer lifetime value. Credit, Care & Repair and iD Mobile are all performing strongly, while colleague engagement and customer satisfaction continue to rise’.

For more than a year, Currys has been a tale of Nordic noir with its previously reliable Scandinavian business beset by competitive and inflationary pressures. Profit from the Nordics declined by a nightmarish 82% in the year to April 2023, interrupting a 20-year track record of rising earnings from the region.

The heartening news for shareholders is Currys delivered a year-on-year surge in first-half Nordics EBIT from £3 million to £12 million with gross margins up 190 basis points year-on-year, back to the levels of two years ago.

‘There’s still a long way back to healthy Nordics performance, but we’re on the way,’ Baldock tells Shares. While like-for-like sales fell 6% and consumer demand remains subdued, Baldock has called the bottom in the Nordics, where Elkjop is ‘on the recovery track’.

Nordic competition remains ‘vicious’, but key rivals are now more focused on profit and cash and less on market share growth. ‘All the progress that we’ve seen in quadrupling profits in the Nordics, albeit off a low base, in the half has come from self-help on margins and costs,’ says Baldock. ‘But to get back to £100 million-plus of EBIT is going to require some kind of recovery in the market, but there’s nothing structural or permanent in what we’ve seen going on in the Nordics.’

A DEPRESSED VALUATION

Shares in Currys are down 60% over five years and 18% over one year, and languish on a depressed rating that looks attractive considering the group’s recovery potential. Currys trades at a discount to electricals peers like AO World (AO.), Best Buy, Ceconomy (CEC:ETR) and FNAC Darty.

This depressed valuation has sparked speculation the electricals leader could become a takeover target, and has not gone unnoticed by Frasers (FRAS), the retail conglomerate controlled by Mike Ashley, which has amassed a 12.7% stake via shares and financial derivatives. ‘You won’t find me whinging about the share price,’ says Baldock. ‘This is a show-me market and we need to show the market that in particular, we’re off the bottom in the Nordics.’

HAS CURRYS BECOME LESS CYCLICAL?

Currys’ management is ‘broadly’ happy with the current store footprint, having shuttered a lot of UK stores going back a few years. ‘We closed all the small high street mobile-only stores, 600 of them,’ recounts Baldock. Now, the retailer has ‘circa 300 larger stores, overwhelmingly on retail parks, which have the space for all the tech and all the experts in one place, anyone in the country can get to one quickly’.

Short average remaining lease lengths give Currys the flexibility to close further stores ‘if we change our mind’, says Baldock. ‘We’re not sentimental, every store has to make sense or we’ll close them. But broadly, having lots of stores and a big online presence is the right model for us.’

As pressures on household budgets begin to ease, appetite for buying larger-ticket items should return. Meanwhile, Currys is benefiting from enduring trends that accelerated during Covid. Hybrid working is here to stay, and online learning and home entertainment continue to grow fast.

Baldock concedes it would be ‘naïve’ to believe Currys can ever be completely non-cyclical, but the the business is becoming less cyclical than it used to be. ‘A lot of what we sell isn’t really discretionary. If you work from home, is a laptop or a printer discretionary? If your washing machine or cooker break, is it discretionary whether you replace them? Plus, we are selling more services like credit, care and repair and mobile subscriptions, all of which carry recurring revenues that are by definition less cyclical.’

One of the key priorities for Baldock and finance director Bruce Marsh is to strengthen Currys’ balance sheet and liquidity. The retailer is in the process of selling its Greece and Cyprus retail business, Kotsovolos, for net proceeds of £156 million, initially earmarked for debt reduction. Paying down debt will give Currys greater flexibility to invest to grow profits and cashflow, and the retailer will also explore the potential to return any surplus capital to shareholders.

Besides operational, regulatory and financial risks, Baldock is ever-attentive to the threat from rivals including the 800-pound gorilla in the room, namely Amazon (AMZN:NASDAQ). ‘You’d be pretty complacent if you took that threat lightly,’ concedes Baldock. ‘At the same time Amazon has been the number two in our market for 25 years, so competing against them is not exactly new and with our omnichannel and services, we’ve got differentiators Amazon will never have.’

WHAT ANALYSTS ARE SAYING

‘While there is a lot to like about the first-half results, we await further evidence of cost control against a difficult macro backdrop that brings uncertainty with it,’ writes Berenberg, which has penciled in a return to the dividend list for Currys in fiscal 2026.

Liberum Capital forecasts a drop in underlying pre-tax profit from £119 million to £110.6 million for the year to April 2024 ahead of a strong recovery to £139.9 million and £163.4 million for full years 2025 and 2026 respectively.

Liberum sees the sale of the Greece and Cyprus operations as ‘an excellent outcome’ which further bolsters the balance sheet and should ‘help to deliver a circa £50 million year-end net cash position (excluding leases and pension). If one applies the achieved deal EV/EBIT of 14 times to the rest of the group, it suggests a valuation of more than double the current share price to over 100p (even on very depressed Nordics earnings)’.

Due to the bombed-out valuation, Liberum says it ‘cannot be ruled out that Currys could be subject to approaches from interested parties. The sale of Greece could be seen to somewhat “tidy up” the group structure, making an acquisition and integration simpler for any would-be acquirers’.

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