Description
Currys can do 20p+ of EPS or FCF in next 2-3 years vs. price of 100p today. 5x EPS or FCF is 50% discount to where it should be trading (best comp Best Buy at 10x today). Currys could double over the next few years
Description
- Currys is the leading electronics retailer in UK&I, Nordics and Greece. They have 25%+ market share in each of those regions
- c. 55% of revenue is from UK&I, 40% from Nordics and 5% from Greece
- c. 30% of revenue is from computing, 25% from consumer electronics, 30% from domestic appliances and 15% from mobile
- Currys has succesfully transioned to a an omni channel retailer. c. 50% of sales is is online (incl. click and collect) and 50% is through their stores (FY2020-21), although that mix might moderate slightly post covid
- Currys has been through a transformation by 1) closing carphone warehouse stores, and 2) transitioning the business online through covid (online transition started already pre covid)
- The electronics markets in UK and the Nordics experienced a boost by covid with 20% growth, but is now slowing a bit down post covid (still positive 2yr LfL). Would normally expect underlying electronics market to be up with GDP
- Company expects to be net cash positive by 100m in FY 2022 (April 2022). However, they do have a 416m pension deficit, so 316m Net Debt if you include deficit
Thesis
- The company is on track to deliver its targets of 4%+ EBIT margin (Best Buy at 4-6%) and GBP 250m FCF by FY April 2024, eqv. to 20p+ per share.
- The company should grow mid single digit over time. Underlying market up by low single digit in line with GDP, and company is taking market share. The company has successfully transitioned from a bricks and mortar retailer to omnichannel. Several other physical retailers have struggled and closed down.
- Competitive advantages
o Scale – enables price match vs. online, also very important when transitioning from physical to omnichannel, can amortize cost over larger customer base (tech, logistics etc.)
o Omnichannel – over the past 3-4 yrs, Currys has really focused on omnichannel, and has even been taking market share online at times (not just overall market share)
o Supplier support and prices, access to certain products. Suppliers clearly see the value in a physical retailer given that in-store professional can upsell customers to latest models – these carry higher $ profits for the supplier. Therefore, suppliers give Currys newest assortment and support marketing spend
o Service proposition of omnichannel better than most offline or online retailers (“best of both world”) – expert help (offline and online), never out of stock, get your product now, help 24/7
- Other key parts of strategy involves credit penetration and additional services, like setup, support, repairs, protection insurance etc. – this helps to support margin and a credit/service customer is more sticky
- Cost savings: company has taken out 300m cost, and expects another 300m over next three years. Cost savings come from increasing productivity, lowering store cost, simplifying central cost etc.
- Good management team. Mgmt. team has transformed the business over past 3-4 years to focus on key profitable segments, and they have managed to move Currys from bricks and mortar retailer to a true omnichannel retailer
- Buyback – company is starting its GBP 75m buyback (on 1.15bn market cap, so 6-7% of market cap per year)
Why is Currys trading at a discount?
- Peak trading was relatively weak vs. last year, as total electronics market down by 10%. However, still up on 2 year basis. Electronics market should stabilize YoY when tough covid comps have been lapped in the coming quarters
- Currys has been through a tough transformation, and the company is yet to show it can make 20p+ FCF
- Company is using 78m FCF p.a. for pension reduction, but that should go to zero over next 3-5 years. At that point, the company will be net cash (with no pension deficit), and can apply all FCF for shareholder distributions
Risks:
- Inflation: inflationary pressures can squeeze disposable income, and have a negative impact on total eletronics market
o Inflation also has a cost impact on labor and other cost items – company has guided to 200m impact from inflation over next few years (will be offset by cost savings mentioned above)
- Supply disruption is obviously a risk, e.g. company is suffering to some extent because of the chips shortage impacting some of their products
- Innovation cycles in consumer electronics are unpredicted and sometimes go against you
- Low margin: An electronics retailer only makes c. 4% margins, making it susceptible for major shocks in revenue or cost. However, gross margin is also low, i.e. significant amount of cost base is variable
- Pension: company has a 416m pension deficit and has agreed with the pension trustees to pay back 78m p.a. over the next 3-5 yrs.
Investment case on website: https://www.currysplc.com/investors/investment-case/
Capital markets day: https://www.currysplc.com/media/dhnk4ozp/currys-cmd-presentation-04nov2021.pdf
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
Buybacks just started + earnings recovery