Currys plc (CURY) Earnings Call Transcript

And welcome to the Currys Peak Trading Update Webcast and Conference Call. This meeting is being recorded. At this time, I would like to turn the conference over to Alex Baldock, Group Chief Executive. Please go ahead.

Thanks, Sergey. Good morning, everybody. I'll run through Peak Trading and what's behind it before Bruce and I take your questions. At this peak, Currys U.K. performance continued to strengthen, but international had a tough time and faces intense, but we still believe not permanent pressures that have substantially disrupted that market. And where that leaves us overall is confidence. Confidence to stand by our guidance for this year and also confidence in our medium term ambitions. Let's turn to the topline first, peak like-for-likes in the U.K. were down 5%, an improvement on the first half trend. But international were down 7%, with Nordics down 10%, a market-driven deterioration on the first half -- the first half sales with market share staying pretty stable. Whereas Greece by contrast, grew by 12%. On categories, happy to give more color in Q&A if you want it. But the short version is that computing and CE were softer, whereas appliances and mobile were strong. Let's turn to the UK&I and market share, first of all. Well, the first thing to say about market share is that we're not chasing less profitable sales still, the trends are improved from the first half to peak with share loss about half of the first half with increasing share in appliances and TV set against a declining share in computing. And gross margins, meanwhile, for the first half, as you'll remember, they were up strongly, probably 160 basis points year-on-year and in peak they were up even more strongly, contributing to a trend of increasing gross margins that's so central to the improvements we're seeing in U.K. profitability. And this peak, we continued our progress on the drivers of that improving gross margin. First, growing services. Credit adoption was a big success story, up 430 basis points year-on-year. Warranty was another, up 240 basis points year-on-year. Those services, as we know, so important not just for improving gross margins but for customers for life stickier and more valuable customer relationships. Second is the customer experience continues to improve, and it has, as we've seen in our customer satisfaction and NPS served as our ability to charge for it while still offering customers good value for money. We told you at the half year that we started charging for all major domestic appliances, deliveries. In peak we're now charging for a large screen TV delivery as well. More to come on that. Third, I said that we're less inclined to chase less profitable sales. And now we have better tools so that we don't have to, notably, a much better understanding of end-to-end profitability. And fourth, we continue to drive down supply chain and service operations costs. And these 4 drives have all contributed to growing gross margins, and there is more to come from all of them. I mentioned supply chain and service operations cost and is good progress on cost savings overall. We've realized, as you see at bottom right here, GBP 113 million of cost savings at the end of the first half. We're confident that we'll get to at least GBP 170 million by the year-end and also confident that we'll do at least the GBP 300 million of mature annualized cost savings by the end of next financial year, FY '24. And finally, stock is in decent shape. We're coming out of a peak pretty clean in the U.K. with stock down 9% year-on-year. International is a less happy story, as we outlined only a few weeks ago, and we continue to face intense though we do not believe permanent market disruption with all the pressures we saw during the first half, some of them intensifying during peak. Aggressive competitors continued to heavily discount excess stock. The Nordics profit pool and technology retail went to near 0. You may have seen this week Verkkokauppa's profit warning, which leaves Elkjøp as the only technology retailer who was going to make any money in the second half of this financial year. And all of these pressures that we talked about before have more recently been compounded by further declines in market demand. So our sales are lower, even with stable market shares and we can't point yet to any improving gross margin trend in the Nordics over peak. Now we're not sitting idly by and waiting for this market to improve. Of course, we've energetically stepped up our self-help actions on margin, cost and cash. On margin, we've raised prices. We're passing more of those COGS increases to consumers. We're leading more boldly on price rises and we're charging for services more now as well. We are doing fewer promotions. The promotional intensity significantly declined, and we're especially doing none of the less profitable ones. We've upped our focus on margin boosting accessories and services, and we're ensuring we get full value from our supplier relationships. On costs, we've cut marketing. We've gone harder on overheads, 10% to 15% back-office headcount reductions announced in the Nordics last week. We've shown all consultants and contractors the door. We've closed a few unprofitable stores, and we further -- made further savings in supply chain service operations costs. Important to say in all of this, we don't believe that we're taking excessive risks with the business's long-term health, but nor are we just sitting, waiting for markets to improve. Finally, and importantly, we're in decent shape in stock in the Nordics, too. International, as you see here, stock is down 5% year-on-year during the peak but the Nordics were down 9% during Peak. Greece, to feed its sales growth was up 19%. So we are exiting peak in the Nordics as in the U.K. in a pretty clean position on stock. What does all this mean for the second half? Well, U.K. profits will rise year-on-year in the second half, and they are ahead of our forecast. But by contrast, international profits are very challenged, even though we will make a second half profit in the Nordics. That leaves overall a group that we're very happy and very confident in sticking to the profit guidance that we gave last time of GBP 100 million to GBP 125 million, and the group will be cash generative overall. So when you take that GBP 100 million to GBP 125 million of profit, as I say, we'll be cash generative, particularly with CapEx at about GBP 120 million and exceptions in about GBP 40 million for the year, which means that the net debt will be lower than GBP 100 million at the year-end, we expect. Looking further ahead, we now see our 3% EBIT margin as an absolute minimum target, and we will achieve that by following the strategy that's producing improving results in the U.K., a strategy founded, as you'll recall, on Happier Colleagues and Customers on better retail fundamentals and making more of the 2 big things that make Currys [indiscernible] Omnichannel and services. Let's start by making most of being a market leader in a market that is still even now double digits larger than it was pre pandemic. And of course, the market and our sales have come under much pressure. During this cost of living squeeze, but we really don't believe that tech can be seen now as a purely discretionary category. On Colleagues and Customers, our success in this market obviously depends on them being happier, and they are both colleagues and -- colleague engagement and customer satisfaction are sharply up in recent years. Just we continue to improve on the other, what you might call retail fundamentals, a bigger range, better availability, being on the money on price and the easier customer experience, for example, on delivery. And one example of these improvements in action is dealing with the challenges to delivery that came this peak through the Royal Mail strikes. And we were able to switch volume quickly at scale without drama to DPD. And when DPD itself came under pressure, we again, we were able to react pretty fast. We altered our proposition. We redirected returns in order to collect. We ensured we've got priority treatment from DPD as the #1 as [indiscernible] and we were able to restore full service levels by Christmas. We just wouldn't have had this flexibility and agility in our supply chain a few years ago, which is a credit to Lindsey Hazelhurst and her team. Better retail fundamentals then and good progress on our big differentiators, too. So on omnichannel, this peak, omnichannel continued to prove itself as the winning model for customers with stable stores share of business year-on-year. But also, it's not just working for customers. It's increasingly we're showing that it works for us as our increased gross margin shows. And one example of how we've been doing this in action over peak is bundling. Bundling approach, I mean, not selling a laptop, for example, on its own, but selling it together with the bulk with products, accessories and services they get most out of that laptop. And the run-up bundle is good for customers because they get everything they need and they get money off as well. And it's good for us. We make a lot more money for a bundle than just selling the [ TIM ] on its own. And how we're selling more? Well, we have made significant improvements to the bundles themselves. Made them more tailored to customers' needs and have a much simplified menu of them. We've trained colleagues on how to sell them, and we're supporting them to do so as well with improved journeys and point of sale. And the results have been strong. And bundles adoption levels have been up by 580 basis points year-on-year this peak, which is good for us, but there is much, much further to go here. The opportunity is in the annualization of the full year benefit of taking bundles to more categories, whereas the focus has been largely on computing so far, there's much more potential in mobile and TVs, for example. Taking bundles online, where bundling is much lower, and we now have a platform to do much better and adding more services to bundles. And speaking of services, that's the second big differentiator for us, of course, where we've again enjoyed record peak adoption levels, again, so important to boost gross margins and to build stickier and more valuable customer relationships. And notably, credit grew very strongly. Credit sales, up by over a quarter. Customer numbers up 17%, adoption levels up by over 400 basis points to over 18% of our sales on credit and with online adoption, especially strong at over 20%. Protection is another service that enjoyed a strong peak, and that's an important profit driver for us. The adoption of our care and repair warranties were 240 basis points year-on-year with stores, again, doing really well at 270 bps. So the opportunity here is online. And as you see on the right-hand side here, online adoption is trending in the right direction, but we're very low base, not to the success with credit online. This now becomes our next area of focus to exploit the potential of our new platform. And finally, we've made good strides with connectivity this peak. I mean the mobile business, is back into growth and share gain. Now we've been through the pain with that. We've got good new contracts with Vodafone and 3 that we're happy with. We made good progress on our own MVNO ID. The subscriber grows up handily to over 1.2 million at a pretty low churn. And all of that strategy, the whole thing that I've just been talking about, you could summarize and give as an example, our experience in domestic appliances this peak. And a year ago, we had issues here in availability and delivery. So we've taken action in the supply chain behind the scenes to have more space with an improved partnership with GXO to better process right-first-time. And that's given us the foundation to get really behind the energy efficiency trend with customers. And in omnichannel, we've been able to sell higher priced products, higher-priced washing machines, especially with the support of credit because the customer can see the lower total cost of ownership over time. So we benefit from selling an all expensive products, the customer benefits, they feel good about sustainability and it costs them less over the life of the washing machine. And the results of all this have been share gain over 1.6 percentage points, better availability, 14 points up, net more satisfied customers at 26 points more satisfied versus 5 years ago in this space. And now we're able to monetize all of these customer experience improvements. The customer experience has improved, so we can charge more for it. And the average delivery installation recycling revenue per order is up 77% year-on-year or over GBP 10 per order, which on over 3 million 2ft deliveries a year, you can do the math. So this is a big reason why profit in MDA was significantly up year-on-year. All of this progress now rest, as you know, on a stronger balance sheet with average total indebtedness down by over GBP 900 million a year on 3. That leads us with strong liquidity headroom of over GBP 500 million with facilities of nearly -- of over GBP 670 million and net debt expected to come down to less than GBP 100 million by the year-end. And this allows us to look ahead, as I mentioned before, with some confidence to at least the 3% EBIT margin target and the GBP 150 million of sustainable free cash flow. So to wrap up, not the easiest environment in any markets, but in that environment, the U.K. has continued to be its upward trajectory, offsetting a weaker international performance. And we're going to continue with the strategy that's seeing such improved U.K. performance, making the most to be #1 in a bigger, more central market with ever happier colleagues and customers, better retail fundamentals, making much more of omnichannels, in services in a financially stronger business, and we're confident that we will keep our financial promises both this year and longer term. And with that, I'll pause, and we can get your questions.

Thank you. [Operator Instructions] I will pause for just a moment to assemble the queue. We will now take our first question from Ben Hunt from Investec.

Apologies, I've sort of been going through different presentations here. I think I've been on the news presentation. But it seems that there's been a slight improvement in the market share or less deterioration over peak. But on the other hand, there's been an improvement in the gross margin performance over peak versus H1. I was just trying to get a sort of grip of what the levers are. I mean, obviously, there's a relationship between market share and gross margin. And whether you think the gross margin improvements of the delta, if you like, is more a function of the structural improvements from service and credit adoption? Or is it the competitive environment? And how does that interlink with the market share improvement as well? That's the first question.

Right. I mean, as you say, these are interrelated, which is why even though we're not solving for sales alone, I mean, clearly, what we're solving for here is sustainable cash flows. We pay -- we do pay attention to market share because we enjoy the benefits of scale. We enjoy the benefits of big #1, and we intend to keep it that way. That's -- and as you rightly observed, the market share trends have improved peak versus the first half. But when you get under the bottom, Ben, I mean, just to give you one example, about half of the market share decline is attributable to 1 category, which is TVs. And a big chunk of that is Sky Glass, the new product being introduced into that category, which we don't yet sell. So we kind of -- that's 1 driver. Other drivers are we're not chasing unprofitable sales. And we have, as I say, better tools so that we don't have to. So the market share has ended up where we expected. We're pretty comfortable with it. We like -- we're comfortable with having about 1/4 of the market, and we like the benefits of market leadership, but we particularly like the gross margin improvements. And to your question, they are the results overwhelmingly of self-help. I mean when you look at the drivers, there are things that we've done, whether it's growing services, credit and care and repair by such healthy proportions, whether it's the improvements in the customer experience and being able to charge for them, whether it's not chasing the less profitable sales or whether it's reducing our own supply chain and service operations costs, those are all things that we've done.

Okay. And forgive me for my ignorance, but when you use this expression, not chasing unprofitable sales, are you referring to specific lines of all categories? Or is it types of customer or channel? Or any color you can give on that?

Well, one of the things that Bruce has driven here is a much better understanding of what we call end-to-end profitability, which is basically a really good favorable contribution model that allows us to look at how much money we really make end-to-end in a given product, category, supplier. And over time, we'll expand that to bundle, to services, to customer segments and the like. So whichever way you cut it, we'll be able to understand is this profitable or is this not? And we're going to be less and less tolerant of doing anything that isn't profitable end-to-end. A couple of examples where this is already [ bitten ], we've significantly improved our PPC marketing efficiency already. And we've also discontinued some unprofitable lines. And obviously, this then serves as a bit of an encouragement, you might say, to our supplier negotiations because we can point with more transparency to your competitor is more profitable to us than you in such and such a line. So everything else being equal, we're going to focus more on that unless you improve your terms. So it is already bearing fruit. So that's what I mean by not chasing unprofitable sales, Ben.

Okay. And then final question related to that. You talked about your supplier negotiations. Is there a risk at all of -- or rather, how much you beholding to volume rebates at the end of Q4? Given that your volumes are likely been down quite materially given the inflation aspect within the like-for-like too?

Well, the simplest answer I can give to that is that we're very confident in sticking to the profit guidance of GBP 100 million to GPB 125 million, and that's all in the next...

Our next question comes from Adam Tomlinson from Liberum.

3 or 4 questions for me, please. Just a follow-up on the market share points. You mentioned just in terms of the categories that you're really looking to dominate in. I know you mentioned a specific example there around TVs, but anything else, any detail you can share in those categories and your market shares in those would be useful. That's the first question. The second question is around stock. So thanks for the detail around the level of stock coming down in the presentation. Just wondering if you can give any color in terms of the -- your views on the quality of that stock and the composition where that now sits? And then finally, just 2 quick questions on services. So noting the record credit penetration there. Just any comments around the quality of the customer or any changes in the default rates that you're seeing. And final, just a quick question on some of your competitors, I think, have mentioned, smaller competitors, installations of around 3,000 a year. Just can you just remind us on how many you do just to give an idea of the scale there, please?

Great. I'll pick those Adam, but I'll let Bruce start on the stock.

Yes. Adam. So as Alex reflected, we have seen success in both the U.K. and the Nordic business, taking total stock at the end of the peak down by 9% to 10% in both markets. So the absolute value of stock has reduced significantly, which sets us up really well for the future. In terms of the quality of stock that underpins that, actually, we're in good shape. I think the best proxy I can give you for that is our stock provision and our stock provision levels have actually improved year-on-year. And that's on a consistent basis. So therefore, from an aging perspective, the quality of our stock is better.

To pick up on some of the other questions. On the category front, over peak, our share of TVs actually increased. And our share of MDA significantly increased by 1.6 percentage points, as we talked about with the success of our focus on energy efficiency and success in trading customers up to higher ASP product in MDA. Mobile did well, and we continue to -- albeit of a much smaller base, our growth in sales, profitability and market share in mobile. I mean the one to suffer notably in the U.K. was computing. And that -- and that -- maybe a good example, we're not chasing less profitable sales. The markets in computing shifted heavily in mix towards lower value entry-level products that we're less interested in and less strong in and therefore, our market share declined over peak in computing quite significantly. So that's kind of the category mix and has been pointed out. Overall, we -- the market share ended up where we expected it to, and we're very attentive to it but it's not what we're primarily solving for, what we're solving for is sustainable free cash flow in this business. Bruce has picked up the point on stock. You asked about services. It's the right question to ask about credit because in this environment, it's the natural question to ask. We're not seeing signs of stress in the book. We're not seeing signs of accelerating customer repayment difficulties. Now 2 points to make about this. First, of course, we don't take any credit or fraud risk ourselves. That all sits with our partner bank, BNPP, who are suitably sober and suitably prudent in their outlook. And that's why we like them as a partner. And I think that why we're not seeing signs of stress in the book when perhaps others might be is because we've been super cautious in who we lend to and how much we lend. In the years we've been building this credit business up to over 18% of our sales. We could have grown it much faster. But we've been very careful not just because we're nice people, but because we want to stay a mile away from any reputational risk, but being associated in the customers' eyes with us lending the money that they can't afford to pay back. So that wouldn't be any good of solve. So the fact that we're able to keep offering really compelling customer propositions in credit, and we're able to keep posting these levels of growth is because we've got our partner bank solidly behind us because they don't see signs of stress in the book. Finally, you asked about installations. I think there's a -- do you say a competitor does 3,000 for these year. We do 800,000 installations a year in the U.K. out of over 3 million deliveries and installations. And obviously, that's just a U.K. number.

We'll now take our next question from Richard Chamberlain from RBC Capital Markets.

A couple of questions from me, please. First one is, are you seeing a narrowing of the gap between in-store and online margins in the light of changes you've made to the online offer, in particular, I guess, delivery charges for -- changing the delivery charges for online orders? And then just second, what are your thoughts on the sort of labor cost outlook now for Currys -- colleagues cost in the light of the almost 10% rise in the minimum wage up in spring time? Those are my 2.

Let me start with the first of those, and Bruce may choose to build on a couple of points there. But the shorter, we're not guiding to a specific number. But yes, we are seeing a narrowing of the gap between in-store and online profitability. And then just, Richard, you don't use our phrase leveling up. It's not everyone's taste, but that's what we're doing. We're leveling our profitability between the channels. And you rightly observed there's some charging on things like delivery that's very helpful in that. But it's not just that. It's also margin boosting services like credit where we've seen a standout success over peak. Our credit adoption online is over 20% now, which is up 710 basis points year-on-year, and it's 400 basis points higher than our stores adoption. So that's going to stand out success of using the -- what the new platform offers in order to be able to do a better job of selling the gross margin accretive services that are so important to our overall gross margins, but of course, also to narrowing the profitability gap. Bruce, I'll let you pick up on the labor cost point.

Yes. So well if I just maybe just add one extra point. There has been an interesting byproduct, which has come from starting to charge for delivery of MDA and more recently for TV. It is causing customers to choose to come into store more partly because we have stock that's available, which means that customers can get their product same day. But of course, it also allows them to avoid that delivery charge. But as Alex reflected, if you then put that in the context of some of the other work we're doing on, so with, so the ability to sell accessories consumable services with those, that gives us an extra benefit as well. So there is a subtle shift within our channel mix. In terms of cost, as we look ahead, clearly, cost inflation within our business is something that we're very attentive to. The 2 key drivers, as we discussed at the half year are around energy and payroll. Energy, we're expecting our energy cost to be broadly flat through the balance of this year. Within payroll, we will continue to invest, obviously, to make sure that our valued colleagues are paid a good wage within the market.

Richard, I think probably just one final word on that. It's worth reminding ourselves that the cost increases that Bruce has spoken to, whether it's the energy costs or whether it's the colleagues costs, are more than covered by our progress against the GBP 300 million of cost out and we're on track, I think, now to realize GBP 170 million of cost benefit in this financial year, we'll get up to at least GBP 300 million by the end of FY '24.

Warwick Okines from BNP Paribas Exane.

3 quick questions, if I may. Firstly, we've talked a bit about the share improvement in the U.K. The 3-year like-for-like has deteriorated on the first half. I was just wondering how you sort of reflect on the consumer heading into what's perhaps a bit less discretionary environment in the months ahead now that you're through peak. The second question is on the Nordics. Are there any particular categories or countries you're seeing the biggest areas of pressure competitively? And then thirdly, just to be interested in whether you've -- you can share anything about what your suppliers are saying to you about the situation in the Nordics.

Yes. So a few questions there. I mean, I think the decline year on 3 years that you referred to is 100% attributable to channel shift. So if you go back 3 years, versus 3 years ago, our store -- our market share in stores are stable and we gained market share in online. It's just the shift towards online has resulted in us a share decline overall. So that's kind of -- it's 100% attributable to channel shift. Is the simple answer there.

Sorry, Alex, just before you move on, but I really mean it's gone from plus 2% in the first half year on 3 years to minus 4% in over peak, which suggests it's the consumer that's dropped off in the past few months, no?

I see what you mean. So I was answering the wrong question. Bruce, why don't answer the right question.

So you're right, the overall level of demand has fallen compared to prepandemic. But when you consider that across the market, I think would reflect that from a television perspective, we've seen some level of drop off with a weaker market. Some of that potentially is go-forward. I think there's also a reflection of clearly discretionary spend on high-value products is going to be more challenging at this point in the cycle. But yes, those, I think, would be our key picture in terms of consumer trends.

Mean if you're asking for a look forward, Warwick, on the consumer, that's obviously -- obviously hard to do. But, and what we're planning on is being very prudent. So we're expecting the U.K. and the Nordics for that matter consumer to have a tough time of it in the next 12 months. Now obviously, we've shown in the U.K. that we don't depend on a rosy outlook in order to improve performance. But of course, you hear everything else being equal, it helps. Now so I think we're planning on a pretty -- on a pretty gloomy outlook. But it's worth saying it could be better. So and you might take the view that U.K. inflationary pressures have now peaked, half of U.K. inflation, I think, is energy and food, and that's not -- and that's already appears to have peaked. And as long as we avoid an inflationary wage-price spiral, then as I said, the inflation pressure may have peaked, interest rates may be near that peak. The U.K. consumer is still sitting at quite a lot of savings. We appear to have now a measure of stable policymaking and assuming no big new geopolitical shock, then up 12 months from now, things could look better, at significantly rosier for the consumer, but we're not counting on it. You had another question, didn't you? About in the Nordics is a country that particularly suffering? And the short answer is Sweden, it's not easy anywhere in the Nordics at the moment, but Sweden is the hardest hit. The consumer that has been hit by the highest rises in energy costs and had the minimal government support at least up to now. We expect some to be coming through in the months ahead. And of course, the Swedish consumers got -- a large proportion of the Swedish consumers have got variable rate mortgages and interest rates have spiked there. So they've been hardest hit. But I think we're calling a difficult environment right away across the Nordics. Finally, on the suppliers, but we continue to have very constructive engagement with all of our suppliers. And of course, we engage with them as a group, and that's one of the benefits of being a group. We matter a lot to them. And the U.K. performance continuing to strengthen is very heartening to them. And of course, we're not slow to make most of our scale when it comes to friendly negotiations with them. But no, we find our supplier base supportive as they would be given our importance to them as well as vice versa.