Currys : Peak Trading Update 2022/23 - Transcript

Currys - Peak Trading Update

Investor Call

Wednesday 18th January 2023

Transcript

Disclaimer

This transcript is derived from a recording of the event. Every possible effort has been made to transcribe accurately. However, neither Currys nor BRR Media Limited shall be liable for any inaccuracies, errors, or omissions.

Conference call...:	Good day 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.
Alex Baldock:	Thanks. Okay, good morning everybody. I'll run through peak trading and
	what's behind it. Before Bruce and I take your questions. This peak carries
	UK 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
	confident, confident to stand by our guidance for this year and also confident
	in our medium-term ambitions. Let's turn to the top line first, peak like-for-
	likes in the UK were down (5)%, an improvement on the first half trend. But
	international were down (7)%, with Nordic's down (10)%, a market driven
	deterioration on 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
	consumer electronics (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, well, the first
	half, as you'll remember, they were up strongly, fully +160bps YoY. 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 UK
	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 +430bps YoY. Warranty was another, up +240bps YoY.

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, as the customer experience continues to improve and it has as we've seen in our customer satisfaction and NPS, so does our ability to charge for it, while still offering customers good value for money. We told you at the half year that we'd started charging for all major domestic appliance 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 our much better understanding of end-to-end profitability. And fourth, we continue to drive down supply chain and service operations costs. And these four drivers have all contributed to growing gross margins and there is more to come from all of them.

I mentioned supply chain and service operations costs, and there's good progress on cost savings overall. We've realised as you see a bottom right here, £130m of cost savings at the end of the first half, we're confident that we'll get to at least £170m by the year end. And also, confident that we'll do at least the £300m of mature annualized cost savings by the end of next financial year, FY24. And finally, stock is in decent shape. We're coming out of peak pretty clean in the UK with stock down (9)% YoY. 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 Nordic's profit pool in technology retail went to near zero. You may have seen this week Verkkokauppa's profit warning, which leaves Elkjøp as the only technology retailer that's going to make any money in the H2 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 overhead, 10-15%back-office headcount reductions announced in the Nordic last week. We've shown all consultants and contractors the door. We've closed our few unprofitable stores and we've 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)% YoY during 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 UK, in a pretty clean position on stock. What does all this mean for the second half? Well, UK profits will rise YoY in the H2 and they are ahead of our forecasts. But by contrast, international profits are very challenged even though we will make a H2 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 £100-£125m. And the group will be cash generative overall. And when you take that a £100-£125m of profit, as I say will be cash generative, particularly with CapEx at about £120m and exceptionals at about £40m for the year, which means that the Net Debt will be lower than a £100m at the year end, we expect.

Looking further ahead, we now see our 3% EBIT margin as an absolute minimum target. And we'll achieve that by following the strategy that's producing improving results in the UK. A strategy founded, as you'll recall, on happier colleagues and customers, on better retail fundamentals and making more of the two big things that make Currys distinct, omnichannel and services. That starts 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 colleague engagement and customer satisfaction are sharply up in recent years. Just as we continue to improve on the other, what you might call retail fundamentals, a bigger range, better availability, big 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 were able to react pretty fast. We altered our proposition, we redirected returns in order and collect (O&C). We ensured we got priority treatment from DPD as the number one, as the fixers. 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 Lindsay Haselhurst and her team. Better retail fundamentals then and good progress on our big differentiators too. So on omnichannel this peak, omnichannel continues to prove itself as the winning model for customers with stable stores, share of business year on year. But also, it is 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'd been doing this in action over peak is bundling. Bundling about