The Currys (LSE: CURY) share price has dropped nearly 45% in 12 months. Although I can see some possible headwinds, I think it’s worth remembering that Currys has a big share of the UK and European market for electricals, with sales of more than £10bn each year.
To put that in context, rival AO World sells around £1.5bn of goods annually. Small-cap Marks Electrical managed just £80m last year. Currys looks cheaper than all of its rivals to me. I think this unloved stock could offer value today.
Customers still like shops
Currys has just reported its results for the year ended 30 April. Sales fell by 2% to £10.1bn, but adjusted pre-tax profit was up by 19% to £186m, thanks to an improvement in profit margins.
The numbers were pretty much as I expected, but one surprise for me was that Currys’ store sales were “higher than expected” last year. According to boss Alex Baldock, customers have been rediscovering the benefits of stores, especially in the UK.
That makes sense to me. Although online shopping is great, it’s not always easy to compare electricals online. I’d guess that there are still plenty of people who find it much easier to compare options in store and discuss products with expert staff.
I can also see some other advantages to Currys’ store estate. Popular click-and-collect services cut down on delivery costs. Shops also act as a useful hub for repair and recycling services — Currys says it repaired more than 1.7m pieces of technology last year.
Hidden risks?
Currys isn’t without risk. A recession could cause a sharp slump in consumer purchases. We don’t yet know if that’s going to happen in the UK, but I certainly think it’s possible.
The company’s guidance for the year ahead suggests profits will fall this year, although management says “forecasting 2022/23 is difficult”.
More broadly, I think it’s worth remembering that Currys operates in a very competitive sector. It sells generic consumer products that customers can always buy elsewhere. For this reason, I think Currys will always have low profit margins.
Baldock appears to recognise these risks. He was previously targeting a 4% operating margin by 2023/24. He’s now scaled back this ambition to 3%. Based on broker forecasts for 2023/24, that’s equivalent to a £95m reduction in operating profit, from £380m to £285m.
Currys share price: bargain buy?
Despite the concerns I’ve highlighted above, I think Currys is a decent business with good management. I don’t think the shares are too expensive, either.
The latest broker forecasts I can find price Currys at seven times 2022/23 forecast earnings, with a 4.9% dividend yield.
Last week’s accounts show decent cash generation with a substantial reduction in debt and pension liabilities, so I’m fairly confident the dividend should be affordable.
I’d be comfortable buying Currys shares for my portfolio at current levels. I think they offer value and could do reasonably well over the next few years.
However, I suspect that the low-margin nature of this business will ultimately limit the returns that are available for investors. For this reason, I’m going to keep hold of my cash and continue hunting for more profitable opportunities elsewhere.