Cost Discipline, Automation, And Shareholder Returns Will Improve Future Prospects In GB Specialty Retail

Key Takeaways

• Strategic investments and cost discipline could enhance future profitability, EBIT margins, and support earnings growth.
  
• Market share gains in the UK and Nordics indicate revenue growth potential despite difficult market conditions.
  
• Operational cost pressures from wage increases and project investments may squeeze margins and earnings, while market challenges threaten revenue growth and profitability.

Catalysts

Operates as a omnichannel retailer of technology products and services in the United Kingdom, Ireland, Norway, Sweden, Finland, Denmark, Iceland, Greenland, and the Faroe Islands.

• Currys is investing in strategic initiatives like services and solution selling which have been improving gross margins, suggesting future EBIT margin expansion.
  
• The company has increased its market share in both the UK and Nordics, signaling potential for revenue growth despite challenging market conditions.
  
• Efforts to reduce working capital and inventory levels, particularly in the Nordics, have led to stronger cash flow, which could improve net margins and overall financial health.
  
• Future profitability and cash flow are expected to benefit from ongoing cost discipline and operational efficiencies, including automation and process improvements, which could support earnings growth.
  
• Currys plans to initiate shareholder returns, highlighting confidence in its cash flow and liquidity position, which could contribute to EPS growth through potential dividends or buybacks.

Currys Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Currys's revenue will grow by 2.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 1.4% in 3 years time.
• Analysts expect earnings to reach £130.3 million (and earnings per share of £0.12) by about September 2028, up from £108.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £149 million in earnings, and the most bearish expecting £106 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, up from 10.8x today. This future PE is lower than the current PE for the GB Specialty Retail industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 1.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.83%, as per the Simply Wall St company report.

Currys Future Earnings Per Share Growth

Risks

• The challenging environment in the Nordics, with declining markets and persistent high interest rates, could hamper revenue growth and overall profitability in those regions.
  
• National living wage and national insurance increases imposed by the U.K. government create additional operational cost burdens, which may compress net margins if not mitigated effectively.
  
• Despite plans to mitigate, there are potential inflationary pressures that could lead to inevitable price rises, possibly affecting consumer demand and impacting revenue.
  
• The increased project investment spending, now being expensed more heavily, may pressure short-term earnings if the operational efficiency gains do not sufficiently offset these costs.
  
• The electronic shelf edge label rollout involves significant upfront costs and logistical challenges, which could strain working capital if not executed efficiently and if the expected efficiencies do not materialize as planned.

Valuation

• The analysts have a consensus price target of £1.507 for Currys based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £1.8, and the most bearish reporting a price target of just £1.3.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £9.2 billion, earnings will come to £130.3 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 10.8%.
• Given the current share price of £1.09, the analyst price target of £1.51 is 27.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.