Currys plc (CURY) Earnings Call Transcript & Summary

Good day, and welcome to the Dixons Carphone conference call. At this time, I'd like to turn the conference over to Alex Baldock, Group Chief Executive. Please go ahead, sir.

Thanks, Emma, and good morning, everybody. Happy New Year if it's not already too late to wish you that, and thank you for joining us this morning. I'll say a few introductory words, and then we can crack into your questions. So upfront, what would I say? I'd say that we're pleased with our performance over this peak trading period despite all the many and myriad challenges that have been thrown our colleagues' way over this period. We are still winning online. And we're winning online, and that's evidenced in the 121% year-on-year growth we've seen in the U.K., 6 points of market share gains we've seen online, and that's been driving an overall electrical like-for-like of 11% up. And we're winning online because we're doing what we said we'd do. And all the things we said we'd do -- range, price, availability, an easy customer experience, an improvement to the platform a couple of years ago -- we've been doing, and these are the results, and so -- which is pleasing. Equally, we still want to put online and stores together. We still believe that in this space, omnichannel wins, the best of digital and physical together is what customers want and is what plays to our strength. And even with the restrictions that we've been under, we've seen our work here bear fruit as well, whether it's in the customers wanting to get hold of their technology immediately and safely, which we can do with the 1-hour 0-contact drive-through order and collect, whether it's customers online who want the face-to-face advice from a trusted expert, which they can get, thanks to our 24/7 video shopping service, ShopLive, which continues to get better, the bigger it gets, and we're going to continue scaling up that rare thing, a defensible innovation. So winning online, but -- and still even with the current restrictions, we're putting online and stores together in interesting ways that work for the customer and work for us. Some product highlights. Over the peak period, we've seen computing go exceptionally strongly. The HP Pavilion 14-inch i5 laptop has been a particular star. Gaming has obviously been strong, PS5 and Xbox Series X have flown off the shelves, Nintendo Switch still a consistent best seller and Oculus Rift headset coming up now as well. With people stuck at home, food has obviously been a preoccupation for many people, judging by the sales of NutriBullets and home baking and particularly coffee. People are obviously wanting that takeaway coffee experience at home with the 20% year-on-year increase in bean to cup coffee machine sales, for example. Apple had a good peak, as we've seen, for example, in the AirPods and watches. And again, with people stuck at home, home entertainment, like large screen TVs up very strongly over this period. And what we've seen over peak is a continuation of the trends that we've seen for a year now of technology playing an ever more important part in people's lives as people want to stay connected. They need to work from home. They want to keep their families clean and fed and entertained, and we're proud of the role that we've played to help millions of people with vital tech through what's obviously been a difficult period. So winning online, still putting online and stores together, even with one arm tied behind our back by the restrictions and seeing no weakening in demand even now, showing that technology has established itself as a more important part in people's lives, which we expect to a degree to provide a continuing tailwind. The other part of the announcement that we made this morning is to announce that Jonny will be leaving us later this year as he heads off to do something else with his life and his career, and he's made a massive contribution to the business and its transformation in his time here, for which I'm personally very grateful, and I will be sad to say goodbye to him when the time comes. Equally, I will be delighted to say hello to Bruce Marsh as his successor. And Bruce, you'll know from playing the pivotal role in the transformation at Tesco U.K., where he's been CFO there for 5 years of a GBP 45 billion retailer with over 300,000 colleagues. And in a sense, Bruce is coming home, having been at Dixons up to 12 years ago. And I'm looking forward to working with him when he gets here in July, just as I'm looking forward to continuing the hard work with Jonny up until that point. And with that, I will pause, and we can go into your questions.

[Operator Instructions] We will now take our first question from Richard Chamberlain, RBC.

I have a couple of questions, please. The first one is on how you're seeing the household sort of appliances market, I guess, in both the U.K. and the Nordic region, kitchen appliances and so on? That's the first one. And then the second one is just on the company's overall net debt position, do you still expect to have no debt or very little debt by the end of this fiscal year?

Jonny, do you want to take that second question first, and I'll come back to talk about the first?

Yes. Okay. Richard, listen, we are still in roughly the same position, which is we said at the interims with reasonable trading between now and year-end, we have a good chance of no net debt. We're reconfirming this morning that with current shop closure restrictions, we expect to deliver profits in line with market expectations, and alongside that, the debt position. We've got a good chance of no net debt. It will certainly be significantly below last year, even if there is a small amount of debt at year-end.

And to take your first question, Richard. I think the large household appliances, obviously, this isn't the time of year when they fly. I mean, perhaps I'm unusual in giving washing machines as a Christmas present. But when it comes to appliances, it tends to be the small kitchen appliances and the small domestic appliances that are particularly strong at this time of year. And there's a reason that we highlighted that. I mean it's been -- the food preparation and coffee, in particular, that's been especially strong. It's been home entertainment, especially large screen TVs, and it's been all aspects of computing, which have continued to be really, really strong. I mean, whether it's on laptops, on peripherals, on home networking, on accessories and everything to do with gaming, whether it's the consoles or gaming accessories or services attached to that. So it's been the -- over the peak period, it's been those -- that technology that allows customers to work from home, to stay connected, to keep their family entertained. And while large appliances have been in growth, they haven't been the strongest growing category.

Okay. That's helpful. I mean just a quick supplementary. Is there a big opportunity to grow that business, though going -- I mean, particularly in somewhere like the Nordic area, which I think has sold kitchens, isn't it? And is that -- do you see that as an opportunity going forward?

Whites is always high on our mind. I mean, they're large domestic appliances or a big category for us, where we have very strong market share and where we continue to grow. And as you say, there are certain -- maybe in the Nordics, as you say, we've got the kitchens business as well. But also, when -- as we emerge from the current crisis and as in particular the housing market picks up again, which the most forecasts expect it to do, that's usually a pretty good driver of the large appliances, the large business. But the other thing I would say is that it has been a decent performer right the way through this crisis because people are spending more time at home. And as they spend more time at home and they're kitting out their home, and it's not just the stuff to stay connected and entertained and to work from home and to home school the kids, we have seen more customers upgrade their washing machines and upgrade their fridge freezers and upgrade their ovens as they spend more time at home.

[Operator Instructions] We will now take our next question from [ Martin Jeffrey from Chubb ].

Can you hear me now?

We can.

My apologies. Right. Have you taken advantage of furlough during the third lockdown? I know you didn't during the second.

Yes, we have. I mean -- and we've -- I mean we believe we've taken a responsible approach to government support right away through this crisis. I mean it's worth just remembering that we haven't benefited from any government-backed lending. And we have been responsible in our use of furlough, we did use it in lockdown 1. We chose not to in -- during lockdown 2, but we are during lockdown 3. And the reason for that is that we expect this period of lockdown to be longer than the close month that was November. And obviously, to an extent that that period of lockdown is unpredictable. And it's a quieter trading period than at peak. And we obviously used lockdown 2 to get the stores in prime shape for peak, to catch up on colleague training, which we've done. And so now what we're doing is responsibly using the government support as it's intended, which is to preserve livelihoods. And it's worth remembering, we've made no COVID-related redundancies at all during the whole of the course of this crisis.

Okay. And the second question was regarding the mobile side. The press release this morning announced 40% slump there. I know there was some exceptional circa 50 million at half year. Just wondering if you could expand a bit more on the mobile side for us, please?

Well, I guess, in a second, Jonny can talk to the numbers. Let me just put a bit of context to it first. I think we are exactly where we expected to be in mobile. We know that this part of the business has been burdened by some legacy issue, in particular, the legacy contracts, the burdened Carphone warehouse. We're coming to the end of those legacy constraints during the course of this current financial year. We'll be out from underneath those legacy contracts, which means we can do 2 things. We can get rid of the legacy cost base required to serve those legacy contracts and complete the integration of Carphone into Dixons. And second, we can move to selling our mobile offer that best meets what customers want to buy. And that's the future mobile offer that we've been hard at work developing, and we've kept on developing it right the way through this crisis and that, too, is on track to launch during the course of this financial year. So this is the year when we come out from those constraints where we can integrate the business and reduce out that legacy cost base and sell stuff that the customers want to buy, and we're on track to do all of that. And the current -- finally, the current crisis has hit mobile harder than the rest of the business. We talked about that at the half year, largely because the -- we've been obviously less successful at transferring, lost small store sales to large stores when the large doors have been closed. And second, we haven't -- we've chosen not to invest as much in the Carphone online platform as we have in the Dixon online platform because, obviously, that's a platform that will be going away. And those 2 things have hit the sales line during the course of the crisis, but not more than we flagged at the half year and not more than we've been expecting. Jonny, I don't know you'd like to answer that.

Just to add a bit of color, there's not much on the numbers. We are expecting a significant loss in this business for this year as we've signaled all the way through. It is a little bit worse than we expected for the reasons that Alex has just mentioned, the big shops have been closed. And therefore, the sales decline -- that, coupled with the fact that 2 of the 3 onerous contracts have already expired, means that the sales decline in the second half will be more than it was in the first half. But all that said, we are absolutely on track for the cash flow generation that we've talked about. The mobile debtor is unwinding. It is funding the operating losses and the restructuring costs. And we do still expect to exit from that traditional post-pay business with a net positive cash flow overall. And the estimated range we've given is [ 1 2 5 to 1 7 5 ], and that remains the case. We're still on track for that.

We will now take our next question from George [indiscernible].

Just kind of any additional comments on firstly, supply, whether that's certain lines that are selling very hard and you're starting to get access to them or whether kind of anything Brexit or ports related to be aware of? And then second one, just on margin, again, anything that we should be aware of that's kind of changed potentially since December, whether that's lockdowns, whether that's product mix, whether that's attachment rate, anything there?

George, Jonny will take the question on margin in a second, just to deal with the first part of your question first. We've had to work extremely hard to maintain supply during what's obviously been a very challenging 12 months globally for technology that's been in hot demand. I think this is where we've proved the worth of being number one. And we have -- and our commercial teams have done great work to make sure that our scale, that our market leadership is reflected in being #1 in the queue for scarce stock, and we have kept that up right the way through this year. I think the one good example of that is in computing, where you all have seen that many of our [ oppos ], our competitors have struggled to stay in stock of the computing that the customers have been demanding, and we've been much more successful at maintaining availability, whether it's in laptops, whether printers, peripherals, gaming hardware or gaming accessories and peripherals. So -- and that's been a really good example where our scale has benefited and the relationships that we've got with our suppliers have real concrete value. And there's just no way that we would have been able to sustain sales growth, like the 121% online growth we've seen in the U.K., and with no way we would have been able to grow our market share online by 6 percentage points had it not been for the success in securing that stock, which has been very gratifying. But I won't hide from you. It's hard work, George, and we're not -- we're expecting the hard work to continue. The short answer to your second question. There are some teething troubles around Brexit, particularly with regard to getting product to the Republic of Ireland, but they are just that, they're teething troubles. We've been preparing for a long time, for a worst-case outcome, for a no-deal Brexit. And so we're being able to mitigate the impact on our customers and work our way through these issues. So no, we're not flagging up -- we're not flagging a big Brexit impact.

And then on margin, George, we've said previously that the gross margin we generate from sales online is significantly lower than in shops, up to 10 percentage points is what we said at the end of last financial year. And the principal reasons for that are higher delivery costs and lower services attachment rates. But at the half year, we were able to update that that gap is closing. We have improved our efficiency in distribution costs, and we have also improved the services attachment through online channels. And ShopLive is one of the contributors to that; although small, at the moment, it's growing very fast. And that gross margin differential is offset at a profitability level by the saving in-store labor costs. And we've made progress there, too, because those store labor costs are becoming more flexible as we use the store labor for other things such as ShopLive or [ context of this ]. So the profitability gap is narrowing. We haven't got any update on that since the interims, which were only effectively 4 weeks ago. The impact, though, is because our shops will be closed for more months this year, we think the profitability impact is GBP 5 million to GBP 10 million per month that our shops are closed. And that's the gap that we are working to close even further as time goes by.

We will now take our next question from Warwick Okines from Exane Paribas.

If I may, could I -- I suppose I'd just be interested in your thoughts about the shape of the peak season. It's obviously very hard to read, and it's even harder to read from the outside. I'm just interested in whether there's anything from a competitive or from a phasing perspective that you think is sort of structurally changed year-on-year, please?

Just explain a little bit more about what you mean when you say the shape of the peak season?

Yes. Just, I suppose, sort of Black Friday versus Christmas trading. And to what extent that has changed against your expectation this year?

I think we can -- one of the things that we've done this year better, Warwick, is instead of hanging our hat on 1 forecast of how things are going to pan out is get better at scenario planning, just as an acknowledgment of the unpredictability and the volatility of the environment that we've been in. And that's been a muscle that the business has built that we fully intend to keep building and that's stood us in quite good stead there, as what's been a pretty unpredictable shape as you can imagine. Now that said, what did we plan for? And did we broadly see it? Yes, in short. So we planned for a strong Black -- not so much Black Friday as Black Fortnight as we consciously spread out the demand over a longer period and made sure that our heft with suppliers was reflected in getting a good period of good deals for our customers, and that's how it panned out. We planned for a slightly more meager Boxing Day than in previous years, and that's how it's panned out. But overall, I think what we got ready for was a peak that's reflected the increasing importance of tech in people's lives and got ready for a strong peak's trading, and that's how it's continued. One of the things that we didn't do in response to changing and unpredictable restrictions in our store opening, we didn't make the -- we didn't cancel out stock with any suppliers. We backed ourselves with our strong and scalable and flexible infrastructure, and we backed ourselves with our strong online business to be able to shift demand into the online channel when stores were closed, and that's, again, how it's turned out in practice. So overall, I think it's been a story of us getting ready for the last 2 years to have a stronger online business, and that work's paid off in the very strong online growth that you've seen. It's been a story of us leaning on this scale, flexible infrastructure and being able to be much more flexible and nimble in response to changing circumstances to accommodate unpredictable, both scale and shape of demand. You asked, Warwick, about the competitive environment. I think a lot of the independents have had a tough time, as you might expect, because the independents don't have well-developed online propositions. And the stores have been closed for upwards of 5 months so far since March 2020. And that's been one trend that we see. But obviously, as you see the same data we do, the GfK standard market data gives us very good insights on the market and our performance in it, rather less clarity on the competitors. What I would say competitively, coming back to the online point, is that we're winning online. And that's the single most important competitive point I would make. As more customers are buying more online, it's super important that our work to become a stronger online business succeeds, and it has. And we are the fastest growing, and by some distance, the largest online player of all the specialist technology players in all of our markets, and that's been very important to protect our overall position even as channel shift has accelerated. So for those customers who want to buy online only, we've been able to accommodate them. For the majority of customers who still want to use a combination of online and stores, then clearly, we intend to be the only game in town.

Yes. Alex, and a couple of sort of more precise questions just on that online. Can you give us a feeling of how material click and collect is in your mix of online? I imagine it's relatively small but just interested in that. And then perhaps for Jonny, just coming back on to furlough, is it sort of reasonable rule of thumb to assume that the support is about GBP 20 million a month based on what you said about lockdown 1.0?

Let me take the order and collect point first. I wouldn't say it's particularly modest, no. I mean, we've seen sort of somewhere between 1/4 and 1/3 -- depending on the time -- of our online sales go through the order and collect channel. And there's a good reason for that because there's a bunch of customers who want their technology right now, and this is the best way for them to get their technology right now, I mean, literally within an hour to -- and importantly, to get it safely. For the 0-contact, stay in your car, drive-through, drop straight into your boot, order and collect service that we pioneered and launched in short order during this crisis has been a big success for us. I mean we innovated this in 6 weeks, and it's here to stay. It's one example of an innovation that's here to stay just as others like ShopLive are examples of that. And it's been an important -- obviously, it's been an important reason why we've been able to go back to our suppliers, even when the government has been closing stores and say, we still want everything. We don't -- we're not backing away from our orders. We want all the stocks that we've ordered. And we back ourselves even in these difficult circumstances to get it to customers. And we've seen, again, the flexibility and the scale of our infrastructure come into play there as well as all the progress we've made as an online business.

And then on the support, Warwick, now, that number is a bit high. The furlough support that we get, obviously, it depends how busy stores are, how much trading is going on, but it's somewhere in the GBP 7 million to GBP 10 million per month range. And then rates is around about GBP 5 million. So it's more like GBP 15 million rather than GBP 20 million.

[Operator Instructions] There are currently no questions in the queue at this time. I will turn the call back to your host.

Thanks, Emma. So just to wrap it up then. Well, first of all, thank you for your time today. But just a reminder of the core message, if you like. I mean, the core message is we're pleased -- despite everything that the environment has thrown at our colleagues, we're pleased that the way that our colleagues have responded. In fact, I'm humbled with the way that they've -- the skill and the will that they've shown in response to difficult circumstances. And such has been their work that we're coming through this crisis, not just strong, but still #1 and coming through it with the strategy visibly working. If there were some observers who expected some competitors to clean up at our expense at a time when the business faced serious disruption, obviously, they've been disappointed because we're winning online. And even in the face of disruption, we've made some material progress in putting online and stores together in a way that the customer prefers and in a way that makes the most of our strengths. Both online and stores together have lent on this strong, flexible infrastructure that we've built over time and that has shown its worth during this crisis. So -- and that allowed us, as you all have seen, to perform strongly during this peak period, but also to give some confidence on the full year outlook and profitability, even assuming that the stores stay closed until the end of the financial year. But please don't imagine that we're satisfied with where we are. Where we are is on a clear trajectory towards the world-class business that we intend to build, but still some way from it. We're nowhere near the full potential of this business. But I think what we've shown, even with one arm tied behind our back during this past year and over this peak, is the business' fundamental strength and the fundamental correctness of the path that we're on, the strategy to make the most of our strengths in a way that the customer likes and do it in a way that the customers can be responding to. So many thanks for your time, and have a great day, everybody.

Thank you.

Ladies and gentlemen, that will conclude today's conference. And you may now all disconnect.