This retailer’s share price will continue to rise in lockstep with increased purchasing power

Currys market valuation has risen by 96pc in the past year alone

Wages in the UK have risen at a faster pace than inflation since April last year. This is highly significant because, while consumers may not necessarily have felt it, their purchasing power has gradually increased. This has resulted in them being able to afford to purchase more goods and services with each passing month.
Investors have started to take notice of the improving consumer environment. Retailers, such as Currys, have produced stunning share price growth over recent months – with the firm’s market valuation rising by 87pc in the past year alone. Its shares have been particularly popular amongst investors because the company sells products that typically experience large fluctuations in demand, depending on the consumer outlook.
For example, televisions, mobile phones and laptops sold by the firm are typically viewed as staple items. However, consumers will often delay upgrading to the latest model of such products if they are experiencing financial uncertainty. With wage growth having failed to keep up with inflation in the 13 months prior to April last year, and many consumers also having chosen to prioritise saving over spending in response to an uncertain economic environment, demand for such products has previously been relatively weak.
Now, however, retailers like Currys are starting to report growing demand and improved financial performance. The company’s recently released trading update, for instance, showed that like-for-like sales growth in the UK and Ireland amounted to 5pc during the first 17 weeks of its current financial year. This compares favourably with a figure of minus 2pc in its most recent financial year.
The firm’s trading update also highlighted that it made market share gains and delivered improved profit margins in the UK and Ireland. Given that the region is the company’s largest by sales, accounting for 59pc of total revenue last year, this bodes well for its long-term prospects. And with interest rates forecast to fall at a brisk pace over the coming years, while inflation is widely expected to remain at or around the Bank of England’s 2pc target, the firm’s long-term financial outlook is increasingly upbeat as consumers continue to enjoy an increase in their purchasing power.
On a less positive note, the company’s performance in the Nordics continued to disappoint. Like-for-like sales growth in the region fell 2pc according to its latest trading update, although the firm was able to grow profit margins as cost rises were kept under control. For the full year, the company’s overall financial guidance was left unchanged following its latest update. 
The firm is expected to deliver annualised earnings per share growth of around 16pc over the next two financial years. Even after its recent share price rise, it continues to trade on a modest price-to-earnings ratio of just 10.9. This suggests there is still a margin of safety present that could prove useful should the near-term economic outlook deteriorate as upcoming interest rate cuts take time to have their full impact on consumer spending.
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Separately, Currys has a reasonably solid balance sheet. Certainly, there are other FTSE 350 retailers with superior financial positions that therefore offer less risk. But with a net gearing ratio of 44pc and net interest cover of 1.3 last year in spite of a very weak financial performance, the company’s reward potential is sufficiently strong to make up for its relatively high level of risk.
Unfortunately, we added the stock to our wealth preserver portfolio at a time when the consumer environment was relatively strong. This meant that we paid a high price for the firm’s shares in June 2021, with them currently trading at a 34pc loss to our notional purchase price even after their recent surge. Even if limited dividends paid over recent years are factored in, our total return still stands at a hugely disappointing 28pc loss.
In Questor’s view, the company’s shares offer recovery potential as the consumer outlook continues to improve. For this reason, Currys will remain a holding in our wealth preserver portfolio. The prospect of a continued increase in purchasing power that lifts all retail stocks, the company’s modest valuation and its earnings growth potential mean that while relatively risky, it is set to deliver an improved total return in the coming years.
Questor says: hold
Ticker: CURY
Share price at close: 83.8p
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