What does Currys’ and AO’s raised profit guidance tell us about the struggling electricals sector?

Following a period of troubling sales, profit warnings and disappointing golden quarters, the electricals sector may finally be finding the light at the end of a very dark tunnel.

Price inflation is slowing down and GfK market research has reported that UK consumer confidence in personal finances has increased by 23 points on this time last year, indicating that consumers now feel they have a bit more cash to spend.

But, apart from making distress purchases, such as fridges and washing machines, shoppers are still reluctant to spend on electrical goods. Retail Week takes a look at why this is happening and asks if AO and Currys can maintain the momentum and bring consumers back to electricals.

Gaining momentum

Currys announced last month that it now expects its profit before tax to be at least £115m, up from £105m-£115m, thanks to consumer sales being “stronger than expectations” and the successful disposal of its Greek business, Kotsovolos.

Alex Baldock, Currys’ chief executive, said both the Nordics and UK and Ireland regions are “progressing well, despite still-challenging markets” which has given the group confidence in its profit.

AO followed suit a week later, announcing that it expects to reach the top end of its guidance of £28m-£33m, as it returned to revenue growth in Q4. Chief executive John Roberts said this was helped by its “pivoting focus to profit and cash generation”.

Peel Hunt analyst John Stevenson agrees that AO and Currys have done well in terms of cost control and margin recovery, and adds that AO’s profit guidance rise is down to “a reduction of excess capacity post-covid, focusing on profitable sales and optimising marketing spend.”

However, while he commends the two retailers for their recent performances, he emphasises that this says more about “management action” than it does “underlying markets” since, despite the macro outlook looking better than recent years, trading conditions remain challenging.

The profit upgrades by Currys and AO did not stop Marks Electricals from reducing its guidance in January this year to £115m-£118m in full-year revenue – notwithstanding its 22% sales increase over the nine months to December 31, 2023.

At the time, chief executive Mark Smithson said the group “remains cautious on the speed of recovery in consumer buying patterns” and that “margin fluctuations are inevitable”. 

Delivering recovery

This may have been a wise move by the electrical goods retailer, as GlobalData retail analyst Oliver Maddison confirms he expects growth in electricals to be “relatively muted” in 2024, before accelerating in 2025.

“Growth in 2024 will be primarily driven by brown goods, notably portable and home audio equipment, as well as a strong performance from personal care electricals, which tends to track with the success of the health and beauty market,” he says, adding that grey goods, such as computers, are the “primary negative driver” in the market, due to their longer replacement cycles and the fact they are “living in the shadow of strong pandemic-era sales.”

For recovery to gain pace in the electricals sector overall, Maddison says delivery costs are a “key point of competition” with Amazon and Marks Electricals doing especially well, and that Currys and AO’s success report is mainly supported by services such as delivery and installation charges and extended warranty uptake.

The retailers’ upticked profit guidance does spark optimism for the electricals market in the coming months – if consumer demand for goods is there. However, Stevenson says that the challenge over the next year or so will be to keep customer recruitment, marketing and service costs in check to “drive profitability” and help capture market recovery and share.

And if GlobalData’s prediction of a “muted” electricals performance comes to pass this year, we may have to wait until 2025 to see the market fully come back to life.