Shares in DSG, owner of Currys and PC World, are under pressure this morning after a downgrade by Morgan Stanley.
The bank has advised its clients to take profits after a 50% rise in the shares over the past three months, and has cut its recommendation from equal weight to underweight. This has left DSG as the biggest faller in the mid-cap index, down 1.75p to 26.25p. Morgan Stanley said:
Although we believe that DSG offers investors more leveraged upside into a consumer recovery than any other stock we cover, the prospect of our bull case scenario playing out looks increasingly remote to us.
We are concerned by the extent to which DSG is underperforming its main peers in the UK electricals market, and believe that the most likely explanation is poor in-store availability. Furthermore, we see the competitive landscape in the UK market as increasingly challenging.
On the availability issue the bank gives more detail, based on a couple of shopping trips which prompted a more thorough piece of research:
A couple of months ago, one of the authors of this report went to a Currys store in Evesham to buy a small-screen TV. The store appeared to offer plenty of choice, but when he had selected the model he wanted and asked a sales assistant to bring him one from the stock room, he discovered that the display-model was the only one available. He chose an alternative model, but the assistant's response was the same, as it also was on his third choice. A few weeks later the same member of our team tried to buy a PC printer at the PC World store in Croydon (South London) and had a very similar experience.
Clearly, extrapolating from just two shopping trips would be inappropriate. However, these experiences left us concerned that DSG might have a big, but non-obvious (because there are no gaps on the shelves) availability problem. We decided, therefore, to commission some more detailed research from our AlphaWise colleagues in New York.
And the conclusion?
Our analysis provides pretty strong evidence to suggest that Currys currently has an issue with instore availability. When taken together with the chain's recent underperformance against its UK peers (for which we can see no other explanation) and evidence from recent store visits, we consider it to be compelling.
We would caution against extrapolating our Currys findings across the rest of the group at this stage. However given that PC World and Currys are run very much as one business these days (and PC World is also trading very poorly), we do think it likely that PC World, at least, could be experiencing similar difficulties.
The company has responded sharply by saying that availability is better than it has been for a number of years, that it is trading slightly ahead of expectations and is comfortable with its stock levels going into Christmas.
