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Dixons Carphone - Fifth consecutive year of Christmas growth

George Salmon | 24 January 2017 | A A A
Dixons Carphone - Fifth consecutive year of Christmas growth

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Dixons Carphone plc Ordinary 0.1p

Sell: 115.70 | Buy: 115.90 | Change -1.70 (-1.45%)
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Christmas trading was stronger than most analysts had been expecting. Despite some availability issues in bigger ticket items and slower sales in the Nordic region, the group expects sales to be ahead of its competitors in the key Christmas period following a record Black Friday event. The shares rose around 1.5% on the news.

Our view:

Demand for electronics should grow in the long term. That puts Dixons Carphone in an enviable position as the UK's last remaining electrical specialist with a bricks-and-mortar presence.

Recent trading has been strong, despite unfavourable economic conditions in many of its core markets. The joint venture (JV) in the US with Sprint, a big American network, looks to be emulating the success of Carphone Warehouse's JV with Best Buy Mobile a few years ago. With the Connected World Services division growing rapidly, there is plenty of scope for growth.

The opportunity to take costs out through integrating PC World, Currys and Carphone Warehouse stores into a 3-in-1 model should help the bottom line too. Analysts expect earnings per share to grow by over 20% from 2016-19, with the dividend increasing by a similar amount. At present, the shares offer a prospective yield of 3.4%.

However, sentiment around the shares has weakened somewhat since the Brexit vote. We have yet to see if the gloomy predictions about the UK's economy are accurate, but any negative impact on the UK consumer would surely be felt by the group. After all, big ticket electronic items usually fall into the discretionary spending category.

Sterling's weakness means that the cost of imported goods looks set to rise, so Dixons could find itself in something of a 'catch 22' situation. The group may need to choose whether to protect sales growth by keeping costs low and taking the hit on profitability, or to protect margins by passing the extra costs on through higher prices, which runs the risk that shoppers will go elsewhere.

The threat posed by online retailers, like Amazon and eBay, is also a concern. These competitors have cost advantages; such as lower rent, staff and business rate burdens. In light of these challenges, the shares change hands for a little over 10 times expected earnings, significantly less than in 2015 when 17x was the going rate.

Christmas Trading in detail:

For the 10 weeks to 7 January 2017, total group sales increased by 3% at local currency rates. Like-for-like (LFL) sales rose 4%, with sales transferring from closed stores.

The group reports patchy availability of larger, high margin phones and tablets during the period, but overall believes it has outperformed the wider market this holiday season. The Black Friday and Boxing Day sales events both stretched out over a week, with robust trading in large screen TVs.

The Nordic region was slightly quieter than usual, with LFL dipping slightly as the group took the decision to optimise margins, which were up as a consequence.

The group expects full year profit before tax to be higher than last, and in line with current market consensus for £475m-495m.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.