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Dixons Carphone - A solid end to the year

George Salmon | 28 June 2017 | A A A
Dixons Carphone - A solid end to the year

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Dixons Carphone plc Ordinary 0.1p

Sell: 115.60 | Buy: 115.80 | Change -2.00 (-1.70%)
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While fourth quarter like-for-like (LFL) sales growth of 2% was behind the 4% seen over the year as a whole, the group says the UK consumer environment seems to be holding up. The shares rose 1.8% on the news.

Our View

Recent trading has been strong, despite unfavourable economic conditions in many of its core markets.

The recent mutual termination of the joint venture in the US with Sprint, a big American network, is something of a setback, but the Connected World Services division should still be capable of further growth. Recently, deals have been signed with Capita for a pilot call centre agreement and also with WebHelp, a big French outsourcer.

Analysts expect earnings per share to grow by over 20% from 2016-19, with the dividend, which currently offers a prospective yield of 3.9%, rising too.

However, these are still challenging times for the group, reflected in the fact that the shares currently trade at 9 times expected earnings. Back in mid-2015, 17x was the going rate.

Sterling's weakness following the vote means the cost of imported goods looks set to rise, which is bad news for most retailers. While we have yet to see much evidence that the gloomier predictions about the UK's economy will prove accurate, any negative impact would surely be felt. After all, big ticket electronic items fall comfortably within the discretionary spending category.

Dixons might be in an enviable position as the last man standing on the High Street, but the threat posed by online retailers, like Amazon and eBay, is a concern. Online competitors have cost advantages such as lower business rates, fewer staff, and cheaper rent. This often translates to lower price tags.

Nonetheless, there are still plenty out there who like to try before they buy, and don't mind paying a touch more if they get a bit of help from a friendly and knowledgeable store assistant. If Dixons' in-store service is sufficient to keep customers coming in, and leaving happy, this could yet prove its trump card.

Q4 and full year results (at constant currency rates)

Full year group revenue was £10.6bn, up 3%. Headline profit before tax of £501m is up 10%, with 77% of this from the UK and Ireland. This is ahead of previous guidance, however, it excludes £27m of losses arising from the decision to exit the Sprint joint venture and iD mobile operations in the Republic of Ireland.

Over the year, revenue in the UK & Ireland increased by 2% to £6.6bn. LFL sales growth was 4%, which includes a c.3% benefit from the transfer of sales from closed stores and sales disruption. The group is particularly pleased with the performance of the electricals business, although notes that the mobile market was more challenging. For example, the delayed release of the Samsung S8 hindered Q4 sales.

In the Nordic region, LFL sales rose 1% over the year, although the group did report a slightly stronger end to the year, with LFL up 2% in Q4. The new warehouse at Jönköping is now fully operational and the integration of the Fona business in Denmark is now complete.

Southern Europe enjoyed another good year, with LFL sales up 6% in the year and 5% in Q4. Greece was a particularly strong contributor to this performance, while the group continues to gain market share and improve its service and delivery propositions.

While acknowledging the challenge brought on by the continued changes in the way people buy its products, group CEO Seb James was upbeat about the future. He said "the improvement in our cost base, the strong leadership position that we have built, the investment that we have made in our digital business and, above all, the enormous shift in customer satisfaction and price competitiveness that we have driven leave us well positioned to flourish in the years ahead."

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.