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Dixons Carphone - Healthy Christmas trading, new CEO appointed

Nicholas Hyett | 22 January 2018 | A A A
Dixons Carphone - Healthy Christmas trading, new CEO appointed

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Third quarter revenues were 4% ahead of the same period last year, with 6% like-for-like (LFL) sales growth.

Margin pressure in both UK mobile and electricals, has seen guidance for full year profits before tax narrowed and reduced slightly to £365m-£385m (previously £360m to £400m).

The shares rose 2.5% in early trading.

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Our View

Since releasing results last June, Dixons Carphone has had a tough time.

The drop in sterling may have boosted overseas sales, but that was more than outweighed by the higher cost of importing goods to the UK, which remains the group's main market. There are other headwinds too, not least the fact real wages are falling as inflation outstrips salary increases.

Against that backdrop, demand for Dixons Carphones' electricals and phones seems to be holding up quite well, supported by the iPhone X launch.

However, the group does seem to be sacrificing margin to support those sales volumes. Customers are hanging onto handsets for longer, and the latest phone models don't come with the same level of must-have upgrades that used to prompt a scramble to the tills. The unbundling of phones and contracts is adding to the turmoil in the mobile market.

Losing CEO Seb James to pharmacy giant Walgreens Boots Alliance amidst all this upheaval is a blow, especially as he was supposed to be planning a restructure.

His successor is a digital specialist, making streamlining sales space or cutting back on more capital-intensive activities potential areas of focus. However, we think it would be a mistake to go head-to-head with online competitors.

The likes of Amazon and eBay have cost advantages such as lower business rates, fewer staff, and cheaper rent. This often translates into lower price tags. Dixons Carphone's will always struggle to compete on those terms, but its position as last man standing on the High Street could yet prove a key advantage. There are still plenty of people 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.

Dixons Carphone has the firepower to invest, generating solid cash flows and with net debt comfortably under one year's earnings. It'll be interesting to see how new CEO Alex Baldock chooses to use the 1,600 stores in the group's estate.

Nonetheless, these are challenging times, reflected in the fact that the shares trade on just 7.2 times expected earnings. That the prospective yield is 5.7% will provide an attraction, but while it was good to see the group provide assurance on the dividend at the half year stage, longer-term growth looks less than assured.

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Third Quarter Trading Update

The large UK & Ireland business delivered total growth of 1%, or 3% on an LFL basis.

UK mobile delivered a particularly strong 8% increase in sales, following the launch of the iPhone X, with electricals ringing up more modest growth of 1%. Gross margin deteriorated; mainly due to mobile, with some increased costs denting margins in electricals.

The smaller Nordics and Greek divisions both turned in much stronger growth, up 11% and 23% respectively. This reflects improvements in product availability following the introduction of a new small products warehouse in Scandinavia and the "first real Black Friday" in Greece.

Full year cash conversion is expected to improve in the full year, with year-end net debt of around £250m.

The group has appointed Alex Baldock to succeed Sebastian James as CEO, who is moving to join Walgreens Boots Alliance. Alex Baldock is currently CEO of Shop Direct, the UK's second largest online only retailer, a position which he has held since 2012.

Find out more about Dixons Carphone shares including how to invest

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 for more information.

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