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Dixons Carphone - Sales still flat

Nicholas Hyett | 6 September 2018 | A A A
Dixons Carphone - Sales still flat

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Dixons Carphone plc Ordinary 0.1p

Sell: 115.50 | Buy: 115.70 | Change -0.10 (-0.09%)
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Like-for-like (LFL) sales were flat in the first quarter, as a bump in sales from the World Cup was offset by weakness elsewhere. Total sales across Dixons Carphone were down 1% on a constant currency basis, and full year profit expectations remain unchanged.

The shares rose 2.9% in early trading.

View the latest share price and how to deal

Our view

2017/18 was another challenging year for Dixons Carphone, and was bookended by two ugly profit warnings.

Wage growth lagged inflation, which saw consumers tighten the purse strings. This put the whole retail sector under pressure, but a weighting towards big ticket items meant Dixons was at the sharp end of the trend.

Against that backdrop, delivering continued sales growth was impressive.

However, look below the top line and the issues start to mount. Dixons seems to be sacrificing margin to support sales volumes, meaning profits have slumped. The old stock market saying that sales are vanity, but profit is sanity springs to mind.

Profitability is particularly challenging in white goods and mobile. Part of the problem is that customers are hanging on to 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. That's seen a trend towards buying phones without SIMs and vice versa, adding to the challenge.

Longer-term, Dixons has to find a way to compete with the likes of Amazon and eBay. Big internet retailers have cost advantages, which often translate into lower price tags. Dixons Carphone will always struggle to compete on price alone.

Fortunately many people still 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.

As the only major electricals specialist with a brick-and-mortar presence, Dixons could be well-placed to corner this niche in the market. The elephant in the room is that, by the CEO's own admission it's nowhere near making the most of those strengths. Change is needed.

So far, that's meant 92 Carphone Warehouse closures, and plans to spend an extra £30m on improving the in-store experience. Both significant, but we fancy there's more in the pipeline.

With more to be done the shares trade on a P/E rating of 7.9 times, well below the longer term average of 10.5. Those looking for recovery potential will note the prospective yield of 6.8%. For the time being this looks well supported by strong cash flows and the relative lack of debt, but growth will be dependent on getting profits moving forward again.

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Q1 Trading Update

LFL sales were flat in both the UK and Nordics, although the small Greek business reported growth of 9%. Total sales fell 2% in the UK, with growth of 1% and 11% in the Nordics and Greece respectively.

The UK benefitted from a boost in consumer electrical sales during the World Cup, however that was offset by softer sales of white goods and computers.

Mobile LFL sales were down 1% as contract sales slipped, although the group gained market share in SIM Only and Sim Free deals.

Online sales rose 13%, with penetrations increasing 2.6 percentage points to 21.4%.

Full year profit before tax is still expected to be in the region of £300m.

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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 for more information.