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Dixons Carphone - on track to meet targets but mobile still weak

Sophie Lund-Yates | 21 January 2020 | A A A
Dixons Carphone - on track to meet targets but mobile still weak

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Currys plc Ordinary 0.1p

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Total group sales were flat in the ten weeks to 4 January, excluding the impact of exchange rates. That includes a flat like-for-like (LFL) performance, and reflects continued weakness in the mobile business offsetting growth in UK & Ireland electricals and international markets.

However, mobile wasn't worse than expected, and the group's on track to meet its targets.

The shares rose 4.5% following the announcement.

View the latest Dixons Carphone share price and how to deal

Our view

The Mobile industry has changed. People upgrade less, and many prefer SIM only contracts. That's been a problem for Dixons.

Its business model was dependent on customers signing up to multi-year contracts on certain networks, and it now looks like it may face penalties for missing volume commitments. Those troubles resulted in management taking the decision to cut the dividend, and there are no plans to grow the payout from the rebased level.

Then there are the challenges facing the electricals business. Currys PC World may be one of the only places left where you can go and physically browse electrical goods, but the rise of online competitors brings a whole new problem.

Sales have been ticking along in this department, but that's coming at the expense of margins as the group engages in promotional activity. Added to that is the concern people are still pulling the purse strings tighter, which means bigger ticket electrical appliances are being rubbed off shopping lists. Combined with a change in mix that's increasing delivery and installation costs, and you're left with a difficult set of circumstances.

To its credit, Dixons is trying to fix itself up. Cost savings are coming in ahead of plan, the mobile business is being restructured and management are hopeful it'll at least break even in 2022. Longer-term, the strategy is to do what its online rivals can't - deliver a face-to-face service. We think that's probably the right way to go - a lot of customers don't mind paying more if they get a bit of help from a friendly and knowledgeable store assistant.

In particular, there's an ongoing push to make stores more of a destination, setting up "experience zones" where customers can play with the latest gadgets. On paper that makes sense, and early signs are positive but it's too early to call if this will be game-changer.

Overall, thin margins and retreating profits are stubborn problems. Dixons is doing well to offset some major headwinds at the moment, and there are certainly some bright spots, but we'd like further proof performance isn't likely to take an unexpected turn.

The shares currently trade on a P/E rating of 9 times expected earnings, and offer a prospective yield of 4.8%.

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Trading details (constant currency)

UK & Ireland electrical LFL sales and revenue rose 2%, with particular strength seen in TVs, Gaming, Smart Tech and Small Domestic Appliances. Online sales grew 7%, while the number of online orders made in-store more than doubled. The group continued to invest in improving the customer proposition, as well as keeping prices competitive.

Transactions made using credit were up 40% on last year.

Sales were down again in UK & Ireland mobile, and the division saw revenue decline 11%. That reflects a 9% drop in LFLs. Dixons is on track to launch a new mobile offer in the first half of next year.

International sales were up 4% overall, with the Nordics up 3% and Greece 7%. Online sales grew 5%. Margins were supported in the period as customer club members drove better in-store sales, and there was particular growth in Domestic Appliances and Kitchens.

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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.