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Dixons Carphone - Carphone Warehouse stores to close

Sophie Lund-Yates, Equity Analyst | 17 March 2020 | A A A
Dixons Carphone - Carphone Warehouse stores to close

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Dixons Carphone plc Ordinary 0.1p

Sell: 70.60 | Buy: 70.80 | Change 0.00 (0.00%)
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As part of its ongoing restructuring of the mobile business, Dixons has announced all UK standalone Carphone Warehouse stores are to close on 3 April 2020. These shops represent 8% of Dixons Carphone's total UK selling space.

The restructuring has no impact on the group's transformation or medium-term guidance to deliver over £1bn of cumulative free cash flow up to and including 2023/24.

Dixons also said there has been no material impact from COVID-19.

The shares rose 19.5% following the announcement.

View the latest Dixons Carphone share price and how to deal

Our view

Conditions are tough for Dixons, and coronavirus has the potential to seriously disrupt progress.

A prolonged downturn in consumer footfall or confidence would not be good news for the electricals specialist. In uncertain times big ticket items like fridges and TVs can find themselves rubbed off shopping lists.

Operating margins are already very thin at around 3%, reflecting stiff price competition from online rivals. That makes the group more vulnerable if sales were to take a severe hit.

To its credit, Dixons is making headway on some stubborn problems. The mobile business has been plagued by changing consumer habits - most notably the fact people are upgrading less, preferring SIM only contracts. The problem was particularly painful because of legacy volume commitments with certain networks, which can fine Dixons for missing targets. Fortunately these agreements are now being wound down, and we like that the group's grasped the nettle and is willing to make some hard decisions to streamline Carphone Warehouse.

Management remains hopeful the mobile business can break even in 2022 too. Longer-term, the store strategy is to do what online rivals can't - deliver a face-to-face service, with multiple product categories under one roof. 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.

But there's still plenty of work to be done. We have concerns about what could happen in the short term if sales plunge. The group has a fairly hefty net debt position, so it's less prepared for financial stress than others. If it's forced to find cash from somewhere a dividend cut will be the first port of call. At the time of writing the shares offer a prospective yield of 11.1%, but dividends aren't guaranteed, and that's particularly true in these difficult conditions.

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

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Mobile strategy and COVID-19 update

Following the 531 store closures, mobile is to be sold through Carphone Warehouse "shop-in-shops" across 305 larger Currys PCWorld stores. As a result about 40% of Carphone Warehouse staff are expected to take on new roles, with the remainder leaving the business.

Dixons has also renegotiated its legacy volume commitments with mobile networks, meaning as these continue to roll off through to 2021, "the Group will no longer be encumbered by historic sales volume targets".

The group expects positive cashflow from Mobile restructuring of around £200m in total, while cash costs associated with the move are expected to reach £220m.

The mobile business is still expected to report a loss of £90m this year, and to at least break even by FY 2021/2022.

Trading has not been "materially" impacted by the coronavirus outbreak. Greek stores will close for at least two weeks from 18 March. Dixons has said supply issues have been limited, and that as more people prepare to work from home there has been an increase in sales of fridges and freezers, small domestic appliances and laptops.

The main exception is the travel business, which has seen a significant drop in footfall, and is expected to have a negative impact on divisional profit of around £5m.

As the outbreak progresses Dixons said: "we are ready to switch more fulfilment to our online and direct channels and we will manage our costs and cash closely, including a tight control of capital expenditure if necessary. Our large bank facilities have substantial headroom (on capacity and covenants) and over two and a half years until maturity."

The group remains on track to deliver underlying pre-tax profit of £210m for the full year.

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