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Dixons Carphone - online sales double, Nordic listing considered

Nicholas Hyett, Equity Analyst | 10 September 2020 | A A A
Dixons Carphone - online sales double, Nordic listing considered

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Dixons Carphone plc Ordinary 0.1p

Sell: 105.20 | Buy: 105.40 | Change 1.40 (1.36%)
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Dixons Carphone reported a 14% rise in like-for-like electrical sales in the first 17 weeks of the year. That reflects growth across all the group's regions, with a 124% increase in online electrical sales. Online sales accounted for 42% of group sales in the period, compared to 21% in the same period last year.

However, mobile sales fell 56% year-on-year, in line with expectations following the closure of standalone Carphone Warehouse stores in the UK.

The shares rose 9.4% in early trading.

View the latest Dixons Carphone share price and how to deal

Our view

These are some very impressive numbers from Dixon's Carphone - with online sales really shooting the lights out.

Innovations like ShopLive, which allow customers to get video help from Dixon's experts at home, have kept the group's key competitive advantage (face-to-face advice) in action over lockdown and are clearly proving popular. The fact online sales have held up even as stores reopen is particularly encouraging.

However, we're still cautious about what's going on underneath the headline numbers and the longer term outlook.

Online sales are lower margin than in-store sales, and Dixon's margins weren't all that impressive to start with. That makes the net effect on profits unclear. We would also flag that these numbers are based on like-for-like results - so the effect of any permanent store closures won't be included.

To its credit the group is taking steps to resolve some stubborn problems - not least in the mobile business which has struggled for a while. The group is winding down some historically onerous agreements with network providers and has now taken the big step of closing all standalone Carphone Warehouse stores. They'll now be integrated into Dixons and Curry's PC World stores, hopefully improving sales at larger sites while cutting costs.

The long-term store strategy is to do what online rivals can't. That is, 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.

However, despite the strong performance this year the outlook remains challenging for Dixons. It sells big ticket discretionary items and demand for that kind of thing tends to be hit hard by an economic downturn - people are usually reluctant to splash cash on an all-singing all-dancing fridge or TV when they feel their job's at risk. The economic picture is far from benign, we suspect that'll weigh on the top line as the year progresses.

The gloomy outlook is probably why the group is taking steps to fortify its balance sheet despite moving to a net cash position. A partial sale of the Nordic business is on the cards - with proceeds earmarked for "strengthening the capital structure".

All-in-all it's a bit of a mixed picture. Carphone's sales have held up well, but what that means for profits is unclear. Online competitors haven't gone away, and while we feel the group's strategy to deal with that challenge is the right one, the economic backdrop will make it difficult to deliver.

While the price-to-earnings ratio may be undemanding by historic standards, there are lots of reasons for caution at the moment. We'd be inclined to remain on the sidelines until the economic picture is clearer.

Dixons key facts

  • Price/Earnings ratio: 7.2
  • 10 year average Price/Earnings ratio: 11.0
  • Prospective yield: 3.9%

We've introduced this section in response to recent survey feedback.

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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AGM Trading Update

Online electrical sales more than tripled in the UK & Ireland during lockdowns, and have remained up more than 100% since stores re-opened. Dixons Travel sales remain 90% lower than a year earlier - as stores remain shut. The increase in online sales and decline in travel sales is expected to hit margins. Overall sales in the UK & Ireland are up 12% year-on-year.

Nordic sales rose 17% on a like-for-like basis, with online sales up 49%. Sales in Greece rose 12%, with online up 115%. Both regions benefited from stores remaining open throughout the crisis, although gross margins have been impacted by the shift to greater online sales.

The group is exploring a minority listing of its Nordic business in 2021. The review is at an early stage, but if a listing goes ahead it is expected to strengthen the group's capital structure.

The group finished the period with net cash on the balance sheet, compared to £284m of net debt at the start of the financial year. The group has access to over £1.3bn of committed debt facilities.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.

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