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Dixons Carphone - online boosts sales, guidance unchanged

Sophie Lund-Yates, Equity Analyst | 20 January 2021 | A A A
Dixons Carphone - online boosts sales, guidance unchanged

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Dixons Carphone plc Ordinary 0.1p

Sell: 128.00 | Buy: 128.10 | Change 0.00 (0.00%)
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Electricals like-for-like revenue rose 11% in the ten weeks to 9 January 2021. Strong growth online has helped offset the impact of store closures. UK & Ireland mobile revenue has continued to decline heavily, but this is in line with plans.

Despite the ongoing store closures, Dixons Carphone expects full year profits in line with market expectations. Medium-term guidance remains unchanged.

The shares fell 1.3% following the announcement.

View the latest Dixons Carphone share price and how to deal

Our view

Dixons is doing much better than expected. Phenomenal growth online is shoring up the business, offsetting the effects of store closures.

We've been particularly impressed by Dixons' jet-fuelled pivot to digital. 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 held up even as stores reopened is particularly encouraging.

Covid-19 has created a structural growth opportunity too. Home working and remote business is a trend that's here to stay. That's good news for those in the business of selling home office and tech equipment.

The final piece of good news is that the restructuring of the mobile business is on track. The group's 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 longer-term strategy is to out-do online rivals by offering a top-tier face to face service and multiple product categories under one roof. Customers won't mind paying more if they get a bit of help from a friendly and knowledgeable store assistant.

For all the good news, there are some remaining concerns.

Operating margins have improved, but they're still thin - a smidge under 3% overall. Online sales are less profitable at the moment, which is depressing gross margins. The difference is being made up by operating cost savings, but you can't cut costs forever. Dixons will need to find a way to allow operating margins to inflate without a helping hand from elsewhere.

That's made more challenging by the lingering threat of online competitors like Amazon. And a gloomy economic outlook could spell trouble in the short to medium term. You're a lot less likely to upgrade your TV or buy a new laptop if you've just lost your job. This is likely to put pressure on prices, and therefore margins.

A wobbly outlook is why the group's taking steps to fortify its balance sheet despite moving to a net cash position, and is likely why no dividend is on the cards. It's considering listing a minority stake of the Nordics business next year.

We can't knock the progress Dixons has made in tidying up its structure and strategy. But before we pop the champagne, we'd like to see a longer-run of operating margin progression. We think there are some genuine growth opportunities long-term, but only for investors prepared to stomach some ups and downs, because near-term challenges remain.

Dixons key facts

  • Price/earnings ratio: 9.4
  • 10 year average Price/earnings ratio: 11.0
  • Prospective dividend yield (next 12 months): 3.5%

All ratios are sourced from Refinitiv. 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.

Register for updates on Dixons Carphone

Ten-week trading details to 9 January 2021

Dixons highlighted strong demand for large screen TVs, smart tech, food preparation, health & beauty and computer & gaming items in the period.

UK & Ireland Electricals saw like-for-like (LFL) revenue rise 8%, despite store closures. These were offset by a 121% increase in online sales, and online market share improved 6 percentage points. There are now 1.4m customers using Dixon's credit. The Mobile business saw a 40% reduction in revenue, but the restructure is on track.

The international business saw LFLs up 14% overall, with a 19% rise in the Nordics offsetting a 13% fall in Greece. Online sales were up 97% and 366% in the Nordics and Greece respectively. Greek sales were adversely affected by a national lockdown.

Alex Baldock, CEO, said of the online business: "we're the biggest and fastest-growing specialist technology retailer in all our markets". The group said a large number of its stores are currently closed across the UK, Ireland and Denmark.

Find out more about Dixons Carphone shares including how to invest

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 Refinitiv. 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.