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Dixons Carphone - positive trends continue, full year in-line

Sophie Lund-Yates, Equity Analyst | 28 April 2021 | A A A
Dixons Carphone - positive trends continue, full year in-line

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Positive sales trends from Christmas have continued, with "very strong online growth" in Electricals across all markets, which more than doubled to £4.5bn in the year. This offset store closures in the UK and Ireland, and restrictions in the Nordics. Total group Electricals sales rose 14%. Dixons has repaid the £73m received for staff furloughs. Including the reimbursement, Dixons expects full year pre-tax profit to be in line with market expectations of £151m. It also expects to have net cash of £150m.

All medium-term guidance is unchanged. The group's on-track to generate £1bn of cumulative free cashflow by 2022/2023.

The shares were broadly flat following the announcement.

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Our view

Dixons is doing much better than expected. Phenomenal online growth 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.

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 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. While we've been impressed with how well consumer spending has held up so far, a gloomy economic outlook could still spell trouble in the medium term. You're a lot less likely to upgrade your TV if you've just lost your job.

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 currently. It's also 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, because near-term challenges remain.

Dixons key facts

  • Price/earnings ratio: 12.9
  • 10 year average Price/earnings ratio: 8.2
  • Prospective dividend yield (next 12 months): 2.9%

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.

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Pre-Close Trading details

The strongest growth in Electricals came from the International business (+16%), this includes a 17% rise in the Nordics and a 9% increase in Greece. Sales in the UK and Ireland rose 13%.

The group's decided to close Dixons Travel, because the removal of airside tax-free shopping earlier this year will dent customer numbers. This division used to contribute £20m a year to profit. Dixons has also closed all Carphone Warehouse stores in Ireland.

The group's refinanced its existing debt, and now has access to £550m of credit, while all other facilities have been cancelled. Dixons expects to finish the year with net cash of around £150m.

Dixons also continues to expect full year capital expenditure of around £190m, and one-off costs of £130m relating to business closures. Profit is expected to fall by £30m because of the way some spending has been categorised.

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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 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.