Dixons Carphone plc (DC.) Ordinary 0.1p
HL comment (29 April 2020)
Electricals like-for-like (LFL) sales rose 2% in the 52 weeks to 25 April. Although, in the last few weeks coronavirus disruption means sales have fallen 3%. April has seen a strong demand for home office equipment and online sales are performing well. In the UK & Ireland, digital sales have recovered about two thirds of lost store sales.
Dixons has extended its borrowing facilities, and continues to try and preserve cash. As a result it has decided not to pay a full year dividend, and no dividend will be paid until its standby debt facilities have been cancelled.
The shares rose 15.5% following the announcement.
Conditions are tough for Dixons, and coronavirus has the potential to seriously disrupt progress.
Operating margins are already very thin at around 3%, reflecting stiff price competition from online rivals. That makes the group more vulnerable to the current changes. While we can't knock the progress being made online while physical shops are shuttered, online sales are likely lower margin which exacerbates the problem.
To its credit, Dixons had been 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. 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, closing its separate stores and integrating the service to Dixons outlets.
Provided the group makes it through the current disruption and social distancing doesn't become the norm, 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.
But there's still work to be done. A £400m hole in sales is hard to plug, no matter how well online sales do. Cash generation will suffer. The group is in a reasonable position to stomach a short-term disruption to cash flow, but it's one to watch. If the closures go on for longer than anticipated the group will begin using up its cash resources which will make servicing interest payments on debt more difficult.
At the moment it's a relief to see Dixons dialling up its online business and battening down the hatches in these torrid times. But investors should remember the recent progress is a signal of its efforts to survive, not thrive.
And things could get worse. Thin margins and retreating profits are unenviable problems. The next few months will be crucial for the group, and to some extent all it can do is hope the disruption to trading is short lived.
COVID-19 business update
In the UK & Ireland LFL sales have fallen 16% in recent weeks, but online sales increased 166%. That reflects strong demand for computers, gaming and TV products. For the year overall LFL sales have risen 1%.
International LFL sales have risen 16% in the last 5 weeks, with the Nordics and Greece seeing growth of 24% and -40% respectively. Online growth was very strong in both regions. For the year as a whole LFLs were up 4% and 2%.
UK and Greek stores remain closed and would have been expected to contribute around £400m in sales this year. All but four Nordic stores are open.
Across the group, to keep online operations running safely new working practices have been put in place, and repair and installation services have been reduced.
Since the crisis began Dixons has decreased its order intake of new stock, and shortened the commitment time for new orders. 16,500 members of staff have been furloughed, and the group will top up the remaining 20% of salaries not covered by the government wage scheme.
All Executive and Board members have taken a 20% pay reduction and other senior leaders have taken a 10% pay reduction, and there will be no UK & Ireland bonuses this year.
Borrowing facilities have been increased with a new £266m revolving credit facility, and now has access to £1bn of undrawn credit. Underlying net debt at the year end is expected to be around £300m. Dixons said: "We do not foresee needing to access any additional liquidity, and we expect to comply with bank covenants unless substantially all of our operations are required to close for an extended period".
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