Dixons Carphone plc (DC.) Ordinary 0.1p
HL comment (26 March 2020)
Following government restrictions all UK Dixons stores have closed on 24 March, which follows the closure of all Greek stores since 18 March. Almost all Nordic shops continue to trade.
Recent trading had been strong but the closures mean Dixons will no longer meet previous guidance for full year underlying pre-tax profit of £210m, or for net debt to be lower this year.
The group will decide if it's to pay a full year dividend at full year results, once it has a clearer picture of the situation.
The shares fell 2% following the announcement.
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 to the current hit to sales.
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. 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.
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 plenty of work to be done. A £400m hole in sales simply can't be plugged, and 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. If it decides it needs to find extra cash from somewhere a dividend cut will be the first port of call, but as it stands we'll have to wait until full year results to see if that's on the cards.
Overall, thin margins and retreating profits are unenviable problems. Dixons had been doing well to offset some major headwinds, and there are some bright spots. But 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 trading update
The closed stores were expected to contribute around £400m in sales for the rest of the year. There will be some recovery through increased online trading but this will not be enough to fully offset the losses.
In the 11 weeks from 5 January to 21 March, Group Electricals like-for-like (LFL) sales were up 8%, including a strong recent uplift. In the last three weeks electrical LFLs were up 23%. That reflects very strong increases in UK and Ireland online, as well as digital sales in the Nordics.
The improvements were driven by strong sales in equipment for home working including laptops and printers, home entertainment, and kitchen appliances, fridges and freezers.
The disruption to sales means the group is taking action to preserve cash, including: using government support to help pay employee salaries and to not pay business rates for a temporary period, reducing non-essential spending, including variable operating costs and marketing, lowering capital expenditure, reduced stock ordering and delaying delivery, moving to monthly rental payments, deferring VAT payments. The group is also considering not paying a final dividend.
The group has access to over £700m of undrawn credit. It doesn't believe it will be in breach of conditions set by lenders at the next review in April, including that the net debt to cash profits ratio shall not be higher than 2.5 times.
Due to the uncertainty Dixons can "not update current year or medium-term guidance until the impact of COVID-19 becomes clearer".
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.
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 disclosure for more information.
Previous Dixons Carphone plc updates
The London Stock Exchange does not disclose whether a trade is a buy or a sell so this data is estimated based on the trade price received and the LSE-quoted mid-price at the point the trade is placed. It should only be considered an indication and not a recommendation.
Trades priced above the mid-price at the time the trade is placed are labelled as a buy; those priced below the mid-price are sells; and those priced close to the mid-price or declared late are labelled 'N/A'.