ii view: Carphone torpedoes Dixons

Covid has added another hurdle to its already troubled mobile phone business. Should investors hang up?

Full-year results to 2 May

• Revenue down 3% to £10.17 billion
• Adjusted profit before tax down 51% to £166 million
• Net debt up 7% to £284 million
• No final dividend payment

Guidance:

• Expects mobile adjusted losses to be slightly worse than year just gone
• Offering no financial estimates for the current year

Chief executive Alex Baldock commented:

"The first ten months of the year was a story of delivering on our promises and accelerating the transformation of Dixons Carphone. We gained market share online as well as in stores, grew Credit and Services, drove big improvements in customer satisfaction, took difficult but essential decisions such as closing our UK standalone mobile stores, and were on track to meet financial expectations.

"With Covid-19, our immediate priorities abruptly changed to keeping everyone safe, helping our customers and securing our future. Since the year end, all our Electricals businesses have continued to grow sales. Where our stores have reopened we've performed well, while continuing to see strong online sales growth. That said, we expect a weakening of consumer spending later this year and are being cautious in our planning.

"We've learned a lot during this crisis and will emerge a better business from it. We've pioneered new ways of shopping, empowered our colleagues to move faster, and seen how technology is set to play an ever-bigger role in everyone's lives. We're also more convinced than ever that Dixons Carphone has the right strategy for our customers, our colleagues and our shareholders in the years ahead."

ii round-up:

Electrical retailer Dixons Carphone (LSE:DC.) today flagged expected bigger losses for its mobile phone business in the year ahead, as Covid-19 hinders the high volume of sales conducted in store. Management had previously pointed to a lower loss. 

Compared to its electricals business, the mobile phones arm has a much smaller share of sales from online operations and is running on a platform that has deliberately seen little investment over the last two years, given a pending integration into a new platform. System development has been paused during the Covid crisis.

Dixons Carphone shares fell by more than 7% in early UK trading and are down by 40% year-to-date. Rival online only retailer AO World (LSE:AO.) shares are up by more than 50% in 2020. 

Consumers have been upgrading their phones less frequently, while legacy network provider contracts and associated volume commitments with the likes of Vodafone (LSE:VOD) and O2 have proved a burden. Such network contracts have ended, or are due to end soon. 

Dixons previously announced the closure of its 500-plus standalone Carphone Warehouse stores to stem mobile losses. The adjusted loss in this latest year came to £104 million. Mobile sales fell by 20% contrasting with a 2% improvement in electrical sales. 

UK & Irish online sales improved by a fifth over the year including a 166% jump in April when its stores were shut under the Covid lockdown. Electrical sales have continued to grow since the year-end. 

Given the uncertain outlook, the board is offering no financial estimates for the current year and is not paying a final dividend for 2019/20. Contributions rising from £46 million last year to £78 million this year will be made into the group’s staff pension scheme, which currently has a deficit of £550 million.

ii view:

Selling goods both in-store and online across eight countries, Dixons falls into the UK subsector of speciality retailers, along with rival AO World and other vendors such as WH Smith (LSE:SMWH) and Pets at Home (LSE:PETS). 

Battling the rise of online retailers such as Amazon (NASDAQ:AMZN), Dixons merged with Carphone Warehouse in 2014. A previously announced five-year transformation programme including cost savings and an increased focus on services and customers buying using credit, are now being pursued. But a slowing in new mobile phone technologies and consumers' increasing desire to be free of more expensive contract tariffs, has left the Carphone Warehouse business holding back the Dixons electricals operation.  

For investors, growing online electrical sales, pushed on by the Coronavirus crisis, offers longer-term hope. Tough decisions being taken to shut outlets also underline management’s determination to readjust. But Covid-19 is now adding headwinds to an already challenging environment for the mobile phone business. With the attraction of the dividend removed, there appears to be no rush to accumulate holdings in this former high street icon.  

Positives

• Growing electrical sales
• Geographical diversity
• Liquidity of over £1 billion

Negatives

• Mobile phone business losses
• Dividend suspended
• Offering no current year financial guidance

The average rating of stock market analysts:

Strong hold