Dixons Carphone pledges to 'simplify' mobile business as profits plummet
Profits at Dixons Carphone crumpled in the first half as UK mobile phone customers continued to hold onto their handsets longer, leading the retailer to plan a restructuring of this business and pledge that the dividend will be kept steady.
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Group headline profit before tax of £61m was down 60% on the £154m last year, mostly due to an expected one-off £58m accounting change, but with efforts to drive mobile sales and retain market share hitting profitability. The analyst consensus forecast was for £63m.
For the full year, chief executive Seb James, whose head has been reportedly been demanded by some investors after the poor start to the year, also trimmed his full year guidance for PBT to £360-400m from the £360-440m expected in August and the consensus forecast of close to £497m at the start of the year. However, the consensus was already at £377m and with free cash flow remaining strong James has promised to leave the full year dividend untouched.
Sales were mixed, with UK sales in the second quarter falling 4% but up 1% on a like-for-like basis, while group sales for the first half were flat on a LFL basis but up 3% on a reported basis as the Nordics business and Greece both delivered double-digit growth, aided by the weak pound.
Excluding mobile sales, first-half electricals LFL sales were up 7% across the group, with growth across all geographical markets of 6-8%, but UK and Irish mobile LFL sales were down 3%.
"As we said in August, the UK postpay mobile phone market is tougher, with a combination of higher handset costs and relatively incremental technology growth continuing to cause customers to hold on to their handsets for longer and some to choose a SIMO contract in the meantime," James said.
"In addition, the later launch of the iPhone X pushed some sales into the second half of our financial year. Throughout the period, we made a very conscious decision to fight hard to drive sales in our product offering, and this has impacted mobile profitability," he said, saying these actions helped reinforce Carphone Warehouse's position as market leader.
"We recognise that the performance of the mobile division needs addressing, and are taking action to adapt our model in order to cement our place in a changing world. We will update the market on these developments in due course, but we believe that we can, over time, reduce the complexity and capital intensity of our mobile business model, and increase the simplicity and profitability of what we do."
An interim dividend of 3.5p per share has been declared, flat on last year, though adjusted earnings per share shrank by two thirds to 4p.
“The big news is that the company appears ready to slice its Carphone store estate to improve profitability," said analyst Neil Wilson at ETX Capital.
Reading between the lines of the CEO's promise of a simpler and less capital intensive Carphone Warehouse, "read store closures", said Wilson.
"With over 700 Carphone stores in a total estate in excess of 1,000 across the group, there is ample opportunity to rationalise the Carphone estate and improve profitability in mobile while still retaining a dominant market position. Indeed with the stock trading at such low multiples, as far as the investment case goes one could easily argue that size of the store estate is really an opportunity rather than a problem.
"This ought to go down well with investors, although there remain concerns about how the electricals business will hold up in the face of slowing consumer spending. On that front, there is reason to be optimistic as inflation ought to ease in 2018 and wages begin to catch up. Continued pressure on profits may keep buyers at bay until there is clearer visibility on H2 and what the changes in mobile will look like.”
Analysts at Investec said restructuring the Carphone business "now becomes a key priority for management", with likely options including downsizing of the store estate where there is a 3.5-year average lease length, renegotiation of network
agreements and a greater push towards unbundling of the handset purchase. "In our view, retaining the sale of the handset
is key to profitability in mobile and unbundling could free up working capital."
On valuation, they added: "Whilst structural pressures facing mobile will continue to be of some concern, post FY18, DC can find itself in a position where profits show signs of stabilisation in our view. We think the balance of risk/reward from here lies on the upside."