New CEO Alex Baldock is carrying out a classic kitchen sink exercise, with today’s downgrades overshadowing the high street retailer’s rather strong overseas showing.
PROFITS LACK SPARK
While headline profit before tax of around £382m for the year to April just-ended will meet market expectations, the result will be well down on last year’s £501m and the Currys PC World-to-Carphone Warehouse brands owner is only hitting its numbers with a boost from a £25m one-off credit.
More worryingly, profits for the new financial year are expected to fall back to roughly £300m, well short of previous expectations amid cost increases, ongoing problems in the mobile phone business and ‘further contraction’ and margin pressure in the UK electricals market.
Prior to this morning’s news, Dixons Carphone’s shares were recovering following an August 2017 profit warning. In part, this rally had reflected optimism that former Shop Direct boss and digital expert Baldock, Sebastian James’ successor, can inject fresh impetus into the retailer’s performance and take its online business to the next level.
First the good news, which is that the top line is growing. UK & Ireland like-for-like sales edged up 1% in the fourth quarter, despite softer computing market conditions and Dixons Carphone also reports strong growth in the International operations, Q4 like-for-like growth of 8% and 10% reported for the Nordics and Greece respectively.
Unfortunately, the retailer is struggling to convert higher revenues into rising profits with weakness in mobile phones and computing exerting further pressure on its margins. Stronger cash conversion does mean Dixons Carphone is guiding towards a £20m year-on-year reduction in year-end net debt to £250m and plans to maintain the full year dividend at 11.25p.
BALDOCK SAYS IT’S FIXABLE
‘Eight weeks in the business have cemented my optimism about Dixons Carphone’s long-term prospects,’ insists Baldock. ‘I’ve found exceptional strengths, and though there’s plenty to fix, it’s all fixable. We’re number one in each of our markets, with people and capability no competitor can match. Our opportunity lies in making the most of those strengths, which we are nowhere near doing. And we must: nobody is happy with our performance today.'
Baldock continues: ‘Right now, with our international business in good shape, we’re focusing early action on the UK. In electricals, we’re focused on gross margin recovery. In mobile, we’re stabilising our performance through improvements to our proposition and network agreements. In both, we’ll work hard to improve our cost efficiency. We won’t tolerate our current performance in mobile, or as a group. We know we can do a lot better.’
AJ Bell investment director Russ Mould comments:
‘Often when a new chief executive joins a company, particularly if has faced operational challenges or is in a difficult sector, he will look to rebase expectations. Eight weeks in to his tenure at electronics retailer Dixons Carphone, chief executive Alex Baldock has followed this playbook to the letter.
‘In what can be described as a kitchen sinking exercise, the company is guiding for a significant drop in profit in the current financial year and reveals plans to shutter 92 Carphone Warehouse stores.
‘Investors may forgive Baldock the pain caused by this shock profit warning if he can back up his assertion that the problems the company faces are ‘fixable’. However, he needs to get it right as there is unlikely to be a second opportunity to ground expectations in this way.'