Dixons’ Faulty Consumer Electronics

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Dixons Carphone Plc just called with some bad news, and a helping of irony.

Its severe profit warning on Thursday was sparked by a downturn in demand for mobile phones, rather than ovens and flat screen TVs. With Brits’ reliance on their phones for everything from social media to shopping, it should have been a much more robust performer than consumer electronics.

After the merger three years ago, the legacy of the old Carphone Warehouse arm of the business, rather than Dixons, seems to be the root of the current problems.

U.K. consumers are facing both a squeeze on income, and higher prices for their phones due to a slump in the pound. So they’re holding onto their handsets for longer, particularly as new models have been uninspiring.

Now throw in a downward revision to the estimate of future income Dixons Carphone expects to receive on mobile phone contracts, due to changes to EU roaming charges and the way it recognizes revenue in its services business. The end result is that it expects underlying pre-tax profit to be between 360 million pounds ($461.4 million) and 440 million pounds this year, compared to the consensus of analysts’ expectations of 508 million pounds.

The shares fell more than 30 percent before stabilizing at a loss of around 24 percent. Consequently, they trade on a forward price earnings ratio of just over 5 times, less than half that of European peers.

On the face of it, that looks harsh. After all, as Gadfly has argued, Dixons and Carphone’s merger has — up to now — actually worked.

Dixons is in much better shape than it was when the financial crisis hit, and, unlike rival AO World Plc, it generates cash. There are also levers that the company can pull to realize cost savings.

But the 10 million pound to 40 million pound one-off hit from the changes to EU roaming charges, compared with a 71 million gain last year underlines just how much the company has relied on exceptional items to boost its profit. With less scope for this type of uplift, it will have to rely more on underlying trading. And that’s a worry, given the current environment.

The last few weeks has seen a slew of bad news from home furnishings retailers and others offering pricey purchases. The danger is that Brits don’t just cut back on new phones, but the broader malaise moves to big-ticket consumer electronics — which always looked more vulnerable to cutbacks in Brits’ post-referendum reality.

Dixons Carphone’s ever-optimistic chief executive officer, Sebastian James, says the U.K. consumer is still in relatively good shape. But that looks increasingly like wishful thinking.

If Dixons is relying on British shoppers to get it out a tight spot, then it really is in a pickle.


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