RBC Capital downgrades Dixons Carphone

RBC Capital Markets downgraded its stance on shares of Dixons Carphone to ‘underperform’ from ‘sector perform’ on Monday, cutting the price target to 75p from 90p.

"We think Dixons Carphone has done a good job improving its electricals offer and is managing through its structural issues in mobile. However, it is operationally and financially leveraged to a prolonged consumer downturn, hence our cautious stance," it said.

RBC said Dixons remains one of the more operationally and financially leveraged retailers in the sector, with a low single-digit operating margin and a lease-adjusted net debt/EBITDAR ratio of about 5x.

However, while it has significant headroom on its bank covenants it is likely to be more vulnerable to pressures on employment and discretionary spend, RBC said.

The bank has assumed around a £40m reduction in pre-tax profit this year compared to its previous forecast, as stores that are now closed were expected to contribute sales of about £400mn. This will be partly offset by strong and accelerating recent online sales, it said.

"DC appears to have received a strong boost from equipment for home working (laptops, printers), for home entertainment (TVs, Gaming) and for home living (fridges, freezers etc). However, we expect TV demand to be brought forward from later this year, particularly with the lack of sport events as a stimulus, while a slowdown in the UK housing market is likely to impact sales of kitchen appliances."

At 1020 BST, the shares were down 15% at 68.22p.