Dixons Carphone agrees major US expansion with Sprint after bumper 2016

Profits rose 17% in the year to April at Dixons Carphone, which delivered a updated strategy and an optimistic appraisal of its chances post-Brexit as the largest player in the UK market.

With much of the results largely pre-flagged by the company, the new news was chief executive Seb James's strategy update, which confirmed that the coming 12 months are "likely to be busy".

"We have very ambitious plans this year which include making every one of the former Dixons stores one of the new 3-in-1 shops, introducing a lively and interactive new e-Commerce platform to Carphone Warehouse, opening Europe’s most modern distribution centre in Sweden, introducing same-day delivery, rolling out circa 150 new stores in the US with Sprint, delivering our honeyBee platform to major global clients, launching our new home services division with a mandate to become a true emergency service for customers across the UK, and continuing to drive market share, price competitiveness and customer satisfaction everywhere."

The joint venture with the Sprint mobile network in the US, where the pair have agreed to roll out a total of up to 500 stores, is expected to contribute $40m-$50m of annual EBIT to the group by 2019/20, the company said.

In the UK, the 3-in-1 store concept, where a Carphone Warehouse will be inserted into merged Dixons and PC World stores, will reduce the store estate by 134 and is expected to have a "neutral or better" impact on sales and a modest benefit to 2016/17 earnings but contribute approximately £30m of incremental EBITDA thereafter.

At the start of the year the Group launched iD, a new mobile network focused on providing users with increased contract flexibility, greater access to free data roaming and competitively priced 4G tariffs. The performance of iD in the UK has been very positive and the business now has an active customer base of over 335,000 subscribers.

In the fledgling Connected World Services division, the Honeybee software has attracted a second major customer; the group's aim to be the UK's largest third party provider of mobile phone insurance saw agreements in the UK with EE and a contract extension with RBS; while a "significant" new distribution agreement was made with TalkTalk to support the sales and distribution of mobile, TV and broadband connectivity.

On the UK's decision to vote to leave the EU, James added the company "expect[s] to find opportunities for additional growth and further consolidate our position as the leader in the UK market".

As for last year's results, they showed that while group sales were down 0.1% to £9.74bn due to a continued slimming down of the UK store estate since the 2014 merger, like-for-like revenues grew 5% thanks to strong growth in the UK & Ireland, Nordic and Greek businesses, though this was slightly lower than consensus expectations.

Operating profit before interest and tax was up 13% to £468m, while headline profit before tax rose 17.3% to £447m, bang in the middle of the guided £445-450m range, while basic earnings per share climbed 15% to 29.3p.

A ha'penny increase of the final dividend to 6.5p was proposed, lifting the total dividend to 9.75p, a 15% increase year-on-year.

Analyst views

Independent retail analyst Nick Bubb confirmed there were "few surprises"in the results.

RBC Capital Markets noted that PBT was in line with consensus, net debt lower, and EPS and dividend was in line with its own estimates, while UK EBIT was ahead of consensus and that the UK was enjoying positive LFL sales so far in Q1, which was better than it was expecting.

As DC has been one of the most negatively impacted stocks by Friday's Brexit announcement, on account of its exposure to a highly cyclical, big ticket electricals category and the potential top line impact from UK consumer uncertainty, RBC thinks the share price decline is "overdone".

However, DC shares were one of the main fallers on the FTSE 100 on Wednesday morning.

Mike van Dulken at Accendo Markets said James's comments on outlook - specifically about "volatility that is the inevitable consequence of such change" and "opportunities for additional growth", were the reason the shares were down.

"A decent spin, but not cutting it with investors", said van Dulken, as it suggested more volatility in the market and that the company might not latch onto that extra growth and might be splashing the cash for M&A opportunities.

George Salmon at Hargreaves Lansdown said Dixons was benefiting from its position as "last man standing" on the UK high street when it comes to the large-scale supply of electrical items but the group has high exposure to the UK consumer and weaker European economies, which had led to the post-Brexit fallout.

"Dixons Carphone also faces a structural threat from online retailers like Amazon and eBay, who have cost advantages like lower rent, fewer staff and less onerous business rate burdens.

"In order to keep earnings on the up and up, Dixons Carphone needs to keep customers coming through the doors. A key factor in their success will be the service and knowledge of their sales staff, as this is one area where the group holds a potential trump card in the battle against the online retailers."