Dixons Carphone backs FY profit guidance after mixed Christmas trading

Dixons Carphone backed its full-year profit guidance on Tuesday as it reported mixed trading over the Christmas period, with electricals sales up but mobile sales down.

In an update for the 10 weeks to 5 January, the company said group like-for-like revenue was up 1%. UK & Ireland electricals LFL revenue rose 2% with share gains across all categories and in store offsetting a market decline. However, UK & Ireland mobile revenue was down 7% on a LFL basis, with a continued decline in the 24-month postpay market.

LFL revenue in the international business, which accounts for nearly 40% of sales, was up 5%, with Nordics and Greece revenue up 3% and 19%, respectively and Dixons gaining or holding share in all territories.

Gross margins were stable across the group and the company maintained its expectations for 2018/19 headline pre-tax profit of around £300m.

Chief executive Alex Baldock said: "Peak trading was solid and in line with expectations, producing record sales against a tough backdrop. We continued to grow our leading electrical market positions in all territories, online and instore. In UK mobile, performance was as expected. Overall, our peak trading was disciplined and well-executed, with stable gross margins.

"In UK electricals we grew sales, despite a challenging backdrop and a declining market. Sales were strong in all categories, with standout performances in TV (where we drove the supersizing trend), smart tech and gaming. As the first category to benefit from our plans to bring more excitement to our stores, gaming was the star performer with sales up 60%. Credit and online contributed strongly, with our reserve & collect service having a strong peak as we started to bring stores and online closer together."

On Monday, Sky News reported that activist investor Elliott Advisors was exploring plans to buy a big stake in Dixons following a slump in its share price.

According to Sky, Elliott has been undertaking detailed analysis of Dixons' finances for a number of weeks.

At 0850 GMT, the shares were up 2.7% to 141.25p.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "Mobile phone sales are in free fall, but profits at Dixons Carphone remain on course thanks to a good showing from its UK electricals business, and its European operations. Trading in gaming equipment and software was a particular bright spot with sales up 60% on the same period last year.

"It’s easy to attribute Carphone’s woes to the parlous state of the UK high street, but while that’s certainly not a helpful backdrop, it’s actually dynamics in the mobile phone market which are doing the damage right now. Consumers aren’t switching phones as often as they used to, choosing instead to hang onto their old handsets, and take out less profitable SIM only contracts.

"In pretty nasty conditions, these latest numbers from Dixons Carphone are as good as could be hoped. Progress now hinges on building the online offering, creating cost savings from properly integrating its two UK businesses, and expanding the credit service it offers customers. Face-to-face customer service is also key to success, because it’s something Dixons Carphone can offer that online competitors can’t."

Russ Mould, investment director at AJ Bell, said: "Another Christmas trading update and another retailer which hasn’t shocked the market with a profit warning. Dixons Carphone has managed to keep its head above water with festive trading which means it can maintain full year earnings guidance.

"This is a really interesting situation if reports are correct that activist investor Elliott has lined Dixons up as its next target. It is much easier to push for changes in a business if the core operations are stable rather than faltering.

"Chief executive Alex Baldock is unlikely to want any interference from activist investors considering he is fairly early into his turnaround plan for the retailer."

RBC Capital Markets analyst Richard Chamberlain said: "Dixons Carphone is a very lowly priced share and has a strong relative market position in all its markets. DC has become a very leveraged play on the UK consumer, GBP exchange rate and Brexit developments, however it continues to take market share in its core electricals markets, although the markets themselves remain challenging.

"Its mobile offer faces a number of ongoing cyclical and structural headwinds and may be an ongoing drag on profitability, although DC should be able to release some value from its net receivable over time. Dixons Carphone trades on a CY19 P/E of 7x and offers a dividend yield of circa 5%."