Dixons Carphone beats forecast as it prepares for 'more uncertain times'

In the 26 weeks to 29 October, including a boost from currency fluctuations, group revenue rose 11% to £4.9bn, with like-for-like sales up 4% thanks to second-quarter LFL that were stronger than expected, driven by another strong quarter in the UK.

Profit before tax by 19% to £144m, beating the consensus analyst forecast of £141m, with basic earnings per share growing 45% to 10.9p.

The interim dividend was hiked 8% to 3.5p as the group generated free cash flow of £65m and cut net debt by a quarter to £285m.

Claiming market share gains across all markets, the core UK & Ireland business grew LFL sales 5% as the second quarter came in at 6% versus consensus of 3.5%, with the Nordics up 2% and much smaller southern Europe up 7%.

UK operating profits were up 8% to £109m, short of the consensus of £111m, the Nordics 13% to £34m, also slightly short, while Southern Europe and Connected World Services both increased their contribution to £5m.

CWS, the business-to-business unit focused on smart technology, grew revenue 46% to £98m and has secured a strategic partnership for its honeyBee software with 'big six' energy company SSE, which will roll it out to around 5m of its customer base to monitor and control appliances at the touch of a button. Analysts said it was the first time the honeyBee software has been adapted outside of mobile.

Hailing the strong start to the year, chief executive Seb James said management were "far from being satisfied".

"As we go into our most critical trading period, the teams are drawing up a programme for next year that is every bit as ambitious, innovative and customer-focused."

"Looking forward, we remain optimistic about our ability to continue to gain market share in all our key markets, and, while we have still not seen any effect on consumer demand as a consequence of Brexit, we have been planning for the possibility of more uncertain times ahead."

A chief focus is reducing the fixed cost base, identifying areas of potential market share growth if competitors falter, and "generally preparing for all eventualities - just in case".

Market and analyst reaction

Shares in the FTSE 100 company were the biggest faller among London's blue chips on Wednesday morning, but were essentially just giving up a portion of the 16% price gain since the beginning of November.

Analysts at RBC Capital Markets were impressed with the LFL sales performance, profits beat and solid margins, with a UK EBIT margin expansion of 10 basis points to 3.6% and gains in the Nordics reflecting sterling weakness and cost-savings initiatives, partially offset by further price investments.

"We remain positive on Dixons Carphone for further market share gains, strong trends in mobile and future growth potential from Connected World Services," RBC said.

With the shares standing almost a third down from where they began 2016, owing to fears of a slowdown in consumer spend in 2017 post Brexit and the impact of potential price rises in electricals, RBC said they think that "the share price weakness fails to reflect a much stronger and less-cyclical market position than during the last consumer downturn, and we continue to see potential for strong FCF generation from FY18".

Broker Cannacord Genuity felt the 15% discount to the wider general retail sector was unwarranted, especially as the group has not failed to meet market expectations in the two years since its merger.

"Obviously, the group's FY results are significantly H2 weighted, accounting typically for over 70% of full year PBT, given the presence of Black Friday and the post Christmas Sale period," the broker said, adding that these results, the company's group-wide initiatives and public pronouncements of no signs of Brexit adversely impacting consumer behaviour, it was leaving its forecasts unchanged.

Taking a more cautious, Hargreaves Lansdown's George Salmon said the strong first half numbers mask the threat of two potential challenges brought on by the Brexit vote.

"Despite saying that it has yet to see any effect on demand as a result of the referendum, this could well be put to the test in the future. We have yet to see if the gloomy predictions about the UK’s economy are accurate, but any negative impact would surely be felt by the group. After all, big-ticket electronic items fall into the discretionary spending category," Salmon said.

Even if the economy remains resilient to the shock of leaving the EU, Salmon said sterling’s weakness means the cost to Dixons of importing its electronic goods will rise, forcing the group to "choose whether to protect sales growth and thus take the hit on profitability, or to protect profit margins by passing on the extra cost sales to the customer, which puts the top line at risk.”

The company's important update will be on 24 January, when it will update on the critical Christmas and Black Friday period.