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Dixons Carphone plunges as it warns on profits with UK mobile phone business hit by weak demand

The UK mobile phones market has come under pressure as customers have not been upgrading their handsets as frequently due an increase in prices
Dixons Carphone
Dixons Carphone reported a 6% like-for-like increase in first quarter sales

Dixons Carphone Plc (LON:DC.) shed almost a fifth of its market value today after the electricals retailer warned that it expects its full year profit to drop due to challenges in its UK mobile business, the disposal of its Spanish arm and lower EU roaming charges.

The company said in a trading statement that it sees headline pre-tax profit of £360mln to £440mln in fiscal year 2017/18, compared to £501mln last year.

WATCH: 'Not necessarily as bad as share price fall would suggest'

In late afternoon trading, Dixons shares were down over 20%, or 48.0p to 187.3p, albeit having dropped over 30% in initial reaction to the warning.

Analysts at Liberum Capital said the warning suggests up to 20% cuts in profit estimates for the electricals retailer, and placed their ‘buy’ rating and 430p price target for the stock under review.

Dixons mobile phone business has come under pressure as UK consumers have been holding onto their handsets for longer rather than updating to the latest releases due to the Brexit-driven slump driving prices higher.

READ: Dixons Carphone resilient in face of Brexit as it posts record full-year pre-tax profits

The group said while it was too early to say whether upcoming handset launches or the normal lifecycle of phones will reverse this trend, it was planning on the basis that overall market demand will not correct itself this year.  

The group has decided to invest in its margin and proposition to maintain market share in the event of continued weakness in consumer demand in post-pay phone contracts.

The investment will carve into profits in the phone business but the company expects this to be offset by “good progress” in its UK & Ireland, Nordic and Greek electrical businesses to deliver overall profit in the core retail operations in line with last year.

EU roaming legislation to hit profits

Group profits will also be hit by new EU rules that scrap roaming charges for people using mobile phones abroad. The company expects a negative one-off adjustment of between £10mln and £40mln, compared to a positive effect of £71mln last year.

Dixons also expects its consultancy business CWS to generate “limited profits overall” due to changes to the way it sells its honeybee software product, a platform housed on handheld tablets that helps store staff streamline the sales process by meeting customers’ individual needs. A move towards software-as-a-service rather than upfront sales will create higher value in the longer term but will have an impact on this year's reported profitability, Dixons said.

In another drag on profits, Dixons last June ended its retail joint venture with US mobile network Sprint Corp, citing  the “changing US mobile market landscape”.

READ: Dixons Carphone to end its US joint venture with Sprint because of “changing US mobile market landscape”

At the time the group said it would concentrate on Honeybee, which the UK group was rolling out across the Sprint store network. Dixons said a significant contract sold to Sprint last year will not be repeated this year, thereby affecting profits.

In July of this year the company also decided to sell its Spanish business for €55mln to Global Dominion Access, a tech services company based in Bilbao.

First quarter sales rise

Alongside its profit warning, the company reported a 6% like-for-like increase in first quarter sales. In the UK & Ireland business, like-for-like sales rose 4%, driven by its electrical business. The Nordics division saw like-for-like sales rise 8% while the Greece unit gained 6%.

"As you can see from our trading statement, we continue to trade well in all geographic markets with like-for-like sales up 6% across the group,” said chief executive Seb James.

“It is good to see this performance from our UK electrical business particularly against the Euros football championship last year, as well as strong sales from our Nordic and Greek businesses.”

 -- Updates share price --

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