Dixons Carphone PLC (LON:DC.) joins a growing list of retailers that have been hit by the so-called Amazon effect.
The Amazon effect describes the impact the digital marketplace is having on the way consumers shop. More and more consumers are shunning physical retail stores and making purchases online.
While this trend is nothing new, the question is whether high street stores like Dixons Carphone will cease to exist in the future.
Let’s face it - how many people can say they still go into stores to buy electrical goods and mobile phones?
Dixons Carphone has acknowledged the decline in footfall with plans to shut 92 Carphone Warehouse stores this year. It will invest in the stores that remain open.
“This move, which is aimed at playing to the group’s main strength as the UK’s last electrical retailer that can offer customers the option to try before they buy, makes sense,” said George Salmon, equity analyst at Hargreaves Lansdown.
“However, the scale of the challenges in front of Dixons means there’s more work to be done before profits start moving in the right direction again.”
Dixons Carphone is not the only retailer facing difficult times.
The tough retail market got the better of Maplin and Toys R Us earlier this year when they collapsed into administration, while Debenhams PLC (LON:DEB), House of Fraser, Marks and Spencer Group Plc (LON:MKS) and Next PLC (LON:NXT) have all announced plans to shut down stores following sluggish sales.
Tough road ahead for Dixons Carphone
New Dixons Carphone chief executive Alex Baldock has admitted the turnaround of the business won’t be easy, saying there is “plenty of work to do, and it will take time”.
The company posted a 24% drop in pre-tax profits to £382mln in the year to 28 April 2018.
It anticipates a further fall in profits in the current fiscal year to £300mln due to an expected contraction in the UK electricals markets and higher minimum wage requirements.
Analysts at Liberum said: "While new management is taking sensible action, uncertainty remains on earnings visibility and the future shape of the Carphone Warehouse business, in particular.”
The analysts said key questions about the future of Carphone Warehouse include: what model will be adopted; how profitable it will be and how sustainable growth will be; and how management ensures the business keeps its position in the value chain.
'All is not lost', says analyst
But Richard Hunter, head of markets at Interactive Investor, believes all is not lost.
“As the group maintained some of its market-leading positions, overall revenue edged up, there was a reduction in net debt and the Nordics region made a strong contribution,” he said of the full year results.
“Meanwhile, the cash generative ability of the business enabled the dividend to be maintained, where a yield of 6% has clear attractions to income seekers.
“Double-digit growth in online sales could be a positive precursor to future prospects, whilst also complementing the in-store option of knowledgeable customer facing staff.”
Russ Mould, investment director at AJ Bell, also sees positives for the company.
He said: “If you take a step back and view the company from a broad perspective; it is still making money, the business isn’t highly leveraged, and there is a strong market for people who want to go into a shop and talk to experts about electronic products rather than simply buy one from Amazon just to save a few quid. Therefore it cannot be lumped in with some retailers in a more desperate state such as Debenhams.”
That being said, Mould reckons Dixons Carphone could improve its performance by achieving stronger cash flows and finding a way to breathe life back into its struggling mobile phone retail business.
Some risks out of management's control
Dixons Carphone said the mobile phone market remains “challenging” with fewer customers signing up to new contracts to upgrade their handsets.
Weaker consumer confidence has also not helped the situation.
“While we appreciate the new management’s stance, the group’s fate, to a certain extent, is out of its control,” said Helal Miah, investment research analyst at The Share Centre.
“The main issue is the state of the UK high street and consumer confidence levels in the face of only modest real wages increases and macro-economic uncertainties.”
Miah thinks Dixons Carphone’s decision to reduce the number of stores is a good start but believes it will be “paramount” that the group’s online offering is on the same playing field as rivals.
He said The Share Centre "remains wary of the retail environment" which has "very few" retailers left on its ‘buy list’ and this is unlikely to change in the near term.
“We no longer have a formal recommendation on Dixons Carphone, but anyone investing in the company will be taking a high risk contrarian approach and must feel that the group can stand up to the giants of online retailing.”