Dixons Carphone Plc (LON:DC.) shares plunged on Thursday as the electricals retailer swung to a big full-year loss and said there would be “more pain” in the current year as the UK mobile market changes faster than it had expected.
Posting results for the year ended 27 April 2019, the FTSE 250 group reported a statutory loss before tax of £259mln compared to the prior year’s profit of £289mln on revenues down 1% to £10.4bn.
The swing to losses was due to a whopping £557mln of charges, mostly non-cash write-downs relating to the UK mobile market, as the group had warned in December.
At that time, the Currys PC World and Carphone Warehouse owner said British consumers were taking out fewer 12 and 24 month contracts in favour of sim-only and credit-based options, hitting the group’s market share and profitability.
These changes in the UK mobile market have sped up further in 2019, “so we are accelerating our transformation to respond”, the company said, with a restructuring that will result in a “significant loss” for its Mobile business as legacy network contracts have been renewed and new credit bundles are developed for launch in the new 2020 financial year.
Dixons does not expect a meaningful contribution from Mobile until the 2021 financial year.
'More pain' hits shares
Chief executive Alex Baldock admitted that keeping up with the changes in the mobile market “means taking more pain in the coming year”.
But he insisted that “accelerating our transformation provides certainty that this year is the trough” and that integrating Mobile and Electricals into one business will provide cost benefits to enable a return to underlying profit growth in 2021 year as Mobile breaks even.
With underlying PBT falling 22% to £298mln if the one-off charges are excluded, roughly as guided in January, and the final dividend to be cut to 4.5p from 7.75p, Baldock's painful transformation is expected to result in an even steeper decline of 42% to around £210mln, with guidance for a flat dividend and net debt.
This was considerably lower than the £300mln analysts were expecting for the coming year, sending Dixons Carphone shares diving more than 20% in early trading to drop below 100p for the first time, down almost two thirds since the merger with Carphone Warehouse in 2014.
The headline PBT was in line with prior guidance and market expectations, said UBS, though the dividend was a little lower, debt better and the pension deficit increased to £579mln.
UBS said the 2020 profit warning was a surprise, but noted that long-term guidance for margin and cash was unchanged.
Russ Mould at AJ Bell said: “It feels like the trend for switching phones to the latest model every year is truly a thing of the past. The latest phones are perfectly adequate to keep for a much longer time and consumers are finding better value by going for SIM-only deals rather than locking into a long-term contracts with a specific network.
“The soaring popularity of WhatsApp has shifted consumer habits away from standard text messaging, thereby removing a key sales point for mobile phone networks trying to lure customers with unlimited texts. Most phones have decent cameras, touch screens and can play music to a reasonable quality, so what’s left for phone sellers to offer in order to make people want to constantly upgrade?"
Mould said this suggested Dixons' merger with Carphone Warehouse in 2014 was a bad move as it came just at the point when Dixons was getting back on its feet and solving previous problems with inferior customer service.
George Salmon at Hargreaves Lansdown noted that "some green shoots", with online and international operations growing, while the percentage of sales made on credit is rising as hoped.
-- Broker comment added --