Dixons Carphone’s mobile phones business took a hit in its first half, culminating in group pre-tax profits plunging 70%.
However, despite the blow to its bottom line, the retailer’s share price climbed 14% from around 165 pence per share to nearly 188 pence in the three days that followed.
What factors bruised the electricals specialist, what plans does it have to power-up again and how has it seemingly managed to satisfy the City?
The way consumers buy phones is changing
In August, Dixons Carphone issued a profit warning, citing a slowing UK contract mobile phone market as the source of its woes. And, after its results earlier this week, boss Seb James gave more detail as to why this was taking its toll.
“The way consumers are buying phones in the UK has changed,” James said.
First he explained that since the Brexit vote knocked sterling’s value, the cost of handsets has spiked around 25%. The iPhone X, for example, currently costs £999.
Not only is this deterring customers from buying new phones, it is also costing Carphone Warehouse – which pays for new handsets upfront – more money.
Secondly, the differences in handsets from iteration to iteration is no longer “transformational”, James said.
“The new phones are not as massive a step-up. They have good new features, but it’s not ‘I must have this’.”
This is encouraging consumers to hold onto phones for longer – in the last 18 months, the average length of use on a mobile phone has extended from two years to 29 months. This has fuelled a trend towards sim-only contracts.
This has a big impact on the group’s profits because of its unique relationship with the phone networks.
Carphone Warehouse currently takes a share of the monthly contract fees that phone networks receive from customers that sign up at its stores and online.
Adding additional salt to the wound, unfavourable one-off items and legislation around EU roaming costs also hit its bottom line.
However the later launch of the newest iPhone had the “biggest material change” on the business and accounted for a “significant” chunk of the year-on-year profits fall. The impact of the iPhone launch will not be seen until the second half.
“It’s nothing to do really with the core business,” James insisted.
The business has promised change
“We’re going to make some considerable changes to the model and adapt to meet changing customer demands,” James vowed.
While the electricals boss remained tight-lipped on the details of this change – much to the disappointment of some City analysts – he did reveal the business is in the “footholds of negotiations” with its mobile phone network partners, with the aim of becoming less vulnerable to changing consumer habits.
When asked whether this means the company would stop buying handsets upfront, James said: “conversations have started”.
The retailer said that more clarity around how it will reduce the “complexity and capital intensity” of its mobile business will be given in due course.
Store closures are not part of the plan
James specified, despite reports to the contrary, that the simplification process would not involve closing a raft of stores.
He explained that the Carphone Warehouse portfolio of around 1,000 stores only accounts for around 10% of the group’s estate in terms of payroll, space and rent, and argued that, as “all but a handful” of these stores are profitable, it wouldn’t be helpful to close them.
“Store closures is not the right thing to be talking about,” he said. “The costs we want to address sharply are very big legacy IT costs and complex systems built up over decades.
“We review our store estate all the time. When we started [as a merged Dixons and Carphone Warehouse business] we had 796 Dixons stores; we now have 321, that’s a big change. The number of Carphone outlets has moved in the last three years from just under 700 to just over 1,000.
“What’s the right number? We’ll keep determining it and checking it once we know what the new model looks like. The impact on our people and customer experience will not be noticeable.
“It’s a good estate,” he concluded.
The electricals business is fully charged
“We’ve had a really good year in white goods,” the ebullient James thundered, “partly down to our tidy logistics operations and improved availability”.
He explained that, by implementing nationwide next-day delivery, midnight order cut-off, and expanding ranges, the business has mitigated a widely-reported slowdown in demand for white goods, linked to a stagnating housing market.
“Our ability to install and deliver and service and finance… we’re offering a compelling proposition,” he said.
What’s more, the firm reported flat margins in electricals, which, given the currency fluctuations, James said was “pretty good”.
Referring to how the competition is faring post-Brexit, the retailer said that – having used promotions to propel sales during the period – it has gained share from AO.com, as well the independents.
“We think we’re really whopping them [AO],” James asserted.
Investors clearly have faith
Dixons Carphone’s share price had already started to rally after James sent out congratulatory tweets on Black Friday. According to its update this week, the group achieved record sales across all its markets on Black Friday.
Although the cost of the bumper promotional period to the bottom line is yet unclear, it bodes well for the retailer’s peak sales and its second-half performance.
It is clear, however, that – despite the lack of clarity around the retailer’s new mobile phone model – its shareholders are satisfied with the plan that was vaguely outlined this week.
The subsequent spike in shares, surprising as it may seem, indicates that the City believes the plunging profits are more symptomatic of a technical glitch than a long-term power shortage.
Dixons Carphone is seemingly plugged in and prepared to take another leap to transform its model, processes and, consequently, its future.
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