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Dixons Carphone shares rally as slump in annual profits as expected, turnaround to take time

Last updated: 23:30 21 Jun 2018 AEST, First published: 16:55 21 Jun 2018 AEST

Dixons Carphone
Dixons Carphone confirmed it sees profits falling again in the current fiscal year

Dixons Carphone Plc (LON:DC.) shares bounced higher on Thursday as a 24% drop in the electricals retailer's annual pre-tax profit proved as expected, although its boss warned that it will take time to turn around the business.

The FTSE 250-listed firm's headline pre-tax profit fell to £382mln in the year to 28 April 2018, down from from £500mln the previous year, with the stores group blaming weaker margins in UK mobile and electrical goods.

WATCH: Interactive Investor’s Richard Hunter on Dixons Carphone profit slump

Dixons Carphone's revenue rose by 3% to £10.5bn from £10.2bn on a reported basis while like-for-like sales grew 4%. In the UK & Ireland business, revenue fell by 1% to £6.6bn, reflecting flat sales of post-pay mobile phone contracts and a softer computing market.

The company said UK gross margins came under pressure from higher costs in providing home delivery and installation services for electrical goods as well as contractual commitments with mobile phone networks. The group's international business achieved a stronger performance, however,with like-for-like sales up 9% in the Nordics and up 11% in Greece.

Richard Hunter, head of markets at Interactive Investors. commented: "Last month’s profit warning may have removed some of the sting, but these numbers nonetheless make for some fairly grim reading. The anticipated 28% decline in pre-tax profit was accompanied by a drop in earnings per share, with gross margins coming under pressure."

He added: "There are also wider concerns regarding the sector, with phone upgrades lessening, the UK consumer potentially retrenching when considering big ticket purchases, and Dixons Carphone’s reliance on customer-facing staff an additional cost burden which digital direct businesses do not face. Meanwhile, the outlook profit number for next year has been reduced even further, as guided by the company in May."

The company. however, maintained its full-year dividend at 11.25p, representing a yield of about 6%. Free cash flow fell to £172mln from £178mln and net debt, but cut by £22mln to £271mln.

In late afternoon trading, Dixons Carphone shares were up 2.8% to 196.15p. 

Hunter concluded: "Dixons Carphone is at an inflection point and, to some extent, has bought itself some time with investors by guiding down next year’s profit. Even so, the more recent improvement in the share price – a 10% hike in the last three months – cannot mask a more reflective dip of 37% over the last year, as compared to a 6% jump for the wider FTSE250. The company has much to prove in a difficult environment and the general market consensus of the shares is likely to remain stuck at a hold, albeit a strong one.”

'Plenty of work to do', says new CEO

Dixons Carphone also said it expects pre-tax profit in the 2018/19 financial year to fall to £300mln, confirming the guidance provided in a trading update last month. It added that current year profits will be weighed down by an increase in costs in the UK electricals arm due to higher minimum wage requirements and IT depreciation.

READ: Dixons Carphone shares plunge as it warns current year profit to drop by 21%, to close shops

Dixons Carphone chief executive Alex Baldock said: “Recent events have underlined that we have plenty of work to do, and it will take time, but I'm even more confident than the day I took the job in our long-term prospects."

Baldock, who took over as chief executive from Sebastian James in April, is carrying out a major restructuring of the company with plans to shut 92 stores this year in response to an increase in consumers opting to shop online.  

His plans hit a snag last week, however, when the company revealed that millions of its customers had their card and personal details hacked. The group is investigating the issue, which started in July last year.  

Management 'taking sensible action', says Liberum analyst

In a note to clients, analysts at Liberum Capital commented: "While new management is taking sensible action, uncertainty remains on earnings visibility and the future shape of the Carphone Warehouse business, in particular.

"A fuller strategic update in December should provide the opportunity for a detailed re-appraisal of the investment case."

Liberum left its rating on Dixons Carphone at 'hold' and maintained its target price at 195p.

-- Updates share price -- 

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