Dixons results error triggers rush to buy cheap shares
A ‘clerical error’ caused a rapid drop in the share price, but sharp-eyed investors spotted a bargain.
21st January 2020 14:20
by Graeme Evans from interactive investor
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A ‘clerical error’ caused a rapid drop in the share price, but sharp-eyed investors spotted a bargain.
The recovery story at Dixons Carphone (LSE:DC.) survived its biggest test yet today when the electricals giant added its name to the small band of retail success stories from Christmas 2019.
Shares jumped 4% to 150p after it emerged underlying sales in UK and Ireland electricals grew 2% in the pivotal 10 weeks to January 4 — driven by demand for supersized televisions and record-breaking sales of wearable technology such as Fitbit (NYSE:FIT) and Apple Airpods.
If shareholders, however, thought that an overall 2% rise in sales across the group sounded too good to be true — they would be right. In an embarrassing correction to the original trading statement, Dixons admitted that this headline figure should have read 2% lower.
The lunchtime about-turn triggered a big sell-off for shares, with Dixons showing that it hadn't completely lost the capacity to surprise investors on the downside. The stock later recovered to more than 147p.
Source: TradingView Past performance is not a guide to future performance
The otherwise resilient festive performance had earlier prompted CEO Alex Baldock to claim that the long-term transformation of the group remained on course, despite a further 9% drop in sales in the structurally challenged mobile division.
He said:
“We've had a good peak in a weak market and we're on track to deliver what we promised for this year.”
Analysts at Morgan Stanley think this means Dixons will hit its target for profits of £210 million in the year to the end of April, which factors in the company's previous guidance for a £90 million loss from the mobile division. It made profits of £298 million in 2018/19.
The team described the performance in electricals as impressive in the current retail climate, with the 2% like-for-like sales growth better than the unchanged market consensus. The figure keeps the division on track for its 10th consecutive year of sales growth.
The US bank, which has a price target of 220p, notes that Dixons is currently trading on 8.8x 2020 earnings and a projected 4.7% dividend yield, compared with 16x and 2.8% for the general retail sector respectively.
Despite today's upbeat trading statement, Baldock still appears a long way from completing the five-year transformation plan. Most pressing is the need to get the mobile phone division back to break-even territory as it adapts to a changing marketplace where customers have increasingly moved away from two-year contracts towards SIM-only deals.
His aim is to grow group profits to over £300 million by 2022, fuelled by £200 million in cost savings and an increased focus on services and customers buying using credit.
Investors appear happy to give Baldock more time to show he has the right strategy, with shares up from 105p in August despite several periods of choppy trading. Like many other retailers, the concern will be whether Dixons Carphone can withstand the pressure from online players such as Amazon.com.
Baldock said today that the company's online sales had grown strongly at 7% in the festive period, accompanied by increased adoption rates for credit and services.
One other positive is that the challenges for the mobile phone business are soon expected to peak. The division, which is still the most important category for Dixons, will soon benefit from the renegotiation of its legacy network contracts so it is able to give customers a better choice of connectivity and networks, as well as more SIM-only products.
Under the old contracts, Dixons faced large penalties for missing volume commitments, while it experienced a cost base that was inflexible and too high. It expects its new offer will make a meaningful contribution in the 2021 financial year, when post-pay volume commitments are due to lift.
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