ii view: Why Dixons Carphone shares just surged 20%

Although a turnaround for the mobile business is still being shaped, investors piled in. 

Closing standalone Carphone Warehouse stores

• Mobile business will be at least breakeven by the full-year 2021/22 
• Not yet seen a material impact from the coronavirus

Chief executive Alex Baldock commented:

"Customers are changing how they buy technology, and Dixons Carphone must change with them. We're underway with a fundamental transformation to do so. Today's tough decision is an essential part of that, the next step in making our UK Mobile business a success for customers, colleagues and other shareholders. 

“Clearly, with unsustainable losses of £90m expected this year, Mobile is currently holding back the whole business. There's never an easy time for an announcement like this, but the turbulent times ahead only underline the importance of acting now.

“We remain committed to Mobile, as we're showing by developing a new offer for customers, retaining as many Carphone Warehouse colleagues as we can, and making Mobile a core category in our big stores and online.”

ii round-up:

Electrical and mobile phone retailer Dixons Carphone (LSE:DC.) today announced the closure of its 531 standalone Carphone Warehouse stores in a surprise statement.

The measure comes as management continues to try and drive a move back into profit for its loss-making mobile phone business. 

The shares rose by as much as 21% in early UK trading. 

Around 2,900 staff will lose their jobs, with efforts being made to transfer 1,800 personnel into the remaining business.

Mobile devices will now be sold through Carphone stores located within its 305 Currys PCWorld stores and online. 

Despite airport outlets and stores in Greece, no material impact from the coronavirus had yet been seen.

Current full-year adjusted profit is still expected to be around £210 million, with losses of £90 million being made by the mobile business. 

The cost of the mobile restructuring is expected to be around £220 million. Mobile losses are expected to reduce over the next financial year, with breakeven achieved in 2021/2022. 

ii view:

Selling goods both in store and online across eight countries, Dixons falls into the UK subsector of speciality retailers, along with rival AO World (LSE:AO.) and other vendors such as WH Smith (LSE:SMWH) and Pets at Home (LSE:PETS). 

Battling the rise of online retailers such as Amazon, Dixons merged with Carphone Warehouse back in 2014. Today, and under a previously announced five-year transformation programme, the group’s plight to adapt and prosper continues. A further 531 store closures add to those already made in the wake of the merger. Cost savings and an increased focus on services and customers buying using credit are being hotly pursued. 

For investors, the potential benefits from its multi-year transformation plan are, as yet, difficult to see. However, these latest store closures are expected to boost group cashflow, with challenges for the mobile phone business soon expected to peak. Furthermore, and despite a recent cut to the dividend payment, a one-year estimated dividend yield of around 10% (not guaranteed) and covered nearly twice by earnings, potentially compensates patient but arguably higher risk investors.

Positives

• Five-year transformation programme previously launched
• Attractive dividend payment

Negatives

• Network provider legacy contracts will generate a loss next year for its mobile business
• A material impact from the coronavirus is eventually highly likely

The average rating of stock market analysts:

Buy