3 reasons I’d hang up on this FTSE 250 stalwart

Dixons Carphone mobile store

Over the last nine months or so, shares in £3.5bn cap electrical retailer and FTSE 250 constituent Dixons Carphone (LSE: DC) have been on a downward trajectory — losing 24% in value since last September. Will today’s full-year results arrest this fall? Despite a fairly positive reaction in early morning trading, I’m not so sure. Here’s why.

Record profits

Initial impressions are undeniably positive. Over the year to the end of April, total statutory pre-tax profits hit £386m — a rise of 47% compared to the previous year (£263m) — after revenue climbed 9% to just under £10.6bn, or 4% on a like-for-like basis. The company’s Nordics business was the standout performer, registering revenue growth of 5% thanks to new store openings and favourable exchange rates. In the UK, revenue rose 2% to £6.5bn.

While free cash flow fell to £160m (from £202m) and levels of debt were “broadly flat year-on-year” at £271m, a final dividend of 7.75p was proposed, bringing the total payout for 2016/17 to 11.25p — an increase of 15% year-on-year.  

Truly resilient?

Right now, shares in Dixons Carphone trade at 12 times earnings and come with a fairly decent 3.8% dividend yield, fully covered by profits. This would suggest that the company should be immediately attractive to value-focused investors or those keen to generate income from their portfolios. Ordinarily I’d agree. However, like all investment decisions, prospective holders need to look beyond the company’s valuation and ascertain whether the kind of performance highlighted in today’s figures can be sustained over the short-to-medium term. While admittedly devoid of a crystal ball, I’m still to be convinced that it can.

First, the big-ticket nature of the items it sells means that the company is likely to run into more trouble as inflation rises and consumer spending, at least on discretionary goods, drops. The challenges faced by Dixons Carphone are surely not dissimilar to those faced by, for example, DFS Furniture, which saw its share price tank after issuing a profit warning earlier in the month. As such, I struggle to agree with CEO Seb James’s comments that the company is now “lower risk” and “more resilient” than before. For me, things look set to get even tougher for retailers over the remainder of 2017 with Brexit likely to continue eroding any remaining optimism, even in companies with a significant presence in markets other than the UK.

Secondly, the huge amount of competition faced from pureplay online giants like Amazon and AO World give the impression that companies like Dixons Carphone, with its sizeable store estate (both in terms of quantity of sites and square footage), are treading water thanks to the major investment needed to maintain these stores.

Thirdly, the lack of information on the company’s trading outlook for the remainder of 2017 is not a good sign. Comments such as how a change to the way consumers buy the kind of products sold by Dixons Carphone “always represents opportunity” are vague and unhelpful for investors keen to protect their capital.  The idea that the company’s job is to find “propositions” that keep it “compelling” to its customers “forever” is also far too starry-eyed for my taste.

Notwithstanding today’s numbers, with such an uncertain future, I’m perfectly content with giving shares in Dixons Carphone a wide berth for the foreseeable future.

Are your ready for Brexit?

With Brexit negotiations under way, it’s more vital than ever to think about how our forthcoming exit from the EU could affect your portfolio. That’s why those canny people at the Motley Fool have penned a special report to guide you through this momentous event.

Click here for your copy of Brexit: Your 5-step survival guide.  It’s completely FREE and without obligation.

More reading

Paul Summers has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s