Dixons Carphone pins hopes on store combo

It's been a year-and-a-half since Dixons and Carphone Warehouse joined forces and they've certainly won the market round. A blinding Black Friday teed up the electronics retailer for a bumper Christmas. Its business-to-business (B2B) division is making good progress, too, and now the firm is to merge its remaining PC World and Currys stores and insert a Carphone Warehouse.

A record Black Friday drove sales 5% higher in the 10 weeks to 9 January, helping Dixons Carphone steal market share. Southern Europe was the group's star performer, with growth of 9%, followed by 5% in the UK & Ireland, and 3% in the Nordic region. This bodes well for the full-year ending April, and management now predicts headline pre-tax profit of £440-£450 million, ahead of consensus estimates by about £5 million.

"In the Nordics we had a huge Black Friday, but currency weakness and oil price continue to impact the Norwegian market, and so it was good to see growth despite this," explains chief executive Seb James. "In Southern Europe we have had a strong peak, with our Greek business in particular going from strength to strength."

DC's new B2B division Connected World Services (CWS) provides global solutions to companies through connected retail consultancy and support, its technology platform honeyBee and products. The US sprint store trial went to plan and Dixons has agreed to manage around 500 stores through a joint venture.

A "major US client" - widely reported to be Apple - will also roll out honeyBee for two US carriers in their retail stores. DC has also secured a new distribution agreement with TalkTalk.

Since Dixons and Carphone Warehouse joined forces in August 2014, the share price has rallied by a third. The integration has gone to plan, with all the major work "more or less complete", and James is clearly over the moon with the enlarged company's "distinct and sometimes quirky" culture. Make of that what you will.

Getting the estate in order

Focus now turns to getting the estate in order, and a major three-in-one property investment programme in the UK, which should boost long-term earnings. Consolidating the remaining PC World and Currys stores and adding a Carphone Warehouse in each will also reduce store numbers by 134. The impact on sales is reckoned to be "neutral or better".

It won't come cheap, though. DC has earmarked £50 million for the refit and will take a £70 million provision for property exit costs, property write-downs and operational costs. Although the impact on earnings for the year to April 2017 will be "modest", management predicts cost savings of £20 million.

Unwinding some of the gains made since the equities bear market made headlines last Wednesday (link beginners guide to the bear), Dixon Carphone shares slipped over 1% to 460p Tuesday. They've risen 7% since making a three-month low at 428p last week, but are still down 9% this year, a drop which accelerated after a bearish breakout from an established trading channel.

If pre-tax profit comes in at £440 million, earnings per share would be about 28.7p. That puts the shares on a price/earnings multiple of 16 times. Matthew Taylor, an analyst at Numis Securities, thinks there's still value here, and that the shares are worth 525p.

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