News Column

UPDATE: Dixons Carphone To "Get Married" From "Position Of Strength"

June 26, 2014

Rowena Harris-Doughty

LONDON (Alliance News) - Electronics retailer Dixons Retail PLC and mobile phone retailer Carphone Warehouse Group PLC both reported higher profits for their recent financial years Thursday, driven by strong trading in the UK and boding well for their upcoming merger.

Last month, the two retailers agreed to merge in a GBP3.6 billion deal that will create the UK's biggest retailer of mobile phones and electrical goods, as they hope to catch the growing technological trend for "connected devices" - the idea of using a smartphone as a remote control to control household goods from ovens and washing machines to thermostats and refrigerators.

The aim of the merger, to create Dixons Carphone, is for Dixons Retail to provide the space and product offering, with the help of its big out-of-town stores, while Carphone will provide the content and connectivity.

"We see strategic logic in the merger given the way the industry is moving, with increasing convergence in technologies and interconnectivity," said Investec Analyst Kate Calvert in a research note Thursday.

The European Commission cleared the merger on Wednesday. The merger is expected to become effective from August 6, with Dixons Carphone PLC shares commencing trading on August 7.

On Thursday, Dixons Retail posted a pretax profit of GBP132.9 million for the year ended April 30, up from GBP86.6 million the prior year, supported by lower exceptional costs associated with business impairments and restructuring charges.

It reported an underlying pretax profit of GBP166.2 million, surpassing market expectations, and up from GBP94.5 million a year earlier.

Dixons' underlying figures exclude costs such as discontinued operations, amortisation, net restructuring, and business impairment charges, as well as other one-off items.

The company had said last month it was expecting to report an underlying pretax profit at the upper end of market expectations of between GBP150 million to GBP160 million, while group gross margins would be down 0.2%, as it drove down its prices to match competitors.

Revenues for the year were up 3% at GBP7.22 billion from GBP7.03 billion a year earlier, driven by a strong trading performance in the UK and Ireland as well as the Nordics, which more than offset declining sales in smaller markets such as Greece. Like-for-like sales were up 3%. Dixons said it saw strong growth in its multi-channel businesses, with group online sales up 16% to GBP1 billion.

"The UK and Ireland delivered a strong profit performance, the best in seven years. We capitalised on market shares gains after the exit of Comet...and the performance was driven by large white goods and kitchen appliances," Dixons Retail Chief Executive Sebastian James told journalists in a call Thursday.

Dixons Retail said it has started the current financial year well, having seen a significant uplift in television sales, driven by the World Cup, although it said it is also seeing "early glimmers of a consumer recovery".

"We are seeing signs of recovery in the UK in terms of housing, so white good sales are going well," James said.

During the year, Dixons Retail streamlined the business by disposing of its loss-making operations, including Pixmania in France, UniEuro in Italy and Electroworld in Turkey.

"If we maintain a tight rein on costs, our pricing sharp - against all comers - and our service levels high, customers will continue to choose us over others," James said in the company's statement.

Carphone Warehouse also posted annual results Thursday, declaring a 20% increase in its dividend for the year, after reporting a pretax profit of GBP67 million for the year ended March 29, compared with only GBP3 million the prior year.

The company reported "headline" earnings before interest and taxes, a closely watched figure by analysts, of GBP151 million, up from GBP132 million the prior year and in line with guidance.

Carphone classes headline figures as results excluding exceptional items and discontinued businesses.

Back in April, Carphone Warehouse said that it was expecting to report headline earnings before interest and taxes in the range of GBP145 million and GBP155 million, with headline earnings per shares of between 17.0 pence to 20.0 pence.

Carphone Warehouse declared a full-year dividend of 6.00 pence per share, up 20% on the 5.00 pence the prior year. Dixons Retail doesn't pay a dividend.

Carphone Warehouse said that like-for-like revenues grew 5.3% during the year, despite the continued sharp reduction in the pay-as-you-go phone market, as it continues to be more than offset by growth in higher-value contract connections, which led to further UK market share gains.

Good performances in the UK, Spain and Ireland, were offset by tougher mainland European markets including the Netherlands and Germany, it said.

Revenue at Carphone Warehouse edged down to GBP3.28 billion from GBP3.35 billion a year earlier.

"Our growth last year was the result of good performances in countries such as the UK, Spain and Ireland balanced by challenges in some of our other Mainland European markets," the company said.

Carphone Warehouse, which has store-in-store partnerships with Media-Markt Saturn in the Netherlands and Harvey Norman in Ireland, said that it is on track to complete the roll-out programme in the Netherlands by the end of September, while its has already completed the roll-out of stores in Ireland.

Total customer base was 1.67 million customers, down from 1.71 million the prior year.

Carphone Warehouse said it is continuing to see momentum in its new 4G services, seeing higher levels of data take up.

"4G is now a major new dynamic in the mobile marketplace. The speed, range of new devices, increased data usage and new 4G tariffs have all increased our appeal to customers," said Chief Executive Andrew Harrison in a statement.

The mobile products retailer swung to a loss in the first half of the year, after booking a hefty impairment from its costly exit from the French retail markets, and the buying back of their shares from the joint venture with Best Buy.

Last month, a day after Dixons and Carphone agreed to merge, Carphone Warehouse issued a statement saying that it was in talks to sell its joint venture in France with Virgin Mobile France to Numericable Group SA. Carphone holds a 46% stake in the joint venture which was formed in 2006.

Carphone Warehouse did not provide any update on the sale process of the joint venture Thursday.

The enlarged group, Dixons Carphone, will together have almost 3,000 stores, and combined revenues of about

The merger with Dixons is Carphone Warehouse's second attempt to break into the wider electronics market, after a failed attempt at a joint venture with Best Buy in 2010, following the acquisition of a 50% stake in the business back in 2008.

The equal merger between Dixons Retail and Carphone, will see the shareholders of both companies have equal shares in the new company, which will be called Dixons Carphone PLC.

Carphone's Charles Dunstone will become the chairman of the combined company, while Dixon's James will become CEO. Carphone's Harrison will decome deputy CEO.

"We both go into this merger with a significant position of strength," Dixons CEO Sebastian James said in Thursday's call with journalists. "It is a great way to get married."

Dixons Retail shares were flat at 48.04 pence Thursday morning, while Carphone Warehouse shares were up 1.0% at 316.60 pence.

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Source: Alliance News

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