Dixons Carphone dials the wrong number

published 1 September 2017

Dixons Carphone could be facing a double whammy: smartphone fatigue and a fall in demand for electronics. Alice Grhns reports.

"Nobody much liked 2014's £3.8bn tie-up between Dixons and Carphone Warehouse on the day it happened," says Alistair Osborne in The Times. Now, they like it even less. Last week the shares plunged by almost 30%, reducing the combined group's value to around £2.1bn after Dixons Carphone announced that profits before tax would be in the range of £360m-£440m this year, in contrast to the market expectation of around £500m. But it was a profit warning "everyone should have seen coming".

The bad news was "hardly a bolt from the blue", agrees Liam Proud in Breakingviews. The company makes most of its money selling electrical goods in Britain and Nordic countries, but its mobile-phone arm was the main source of the profit warning. The recent changes to EU roaming charges prevent networks charging extra when customers use their phone on the continent. Roaming charges used to be a source of extra cash for Dixons. Network operators' recent results were replete with references to the hit from new rules, so the company was bound to be affected. Meanwhile, the wider problem has been no secret either: the slide in sterling is pushing up inflation and squeezing consumer spending.

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But while the hit to real incomes may be one reason people are holding on to mobile handsets for longer, there could be a structural issue here too, says Lex in the FT. "The status value of a new smartphone is declining in line with its added utility. Users flaunting handsets with cracked screens are one indicator." Dixons may have neglected the mounting evidence of "smartphone fatigue", thanks partly to good electrical sales.

At first glance, the shares could appear to offer an opportunity to bargain hunters, says Andrea Felsted in Bloomberg Gadfly. They trade on a forward price earnings ratio of just over five times, less than half that of European peers. Nevertheless, the group is in better shape than it was when the financial crisis struck. Yet the outlook is worrying. The earnings hit from the changes to roaming charges highlights how much the firm "has relied on exceptional items" to boost profits.

Faced with weak growth and pressure from activist investors, "makers of everything from canned soup to laundry soap are slashing costs to fatten margins", with marketing spending a key target. Unfortunately for WPP, it gets about 30% of annual sales slightly more than other advertising groups from crafting ad campaigns and advising makers of packaged foods and consumer goods. The industry is also "spooked" about Amazon's $13.7bn takeover of US supermarket chain Whole Foods and what this might do to their margins and sales long term.

Martin Sorrell, CEO of WPP and the industry's elder statesman, reckons the effects of the advertising cutback and margin-obsessed activist investors, "the pace of which has taken WPP by surprise, will abate", says Liam Proud in BreakingViews. "The catch is that the torrent of value-focused activists targeting the sector shows no sign of slowing." That suggests they may not let the consumer goods giants boost their ad spending much. Note too that Procter & Gamble last month said its move to cut $100m in "ineffective" digital ads had little impact on its business. The upshot? "Marketing frugality might become the new normal."

Greene King, Britain's biggest pub company, "aspires to be the best", says Neil Collins in the Financial Times. Yet the shares are at a four-year low and the dividend yield of 5% is signalling potential trouble. The minimum wage, more stringent hygiene rules, competition from supermarkets and the smoking ban are creating problems for pubs, while last week's approval for Heineken to buy 1,900 Punch Taverns will increase competition. "Despite cost savings being achieved, some industry experts worry whether Greene King is really earning the cost of its capital".

The last few weeks "must have been miserable for Neil Woodford", says Patrick Hosking in The Times. In July, AstraZeneca, Woodford's single biggest holding, reported that a key trial of a potential blockbuster lung cancer drug had flopped. AA, another holding, sacked executive chairman Bob Mackenzie for gross misconduct. Last week, Provident Financial reported a "quadruple whammy" of bad news and Allied Minds announced a worsening in half-year profits. "In the back of [investors'] minds lurks an unpalatable niggle. Sometimes even the most brilliant fund managers just don't get their mojo back."

Michael O'Leary, chief executive of Ryanair, "is usually worth listening to, even if his rants tend to be a little colourful", says Ben Marlow in The Daily Telegraph. O'Leary is lambasting opponents and talking up the prospects of his budget airline. Ryanair "is in rude health and the financial woes of big names such as Alitalia and Air Berlin have thrown up opportunities to grab a big slice of several lucrative markets". Indeed, the European airline industry looks as though it is on the verge of a shakeout: "O'Leary says there will be just a handful of names left in five years' time. He will make sure Ryanair is at the front of the pack".

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Alice grew up in Stockholm and studied at the University of the Arts London, where she gained a first-class BA in Journalism. She has written for several publications in Stockholm and London, and joined MoneyWeek in 2017.