Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

After Brexit, there's a second leave vote that's worrying British retailers: leave it on the shelf. Amid the uncertainty, fears are growing that consumers will rein in spending on everything from cardigans to carpets.

Dixons Carphone, the electricals and mobile phone retailer, offered a modicum of comfort on Wednesday -- though you wouldn't have guessed it by the share price reaction. Announcing higher sales and underlying profit for the year to May 2, it said sales actually rose in the four days after the referendum.

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Dixons shares have suffered on fears of a U.K. economic slowdown post-Brexit
Source: Bloomberg

Of course, it's very early days. Spending on big-ticket items, including expensive electrical products such as TVs, would probably suffer from any caution. A slowdown in the housing market would exacerbate that.

As a result of those fears, the company's shares have fallen 22 percent since the referendum. But while broad concern about consumer spending is justified, particularly as electronics has notoriously thin margins for retailers, the punishment looks harsh.

Dixons Carphone said on Wednesday that more than 90 percent of its sourcing costs were in sterling, easing the burden of the falling pound. Moreover, it generates about 35-40 percent of its revenue from mobile phone sales, according to RBC analysts. Those should be more resilient than big ticket electricals. After all, Britons, like other nations, can't live without their phones.

Finally, Dixons Carphone is building other income streams, including operating U.S. stores for mobile carrier Sprint. The British company estimated this would add $40 million to $50 million to earnings before interest and tax in the 2019-2020 year.

It has also strengthened the balance sheet since the financial crisis. Dixons -- before its merger with Carphone Warehouse -- had net debt of 477.5 million pounds ($598 million) in May 2009. The figure for the combined group was 267 million pounds at April 30, with free cash flow of 202 million pounds.

As Gadfly has argued, the group is a rare example of a merger that actually worked. And it's still possible it could benefit if Brexit drives weaker rivals to the wall. It gained from the demise of rivals Comet and Phones4U.

Dixons Carphone concedes that volatility is "inevitable" as a result of Brexit. It's going to take a while for political turmoil to subside in the U.K. and to get a clear sense of the economic damage. That said, even after the post-Brexit decline in its shares, the company still trades at a premium to international rivals Best Buy and Fnac on a price-to-sales basis. Even if shoppers do hold off on those flat screen TVs or fancy coffee-makers, it has the financial firepower to ride out a (short-term) storm.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net