Double Downgrade Hits Dixons Carphone as Retailer's Shares Slide

  • Stock drops 8.8% as Exane reverses positive recommendation
  • Changes to U.K. mobile market ‘inviting in new competitors’

Carphone Warehouse concessions will be inserted into stores

Photographer: Chris Ratcliffe/Bloomberg

Dixons Carphone Plc had its biggest drop in more than a year after the U.K. consumer-electronics seller was doubly downgraded by one of the top followers of the stock.

The shares fell as much as 8.8 percent, the most since June 2016, as Exane BNP Paribas’s Simon Bowler cut his opinion to underperform from outperform, citing adverse developments in the mobile-phone market. Bowler is ranked second by Bloomberg among 18 analysts who cover the stock, based on the relative returns of his recommendations over the past year, and becomes the only one to have a negative rating.

The downgrade deals a new blow to the shares, which already were trading at three-year lows on concern over a broad decline in U.K. consumer spending. Bowler is most worried by changes in the mobile market including a reduction in the number of customers upgrading to new phones and an unbundling of handset and network contracts.

“These market changes are inviting in new competitors,” Bowler wrote in a note. “Not only are the networks and manufacturers looking to take a greater proportion of direct business, but new entrants such as BT and Sky are more easily able to participate, and are happy to be aggressive in doing so.”

The analyst also has concerns around the quality of the retailer’s earnings, estimating that full-year results included a 50 million-pound ($65 million) contribution from changes in revenue recognition around insurance and warranty sales. Without that, U.K. profit would have been down 10 percent to 15 percent, compared with the stable earnings that Dixons Carphone reported, he said. Taking account of benefits from the 2014 merger of mobile-phone and consumer-electronics retailers that created the company, the underlying drop “is arguably closer to 15-20 percent,” he said.

“Revenue trends and margins in electricals were robust, and hence the decline looks to have been driven by mobile, where second-half profitability likely fell by circa 30 percent,” Bowler wrote.

Dixons Carphone representatives didn’t have any immediate comment.

— With assistance by James Cone, and Heather Burke

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