Dixons Carphone Plunges as Mobile Slowdown Leads to Warning

  • Shares drop by about a third, most since company’s formation
  • Increased number of Britons waiting longer to upgrade phones

The warning halts what was an unblemished record of profit growth since Dixons Carphone was formed in a merger three years ago.

Photographer: Luke MacGregor/Bloomberg

Dixons Carphone Plc forecast an unexpected drop in earnings this year, sending its shares plunging by as much as 32 percent, as more expensive mobile phones and a lack of hot new products deterred Britons from upgrading their handsets.

Pretax profit will be in a range of 360 million pounds ($460 million) to 440 million pounds in the year through April, the U.K.’s largest electronics retailer said in an unscheduled statement Thursday. The average analyst estimate was 508 million pounds.

The warning halts what was until now an unblemished record of profit growth and heaps pressure on Chief Executive Officer Seb James, who gave little hint of the looming troubles when the company reported its results in June. Sterling’s decline against the euro since the Brexit vote means mobile handsets have become more expensive, while fewer advances in phone technology gives people less reason to upgrade, the CEO said Thursday.

“This is a significant disappointment,” Neil Dwane, a portfolio manager and global strategist at Allianz Global Investors, said in an interview with Bloomberg Television. “They had their results within the last couple of months and didn’t foreshadow any of this current disappointment that they’re now reflecting.”

Speaking on a conference call with analysts, James said customers are keeping their handsets for an additional four to five months. The market’s weakness won’t be long term and Dixons Carphone is optimistic that the introduction of Apple Inc.’s iPhone 8 will be a catalyst for growth, James said. Apple usually releases the latest version of the iPhone ahead of the holiday shopping season.

As the mobile market slows, Dixons Carphone said it made “a conscious decision to invest in our margin and proposition to maintain market share,” a measure that’s weighing on profitability.

The shares were down 19 percent at 177.7 pence as of 9:43 a.m. in London, reducing the retailer’s market value by about 590 million pounds to 2.04 billion pounds. Deputy CEO Andrew Harrison, who has worked in the company’s mobile phone business since 1995, sold 1 million shares at 278 pence apiece on July 10, though still holds 4.29 million shares.

Investor Skepticism

The share price drop in part reflects increased investor skepticism over the quality of earnings, UBS analyst Andy Hughes said in a note. The company also faced questions over whether it provided sufficient clarity on issues facing the mobile-phone market at the time of its results.

“The big issue here is that the market had been uncomfortable about some of these issues at the time of the prelims and management did not provide sufficiently robust answers,” Sanjay Vidyarthi, an analyst at Canaccord Genuity, said in a note.

The hit to profit from the market’s slowdown will be exacerbated by a negative one-time charge of between 10 million pounds and 40 million pounds related to changes in European Union roaming legislation, the company said.

Historically, Dixons Carphone’s earnings have benefited from non-recurring income, such as insurance plans and charges on customers who use their phones outside of the terms of their plan. Due to regulatory changes in the EU, which mean consumers are no longer charged additional fees for using their phone across borders, the retailer will receive less of a boost than it had expected.

“It was never clear to the market that the positive one-offs would reverse,” Chris Chaviaras, an analyst with Bloomberg Intelligence, said by phone. “The company should have been more upfront about it and this will hurt management’s reputation.”

Same-store sales rose 6 percent across the group in the 13 weeks ended July 29.

— With assistance by Manus Cranny

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