Shares in Dixons Carphone (LSE: DC) slumped by as much as 30% in early deals this morning after the company issued a profit warning.
Thanks to a number of different factors, the company’s management now expects headline pre-tax profit to fall to between £360m and £440m compared to £501m last year, a drop of 28% at the low end.
According to the company’s Q1 trading statement, profit growth has slowed because UK consumers have been holding onto their smartphones for longer rather than upgrading to the latest releases due to rising prices. The fall in the value of sterling since Brexit has forced some suppliers to raise prices, which has put customers off. For example, Apple’s iPhone 7 with 32GB of disk space saw a price increase of £60, from £593 to £599 and the premium iPhone 7 Plus with 256GB of disk space had its price increased by £100 to £919. Considering these price hikes, lacklustre wage growth, and rising inflation, it’s no surprise consumers have decided to postpone purchases.
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Multiple issues
Rising prices aren’t the group’s only problems though. New EU rules that scrap roaming charges for people using mobile phones abroad are expected to result in a one-off cost of between £10m to £40m compared to a profit of £71m last year. Dixons also expects its consultancy business CWS to generate “limited profits overall” due to changes in the way it sells software.
A change to selling software-as-a-service rather than upfront sales will ultimately result in more value and recurring income in the long term but with a negative short-term impact.
Current headwinds are holding back profitability, but Dixons is also fighting against strong comparable figures. Last June the company ended its retail joint venture with US mobile network Sprint Corp, citing the “changing US mobile market landscape” and a large contract with the US company will not be repeated this year.
Sales still expanding
All of the above have weighed on the company’s bottom line. However, sales are still growing.
The company reported a 6% like-for-like increase in first-quarter sales overall with growth of 4% in UK and Ireland, 8% in the Nordics and 6% in Greece. So it looks as if customers are still attracted to the firm’s offering.
And while profits are expected to take a hit this year, the continued interest from customers shows that these headwinds are unlikely to hold back the group’s long-term growth. In fact, it looks as if the EU roaming charges adjustment will account for all of the company’s profit decline and this is a problem the industry as a whole has to deal with, it’s not just limited to Dixons.
Undervalued
A rough-back-of-the-envelope calculation suggests that at the low end of pre-tax profit forecasts (£360m), after deducting estimated corporate tax of 20% and dividing by the number of shares outstanding (1,158m), the company is on track to earn 24.8p per share for this financial year, with an estimated forward P/E of 7.2. This is a relatively low valuation and does not account for any future growth potential. With this being the case, today might be an opportunity for risk-tolerant investors to invest.
