Monday 19 February 2018

Dr John Lynch: Happy times if you bought into Dixons

Dr John Lynch

Sometimes, the really clever thing to do is sit tight. I have discovered over the years that the answer to many problems is to relax and go with the flow. It is a management tactic that gets scant attention in chunky texts. It does not get a lot of mileage in the schools of management. Nevertheless, it works from time to time. I would caution, however, that if one were to try out this tactic, it is necessary to be very lucky. It is not unlike buying a ticket for the Lotto.

The company we are perusing today, computer and electronics retailer Dixons, is one that got lucky by being still alive when all its close rivals bit the dust. As the recession trundles on, Dixons, which operates as PC World and Currys, has become the big survivor in the great British electronics retail shakeout.

Dixons Group is the second-biggest retail specialist in electronics in Europe. In the post-millennium consumer boom, the name became familiar around Ireland. It sells domestic appliances, consumer electronics, computer equipment, photographic equipment and communications products. It operates in 13 countries, has 1,200 retail outlets and is the market leader in the UK and Ireland, the Nordic countries and Greece. It employs 36,000 people and is valued at £1.5bn (€1.7bn).

It was founded in 1937 with a share capital of £100 in Southend, Essex. It is said that when the first outlet opened, the shopfront could accommodate only a name with six letters, so the anxious founders opened the telephone book and found "Dixons".

A listed company in 1962, it acquired Currys, with 610 retail stores, in 1984. Nine years later, it bought PC World. In 1997 it bought Dublin's Harry Moore, which had been in Dawson Street for years. It has since expanded to Italy, Spain, Portugal and Finland.

Dixons' largest division is the UK and Ireland, with sales of £4bn, 590 stores and 20,000 employees. It has 34 outlets in Ireland, including in Terminals 1 and 2 at Dublin Airport. The company is also embarking on a programme of having Currys and PC World under one roof.

The group's Nordic division consists of Norway, Sweden, Finland and Denmark. Its annual sales are £2.8bn, with 315 stores employing 9,000 people. Dixons-owned Elkjop is the leading retailer in the Nordic countries, but the company also has stores called Giganten in Sweden and Denmark. The southern European division consists of Italy, Greece and Turkey (Dixons exited Spain). It has sales of £1bn, with 280 stores and 5,000 employees. Given the economic turmoil, southern Europe markets are challenging, and Pixmania, the French e-commerce subsidiary, has particular difficulties.

Sales, at £8.5bn, are up 4pc, with the UK and Ireland accounting for almost half of group turnover, followed by the Nordic countries with 30pc. Sales in the UK and the Nordic countries offset the problems of southern Europe and the e-commerce firm. In the UK, it looks like Dixons is the last man standing. Its sales recently have been helped by the popularity of tablets plus the demise of competitors' including Comet, Jessops and HMV. As a result, the UK and Ireland unit saw a profits increase of 39pc last year. A surprise, however, was the increase in oven sales, a phenomenon spurred on by the television-inspired home baking craze in the UK.

The company has expressed its interest in exiting Pixmania after sales plummeted 68pc, with an estimated loss of £40m. It also states that the business in Turkey, with 15 shops and 16 franchises, is very small, and it may pull out.

Italy's Unieuro, with its 148 shops, is in Dixons' opinion too small for long-term strategic stability (another disposal?). Interestingly, the company is of the opinion that there is nothing wrong with Greece.

Dixons' pre-tax loss was £115m in the last financial year, slightly better than the previous, but underlying profits were up 15pc from £82m to £94m. Gross margins fell slightly because of online competition. Group costs were reduced by £45m, with a similar amount planned for this year.

The good news is a net cash position of £42m, an achievement from the previous year of £100m net debt and the first cash position in five years. If you bought Dixons shares in December 2011 they cost you 9.8p per share. Today they trade at 42p – happy days.

If you can hold them in the expectation that Pixmania will be sorted out with little cost, then happier days still, but making a profit (or loss) from investments always starts with "if".

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares.

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