Shutting 92 Carphone Warehouse stores is a smart move

Eleanor Parr, retail analyst at GlobalData, reacts to the news that Dixons Carphone has issued a profit warning and is to close 92 Carphone Warehouse stores

A shock profit warning this morning (May 29) saw Dixons Carphone’s share price crash 20 per cent, meaning they are now tracking more than 40 per cent below last year.

The retailer has blamed challenging mobile phone margins following changes in EU roaming charges in 2017 and an unfavourable electricals category and channel mix over the past year.

Profit before tax (PBT) for its financial year 2017/18 is expected to be £382m – down 23.6 per cent – and is forecast to worsen over FY 2018/19 to £300m.

Although retaining its market-leading position, the retailer’s reported revenue for the UK and Ireland has declined one per cent over the last year, meaning the gap between it and the UK’s second largest electrical player, Amazon, continues to narrow.

With margins for the retailer’s electrical assortment impacting PBT, we expect Dixons Carphone will be forced to curb its over-reliance on discounting over the next two years. Although in the long run this will be essential to recover margin, the electricals specialist will be vulnerable to share loss during this time.Dixons Carphone

While new CEO Alex Baldock has only been at the retailer for two months, he has already implemented significant top management changes and has outlined his turnaround strategy for the business in his statement today.

Mr Baldock plans to focus his efforts on the lagging UK market, aiming to recover challenging gross margins in its electricals assortment and improving the retailer’s mobile phone proposition and network agreements.

Additionally, with online revenue significantly outperforming physical sales, it plans to shut 92 Carphone Warehouse stores over the remainder of the year – a smart move for the retailer, as its extensive store portfolio has no doubt become a burden over the past two years.

With Mr Baldock’s successful track record for turning around struggling Shop Direct into one of the strongest growing electricals player in the UK, the retailer is in good hands. However, he will need to reassure investors that this is a move to create a lower baseline from which he is judged, rather than the beginning of a rocky period as the mobile business is repositioned.