Dixons Carphone results were broadly in line with forecasts, although full-year profits are now seen at the lower end of previous guidance. The big news is that the company appears ready to slice its Carphone store estate to improve profitability.

Group headline profits in the first half were in line at £61m, down from £154m. The profits warning of Aug 24th had already prepared us for the number to be in this range. And while the market took the warning badly, it’s important to note that this includes a £58m one-off non-trading hit that was flagged in August. Group revenues were up 4% like-for-like.

Management has narrowed guidance on profits for the year and set its sights a little lower, with headline profit before tax seen in a range of £360m-£400m, down from the £360m-£440m guided in August. That is a slight disappointment given we have had well over a month of Q3 sales and the start of the peak trading season to offer some visibility on earnings. But the good news for shareholders is that the dividend is being maintained.

Mobile remained very tough as higher handset costs and lack of major product refresh cycles meant consumers replaced existing handsets more slowly. UK & Ireland like-for-like mobile sales declined 3%, thanks also to the delayed launch of the iPhone X. Efforts to drive sales and retain market share hit profitability in mobile.

But there are positive indicators aplenty with electricals sales up 7% on a like-for-like basis and record Black Friday sales in all geographies. The start of the peak trading season appears to be going well, with record sales reported in all territories. We also note that Dixons is gaining market share and this is key for the stock going forward. Uplift from the iPhone X will be felt in H2/18 and this against a relatively easier comparison with a £25m hit to profits from slower mobile sales booked in H2/17.

On Carphone, as anticipated, there is action. Chief executive Seb James says the firm will seek to ‘reduce the complexity and capital intensity of our mobile business model’. For simpler and less capital intensive, read store closures. With over 700 Carphone stores in a total estate in excess of 1,000 across the group, there is ample opportunity to rationalise the Carphone estate and improve profitability in mobile while still retaining a dominant market position. Indeed with the stock trading at such low multiples, as far as the investment case goes one could easily argue that size of the store estate is really an opportunity rather than a problem.

This ought to go down well with investors, although there remain concerns about how the electricals business will hold up in the face of slowing consumer spending. On that front, there is reason to be optimistic as inflation ought to ease in 2018 and wages begin to catch up. Continued pressure on profits may keep buyers at bay until there is clearer visibility on H2 and what the changes in mobile will look like.

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