Hobson: Why I’m Sticking With Dixons

THE WEEK: Morningstar columnist Rodney Hobson gives his views on the week’s top stock moves and news 

Rodney Hobson 30 June, 2017 | 12:18PM

It was a tale of three retailers this week as Dixons Carphone (DC.), JD Sports (JD.) and Debenhams (DEB) earned widely different marks on my progress report.

I normally avoid retailers, as the sector is highly competitive, subject to rising costs and vulnerable to any downturn in consumer spending. But as regular readers will know I have made an exception to this general rule for Dixons – which I bought when the shares were punished unfairly after a previous encouraging update.

Investors were at it again this week, driving the shares down towards 280p, a full £1 below last August’s peak. I must be missing something: in the year to the end of April, revenue was up 9% and like-for-like sales 4%.

Underlying profits rose 10%, with all geographic areas doing better, and were further boosted by a lower one-off charge this time. The dividend total is up 15%. What’s not to like?

As chief executive Seb James said: “The UK consumer environment seems to be holding up for us.”

Dixons sells the sort of electronic and electrical stuff that we can’t seem to manage without, however much incomes are squeezed. I’m staying in, and if the shares fall further I will be looking to top up my stake.

JD Sports Fails To Impress

Dixons got off lightly compared with JD Sports, where shares fell 10% despite an assurance that the growth in sales has been in line with expectations in the financial year so far. There has been some pressure on margins, but this was anticipated and results are still running in line with expectations.

JD rather muddied the waters by claiming that the timing of the Muslim festival Eid had distorted comparative sales figures, which didn’t sound entirely convincing. It also admitted that it was running up against strong comparatives from last year, because of the summer boost from the European football championship – which obviously had a positive effect on sales.  However, if it comes to a choice between JD and its deadly rival Sports Direct (SPD) it is no contest, in my view. JD wins hands down.

Debenhams Shares Look Vulnerable

At first sight, Debenhams doesn’t look too bad. Sales for the 41 weeks of the financial year so far are slightly ahead, but ominously the figures for the latest 15 weeks show some slowdown in growth. Trading has been volatile in the UK, while overseas the picture is mixed.

The key phrase is this: “We currently anticipate that 2017 profit before tax will be within the range of market expectations. However, should current market volatility continue, the outcome could be towards the lower end of the current range.”

Not quite a profit warning but it sounds ominously as if shareholders are being softened up for bad news. Volatility in retailing is indeed likely to continue and Debenhams is the sort of store chain that will be particularly vulnerable.

The shares are now just over 40p, down by 33% since September and half the peak they hit two years ago. This has been a doubtful investment since it returned from private ownership laden with debt and although the debt pile has been reduced the worries over its performance in the High Street never go away.

I’d rather invest in Marks & Spencer (MKS) or Next (NXT), and that’s saying something. Stay well clear.

So the end of term retailers report is: A* for Dixons, B for JD Sports -  but a D for Debenhams.

Is Price Rise in Purplebricks Stable?

I can quite see that estate agent Purplebricks (PURP) has found a niche in a market where clients welcome a reduction in fees to offset the rise in stamp duty. However, it is expanding overseas at great cost while managing only a tiny operating profit in the UK.

Its pre-tax loss may have been trimmed but it was still £6 million in the year to April and heaven knows when it will ever be so profitable that it can pay a dividend. By then rivals will probably have emerged.

The shares have quadrupled in six months. If the bubble bursts, which is highly likely, the language emitted by shareholders may be as colourful as the company’s name.

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Debenhams PLC3.26 GBX1.18-
Dixons Carphone PLC129.60 GBX-1.37-
JD Sports Fashion PLC472.70 GBX-0.44-
Marks & Spencer Group PLC288.40 GBX-0.86-
Next PLC4,993.00 GBX0.16-
Purplebricks Group PLC134.00 GBX7.20-
Sports Direct International PLC271.40 GBX-0.40-

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.