Yup, it’s another tale of woe from Britain’s high street.
Not an entirely surprising one admittedly – the share price has been telling us for weeks that things had taken a turn for the worse.
But Wednesday’s big profits warning from Dixons Retail has served to underline just how bad things are in the retail sector and why cost cutting, stock control and cash management are now the order of the day
To the news, then.
After seeing same stores sales fall 7 per cent in the past 11 weeks across the group (and the UK & Ireland plunge 10 per cent), Dixons has warned that pretax profits for the year to April 2012 will be around £85m. To put that figure in perspective, the consensus forecast was £106m.
Dixons boss John Browett has responded to the sharp slowdown in sales with a four point survival plan.
So…
- Capital expenditure is being cut this year and next — to £160m and £150m respectively.
- It is looking to exit Spain — “the Group is entering into a consultation process to consider its options”.
- Another round of cost cutting is being planned — a further £50m is being targeted over the next three years.
- and the company is looking to raise £55-60m from a sale-and-leaseback of its Swedish warehouse.
This last point is revealing. Dixons is the most operationally geared UK general retailer, it has net debts of £370m (one warranty funds are stripped out) and faces a £160m bond repayment in 2013.
So cash is king for Dixons.
In fact it’s more important than that, says Simon Irwin at Liberum Capital.
The only thing that matters is whether Dixons has enough cash to survive in what will clearly continue to be a very difficult environment for all retailers especially in consumer electronics. They have announced a series of cost cutting and cash conserving measures, but woefully late.
Quite.
The only reason why were aren’t talking about Dixons in the same breath as HMV is the performance of its Nordic business, ElkjØp. That grew at an impressive 9 per cent in the past 11 weeks and is keeping the parent company afloat.
For the moment though, Dixons remains clear of its generous banking covenants. But make no mistake, this company in a battle for survival.
And a slowdown in Scandinavia really doesn’t bear thinking about.
At pixel time shares in Dixons were down 2.35p at 14.4p — a pretty muted response given the dire outlook.
Update: 10:00.
We have a comment from Browett:
Doing a turnaround is never easy, especially in the middle of a recession. We have a clear plan that is working, and are confident about our ability to deliver.
———–
And in another retail news…
Domino’s Pizza has fallen sharply in the wake of its trading statement.
The reason.
Ireland.
Its seems the Irish no longer have €13 to spend on a calorific, cholesterol busting pizza.
The Company’s total like-for-like figure is also increasingly affected by the performance of the Republic of Ireland stores where trading conditions have continued to deteriorate during the period. Trading in the UK stores (which represent 92.6% of system sales) is far more buoyant with like-for-like sales up by 5.5%, while like-for-likes in the Republic of Ireland are at -10.5%. The UK growth in like-for-like sales increases further if the VAT rise is taken into account.
Something to remember the next time a retailer tells you his/her product is recession proof.
Update: 3.40pm.
Some feedback from the analyst conference call, which shows the Dixons management team remain relaxed in spite of the storm raging around them.
Covenants:
If it’s just one thing on covenants, we have significant headroom on our covenants. I know it’s been well talked about. But we have to almost get down to PBT level of break even before we get to the covenant levels where we’re in danger so there’s plenty of headroom there. And the fixed charge covenant one is the one we’re closest to. So that’s there. And in terms of the interest one, I think we’ve got to have virtually more than GBP20m extra interest in our line to break our covenants there. So they’re the two closest ones, xxx, and the debt one’s got more headroom.
Pension fund:
So to go to the triennial pension fund, so just of course we haven’t quite finished the negotiations with the pension trustees at the moment so whatever I say here is subject to finalization. I think the final valuation deficit will be roughly GBP240m to GBP250m so slightly better than we had in our interim results. We’re currently paying GBP12m per year into the funds from the last triennial valuation. I think that where we’ll get to is we’ll probably step up to GBP16m next year and then it’ll be round about GBP20m for the following few years thereafter.
Credit Insurance:
On the credit insurers, two things on the credit insurers. One, we’re a lot less reliant on the credit insurers than we were back in 2008/2009. And we’ve worked very hard with our suppliers to make sure that they understand where our positions are and there’s a lot of more in-house risk taken by our suppliers. That’s the first thing.
The second thing is I meet our credit insurers every other month and keep up to form, up to date with where we are. And in fact what they’ve been doing over the last six months is actually trying to increase their exposure to us rather than decrease it. And the thing that they feel happy with is, one is we’ve got very clear room on our covenants, and the secondly, second thing, is the headroom that we’ve had on our facility right the way through this year has been very material.
Related link:
Dixons steps up cost cuts after warning – FT