Dixons Carphone: smartphone fatigue

The status value of a new smartphone is declining in line with its added utility. Users flaunting handsets with cracked screens are one indicator. Another is a profits warning from Dixons Carphone. The UK electrical retailer says customers are hanging on to their old iPhones for five months longer, well over two years. A slump in the shares reflects fears of deeper structural change.

Optimists see a buying opportunity. It is easy enough to build a bull case. Dixons Carphone forecasts profits before tax of £360m-£440m in 2017-18. The midpoint is around £100m below prior consensus. But the matching 23 per cent drop in the shares on Thursday could be excessive, given the composition of the earnings decline. This includes a big non-cash swing in debtor valuation and a deferral of some software revenues.

A bear would counter that the market response contained a big dollop of pessimism relating to smartphone fatigue. For consumers, replacing a phone is becoming a chore rather than a pleasure. Dixons Carphone made little allowance for this in its guidance, thanks partly to good electricals sales. Chief executive Sebastian James believes the launch of the iPhone 8 will reprise the moderate success of the iPhone 6S, rather than the flop that was the iPhone 7.

Longer term, it is prudent to imagine smartphones will become as much of a commodity as toasters. Dixons Carphone sells these too. The business was created through a defensive merger in August 2014. This was executed with élan by Mr James, who was assisted by the previous collapse of Comet and subsequent demise of Phones4U.

The shares have dropped 64 per cent below their post-merger high. Dixons Carphone should still avoid the mournful fate of its rivals. A forward earnings ratio of seven times and a yield of 4 per cent shows investors rightly anticipate little growth. A dividend cut is possible.

Dixons Carphone was the third large UK business in three days to warn on profits. At one level, this was autumnal business as usual. UK companies habitually dial back optimistic City profits forecasts during the second half. More worryingly, all three companies — WPP and Provident Financial were the others — are menaced by structural decline. What big, fast-growing companies can the UK brag about to counter that? Vanishingly few.

The Lex team is interested in readers’ views. How serious is the structural growth issue facing Dixons Carphone? Please tell us what you think in the comments section below.

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