New Name, Same Business

Published in Company Comment on 24 June 2010

Lacklustre sales and thin margins don’t make for a pretty picture at this major electronics retailer.

Back in the dark days of November 2008, debt-laden DSG International (LSE: DSGI) seemed a risky proposition, with its plunging sales and a share price measured in an alarmingly small number of pence. If Woolworth's could founder into bankruptcy, ran the logic, would DSGI -- owner of retail formats such as Currys and PC World -- be that far behind?

Eighteen months on, the company is still with us, having taken the opportunity offered by its near-death experience to launch itself upon a hefty 'Renewal and Transformation' programme designed to refresh its retail formats and offer aftersales services such as 'The TechGuys'.

Today, the company released its preliminary audited results for the 52 weeks ended 1 May 2010 -- and with it, a change of name to 'Dixons Retail'. But investors want more than just a re-badging. Is the transformation working? And will the medicine do anything for the company's still-moribund share price?


Chief executive John Browett, a former Tesco (LSE: TSCO) high-flyer, was in a reasonably upbeat mood: "I am delighted with the excellent progress we have made over the past twelve months, despite the recessionary environment across Europe. We are now two years into the Renewal and Transformation plan and are encouraged by the improved profitability and competitiveness it continues to deliver."

  • Underlying revenues up 4% to £8.5bn
  • Underlying EBIT up 60% at £133.2 million
  • Underlying pre‑tax profit up 61% at £90.5 million
  • Free cash flow of £28.1 million (before restructuring and impairment charges), versus 2008/09 cash outflow of £340 million
  • Net debt down 54% to £220.6 million

All good stuff, to be sure -- especially in the recessionary environment the company has been trading in. And, as one might expect, the second half of the year showed a distinct improvement on the first half, highlighting the combined effect of the transformation programme and improving consumer fortunes.

There were encouraging noises, too, about the transformation programme itself. Two thirds of the store portfolio by sales in the UK will be reformatted by October 2010, delivering a 20% margin improvement each. Some 160 stores have been closed; customer satisfaction statistics are rising, stock availability has risen 12%; and some 16% of group sales -- £1.4 billion -- are now 'pure Internet' sales.

Internationally, things are also better. The Nordic reformatting programme is proceeding well, with 16 'megastores' now open, while turnaround plans in Italy are ahead of schedule, with like-for-like sales and margins showing improvements. The operations in Greece and Spain, meanwhile, are weathering their respective economic challenges well, and gaining market share.

Is it a buy?

Gradually, the nasties are being managed away. I'm particularly pleased to see debt halved, and that the new-look stores actually are delivering better footfall, sales, and margins.

Better still, the £200 million, four-year cost saving programme appears to be on track, delivering a £50 million cost reduction in the year. And in the UK, the defined benefit pension scheme has been closed to future accruals, drawing a line under that expensive liability.

But the company's medium-term target of 3-4% EBIT isn't especially exciting, and the lacklustre sales experienced in the core UK computing business -- PC World, TechGuys and the business-related offering -- shows how hard it could be to achieve even that. This is a business with a lot of competition, in short, and margins are incredibly thin.

Changing hands today at 27 pence, little changed on the year, FTSE 250 DSGI has a market capitalisation of £993 million and trades on a prospective P/E of 11.4 -- and has yet to return to paying a dividend.

Broker coverage rates the company a 'strong buy', with ten of the twelve brokers that have a positive view of the business giving that rating. But I struggle to see it, quite frankly, and won't be tempted to buy in until the news is a lot more positive than today's showing.

Malcolm owns shares in Tesco.

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LastChip 24 Jun 2010 , 11:45pm

Forget the numbers, just go into any local Currys or PC World and you will find a bunch of disinterested teenagers, with zero product knowledge, who find it a pain to have to talk to you - if my local stores are anything to go by.

Do a search for TechGuys and you will find numerous horror stories of poor service, lost computers and just about anything else you could imagine.

Would you seriously consider that, a "strong buy"?

Answers on the back of a postage stamp please...

Gengulphus 25 Jun 2010 , 9:02am

Forget the numbers, just go into any local Currys or PC World and you will find a bunch of disinterested teenagers, with zero product knowledge, who find it a pain to have to talk to you - if my local stores are anything to go by.

Hmm... I was in my local PC World recently, and certainly didn't notice the "pain to have to talk to you" part: I had three of the staff come up to me and ask whether they could help me... I was just using a few spare minutes to get a general impression of what was on offer, though, rather than interested in any specific product, so didn't test their product knowledge.


AleisterCrowley 25 Jun 2010 , 11:35am

My personal experience of Currys, (admittedly several years ago) was terrible
Buying a simple CD player / radio etc turned into a Kafkaesque nightmare
Stock was on display 'on offer' but turned out to be the last remaining item in many cases and they wouldn't/couldnt reorder or even discount the display item ( battered and dirty)
Shower - would never go back

Luniversal 25 Jun 2010 , 11:54am

Where I live the branch was folded into PC World round the corner, so why call the whole kit and caboodle Dixons?

Strange are the ways of corporate branders.

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