Nick Bubb’s Verdict: Dixons – could the 'dream scenario' come true?

Shareholders in Dixons have been haunted by the prospect of the UK recovery being frittered away by persistent losses in peripheral businesses.

Despite the impressive progress of Currys and PC World in improving UK market share (and very solid returns from the group’s “jewel in the crown”, the Nordics business), Dixons’ profits overall have been stuck on a plateau for some time, because of the worryingly large and persistent losses in southern Europe (Italy, Greece and Turkey) and in the French ecommerce business Pixmania. The inability to offset those overseas losses has also meant that the group tax rate has also been punitively high, crippling Dixons’ earnings per share.

The energetic management team, led by the ebullient Seb James, has clearly been working hard to resolve the problems with Pixmania and southern Europe, but the economic weakness in the eurozone hasn’t exactly been helping its cause. Shareholders have had to be conscious of the ‘nightmare scenario’ for Dixons: that UK progress would somehow continue to be undermined by intractable losses elsewhere, or that something else would go wrong.

But today has brought a dramatic double-whammy of news. Dixons has agreed to sell the wretched Pixmania business to a German turnaround specialist for a very acceptable cash dowry (of only €69m) and sold the loss-making Electroworld business in Turkey to a local competitor for a modest cash sum (£2m).

It will take a few months to complete the Pixmania and Turkey deals (and French employment law issues should never be underestimated), but all being well Dixons will enter 2014 having halved the number of its European problem children, leaving just Italy and Greece.

Unfortunately, the summer weather in Italy and Greece was poor, meaning weak sales of air-conditioning equipment, and LFL sales were 12% down in Q1. Losses will continue this year in these countries, but the situation is under control. The Greek economy is obviously challenging, but Dixons’ market leadership there should deliver shareholder value in due course. Meanwhile, the retailer is working on a deal to merge the business in Italy with another local competitor in order to add scale, similar to the deal Darty did in Italy. It takes two to tango, as James likes to say, but the vibes are that a solution to Italy can be found in the next few months or so.

So, as the losses in southern Europe and Pixmania drop away, can the UK maintain its recovery or will something else go wrong?

It is another two months before the anniversary of the collapse of Comet will be passed, so the real test of underlying momentum in the UK will come at Christmas. But Currys and PC World have clearly increased market share (growing LFL sales by 6% in a weak overall electricals market in Q1) as a result of the rejuvenation of the store portfolio and a big improvement in customer service.

And there are signs that the electricals market is improving in the UK. The weekly John Lewis sales figures in August were notably strong, despite tough comps, with the weather turning more helpful and progress was broad-based. In the same way, Dixons is experiencing strong sales of white goods and small appliances, as well as technology, with the pick-up in housing transactions and the huge interest in cooking and kitchens all driving improved business.

Having seen off Comet, Dixons’ position as the leading specialist is still threatened by online players and Amazon but the price gap has been narrowed significantly, and Dixons’ multichannel and distribution expertise is playing well with both consumers and the leading suppliers.

Without relying too heavily on the much-vaunted UK economic recovery, Dixons’ UK business looks set fair therefore and, after the action to cut overseas problems, the ‘dream scenario’ of an unencumbered UK recovery is very much on the cards, which is why the Dixons’ share price is much improved these days.