Nick Bubb's Verdict: Dixons - If only France and Southern Europe didn't exist

Dixons’ sterling progress in the UK and Nordics continues to be undermined, alas, by poor trading in Southern Europe and its French business Pixmania.

If only Dixons was just a UK and Nordics electrical retailer then things would looking quite rosy, as profitability and market share is improving well in these core “multichannel” operations and the financial year ended in fine fettle, with impressive like-for-like growth of 13% and 14% for the fourth-quarter period reported.

But the fact that the group has only edged up its guidance on underlying pre-tax profit to the top of the previously stated £range, despite the fantastic fourth quarter in the UK and Nordics, implies that a few other things are going on.

If Dixons blew away market expectations in the UK and the Nordics, the sales performance in its Southern Europe and Pixmania e-commerce divisions was less impressive, although the 5% like-for-like decline in quarter-four across Italy, Greece and Turkey was at least respectable, given the dire state of the markets in those countries.

Ahead of the update, Dixons had made some pretty bullish noises about its ability to cut the massive losses at the wretched Pixmania, so the 36% drop in Pixmania’s like-for-likes was a shock.

Nevertheless, it appears that the pre-exceptional loss at Pixmania in the year won’t be quite as bad as the £35m that the market had feared, thanks to restructuring and cost savings (in France the business now employs only about 700 people, versus a peak of 1300).

Dixons have much to thank previous chief executive John Clare for, including his shrewd acquisition of the market-leading Nordics business Elkjop in 1999.

But the overseas moves that soon followed in the early 2000s into Italy and Greece were less inspired.

And the decision in April 2006 to buy a majority stake in Fotovista (the parent company of Pixmania, which was then a leading European etailer of digital photographic and consumer electronic products) was a disaster.

Clare’s successor, John Browett, began the process of transforming and rejuvenating the UK business of Currys and PC World, seeing off Best Buy in the process.

But he failed to tackle the problems he inherited in Southern Europe and Pixmania, so Dixons’ passionate new chief executive Seb James is having to work hard to keep the UK recovery going in the face of a flat economy, while also dealing with the big losses on the periphery of the group.

Fortunately, Dixons has had some tailwinds in the UK over the last year, including helpfully poor weather, the ‘Summer of Sport’ and the digital switchover in London, plus the relentless growth of the tablet PC market and the demise of Comet.

In fact, having picked up nearly a third of Comet’s old business, Dixons reckon that about half the UK like-for-like growth in the fourth quarter came from Comet.

Although the comps now get tougher, momentum seems good as the group enters the new financial year, with “wind in its sails” as James put it.

But although Dixons has done much to take on the competition in online electricals from mighty Amazon by embracing “multichannel” retailing techniques, with a powerful click and collect operation, much improved customer service in the stores and tighter product pricing, the turnaround of the UK business has not been pain free.

Given the state of the out-of-town retail property markets, Dixons is still taking sizeable losses as it gets out of retail park stores that are now deemed surplus to requirements.

And an increase in such “property disposal losses” to £25m is one of the reasons why underlying group profits will be no higher than around £85m this year (around the level that profits have been stuck at for several years now).

Of course, the stock market is right to dream of what Dixons’ profits would look like if it could make inroads into the Pixmania losses, UK property losses, Southern Europe losses… and replace its high interest rate 2015 bonds.

All easier said than done, but Seb James and his management team seem very focused on that task and the very useful recovery in the Dixons share price in recent months implies that the bulls are winning the argument.

One day in the not too distant future, Dixons won’t have the same exposure to the problems of France and Southern Europe and shareholders are entitled to be increasingly happy about that prospect, while keeping all their fingers crossed that nothing else then goes wrong.