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19% profit growth could make Dixons Carphone plc a big winner in 2017

Photo: Dixons Carphone: Fair use

Technology retailer Dixons Carphone (LSE: DC) reported a 19% increase in half-year profits this morning, proving that not all retailers are struggling in the current market.

However, the group’s solid results didn’t impress the market. Dixons’ shares are down by 6% as I write, taking the stock’s total decline this year to 30%. Is the market right to be cautious about this big retailer, or is a contrarian opportunity emerging for bold investors?

Gains across all markets

Dixons reported sales rose by 11% to £4,869m during the first half of the year. The group’s adjusted pre-tax profit rose by 19% to £144m. The interim dividend will rise by 8% to 3.5p, while adjusted earnings per share were 45% higher, at 10.9p.

Today’s figures were given a boost by the effect of the weaker pound against the euro and the Norwegian krone. If exchange rates had stayed the same, the group’s total sales would have risen by 5%, while like-for-like sales would have been 4% higher.

More than a third of Dixons’ sales come from overseas. Sales in Southern Europe (Spain and Greece) rose by 7% on a like-for-like basis during the first half. I believe operations in this region could provide additional growth opportunities for the group over the medium term.

In the meantime, the UK market seems to have remained strong, despite Brexit fears. Chief executive Seb James said today that the firm is “preparing for all eventualities”, but that so far, “we have still not seen any effect on consumer demand [from] Brexit”.

Today’s 6% decline means that Dixons Carphone shares trade on a 2016/17 forecast P/E of 11.1, and offer a prospective yield of 3.1%. Net debt is very low, and earnings are expected to rise by about 5% in 2017. In my view, now could be a good time to buy.

An unfashionable choice?

If you’re looking for growth opportunities in the retail sector, I do have another suggestion. Upmarket fashion retailer Burberry Group (LSE: BRBY) has never looked cheap, but the group’s high margins and strong cash generation mean that it scores highly on quality.

Burberry shares have risen by 22% this year, but are still worth 24% less than when they peaked in early 2015. One potential catalyst for further growth is that luxury retail specialist Marco Gobbetti is due to take charge of the firm next year.

Mr Gobbetti has a strong track record of running luxury fashion brands, including Moschino, Givenchy, and most recently, Céline. He’s expected to bring a sharper commercial focus to the group than current chief executive Christopher Bailey, who was originally the group’s chief designer and who will remain in creative control.

I’m not really qualified to judge the appeal of Burberry’s posh bags, but I certainly find the group’s accounts attractive. Net cash was £529m at the end of September, while free cash flow has totalled £315.8m over the last 12 months. That’s enough to cover this year’s forecast dividend of 37.8p per share twice over.

Burberry currently trades on a forecast P/E of 19, with a prospective yield of 2.6%. This isn’t obviously cheap, but growth expectations are currently very low. If new boss Gobbetti can deliver a fresh round of growth, I believe the shares could rise significantly from current levels.

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Roland Head has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.