MARKET COMMENT
Carphone Scarehouse

By David Kuo (TMFDragon)
November 6, 2002

A change can be as good as a rest. In the case of Carphone Warehouse (LSE: CPW), a change of scenery for Charles Dunstone has worked wonders for the company's share price. Ever since Dunstone relinquished his role as chairman of the mobile phone retailer in May this year, the share price has risen by some 45% from its all time low of just 68p. That's still a far cry from the heady days when the shares were flying high at 220p a pop.

Though Dunstone handed over the role of chairman to Hans Snook, the former boss of Orange (LSE: OGE), he still retained his position as chief executive. Nevertheless with Snook overseeing the company, Dunstone's urge to rapidly grow the business through acquisition has been dramatically curtailed. That is until today when the company announced the somewhat questionable purchase of Opal Telecom for £65m. What on earth can Dunstone and Snook be thinking of?

Dunstone's spending spree, it should be said in his defence, catapulted the small mobile phone retailer into the big league. It acquired market share to become a leader for mobile handset sales with its 1,000-strong chain of outlets. However, whilst revenues were boosted the same cannot be said for either its operating or bottom-line profit. Over the last four years, those many purchases have bumped its revenues up some 3.6 times. Yet operating profit has not kept pace, only improving by a factor of 1.6. Of even greater concern is that the company has seen cash flowing out of the business by the bucketful. Just over £342m has streamed out of the company in those four years.

This then begs the question as to why Carphone Warehouse would even contemplate another acquisition at this time. It cannot even be argued that the purchase is in any way cheap. The likely rationale must be that the company sees the fixed line telecom business as a potential cash generator. Today's interim results demonstrate just why it desperately needs to generate cash. While operating profit has undeniably improved, stock levels have risen and debtors have ballooned leading to a net cash outflow for the half year of some £30m.

There are, however, better ways for a retailer to generate cash than this drastic measure of purchasing a fixed line telecom outfit. In a recent comment, it was pointed point Carphone Warehouse lacked a cogent corporate strategy for a retailer. Scarily nothing has changed except now with Dunstone done, it's the turn of Snook to spook Carphone Warehouse investors.