DSG International, the former Dixons, continues to struggle. Rodney Hobson thinks investors should steer clear.
You might think that electrical goods retailer DSG International
(LSE: DSGI)
has enough troubles on the British High Street so it is not very encouraging to be told it also has serious problems in Italy.
DSG is a classic example of a company changing its name (from Dixons) without tackling the underlying problems so nothing apart from the name has changed. Underlying profits for the 53 weeks to 3 May have crashed 30% from £295.1m to £205.3m.
It is little consolation that DSG had already warned the market that underlying pre-tax profits could have been even lower. Throw in reorganisation costs and writedowns and you get a loss of £192.8m.
Sales
Yet DSG has actually sold more goods, albeit in a financial year with an extra week. Total sales were up 8% to £8.5bn and like-for-likes sales nudged up 1%. The group is running faster only to find it has slipped backwards.
Sales figures are just about the only comfort that can be found. Cash flow has halved and likewise the final dividend is chopped from 6.85p to 3.43p. Even so, the dividend total of 5.45p is covered only one-and-a-half times by underlying earnings.
No wonder chief executive John Browett says DSG has been through ‘a challenging year'. That word challenging crops up again in his description of the current trading environment. He says: ‘The economic backdrop continues to be difficult and the group remains very cautious about consumer confidence in many of the markets in which it operates.'
I think most of us had worked that much out for ourselves.
While the electrical goods side has been propped up by the sale of digital TVs, the computing side continues to struggle. In the UK, sales on the computing side were down 1% in total and 5% like-for-like.
Some things just don't seem to add up. Computer hardware, where margins are lower, saw sales rise thanks to ‘the strong demand for laptops' yet in the same breath DSG talks of ‘increased promotional activity as a result of the need to reduce laptop stocks in the first half'.
Likewise there was ‘a reduction of higher margin non-hardware products in the sales mix as these products became more widely available'. The outcome will inevitable be that margins on these products are forced downwards.
Yet Browett's strategy is to push into providing ‘a unique offer of value, choice and service for computing related products'. Assuming that this and similar phrases actually mean anything, which is doubtful, it seems to suggest greater activity in the area that is becoming more competitive.
Italy
Still, these problems are nothing compared with the mess in Italy, where like-for-like sales slumped 11%. Old management has been cleared out and the new team there is closing 43 stores over the next two years while opening new ones in trendier shopping malls. Well, that at least is action we can all understand. It could work but will inevitably cost money.
DSG shares slipped initially in response to the news but recovered to stand unchanged at 45p. They have dropped from 222p is less than two years, losing 80% of their value. It takes an optimist to suggest that the worst is over. Buy at your peril.
