DSG, the owner of Dixons.co.uk, Currys and PC World, faces a race against time to refocus its business. If it succeeds, the shares could prove to be an absolute steal.
John Browett has had a baptism of fire since he took charge of DSG International (LSE: DSGI) a year ago. When he joined, its share price was around 120p. It’s now 14p having dipped below 10p last week. With MFI and Woolworths now in administration, times have never been tougher on the high street.
DSG is the owner of Currys, PC World and Dixons.co.uk here in the UK. It also has a strong presence in the Nordic region and in other European countries, which together account for around 40% of its sales.
It’s been around for over 70 years and has been a listed company since the early 1960s. It can boast leading positions in many of its markets, has nearly 1,400 stores and is the biggest European online retailer of electrical goods. Total sales exceeded £8.5bn last year, of which £1bn were online. Yet it’s been dogged by the perception of poor customer service over the last couple of decades, most notably the flogging of overpriced extended warranties.
DSG’s new broom
Browett was brought in to change all that. He spent 9 years at Tesco (LSE: TSCO) where he was operations director and also the head of Tesco.com. He wants to focus on the customer and the company is now six months into its ‘Renewal and Transformation’ programme.
So far his changes appear to be working. With many of its stores on leases – hard to get out of in the current environment – the focus is improving stores rather than relocating them.
There has been an uplift of 15%-25% in sales for the 40 PC Worlds that have been converted to a new format. Browett showed several photos that compared the old and new formats in the results presentation this morning; the new look is much cleaner and less cluttered yet can display a much wider range. Extra table displays allow technology products to be demonstrated much more easily. This is boosting sales and customers are spending more time in the stores.
Similar overhauls are underway at Currys and Currys.digital (the old Dixons’ stores) although less of a sales uplift is expected from more traditional white goods. Other changes include retraining all sales staff and three-hour delivery slots for Currys between 7am to 10pm. These cost an extra £5 but have proved popular and DSG reckons it is the only UK electrical retailer with the scale to make such a scheme cost effective.
The UK business is holding its market share at the moment but Browett reckons it should be making gains in a downturn. That’s what its European businesses are doing. While this is disappointing for the UK business, it also illustrates how much room there is for improvement. With the US giant Best Buy looking its increase its UK presence, DSG needs to act fast.
Overall, DSG has a target of boosting margins by three or four percentage points with its transformation programme. While these changes should boost profits in the medium term, they cost money in the short term, and this is denting profits that are already weak due to falling sales. Today’s interim results illustrated the squeeze that DSG faces.
Slipping into the red
Total sales were ahead 3% to £3.5bn but fell by 7% on a like-for-like basis. These six months are the quieter half-year although DSG has previously managed to produce a reasonable profit. This time it sunk to a pre-tax loss of £61m after absorbing £31m of restructuring costs.
Cash is a bigger concern than profits at the moment. DSG has previously enjoyed a net cash position but now it has slipped into net debt of £200m. Included in this figure is a £300m bond which runs to November 2012. It has also drawn down £100m of a £400m revolving credit facility which expires in October 2011. Up to £300m of this facility could be drawn down over the peak Christmas period.
So there is a little leeway on the cash front but not much. The Christmas trading period will be key and DSG didn’t make any predictions for this or give any indication as to how trading has gone since its half year ended on 18 October.
Unsurprisingly there is no dividend and there won’t be one with the final results either. Last year DSG paid out a total of £160m in dividends but it needs every penny at the moment. It’s continuing to cut costs and capital expenditure while also fine tuning format changes to see what adds the most value.
On the subject of credit insurers, Browett was quite dismissive. Some retailers have been forced to pay for goods upfront as their insurance cover has been withdrawn. DSG shares have suffered in recent weeks due to fears they could caught by this. However, DSG says its trading terms haven’t been affected so far. Indeed, Browett believes that the insurers have a far worse credit position than DSG.
Will the shares bounce back?
With DSG shares at 14p, its market value is just £250m. When you consider that sales could be hitting £10bn in a few years’ time and that profit margins were 3%-5% not that long ago, there is massive upside potential for these shares.
I haven’t looked at this company for a while but the sliding share price over the last year has obscured a significant turnaround in its prospects. Not everyone is convinced though and there are of course doubts over whether it could survive a really prolonged downturn, but Browett looks like a man to back when the recovery comes.
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