While Dixons Carphone’s (LSE: DC) share price has remained broadly resilient in recent months, I reckon the electricals mammoth could be on the cusp of a sharp correction if UK retail data worsens.
This week was the turn of the British Retail Consortium (BRC) to underline the fragile condition of the high street. The body advised that like-for-like retail sales fell 0.4% year-on-year during May, with non-food retailers enduring their worst month since May 2011.
It comes as no surprise that discretionary spending is coming under the cosh as inflation steadily picks up (the CPI gauge hit a three-and-a-half-year peak of 2.7% in April). Indeed, BRC head of retail Paul Martin commented that “after the surge in retail sales last month — the by-product of this year’s relatively late Easter — retailers have been brought back down to earth with a thump.”
“With inflation continuing to rise and wage growth stagnating, consumers are starting to feel the pinch,” he added.
A world of pain?
The difficult trading environment was this week underlined by Dixons Carphone’s rival AO World, whose share price plummeted to 12-month lows after the release of a worrying trading update.
The Bolton business advised that “the challenging trading environment we saw in the UK in the second half of last year has continued into the start of our new financial year,” a backdrop which — combined with the impact of strong comparatives last year — should see sales growth “slow significantly” during the first fiscal quarter.
Dixons Carphone has so far managed to avoid a horrendous sales slump despite the fall in consumer confidence following last June’s EU referendum. But there are still causes for concern — indeed, a 2% rise in domestic like-for-like sales between January-April indicates that the levée may be weakening (underlying revenues in the UK and Ireland rose 6% in the prior two quarters).
The City currently expects Dixons Carphone to follow a 6% earnings advance in the year to April 2017 with a further 5% rise in the current year, leaving the business dealing on a ‘cheap’ forward P/E ratio of 9.8 times.
Still, in my opinion this is not low enough given the strong possibility of hefty downgrades as shopper spending power comes under increasing strain and as supplier costs mount. I reckon investors should give Dixons Carphone short shrift right now.
I am certainly more optimistic over the earnings prospects of pipe manufacturer Tricorn Group (LSE: TCN), particularly after its stunning full-year financials release.
Tricorn was last 5% higher from Tuesday’s close after announcing that revenues had risen 3% in the 12 months to March 2017, to £18.5m, a result that powered “profits significantly ahead of market expectations.” The Malvern company snapped from pre-tax losses of £273m last year to profits of £230m in the period just passed.
Like Dixons Carphone, the City also expects Tricorn to keep earnings rattling higher and have chalked-in a 164% rise in the year to March 2018.
And with the business witnessing a steady build in customer demand (Tricorn noted that second half revenue was up 8% on the first six months, and 21.5% from the same period last year), I reckon current forecasts could be in line for meaty upgrades, particularly given that the company still trades on an unassuming forward P/E ratio of 10.8 times
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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.