LONDON (Reuters Breakingviews) - Dixons Carphone’s double whammy is a lesson in the dangers of misplaced confidence in forecasting. The UK electronics retailer’s shares fell 30 percent on Thursday after it said profit for the year would be much lower than anticipated. But the main culprits for the lower guidance were known risks.
The company makes most of its money selling electrical goods in Britain and Nordic countries. Its mobile-phone arm, however, is the chief source of the profit shock. New European Union rules that prevent networks charging extra when customers use their phone on the continent and a Brexit-induced slowdown in consumer spending mean Dixons’ profit before tax will be in the range of 360-440 million pounds this financial year. Analysts polled by Reuters had expected the figure to be almost 500 million pounds.
The 30 percent drop in share prices might seem overdone. The 820 million pounds that was wiped off Dixons’ market capitalisation was equivalent to 120 million pounds of lost annual earnings if Dixons’ seven-times price-earnings multiple is used. But the midpoint of the new guidance implies lost earnings of only around four-fifths that amount relative to analysts’ forecasts, assuming the reduction drops straight through to the bottom line.
Reduced confidence in the company – and analysts’ – ability to predict future profits may explain the difference, especially since profit guidance was cut for reasons that were hardly a bolt from the blue.
Take the changes to EU roaming charges, previously a source of extra cash. Dixons books revenue for rolling mobile-phone contracts when the sale is made, but actual cash payments are staggered over the life of a contract and vary according to extra charges customers incur. Network operators’ recent results were replete with references to the hit from new rules, so it should have come as no surprise that the company was affected.
And there’s been no dearth of evidence that the Brexit-related slide in sterling is pushing up inflation and squeezing consumer spending. Little wonder then that a company so heavily dependent on sales of big-ticket, discretionary imports is suffering. Granted, trends are easier to spot with hindsight. But Dixons’ share price is testament to how radically analysts underestimated the effects of a couple of very obvious ones. Investors who put too much faith in forecasts may pay a heavy price.
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