More on DSG International
DSG: 2005/6 results
Most of the key numbers in the results were no surprise. The fall in sales at The Link has already been disclosed in the first half results and the trading statement. We had already inferred the lower margins at PC World from the sales growth and market trends.
DSG International’s total sales growth of 8% (excluding The Link) was largely due to a fairly good second half at Dixons and Curry’s and good performance in continental Europe.
The market has largely reacted negatively to the fall in profits, but if we exclude The Link, amortisation, and exceptionals, the underlying fall in operating profit of 2.2% is not that disappointing in current conditions. What does worry us are the long term prospects for DSG.
A lot has been done in the last few months to deal with problems in the group’s weaker businesses - the rebranding of Dixons shops to Currys and the sale of a 60% stake in The Link to O2 in particular. However the changes betray as many weaknesses as they address, and building the Dixons branded on-line business will be difficult.
The withdrawal of the Dixons brand from the high street seems to us to be an admission of the weakness of this brand - its reputation for poor service and aggressive sales of extended warranties in particular. Unless the underlying problems are addresses we see no reason why the rebranded operation will do any better.
As for the continuing Dixons branded operation, we do not believe that an on-line retailer can match the margins that Dixons achieved on the high street. For the Dixons on-line operation to be successful it needs to match the prices of other on-line retailers. This means that even if DSG maintains its high market share, more low margin on-line sales will still mean lower profits.
Given that DSG has yet to prove that its on-line operations will be successful, this is a poor outlook. Given its current poor performance we do not see that it is worth the prospective PE of around 15× - although the 4.5% yield is not unreasonable.
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