Dixons Carphone Analysis - Case Study Example

Dixons Carphone is a public limited company dealing in electrical and telecommunications retailing and services. The company was formed in August 2013 in a merger involving Carphone Warehouse Group and Dixons Retail. The company remains a constituent of FTSE 250 index and listing on London Stock Exchange. It operates in the United Kingdom through PC World, Currys, Dixons Travel, Carphone Warehouse and Team Knowhow. It has similar brands in the Republic of Ireland. Its operations in the Nordic region involve the Elkjop, Gigantti, Elgiganten, and Lefdal (Dixons Carphone, 2017). Its governance features Sebastian James from Dixons Retail as its chief executive and Ian Livingstone of Car Warehouse as the chairman. The duo oversees the company governance whose operations feature 2,139 stores and 43,000 employees (Dixons, 2017). This paper features a case study analysis on financial performance, SWOT and corporate structure.

Dixons Carphone SWOT Analysis

Being among the market leaders in the electrical and telecommunication industry positions Dixons Carphone Plc thrives strongly within the market. The company illustrates a successful record on an integration of complementary firms to create a reliable supply chain and portfolio (Dixons, 2015). Secondly, its use of go-to-market strategies across its offerings results in high-level customer satisfaction. It translates into strong brand equity. The merger brought more resources that the company commits to sustain a strong distribution network. Additionally, the company has the strong brand portfolio with expansion in new product categories (Dixons, 2016). Its strong dealer community allows it promote its products hence the superb performance in new markets as it expands in the mainland Europe.

The company suffers several weaknesses owing to its management approach. Its marketing approach leaves the brands with a lot to desire on the promotion. Although its product sales are a success, lack of unique selling proposition and defined ranks translates to attacks from competitors. Secondly, the absence of refined product demand forecasts leads to higher chances of missed opportunities than rivals. It translates to retaining higher in-house and in-channel inventory levels (Dixons, 2014). The higher spending at Dixons Carphone Plc lacks a competitive element through innovation. This falls below the fastest growing brands with the company positioning itself as the mature firm whose products emerge from tested market features. Its product range features multiple gaps with lack of wider choice (Dixons, 2017). Their presence presents existing and new competitors a zone to gain the foothold in the market it considers.

The presence of stable free cash flow is an opportunity the retailer could exploit by investing in the adjacent product segments. The emphasis of the green drive from the government expands procurement opportunities for its products through federal, state and municipal government contractors (Dixons, 2016). The steady growth in European economy stimulates market development effect capable or diluting the advantages of rivals (Dixons, 2017). Such presents opportunities for Dixons Carphone to optimize its competitors and surpass competitors. The decreasing transportation costs through price wars amongst shipping lines will reduce the cost hence boosting the overall profitability. Government agreements present opportunities to embrace them as emerging market through contractual agreements (Dixons, 2016).

Dixons Carphone faces multiple threats chief among them being inflationary cost prices following the exit of the United Kingdom from the European Union. The decline of the pound will expose it to declining revenue besides the difficulty of hiring expertise as the UK cuts off from the mainland Europe. Operating in multiple national markets exposes it to fluctuating currency and disruptions from volatile political climate. The increased presence of imitation and lower quality products threatens the company survival in the low-income markets (Dixons, 2017). The seasonal nature of highly profitable products may affect the companys performance. Lastly, growing strengths in local distributors pose a threat to its future operations when competitors offer higher margins.

Financial Analysis

The merger between Dixons Retail and Carphone in 2014 resulted in improved performance replicated in the subsequent accounting period. Its revenue improved by 310.91% from 2,576 million in 2015 to 10,585 million in 2017. The gain matches the 251.96% growth in gross profit from 664 million in 2014 to 2,337 million in 2017. The use of tight cost controls has allowed the company to grow its operating income by 450% from 76 million in 2014 to 418 million in 2017. The gain reflects the 514.58% increment in the net income from 48 million in 2014 to 295 million in 2017 (Dixons, 2017). However, the high growth in the cost of revenue translates to decline from 31.47 in 2016 to 8.60 in 2017. This emerges of the inflationary trend of the cost that would only worsen with the UK exit from EU.

The revenue growth reinforces the companys financial stability, liquidity, and solvency. Firstly, the company indicates increasing capacity to meet its interest expense. This is demonstrated by an improving interest coverage ratio from 2.82 times in 2014, 6.19 in 2016 and 12.29 in 2017. The return on equity has equally improved with rising revenue from 6.23 in 2014 to 9.97 in 2017. A similar pattern occurs in return on invested capital where it gains from 5.54 in 2014 to 9.04 in 2017. The total assets turnover shows improvement between 2014 and 2016 where the company realized 3.76 and 4.22 respectively. However, the company failed to replicate that in 2017 to realize 1.53 total assets turnover was owing to the 200% growth in total assets. The company struggled to efficiently utilize them into generating revenue with only 8% growth in revenue realized from 9,738 million in 2016 to 10,585 million in 2017 (Dixons, 2016;2017). The company challenges appear in the utilization of its fixed assets, whose turnover declined from 9.85 times attained in the year 2016 to 2.3 in 2017. It emerges from the sharp increase of fixed assets by 715% from 456 million to 4,607 million in 2017.

The company liquidity in 2017 declined as the company relied upon short-term liabilities to finance its working capital requirements. This is revealed by its current ratio where the five times coverage of its current liabilities in 2014 declined to 1.38 in 2016 to 0.93 in 2017. The sharp increase in its liabilities by 10279% from 24 million in 2014 to 2,491 million in 2017 outgunned 1835% growth in current assets from 120 million in 2014 to 2,322 million in 2017(Dixons, 2014;2016;2017). The dependency on borrowed funds has eroded its liquidity where in 2017 it was unable to pay off its short-term obligations from its current assets. The reliance on borrowed funds to fund its expansion leaves the company on a declined caution against bankruptcy. The company debt-to-equity ratio declined from 0.06 in 2014 to 1.423 in 2017. It shows the increased borrowings have left equity holders with no claim in 2017 where debt rose by 185% to 4,069 million from 1,427 million in 2016.

In conclusion, the company should contain its rising debt levels by cutting on borrowed funds to finance its expansion objectives. This would necessitate the optimized use of the existing resources such as the increased fixed assets that the company failed to use to raise more revenue efficiently. The company should eliminate gaps in its product offering since such presents opportunities for competitors to gain the foot in its existing markets. Lastly, the company should translate the huge spending in research and development to realize an innovative output. Such would help the company overcome the challenge of appearing a mature firm was owing to its thin portfolio of common products.

References

Dixons Carphone. (2017). Dixons Carphone Annual Reports 2017.

Dixons Carphone. (2016). Dixons Carphone Annual Reports 2016.

Dixons Carphone. (2014). Dixons Carphone Annual Reports 2014.