New-look Dixons delivers improvement

Anyone expecting a dramatic swing back to profitability at Dixons Retail - the electrical retailer known for a while as DSG - will have been sorely disappointed. The group may be making progress, but it still made a loss of £7.9m in the first six months of the year, albeit an improvement on the £17.6m it lost in the same period a year earlier.

That progress is largely the result of its ongoing store upgrade programme, which has so far seen 250 stores "transformed", and deep cost-cutting programmes. That meant underlying operating profits climbed 46 per cent to £8.2m, with pre-tax losses the result of hefty net finance costs of £16m. At least net debt was flat at £215m, despite higher capital expenditure of £47m resulting from the store renewal programme.

Trading is holding steady, too, with group like-for-like sales up 1 per cent. That included a 2 per cent underlying improvement in the UK and Ireland, where a successful World Cup TV promotion and the launch of the Apple iPad offset tough trading in Ireland and the entry of competitor Best Buy. Dixons' Nordic business, Elkjop, also reported a healthy sales increase, lifting underlying operating profits by 15 per cent to £45m. However, losses widened in its other overseas units, due to continuing economic troubles in Greece and Spain.More worrying, though, was the swing to a small loss in its e-commerce business, where overall sales slipped 4 per cent.

Royal Bank of Scotland says...

Buy. We estimate that, over the three years to 2013, scaling back the portfolio to around 500 stores ought to generate lease and staff cost savings of approximately £70m. The other key message was that the group remains on target to deliver £50m of annual cost savings across the business in the current financial year as part of a wider £150m cost-saving programme over the next three years, which management expect to double group operating margin to between 3 and 4 per cent.

Shore Capital says...

Buy. It is encouraging to see that the store "Renewal and Transformation" programme continues to deliver gross profit uplifts of 20 per cent versus the unformatted stores. The company now has 62 Megastores across all its markets - including 25 in the UK and 19 in the Nordics - and is continuing apace with the transformation of its stores. The reformatted stores are delivering underlying sales improvement of 0.6 per cent in their second year of operations, indicating that the uplifts are permanent and not a one-off following the investment. Expect pre-tax profit of £125.1m and EPS of 2.2p for the year to April 2011.