Dixons blames the Government for sliding sales

Disaster for Dixons, as UK sales tumble 11%. It's blaming the VAT hike and government cuts - but its problems may run deeper.

by Elizabeth Anderson
Last Updated: 06 Nov 2012
Here’s another stark illustration of how the consumer spending slowdown is putting the squeeze on retailers: electronics retailer Dixons said today that its sales slumped in the first quarter of this year, with like-for-likes down 7% overall and 11% in the UK & Ireland. Worse still, it had to issue a profit warning after admitting that profits for the year to April would be around £85m, well short of the £105m the City was expecting. So it's no wonder its shares have lost more than 10% of their value this morning....

So what's gone wrong? Well, Dixons is pointing the finger well and truly at the Government: it reckons that consumer confidence has plummeted since the Coalition hiked VAT and started enforcing its programme of cuts, as a result of which people are buying fewer electrical goods. But it clearly has problems of its own: the group, which also owns Currys and PC World, reckons that net debt at the end of the year will be around £250m. That's a lot of leverage, given the pressure on its bottom line, and means it's going to have to focus on generating enough cash to service that debt pile.

Cash generation's a big part of CEO John Brewett's four-part plan to save Dixons' bacon and keep his 'Renewal and Transformation' plan on track. He'll also be focusing on the best-performing markets like Scandinavia, while pulling out of struggling markets like Spain; closing its 34 stores there will apparently reduce its losses by £5m a year for the next two years. It will also revamp another 55-60 stores, which it reckons tends to lead to higher profits. And it plans to find another £50m of cost savings. So this is some serious medicine we're talking about here.

Of course, Dixons isn’t the only retailer struggling to entice customers.  Figures from the Office for National Statistics show Brits are tightening their belts when it comes to high street spending. Sales fell by 0.8% in February, while even good performers like Sainsbury's and Next have admitted that it's getting harder to keep the tills ringing. And with inflation at 4.4%, wage levels stagnant and more cuts looming, it's hardly surprising that consumers are reluctant to splash the cash.  

But Dixons' problems could run deeper than a (relatively) short-lived consumer confidence crisis. More and more of us are buying our electrical goods online, while even in the megastore format it faces tough competition from the like of Comet and Best Buy - all of which is depressing margins further. So Brewett has a real fight on his hands to turn this situation around.

Finance Retail

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