Wrong Carphone numbers

Alex Brummer12 April 2012

CHARLES Dunstone and the Carphone Warehouse bandwagon have come to a shuddering halt. The combination of profits warning, overstretch in Europe and pressure on margins is scaring the market to death.

Investors who bought into Carphone, 200p at flotation, must be feeling bitter now that the shares stand at 93 1/4p, down 19% in the latest trading session. Some must be wishing that they had put their cash elsewhere in the defensive and high-flying retail sector.

That is not to say, however, that Carphone is a hopeless, flash-in-the-pan business, like so many that were foisted on an unsuspecting public during the telecoms bubble.

No-one likes a company that makes a profits warning. Nevertheless, a 10% drop in profits for a technology retailer in the present circumstances does not represent disaster. When one considers how far mobile sales fell off a cliff during the holiday season, with the market down 40 to 50%, Carphone's sales loss of 6% does not look that dramatic. The next big surge in mobile sales will be when next generation services (GPRS) come through.

Experience from markets such as Tokyo, where third-generation phone services are already in use, suggests an appetite for new services. Moreover, Carphone is making sure it is not totally dependent on a pre-paid retail revenue stream, and is working hard to gain new and recurring sources of income, with insurance and telecoms services improving strongly. But these are dwarfed by the main retail operations.

Carphone was particularly hammered in the past 13 weeks in wholesale and on the Continent. The decision to push into Europe was too ambitious. Many more mature companies have come unstuck there because of management overstretch. That is precisely what seems to have happened to Carphone in Germany, Belgium and the Netherlands. Big battalion shareholders will not like the missed targets and the apparent management failings in Europe.

Dunstone as the biggest shareholder (with 38% of the stock), and chairman and chief executive, can expect a tough ride when he next meets his institutional investors. They are no doubt comforted by the presence on the board of Sir Brian Pitman, one of Britain's sharpest business minds.

But it is time for pressure to be exerted for changes, with Dunstone making space at the top for an independent chairman better acquainted with running the board of a £770m company and ensuring the ambitions of youth do not get in the way of sound management.

Vandevelde's share
THERE will be a spring in the step of Marks & Spencer's loyal band of 350,000 small shareholders today. The decision to reward them with a 70p per share capital repayment will be welcome after the fallow years, which saw the shares plunge from their 1997 peak of 673p to 163p last year.

None, of course, will better rewarded as a result of the capital payout than chairman Luc Vandevelde, who stands to collect an additional £565,000 in addition to his £2m pay and bonuses.

Critics will argue that M&S would be far better off investing the £2bn in the business. The reality is that in a group with such a strong cash flow, the money is surplus to requirements.

It can carry on with its large-scale store refurbishments and improving its warehousing without needing to dip deeply into its reserves.

The danger of holding too much capital is that it is spent unwisely. This, it could be argued, was one of the mistakes made by a previous management when it bought Brooks Brothers in the US.

Better the shareholders have the money back, than let the current generation of M&S managers squander it on ill- conceived expansion.

Sterling challenge
THERE are few direct clues to the next moves in interest rates from the minutes of the Monetary Policy Committee.

It was impressed at its January session by better data from the United States, with the latest lead economic indicators from there confirming a better trend.

Here at home there are good reasons for the Bank to hold rates, if not raise them.

The consumer credit boom may be easing, but Governor Sir Eddie George would not want to give it a further boost by cutting rates now.

Some time, however, policymakers at the Treasury and the Bank are going to have to face up to the fact that despite the lowest interest rates in 40 years, the pound's exchange rate is too high and our exporters are in desperate straits.

This is reflected in the latest trade figures with the deficit outside the EU deficit surging to £2.4bn in December.

That is the biggest challenge ahead.

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