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Dixons Carphone cuts costs just in time for coronavirus

17th March, 15:46

Bricks-and-mortar retailers can't catch a break. Consumers already were switching online. Coronavirus quarantines are forcing them there faster. Amazon plans to recruit another 100,000 staff and raise their wages to cope with demand. Physical retailers such as Halfords and Mountain Warehouse meanwhile plan job cuts. Laura Ashley has gone bust.

That makes Dixons Carphone's decision, which was in the works before coronavirus, to close its standalone UK Carphone Warehouse stores badly timed in many ways but well timed in terms of shoring up the business.

All 531 stores will bring down the blue shutters for good from April 3, assuming the government doesn't declare a retail lockdown before then. The closures will cost nearly 2,900 employees their jobs. Dixons bills its £28m redundancy package as generous -- that is 75 per cent above its statutory obligations. Nonetheless, announcing mass job losses just as the UK faces recession is uncomfortable.

Those optics aside, the decision to close the Carphone stores on the high street is necessary, even inevitable. The UK mobile division is on course to lose £90m in the year to April. Sales in the unit are declining. Expensive handsets and an absence of innovation that makes upgrading unattractive for consumers mean the trend is unlikely to change. Small stores have shortish leases, limiting the cost of a high street exit. Carphone Warehouse will continue inside Currys PC World.

Dixons Carphone chief executive Alex Baldock has been preparing for the online shift. He has built capacity and improved tech and stock management. The company says it is taking steps to ensure it can handle a coronavirus surge in online orders as consumers start to stay at home.

It may struggle to cope if consumers change their shopping habits more permanently, however. Dixons Carphone depends on its big-box stores and sales staff to create customer loyalty, even if shoppers subsequently complete purchases online.

The company has already adopted price-matching. Margins will suffer as price competition becomes more fierce. It is harder too to upsell products such as credit and top-up warranties via the internet, though Mr Baldock says the gap is closing. A recession-induced drop in demand will hurt sales wherever they are made.

Shutting Carphone Warehouse stores will make Dixons Carphone's immediate future as a business brighter (if not for those put out of a job). But the long-term outlook for electrical retailers in the age of Amazon remains overcast.

Betting business William Hill looks like the donkey in the race, whatever lifelines chancellor Rishi Sunak throws at UK companies to help them through the coronavirus shock.

This week, the company outlined the cost of the suspension of sports fixtures from the Cheltenham Gold Cup to Euro 2020. It said postponing races and matches, closing casinos in the US and shutting its high-street betting shops for a month would cost up to £110m of earnings before tax and other negatives. That equates to about 40 per cent of analysts' forecasts for 2020.

More than half of Wm Hill's revenues and 60-or-so per cent of earnings before interest, tax, depreciation and amortisation comes from sports betting. Every month its shops are shut costs it an extra £25m to £30m of ebitda.

Coronavirus is kicking a donkey that is already down. The group made a £37m pre-tax loss last year after the regulatory clampdown on fixed-odds betting forced it to restructure and shut down 713 of its high-street booths.

Other gambling groups, Flutter and GVC, are also being bashed by the sporting fixtures freeze. Sports betting accounts for 45 per cent of GVC revenues and about four-fifths of Flutter's.

However, William Hill is burdened by its legacy estate of shops and £535m of debt taken on to fund its expansion in the US. Before this week's profit warning, net debt stood at about 2.4 times ebitda. Every ebitda cut edges it closer to its loan covenants. The company has £425m undrawn credit facilities and says it is working with its lenders to "enhance its liquidity position". Tellingly, though, the group has frozen its dividend to save it about £45m this year.

If the disruption from Covid-19 is short-lived, shares at 62p -- off 70 per cent in a month -- may look like an option on consolidation in the sector and the group's US expansion paying off. But on Tuesday, British horseracing was suspended until the end of April. They say the house always wins. But in Wm Hill's case, don't bet on it.

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