Business Watch: Carphone duality lives on after TalkTalk


Carphone Warehouse may have demerged its Talk Talk internet business last year but the retailer’s latest results statement still looks like a tale of two companies

That’s because the European business had a tough-looking Christmas in comparison to the US operations, where growth is soaring ahead.

A stunning performance with Best Buy Mobile,  its joint venture with US electronics giant Best Buy, helped Carphone chief executive Roger Taylor deliver a pleasant surprise for the City – he expects Carphone to reap as much as £100 million this financial year from its shares of Best Buy Mobile US’s profits as opposed to as-little-as £85 million, his previous forecast.

But first to Europe, where like-for-like connections were down 7.1 per cent in the December quarter, worse than the previous fall of 3.3 per cent. Similarly, like-for-like revenue growth fell from 1.6 per cent to just 0.7 per cent.

It’s a far cry from the retailer’s days of heady growth but it’s also important to unpick the trends. Prepay sales are getting worse while contract sales are strengthening. “The main reason for the worsening in the quarter is likely to be the greater weight of prepay in the Christmas period, with the underlying trend much steadier,” wrote analysts at industry watcher Enders Analysis.

Taylor put the prepay weakness down to customers holding back from upgrades due to a lack of compelling smartphone handsets in the right price range.

But, as Enders pointed out, it’s likely that there were other factors at work. In the depths of the recession last Christmas, Carphone did particularly well as more customers dumped contracts for prepay as they cut back on calls. Carphone’s rivals also had some cashflow issues at the time “and some of this has likely unwound”, said Enders.

It’s also worth noting that punters who still don’t want to go on contract are less likely to fork out hundreds of pounds for a fancy smartphone when their mates on contracts can get
them for free.

Thankfully for Taylor, contract sales are more than offsetting prepay weakness, helped by the continuing strength of contract smartphones sales. So he is still generating some like-for-like revenue gains.

The UK was among the star performers in that regard, with like-for-like revenue growth at 2.3 per cent, whereas Spain saw a decline of some five per cent. Analysts noted that Carphone’s UK business has bigger stores, which tend to sell more contracts and are therefore better placed to cash in on smartphone growth and to avoid prepay weakness.

‘Big box’ performance
Which leads us – before we go across the pond to the US – to Carphone’s really big UK stores, the Best Buy ‘big box’ out of town outlets.

On this subject Taylor was somewhat dissatisfactory. All we really know is that six of the stores are now open; there was scant detailson how they are actually trading.

Here’s what he said: “The performance of our first six ‘big box’ stores in their launch year has reaffirmed our belief in the substantial opportunity that exists within the consumer electronics market for our innovative, deep service-based proposition.

“The online offering launched before Christmas has seen a strong performance to date, particularly in home appliances, and is generating a high number of customers visiting the interactive site to get information and inspiration about technology before buying. Our planned store roll-out continues and we are broadening our online range throughout the coming year.”

The ‘Wireless World’ store format also continued to perform well, said Taylor, who currently has 73 such stores and says he remains on course to reach his target of 100 by March 2011.

Huge US growth
But it was in the US that things really took off, thanks in part to some heavy marketing and promotional activity. Connections were up a remarkable 33.6 per cent at 2.2 million, an increase on already-impressive growth of 22 per cent in the previous quarter.

And growth isn’t just strong in the mobile concessions within Best Buy stores, it’s also getting a fillip from the increasing number of standalone Best Buy Mobile stores, many of them in malls and shopping centres.

There are more than 1,000 concessions stores but just 158 standalone stores. As a sign of the pace of expansion, Best Buy Mobile plans to open another 17 standalone stores before the end of March.

The company has identified 500 of what it calls “top class” sites and another 1,000 “grade A” malls to target. The growth possibilities are so great because the independent dealer model has never really taken off in the US – people have tended to buy direct from network operators’ own stores.

Enders, for one, is very bullish: “Best Buy Mobile’s current market share is only around five per cent, and we see no reason why it should not rise to around 10-20 per cent as more standalone stores are rolled out,” it wrote.

As a result of the strong US performance, Carphone – whose shares have performed very strongly since the demerger from Talk Talk last year – expects group full-year earnings to hit the top of its guidance range.

But, before we go too excited, it is worth noting that Taylor stressed in his closely-watched outlook statement that he “remains cautious on the economic environment” across the company’s European heartland.

So it may be that Carphone remains a story of two companies for some time to come.