Ratings agency urges caution on Phones 4U expansion

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Moody’s urges caution on expansion, but says business remains resilient despite challenging conditions

Rating agency Moody’s has warned that Phones 4U’s “aggressive” store expansion programme poses a risk to the retailer’s financial performance.

The agency said in a report that the retailer increased its store count by 84 in the 2011 fiscal year, up from an addition of 55 stores in 2010.

Half of the new stores opened in 2011 were concessions in the Dixons chain of stores.

Moody’s estimates that more than 85 per cent of the retailer’s sales come from its retail stores.

However, the rapid expansion had contributed to an increased cost of sales and reduced margins at the retailer, said the report.

Moody’s said it expects Phones 4U to to reduce its store count in coming years, or even within the next twelve months, in response to declining margins.

The report said: “While we have a constructive view of the company’s growth strategy, we note that it is not without risk.

“The net effect of the increase in operating leverage that comes with each new store has been a reduction in adjusted EBITDA and EBIT margins – a trend that is typical in highly competitive markets where revenue growth comes through increases in volume, not price.

“In our opinion, this trend of declining margins may lead Phones 4u to undertake a rationalisation of store fronts in the coming years, or even quarters.”

Despite urging caution over Phones 4U’s rate of expansion,  the agency said the outlook for the firm’s B2 rating was “stable” despite challenging economic conditions.

The report said: “The B2 corporate family rating (CFR) is reflective of the continued resilience displayed by the company’s business model, as demonstrated by solid operating performance and cash flow generation despite the challenging trading environment in the UK retail sector.”

Moody’s highlighted the Phones 4U’s strong presence in the 16 to 24 year-old market, which continues to make the retailer “an attractive distribution channel for mobile network operators (MNOs) and handset manufacturers”.

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