10 out of 10 for effort at Dixons

Back to basics #2

A shop assistant on the cover of DSG International‘s annual report asks:

Hello, what brings you to our store today?

She might well ask, because I can’t remember the last time I went into a Currys or PC World and bought anything. Actually, I think I can. It was Microsoft Office 2003, seven years ago when Currys.digital was called Dixons. The company has a reputation for poor service, expensive extended warranties, and being a showroom for shoppers who subsequently buy more cheaply on the Internet.

It wasn’t always that way, I remember wandering into Dixons as a penniless teenager just to be amazed. It was where you went to see the latest gadgets, and buy them, the interface between customers with increasing amounts of leisure time and exotic new cameras, hi-fi’s and computers.

Now the shares are at bargain levels, costing just four times average earnings over the last ten years, and DSGi (DSGI), its chief executive a Tesco alumnus, has instituted an M&S style back-to-basics reform programme, perhaps it’s time to give Dixons a break. It’s even re-rebranding its corporate identity. DSG International will soon be called Dixons Retail, although its retail outlets remain Currys.digital.

Maybe Dixons has learned a lesson. On page 1 of its annual report a Swedish shop assistant says:

Customer service is at the heart of everything we do. We want to help you choose the right product for your needs and get the most out of it.

Her nationality is significant because Dixon’s Nordic stores earned more profit than it’s UK and Ireland stores in 2010 despite achieving only half the turnover, and the company says it’s rolling out staff training programmes developed there across the rest of Europe.

It needs to, its third biggest division, the rest of Europe, is still loss-making and its fourth, e-commerce, comprising the dixons.co.uk and pixmania.com websites, contributed just 7% of total profit.

Still, the first dozen or so pages of the annual report address customers, not investors, and since winning back customers is more likely to be in the long-term interest of shareholders than pandering to our craven, short-term longings, I’m warming to the new Dixons and making a mental note to visit a Currys or PC World next time I’m near one.

My interest is, as usual, initially statistical. The shares are not only cheap, but in 2010 the company returned to profitability without plunging any further into debt. The only thing stopping it get a perfect nine out of nine using Piotroski‘s F_Score test for financial strength was a placing and rights issue last year, to raise the funds it required to refurbish its stores and retrain its staff.

A rights issue is a sign of weakness, the company could not afford to fund change without going to shareholders, but it’s the only one identified by the F_Score, which seems to validate Dixons’ story, that it’s turning around.

In fact, the "Renewal and Transformation" theme runs right through the report. In the UK, for example, back-office functions like logistics, buying, and merchandising are being consolidated across Dixons’ multiple brands. It’s very encouraging that not only is Dixons talking the talk, but it appears to be producing results.

The big concern is, despite everything the company’s doing, future profits might be forever muted because Dixons is in a much more competitive environment than it was. It has a long history of leading technological change, ever since 1937 when founder Charles Kalms named his Southend photographic studio ‘Dixons’ because there was only room for six letters on the front, right up to the sale of Freeserve in 2001, the iconic internet service provider it launched at the height of the dot.com boom.

The turn of the century was the high point for shareholders. Since then the company has lost its position between the customer and gadgets because gadgets are ubiquitous, and can be bought anywhere. The shares then were more than ten times the price they are now and I can’t help thinking Dixon’s years of dominance are over. It’s hardly an original thought, especially now Best Buy, the giant US chain is moving into the UK.

Meanwhile there is the usual weaknesses facing long-established retailers, particularly one that has been through a difficult period. The company’s defined benefit pension scheme is in deficit, it has a modest amount of debt which it is seeking to refinance and is committed to providing services to customers under support agreements, all of which contribute to its liabilities. Dixon’s ratio of shareholders’ equity to total assets (yellow line), bolstered by the recent rights issue, is an unimpressive 23%. Sixty-seven per-cent of its funding is debt of one kind or another, even before considering its commitments to operating leases on its properties, an off-balance-sheet item that dwarfs its conventional borrowing.

While the company’s profitable it looks strong. I’m not at all sure that would be true, if the recession returned.

Though I give Dixons a provisional ten out of ten for effort, I’m not going to add it to the Thrifty 30 portfolio. I prefer quirky Argos, which admittedly comes saddled with Homebase. It has no debt, seems to have weathered the recession better, and is buying back shares, rather than trying to expand its way to growth.

The only thing stopping me adding Argos’ parent Home Retail to the portfolio is cash. I want to save some in case the market lurches downwards again.

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Limits of arbitrage

Stagecoach ceo Brian Souter is redeploying his dividends into profitable companies that need their balance sheets repaired.

Investors oppose new guidelines that require the annual re-election of board members because it will encourage a short-term culture.

Adair Turner summaries the new conventional wisdom, regulators, governments, and risk managers gravitated to a vulgar version of equilibrium theory.

Here’s another theory: A self-reinforcing property bubble was responsible for the financial crisis.

You really would be better off copying Buffett says a paper by John Hughes, Jing Liu and Mingshan Zhang.

Eugene Fama and Kenneth French disagree on the limits of arbitrage, or you might say, the efficiency of the market.

Here’s a synopsis [pdf] of When Money Dies, the ‘definitive text’ on hyperinflation in Weimar Germany by Adam Fergusson and rediscovered by Warren Buffett.