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Carphone ponders next move for Best Buy UK

By This Is Money
Updated: 10:37 EDT, 14 June 2011

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Carphone Warehouse said it is still 'evaluating the next steps' for the future of Best Buy UK after the operation's losses ballooned in the past year.

New service model: Customers at Best Buy in Thurrock, Essex

The business, which operates 10 'Big Box' stores, reported an underlying loss of £62m compared to £21m the previous year.

Carphone launched the first store last year as part of a joint venture with US retailer Best Buy, and has invested heavily in marketing and promotional activity in a bid to get the brand off the ground.

The company's core business, including its European and US mobile phone retail chains, has continued to trade well and it reported a 67% increase in underlying earnings to £63.3m for the year to March 31.

Revenue was £5.6bn, up from £5.5bn. And Carphone announced an inaugural dividend of 5p per share.

It stock was up 2.75p at 401.25p in trading today.

Carphone originally intended to open up to 200 Big Box stores in Europe by 2013, but this goal was reduced to 100. There is currently one store in the pipeline.

It has seen the UK consumer electronics market hit by the spending squeeze, and other retailers in the sector are also struggling, including Dixons Retail, Comet and Argos.

The possibility of closing the Best Buy UK business has been flagged by the City. If it opens no more stores, analysts reportedly believe the company could cut up to £20m from the division's loss this year.

Best Buy currently has Big Box stores in Aintree, Bristol, Croydon, Derby, Hayes, Hedge End, Merry Hill, Nottingham, Rotherham and Thurrock.

However, some have suggested Carphone could be waiting to see what rival Kesa Electricals does with its Comet stores - hinting at a possible acquisition.

Best Buy US invested £1.1bn in Carphone during 2008 as the first step to a European rollout. The Minnesota-based retailer, with 1,300 stores worldwide, wanted to shake up the UK market with its model of expert customer service.

But the business still has a disproportionate cost base as its huge warehouses and marketing spend outweigh revenues.

Carphone's European mobile phone retail arm saw 18% growth in underlying earnings to £134.6m as demand for smartphones, such as Apple's iPhone and Research In Motion's Blackberry, drives sales.

Best Buy Mobile in the US had an 'outstanding'year, Carphone said, boosting Best Buy Europe's share of the operation's profits by 111% to £97.9m.

Looking ahead, Carphone expects its Best Buy Europe operations, which include the mobile retail business, to post like-for-like sales within a range of minus 2% to 2% in the year to March 2012.

View from the City

Broker Arden Partners commented: 'Today's finals and strategy update was meant to be “D-Day” for the heavily loss-making Best Buy UK “big box” business and the Sunday press had softened the market up for a freezing of further store expansion, but, slightly pathetically, Carphone Warehouse has said that it has not made up its mind what to do with the business yet.

'Maybe that just means they are waiting for Kesa to reveal their hand on Comet first.'

It added that fortunately the US Best Buy joint venture was still 'going gang-busters'.

Broker Oriel Securities, which has a buy recommendation on the company, said: 'We believe that Carphone Warehouse will benefit directly from the smartphone and wireless revolution.

'Penetration levels in post-pay contracts at Europe have yet to catch up with the UK and US and we believe pre-pay sales will pick up when smartphone prices begin to reach more affordable levels.'

And it added: 'Recent press speculation suggests that the company will be looking to halt growth plans for Best Buy UK "Big Box". We think that this will be taken well by the market if this turns out to be the case.'

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