Phones 4u's growth strategy could be 'overly aggressive' as the retailer will face 'challenging' trading conditions during the next 18 months, according to a report by credit agency Moody's.
The agency gave the high street retailer a 'stable' outlook, given its strong store network, market positioning and liquidity. It said: [The rating] 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.'
The retailer welcomed the report and said Moody's outlook for the business backed its strategy.
Moody's said Phones 4u had sales of £976m and adjusted earnings before interest, depreciation and amortisation of £159.7m last year. Its distribution segment, which includes its connections, handsets and accessories business, accounted for 77.6% of 2011 sales. Its insurance wing accounted for the remaining 22.4%.
The retailer had 84 net store openings last year, versus 55 for the previous year. Concessions in Dixon's stores accounted for 42 store openings. The report said: 'The concessions are an attempt by Phones 4u to support its longer-term growth by broadening its customer base into an older and more affluent demographic.'
However, Moody's warned while it had a constructive view of the retailer's growth strategy, it was not without risk. It said the strategy could be 'overly aggressive' and its lease-adjusted debt was slightly high for a company of its credit rating. The report said: 'While we expect that Phones 4u will reduce its leverage over the next 12-18 months, we note that the company, a discretionary goods retailer, will face challenging trading conditions as the UK consumer remains constrained by an economic environment marked by high unemployment, subdued wage growth, and increasing prices for non-discretionary goods and services.'
It warned opening stores lead to a reduction in margin, which is a symptom of highly competitive markets were sales increase because of volume, not price. The report said: '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.'
The report lauded Phones 4u's ability to tap into the youth market and said it was an 'attractive' distribution channel for operators and manufacturers. It said: 'Operators and handset manufacturers rely on the youth market segment for its early adoption of new handset technologies, features and fashions.'
Moody's said its 'track record of expertise' left Phones 4u in a good position to manage the volatility of the market. It said it had adapted its insurance model to deal with the increasing value of claims for lost smartphone devices.
In a statement, a Phones 4u spokesman said: 'Phones 4u welcomes Moody’s credit research published today and is pleased that their 'stable outlook' view recognises the group’s solid operating performance, positive cash flow generation and strong market positioning. Despite the challenging trading environment in the wider UK retail sector, the research also acknowledges that the group entered 2012 well placed to build on its strong Q4 2011 performance.
'Our strategy reflects the potential for the business to grow further alongside our ambitions to build on our strong performance to date. Margin expansion and a progressive store opening programme remain core elements of this strategy and will remain key drivers for the group throughout 2012.'
Editor: Graeme Neill