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Saturday, January 06, 2007

Carphone: The Motorola Parallel

Reading about Motorola’s travails in the Financial Times this morning, especially the bit about “an unfavourable geographical and product-tier mix of sales” meant that earnings would be below analyst expectations; my thoughts immediately leaped forward to the highlight of this week – the Carphone Trading Update on Friday.

What is the point of making record volume sales if the profits do not follow?

The feature of the Carphone season was the 2 for £50 offer on the Motorola L6 on Orange. Now unless Orange was offering great commissions and Motorola were practically giving the phones away, I can’t see Carphone making much margin on that. Carphone had cheap handsets last year in the £20 range, but they weren’t pushed no where nearly as hard.

This time last year the Carphone was well on its way to selling 500k pink RAZRs which were priced at £130 on pre-pay. This year Carphone had the Cath Kidston exclusive which I don’t believe anyone thinks has done anyway nearly as well as the pink RAZR and to be fair no-one expected them to.

The above two points really highlight to me how important the mix is for Carphone, both in terms of Average Selling Prices and Average Margins.

Looking at past Carphone Christmas trading statements, I believe Carphone will only provide details on Total Distribution Revenues, which admittedly is more relevant than a pure connections figure.

I also note the big change this year is that Carphone will not report online and retail separately and this will be hugely beneficial for Carphone in the like-for-like comparisons. The growth area is online and Carphone probably only have a handful of “online stores” throughout Europe and any growth will be skewed to them rather than the smaller rural physical stores that Carphone are currently opening.

The growth in online actually destroys a myth that the offers are now so complex that people need guiding through them. And therefore destroys the uniqueness of the Carphone model.

I suspect that the analysts will be focusing on like-for-like connections growth which is a bit ridiculous to me. It is a bit like people focusing on how items of clothing Next sold in its recent trading update. In fact they didn’t even bother disclosing that information, what they did say was that sale on the high street was down, but this was more than compensated by online sales and overall profits were up, therefore the shareholders heaved a huge sigh of relief and the share price went up.

On Friday, I expect Carphone to report that volumes are up and sales are marginally up – nothing about margins and profitability. In other words there will not be enough information to value the retail operations.