Carphone Warehouse 2008 Annual Report Download - page 19

Directors’ Report: Business Review
Chief Executive’s Review
This has been a very successful year for The Carphone Warehouse.
Financially we have performed very well, with 12% growth in revenues
and 75% growth in headline pre-tax profit. Perhaps more importantly,
our operational performance has improved significantly. The additional
investment in our telecoms customer service we highlighted last year has
started to pay off, and our network investment is delivering better speeds
and reliability to an ever increasing proportion of the population.
Ultimately all of this has a direct financial payback: it improves the worth
of the brand in the marketplace, making customer recruitment easier;
and it drives down customer churn, increasing customer lifetime value.
We have grown strongly but we have also invested heavily: in our
telecoms network, our IT infrastructure, our stores and customer
recruitment. We are confident that this is all money well spent and
will generate a good return for shareholders over time. Weighing capital
structure considerations against opportunities to invest and grow is
always a difficult balance to strike. However, as always we place the
potential for long-term value creation above the shorter-term vagaries
of stock market fashions.
As a result net debt has increased substantially this year, affected also
by the weakness of sterling. But we will continue to invest in areas
which deliver competitive advantage: store growth, network capacity
and resilience and broadband market share, where we see good future
returns. We believe that our shareholders will continue to support us in
this strategy for as long as we explain our investment strategy coherently
and demonstrate value creation.
After the year end, we announced one of the most important
developments in the Group’s history: the formation of a new company
with Best Buy, one of the world’s leading consumer electronics retailers
and our partner in the US market. Under the terms of the deal, we are
to receive £1.1 billion in cash, and Best Buy will become 50% owners of
our retail chain and related assets. The newly formed company will not
only accelerate the evolution of our existing store proposition, as
described below, but also look to seize the significant opportunity
presented by the European consumer electronics market.
I make no apology for the short-term negative impact on our earnings
that this transaction creates. It should be seen in the context of the
long-term growth opportunities it presents, both for our core business
and new areas of retail where we have no current expertise but where
Best Buy are global leaders. I believe we have entered a new and very
exciting growth phase for the business.
Strategic context
Our strategic approach is built on three primary objectives. The first and
third of these objectives have been consistent for a number of years; the
second objective has changed over time to reflect the proposed evolution
of the retail business:
• To continue to grow mobile handset market share in all our geographical
markets, by investing in new store openings, achieving increased
productivity from our existing estate, and developing additional
distribution channels;
• To develop our retail proposition to meet the changing needs of
customers and suppliers, so that we offer the widest range of mobile
and fixed line broadband services and associated hardware alongside
the core mobile phone offer; and
• To become the leading alternative provider of fixed line
telecommunications services in the UK.
Through organic growth and acquisition, we have built up a unique set
of assets: a network of stores that act as the focal point of our interaction
with customers, both mobile and fixed line; a comprehensive fixed line
telecoms network covering the whole of the UK, delivering a mass market
all-IP platform that no-one else in the UK has yet replicated on the same
scale; and significant customer bases, creating valuable annuity revenue
streams to improve the quality of our earnings. Our strategic objectives
aim to leverage these assets to deliver long-term growth and value
creation to shareholders.
Growing our retail presence
Our core business of helping customers with their choice of mobile
handset, network and tariff remains one with attractive financial returns
and ongoing growth opportunities. Although Western European markets
are quite saturated, we believe that our constantly evolving proposition
can allow us to continue to grow market share, and establish ourselves
as the leading independent distributor in all of our geographical markets.
We see no structural barrier to reaching a similar share in our other
European markets as we see in the UK over time.
Why is market share important? Firstly, it makes us the independent
distributor of choice for network operators and handset vendors. Our
scale can influence their share of the market, and our trading terms
reflect this. Furthermore, our focus on handset range and availability
is supported by a regular supply of exclusive and first-to-market
models which differentiates us from our competitors.
Secondly, our growing market share allows us to reinvest the benefits of
scale into our customer proposition: improved terms from networks and
“As always, we place the
potential for long-term
value creation above the
shorter-term vagaries of
stock market fashions”
www.cpwplc.com 7
Business Review
Headline Financials
2008 2007
£m £m
Revenue 4,474.4 3,991.5
Distribution 3,116.2 2,917.8
UK Fixed Line 1,399.6 1,084.3
Eliminations (41.4) (10.6)
EBIT 258.3 149.5
Distribution 175.0 176.9
UK Fixed Line 125.6 19.7
PLC costs (36.2) (37.2)
JVs (6.1) (9.9)
Business Review
Charles Dunstone, Chief Executive Officer