More than £1.2bn was wiped off the stock market value of electrical retailer Dixons yesterday as the group was forced to admit its profit margins are being hit by tumbling prices.
The price collapse leaves the vast Dixons empire - which includes Currys, PC World, The Link and Jakarta and is the UK's largest electrical retailer - appearing increasingly like an internet company with shopping offshoots.
The company is now valued at just over £5bn, but its 80% holding in internet service provider Freeserve is valued at £3.7bn. The 1,000-store business, therefore, is worth only a little more than a third of the loss-making net operation.
The price of the store group's shares slumped by 302p - more than 20% - as analysts took fright at the Dixons' warning, even though the company was also unveiling better than expected first half profits, a £121m cash handout to shareholders and a robust set of sales figures showing a 5% improvement in pre-Christmas trading.
Dixons reported a 0.7% decline in its profit margins last year, but yesterday chairman Sir Stanley Kalms said: "It is definitely 1% or more now."
Analysts described the information as an "unwelcome surprise", but Sir Stanley disagreed. "It may be unwelcome, but it is not a surprise. If analysts haven't noticed that prices are going down then they are out of touch and not doing their jobs properly."
He added: "We have had deflation for quite a few years now and it will carry on in some products.
"It is probably averaging 5% but on some products is much more. We are selling videos for £70 that cost £300 a few years ago, we have high quality computers for £400 - and just look what has happened to the price of mobile phones, down from £69 to £39".
But he warned that to start decribing Dixons as an internet company was "a flippant reaction", insisting that the company remained primarily a retailer and that he was unworried by the share price.
"It doesn't mean very much. It is just a knee-jerk reaction. We have had a good year and are pleased with our results."
The company was reporting profits up 14% in the six months to November 13.
Underlying profit, before tax, exceptional items and a £8.6m loss at Freeserve, rose to £92.5m, compared to £80.9m a year ago.
Shareholders are to receive a 25p a share cash handout after the company banked £219m from the sale of 20% of Freeserve last year.
The company said the product cycle and outlook was encouraging. "The digital TV boom hasn't even started yet, and DVD is going to have a major impact.
"In two or three years' time nobody will be buying video tape recorders. Digital cameras have also become a serious product group."
The company also announced its plans to make Dixons a major net retailer by the end of this year, with a £30m investment.
"Nobody understands e-commerce properly," said Sir Stanley. "Setting up a website is easy. It is like putting a carpet down in the street and putting a few goods out on it.
"You could do that from your bedroom. But successful e-commerce will be about fulfilment. It is about next-day delivery anywhere in the country, it is about servicing, repairs and returns," he said.
