According to the
Sunday Telegraph, the Carphone Warehouse is in choppy waters. Investors are expecting the share price to fall further - and questions marks over its accounting are not helping.
Charles Dunstone, the chief executive of Carphone Warehouse, should be riding high. In October the telecoms-cum-retail business he founded with just £6,000 of savings 20 years ago joined the FTSE100 index - the elite club of top British businesses.
Six months later the entrepreneur unveiled a £1.1bn deal with Best Buy, the US behemoth, that will see the two companies develop a new supermarket-size electricals store after a three-year courtship.
It is a format that Dunstone believes will revolutionise the way we shop for everything from mobile phones to TVs in Britain. "We are.... going to transform the face of retailing of consumer electronics products in Europe," he boasted when he unveiled the deal in May.
But investors have been unimpressed by the Best Buy deal. Almost one in four shareholders abstained from backing the Best Buy deal at an extraordinary meeting in June, and shares in Carphone Warehouse have plunged by almost 30 per cent since the company unveiled the Best Buy joint venture.
Carphone has also been targeted by short-sellers, traders who sell shares they do not own in the belief that they can buy them back more cheaply at a later date. Even David Ross, who co-founded Carphone alongside Dunstone, appears to be losing confidence, selling more than £30m worth of shares last month - although he retains a sizable stake.
Dunstone is in choppy waters and with critics questioning everything from the group's accounting policies to its strategy there are even calls to break up the empire that Dunstone has spent more than two decades building.
Data Explorers, a research firm that analyses stock-lending figures to detect short selling, ranks Carphone as one of the most shorted stocks in the FTSE100 index. With around 15 per cent of Carphone Warehouse shares currently on loan, traders are estimated to have staked almost £300m on shares in the company falling even further in the coming months.
The traders have already banked hundreds of millions of pounds by short selling the stock. Yet despite the dramatic 41 per cent fall in the share price since the start of the year, the vast majority of the short positions appear to remain in place. Traders see no signs of Carphone sailing into calmer seas in the short term.
In recent weeks, shorters have seized on research published by analysts at Landsbanki, which questions how Carphone accounts for hundreds of millions of pounds' worth of costs.
The claims are vehemently rejected by Anthony Carlisle, a spokesman for the company. "Has it given a false view of the company? Clearly the auditors don't think so. It is a very clear policy. It is very consistent. It is not unusual," he said.
Carlisle argued that short-sellers had simply seized on the issue. "There has been consistent shorting of Carphone for years. It is just an argument of convenience," he said.
Landsbanki's analysis focuses on how Carphone - and other technology companies - account for the costs of recruiting customers or developing software ( "capitalisation" in accounting jargon ).
For example, in order to encourage customers to sign up to a broadband or airtime package, Carphone will often give away (or subsidise the cost of) a laptop or "must-have" phone. But the customer will sign up to a contract that runs over more than one financial year, so how do you account for the cost of the laptop or phone?
Some telecoms companies take the hit in the first year, but Carphone spreads the cost of the phone or laptop over the length of the contract. So if a customer signs a two-year contract, the cost will be split between two years. How you split the costs may appear arcane, but it is not academic. Landsbanki argues that in 2007/08 the capitalisation of costs "boosted Carphone's adjusted profits by 82 per cent" - with the profit and loss account benefiting to the tune of £82m.
While in Carphone's case the critics merely argue that the capitalisation policy makes comparison with rivals complicated, in the past it has hidden serious problems. When Australian telecoms company One.Tel collapsed owing A$600m (£291m), questions were raised about changes to the group's accounting policies - and in particular the capitalisation of customer acquisition costs - which resulted in the group showing a profit rather than a loss the year before it collapsed.
But it is the growing gap between the costs being capitalised every year and the amount of depreciation and amortisation that has sparked most concern. In 2007/08 Carphone capitalised £285m of costs - but the depreciation and amortisation totalled just £112m. "To an extent this lag.... should be expected," concluded the investment bank. "Investment in telecoms network equipment, which has a long average asset lifetime [seven years], has massively increased capital expenditure while simultaneously pushing out the average depreciation period.
"Nevertheless, such a large and sustained gulf between depreciation and capital investment is unusual. Our attempt to build a depreciation schedule.... suggests the depreciation charge should be currently running at over £100m a year - nearly 25 per cent above the current rate."
But it is not just Carphone's accounting policies that are facing increasing scrutiny. The group's two main businesses - retailing and telecoms - face serious challenges.
With increasing competition from mobile phone operators, Dunstone is said to be the first to recognise that the retailing arm needs to adapt.
There is also a piece on this subject which will be covered on another thread about the weekend press.
