- Fresh guidance implies 10% downgrade
- DFS has seen softer orders in recent weeks
- Retailer’s market share reaches a record 38%
Sofas seller DFS Furniture (DFS) delivered resilient first half results in a difficult economic backdrop. To secure market share gains in the face of a cost of living crisis that is causing consumers to shy away from big ticket purchases suggests that the firm is doing something right.
But softening orders and pressure on profits are battles for the coming months, and investors are not sure what to think. Shares in the UK living room furniture leader lost 3.8% to 128p in early trading after DFS downgraded pre-tax profit guidance for the year to June 2023. Those softer orders mean investors can now expect £30 million and £35 million pre-tax profit.
Towards the lower end of the £30 million to £40 million range given in January, the narrowed guidance resulted in a 10% downgrade to the mid-point from £36 million to £33 million and implies DFS Furniture is on course to deliver a 45% year-on-year drop in profits.
RESILENT SHOWING
Results for the half to 25 December 2022 revealed a 70% drop in underlying pre-tax profit to £7.1 million as DFS was impacted by softer lower sales and rising costs, although this was a pretty solid showing given the backdrop of upholstery market volume declines.
Revenue of £544.5 million was 9.4% ahead of the non-Covid disrupted comparable half in 2029, though down 2.2% on last year’s £556.5 million.
Net debt increased by £45.6 million to £135.6 million in the half due to lower profits, the completion of share buybacks and with DFS’s working capital balances starting to normalise.
SOLID PLANS IN PLACE
DFS, which also own the Sofology and Dwell brands, reported a record market share, up 2 percentage points since its 2022 year end to 38%, which has helped the retailer alleviate the impact of weaker market conditions.
And looking ahead, CEO Tim Stacey pointed out that ‘cost headwinds are reducing and in some cases reversing’ and he expects ‘our upward gross margin trajectory to continue as we execute our margin build back plan.’
Stacey continued: ‘At our capital markets day in March 2022 we set out our ambitions to grow revenues to £1.4 billion and operate at an 8%-plus profit before tax margin generating post tax free cash flows of 75%-plus. We continue to target that level of financial performance and have solid plans in place to deliver this.’
THE SHORE CAPITAL VIEW
Shore Capital noted that while DFS is expanding into lower ticket items in the adjacent homeware category, the retailer ‘remains exposed to big ticket purchases, which consumers are putting off.
‘However, in our view, today’s statement echoes recent updates from the sector, with leading multichannel offers taking up market shares despite the challenging macro backdrop. In our view, DFS’s strong brand awareness is well-positioned to capitalise on consumer spending in the home-related categories.’
