DFS Furniture confirms profits below expectations, dividend doubled

DFS Furniture confirmed a disappointing drop in full year profits that came in below City analyst expectations, but steadfastly back the business model to continue delivering cash and return to profit growth in 2018 despite challenging market conditions.

In the 52 weeks to 29 July, DFS produced gross sales of £990.8m, a 1.1% increase on the previous year, with revenue up 0.9% to £762.7m amid a "very challenging" furniture market environment in the second half that hit sales and profit.

Earnings before interest, tax, depreciation and amortisation shrank 12.7% to £82.4m, the bottom of the £82-87m range guided by management.

Profit before tax collapsed 22.3% to £50.1m with adjusted earnings per share down 21.1% to 18.7p, both also lower than consensus of £52.5m and 19.3p, respectively.

There was still £57m of free cash flow generated, though this was down almost 25%, with directors declaring a final dividend of 7.5p per share that makes for a total ordinary payout of 11.2p plus the 9.5p special dividend that makes for a bumper 20.7p all in all.

The year closed with £144.5m of net debt meaning with the lower profitability in the year that the leverage ratio rose to 1.75 net debt/EBITDA, higher than the 1.5x target.

Management will target returning to the guidance range over the next two financial years, subject to any potential requirement to pay consideration in excess of the initially announced £25m for the acquisition of Sofology.

Chief executive Ian Filby said in spite of the tough market, the company continued to make "good strategic progress" on its growth plan, notably the acquisition of Sofology since the year-end and the exclusive licensing partnership with clothing retailer Joules.

"Historically DFS has been able to build its market leading position and generate strong cashflow for shareholders in all environments by leveraging its fundamental strengths.

"Our recent strategic investments and operating efficiency programme support our confidence in our ability to deliver modest profit growth and cash returns in the current financial year and we continue to have excellent prospects for the long term."

Filby said the fundamental strengths of the company were in store sales densities, its scale of operations, flexible cost base and vertically integrated business model, while saying he was also focusing on broadening the appeal to customers, highlighted by gaining a 25% share of the "aspirational consumer" market, while also hailing a 20% increase in partnership brand upholstery orders via the first Joules collection.

Three new stores were opened in UK and ireland plus a third trial small store in Crawley, while a second was opening in Spain's Costa Del Sol.

DFS shares fell a further 4% to 216.25p on Thursday morning, having already dropped around 20% since warning on profits in June.

Analyst Phil Carroll at Shore Capital said he sensed consensus forecasts might nudge down post the announcement, with EPS of 19.8p currently being market expectations.

Most of the bad news contained in the DFS Furniture results was known already, said Neil Wilson at ETX Capital.

"The trouble for investors who hung on to the shares since June is that there was precious little good news to cheer," he said, but said the doubling of the dividend was perhaps a sign that management is comfortable with its ability to navigate the testing market conditions.

"DFS has been here before, coping with recessions and downturns that stops customers splashing out on big ticket....Heft should see it through and on a positive note the acquisition of Sofology offers good optionality and broadens the appeal of DFS, as well as strengthening its online/omnichannel offering.

"What has investors worried still is that the outlook has not improved: the results statement is pretty bleak with all the emphasis on a ‘very challenging furniture market environment’ and the ‘significant deterioration in the consumer market’. Like for like revenue growth will be a lot harder to achieve than in the past. Economic headwinds are battering retailers that deal in higher-value items, and there is not much sign of this changing. A big Christmas sales rush would help restore confidence, but it doesn’t look like consumers are ready to oblige.”