Made-to-order-sofas seller DFS Furniture’s (DFS) shares are taking a pounding today, slumping 21% to 200p on a profit warning that was pretty predictable with hindsight.
The Doncaster-headquartered- firm says recent trading has ‘weakened beyond our expectation’ since it last updated the market, UK consumers tightening their purse strings amid rising inflation and political turbulence.
Yet amid the panicked selling, it is worth noting that DFS is a veritable cash machine that grew sales and market share during the last recession.
DOWNGRADES FOR DONCASTER’S FINEST
Click here to read today’s trading statement from the upholstered furniture market leader, guided by seasoned retailer Ian Filby, CEO (pictured below).
DFS warns it expects EBITDA for the full year will be lower than market expectations and ‘in the range of £82m-to-£87m’.
According to Stifel, this will translate into pre-tax profit (PBT) of around £53m, so a very material downgrade from the current consensus figure of £64m PBT.
Having prudently flagged scope for softer second half market conditions in its half year results, DFS has indeed seen ‘significant declines in store footfall leading to a material reduction in customer orders.'
Filby believes the drop-off in demand is market-wide rather than DFS-specific and ‘linked to customer uncertainty regarding the general election and the uncertain macroeconomic environment.'
Rival sofa retailer ScS (SCS) softens 9.2% to 152p, while other big ticket item purveyors including Kingfisher (KGF), Dixons Carphone (DC.) and AO World (AO.) take a tumble on the negative read-across.
CONSUMERS FEEL THE PINCH
‘It’s a bit of a knock after the firm gave a relatively upbeat assessment in its half year results,’ says Neil Wilson of ETX Capital. ‘First half revenues were up a healthy 6.8% in the first half as consumer spending remained robust. That has changed.
The slowdown in the second half is not surprising when one considers the recent macro-economic data. CPI inflation has accelerated to 2.9%, while wage growth is slowing. Real wages are falling. If the gap continues to widen then the likes of DFS could suffer further as spending takes a knock. Undoubtedly the uncertainty around the general election and Brexit means people are delaying big ticket purchases.’
However, DFS does stress that ‘the upholstery market does see short-term demand fluctuations from time-to-time, within an overall historical trend of long-term growth.’
And as Shares has previously outlined - see Griller, 12 May 2016 - DFS is a strongly cash generative retailer with the financial clout to invest in competitive advantage and furthering its growth strategy.
A vertically integrated business model sees DFS make, sell and deliver products to customers and gives the retailer the ability to generate strong cash flows through the cycle while funding a progressive dividend. At the interim stage, the retailer increased the half time dividend 5.7% to 3.7p and declared a 9.5p (£20m) special dividend too.
DFS expresses confidence that ‘we will outperform the market over the longer term, driven by our scale, business model and proven growth levers’, although investors are understandably hiding behind the sofa this morning.
