Investors may be rash in selling sofa retailer DFS Furniture (DFS), whose shares nudge 2.6% lower to 270.8p despite pre-tax profit soaring from £33.3m to £64.5m in the 52 weeks to 30 July.
The fall likely reflects profit-taking, since the shares have risen following a positive year-end update in August and were among the early gainers on Thursday.
Gross sales grew 7.4% to £980.4m and revenue climbed from £706.1m to £756m last year, while DFS' online business delivered double-digit growth in sales and profits.
Albeit still early days, DFS says trading over the last 14 weeks has not indicated any weakening of demand since the Brexit vote. However, the home improvement retailer warns that the furniture retail sector in the UK faces an increased risk of a market slowdown next year, while sterling weakness may result in additional cost pressures.
DFS also hopes to announce a special capital return to shareholders before the end of its financial year end in 2017 after rewarding investors with an 18.3% hike in the total dividend to 11p.
Analysts are bullish on the DFS story. UBS urges clients to ‘buy’ with a price target of 310p, noting the group is well placed with a flexible cost base if demand weakens.
The broker says the pro forma impact of sterling devaluation will be approximately £12m, but two thirds of this has been mitigated using the supply chain, cost base and mix. Shares has previously explained how vertical integration provided by DFS' in-house manufacturing operations limits currency exposure.
Jeffries is also upbeat about DFS' cash-generative model, speculating that the special capital return implies attractive recurring cash returns to investors north of 10%.
