- Sofa retailer warns of slowdown

- Downgrades earnings guidance

- Retailer has gained share during previous market declines

Life is getting decidedly tougher for sofas seller DFS Furniture (DFS), which has reported a slowdown in orders as consumers defer spending on big ticket purchases amid the worsening cost-of-living crisis.

The UK’s leading living room furniture retailer also downgraded its outlook, sending its shares down 16.3% to a one year low of 154.8p.

FURNITURE MARKET SOFTENS

Ahead of its 26 June 2022 year end, DFS said it had delivered double digit order volume growth for the third quarter ended 27 March versus its 2019 pre-pandemic comparative, with volume growth achieved ‘despite offsetting significant cost inflation through mitigation and retail price increases’.

Moving into the fourth quarter, however, the UK furniture market has declined as cash-strapped homeowners grapple with soaring inflation and rising bills.

DFS cited recent Barclaycard data suggesting a 2.1% reduction in transactions in April relative to pre-pandemic periods and conceded it had seen ‘a similar change in order volumes across our group.

While we have increased our weekly production and delivered revenues progressively over half 2, to record levels in the fourth quarter, the ongoing Covid linked supply-chain disruption, combined with lower order intake since April has led to lower levels of production and deliveries relative to our previous expectations.’

GUIDANCE DOWNGRADE

For 2022, DFS now expects to generate underlying pre-tax profit of between £57 million and £62 million, a significant downgrade from previous guidance for taxable profits of between £66 million and £85 million.

DFS now expects to close the financial year with an order bank elevated by some £30 million relative to pre-pandemic levels, which it insists will provide ‘some resilience’ heading into 2023.

That said, the upholstered furniture purveyor warned it was ‘difficult to forecast consumer behaviour over the next twelve months’.

DFS also reminded investors that it has gained share during previous periods of furniture market decline and remains ‘well-positioned against the market, given our scale, brand strength and our integrated retail strategy’.

Russ Mould, investment director at AJ Bell, explained: ‘Big ticket items like sofas were always going to be the first place where people think twice about handing over the cash. If you’re under financial pressure, the idea of paying more than £1,000 for something is a big commitment.’

Mould continued: ‘If bills are racing higher, it’s an easy decision to hold off from getting a new sofa or armchair. Therefore, DFS will have to sit tight and ride out a difficult period for the business.’

Shore Capital commented: ‘Today’s announcement does not surprise us, given the recent trading update from Made.com (MADE). While comments mainly centred around the digital channel (underlying market down 30% to 40%), we expected softer offline trading. Consumers are starting to feel the cost of living squeeze and be more prudent around big-ticket items, making the strategy of players like DFS and Made.com (category extension into homeware) even more crucial in this context.’

The broker believes DFS’ management has ‘a tight grip on cost, stock and cash generation and has shown the multichannel opportunity through the pandemic.’

DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Steven Frazer) own shares in AJ Bell.

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Issue Date: 09 Jun 2022