DFS hit by supply chain woes

Pre-tax profits slumped at DFS Furniture (DFS) as supply chain and logistics issues hammered the bottom line. Investors may nontheless be bouncing up and down on their sofas, however, as the company announced the return of £80mn of surplus capital to shareholders in the form of dividends and buybacks.

Chief executive Tim Stacey highlighted “extended supplier lead times, containers being held at port and reduced HGV trunking reliability” as examples of the supply chain challenges that blew a £21mn hole in the net margin and operating costs. He pointed the finger at “industry-wide Covid disruption”. Whatever the case, the market will not want to see a repeat in the second half.

Despite the supply chain gloom, these results still soared ahead of DFS’s pre-pandemic figures. Revenue was more than 17 per cent higher than the two-year comparator, and profit before tax was up by 36 per cent on the same basis.

Logistical headaches also shouldn’t obscure progress made in key operational areas. Delivery levels have been volatile, but investment in the Sofa Delivery Company – DFS’s final-mile logistics operation – helped second-quarter revenues jump by a quarter against the prior three months. The order book is £175mn up against 2019, and six new Sofology showrooms and investment in its digital technology helped deliver two percentage points of growth in market share.

When it comes to the shareholder payouts, which will be completed over the next year and include a £26mn special dividend and a £25mn share buyback programme, the sceptic might note that these aren't merely due to the company’s munificence. Rather, capital needs to be returned to prevent “leverage outside our target range” by the year-end, as management pointed out. But investors won’t be complaining.

Furthermore, post-period trading has been robust. The cost inflation that is hitting the industry is reflected in significant price increases for DFS products, and there has been a £10 increase in the delivery charge for each order, but importantly it looks as though customers are still willing to stump up. Management flagged “double-digit volume and value order intake growth” in the second half so far.

Peel Hunt analysts said that “the valuation looks very cheap to us, from a free cash flow or a profit multiple basis”. The broker has the shares trading at a mere six times forecast 2023 earnings, and estimates adjusted earnings per share of 31.4p and then 29.8p for the 2023 and 2024 financial years. We expect a profit improvement in the second half of the year. Buy.

Last IC view: Buy, 275p, 24 Sep 2021