DFS Furniture expects return to growth after profit fall

DFS Furniture (DFS) said in July that the furniture market is faring “significantly worse than expected”, so it wasn’t a surprise that the retailer’s annual profits plunged as demand continues to be impacted by cost of living pressures. Revenue went in the wrong direction as more shoppers decided not to splash the cash on big-ticket sofas. But the market responded favourably to the reaffirmation of a return to profit growth in 2024, with the shares marked up by 6 per cent despite the confirmation of a lower dividend.

Given the challenging trading backdrop, with management expecting a 5 per cent drop in market volumes in 2024 after a 15 per cent drop in upholstery volumes in 2023 against pre-pandemic, the good news for investors is that DFS tends to outperform. It grew its upholstery market share to a record 38 per cent in the year, with both the DFS and Sofology brands making progress. This was a pleasing result given price increases.  

Despite the fall in revenue, gross margin rose 170 basis points to 54.4 per cent on the back of solid cost control as the company makes headway towards returning to its 58 per cent pre-pandemic baseline. After a review of the cost base, the aim is now for £50mn of annualised savings by 2026, which will help margins.  

Leverage rose to 1.9 times, compared with a target range of 0.5-1.0 times. So the refinancing of debt facilities after the year-end, which increases available funds to £250mn, gives some balance sheet reassurance. 

A valuation of 10 times forward consensus earnings is attractive given the opportunity on offer, in our view. Like-for-like sales have grown in the current year, and the medium-term 8 per cent profit before tax margin target looks achievable once the demand environment improves. Buy. 

Last IC view: Buy, 125p, 15 Sep 2022