DFS expects tough 2023

Furniture retailer DFS (DFS) has been honest about the struggles it is facing. On the supply side, rising inflation and worker shortages increases costs. Meanwhile, on the demand side, the cost of living crisis is expected to eat into household budgets. Not a great combination.

In the full year, revenue increased 8.5 per cent but because of rising raw material and haulage costs, the gross profit margin fell 3.5 percentage points to 52.7 per cent. Operating costs also rose 8 per cent. DFS had to open new warehouses to carry more inventory, and there was £7.6mn of wage inflation across the year.

DFS is confident there will be normalisation of these costs next year, and we tend to agree. Shipping costs have dropped massively. Management is therefore conscious about raising prices too high as it doesn’t want to lose market share when costs do come back down.

The company has offered three potential outcomes for next year, and none of them look great. The middle prediction assumes the wider market order intake drops 10 per cent next year. If this happens, DFS expects pre-tax profit of £36mn for the year, down 22 per cent from 2019.

Broker Peel Hunt sees DFS’s sell-off as a buying opportunity. Peel Hunt believes DFS is the market leader and, despite overall volumes falling, thinks it will be taking market share. The broker expects earnings per share to fall 40 per cent to 10.6p in 2023, but then to rise to 21.5p in 2025. This gives an affordable 2025 price/earnings ratio of 6.3.

DFS has been through a few crises before and come out the other side. Peel Hunt thinks “value investors should be on alert to buy a fundamentally good business”. We agree. Buy.   

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