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DFS acquisition may lift it from doldrums

The sofa expert has agreed to take over Sofology despite a profit warning in June
August 8, 2017

Just weeks after a surprise profit warning, sofa specialist DFS (DFS) has agreed to buy retail chain Sofology for £25m. Sofology owns 37 stores in the UK, and also operates via its own website. Cost synergies worth around £4m have already been identified, and the deal is expected to be earnings accretive from the first year. DFS has also managed to refinance its debt to a new lower-cost five-year £230m revolving credit facility, which will go some way to help fund the acquisition.

IC TIP: Hold at 226p

The timing is interesting in light of June’s warning. At the time, analysts labelled the update a "watershed" moment in British retail as DFS appeared to be the first to crack under the pressure exerted by sterling depreciation, rising costs and squeezed margins. That said, the decision to undertake M&A activity at this time seems to have gone down well with investors. The share price has staged a mini recovery since the post-profit warning plummet, and this announcement buoyed the shares further.

So what is it investors like so much? DFS has form when it comes to acquisitions. It bought Dwell in 2014 after it had fallen into administration and Sofa Workshop in 2013. Ironically, DFS has agreed to this latest deal just two years after it forced Sofology to change over to its current moniker from ‘Sofaworks’ after claiming it infringed on the Sofa Workshop brand.

Sofology reported revenue growth of 5 per cent during the six months to 30 June 2017, while its gross assets were last valued at £36.2m on 31 December 2016. However, rising costs and disruption associated with its Sofology rebrand resulted in a £2.7m cash loss last year. Still, DFS claims it will generate returns “materially above its cost of capital in the second full financial year post acquisition”.

It seems DFS chief executive Ian Filby refuses to be defeated by the gloomy consumer picture in the UK too. He said that while the UK furniture retail market continues to be very challenging, the company remains focused on making strategic progress to strengthen its position.