We all need furniture, but we don’t need to buy it every day and that is both the strength and the weakness of DFS. It’s hard to believe that shares in Britain’s biggest seller of armchairs and the like were changing hands for 300p only three years ago, after Covid lockdowns forced us to take a long, hard look at our sagging sofas. Staff absences, skills shortages, the cost of living crisis and even the invasion of Ukraine took them down to 105p and they have struggled ever since, despite the best efforts of Helena Bonham-Carter to boost the group’s Sofology brand. However, that might be the right backdrop to buy.
In June, DFS cut its profit expectations by nearly 50 per cent, saying that consumer demand in the upholstery sector was at a “record low”. As if that wasn’t bad enough, the supply pipeline has been disrupted since last October by Houthi militants based in Yemen attacking container shipping in the Red Sea. That has forced many vessels to travel around South Africa instead, taking weeks longer and adding millions of pounds to costs. Even though DFS makes one in five of its sofas in its British factories, the disruption could prevent £14 million of orders being fulfilled this year. Analysts at Peel Hunt, the broker, say that conditions are “almost unplayable for the upholstery retailers, with difficult selling conditions compounded by cost pressures”.
The recent partial rescue of the Carpetright flooring chain, while not strictly related, has shown that the entire household goods sector is under pressure. Enter Sir Keir Starmer, calling for the building of 1.5 million houses in this parliament. That should be all that DFS needs, as we buy most of its products when we move home. That’s especially true of the company’s mainly younger customers.
Founded in 1969, DFS has been floated on the stock market, taken private and was refloated in 2015, testimony to the ups and downs of the furniture trade. Through all that, the company has expanded to account for a 38 per cent slice of the nation’s upholstered household goods sold through 175 branches in Great Britain and Ireland. Spanish and Dutch forays were abandoned two years ago, although the temptation to try its luck again across the North Sea may prove too much to resist once the cycle edges upwards.
The City is debating the group’s future. Berenberg thinks that DFS faces more challenges before it enters a period of demand resurgence. “We continue to expect subdued end-market demand through to the end of 2024, and note that continued shipping disruption poses upside risks to the cost base and downside risk to consensus estimates,” Matthew Abraham, the broker’s analyst, said.
In the half-year to December 24 last year, sales fell from £705.6 million to £666.2 million and pre-tax profits shrank from £6.8 million to £900,000. For the year to then end of June, Peel Hunt has taken its £19 million forecast down to £10.5 million, and to £22 million instead of £37 million for the year that has just begun. it is understood that the group’s banks are standing firm. We will know more when the 2023-24 results are announced in September.
Nevertheless, Jonathan Pritchard, of Peel Hunt, rates the shares as a “buy”, arguing that “while life is doubtless very tough at the moment, DFS is still a fine business in our view, well-managed with an enviable market position and plenty of routes to grow profit when the consumer turns. Once the signs of life emerge, the shares will be strong performers.” He sees the price-to-earnings ratio dropping from 34 to 9.1 in the next two years and the dividend yield rising from 1.9 per cent to 7.5 per cent at the present share price of 118p or so (the shares were up to 120p yesterday). Jefferies, the investment bank, is another fan, noting the potential for profit margins to recover to 8 per cent.
Still, according to Berenberg: “DFS is likely to face further cost challenges prior to entering a period of demand resurgence.”
Clearly, there are plenty of uncertainties, not least the economic recovery and resistance to Starmer’s housebuilding ambitions, but the darkest hour is when investors’ bravery is most likely to be rewarded. In a year’s time, today’s share price could look cheap.
Advice Buy
Why Virtually all the bad news is in the share price.
Alliance Pharma
According to Alliance Pharma’s advertisement for Kelo-Cote, its silicon scar treatment, you can “help your scar fade to feel your confidence grow”. Investors’ scars may be more resistant to treatment, though, especially for those who bought the shares in July 2022 when they were priced at 117p. These days they languish below 40p.
The decline was prompted in part by a Times investigation into apparent price collusion over prochlorperazine, a nausea, dizziness and migraine drug. The Competition and Markets Authority later fined Alliance and several other companies, but Alliance successfully appealed against that verdict this year. Meanwhile, the Aim-listed group’s investors grew impatient at unrelated delays in producing the 2023 report and accounts.
Alliance originated in a parcel of brands bought in 1998 from Novartis, the Swiss-American pharmaceuticals group. Since then, management changes have led to a zig-zag of strategies, settling in 2009 on consumer healthcare through more brand purchases, rather than on research and development. It has bought 17 companies since 2010, increasingly to help damaged skin and to support healthy ageing.
Alliance’s shares responded positively to half-year results this week, showing “see-through” revenues up by £2.4 million at £84.8 million. “See-through” includes sales from Nizoral, a medicated anti-dandruff shampoo, as if they had been invoiced by Alliance as principal rather than simply the marketing rights.
While consumer healthcare revenue rose by 5 per cent at constant currency rates to £61.4 million, there was plenty else going on beneath the surface.
Kelo-Cote’s sales jumped 18.4 per cent to £29.2 million, nearly half the total, while other brands struggled with destocking and a factory rejig. Nick Sedgwick, a new chief executive, arrived in May, promising detailed plans in the autumn.
Analysts at Investec see the normalised price-to-earnings ratio coming down from 9.2 to 7.3 over the next three years, which seems good value on the face of it. Any slippage will be seized on by DBay Advisors and Slater Investments, which between them own 40 per cent of the shares and are known for their no-nonsense attitudes and short fuses.
Advice Hold
Why Wait for a clearer picture from the new chief executive
