It’s a brave furniture chain boss who decides to open more shops amid the most brutal retail market for years.
While stalwarts from Marks & Spencer to Dixons Carphone are busy trying to work out how much worse the high street can get and where to shut shops, enter DFS, the ever-expanding sofa retailer founded by Conservative peer Lord Kirkham in 1969. Now on its second outing as a listed company, DFS is carving through the remains of rivals, picking up assets from the carcasses of failed retailers such as Multiyork. In the past year it has gone from 112 to 117 stores in the UK and Ireland, and plans another three to five more a year.
There is method to this apparent denial of retail reality. When DFS opens new shops, it is increasingly lumping together its different brands, which include Dwell and Sofa Workshop. These shared sites suck in more customers, minimise the rent burden and, it says, boost sales by 15%. Then there is last year’s £25m purchase of “technology led” rival Sofology, which it will expand with 30 openings across the country, insisting it is not cannibalising its other brands.
Leases are being squeezed — at a recent meeting with analysts, DFS reportedly said it is gunning for rent cuts of 25% to 45% when they come up for renewal. Its model of in-house manufacturing to order, in five UK factories, helps reduce working capital and inventory tied up in warehouses.
In all, it reckons it can add £40m of profits through cost cuts and expansion.
DFS shares have rallied strongly over the past three months, and ended last week at 230p, valuing the chain at £487m. That puts it on an enticing 4.9% projected dividend yield for this year.
Yet DFS is in a precarious position. A £900m turnover empire, it now commands a third of the UK upholstery market and is more than three times the size of its nearest rival, ScS.
Debt has risen along with acquisitions and stood at £173.2m in January — 2.2 times underlying earnings.
A weakening housing market and rising interest rates mean it will have to fight harder for every sale. Last summer its shares plunged 20% in a day when it warned that election uncertainty had driven away customers. Half-year like-for-like sales were 3.5% lower than a year ago.
Added to that, longstanding boss Ian Filby is off, to be replaced by chief operating officer Tim Stacey.
With a 32% market share, growth will be much harder to come by. Darwinism on the high street has played into DFS’s hands so far, but it is not immune. Avoid.
