Jefferies upgrades DFS to 'buy', hails 'resilience' in challenging market

Analysts at Jefferies upgraded their rating of furniture retailer DFS from ‘hold’ to ‘buy’ on Monday, citing the company’s acquisition of Sofology and its "resilience" in the face of a challenging market.

The UK upholstery market is expected to decline by 2-3% over the next 12 months but Jefferies analysts noted that the first-half results for DFS showed that with "better visibility of market growth, flexibility in operating expenses and marketing cost deflation, it is able to limit operating deleverage.”

The retailer’s like-for-like sales fell 4.6% over the period but EBITDA margins fell by just 20 basis points and DFS also managed to expand its market share to over 30% through the acquisition of Sofology and eight Multi York stores.

The Sofology deal from August is viewed as particularly crucial by Jefferies, which expects it to result in the addition of 28% more stores, 25% more sales, 10% more EBITDA and 5% more EPS by the end of 2020.

Risks that the company may face in the near future include potential difficulties with the integration of Sofology, rising interest rates, IFC legislation changes and manufacturing issues.

However, as Jefferies analysts see further market deterioration as unlikely they have raised DFS’s target price to 255p from 210p.

"We like DFS's sofa market leadership and ability to flex its operating costs (more than 85% variable) to deliver growth in profits. Increased visibility over DFS's cashflows and limited downside risk to the market declining further leads us to increase our target multiple for DFS.”

As of 1510 BST, DFS shares were up 0.22% at 230.00p.