DFS expects record full year results, confident of swerving Brexit effects

So far, so good for sofa retailer DFS as it posted a mixed year-end statement where it confirmed a strong second half and remained bullish in spite of a warning about the increased risk of a post-Brexit market slowdown.

After an excellent finish for the year to end-July, the FTSE 250-listed group expects to deliver a record performance for the full year, with results towards the upper end of market expectations.

Revenue was up 7% on the previous year thanks to the strong performance through the second half, with revenue for the period of 7% compared to the second half of last year, rather than slowing to 5% from the 6.9% seen in the first half as some analysts feared.

However, looking forward, management said that they recognised that "following the EU Referendum, retailing of furniture in the UK faces an increased risk of a market slowdown with additional cost pressures from foreign exchange movements, whilst it is likely that the retail environment will remain intensely competitive".

On the plus side, the six weeks since the Brexit vote has not indicated any weakening of demand, although this period is clearly "too short a period to permit a meaningful assessment of future furniture retail trends".

Moreover, DFS is confident it remains "very well positioned" to deal with any economic headwinds, highligting its store sales densities, scale of operations and highly flexible cost base as providing resilience against weaker trading conditions and giving the potential to grab more market share even if adverse conditions arise, while its in-house manufacturing operations limit exposure to currency fluctuations.

As group sales growth benefited from subsidiaries Sofa Workshop and Dwell, with trials of these new format stores alongside or within a DFS store, the decision has been made to accelerate the programme of converting retail space and opening Customer Distribution Centres (CDCs) and so bringing forward associated capital expenditure.

In the first half DFS continued converting in-store warehouses into additional retail space and consolidating warehouse operations into larger, more efficient offsite facilities.

"While the full potential for the Dwell store-in-store opportunity is still being assessed, the initiative is likely to generate incremental profits when compared to conversion of that space to retailing of beds and dining furniture, with the additional benefits expected to begin to accrue in FY2018," it said.

Thanks to strong free cashflow, net debt was slightly less than 1.5 times EBITDA at the end of the year and the board anticipates announcing a progressive final dividend in October in line with guidance of an overall payout for the whole year of 45-50% of profit after tax.