DFS Furniture fightback is underway

“A strengthening trading performance” and “modest growth in EBITDA” are not phrases investors hear too often in the retail sector these days, so there was understandable relief at the tone of DFS Furniture (DFS) results Wednesday.

The Doncaster-based chain appears to have staged something of a fightback since a profits warning last summer sent its shares crashing to a record low.

As home furnishings is a sector where declining consumer confidence is felt earlier and keener than elsewhere, it’s fair to say that there would have been plenty betting on DFS struggling again this Spring.

In fact, the group said trading momentum had strengthened during the first half of the financial year and into this month, leading to expectations that revenues will show an improved trend during the busier second half.

Source: interactive investor                Past performance is not a guide to future performance

There’s also optimism that last winter’s acquisitions of Sofology and Multiyork assets will build on the momentum over the coming months.

As a result, DFS expects to deliver most growth in underlying earnings and strong cash generation across the financial year. In a further sign of the company’s optimism, the half-year dividend was maintained today at 3.7p.

Shares responded to the comments from chief executive Ian Filby by climbing 8% to 184p. However, that’s only moving the stock away from the new low set at the end of last week and is a far cry from the 350p seen at the end of 2015.

However, analysts at UBS think a recovery of sorts is on the cards after placing a price target of 250p on the stock.

In a note published today and headed “First Signs of Spring”, they said half-year profits amounting to £11.7 million were slightly ahead of expectations, albeit 30% lower than a year earlier. They said the beat reflected a stronger gross margin as FX pressures were more than offset by company initiatives.

They also noted that the recent acquisitions will be EBITDA neutral this year and accretive thereafter. Current trading will be helped by weaker comparisons with 2017, when revenues fell ahead of and during the General Election period.

However, UBS added that recent weather may have taken the edge off the performance as it trimmed the H2 like-for-like sales growth forecast from 4% to 2%. The pre-tax profits estimate has also come down £4 million to £48 million.

The UBS valuation is based on a 2018 price/earnings (PE) multiple of 9.6.

DFS, which joined the FTSE 250 Index in 2015 after US private equity firm Advent International listed the shares at 255p, has more than 110 DFS stores and trades under other brands including Sofa Workshop and Dwell.

Partnerships with brands such as French Connection, Country Living and House Beautiful delivered gross sales order growth of 8% in the period.

And with more than 80% of customers conducting research before visiting a DFS showroom, the company said web traffic was about 10% higher in the first half, with the trends particularly driven by the growth of mobile unique visitors.

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