TIDMDFS
RNS Number : 9088C
DFS Furniture plc
04 October 2018
4 October 2018 For immediate release
DFS Furniture plc
Preliminary Results
SOLID OPERATIONAL AND STRATEGIC PROGRESS WITH TRADING
PERFORMANCE IMPACTED BY EXCEPTIONALLY HOT WEATHER IN FOURTH
QUARTER
DFS Furniture plc (the "Group"), the market leading retailer of
living room and upholstered furniture in the United Kingdom today
announces its preliminary results for the 52 weeks ended 28 July
2018 (prior year: 52 weeks ended 29 July 2017).
Financial Summary:
-- Group revenue including acquisitions up 14.1% to GBP870.5 million (FY17: GBP762.7 million)
-- Revenue before acquisitions down 2.0% to GBP747.7m (FY17: GBP762.7m)
-- Underlying EBITDA down 7.6% to GBP76.1 million (FY17: GBP82.4 million)
-- Underlying profit before tax and brand amortisation down
23.7% to GBP38.3 million (FY17: GBP50.2 million)
-- Reported profit before tax down 48.5% to GBP25.8 million (FY17: GBP50.1 million)
-- Underlying EPS down 25.1% to 14.0p (FY17: 18.7p)
-- Reported EPS after acquisition costs down 52.4% to 8.9p (FY17: 18.7p)
-- Higher leverage from lower profitability and cost of
acquisitions: 2.1x net debt / underlying EBITDA (FY17: 1.75x)
-- Final dividend of 7.5p per share proposed, maintaining total
ordinary dividend at 11.2p for the year (FY17: 11.2p)
Operational Summary:
-- Strategic progress continued across all brand businesses despite fourth quarter environment:
o Omnichannel
-- Strong +15.1% growth in Group online revenues
-- Improved mobile site and app capabilities including launches
of UK sector's first augmented reality web technology and
cross-channel order build
o Broadening our appeal to customers
-- Continued progress in DFS brand appeal metrics
-- Good growth in DFS partnership brands, helped by Joules
launch
-- Sofology trading positively with good momentum on realising
synergies
-- First (and to date only) sofa retailer to secure British
Standards Kitemark
o Store network development
-- Three new 10-15,000 sq. ft. DFS stores opened and trading
successfully
-- Small store DFS trials opened in Chelmsford and Guildford
o Retail space and distribution cost efficiency
-- Completion of UK CDC network, leading to lower costs per
order
-- Four DFS and Sofology UK store leases renegotiated, leading
to material rent reductions
o International development
-- Netherlands TV marketing trial lengthened to account for
heatwave disruption
-- Spain trading profitably following annualisation of second
store opening
-- Progress on group operating platform continues; opportunity
to grow from current sector-leading Group EBITDA margins of
8.7%
-- Continuation of very strong DFS customer satisfaction scores;
post-purchase NPS of 84.9% (FY17: 85.2%); established customer NPS
(surveyed 6 months post order) rising from 34.2% to 35.8%
DFS Chief Executive Officer Ian Filby said:
"We have continued working to develop the Group's strategic and
market position; however financial results for the year reflected
the exceptional downturn in market demand we saw in the fourth
quarter.
"We are pleased to note that the market has recovered since the
start of the new financial year, with the Group seeing
like-for-like order growth across all brands over the first nine
weeks. We believe, however, we are benefiting from deferred
purchases in the prior financial year and overall we expect the
market to remain subdued into 2019, constrained by political risk
and weak consumer sentiment. Notwithstanding this we believe the
Group is well positioned to become stronger in this current
environment, boosted by investment and acquisition benefits, and we
have excellent prospects for profitable growth and attractive cash
flow generation over the longer term."
Key Performance Indicators
FY18 FY17 YoY change
Financial KPIs
Gross sales(1) GBP1,125.6m GBP990.8m +13.6%
Revenue GBP870.5m GBP762.7m +14.1%
Revenue before acquisitions GBP747.7m GBP762.7m -2.0%
Underlying EBITDA(2) GBP76.1m GBP82.4m -7.6%
Underlying EBITDA before acquisitions(2) GBP72.6m GBP82.4m -11.9%
Reported profit before tax GBP25.8m GBP50.1m -48.5%
Underlying profit before tax
and brand amortisation(3) GBP38.3m GBP50.2m -23.7%
Underlying earnings per share(4) 14.0p 18.7p -25.1%
Earnings per share 8.9p 18.7p -52.4%
Free cash flow(5) GBP60.4m GBP57.0m +6.0%
Cash conversion(6) 79.4% 69.2% +10.2%pt
Dividend 11.2p 11.2p -
========================================= =========== ========= ==========
Non-financial KPIs
Number of UK & ROI DFS stores 116 113
Post purchase Net Promoter Score 84.9% 85.2%
Established Customer Net Promoter
Score 35.8% 34.2%
Group Online revenue growth
rate +15.1% +11.1%
Growth in partnership brand
sales +7% +20%
Average no. of stores with converted
warehouse space(7) 44 36
Notes:
(1) Gross sales represents amounts payable by external customers
for goods and services supplied by the Group, including aftercare
services (for which the Group acts as an agent), delivery charges
and value added and other sales taxes.
(2) Underlying EBITDA means earnings before interest, taxation,
depreciation and amortisation, as adjusted for certain material,
unusual or non-recurring items which the directors believe are not
indicative of the Group's prior period underlying performance.
Underlying EBITDA before acquisitions means Underlying EBITDA
excluding the performance of acquired businesses.
(3) Brand amortisation of GBP1.1m in FY18 and GBP0.1m in FY17
associated with the amortisation of the acquired brands of
Sofology, Dwell and Sofa Workshop
(4) Underlying earnings per share means post tax earnings per
share as adjusted for certain material, unusual or non-recurring
items which the directors believe are not indicative of the Group's
prior period underlying performance.
(5) Free cash flow is the sum of Underlying EBITDA, less gross
capital expenditure and changes in working capital.
(6) Cash conversion is free cash flow expressed as a percentage
of Underlying EBITDA
(7) Weighted average number of DFS stores during the financial
period where former warehouse space has been converted into retail
space.
Analyst Presentation
DFS will be hosting an analyst presentation at 10.30am today.
The presentation slides and a listen only web-cast facility will be
available through the Group's corporate website:
www.dfscorporate.co.uk. The presentation slides will be made
available on the Group's website: www.dfscorporate.co.uk.
Enquiries:
DFS (enquiries via FTI) FTI Consulting
Ian Filby (CEO) Jonathon Brill
Nicola Bancroft (CFO) Tom Hufton
Mike Schmidt (Chief Development Eleanor Purdon
Officer)
+44 (0) 20 3727 1000
dfsfurniture@fticonsulting.com
About DFS Furniture plc
DFS is the clear market leading retailer of living room
furniture in the United Kingdom. We design, manufacture, sell and
deliver to our customers an extensive range of furniture products.
The business operates a retail network of living room furniture
stores in the United Kingdom and Europe, together with an online
channel. These have been established and developed gradually over
48 years of operating history. We attract customers to our stores
and website through our substantial and continued investment in
nationwide marketing activities and our reputation for high quality
products and service, breadth of product ranges and price points
and favourable consumer financing options.
CHAIR'S STATEMENT
Overview
My first full year as Chair has seen two important developments
for the Group. In November 2017 we acquired Sofology - a
significant addition to the Group which extends our stable of
furniture brands. More recently we have announced that Tim Stacey
will succeed Ian Filby as Chief Executive later this year to lead
the Group forward in the next stage of its development.
In last year's report we noted that the trading environment for
the Group had become markedly tougher, with weaker consumer
confidence impacting sales particularly in the second half of last
year. The start of this year saw some improvement in this picture
and at the time of our half year results our expectations for the
full year continued to be that the Group would deliver modest
EBITDA profit growth. However, continued economic uncertainty for
consumers, compounded by some exceptional hot weather over key
trading periods in the final quarter, resulted in sales and profits
for the full year falling below our expectations.
While retailers will inevitably feel the short term effects of
external factors, we are focussed on evolving our strategy to
acknowledge the long term structural changes in our market and the
changing expectations of our customers, including the role that
online and, in particular, mobile technology plays. The number of
retailers entering CVAs or administration in recent months serves
as a stark reminder of the dangers of failing to keep pace.
Over the medium term, the current weakness in the market does
present the Group with opportunities, which we can exploit through
an unrelenting focus on understanding and satisfying the needs of
our customers. It also requires a sharp focus on the returns from
our capital expenditure.
People
I am delighted that after an extensive and demanding process an
internal candidate has been appointed as our new Chief Executive,
and this illustrates how Ian Filby has built a team with growing
strength and depth during his tenure. Ian has been an exemplary
leader over the last eight years and his continued availability and
support over the coming year will be invaluable as Tim Stacey
develops the senior management structure which is now in place. Tim
has already met with many external stakeholders as part of his
induction to his new role and will present his assessment of our
strategy to shareholders with the half year results early next
year.
The colleagues in our shops, warehouses, offices, and delivery
and service vehicles are dedicated, enthusiastic and proud of the
Group's market-leading position. We will continue to support their
efforts by building on the extensive training which they receive
and improving the information systems to allow the Group to become
ever more agile and well informed.
Board
Following the departure of Gwyn Burr earlier in the year, I am
pleased to welcome Alison Hutchinson to the Board. Alison will take
on the role of Remuneration Committee Chair from 1 October 2018. My
thanks also go to Luke Mayhew for the admirable role he has played
in the interim in leading the Committee through this year's
remuneration review.
Julie Southern has announced her decision not to stand for
re-election at this year's AGM and an active search is now underway
for her successor as a non-executive and Chair of the Audit
Committee.
During the year, the Board has maintained an active agenda with
a particular focus on operational performance, strategy and
risk.
Dividend
The Board has carefully considered the balance between regular
dividends supported by the performance, expectations and capital
needs of the Group and the return of capital where there is a
surplus. We anticipate that value created over time will be
delivered to shareholders through a combination of ordinary
dividends, special returns and capital growth.
Notwithstanding the current subdued sales environment, our
longer term expectations for the future earnings and cash needs of
the business have enabled the Board to recommend maintaining a
final dividend of 7.5 pence (FY17: 7.5 pence), taking the full year
ordinary dividend to 11.2 pence (FY17: 11.2 pence). The Financial
Review provides further information on our dividend policy.
Looking forward
The Group continues to face a particularly uncertain UK consumer
market in the run up to Brexit in March next year; the associated
risks around this are discussed more fully in the Chief Executive's
review.
The Board considers that the Group can look through short term
market uncertainties and remain committed to the growth of the
Group with some confidence. The executive team has begun the new
financial year with great enthusiasm and recognises the opportunity
to build upon the unique capabilities of the Group as the UK's
largest upholstery retailer (and manufacturer) under the leadership
of Tim Stacey.
Ian Durant
Chair of the Board
CHIEF EXECUTIVE'S REVIEW
We have continued working to develop our Group's strategic and
market position; however, financial results for the year reflected
the impact of the exceptional downturn in market demand we saw in
the fourth quarter.
Overview
Our financial results for the year reflect a solid trading
performance over the first three quarters, and the impact of the
sustained market slowdown we saw in the fourth quarter. This sudden
change in market environment was caused by the combination of very
hot weather and the distraction caused by major public events. This
was compounded by the impact of container shipping delays at
Felixstowe, one of our major ports, which delayed some previously
anticipated customer deliveries beyond the financial year end and
still continues to cause disruption. Notwithstanding this, over the
first three quarters we were satisfied with our financial
performance in a challenging market and were pleased to see
positive like-for-like order intake in the third quarter of the
financial year. Throughout the year we have also sought to continue
our strategic development and achieved some significant
milestones.
Strategic update
Our Group has been transformed over the last twelve months
through the acquisition of Sofology. We have commenced significant
work to release the cost and revenue benefits of this new member of
our Group.
DFS's performance has long been underpinned by an efficient
operating platform, which we are working to develop further. Our
scale enables us to realise cost advantages across a range of
activities, from buying and advertising through to warehousing and
two-man customer delivery. Following investment in technology and
infrastructure, DFS's operating platform is now being leveraged in
some areas by our subsidiaries Dwell and Sofa Workshop, and we have
commenced work to broaden DFS's integration with Sofology.
Critically the operating management of each brand will retain
direct control over all aspects of the customer experience, thereby
ensuring a distinctive brand proposition is maintained.
Our key strategic levers for the delivery of future growth
continue to be those we set out at IPO. Progress in the year is
described below:
Omnichannel
With the vast majority of sofa buyers carrying out significant
research online, but also demanding a 'sit and feel test' in
showrooms, we continue to believe a strong, integrated stores and
web offer is critical to succeed in this segment. We have retained
our strong online market leadership, with dfs.co.uk continuing to
attract over 40% of all online specialist-sector traffic, and
unique website visitor numbers continuing to grow across the Group.
Online revenues once again grew strongly by 15.1%, a pleasing
result given the challenging market backdrop.
We continue to invest in and optimise our omnichannel
experience, particularly the mobile site where most of our web
traffic originates. Our Sofology business has made significant
progress with its omnichannel technology with the successful launch
of its 'my sofology' app, which allows customers to receive
additional information and build baskets on their phone in store,
either independently or with sales colleague assistance, before
then allowing them to check-out immediately or at home. On
dfs.co.uk, we are delighted to be the first UK furniture brand to
launch augmented reality furniture display on iOS 12 through the
mobile web site.
Broadening our appeal to customers
While we are market leader with all customer segments that we
identify we still see significant growth opportunity from
broadening the Group's appeal, with 32% of all potential customers
that are aware of DFS still choosing not to consider the brand.
Our DFS advertising approach has continued to score strongly
with customers, driving record "brand love", "brand acceptability"
and "brand consideration" scores. In making this progress, we have
also maintained 80% of all DFS advertising as having a
pricing/promotional message, which has driven a strengthening of
our perceived value and call to action.
We have continued to develop new ranges for DFS under the French
Connection, Country Living and House Beautiful brands and
successfully launched our new Joules ranges. We have also benefited
from the sale of selected ranges from our own Sofa Workshop brand
within the DFS store estate.
The acquisition of Sofology has added a strong, distinctive
brand with c. GBP180m of annual revenues to the Group's portfolio.
We see significant roll-out potential for Sofology with a large
number of areas where DFS currently trades successfully remaining
unserved by the Sofology store network. Leveraging the strength of
the DFS Group operating platform will also create the potential for
some GBP4 million of near-term synergy benefits in the purchasing
of advertising, interest-free credit, upholstery and other
services. In the medium to longer term there is scope for further
cost and revenue synergies, and for better utilisation of both
companies' warehousing facilities and delivery fleets, together
with potential for further Group benefits through shared innovation
in the future.
Having now owned Sofology for approximately ten months, we are
encouraged by the operational performance to date. Through the
Group's scale we remain on track to drive anticipated synergies,
and our financial strength has allowed us to secure beneficial
working capital terms. Assisted by our support, Sofology has been
able to deploy significantly higher amounts of marketing, including
the use of national TV advertising, which has driven material
like-for-like growth year-on-year. While this trading momentum has
been encouraging, from October 2018 we will begin to annualise the
reintroduction of TV advertising.
With the end of the earn-out period now being reached, Jason
Tyldesley Sofology's CEO and former majority shareholder has
decided to leave the business. I am however delighted to welcome
Sally Hopson, who has joined the Group to take on the Sofology CEO
role. Sally brings tremendous experience to Sofology and the Group,
with a proven record of success in the furniture business and wider
retail, having previously held senior roles at Habitat, Asda and
most recently Pets at Home.
Store network development
Our well-established programme of opening new 10-15,000 sq.ft.
DFS stores in the UK and Republic of Ireland at the rate of three
to five per annum has remained on track, with three new stores in
Haverfordwest, Rugby and Wednesbury all opening in the first half
on the year. We continue to develop our small format store
operating model, with openings in Chelmsford and in Guildford
during the year resulting in five in total.
We have three new DFS stores due to open in the 2019 financial
year, maintaining our established rate of expansion. We intend to
be more selective in future given the national roll-out opportunity
in non-cannibalistic locations offered by Sofology.
We are also currently finalising submissions for planning
consent at an initial three trial retail park locations within the
UK to optimise the existing leased Group retail footprint. In these
proven locations, through the use of mezzanine space, we intend to
open new Sofology and Dwell stores, while maintaining a full-size
DFS 'ground floor only' presence, without any material increase to
passing rents. We are also discussing commercial terms with a key
partner landlord to deliver three further new build standalone
Sofology stores within existing DFS leasehold curtilage, at a
limited incremental rental cost for the Group.
Retail space and distribution cost efficiency
I'm pleased to confirm that our accelerated programme of
establishing Customer Distribution Centres ("CDCs") for final mile
delivery to customers has now completed with the opening of our two
final UK CDCs this year. At the year end, 45 stores had benefited
from the conversion of their former warehouse space to retail use
while the weighted average of converted stores operational through
the year was 44. During the current financial year we are
converting ex-warehouse space in 16 stores to sell an extended
range of DFS beds and dining furniture, and we will open one
additional Dwell store in Farnborough.
We opened six new co-located Dwell stores, thus reaching a total
of 36 Dwell stores across the UK. We also opened five new
co-located Sofa Workshop stores. Sofa Workshop further grew through
the acquisition of six standalone stores that formerly traded as
Multiyork. At the end of the financial year there were therefore 31
Sofa Workshop stores operating, offering a true national footprint.
We have been pleased at how quickly all these new stores have
established themselves and we expect that Sofa Workshop and Dwell
will generate attractive financial returns in the 2019 financial
year as they leverage the Group operating platform and benefit from
their increased store network scale.
We have continued to make progress in negotiations with
landlords regarding our leased property estate, seeing significant
rent reductions in five recently extended leases. We also took the
difficult decision to close, following conversations with
landlords, two legacy DFS stores in Darlington and Wetherby and one
Dwell store at Westfield White City. Although all established DFS
stores contribute towards profits, we are highly disciplined in
ensuring we generate incremental profits and good returns on the
lease adjusted capital employed. We intend to maintain this
approach in future and where we believe stores do not generate an
appropriate return we will either mothball or close those
locations. The annualised combined benefit of the actions recently
implemented will be to reduce our rental cost by over GBP2.0
million per annum, of which c. GBP1.2 million relates to leases
renegotiated and extended.
Looking forward, with 42 leases now due to expire by the end of
2023, we continue to believe there will be a significant annualised
property cost (rent and rates) benefit of GBP6-8 million to be
realised through the renewal of leases.
International development
Our measured strategy of testing and learning in the Netherlands
continues to progress. As we previously announced, we trialled TV
marketing this Spring to assess the potential uplift from
replicating the UK operations' broadcast marketing model. This
proved initially encouraging however as the Netherlands experienced
the same hot weather seen across the UK in the fourth quarter, we
shall continue our trial for a further six months in order that we
may fully assess this opportunity. This will fall within the scope
of our budgeted operating loss in The Netherlands, which we expect
to be in the range of GBP2-3 million for the coming year.
In Spain, our second store in Malaga is now fully established
and, together with our first store in San Javier, we continue to be
pleased by progress. Notwithstanding the uncertainties surrounding
Brexit, the business has performed well and contributed to
operating profit during the year.
Customer service
Delivering the highest standards of service to all our customers
is explicit in our Group's values. Our approach relies both on
proactive training and on careful monitoring of our Net Promoter
Score ("NPS") which is linked to staff incentivisation, combined
with a feedback system that allows us to accurately measure and
track the satisfaction of customers throughout their purchase down
to product, store, factory and employee level.
I am pleased to report another strong performance in our DFS
overall post-purchase NPS of 84.9% during the year, broadly in line
with 85.2% in the prior year, and an improvement in established
customer satisfaction (surveyed six months after orders are placed)
to 35.8%, compared with 34.2% in FY17.
The quality of our products has always been of great importance
to us, and we are very proud that DFS has become the first (and to
date only) retailer in the sector to have its upholstery products
carry the prestigious British Standards Kitemark(TM) .
Impact of the UK's Exit Process from the EU
We continue our work to assess and mitigate the likely impact
from the current UK process to exit the EU. Given the range of
possible scenarios it is impossible for us to be specific, however,
we have been reviewing and continue to assess five potential
aspects in particular, which may have an impact on our Group:
1) Consumer demand - we recognise the retail market for
furniture may be volatile, so we intend to remain vigilant to signs
that consumer demand is being affected, so that we may seek to
respond appropriately and expediently
2) Border delays - while we have significant internal
manufacturing activities and strong relationships with British
manufacturers, just over half of finished good products that we
sell are imported into the UK from mainland Europe or China.
Although furniture goods will not 'spoil' as a result of any border
delays, we would still see a deferral in revenue recognition in our
made-to-order model and there would be an adverse impact to the
customer proposition. We are trialling ways to accelerate the
movement of goods internationally to mitigate some of these
impacts. We also import raw materials (principally timber and
fabric) to manufacture finished goods. We would expect our partner
suppliers to increase the near-shore the supply of these
3) Increased regulatory burden and other friction - we operate
our mainland EU activities using UK entities, and complying with
European standards, including on passporting arrangements in
financial services. We are reviewing any impacts on our ability to
trade using this approach.
4) We do not currently expect to see a material tariff impact,
as our finished goods currently largely attract a 0% tariff under
WTO terms and our business has experience of operating within the
tariff regime for Far East imports. Notwithstanding this there may
be additional administrative and other cost burdens associated with
the chain of custody requirements to avoid tariffs being imposed on
raw materials imports.
5) Exchange rates - the exit process may prompt movements in the
USD/GBP exchange rate, which would impact the cost of our Far East
imports. We have increased Group hedging to cover our expected US
Dollar requirements for the next eighteen months to give us
increased time to respond to any such adverse trends
We will continue our preparations for all likely process
outcomes as part of our regular risk mitigation process, until the
UK and EU's path forward is clear.
Corporate responsibility
Our Group believes in responsible business conduct, and we work
to raise our operational standards each year. We aim to interact
with our customers, colleagues, shareholders, suppliers and the
people in the communities in which we operate in a way that has a
positive impact on society and the environment while supporting the
Group's longer term commercial and strategic objectives. Our sofa
recycling partnership with The British Heart Foundation generated
close to GBP4 million this year and we are on target to raise
GBP1.5 million for BBC Children in Need by 2019 through our "Give
me Five" customer initiative. In addition we continue to support
The Duke of Edinburgh's Award and numerous local charities through
direct donations.
We are committed to promoting a positive health and safety
culture throughout DFS and improving the environmental performance
of our operations year-on-year. We have continued to invest in
improving our processes and practices to ensure that we operate
safe, secure and responsible workplaces no matter where they
are.
We will introduce a timber sourcing policy in the current
financial year, under which we will measure and report on the
certification of timber sources to inform future improvements. We
are also undertaking a review of our finished goods packaging to
seek to minimise our impact on the environment.
We recognise investing in our team of more than 5,000 people is
critical to our success. We have continued our programme of
training and development of all our people, with a particular
emphasis on leadership development across our retail organisations.
We are also proud of our award-winning apprenticeship programme,
which is providing us with a new generation of highly-skilled
colleagues. We are pleased to receive external recognition for
excellence in employee conditions by the continuation for the fifth
year of our Top Employer certification from the Top Employers
Institute, and also our recognition within the Sunday Times' Top 25
'Best Big Companies to Work For'.
CEO succession
DFS announced in May 2018 that I was planning to retire as CEO
at the end of October 2018. I was delighted to see that the Board
of Directors and Nomination Committee chose Tim Stacey, previously
our Chief Operating Officer, to be my successor. Having worked with
Tim for many years, I believe he is a strong choice with a good
balance of omnichannel retail, people leadership, strategic
development and financial analysis skills. This appointment
reflects both the quality of the Group's senior leadership and the
success of our philosophy of developing internal talent. I look
forward to supporting him in this role as I take on the role of
Non-Executive Chair of Sofology over the 12 months to October
2019.
Outlook
We have continued working to develop our Group's strategic and
market position; however financial results for the year reflected
the exceptional downturn in market demand we saw in the fourth
quarter. Our online channels, together with our Sofology, Dwell and
Sofa Workshop businesses, continue to grow and we will continue to
progress our operational and strategic development. The financial
returns of strategic investments in online, new stores and our
distribution network are feeding through into our results and we
expect these along with operating cost efficiencies to benefit the
new financial year.
We are pleased to note that the market has recovered since the
start of the new financial year, with the Group seeing
like-for-like order growth across all brands over the first nine
weeks. We believe however, we are benefiting from deferred
purchases in the prior financial year and overall we expect the
market to remain subdued into 2019, constrained by political risk
and weak consumer sentiment. Notwithstanding this we believe we are
well positioned to become stronger in this current environment,
boosted by investment and acquisition benefits, and we have
excellent prospects for profitable growth and attractive cash flow
generation over the longer term.
Ian Filby
Chief Executive Officer
INTRODUCTORY THOUGHTS FROM TIM STACEY, CEO DESIGNATE
I feel hugely proud and honoured to be very shortly taking on
the position of CEO at DFS. I have worked with Ian and the DFS team
over the last seven years to grow our market-leading position and I
see many exciting opportunities ahead. I'd like to take this
opportunity to thank Ian for his continuing support and guidance,
particularly over the last four months in helping me transition
into my new role.
During this transition period I have taken some time to reflect
on our strategic priorities. While I intend to present a more
detailed update in our interim results in early 2019, I'd like to
share some early reflections at this stage.
The five growth levers that we have followed to date have each
had a clear business rationale and generated near-term returns.
However, in today's market, I intend to increase the pace and focus
on a few specific areas:
-- We need to grow the core DFS business, driving like-for-like
sales through the strengthening of our end to end customer
proposition and by accelerating our omni-channel strategy;
-- With the acquisition of Sofology, and the continued growth at
Dwell and Sofa Workshop, it is now time to develop a true platform
of services to be shared across the Group to reduce costs and
increase capital efficiency; and
-- We will exploit the revenue and earnings growth opportunities
now presented by Sofology, Dwell and Sofa Workshop.
I'm also keen to ensure that our plans are underpinned by a
deeper, evidence-based understanding of our customers across the
Group portfolio. We will continue our work in building these
foundations.
To deliver the plan I need great people around me and I'm
delighted to have such a strong Executive Team in place, consisting
of talent from within the Group, following the re-structuring of
our key leadership positions to align with my appointment as CEO
designate in August. I've also taken the opportunity to reinforce
the executive team through the addition of Sally Hopson as CEO of
Sofology. Sally brings a wealth of retail experience to the Group
and will work with Ian Filby, in his new role as Chairman of
Sofology, to build this growing business.
In summary I'm looking forward to taking up the mantle of CEO
and to seizing the opportunities available to us to ensure the
Group continues to flourish.
There is a real 'can do' attitude that pervades throughout the
organisation and this provides me with great confidence that we
will build on our position as the market leader by delighting our
customers, providing a great working environment for our colleagues
and as a result produce strong returns for our shareholders.
Tim Stacey
Chief Executive Designate
FINANCIAL REVIEW
We began the year well prepared for the continued challenging
conditions in the UK living room furniture market, and the actions
initiated in FY17 to improve our gross margin percentage have
yielded positive results. The underlying weakness in the market was
compounded in the last quarter of the year by a sustained period of
hot weather which impacted key trading periods. The acquisition of
Sofology represents a significant opportunity for the Group and the
performance of the acquired business has been encouraging so
far.
The Group successfully completed the acquisition of Sofology on
30 November 2017. Accordingly, the consolidated results presented
in this annual report include 8 months' activity of the acquired
business. In order to facilitate an understanding of underlying
trading performance, the following table (which excludes
non-underlying items) separates the results of Sofology from the
pre-acquisition Group:
DFS Other Existing
brands Group Sofology Total
GBPm GBPm GBPm GBPm GBPm
============================== =============== ======= =============== =============== ===============
Gross sales 898.5 71.9 970.4 155.2 1,125.6
============================== =============== ======= =============== =============== ===============
Revenue 689.2 58.5 747.7 122.8 870.5
Cost of sales (276.7) (25.9) (302.6) (61.0) (363.6)
============================== =============== ======= =============== =============== ===============
Gross profit 412.5 32.6 445.1 61.8 506.9
Selling and distribution
costs (excl. property costs) (223.9) (22.3) (246.2) (35.3) (281.5)
=============== ===============
Brand contribution 188.6 10.3 198.9 26.5 225.4
=============== ======= =============== =============== ===============
Property costs (84.8) (14.3) (99.1)
Underlying administrative
expenses (41.5) (8.7) (50.2)
=============== =============== ===============
Underlying EBITDA 72.6 3.5 76.1
=============== =============== ===============
As noted in the financial statements, with the expansion of the
Group through a significant acquisition, we have taken the
opportunity to enhance the presentation of our financial
information by separating direct cost of sales from other selling
and distribution costs on the face of the income statement. The
table above further shows property costs separately in order to
highlight brand contribution, our preferred measure of segment
profitability.
PRE-ACQUISITION GROUP
Gross sales and revenue
At the half year we reported a 3.5% decrease in Group gross
sales and revenue, reflecting the tougher market conditions that
had begun in the latter part of FY17. The impact of this new
environment began to annualise in the second half of this year,
giving a lower percentage decrease for the full year of 2.0%.
We had planned for challenging trading conditions through the
year; however, as set out above, the final quarter was
significantly more challenging than expected which gave rise to a
disappointing end to the year as we described in our July trading
statement.
As a consequence, gross sales for the year excluding
acquisitions were GBP970.4 million (FY17: GBP990.8 million) and
revenue was GBP747.7 million (FY17: GBP762.7 million).
Gross profit
While we experienced a reduction in revenue, we continued to
benefit from our ongoing actions to improve our sourcing and range
mix and consequently the gross profit for the pre-acquisition Group
of GBP445.1 million (FY17: GBP448.5 million) was only 0.8% below
last year. This represents an increase of 70 basis points in gross
margin percentage to 59.5% (FY17: 58.8%) across the full financial
year, in line with the expectation we shared at the half year.
This improvement was despite the impact of less favourable US
Dollar exchange rates, particularly in the first half of the year.
We continue to fully hedge our US Dollar purchases, with cover
currently in place for the Group up to 18 months ahead.
Operating Costs
The deflation in TV advertising costs that we noted at the half
year continued for the majority of the second half, allowing us to
make savings in promotional spend while maintaining our strong
presence and share of voice. This deflationary trend annualised
towards the end of the financial year and we anticipate some
inflationary impacts as we move forward into FY19.
Other operating costs were broadly consistent as a proportion of
revenue, reflecting the high degree of variability in our cost
base. However, new store openings in the year (and annualisation of
those opened last year) did contribute to a small increase in
non-variable elements of employee and site costs. Total selling and
distribution costs overall decreased by 0.5% to GBP246.2 million
(FY17: GBP247.5 million).
Property costs and administrative expenses
New store and CDC openings resulted in an increase in property
costs of GBP4.3 million to GBP84.8 million, which in an environment
of negative like-for-like revenues generated an increase in these
costs relative to revenue.
Underlying administrative expenses increased by 8.9% to GBP41.5
million (FY17: GBP38.1 million) reflecting increased share based
payment charges and auto-enrolment pension costs as well as some
annualisation of vacancies filled in the last year.
Underlying EBITDA
As a net consequence of the decrease in revenue and the other
factors described above, underlying EBITDA for the pre-acquisition
Group decreased by 11.9% to GBP72.6 million (FY17: GBP82.4
million).
ACQUISITIONS
Sofology
The Group's acquisition of Sofology Limited was formally
completed on 30 November 2017, with initial cash consideration
payable of GBP26 million, reflecting a debt-free, cash-free
valuation of GBP25 million. After the recognition of an intangible
asset of GBP13.8 million in respect of the Sofology brand name,
goodwill arising on the transaction was GBP28.4 million. This
figure represents an update on the provisional values available at
the time of our interim results in March 2018.
The earnings period determining the value of any deferred
consideration payable on the acquisition ended on 30 September
2018. Final results were still being prepared at the time of the
publication of this annual report and there remains a high degree
of uncertainty; however based on information available to date,
some additional consideration may be payable and accordingly an
accrual of GBP5.0 million has been recognised as a non-underlying
expense. The performance of the acquired business has been
encouraging and we are beginning to see some early benefits of the
synergies we aim to realise. Sofology contributed GBP122.8 million
to Group revenue in the year and generated brand contribution of
GBP26.5 million and a loss before tax of GBP1.4 million. If
Sofology had been part of the Group for the full financial year, it
would have contributed a total of GBP180.0 million to reported
Group revenue, brand contribution of GBP36.6 million and loss
before tax of GBP4.1 million.
Multiyork
As announced on 22 December 2017, the Group agreed to acquire
eight store leases and certain assets and intellectual property
from Multiyork Furniture Limited on 27 December 2017, following
that business entering administration for cash consideration, of
GBP1.2 million.
COMBINED GROUP
Revenue and profit
Total Group revenue for the year, including acquisitions, was
GBP870.5 million, an increase of 14.1% on the previous year (FY17:
GBP762.7 million). The relative increase in gross profit of 13.0%
to GBP506.9 million (FY17: GBP448.5 million) was slightly lower due
to the dilutive effect of the Sofology gross margin percentage,
which for FY18 was 50.3% - substantially lower than the 59.9%
equivalent margin reported for the DFS brand. While this dilution
will not be eliminated immediately, the development of buying
synergies and improved exchange rates on US Dollar purchases,
offset by some inflationary pressures, should overall result in an
improved Group gross margin percentage for FY19. The projected US
Dollar requirements of the Group for the next 18months are now
fully hedged.
Underlying Group EBITDA of GBP76.1 million was 7.6% lower than
the previous year (FY17: GBP82.4 million).
Group depreciation and amortisation charges increased to GBP28.3
million (FY17: GBP21.9 million). This was due to the combined
effect of growth in the pre-acquisition Group reflecting the
capital investment in the CDC and retail space optimisation
programme over the last three years and additional charges for
Sofology fixed assets. Amortisation charges include GBP1.1 million
in respect of acquired brand names.
The increase in depreciation and amortisation charges in
addition to the reduced operating margin of the Group resulted in a
21.0% decrease in underlying operating profit to GBP47.8 million
(FY17: GBP60.5 million).
Non-underlying costs
A total of GBP9.9 million of non-underlying costs are included
in administrative expenses comprising GBP2.6 million of
professional fees relating to the Sofology and Multiyork
acquisitions, GBP5.0 million estimated additional consideration for
Sofology, GBP2.0m of integration costs incurred to date to drive
the release of synergies and GBP0.3 million of restructuring costs
relating primarily to the closure of our national distribution
centre.
As we have previously guided, there will be further
non-underlying expenses of c.GBP3 million incurred in FY19 in
connection with the integration of Sofology to unlock the near-term
synergy benefits that we see for the Group. We anticipate that we
will be in a position to achieve the estimated GBP4 million annual
benefit from these synergies from the beginning of FY20.
Operating profit after non-underlying costs was GBP37.9 million,
a decrease of 37.4% on the previous year (FY17: GBP60.5
million).
Finance costs
At the start of the financial year the Group successfully
refinanced its existing senior loan and revolving credit facilities
with a new GBP230 million revolving credit facility. This has
enabled us to flex the level of borrowings to more closely meet
short term requirements, and minimise finance costs by using
surplus cash to reduce borrowings instead of being held separately.
The Group continues to manage interest rate risks associated with
its borrowings through the use of appropriate hedging
instruments.
As a consequence, notwithstanding the GBP21.3 million increase
in net debt arising from the Sofology and Multiyork acquisitions,
total net underlying finance costs of GBP10.7 million (FY17:
GBP10.6 million) were in line with last year. In addition, GBP1.5
million of non-underlying finance costs were incurred in connection
with the refinancing.
Tax
As in previous years, the underlying effective tax rate for the
year of 20.7% (FY17: 21.1%) was higher than the applicable UK
Corporation Tax rate of 19.0% (FY17: 19.67%), primarily due to
disallowable depreciation on non-qualifying fixed assets. The
higher total tax rate of 27.1% (FY17: 21.1%) reflects the
non-deductible acquisition consideration and expenses incurred in
the year.
Earnings per share
Underlying basic earnings per share for the Group were 14.0
pence per share (FY17: 18.7 pence), a decrease of 25.1% on last
year. Including the effect of non-underlying operating and finance
costs totalling GBP10.7 million, reported basic earnings per share
decreased by 52.4% to 8.9 pence per share (FY17: 18.7 pence).
Capital expenditure
Although conversion of released retail space will continue
through to FY20, the CDC warehouse opening programme was completed
in the first half of FY18, and consequently cash capital
expenditure reduced to GBP22.0 million (FY17: GBP28.3 million).
This was slightly lower than our previous guidance of GBP24-26
million as during the year we began to source replacement
commercial vehicles under finance lease arrangements. In FY19 we
anticipate cash capital expenditure for the Group, including
Sofology, to be GBP24-26 million.
The Board continues to place importance on enhancing the Group's
return on capital employed. While we will continue to make an
appropriate level of maintenance spend on our store estate and
infrastructure and maintain a considered approach to our trial and
innovation pipeline, we will focus the allocation of capital where
there is a proven and positive return.
Cash flow and balance sheet
Although the decrease in profit had an inevitable impact, the
Group continues to be highly cash generative, with net cash inflow
from operating activities of GBP67.5 million (FY17: GBP74.8
million). Free cash flow (measured as underlying EBITDA, less
capital expenditure and working capital movements) increased 6.0%
on FY17 to GBP60.4 million (FY17: GBP57.0 million) primarily as a
consequence of lower capital expenditure.
After GBP23.7 million of dividends paid to shareholders, and the
costs of acquisitions closing net debt was GBP159.0 million (FY17:
GBP144.5 million).This resulted in a gearing ratio of 2.1 times
underlying EBITDA (FY17: 1.75 times). The Board continues to target
a return to a gearing ratio of 1.5 times over the medium term.
The Group will adopt IFRS 16 in FY20 and this will have a
significant impact on the reported gearing ratio of the Group as
leasing obligations are recognised in full on the balance sheet.
Our work in this area is continuing and we will provide further
updates in the year ahead. This change in reported gearing will not
affect covenants on our bank facilities which will continue to be
calculated in accordance with the pre IFRS 16 methodology.
Dividend
The Board remains focused on delivering appropriate returns to
shareholders whilst maintaining a robust balance sheet. Over the
medium term the Board expects to target a dividend pay-out ratio of
45-50% of profit after tax and will continue to work towards its
commitment to maintaining a capital structure of 1.5x net
debt/EBITDA.
The Board has decided to recommend to shareholders a final
dividend of 7.5 pence per share (FY17: 7.5 pence), resulting in a
total dividend for the year of 11.2 pence, in line with FY17. This
reflects the Board's confidence in the underlying performance of
and outlook for the business.
The Board continues to monitor the overall level of net debt in
light of recent acquisitions and future investment opportunities.
To the extent that the Group has sustainable levels of capital in
excess of anticipated requirements, the Board expects to return it
to shareholders.
Change of Financial Reporting Period
As part of our work on transitioning Group reporting following
the acquisition of Sofology we have completed a careful review of
our Group's operational cycle and fit with financial reporting
periods. This review has concluded that moving the Group's
financial year to a 52 week period ending late June, would offer a
number of benefits:
1) Manufacturing operations benefits - in order to maximise
deliveries in each respective financial period the business has
historically sought to delay manufacturing summer maintenance
shutdowns for both our internal operations and also supplier
partners through to early August. This has not been consistently
possible with external suppliers, and is seen as less desirable by
our manufacturing employees. A June financial period end would
consistently be before any shutdown periods, improving year-on-year
comparability of our financial results as well as allowing
manufacturers to choose their optimal timing for annual
shutdowns.
2) Improved comparability of period ends - We see consistent
strong customer demand to receive orders ahead of Christmas as part
of our Guaranteed Christmas Delivery campaign, which contrasts with
customers' more variable willingness year-to-year to take delivery
of orders at the end of January. We believe this consistent low
point in the order bank allows more consistent measurement of
trading performance in the half-year. Likewise we believe a similar
comparability benefit will be seen in the change from July to June
period ends, with the holiday period having differing degrees of
impact on delivery of the order bank.
3) Timing of new store opening costs - Our experience indicates
that the most immediate financial paybacks are generated by store
openings made in time for the August Bank Holiday. In order to open
a store in late August, the store fit-out and training of staff
must commence during July, resulting in a loss in that month as no
revenues are being generated by the store. Although we have
previously chosen to open a number of stores to be ready for the
August bank holiday (most recently Barnstaple), it does create a
distorting impact on the prior financial year. A move to a June
financial year end allows these pre-opening costs to be recognised
in the same financial period that the store opens.
4) Alignment of acquired business - Following its acquisition by
the Group, there is a need for Sofology to align its financial year
end (historically December) with that of the Group. This can be
achieved more straightforwardly through an 18 month long period of
account to June 2019 than inserting an additional short accounting
period in order to align to a July year end.
We will therefore adopt an accounting reference date for the
Group of 30 June with immediate effect, meaning FY19 will be a 48
week financial period ending 30 June 2019.
We do not anticipate there will be a material difference in our
financial performance over the 52 weeks to June 2019 relative to
the 52 weeks to July 2019. To aid comparison however we publish
below a summary of financial performance for the 52 weeks and 48
weeks ending 30 June 2018.
52 weeks ending 30 June 2018 (unaudited)
DFS Other Existing
brands Group Sofology* Total
GBPm GBPm GBPm GBPm GBPm
=================================== ============== ======= ============== ============== ==============
Gross sales 902.0 71.4 973.4 132.1 1,105.5
=================================== ============== ======= ============== ============== ==============
Revenue 691.3 58.1 749.4 104.6 854.0
Cost of sales (277.0) (25.7) (302.7) (52.6) (355.3)
=================================== ============== ======= ============== ============== ==============
Gross profit 414.3 32.4 446.7 52.0 498.7
Selling and distribution costs
(excl. property costs) (222.5) (22.0) (244.5) (31.0) (275.5)
============== ==============
Brand contribution 191.8 10.4 202.2 21.0 223.2
============== ======= ============== ============== ==============
Property costs (84.7) (13.0) (97.7)
Underlying administrative expenses (41.6) (7.2) (48.8)
============== ============== ==============
Underlying EBITDA 75.9 0.8 76.7
============== ============== ==============
* Sofology shown for the seven months ending June 2018, since
acquisition
excludes amortisation of brand names
48 weeks ending 30 June 2018 (unaudited)
DFS Other Existing
brands Group Sofology* Total
GBPm GBPm GBPm GBPm GBPm
=================================== ============== ======= ============== ============== ==============
Gross sales 806.7 64.7 871.4 132.1 1,003.5
=================================== ============== ======= ============== ============== ==============
Revenue 618.0 52.6 670.6 104.6 775.2
Cost of sales (249.6) (23.3) (272.9) (52.6) (325.5)
=================================== ============== ======= ============== ============== ==============
Gross profit 368.4 29.3 397.7 52.0 449.7
Selling and distribution costs
(excl. property costs) (207.6) (20.6) (228.2) (31.0) (259.2)
============== ==============
Brand contribution 160.8 8.7 169.5 21.0 190.5
============== ======= ============== ============== ==============
Property costs (78.1) (13.0) (91.1)
Underlying administrative expenses (39.4) (7.2) (46.6)
============== ============== ==============
Underlying EBITDA 52.0 0.8 52.8
============== ============== ==============
* Sofology shown for the seven months ending June 2018, since
acquisition
excludes amortisation of brand names
The strongly profitable financial results that can be implied
for July 2018 and July 2017 partly reflects significant volumes of
deliveries being made in the month, following the important Easter
and May bank holiday periods. Lead times are also typically shorter
in this period in order to minimise the customer impact of August
manufacturing shutdowns and to ensure booked orders are recognised
before year end. Operating costs are also typically low during the
July period, with limited consumer demand events, minimal
promotional marketing spend is incurred. Measuring July and August
together shows a financial result that is not materially different
to a typical two month period in the year.
Looking forward
As we move into a new financial year in what we anticipate to be
continued challenging market conditions, we will retain our focus
on maintaining our gross margin and controlling our costs while
making appropriate investment in the growth of our business. The
management of our cash will also be of importance in order to
maintain the strength of our returns to shareholders and make the
most efficient use of our borrowing facilities.
Nicola Bancroft
Chief Financial Officer
Consolidated income statement
2018 2018 2018 2017
Underlying Non- Total Total
underlying
Note GBPm GBPm GBPm GBPm
=============================== ==== ============== ================== ============= ==============
Gross sales 2 1,125.6 - 1,125.6 990.8
=============================== ==== ============== ================== ============= ==============
Revenue 2 870.5 - 870.5 762.7
Cost of sales (363.6) - (363.6) (314.2)
=============================== ==== ============== ================== ============= ==============
Gross profit 506.9 - 506.9 448.5
Selling and distribution
costs (380.6) - (380.6) (328.0)
Administrative expenses 3 (50.2) (9.9) (60.1) (38.1)
=============================== ==== ============== ================== ============= ==============
Operating profit before
depreciation and amortisation 76.1 (9.9) 66.2 82.4
Depreciation (24.1) - (24.1) (19.4)
Amortisation (4.2) - (4.2) (2.5)
=============================== ==== ============== ================== ============= ==============
Operating profit 3 47.8 (9.9) 37.9 60.5
Finance income 0.1 - 0.1 0.2
Finance expenses 4 (10.7) (1.5) (12.2) (10.6)
=============================== ==== ============== ================== ============= ==============
Profit before tax 37.2 (11.4) 25.8 50.1
Taxation (7.7) 0.7 (7.0) (10.6)
=============================== ==== ============== ================== ============= ==============
Profit for the year 29.5 (10.7) 18.8 39.5
=============================== ==== ============== ================== ============= ==============
Earnings per share
Basic 514.0p (5.1)p 8.9p 18.7p
=================== ===== ====== ==== =====
Diluted 513.9p (5.0)p 8.9p 18.6p
=================== ===== ====== ==== =====
Consolidated statement of comprehensive income
2018 2017
GBPm GBPm
=================================================== ===== ============
Profit for the year 18.8 39.5
Other comprehensive income
Items that are or may be reclassified subsequently
to profit or loss:
Effective portion of changes in fair value
of cash flow hedges 4.7 1.8
Net change in fair value of cash flow hedges
reclassified to profit or loss 6.3 (5.8)
Income tax on items that are/may be reclassified
subsequently to profit or loss (1.6) 0.8
=================================================== ===== ============
Other comprehensive expense for the period,
net of income tax 9.4 (3.2)
=================================================== ===== ============
Total comprehensive income for the period 28.2 36.3
=================================================== ===== ============
Consolidated balance sheet
2018 2017
GBPm GBPm
========================================= ======= =======
Non-current assets
Property, plant and equipment 91.1 74.2
Intangible assets 537.0 491.8
Other financial assets 1.6 -
Deferred tax assets 8.0 9.8
========================================== ======= =======
637.7 575.8
========================================= ======= =======
Current assets
Inventories 54.4 36.6
Other financial assets 3.7 -
Trade and other receivables 31.2 24.5
Cash and cash equivalents 47.2 61.0
========================================== ======= =======
136.5 122.1
========================================= ======= =======
Total assets 774.2 697.9
========================================== ======= =======
Current liabilities
Trade payables and other liabilities (228.5) (165.6)
Provisions (4.9) (5.1)
Other financial liabilities (0.1) (3.5)
Current tax liabilities (2.7) (3.8)
========================================== ======= =======
(236.2) (178.0)
========================================= ======= =======
Non-current liabilities
Interest bearing loans and borrowings (195.7) (198.8)
Provisions (5.9) (5.2)
Other financial liabilities (1.1) (3.5)
Other liabilities (82.9) (67.3)
========================================== ======= =======
(285.6) (274.8)
========================================= ======= =======
Total liabilities (521.8) (452.8)
========================================== ======= =======
Net assets 252.4 245.1
========================================== ======= =======
Equity attributable to equity holders
of the parent
Share capital 319.5 319.5
Share premium 40.4 40.4
Merger reserve 18.6 18.6
Treasury shares (3.3) (3.7)
Cash flow hedging reserve 4.0 (7.0)
Retained earnings (126.8) (122.7)
========================================== ======= =======
Total equity 252.4 245.1
========================================== ======= =======
Consolidated statement of changes in equity
Cash
Treasury flow
Share Share Merger shares hedging Retained Total
capital premium reserve reserve earnings equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
======================= ======== ======== ======== ========== =============== ========= =======
Balance at 30 July
2016 319.5 40.4 18.6 (3.7) (3.0) (121.2) 250.6
Profit for the year - - - - - 39.5 39.5
Other comprehensive
income/(expense) - - - - (4.0) 0.8 (3.2)
======================= ======== ======== ======== ========== =============== ========= =======
(
Total comprehensive
income/(expense) for
the period - - - - (4.0) 40.3 36.3
Dividends - - - - - (43.8) (43.8)
Share based payments - - - - - 2.0 2.0
======================= ======== ======== ======== ========== =============== ========= =======
Balance at 29 July
2017 319.5 40.4 18.6 (3.7) (7.0) (122.7) 245.1
Profit for the year - - - - - 18.8 18.8
Other comprehensive
income/(expense) - - - - 11.0 (1.6) 9.4
======================= ======== ======== ======== ========== =============== ========= =======
Total comprehensive
income/(expense) for
the period - - - - 11.0 17.2 28.2
Dividends - - - - - (23.7) (23.7)
Treasury shares issued - - - 0.4 - (0.4) -
Share based payments - - - - - 2.8 2.8
======================= ======== ======== ======== ========== =============== ========= =======
Balance at 28 July
2018 319.5 40.4 18.6 (3.3) 4.0 (126.8) 252.4
======================= ======== ======== ======== ========== =============== ========= =======
Consolidated cash flow statement
2018 2017
GBPm GBPm
======================================================= ======= ======
Operating profit 37.9 60.5
Adjustments for:
Depreciation, amortisation and impairment 28.3 21.9
Gain on sale of property, plant and equipment (0.9) (0.8)
Accrued acquisition consideration 5.0 -
Share based payment expense 2.8 2.0
(Increase)/decrease in trade and other receivables (1.7) 1.9
Increase in inventories (4.7) (1.7)
Increase in trade and other payables 11.0 2.2
Decrease in provisions (1.1) (1.5)
======================================================= ======= ======
76.6 84.5
Tax paid (9.1) (9.7)
======================================================= ======= ======
Net cash from operating activities 67.5 74.8
Cash flows from investing activities
Proceeds from sale of property, plant and equipment 1.0 1.0
Interest received 0.1 0.2
Acquisition of subsidiaries (20.1) -
Acquisition of trade and assets (1.2) -
Acquisition of property, plant and equipment (17.3) (25.2)
Acquisition of other intangible assets (4.7) (3.1)
======================================================= ======= ======
Net cash from investing activities (42.2) (27.1)
Cash flows from financing activities
Proceeds from new loan 197.0 -
Interest paid (7.4) (7.3)
Exceptional refinancing costs (1.9) -
Repayment of borrowings (200.0) -
Payment of finance lease liabilities (3.1) (2.3)
Ordinary dividends paid (23.7) (23.7)
Special dividends paid - (20.1)
======================================================= ======= ======
Net cash from financing activities (39.1) (53.4)
Net decrease in cash and cash equivalents (13.8) (5.7)
Cash and cash equivalents at beginning of period 61.0 66.7
======================================================= ======= ======
Cash and cash equivalents at end of period 47.2 61.0
======================================================= ======= ======
Notes to the condensed consolidated financial statements
1 Basis of preparation
The condensed consolidated financial statements have been
prepared and approved by the directors in accordance with
International Financial Reporting Standards as adopted by the EU
("Adopted IFRS"). The financial statements are prepared on the
historical cost basis except for certain financial instruments and
share based payment charges which are measured at their fair value.
The financial statements are for the 52 weeks to 28 July 2018 (last
year 52 weeks to 29 July 2017).
The financial information set out above does not constitute the
company's statutory accounts for the years ended 28 July 2018 or 29
July 2017 but is derived from those accounts. Statutory accounts
for the year ended 29 July 2017 have been delivered to the
registrar of companies, and those for the year ended 28 July 2018
will be delivered in due course. The auditor has reported on those
accounts; their reports were (i) unqualified, (ii) did not include
a reference to any matters to which the auditor drew attention by
way of emphasis without qualifying their report and (iii) did not
contain a statement under section 498 (2) or (3) of the Companies
Act 2006.
Presentation of financial statements
Following the acquisition of Sofology Limited, the directors
have reflected on the continuing need to provide relevant financial
information to shareholders as the Group grows and develops. As a
consequence, with effect from the financial year commencing 30 July
2017 the analysis of operating expenses on the face of the income
statement has been expanded to separate direct cost of sales (cost
of goods, related costs of shipping) from other selling and
distribution costs (advertising, wages and other store costs,
delivery and customer service costs). Disclosures of amounts
charged to operating profit in respect of cost of inventories has
also been revised to align with the new presentation.
In addition, segmental analysis presented in accordance with
IFRS 8 has been amended to provide a separate analysis of the
Group's major brands in order to more closely reflect the way in
which the enlarged Group reviews and manages its operations. The
directors consider that this revised presentation will provide
shareholders and other users of the financial statements with
useful additional relevant information in order to evaluate the
nature and financial effects of the different business activities
in which the Group engages.
These changes have no effect on reported operating profit and
all comparatives presented have been restated in line with the new
presentation.
Going concern
The market in which the Group operates continues to present a
number of challenges. Nevertheless the Group remains highly cash
generative and currently has sufficient medium and long term
facilities in place, including a GBP230.0 million revolving credit
facility in place until August 2022.
On the basis of their assessment of the Group's financial
position, forecasts and projections the Company's directors are
satisfied that it is appropriate to adopt the going concern basis
of accounting in preparing the financial statements.
2 Segmental Analysis
The Group's operating segments under IFRS 8 have been determined
based on management accounts reports reviewed by the Executive
Board. Segment performance is assessed based upon brand
contribution. Brand contribution is defined as underlying EBITDA
(being earnings before interest and tax excluding depreciation
charges and non-underlying items) excluding property costs and
central administration costs.
The Group reviews and manages the performance of its operations
on a retail brand basis, and the identified reportable segments and
the nature of their business activities are as follows:
DFS: the manufacture and retailing of upholstered furniture and
related products through DFS branded stores and websites.
Sofology: the retailing of upholstered furniture and related
products through Sofology branded stores and website.
Other segment activities comprise the retailing of upholstered
and other furniture and related products through other brands,
including Dwell and Sofa Workshop.
Segment revenue and profit
External sales Internal sales Total gross sales
2018 2017 2018 2017 2018 2017
GBPm GBPm GBPm GBPm GBPm GBPm
=============== ========= ===== ======= ======= ========== =======
DFS 898.5 925.0 - - 898.5 925.0
Sofology 155.2 - - - 155.2 -
Other segments 71.9 65.8 0.6 0.6 72.5 66.4
Eliminations - - (0.6) (0.6) (0.6) (0.6)
================ ========= ===== ======= ======= ========== =======
Gross sales 1,125.6 990.8 - - 1,125.6 990.8
================ ========= ===== ======= ======= ========== =======
2018 2017
GBPm GBPm
======================================== ======= =======
Total segments gross sales 1,125.6 990.8
Less: value added and other sales taxes (175.8) (153.8)
Less: costs of interest free credit and
aftercare products (79.3) (74.3)
======================================== ======= =======
Revenue 870.5 762.7
======================================== ======= =======
2018
DFS Sofology Other TOTAL
GBPm GBPm GBPm GBPm
============================= ======= ======== ====== =======
Revenue 689.2 122.8 58.5 870.5
Cost of sales (276.7) (61.0) (25.9) (363.6)
============================= ======= ======== ====== =======
Gross profit 412.5 61.8 32.6 506.9
Selling & distribution costs
(excluding property costs) (223.9) (35.3) (22.3) (281.5)
Brand contribution (segment
profit) 188.6 26.5 10.3 225.4
Property costs (99.1)
Underlying administrative
expenses (50.2)
Underlying EBITDA 76.1
============================= ======= ======== ====== =======
2017
DFS Sofology Other TOTAL
GBPm GBPm GBPm GBPm
============================= ======= ======== ====== =======
Revenue 709.2 - 53.5 762.7
Cost of sales (289.3) - (24.9) (314.2)
============================= ======= ======== ====== =======
Gross profit 419.9 - 28.6 448.5
Selling & distribution costs
(excluding property costs) (227.4) - (20.1) (247.5)
Brand contribution (segment
profit) 192.5 - 8.5 201.0
Property costs (80.5)
Underlying administrative
expenses (38.1)
Underlying EBITDA 82.4
============================= ======= ======== ====== =======
2018 2017
GBPm GBPm
============================ ====== ======
Underlying EBITDA 76.1 82.4
Non-underlying items (9.9) -
Depreciation & amortisation (28.3) (21.9)
Operating profit 37.9 60.5
Finance income 0.1 0.2
Finance expenses (12.2) (10.6)
Profit before tax 25.8 50.1
============================ ====== ======
A geographical analysis of revenue is presented below:
2018 2017
GBPm GBPm
=============== ===== =====
United Kingdom 839.7 736.6
Europe 30.8 26.1
=============== ===== =====
Total revenue 870.5 762.7
=============== ===== =====
Segment assets and liabilities
Assets Liabilities
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
DFS 662.4 676.5 (249.6) (233.5)
Sofology 87.3 - (61.7) -
Other segments 33.5 29.4 (33.2) (27.5)
=============================== ====== ====== ======= =======
Total segments 783.2 705.9 (344.5) (261.0)
Loans and financing - - (195.7) (198.8)
Financial assets/(liabilities) 5.3 - (1.2) (7.0)
Current tax - - (2.7) (3.8)
Deferred tax 8.0 9.8 - -
Eliminations (22.3) (17.8) 22.3 17.8
=============================== ====== ====== ======= =======
Total Group 774.2 697.9 (521.8) (452.8)
=============================== ====== ====== ======= =======
Segment assets comprises tangible and intangible non-current
assets including goodwill and brand names, inventories, trade and
other receivables, cash and cash equivalents. Segment liabilities
comprises trade payables and current and non-current other
liabilities and provisions.
Additions to non-current Depreciation and
assets amortisation
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
DFS 20.7 26.6 21.4 20.0
Sofology 2.3 - 4.3 -
Other segments 4.1 5.2 2.6 1.9
=============== ============ ============ ======== ========
Total Group 27.1 31.8 28.3 21.9
=============== ============ ============ ======== ========
Additions to non-current assets represents includes both
tangible and intangible non-current assets but excludes amounts
arising on acquisition.
3 Operating profit
Group operating profit is stated after charging/(crediting):
2018 2017
GBPm GBPm
============================================= ===== ======
Depreciation on tangible assets 24.1 19.4
Net gain on disposal of property, plant and
equipment (0.9) (0.8)
Amortisation of intangible assets 4.2 2.5
Cost of inventories recognised as an expense 371.2 326.4
Write down of inventories to net realisable
value 0.6 0.6
Other cost of sales variances (8.2) (12.8)
Operating lease rentals 74.2 61.6
============================================= ===== ======
Non-underlying items 2018 2017
GBPm GBPm
====================================== ==== ====
Acquisition related professional fees 2.6 -
Estimated additional consideration 5.0 -
Integration costs 2.0 -
Restructuring costs 0.3 -
====================================== ==== ====
9.9 -
====================================== ==== ====
Acquisition related fees, additional consideration and
integration costs arose on the Group's acquisitions of Sofology
Limited and certain assets from Multiyork (note 9). Restructuring
costs relate to the previously announced closure of our national
distribution centre.
4 Finance expense
2018 2017
GBPm GBPm
============================================ ====== ======
Interest payable on senior loan facility (0.1) (7.1)
Interest payable on senior revolving credit
facility (7.0) -
Bank fees (0.1) (0.2)
Fair value lease adjustment unwind (3.0) (2.9)
Unwind of discount on provisions (0.1) (0.1)
Finance lease interest (0.4) (0.3)
Underlying finance expense (10.7) (10.6)
Non-underlying refinancing costs (1.5) -
============================================ ====== ======
Total finance expense (12.2) (10.6)
============================================ ====== ======
Non-underlying finance costs relate to the refinancing of the
Group's borrowings.
5 Earnings per share
2018 2017
Pence Pence
================================================ =========== ===========
Basic earnings per share 8.9 18.7
Diluted earnings per share 8.9 18.6
================================================ =========== ===========
2018 2017
GBPm GBPm
================================================ =========== ===========
Profit attributable to equity holders of the
parent company 18.8 39.5
================================================ =========== ===========
2018 2017
GBPm GBPm
================================================ =========== ===========
Weighted average number of shares for basic
earnings per share 211,631,564 211,530,721
Dilutive effect of employee share based payment
awards 1,301,607 753,518
================================================ =========== ===========
Weighted average number of shares for diluted
earnings per share 212,933,171 212,284,239
================================================ =========== ===========
Underlying earnings per share
Underlying basic earnings per share and underlying diluted
earnings per share are calculated by dividing the profit for the
period attributable to ordinary equity holders of the parent
company, as adjusted to exclude the effect of non-underlying items,
by the same weighted average numbers of ordinary shares above used
for basic and diluted earnings per share respectively.
2018 2017
GBPm GBPm
============================================ ===== =====
Profit for the year attributable to equity
holders of the parent company 18.8 39.5
Non-underlying loss after tax 10.7 -
============================================ ===== =====
Underlying profit for the year attributable
to equity holders of the parent 29.5 39.5
============================================ ===== =====
2018 2017
Pence Pence
============================================ ===== =====
Underlying basic earnings per share 14.0 18.7
Underlying diluted earnings per share 13.9 18.6
============================================ ===== =====
6 Dividends
2018 2017
GBPm GBPm
=================================== ==== ==== ==== ====
Final ordinary dividend for FY16 6.2p paid - 15.9
Interim ordinary dividend for FY17 3.5p paid - 7.8
Special dividend for FY17 9.5p paid - 20.1
Final ordinary dividend for FY17 7.5p paid 15.9 -
Interim ordinary dividend for FY18 3.7p paid 7.8 -
=================================== ==== ==== ==== ====
23.7 43.8
=================================== ==== ==== ==== ====
The directors recommend a final dividend of 7.5 pence per share
in respect of the financial period ended 28 July 2018, resulting in
a total proposed dividend of GBP15.9 million. Subject to
shareholder approval it is intended that this dividend will be paid
on 27 December 2018. DFS Furniture plc shares will trade
ex-dividend from 6 December 2018 and the record date will be 7
December 2018. This dividend has not therefore been recognised as a
liability in these financial statements.
7 Financial instruments
All derivatives are categorised as Level 2 under the
requirements of IFRS 7 as they are valued using techniques based
significantly on observed market data.
The directors consider that the fair values of each category of
the Group's financial instruments are the same as their carrying
values in the Group's balance sheet.
8 Capital expenditure
For the 52 weeks to 28 July 2018, additions of property, plant
and equipment (including those acquired under finance leases)
totalled GBP22.4 million (2017: GBP28.7 million). Additions of
intangible assets (computer software) totalled GBP4.7 million
(2017: GBP3.1 million).
At 28 July 2018 the Group had contracted capital commitments of
GBP3.9 million (2017: GBP3.4 million) for which no provision has
been made in the financial statements.
9 Business combinations
Sofology
On 30 November 2017 the Group acquired 100% of the issued share
capital of Sofology Limited, a UK based living room furniture
retailer with a focus on upholstered furniture. This acquisition
has added a further strong distinctive brand to the Group's current
portfolio, supporting the Group's existing strategy of developing
its appeal to a broader range of customers.
Initial cash consideration payable was GBP26.0 million,
(equivalent to GBP25 million on a debt-free, cash-free basis), with
deferred contingent consideration payable based on underlying
earnings before interest, tax, depreciation and amortisation for
the 12 months ended 30 September 2018 (the "earn-out period").
Based on the immediate post-acquisition performance of the acquired
business, the Directors estimated that no further consideration
would be payable and this is reflected in the acquisition
accounting.
At the date of this annual report, although the earn-out period
has just ended the actual results for the 12 months to 30 September
are not yet available and accounting confirmation procedures under
the sale and purchase agreement have not yet commenced. Performance
of the acquired business has strengthened over recent months and it
is therefore possible that some additional consideration could
become payable. While a high degree of uncertainty remains, the
Directors have accrued GBP5.0 million as an estimate of additional
consideration potentially payable which has been recognised in the
income statement as a non-underlying expense. It is anticipated
that the determination and settlement of the final amount due will
occur during FY19, and any difference between the amount provided
and the final amount paid will be recognised as a non-underlying
expense or credit.
The goodwill of GBP28.4m arising from the acquisition is
attributable to the established store network, workforce, designs
and technologies of the acquired business and cost savings realised
in the combined businesses through economies of scale and other
synergies.
The amounts recognised in respect of the identifiable assets
acquired and liabilities assumed are as set out below:
Recognised amounts of identifiable assets GBPm
acquired and liabilities assumed
Provisional fair value
================================================= =========================
Property, plant & equipment 18.7
Intangible assets - software 1.3
Intangible assets - brand name 13.8
Inventories 13.1
Cash 5.9
Trade and other receivables 5.0
Trade payables and other liabilities (51.7)
Fair value lease creditor (7.4)
Deferred tax (1.1)
================================================== =========================
Total identifiable net liabilities (2.4)
Goodwill 28.4
================================================== =========================
Total consideration 26.0
================================================== =========================
Satisfied by:
Cash consideration 26.0
Contingent consideration -
================================================= =========================
Total consideration 26.0
================================================== =========================
Cash consideration 26.0
Less: cash and cash equivalent balances acquired (5.9)
================================================== =========================
Net cash outflow arising on acquisition 20.1
================================================== =========================
Acquisition related costs of GBP2.5 million have been charged as
non-underlying administrative expenses in the income statement.
In the period from 1 December 2017 to 28 July 2018, Sofology
Limited contributed GBP122.8 million to reported Group revenue and
a loss before tax of GBP1.4 million. Had Sofology Limited been
consolidated from 30 July 2017, reported Group revenue would have
been GBP927.7 million and underlying EBITDA would have been
GBP77.7m. Profit before tax, including the costs of shareholder
loans and non-underlying items would have been GBP23.1 million.
Multiyork
On 27 December 2018 the Group acquired eight store leases and
certain assets and intellectual property from Multiyork Furniture
Limited following that business entering administration. Cash
consideration for this transaction, which has been accounted for as
a business combination, was GBP1.2 million has been recognised as
goodwill. In addition, GBP0.1million of related acquisition costs
have been recognised in non-underlying administrative expenses.
10 Net debt
Other non-cash
2017 Cash flow Acquisitions changes 2018
GBPm GBPm GBPm GBPm GBPm
================== ====================== ================= =============== ============== ======================
Cash in hand, at
bank 61.0 (19.7) 5.9 - 47.2
================== ====================== ================= =============== ============== ======================
Cash and cash
equivalents 61.0 (19.7) 5.9 - 47.2
Senior loan
facility (198.8) 200.0 - (1.2) -
Senior revolving
credit facility - (197.0) - 1.3 (195.7)
Finance lease
liabilities (6.7) 3.1 (1.8) (5.1) (10.5)
================== ====================== ================= =============== ============== ======================
Total net debt (144.5) (13.6) 4.1 (5.0) (159.0)
================== ====================== ================= =============== ============== ======================
11 Annual General Meeting
The Annual General Meeting will be held on Friday 30 November
2018 at 1 Rockingham Way, Redhouse Interchange, Adwick-le-Street,
Doncaster, DN6 7NA. The Annual Report and Accounts and Notice of
Meeting will be sent to shareholders and copies will be available
from the Company's registered office: 1 Rockingham Way, Redhouse
Interchange, Adwick-le-Street, Doncaster, DN6 7NA and on the
Company's website at www.dfscorporate.co.uk.
This interim report, the full text of the Stock Exchange
announcement and the results presentation can be found on the
Company's website at www.dfscorporate.co.uk
This interim report contains statements that constitute
forward-looking statements relating to the business, financial
performance and results of the Company and the industry in which
the Company operates. These statements may be identified by words
such as "may", "will", "shall", "anticipate", "believe", "intend",
"project", "goal", "expectation", "belief", "estimate", "plan",
"target", or "forecast" and similar expressions for the negative
thereof; or by forward-looking nature of discussions of strategy,
plans or intentions; or by their context. No representation is made
that any of these statements or forecasts will come to pass or that
any forecast results will be achieved. All statements regarding the
future are subject to inherent risks and uncertainties and various
factors that would cause actual future results, performance or
events to differ materially from those described or implied in
these statements. Such forward-looking statements are based on
numerous assumptions regarding the Company's present and future
business strategies and the environment in which the Company will
operate in the future. Further, certain forward-looking statements
are based upon assumptions of future events which may not prove to
be accurate and neither the Company nor any other person accepts
any responsibility for the accuracy of the opinions expressed in
this interim report or the underlying assumptions. Past performance
is not an indication of future results and past performance should
not be taken as a representation that trends or activities
underlying past performance will continue in the future. The
forward-looking statements in this interim report speak only as at
the date of this interim report and the Company expressly disclaims
any obligation or undertaking to release any updates or revisions
to these forward-looking statements to reflect any change in the
Company's expectations in regard thereto or any change in events,
conditions or circumstances on which any statement is based after
the date of this interim report or to update or to keep current any
other information contained in this interim report or to provide
any additional information in relation to such forward-looking
statements. Undue reliance should not therefore be placed on such
forward-looking statements.
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR BRBDGIGGBGIX
(END) Dow Jones Newswires
October 04, 2018 02:00 ET (06:00 GMT)
Dfs Furniture (LSE:DFS)
Historical Stock Chart
From Mar 2024 to Apr 2024
Dfs Furniture (LSE:DFS)
Historical Stock Chart
From Apr 2023 to Apr 2024