Final Results

DFS FURNITURE COMPANY PLC 14 October 1999 DFS FURNITURE COMPANY PLC PRELIMINARY RESULTS FOR THE 52 WEEKS ENDED 31 JULY 1999 'I am pleased to report an improving trend in our performance during the second half of the year, which has strengthened further in the current year to date.' * Sales up 5.3% to £295.5 million * Improving trend in operating margin - first half 8.0%, second half 8.5% * Pre-tax profit £25.7 million * Earnings per share 16.6 pence * Final dividend increased 5.0% to 10.5 pence per share * Special dividend of 10.0 pence per share * Five new stores opened * 60,000 sq. ft Lincoln House factory and brands acquired * Mike Blackburn appointed as third non-executive director - Graham Kirkham, Executive Chairman Enquiries: DFS Furniture Company plc Hudson Sandler Graham Kirkham, Executive Chairman Keith Hann / Justin Strong Jon Massey, Chief Operating Officer Tel: 0171 796 4133 Ian Bowness, Finance Director Tel: 0171 796 4133 (on 14 October) CHAIRMAN'S STATEMENT I am pleased to report an improving trend in our performance during the second half of the year, which has strengthened further in the current year to date. This reflects the changes we have made to our product range, pricing structure, marketing and advertising, together with the benefit of lower interest rates. The achievement of greater coverage in England has given us increased cost-effectiveness in our advertising and we are deriving a range of commercial and financial advantages from the expansion of our manufacturing capacity. Although our market place remains highly competitive, I am confident that DFS is now building on the positive trend established at the end of our last financial year and is well equipped to deliver the growth in shareholder value to which we have always been committed. Results While Group profits were lower than in 1997/98, they are ahead of the revised expectations for the year. Including the benefit of new selling space, turnover grew by 5.3% to £295.5 million. The performance of our core of comparable stores improved in the second half, during which there was a like-for-like sales decline of 5.0%, compared with the 7.4% reduction reported in the first half. While the volume of sales was up, the like-for-like value of sales was down 6.2%, entirely the result of an 8% reduction in our average order value following the adoption of a more aggressive pricing strategy to enhance our competitiveness. Our operating margin rose from 8.0% in the first half to 8.5% in the second, benefiting from an improved gross margin and lower interest rates. The operating margin for the year as a whole was 8.3% (1998: 11.4%) and operating profit was £24.5 million (1998: £31.9 million). Mainly as a result of lower average interest rates, interest receivable was £1.2 million, £0.9 million lower than last year. Profit before taxation was 24.5% below that of the prior year at £25.7 million, while earnings per share were 16.6 pence (1998: 22.0 pence). Finances Our finances continue to be very strong. At the year end we had no debt and total cash balances of £62.6 million, compared with £58.6 million the year before. The current year's figure includes £42.6 million (1998: £32.6 million) associated with the case of Primback Ltd, pending its final resolution by the European Court. Free cash balances of £20.0 million were £6.0 million lower than in 1998, as the result of a £4.0 million increase in our capital expenditure to £16.3 million, and a £2.6 million share buyback during the first half. Dividend The Board's confidence in our business allows us to recommend a 5.0% increase in the final dividend to 10.5 pence per ordinary share (1998: 10.0 pence). Together with the maintained interim dividend of 4.4 pence paid in June, this makes a total dividend for the year of 14.9 pence (1998: 14.4 pence), an increase of 3.5%. This increase is appropriate in the light of the Group's strong finances and improving prospects. Special dividend DFS is a highly cash generative business and it has always been our policy to ensure that shareholders derive full benefit from any surplus cash. In view of our existing cash position, projections of future income and anticipated capital expenditure, the Board has concluded that our free cash balances exceed the current requirements of the business. Accordingly, we have decided that the most equitable way to return surplus cash to shareholders is through payment of a special dividend and we are therefore declaring a special (second interim) dividend of 10.0 pence per share. This will reduce our free cash balances by £10.3 million, leaving us with ample funds to pursue our planned expansion. Business development In June 1999 we acquired for £1.5 million in cash the assets of Orchard plc. These comprise the 60,000 sq. ft Lincoln House factory at Alfreton in Derbyshire, together with its plant and equipment, its highly trained workforce, and three furniture brands: Lincoln House, Medallion and Quantum. This acquisition has doubled our production capacity, restoring the proportion of sales manufactured in our own factories to the 15 - 20% range in which we operated at the time of our flotation. Our in-house production capability is an important point of differentiation and brings significant benefits through our direct involvement in design and quality control, together with an absolute guarantee of product exclusivity. It also provides an opportunity to improve overall profitability by enabling us to capture both manufacturing and retailing margins. This acquisition has certainly proved to be a most cost- effective, quick and efficient way to achieve a major expansion of our production capacity. We have completely restructured the Lincoln House factory, reducing overheads by £1.2 million per annum, increasing production and introducing new product ranges. The scale of the operation provides us with further scope to expand our production in line with the growth of our retail chain and increase our profitability in the future. Store expansion and refurbishment A total of five new stores opened during the year, in line with the target we set in 1997 of opening 15 - 20 additional stores over the next three years. We opened new freehold stores at Maidstone on 21 August and Hanley on 10 October and added a new leasehold store at Southampton on 29 January. All three of these first half openings performed well and all contributed to our profits for the year. Our openings during the second half were leasehold stores at Beckton on 20 March and at Bolton on 26 March. Although these openings also met our sales targets, they did not contribute to profits during the year. This reflects our conservative accounting policy of writing off all pre-opening and launch costs as they are incurred and of recognising sales and profits only on delivery to the customer. We have continued to make significant improvements to store design and decor, to ensure that our new product ranges are displayed in the most appropriate and enhancing room settings. Stores at Preston, Darlington, Nottingham and Brigg were comprehensively refurbished during the second half, maintaining the pace of refurbishment we set during the first half. Expansion will continue in the current year, with the opening of a new leasehold store at Romford and a new freehold store at Swansea already scheduled and with negotiations advanced at Watford. All will strengthen our position within existing TV regions. We will also enter the market in both Scotland and Northern Ireland for the first time, with sites identified and plans well advanced for new stores in Edinburgh, Glasgow and Belfast. This will ensure that we continue our prudent and profitable expansion, in line with our long-established plans. Buying and marketing The recruitment of a new, younger buying team together with the revision of our marketing strategy and the new pricing policy, has undoubtedly broadened our customer appeal and enabled us to gain share within a highly competitive market place. We have also benefited from the increased cost-effectiveness of our advertising, as we have consolidated our national representation. In particular, we are achieving valuable economies of scale in the London area, following the opening of our sixth store in the region at Beckton during the second half. With this development, we attained the critical mass that we always stated we would require in order to make our advertising in the LWT/Carlton TV area economic and cost-effective. Further benefits will flow through with the opening of our seventh store in the region at Romford and will, of course, continue to accrue as other stores are opened in the region. Systems We have continued to invest in our computer systems, with the installation of a new central server that provides additional capacity to handle the planned expansion of our branch network. The new Lincoln House factory has been fully integrated into our systems, enabling stores to place orders with it directly through EDI. We continue to derive important advantages from the speed and accuracy of the electronic information transfer systems we have established with our major external suppliers. The Board I am delighted to announce the strengthening of our Board through the appointment of Mike Blackburn as our third non-executive director. Mike Blackburn, who is 57, became non-executive Vice Chairman of Halifax plc at the beginning of 1999, having served as their Chief Executive since 1993. I am sure that we will derive great benefits from his extensive business experience. The DFS team I take great pleasure in welcoming to the DFS team the 120 people who joined us through the acquisition of the Lincoln House factory. In both retailing and manufacturing, the quality of DFS people is one of the key factors that sets us apart from our competitors. We continue to make substantial investments in training and development to reinforce our advantage and I am confident that our commitment to excellence in products and service will drive the growth of DFS in the future. I would like to take this opportunity to thank everyone at DFS for the efforts they have made to ensure that we have retained our market leadership and reputation through what has been a testing period for the whole of our sector. Outlook I am pleased to report that the more positive trend established in the second half has continued into the current year, with like-for-like sales 6.7% up for the financial year to date. The margin trend is positive too, benefiting from the increased proportion of in-house production, the substantial productivity improvements we have effected at the Lincoln House factory and the increased cost-effectiveness of our advertising, together with the overall reduction in interest rates over the last 12 months. The scale of our operation as the UK market leader and our direct involvement in manufacturing mean that we are ideally positioned to continue widening our appeal through the introduction of more fashionable and exclusive better value ranges. We have been in business now for 30 years, during which time we have established an unrivalled reputation as the specialist in upholstered furniture. I am confident that our concept, retailing skills and customer goodwill are working as efficiently as they ever have for us and that we will achieve long-term growth in profits, earnings and dividends for our shareholders. I look forward to reporting solid progress in the current year. Graham Kirkham Executive Chairman GROUP PROFIT AND LOSS ACCOUNT 52 WEEKS ENDED 31 JULY 1999 (52 WEEKS ENDED 1 AUGUST 1998) Notes 1999 1998 £000 £000 Turnover 295,486 280,493 Cost of sales (262,176) (241,061) ---------- ---------- Gross profit 33,310 39,432 Administrative expenses (8,829) (7,482) ---------- ---------- Operating profit 24,481 31,950 Interest receivable 1,259 2,161 ---------- ---------- Profit on ordinary activities before taxation 25,740 34,111 Taxation on profit on ordinary activities (8,515) (11,022) ---------- ---------- Profit for the financial period 17,225 23,089 Dividends paid and proposed 1 (25,650) (15,115) ---------- ---------- (Deficit)/retained profit for the period (8,425) 7,974 ---------- ---------- Earnings per ordinary share 2 16.6p 22.0p ---------- ---------- Diluted earnings per ordinary share 2 16.6p 22.0p ====== ====== All activities were continuing throughout both the current and previous periods. There were no recognised gains and losses in either period other than those reported in the Group profit and loss account. GROUP BALANCE SHEET AS AT 31 JULY 1999 (1 AUGUST 1998) Notes 1999 1998 £000 £000 Fixed assets Tangible assets 67,362 55,915 -------- -------- Current assets Stocks 12,498 12,279 Debtors: due within one year 3,550 4,117 Debtors: due after one year - 2,624 Total debtors 3,550 6,741 Cash at bank and in hand 62,599 58,550 -------- -------- 78,647 77,570 Creditors: amounts falling due within one year (110,061) (86,858) -------- -------- Net current liabilities (31,414) (9,288) -------- -------- Total assets less current liabilities 35,948 46,627 Provisions for liabilities and charges (5,302) (4,937) -------- -------- Net assets 30,646 41,690 -------- -------- Capital and reserves Called up share capital 5,170 5,248 Share premium account 2,059 2,059 Revaluation reserve 4,537 4,620 Capital redemption reserve 78 - Profit and loss account 18,802 29,763 -------- -------- Equity shareholders' funds 3 30,646 41,690 ====== ====== GROUP CASH FLOW STATEMENT 52 WEEKS ENDED 31 JULY 1999 (52 WEEKS ENDED 1 AUGUST 1998) Notes 1999 1998 £000 £000 Net cash inflow from operating activities 4 48,460 45,687 Returns on investments and servicing of finance 5 1,258 2,053 Taxation (12,195) (10,557) Capital expenditure 6 (15,906) (12,051) Equity dividends paid (14,949) (13,827) Financing 7 (2,619) 874 -------- -------- Increase in cash in the period 4,049 12,179 -------- -------- Reconciliation of net cash flow to movement in cash Increase in cash in the period 4,049 12,179 Cash at bank and in hand at the beginning of the period 58,550 46,371 -------- -------- Cash at bank and in hand at the end of the period 62,599 58,550 ====== ====== NOTES TO THE ACCOUNTS 1. Dividends paid and proposed 1999 1998 £000 £000 Interim dividend paid 4,453 4,619 Final dividend proposed 10,857 10,496 Special dividend proposed 10,340 - -------- -------- 25,650 15,115 -------- -------- 2. Earnings per share The calculation of earnings per ordinary share is based on the profit for the financial period of £17,225,000 (1998: £23,089,000) and a weighted average of 103,839,130 shares in issue during the period (1998: 104,863,404). Share options were not dilutive in either period. 3. Reconciliation of movements in shareholders' funds 1999 1998 £000 £000 Profit for the financial period 17,225 23,089 Dividends paid and proposed (25,650) (15,115) -------- -------- Retained profit for the period (8,425) 7,974 Purchase of own shares (2,619) - Share issues - 874 -------- -------- Net (reduction in)/addition to shareholders' funds (11,044) 8,848 Shareholders' funds at the beginning of the period 41,690 32,842 -------- -------- Shareholders' funds at the end of the period 30,646 41,690 -------- -------- 4. Reconciliation of operating profit to net cash inflow from operating activities 1999 1998 £000 £000 Operating profit 24,481 31,950 Depreciation 4,606 3,615 Profit on sale of fixed assets (149) (73) Increase in stocks (219) (349) Decrease/(increase) in debtors 609 (456) Increase in creditors and provisions 19,132 11,000 -------- -------- Net cash inflow from operating activities 48,460 45,687 -------- -------- The increase in creditors and provisions includes an amount of £10,061,000 (1998: £9,668,000) associated with the Primback case. 5. Returns on investments and servicing of finance 1999 1998 £000 £000 Interest received 1,258 2,053 -------- -------- 6. Capital expenditure 1999 1998 £000 £000 Purchase of tangible fixed assets (16,300) (12,300) Sale of fixed assets 394 249 -------- -------- Net cash outflow for capital expenditure (15,906) (12,051) -------- -------- 7. Financing 1999 1998 £000 £000 Purchase of own shares (2,619) - Issue of ordinary share capital - 874 -------- -------- Net cash (outflow)/inflow for financing (2,619) 874 -------- -------- 8.The financial information set out above does not constitute the Company's statutory accounts for the periods ended 31 July 1999 or 1 August 1998. Statutory accounts for 1998 have been delivered to the Registrar of Companies and those for 1999 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts. Their reports were unqualified and did not contain statements under Sections 237 (2) or (3) of the Companies Act 1985. 9.The annual report will be posted to shareholders on or about 5 November 1999 and will be available on request from the Secretary, DFS Furniture Company plc, Bentley Moor Lane, Adwick-le-Street, Doncaster, South Yorkshire, DN6 7BD. OPERATING AND FINANCIAL REVIEW Turnover Sales grew by 5.3% to £295.5 million over the year as a whole. Like-for-like sales declined by 7.4% in the first half and 5.0% in the second half, that is 6.2% over the year as a whole. This was entirely the result of an 8% reduction in our average order value due to more aggressive pricing. Like-for-like sales are calculated on a core of comparable stores, excluding new branches whose performance has been distorted by launch promotional activity in the current or prior year, together with any other branches whose trading profile has been affected by our new store developments. Operating profit Operating profit of £24.5 million was £7.5 million lower than in the previous year. Whilst operating profits were down 35.4% in the first half this was substantially moderated in the second half, when operating profit declined by 9.5%. This reflected an improving margin trend: operating margin was 8.0% for the first half and 8.5% for the second, making 8.3% for the year as a whole. Interest receivable Interest receivable of £1.2 million was £0.9 million lower than in 1997/98, reflecting the reduction in interest rates and lower average cash balances during the year. Profit before taxation Profit on ordinary activities before taxation was £25.7 million, a decrease of 24.5% compared to last year, comprising a reduction of 34.2% in the first half and 13.5% in the second. Taxation The Group's effective tax rate for the year was 33.1%, compared with 32.3% in the previous year. Our tax charge is expected to remain slightly above the standard UK corporation tax rate because of the treatment of non-allowable store development expenses. Earnings per share Earnings per ordinary share were 16.6 pence (1998: 22.0 pence). The average number of shares in issue fell from 104.9 million to 103.8 million, following the buyback of 1.565 million shares for cancellation during the first half. Final dividend The recommended final dividend is 10.5 pence per ordinary share, compared with 10.0 pence in the previous year, an increase of 5.0%. Subject to the approval of the Annual General Meeting, this will be paid on 10 December 1999 to those shareholders whose names are on the register on 5 November 1999. The total ordinary dividend for the year is 14.9 pence, compared with 14.4 pence in 1997/98, an increase of 3.5%. Special dividend The special dividend referred to in the Chairman's Statement will be a second interim dividend of 10.0 pence per share payable on 16 November 1999 to shareholders whose names are on the register on 13 October 1999. The increase in the final dividend reflects our long-standing commitment to a progressive dividend policy. This, together with our special dividend, is indicative of our strong financial position and our confidence in the future prospects of the Group. Stores Five new stores opened during the year: three in the first half, one of which replaced an existing store, and two in the second half. This gave us a total of 53 stores trading at the year end. Capital expenditure Capital expenditure totalled £16.3 million, compared with £12.3 million in the previous year. Major items of expenditure included the land and buildings for our new freehold store in Maidstone, the purchase of land for our Swansea store development, and the acquisition of the freehold of the Lincoln House factory. We also invested in the fitting-out of five new stores opened during the year, in the refurbishment of seven existing stores and in upgrading our central computer hardware. Cash flow Our business is highly cash generative, enabling us to fund our entire expansion programme from our own resources, including the regular purchase of store freeholds. There was a modest outflow of free cash of £6.0 million during the year, reflecting the increase in capital expenditure and a £2.6 million share buyback during the first half. Balance sheet The Group's balance sheet is strong with no borrowings and total cash balances of £62.6 million at the year end, compared with £58.6 million in 1998. These balances include £42.6 million (1998: £32.6 million) associated with the Primback case, which is offset by a corresponding sum shown within creditors. Our working capital requirements remain minimal, with stocks comprising principally store displays, raw materials at the Group's factories and finished goods awaiting delivery. Year 2000 The necessary upgrades to our systems to ensure Year 2000 compliance have all been completed and fully tested, backed by external quality assurance checks. We have also taken steps to ensure that the compliance programmes of our suppliers and business partners are on schedule. The total cost of our compliance programme has not been material to the Group. Opportunities and risks DFS is the UK's leading specialist retailer of upholstered furniture, selling almost 20,000 individual pieces of furniture each week. Our formula has developed over 30 years in business and is based on a clear specialist focus and constant investment in stores, systems, products and people. We derive important advantages from our specialisation, market leadership and direct involvement in manufacturing. Nevertheless, the fragmented nature of our market place means that our national share is still relatively small, at around 12%. This affords us significant potential for further growth through self-financed geographical expansion. The finance for all the Group's credit sales is provided through external financing companies, without risk or recourse to DFS. We continue to monitor the introduction of the European single currency and its potential implications for UK retailers. As all our sales are made within the UK, and the majority of our overseas suppliers invoice us in sterling, exchange rate risk has never been a material issue for the Group and we do not anticipate any significant short term impact on our operations from the introduction of the euro. DFS does not undertake speculative financial transactions and continues to pursue prudent treasury policies, investing its surplus funds only with top- rated financial institutions. Insurable risks are centrally monitored and controlled and are covered with leading UK and international insurance companies. All other aspects of risk management are kept under continuous review.

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