Final Results

D.F.S. Furniture Company PLC 09 October 2003 9 October 2003 PRELIMINARY RESULTS FOR THE 52 WEEKS ENDED 2 AUGUST 2003 'think sofas, think DFS' • Record profit before tax £ 56.4 million up 5.2%* • Turnover £499.1 million up 8.0% • Like-for-like sales up 2.5% • Earnings per share 35.9 pence up 5.6%* • Ordinary dividend per share 24.0 pence up 5.7% * before prior year exceptional profit relating to the Primback case. 'We have achieved our financial targets with yet another record profit before tax and increased our share of a UK furniture market that has never been more active, aggressive and competitive. With new entrants targeting our sector, and established players imitating aspects of our successful concept, DFS continues to stand out because of the fundamental strengths of our business, built up over more than 30 years. We continue to benefit from our proven abilities in product innovation, our unique integrated approach to manufacturing and retailing, our market-leading brand, established national media presence and high levels of consumer awareness. These are coupled with a strong operating cash flow and balance sheet, and a substantial freehold store base. The new DFS logo is already featured on all our advertising and promotional material and many of our stores, with all due to receive this new fascia by the end of the calendar year. This is the first major change in our corporate identity in 15 years, and brings our image completely up-to-date, to match the extensive changes we have made to our store layouts and product range. DFS already achieves truly exceptional performance ratios, with sales of over £500 for every square foot of retail selling space and of over £0.5 million for every retail employee. Our new stores make an enormous impact in their local markets from the moment they open. As store numbers grow and competition increases the impact on our established stores becomes more pronounced and it becomes increasingly difficult to deliver sustained, significant like-for-like sales increases. Our future growth will therefore be based on the continued expansion of our store chain and the progressively increasing benefits of amortising our advertising and other costs across this growing base. Given the increasingly competitive nature of our market, and the phasing of our planned store openings, we do not expect to make material profit progress in our current financial year. I remain totally confident, however, of our ability to meet all the challenges in our market place and that the fundamental strengths of our brand and concept will enable us to continue delivering profitable growth for the benefit of our shareholders in the future.' Graham Kirkham Executive Chairman Enquiries DFS Furniture Company plc Hudson Sandler Graham Kirkham, Executive Chairman Keith Hann Jon Massey, Chief Operating Officer Noemie de Andia Ian Bowness, Finance Director Tel: 020 7796 4133 Tel: 020 7796 4133 (on 9 October 2003) CHAIRMAN'S STATEMENT We have achieved our financial targets with yet another record profit before tax and increased our share of a UK furniture market that has never been more active, aggressive and competitive. With new entrants targeting our sector, and established players imitating aspects of our successful concept, DFS continues to stand out because of the fundamental strengths of our business, built up over more than 30 years. We continue to benefit from our proven abilities in product innovation, our unique integrated approach to manufacturing and retailing, our market-leading brand, established national media presence and high levels of consumer awareness. These are coupled with a strong operating cash flow and balance sheet, and a substantial freehold store base. RESULTS Sales for the 52 weeks to 2 August 2003 grew by 8.0% to £499.1 million (2002: £462.2 million), including like-for-like growth through our core of comparable stores of 2.5%. After a 3.5% increase in the first half, like-for-like sales rose by 1.5% in the second half, reflecting stronger prior year comparatives and an increasingly competitive trading climate. Operating profit increased 5.3% to £55.9 million (2002: £53.1 million excluding the prior year's £8.7 million exceptional profit relating to the Primback case). Our operating margin improved from 10.7% in the first half to 11.7% in the second, reflecting an uplift in gross margin and the benefits of amortising our advertising costs across an expanding store base. After interest receivable of £0.5 million, the same as in the prior year, profit before taxation was £56.4 million (2002: £53.6 million before exceptional item), an increase of 5.2%. Earnings per share increased by 5.6% on a pre-exceptional basis to 35.9 pence (2002: 34.0 pence). FINANCES Our balance sheet remains exceptionally robust, with no debt and free cash increasing to £32.3 million at the year end, compared with £25.4 million in August 2002. Total cash balances of £45.2 million include £12.9 million relating to the Primback case (2002: £18.2 million). We continue to pursue legal actions regarding various sums already paid to H.M. Customs & Excise related to this case. DIVIDENDS The Board recommends a final dividend of 17.0 pence per share (2002: 16.0 pence), an increase of 6.3%. Together with the increased interim dividend of 7.0 pence paid in June, this makes a total ordinary dividend for the year of 24.0 pence (2002: 22.7 pence), a rise of 5.7%. This continues the progressive dividend policy that we have pursued throughout our ten years as a public company; we have returned a total of £230 million to our shareholders through ordinary and special dividends and share buybacks since our flotation in 1993. The Board remains committed to ensuring that shareholders receive increases in their income that broadly reflect the growth of earnings per share over the medium term, and that they also derive full benefit from any future surplus cash. STORES We opened a total of seven stores during the year - six in our principal DFS upholstery format, together with one addition to the specialist Dining Centre concept that we operate in the Yorkshire TV region. New leasehold DFS stores opened at Hull, Birstall (Leeds), Watford and Aberdeen during the first half, while in the second half our new leasehold store at Tunbridge Wells opened on 5 April. We also re-opened our former Hull upholstery store as a Dining Centre on 3 June and a new freehold DFS store at Tollcross (Glasgow) opened on 7 June. The Tollcross store was the first to carry the new DFS fascia, which we have updated after 15 years to reflect our strong, contemporary product range and consumer appeal. This will be in place on all our stores by the end of 2003. In the current financial year, we will construct new freehold stores at Inverness and Carlisle, and also lease a new store which is being built for us on a site in Cambridge. The longer lead times associated with new builds means that all these stores are likely to open towards the end of our financial year. Our long-established policy of investing in freeholds and long leaseholds affords us a degree of protection from escalating rental costs which is proving of ever-increasing value in the current climate. We continue to aim for controlled expansion of our business at the rate of 15 - 20 new stores over a three year period, with ultimate potential for around 100 upholstery stores in the UK compared with 65 currently trading. We have continued our rolling programme of total store refurbishments designed to ensure that we maintain an up-to-date public image and can display our continually evolving product range in appealing room settings that incorporate our latest standards of design, decor and visual merchandising. During the year we refurbished our stores at Colchester, Peterborough, Bristol, Cardiff and Sidcup, and in the current year to date we have already undertaken comprehensive refits at Milton Keynes, Plymouth, Norwich and South Ruislip. PRODUCTS, MANUFACTURING AND DISTRIBUTION Like all retailers, our success is ultimately dependent on offering customers products that they want to buy, at appealing prices and with delivery dates that meet their requirements. With competition in our market increasing to unprecedented levels, we have redoubled our efforts not only to develop attractive new products but also to ensure that we achieve service levels that set DFS apart. Our three UK factories at Long Eaton, Alfreton and Adwick-le-Street continue to make a meaningful contribution to our profits, and also provide DFS with a unique point of difference as an integrated manufacturing and retailing business. All our factories achieved record outputs during the year, with the Berkeley Magna (Long Eaton) and Lincoln House (Alfreton) production units benefiting from investment in additional capacity and new machinery. We benefit from direct control of quality, design flexibility and lead times in our own factories, and also from the expertise which they allow us to apply in developing supplier partnerships with other manufacturers in Europe and, increasingly, in low-cost economies further afield. Our efficiency in handling imported product has been significantly enhanced by the opening of our new Redhouse distribution facility near Doncaster, which opened in the first half. Volume has built progressively, in accordance with our plans, as we have completed the transfer of operations from external contractors, and we are achieving the expected improvements in our customer service standards. DFS BRAND AND MARKETING The new DFS logo is already featured on all our advertising and promotional material and many of our stores, with all due to receive this new fascia by the end of the calendar year. This is the first major change in our corporate identity in 15 years, and brings our image completely up-to-date, to match the extensive changes we have made to our store layouts and product range. The theme of 'think sofas, think DFS' is designed to reinforce consumer awareness of DFS as the market leader in upholstered furniture, and the first choice when making a buying decision in this category. The cost-effectiveness of our national TV, radio, newspaper and magazine advertising will continue to improve as we expand our store network, enabling us to amortise these and other costs across a wider retail base. This will make an important contribution to the value we can offer both customers and shareholders in the years ahead. THE BOARD As previously announced, Bill Barnes will join us as Finance Director on 31 October 2003 from NEXT plc, where he has spent 13 years as Group Financial Controller. Bill will take over from Ian Bowness, our Finance Director since 1995, who has decided that he would like to take a break and consider other opportunities for his future. Although Ian will be resigning from the Board on 31 October, he has agreed to continue working for us on a consultancy basis for as long as may be required to ensure a smooth handover of his responsibilities. I am absolutely delighted that we have been able to attract someone of Bill's calibre to fulfil this role, and would like to say a huge personal thank you to Ian for all his hard work and his contribution to the business over the last eight years. PEOPLE We have always said that there is no compromise on the quality of the people we employ and that the recruitment of high calibre staff is the most important single constraint on the expansion of DFS. Growing competition is making it an even greater challenge to recruit and retain staff of the calibre we need to drive our growth, and increasing the importance of our long-established focus on training and development. Our new, purpose-built training centre at Redhouse (Doncaster) is providing us with massive benefits in inducting people to the business, and in developing their service and selling skills. In addition to offering industry-leading training programmes, our appeal to new staff is founded on our reputation as a long-established market leader offering both security and long-term career prospects. We were pleased to create a further 200 new jobs through our expansion programme last year, and I am delighted to have this opportunity to welcome those who have joined our team during the year as well as to thank all our people for their individual contributions to another record result for DFS. OUTLOOK The value of orders booked at the end of the last financial year and over recent weeks, which will become delivered sales in the current financial year, was 3.9% lower than in the comparable period in 2002 on a like-for-like basis, albeit compared with a period of strong growth that included the benefit from last year's 2002 Golden Jubilee bank holidays. While the exceptionally hot summer weather was not helpful to our industry, we believe that the slower sales performance mainly reflects the growing intensity of competition in our sector, with much highly aggressive promotional activity. We are confident that we are well placed to mitigate this by virtue of our market leadership and brand appeal, clear specialist focus, proven marketing skills and substantial financial strength. Our strategy will continue to be simple and straightforward: providing products that are relevant and attractive to consumers, backed by the best service in our sector and delivered to customers on time. Our prices will remain attractive, but we will never lose sight of our prime objective of running a profitable business. DFS already achieves truly exceptional performance ratios, with sales of over £500 for every square foot of retail selling space and of over £0.5 million for every retail employee. Our new stores make an enormous impact in their local markets from the moment they open. As store numbers grow and competition increases the impact on our established stores becomes more pronounced and it becomes increasingly difficult to deliver sustained, significant like-for-like sales increases. Our future growth will therefore be based on the continued expansion of our store chain and the progressively increasing benefits of amortising our advertising and other costs across this growing base. Given the increasingly competitive nature of our market, and the phasing of our planned store openings, we do not expect to make material profit progress in our current financial year. I remain totally confident, however, of our ability to meet all the challenges in our market place and that the fundamental strengths of our brand and concept will enable us to continue delivering profitable growth for the benefit of our shareholders in the future. Graham Kirkham Executive Chairman GROUP PROFIT AND LOSS ACCOUNT 52 WEEKS ENDED 2 AUGUST 2003 (53 WEEKS ENDED 3 AUGUST 2002) 2003 2002 £000 £000 Notes Turnover 499,083 462,154 Cost of sales Before exceptional item (428,356) (395,694) Exceptional item 1 - 8,699 Total (428,356) (386,995) Gross Profit Before exceptional item 70,727 66,460 Exceptional item 1 - 8,699 Total 70,727 75,159 Administrative expenses (14,782) (13,329) Operating profit Before exceptional item 55,945 53,131 Exceptional item 1 - 8,699 Total 55,945 61,830 Interest receivable Before exceptional item 482 483 Exceptional item 1 - 8,723 Total 482 9,206 Profit on ordinary activities before taxation Before exceptional items 56,427 53,614 Exceptional items 1 - 17,422 Total 56,427 71,036 Taxation on profit on ordinary activities Before exceptional item (18,280) (17,894) Exceptional item 1 - (2,610) Total (18,280) (20,504) Profit for the financial period Before exceptional items 38,147 35,720 Exceptional items 1 - 14,812 Total 38,147 50,532 Dividends paid and proposed 2 (25,645) (38,936) Retained profit for the financial period 12,502 11,596 Earnings per ordinary share Before exceptional items 3 35.9p 34.0p Exceptional items 1 - 14.0p Total 35.9p 48.0p Diluted earnings per ordinary share Before exceptional items 3 35.7p 33.6p Exceptional items 1 - 14.0p Total 35.7p 47.6p Dividend per ordinary share 24.0p 22.7p Special dividend per ordinary share - 14.1p 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 2 AUGUST 2003 (3 AUGUST 2002) 2003 2002 £000 £000 Notes Fixed assets Tangible assets 111,230 100,040 Current assets Stocks 16,028 14,888 Debtors 7,050 7,149 Cash at bank and in hand 45,182 43,622 68,260 65,659 Creditors: amounts due within one year (101,704) (103,737) Net current liabilities (33,444) (38,078) Total assets less current liabilities 77,786 61,962 Provisions for liabilities and charges (10,933) (10,747) Net assets 66,853 51,215 Capital and reserves Called up share capital 5,344 5,291 Share premium account 11,749 8,666 Revaluation reserve 4,218 4,294 Capital redemption reserve 78 78 Profit and loss account 45,464 32,886 Equity shareholders' funds 4 66,853 51,215 GROUP CASH FLOW STATEMENT 52 WEEKS ENDED 2 AUGUST 2003 (53 WEEKS ENDED 3 AUGUST 2002) 2003 2002 £000 £000 Notes Net cash inflow from operating activities 5 62,466 27,088 Returns on investments and servicing of finance 6 471 588 Taxation (18,586) (18,269) Capital expenditure 7 (21,523) (28,459) Equity dividends paid (24,404) (37,197) Net cash outflow before financing (1,576) (56,249) Financing 8 3,136 2,669 Increase / (decrease) in cash in the period 1,560 (53,580) Reconciliation of net cash flow to movement in net funds Increase / (decrease) in cash in the period 1,560 (53,580) Net funds at the beginning of the period 43,622 97,202 Net funds at the end of the period 45,182 43,622 NOTES TO THE ACCOUNTS 1. Exceptional profit Certain amounts previously provided in respect of the Primback case were released in the prior period. These comprised VAT no longer recoverable by H.M. Customs & Excise and related interest accruals. The interest accruals were not allowed for corporation tax and no charge was therefore incurred on their release. 2. Dividends paid and proposed 2003 2002 £000 £000 Interim dividend paid 7,474 7,112 Special interim dividend paid - 14,894 Final dividend proposed 18,171 16,930 25,645 38,936 3. Earnings per ordinary share The calculations of earnings per ordinary share and fully diluted earnings per ordinary share are based on the profit for the financial period of £38,147,000 (2002:£50,532,000). The calculation of diluted earnings per share is based on : 2003 2002 Number Number Weighted average number of shares per EPS calculation 106,206,063 105,172,704 Dilutive effect of shares under option 660,920 879,838 Weighted average number of shares per diluted EPS 106,866,983 106,052,542 calculation NOTES TO THE ACCOUNTS 4. Reconciliation of movements in shareholders' funds 2003 2002 £000 £000 Profit for the financial period 38,147 50,532 Dividends paid and proposed (25,645) (38,936) Retained profit for the period 12,502 11,596 Share issues 3,136 2,669 Net addition to shareholders' funds 15,638 14,265 Shareholders' funds at the beginning of the period 51,215 36,950 Shareholders' funds at the end of the period 66,853 51,215 5. Reconciliation of operating profit to net cash inflow from operating activities 2003 2002 £000 £000 Operating profit 55,945 61,830 Depreciation 9,090 7,468 Loss/(profit) on sale of fixed assets 1,243 (168) Increase in stocks (1,140) (1,534) Decrease/(increase) in debtors 110 (643) Decrease in creditors and provisions (2,782) (39,865) Net cash inflow from operating activities 62,466 27,088 The decrease in creditors and provisions includes a net decrease of £5,279,000 (2002: decrease of £49,229,000) associated with the Primback case. NOTES TO THE ACCOUNTS 6. Returns on investments and servicing of finance 2003 2002 £000 £000 Interest received 471 588 7 Capital expenditure 2003 2002 £000 £000 Purchase of tangible fixed assets (22,162) (28,998) Sale of fixed assets 639 539 Net cash outflow for capital expenditure (21,523) (28,459) 8. Financing 2003 2002 £000 £000 Issue of ordinary share capital 3,136 2,669 9. The financial information set out above does not constitute the Company's statutory accounts for the periods ended 2 August 2003 or 3 August 2002. Statutory accounts for 2002 have been delivered to the Registrar of Companies and those for 2003 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. 10.The annual report will be posted to shareholders on or about 30 October 2003 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 Turnover for the 52 weeks ended 2 August 2003 was £499.1 million (2002: £462.2 million), an increase of 8.0%, including like-for-like sales growth of 2.5%. Sales rose by 14.3% in the first half, including like-for-like growth of 3.5%. Sales in the second half grew by 2.7% in total (compared to a 27 week period in 2002), including a like-for-like gain of 1.5%. It remains our policy to calculate like-for-like sales on a core of comparable stores, excluding branches whose performance has been distorted by launch promotional activity in the current or prior year. Our average order value was broadly in line with the previous year at around £1,500. OPERATING PROFIT Operating profit was £55.9 million (2002: £53.1 million before the exceptional profit relating to the Primback case), an increase of 5.3%. Our operating margin of 10.7% in the first half (2002: 12.1%) reflected the costs of increasing staff levels to improve customer service, which had taken effect in the second half of the prior year, together with rent reviews, increased pre-opening costs and additional expenses relating to the development of our Redhouse distribution centre. In the second half operating margin improved to 11.7% (2002: 10.9%) following an uplift in gross margin and the benefit of amortising our advertising costs across a broader store base. Other store costs continued to increase, notably rents. The group's operating margin for the year as a whole was 11.2%, compared with 11.5% before the exceptional profit in the prior year. Store pre-opening costs for the year totalled £4.0 million, the same as in the previous year. In line with our long tradition of conservative accounting, we have always charged all rental, staffing, training and marketing costs associated with new store developments to the profit and loss account as they are incurred. INTEREST RECEIVABLE Interest receivable of £0.5 million was in line with the previous year's figure before the exceptional profit relating to the Primback case. PROFIT BEFORE TAXATION Profit on ordinary activities before taxation was £56.4 million (2002: £53.6 million before exceptional item), an increase of 5.2%. The previous year's profit before taxation, including the exceptional item, was £71.0 million. TAXATION The Group's tax charge for the year was 32.4%, compared with an effective rate of 33.4% before the exceptional profit in the prior year. This reduction reflects the movement in creditor balances relating to the Primback case, and is expected to be maintained in the medium term. It is anticipated that the Group's underlying tax charge will remain slightly above the standard UK corporation tax rate because of the treatment of certain non-allowable costs. EARNINGS PER ORDINARY SHARE Basic earnings per ordinary share of 35.9 pence (2002: 34.0 pence before exceptional item) grew by 5.6%. On a fully diluted basis, the increase was 6.2% to 35.7 pence. Basic earnings per share in the prior year, including the exceptional item, were 48.0 pence (47.6 pence fully diluted). The weighted average number of shares in issue increased by 1.0 million to 106.2 million (106.9 million on a fully diluted basis) as the result of share issues under the Group's option schemes. EXCEPTIONAL ITEMS There were no exceptional items in the year under review. In the previous year an exceptional profit of £17.4 million before taxation (£14.8 million after taxation) relating to the Primback case was released to the profit and loss account and returned to shareholders through a special dividend. DIVIDENDS The recommended final dividend is 17.0 pence per ordinary share, an increase of 6.3% compared with the 16.0 pence paid in the previous year. Subject to approval at the Annual General Meeting, the final dividend will be paid on 5 December 2003 to those shareholders whose names are on the register on 7 November 2003. Including the interim dividend paid in June, which was increased by 4.5% to 7.0 pence, the total ordinary dividend for the year is 24.0 pence (2002: 22.7 pence), an increase of 5.7%, maintaining cover of 1.5 times. In 2002, shareholders also received a special dividend of 14.1 pence per share relating to the exceptional profit noted above. CAPITAL EXPENDITURE Capital expenditure for the year was £22.2 million (2002: £29.0 million), with the reduction reflecting a lower level of investment in freeholds and long leaseholds. The principal components of the year's expenditure were the acquisition of additional freehold land associated with our Carlisle store development, the construction and fitting out of our new freehold Tollcross (Glasgow) store, the fitting-out of our six other new stores and the comprehensive refurbishment of five established stores. CASH FLOW The Group generated a total of £62.5 million from operations and increased its net free cash balances by £6.9 million after funding capital expenditure and paying £24.4 million in dividends to shareholders. Comparative figures for the prior year are distorted by the payment of £44.4 million to H.M. Customs & Excise to protect ongoing appeals relating to the Primback case. The highly cash generative nature of our business means that DFS has always been able to fund its entire expansion programme from its own resources, and to purchase store freeholds as suitable opportunities arise. BALANCE SHEET The Group continues to enjoy a very strong balance sheet, with no borrowings at either this or the prior year end, and tangible assets including £63.9 million (2002: £58.7 million) of freeholds and long leaseholds. Total cash balances at 2 August 2003 were £45.2 million (2002: £43.6 million), comprising free cash of £32.3 million (2002: £25.4 million) and monies associated with the Primback case of £12.9 million (2002: £18.2 million). OPPORTUNITIES AND RISKS DFS is the UK's leading specialist retailer of upholstered furniture, selling around 30,000 individual pieces of furniture each week, some 15% of which are manufactured in our own three British factories. We have developed our unique, integrated retail and manufacturing formula over 34 years in business, during which we have attained market leadership by maintaining a strong specialist focus and constantly investing in our stores, systems, products, factories and people. We have made substantial gains in market share, from around 5% at the time of our flotation in 1993 to 17% today, through the pursuit of a policy of controlled and prudent expansion that aims to add 15 - 20 stores over a typical three year period. The finance for all the Group's credit sales is provided through external financing companies, without recourse to DFS. DFS makes all its sales within the UK, and many of our overseas suppliers invoice us in sterling. Although some business is transacted in dollars, the Group's risk is managed by buying sufficient foreign exchange to cover all outstanding contracts. Exchange rate risk has therefore never been a material issue for the Group. 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. This information is provided by RNS The company news service from the London Stock Exchange

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