Interim Results

D.F.S. Furniture Company PLC 15 April 2004 15 April 2004 DFS Furniture Company plc INTERIM RESULTS FOR THE 26 WEEKS ENDED 31 JANUARY 2004 RESULTS BEFORE EXCEPTIONAL ITEM: • Turnover £249.4 million up 3.1% • Like-for-like sales down 2.9% • Profit before tax £ 24.5 million down 6.3% • Earnings per share 15.4 pence down 8.3% • Dividend per share 7.0 pence maintained RESULTS INCLUDING EXCEPTIONAL ITEM: • Profit before tax £ 30.2 million up 15.6% • Earnings per share 20.8 pence up 23.8% • Including exceptional profit of £5.7 million on sale of a store property. 'The disappointing result for this half year reflects the growing intensity of competition in our market place, which I have highlighted in previous reports. The entry to the home furnishings market of many highly professional new retailers, with strong pedigrees in other sectors, has stimulated much aggressive promotional activity. In addition, growing cannibalisation and increased competition for store sites and able staff is forcing us to reassess the potential for continued expansion of the DFS format. Following the poor response to our winter sale, we increased our focus on marketing the DFS brand and its points of difference. This has been successful in generating additional business including an uplift in order intake over the Eastertime period. However, the benefit of these higher sales will be more than offset by the margin reduction caused by increased promotional expenditure, and we therefore expect a further decline in the profitability of the business during the second half compared to the prior year. The profit before tax and exceptional item for the year as a whole is expected to be at the low end of the current range of market forecasts at around £51 million (2003: £56.4 million). DFS remains a business with enormous fundamental strengths, including its brand and market leadership, proven marketing skills and solid finances. But as the number one in upholstered furniture in the UK, we are disproportionately affected by the continuing structural changes in our market place. In addition, in the short term, the prospect of further interest rate rises can only make trading conditions more demanding. Although I remain confident that we are more than capable of meeting the competitive challenges we face over the long term, there is no doubt that they will impose pressure on profitability and constrain the expansion potential of our business in the medium term.' Graham Kirkham, Executive Chairman Enquiries DFS Furniture Company plc Hudson Sandler / keithhann.com Graham Kirkham, Executive Chairman Alistair Mackinnon-Musson / Philip Dennis Jon Massey, Chief Operating Officer Tel: 020 7796 4133 Bill Barnes, Finance Director Keith Hann Tel: 020 7796 4133 (on 15 April 2004) Tel: 07831 521870 CHAIRMAN'S STATEMENT The disappointing result for this half year reflects the growing intensity of competition in our market place, which I have highlighted in previous reports. The entry to the home furnishings market of many highly professional new retailers, with strong pedigrees in other sectors, has stimulated much aggressive promotional activity. In addition, growing cannibalisation and increased competition for store sites and able staff is forcing us to reassess the potential for continued expansion of the DFS format. RESULTS Like-for-like order intake was negative for the first half. In particular, our important winter sale fell below expectations, producing a negative like-for-like order intake over this vital trading period for the first time in our history as a public company. Like-for-like delivered sales for the period as a whole were 2.9% below those of the comparable period last year, while total sales were 3.1% higher at £249.4 million. We exclude from our like-for-like calculations stores affected by launch promotional activity in the current or prior year, including those impacted by the opening of new DFS stores within their trading areas. If we included stores affected by cannibalisation, like-for-like delivered sales would show a decline of 4.8%. Operating profit was down 7.9% at £23.9 million (2003: £25.9 million), with our operating margin declining from 10.7% to 9.6%. This was despite a slight improvement in gross margin as the result of lower interest rates, and reflected escalating rental costs, additional investment in our service and delivery proposition, higher depreciation and increased payroll costs, including the effect of higher National Insurance contributions. Interest receivable increased to £0.6 million (2003: £0.2 million) as a result of reduced provisions relating to the Primback case and higher average cash balances, so that profit before taxation and the exceptional item was 6.3% lower than in the first half last year at £24.5 million (2003: £26.1 million). There was an exceptional credit of £5.7 million (2003: nil) relating to the profit on the sale and leaseback of our New Malden store. Earnings per share before the exceptional item were 8.3% lower at 15.4 pence (2003: 16.8 pence), and 23.8% higher at 20.8 pence including the exceptional credit. FINANCES Our balance sheet remains robust, with no debt and free cash balances of £39.6 million (2003: £19.3 million) at the end of the first half. This increase arose principally from the receipt of £9.7 million for our New Malden store, together with the strong weighting of this year's capital expenditure programme towards the second half. Total cash balances, including £13.1 million (2003: £18.6 million) relating to the Primback case, were £52.7 million (2003: £37.9 million). We are continuing to pursue various legal actions relating to monies connected with the Primback case. DIVIDEND In the light of the Group's strong cash position, the Board has decided to declare a maintained interim dividend of 7.0 pence per share. The Board's medium term objective is to pursue a dividend policy that broadly reflects earnings per share performance, while maintaining cover by earnings before exceptional items at a prudent level of around 1.5 times. STORES We expect to open two new stores in the final weeks of the current financial year: a new freehold store in Carlisle and a long leasehold store in Rotherham both scheduled to open in July. Further new stores at Inverness, Cambridge, Brent Cross, Farnborough and Derby are planned to open in our next financial year. The business has expanded from 24 upholstery stores on flotation in 1993 to 65 today, an average of four new openings each year. Following this decade of continual expansion and the growing competition in the market place for sites, staff and sales, we believe that it would be prudent to allow a period of consolidation once the current pipeline of developments is completed. While there is undoubtedly some scope in the longer term for further store developments, the strength of our brand and consumer proposition means that our stores attract customers from well beyond their natural catchment areas. In consequence, our experience of cannibalisation following recent openings has been more severe than we expected, and this must limit the potential for further expansion of our current upholstery format. In an increasingly crowded market place, it is more important than ever that all of our stores should stand out from the competition by virtue of their superior ranging, layout and visual merchandising. We have therefore continued to invest in refurbishments designed to bring established stores up to our very latest standards. During the first half we completed comprehensive refits at Milton Keynes, Plymouth, Norwich, South Ruislip, Reading and Swindon, and a further six refurbishments are scheduled for the second half. In addition, we have completed the roll-out of the new DFS fascia to all our stores. HEAD OFFICE, SYSTEMS, MANUFACTURING AND DISTRIBUTION Our new head office at Redhouse, near Doncaster, will open in July. This will facilitate greater cohesion between our various central functions and will be accompanied by a significant enhancement of our IT capabilities following an investment of over £1 million in a new computer system. The new distribution facility for imported products, also at Redhouse, has operated smoothly and handled steadily increasing volumes since its opening last year. This investment is delivering all the expected benefits in improved customer service standards. Transfer of our head office from Adwick-le-Street will free space for future expansion of our adjoining upholstery factory. We remain committed to manufacturing some 15-20% of all the furniture we sell, providing us with real product exclusivity, direct control of quality and lead times, and a key point of difference from our competitors. PRODUCTS, BRAND AND MARKETING Growing competition in the furniture market means that consumers are enjoying better value than ever before. While our average order value has remained stable, at around £1,500, deflation means that this buys more - or a higher quality product - than it did a year ago. Our strategy in this climate is to continue emphasising the unique qualities of DFS through investment in our brand and in service, building on the significant goodwill we have generated over the last 35 years. The new and distinctive DFS logo stands for a range of real brand values that underpin our market leadership in upholstered furniture, and we believe that this will become an increasingly important source of strength in a market where so many others are focused primarily on price. INVESTMENT Capital expenditure during the first half was £8.5 million (2003: £12.4 million), principally comprising investment in refurbishments and the introduction of our new corporate identity throughout the retail chain. Investment will increase substantially during the second half, and we expect an increased total for the year of some £30 million (2003: £22.2 million), including the purchase of a freehold in Inverness, a long leasehold in Rotherham, and the construction and fitting out of our new head office and two new stores. PEOPLE Our people are undoubtedly our biggest asset. Increased competition inhibits our ability to find and retain staff of the right calibre, and is ultimately perhaps the most important constraint on our ability to grow safely and profitably. While we have taken a lead in staff development and training through organised programmes, we are ever conscious of the danger that we may simply become a training ground for our industry as a whole. In order to ensure that we retain key personnel, we have already made adjustments to the incentive levels of our sales staff. We remain committed to offering salary, incentive and benefit packages that will ensure DFS people remain the very best in our industry. OUTLOOK Following the poor response to our winter sale, we increased our focus on marketing the DFS brand and its points of difference. This has been successful in generating additional business including an uplift in order intake over the Eastertime period. However, the benefit of these higher sales will be more than offset by the margin reduction caused by increased promotional expenditure, and we therefore expect a further decline in the profitability of the business during the second half compared to the prior year. The profit before tax and exceptional item for the year as a whole is expected to be at the low end of the current range of market forecasts at around £51 million (2003: £56.4 million). DFS remains a business with enormous fundamental strengths, including its brand and market leadership, proven marketing skills and solid finances. But as the number one in upholstered furniture in the UK, we are disproportionately affected by the continuing structural changes in our market place. Precisely because we already attain exceptional levels of performance, measured for example by sales per square foot or per retail employee, we have very limited capacity to mitigate competitive pressures by increasing our own efficiency. In addition, in the short term, the prospect of further interest rate rises can only make trading conditions more demanding. Although I remain confident that we are more than capable of meeting the competitive challenges we face over the long term, there is no doubt that they will impose pressure on profitability and constrain the expansion potential of our business in the medium term. Graham Kirkham Executive Chairman 15 April 2004 Group Profit and Loss Account 26 wks ended 26 wks ended 52 wks ended 31 January 1 February 2 August 2004 2003 2003 £m £m £m Notes Turnover 249.4 241.9 499.1 Operating profit 23.9 25.9 55.9 Exceptional item 1 5.7 - - Interest receivable 0.6 0.2 0.5 Profit before taxation Before exceptional item 24.5 26.1 56.4 Exceptional item 1 5.7 - - Total 30.2 26.1 56.4 Taxation Before exceptional item 2 (8.0) (8.4) (18.3) Exceptional item 1 - - - Total (8.0) (8.4) (18.3) Profit for the financial period Before exceptional item 16.5 17.7 38.1 Exceptional item 1 5.7 - - Total 22.2 17.7 38.1 Dividends 3 (7.5) (7.4) (25.6) Retained profit for the financial period 14.7 10.3 12.5 Earnings per ordinary share Before exceptional item 4 15.4p 16.8p 35.9p Exceptional item 1 5.4p - - Total 20.8p 16.8p 35.9p Dividend per ordinary share 3 7.0p 7.0p 24.0p Group Balance Sheet Notes 31 January 1 February 2 August 2004 2003 2003 £m £m £m Fixed assets Tangible assets 110.6 107.9 111.2 Current assets Stocks 14.5 14.6 16.0 Debtors 9.6 7.7 7.1 Cash at bank and in hand 5 52.7 37.9 45.2 Current liabilities Creditors: amounts due within one year 5 (93.5) (94.1) (101.7) Net current liabilities (16.7) (33.9) (33.4) Provisions for liabilities and charges (11.1) (11.1) (10.9) Net assets 82.8 62.9 66.9 Capital and reserves Called up share capital 5.3 5.3 5.3 Share premium account 13.0 10.0 11.8 Revaluation reserve 4.2 4.3 4.2 Capital redemption reserve 0.1 0.1 0.1 Profit and loss account 60.2 43.2 45.5 Equity shareholders' funds 82.8 62.9 66.9 Group Cash Flow Statement 26 wks ended 26 wks ended 52 wks ended 31 January 1 February 2 August Notes 2004 2003 2003 £m £m £m Net cash inflow from operating activities 6 33.0 31.8 62.5 Returns on investments and servicing of finance 7 0.6 0.2 0.5 Taxation (10.3) (9.9) (18.6) Capital expenditure 8 1.2 (12.2) (21.5) Equity dividends paid (18.2) (16.9) (24.4) Net cash inflow/(outflow) before financing 6.3 (7.0) (1.5) Financing 9 1.2 1.3 3.1 Increase/(decrease) in cash in the period 7.5 (5.7) 1.6 Reconciliation of net cash flow to movement in net funds Increase/(decrease) in cash in the period 7.5 (5.7) 1.6 Net funds at the beginning of the period 45.2 43.6 43.6 Net funds at the end of the period 52.7 37.9 45.2 Reconciliation of Shareholders' Funds 26 wks ended 26 wks ended 52 wks ended 31 January 1 February 2 August 2004 2003 2003 £m £m £m Profit for the financial period 22.2 17.7 38.1 Dividends (7.5) (7.4) (25.6) Retained profit for the financial period 14.7 10.3 12.5 Issue of new shares 1.2 1.3 3.1 Total movement during the period 15.9 11.6 15.6 Shareholders' funds at the beginning of the period 66.9 51.3 51.3 Shareholders' funds at the end of the period 82.8 62.9 66.9 Notes to the Accounts 1. Profit on disposal of long leasehold land and buildings is shown as an exceptional item and is not subject to tax as rollover relief is expected to be available. 2. The tax charge for the period is based on the estimated effective rate of 32.5% for the full year on profits before the exceptional item (2003: 32.0%). 3. An interim dividend of 7.0p per ordinary share will be paid on 17 June 2004 to shareholders on the register on 21 May 2004. 4. The calculation of earnings per share is based on the profit attributable to ordinary shareholders and a weighted average of 107.2m shares in issue during the period (2003: 106.0m). 5. Cash at bank and in hand includes £13.1m (2003: £18.6m) associated with the Primback case. The same amount is included in creditors (amounts due within one year) pending resolution with H.M. Customs & Excise. 6. Reconciliation of operating profit to net cash inflow from operating activities 26 wks ended 26 wks ended 52 wks ended 31 January 1 February 2 August 2004 2003 2003 £m £m £m Operating profit before exceptional item 23.9 25.9 55.9 Depreciation 5.0 4.3 9.1 (Profit)/loss on sale of fixed assets (0.1) - 1.2 Decrease/(increase) in stocks 1.5 0.3 (1.1) (Increase)/decrease in debtors (2.5) (0.6) 0.1 Increase/(decrease) in creditors and provisions 5.2 1.9 (2.7) Net cash inflow from operating activities 33.0 31.8 62.5 7. Returns on investments and servicing of finance 26 wks ended 26 wks ended 52 wks ended 31 January 1 February 2 August 2004 2003 2003 £m £m £m Interest received 0.6 0.2 0.5 8. Capital expenditure 26 wks ended 26 wks ended 52 wks ended 31 January 1 February 2 August 2004 2003 2003 £m £m £m Purchase of tangible fixed assets (8.5) (12.4) (22.1) Disposal of fixed assets 9.7 0.2 0.6 Net cash inflow/(outflow) for capital expenditure 1.2 (12.2) (21.5) 9. Financing 26 wks ended 26 wks ended 52 wks ended 31 January 1 February 2 August 2004 2003 2003 £m £m £m Issue of ordinary share capital 1.2 1.3 3.1 10. The results for the 26 weeks to 31 January 2004 and 1 February 2003 are unaudited. The accounts for the 52 weeks to 2 August 2003 are not full accounts within the meaning of Section 240 of the Companies Act 1985. Full accounts for that period incorporating an unqualified audit report have been delivered to the Registrar of Companies. 11. The interim report was approved by the directors on 14 April 2004 and has been prepared using consistent accounting policies with those set out in the accounts for the 52 weeks ended 2 August 2003. 12.The interim report will be posted to shareholders on or about 26 April 2004 and will be available on request from the Company Secretary, DFS Furniture Company plc, Bentley Moor Lane, Adwick-le-Street, Doncaster, South Yorkshire DN6 7BD. Appendix I Letter from KPMG in relation to the Profit Forecast KPMG Audit Plc 2 Cornwall Street Birmingham B3 2DL United Kingdom The Directors DFS Furniture Company plc Bentley Moor Lane Adwick-le-Street Doncaster DN6 7BD The Directors Citigroup Global Markets Limited 33 Canada Square Canary Wharf London E14 5LB 15th April 2004 Dear Sirs DFS Furniture Company plc ('the Company') and its subsidiaries ('the Group') We have reviewed the accounting policies and calculations for the forecast of profit before taxation and exceptional item of the Group for the 52 weeks ending 31 July 2004 ('the forecast') as set out in the unaudited interim statement of results of the Group for the 26 weeks ended 31 January 2004 published on 15 April 2004 ('the Interim Statement'). The directors of the Company are solely responsible for the forecast. The forecast includes results shown by the Interim Statement. We conducted our work in accordance with Statements of Investment Circular Reporting Standards issued by the Auditing Practices Board of the United Kingdom. In our opinion the forecast, so far as the accounting policies and calculations are concerned, has been properly compiled on the basis of the assumptions made by the directors set out in Appendix III to the Interim Statement and is presented on a basis consistent with the accounting policies normally adopted by the Group. Yours faithfully KPMG Audit Plc KPMG Audit Plc, a company Registered in England incorporated under the UK No 3110745 Companies Acts, is a member of KPMG International, a Registered office: Swiss cooperative 8 Salisbury Square, London EC4Y 8BB Appendix II Letter from Citigroup in relation to the Profit Forecast Citigroup Global Markets Limited Citigroup Centre Canada Square Canary Wharf London E14 5LB United Kingdom The Directors DFS Furniture Company plc Bentley Moor Lane Adwick-le-Street Doncaster South Yorkshire DN6 7BD 15 April 2004 Dear Sirs, DFS Furniture Company plc ('the Company') and its subsidiaries ('the Group') We have discussed the forecast of profit before taxation and exceptional item of the Group for the 52 weeks ending 31 July 2004 ('the Profit Forecast') and the bases and assumptions on which it has been prepared with you as directors of DFS Furniture Company plc. We have also discussed the accounting policies and basis of calculation for the Profit Forecast with KPMG Audit Plc, the Group's auditors, and we have considered their letter of today's date addressed to both yourselves and ourselves on this matter. On the basis of the foregoing, we consider that the Profit Forecast referred to above, for which you as directors of the Group are solely responsible, has been compiled with due care and consideration. Yours faithfully, for Citigroup Global Markets Limited William Barter Managing Director Citigroup Global Markets Limited Citigroup Centre, Canada Square, Canary Wharf, London E14 5LB, United Kingdom Registered office at above address. Registered Number 1763297 England. Regulated by the FSA Appendix III Profit forecast for DFS Furniture Company plc for the year ending 31 July 2004 Subject to unforeseen circumstances and on the basis of preparation and principal assumptions set out below, the directors of DFS Furniture Company plc 'the Group' expect a further decline in the profitability of the business during the second half year compared to the prior year. The profit before tax and exceptional item for the 52 weeks ending 31 July 2004 is expected to be at the low end of the current range of market forecasts at around £51 million. Basis of preparation and principal assumptions The above profit forecast is based on unaudited accounts for the 26 weeks ended 31 January 2004 and forecast results for the 26 weeks ending 31 July 2004. The forecast has been prepared using the accounting policies adopted by the Group in its annual accounts for the 52 weeks ended 2 August 2003 and after taking into account the following principal assumptions: 1. There will be no material change in the present management or control of the Group. 2. There will be no material change to the Group's strategy or commercial policy. 3. There will be no material adverse change in economic conditions that would affect the Group's business, including levels of competition in the UK upholstery market. 4. There will be no material adverse change in legislation, governmental or regulatory requirements impacting on the Group's operations or its accounting policies. 5. There will be no material unanticipated change in interest rates or exchange rates from those currently prevailing. 6. There will be no material changes in the rate or bases of taxation, direct or indirect, affecting the Group from those currently prevailing. 7. There will be no major disruptions to the business of the Group, or its suppliers by reason of industrial disruption, civil disturbance, government action or disaster, natural or otherwise. 8. No account has been taken of the costs incurred or to be incurred by the Group in relation to the possible offer for the Group by Graham Kirkham. This information is provided by RNS The company news service from the London Stock Exchange

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