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.
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