DFS Furniture : Half Year Results

RNS Number : 9540A DFS Furniture plc

30 March 2017

DFS Furniture plc today announces its half year results for the 26 weeks ended 28 January 2017 (comparative period: 26 weeks ended 30 January 2016).

• Group revenue up 6.8% to £379.9 million (2016: £355.8 million)

• Gross sales for 12 month period exceed £1 billion for the first time

• EBITDA up 4.5% to £32.4 million (2016: £31.0 million)

• Profit before tax up 3.1% to £16.7 million (2016: £16.2 million).

• Underlying basic earnings per share up 3.3% to 6.2 pence (2016: 6.0 pence)

• Continued strong cash generation: gearing ratio reduced to 1.42x (2016: 1.71x)

• Interim dividend increased 5.7% to 3.7 pence (2016: 3.5 pence)

• Special dividend of 9.5 pence per share declared

  Operational Highlights:

• Proven growth strategy on track:

  • Broadening our appeal

    • Continued, award-winning innovation in advertising

    • Exclusive Brands and Sofa Workshop ranges delivering further growth

  • UK and ROI store roll-out

    • Two new 10-15,000 sq ft DFS stores opened in UK with one further opening planned for early April

    • DFS small store trial extended: new Crawley store trading profitably

  • International

    • The Netherlands: two new stores added

    • Spain: one new store opened, positive profit contribution expected

  • Retail space optimisation

    • 14 Customer Distribution Centres now operational

    • 17 new co-located stores opened: 15 Dwell, 2 Sofa Workshop

  • Omnichannel

    • Continued double digit growth in online traffic and transactions

• Record Net Promoter Scores achieved

"I am pleased to report continued good sales growth and strong cash generation reflecting the successful implementation of our proven growth strategy. This strong performance underpins our announcement today of our first special dividend for shareholders.

The scale of our business, which is larger than our next four UK competitors combined, gives us significant advantages that allow us consistently to offer outstanding value to our customers. We are confident that our size, combined with the flexibility of our cost base and vertically integrated business model means that DFS is particularly well positioned to respond to economic headwinds and cost pressures while continuing to grow our share of the UK retail furniture market.

Our expectations for profit before tax over the full year accordingly remain unchanged, and we believe that DFS continues to enjoy excellent prospects to deliver long-term profitable growth."

Notes:

1. Last Twelve Months - the 52 weeks ended 28 January 2017 are measured relative to the 52 weeks ended 30 January 2016.

2. Gross sales represents amounts payable by external customers for goods and services supplied by the Group, including aftercare services (for which the Group acts as an agent), delivery charges and value added and other sales taxes.

3. Underlying EBITDA means earnings before interest, taxation, depreciation and amortisation, as adjusted for certain material, unusual or non-recurring items which the directors believe are not indicative of the Group's prior period underlying performance.

4. Free cash flow is the sum of Underlying EBITDA, less gross capital expenditure and changes in working capital. 5Cash conversion is free cash flow expressed as a percentage of Underlying EBITDA

6Weighted average number of DFS stores during the financial period where former warehouse space has been converted into retail space.

DFS will be hosting an analyst presentation at 9.30am today. There will be a telephone dial-in facility available on

+44 (01452) 542303, with conference ID 88732165. The presentation slides will be made available on the Group's website: www.dfscorporate.co.uk. A replay facility will be available for six days after the event. To access the replay please dial +44 (0)1452 550000 and use passcode 88732165.

Nicola Bancroft (CFO)

Mike Schmidt (Director of Corporate Finance) investor.relations@dfs.co.uk

Jonathon Brill +44 (0) 20 3727 1000

Georgina Goodhew dfsfurniture@fticonsulting.com Eleanor Purdon

DFS is the clear market leading retailer of upholstered furniture in the United Kingdom. We design, manufacture, sell and deliver to our customers an extensive range of upholstered furniture products. The business operates a retail network of upholstered furniture stores in the United Kingdom and Europe, together with an online channel. These have been established and developed gradually over more than 47 years of operating history. We attract customers to our stores and website through our substantial and continued investment in nationwide marketing activities and our reputation for high quality products and service, breadth of product ranges and price points and favourable consumer financing options.

Continued good sales growth and strong cash generation during the first half of our financial year reflect the successful implementation of our proven growth strategy, which is delivering clear benefits. This has enabled us to increase profits and earnings per share, and to reduce our gearing and interest costs, allowing us to pursue a progressive dividend policy and to make a special cash return to our shareholders.

Group gross sales for the 26 weeks ended 28 January 2017 (2016: 26 weeks ended 30 January 2016) grew by 7.0% to £493.7 million (2016: £461.3 million). This included a 5.4% increase in DFS gross sales, reflecting like-for- like growth through established stores, the benefit of new store openings, and a further double-digit percentage increase in online sales. We also enjoyed increased contributions from Dwell and Sofa Workshop as we continued to grow these brands through the conversion of former DFS warehouse areas into new retail space. Group gross sales for the 52 week period ended 28 January 2017 were £1,012.8 million, taking us past the £1 billion sales milestone for the first time in our 47 year history.

Group EBITDA increased by 4.5% to £32.4 million (2016: £31.0 million), despite the anticipated pressure on margins from adverse foreign exchange movements, while profit before tax was 3.1% higher at £16.7 million (2016: £16.2 million). Underlying basic earnings per share, which are comparable year on year for the first time since our IPO, increased by 3.3% to 6.2 pence (2016: 6.0 pence).

The Board has declared an interim dividend of 3.7 pence per share (2016: 3.5 pence), an increase of 5.7%, payable on 21 June 2017 to shareholders on the register at 2 June 2017. The continued strength of our cash flow generation has also enabled us to fulfil our previously communicated intention to make an additional capital return to shareholders. Therefore in addition to the ordinary interim dividend, the Board proposes to pay on the same date a special dividend of 9.5 pence per share.

We have continued to make strong operational progress in implementing all parts of our growth strategy, which builds upon our well-established fundamental strengths of market-leading scale, the flexibility of our cost base, and vertically integrated manufacturing and retail operations.

Broadening our appeal to customers

We have maintained our successful focus on extending our appeal to an even broader range of customers so as to consolidate our position as the UK market leader in upholstered furniture across all customer segments. Awareness and appreciation of the DFS brand has benefited from successive innovative advertising campaigns, which we took into new territory at Christmas 2016 with a multichannel campaign created in partnership with Aardman Animations to highlight the work of the skilled craftsmen and women in our UK factories. Earlier this month our Team GB Olympics campaign was named Retail Advertising Campaign of the Year at the annual Retail Week Awards.

Our Exclusive Brands collections have continued to deliver growth, benefiting from continued product innovation including the launch of new Country Living Keswickand French Connection Clayranges. We have also successfully introduced two Sofa Workshop ranges throughout the DFS estate.

UK and Republic of Ireland DFS store roll-out

Our well-established programme of opening new 10-15,000 sq ft DFS stores in the UK and Republic of Ireland at the rate of three to five per year remains well on plan, with two new stores opened during the first half at Salisbury in August and Truro in September, and a third opening next month in Ashford. We have a clearly defined new store pipeline to maintain our planned store expansion for the next two years, subject to final negotiation.

In addition to our new store openings during the last six months we have undertaken major refits and relaunches of our Banbury, Nottingham and King's Lynn stores, where, as is usual, we have received the benefit of substantial lease extension incentive packages from our landlords.

We also opened a smaller 5,200 sq ft DFS store at Crawley in November, the third store in this trial format and our first outside the M25. The store is operating profitably and work is now underway to refine our small store operating model based on our learnings to date.

International expansion

Our measured strategy for the Group's international development continues to progress. We opened two new stores in The Netherlands this year, at Heerlen (December) and Den Haag (March), giving us a total of five stores in the country. This brings us closer to a scale where we can begin to test national marketing, based on our proven model in the UK. Our operating profit investment in The Netherlands remains in line with our expectations and as previously indicated is likely to be in the range of £2-3 million over the current year as a whole.

In Spain we opened a second store near Malaga earlier this month to make DFS even more accessible to the substantial British expatriate community there. We have also made our interest free credit proposition available to both British and Spanish residents. Notwithstanding the uncertainities surrounding Brexit for UK citizens resident overseas, we expect DFS Spain to make a positive contribution to operating profit.

Retail space optimisation

As we outlined in the annual report, the proven success of converting store warehousing space for retail use has led us to accelerate our Customer Distribution Centre (CDC) conversion programme which consolidates our warehouse operations into larger, more efficient offsite facilities. Three additional CDCs opened during the first half, contributing to the current total of 14 CDCs serving 61 stores, of which 39 had been converted to release additional retail space by the end of January.

We opened 15 new co-located Dwell stores in former DFS warehouse space during the first half, and two new co- located Sofa Workshop stores. All are trading successfully and also helping to drive footfall and bookings in their associated DFS stores. To support the growth of the Dwell brand, we also successfully opened a new dedicated distribution warehouse at Milton Keynes in January.

We will complete our CDC conversion programme with the opening of the final five CDCs over the next six months, reaching nineteen in total, while our retail space conversion programme will continue towards completion during FY18. As previously indicated, by the conclusion of the programme we expect to achieve nationwide coverage with Dwell, giving us a chain of more than 40 stores, together with more than five new Sofa Workship stores. We will use the expanded space released elsewhere in the DFS estate to offer additional ranges of beds and dining furniture.

The financial results of the programme are in line with our plans, with pre-opening costs offsetting the higher sales generated by additional retail space in the current year. As previously guided, we remain confident that the programme will deliver incremental EBITDA of £650k-£700k per CDC cluster converted.

Omnichannel

The web is now the natural starting point for most consumers considering a furniture purchase, and we know that today around 80% of DFS customers begin their research online. The DFS website retains strong market leadership, continuing to attract over 40% of all UK upholstery web traffic, and we have seen significant increases in website visitor numbers during the current year. DFS already has the leading presence in natural web searches, through effective search engine optimisation, and we have an ongoing innovation programme designed to increase the efficiency and impact of paid searches.