Are you sitting comfortably? If you are, it’s bad news for DFS, the sofa company that would like you to spend some money upgrading your ‘upholstered furniture’ experience in 2025.
Last week’s trading update from the business was cautiously optimistic after a shocker of a results statement in December when the firm axed its dividend, blaming disruption in the Red Sea and ‘record low market demand’.
Tim Stacey, DFS chief executive, says the market is still ‘relatively subdued’ and there’s no sign of a renewed payout for investors – but he is cushioning the blow with phrases such as ‘cautiously optimistic’ and ‘attractive returns for shareholders’.
These are phrases that are likely to make any current investor sit up straight. They have seen their holdings droop like an overused settee since 2021 when they were priced at 300p a share. At 142p, they are at less than half price (rather like some of the company’s less popular ranges now).
There have been some signs of a recovery but has DFS got further to go from here? Taking a peep behind the sofa cushions, where we know all the nasties hide, should help new buyers to decide.
SOFA SO GOOD
On the plus side, DFS is a big player with more than 30 per cent market share. As well as the DFS brand, it owns companion business Sofology and has done well out of brand partnerships with the likes of Joules and Ted Baker. While these high street names have struggled, the DFS sofas promoting a similar lifestyle have proved very popular and partnerships now account for 45 per cent of the company’s sales.
Comfort zone: Trading figures at sofa supplier DFS are encouraging
The DFS strategy is simple. It allows customers to go into a warehouse to try its sofas and then it makes most items to order. Offering interest-free credit for up to four years means that cash-strapped customers feel comfortable making a new purchase.
This current trading period – the post-Christmas winter sale – is arguably DFS’s most important. When we’re all trapped inside by the weather, we notice if our sofas are looking tired and DFS adverts are all over the television, exhorting customers to ‘let your bum find its thing’. The trading statement suggests that the sale period is in line with expectations, though there is all to play for while order intake for the first half of the year is very positive, up 10.1 per cent. Analysts at financial advisory platform Jefferies state there has been a ‘marked acceleration’ since the first quarter.
The company has benefited from the takeover of rival SCS by Italy’s Poltronesofa, which has closed many SCS stores for refurbishing purposes, giving DFS a boost.
SITTING PRETTY
However, there is reason for caution too. The company is mindful of increased labour costs from the increase to employer National Insurance contributions while interest rates remaining higher for longer may make worried householders rein in spending. After all, a new sofa is usually a discretionary purchase not a necessary one, which means it is easier to cut back. A boost to the housing market could lift DFS considerably but recent economic events mean recovery could be slower than previously expected.
Meanwhile, the SCS refurbishments mean that the company’s main competitor could bounce back more strongly.
Despite all this, analysts are inclined to think DFS is sitting pretty. Jonathan Pritchard, at retail analyst Peel Hunt, says that management is being cautious around interest rates, market share and consumer confidence.
However, the company has seen market share grow faster than other retailers and Pritchard reckons there is huge scope when the economy bounces back.
‘The risk is very much to the upside of short-term forecasts,’ he says. ‘Any further supernormal market share gains would bring the prospect of returning to historic profitability levels even closer.’
Pritchard has a 200p price target on the shares but says even this will look cheap if the company continues to gain market share.
Midas verdict: Buying a sofa is not something most of us do lightly, and it’s easy to put off doing so when you’re feeling less confident about the state of your finances.
Stacey and his crew can’t do much about the decisions made in 11 Downing Street, nor about the state of the global economy, both of which may persuade many of us to keep an old faithful couch for a little while longer.
As a result, it may take some time before the results of their hard work cutting internal costs, maintaining margins and being as efficient as possible are reflected in the DFS share price.
Current trading figures are encouraging though, and for those with a long-term view it may be worth buying at this price, then sitting tight.
Traded on: Main Market Ticker: DFS Contact: dfscorporate.co.uk/investors
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