DFS sees dangers and opportunities in a challenging and changing market and is changing its strategy as shoppers change the way they shop, especially with the rise of online and mobile shopping.
“The number of retailers entering CVAs or administration in recent months serves as a stark reminder of the dangers of failing to keep pace,” said Ian Durant, chair of the DFS board, as the retailer published its full-year results.
Durant added: “Over the medium term, the current weakness in the market does present the group with opportunities which we can exploit through an unrelenting focus on understanding and satisfying the needs of our customers.” To do that, he said, would mean a “sharp focus on the returns from our capital expenditure.”
The omnichannel opportunity
DFS says “the vast majority” of sofa buyers now carry out “signficant research online” but also want to come into stores for a “sit and feel test” – and it believes that selling via stores and web “is critical to succeed in this segment”. Online sales grew by 15.1% during the year, and it is investing in omnichannel and in particular in its mobile site. A ‘my sofology’ app now enables shoppers to build baskets on their phone in store with advice from sales staff before checking out either immediately or at home. The DFS site now enables shoppers to see what a sofa would look like in their homes using augmented reality on iOS 12. Chief executive designate Tim Stacey says he will focus on speeding up its omnichannel development as it improves its customer proposition.
Brexit risks
When it comes to Brexit, DFS says it will monitor changing consumer demand in what may be a “volatile” market. Even though it has significant manufacturing in the UK, just over half of the products its sells are imported from mainland Europe or China. Border delays for those goods would mean it waits longer for the income it makes “and there would be an adverse impact to the customer proposition.” It is currently looking at ways to speed up the international movement of goods in order to mitigate these impacts, and would want its suppliers of raw materials to bring goods closer to them. It believes changes to tariffs won’t affect its business unduly since the finished goods it sells attract a 0% tariff under WTO terms, but it is looking at what impact increased regulatory burden would have on its business. “We will continue our preparations for all likely process outcomes as part of our regular risk mitigation process, until the UK and EU’s path forward is clear,” it said.
Store and brand strategy
The retailer has evolved its store strategy by converting warehouse space to retail use and at the same time co-locating its brands, so that Dwell and Sofa Workshop trade alongside DFS stores. Stacey says that it’s now time to develop a platform of services across the group, including Sofology, Dwell and Sofa Workshop, in order to reduce costs and increase capital efficiency.
The retailer is renegotiating rents downwards as it extends its leases. It now has 42 leases due to expire by the end of 2023 and it aims to cut property costs by between £6 and £8m a year through this strategy.
The context
DFS is a Top350 retailer in IRUK Top500 research. It boasts the position of the largest manufacturer, and retailer, of upholstery in the UK. It makes sofas and other living room furniture that it sells online and via a chain of 116 shops in the UK and Republic of Ireland. In recent years it has bought the Sofology, Dwell and Sofa Workshop brands as well as intellectual property and stores from Multiyork after its administration.
Today the retailer reported group revenues of £870.5m during the year to July 28. That’s up by 14.1%, and was boosted by its acquisition of Sofology. But when the acquisition effect was discounted, revenue came in at £747.7m, down by 2% on last time. The retailer said sales were hit in the fourth quarter of its financial year, when the weather was unusually hot.
Top-line pre-tax profits came in at £38.3m, down by 23.7% on the previous year. At the bottom line, after exceptional items related to acquisitions, pre-tax profits of £25.8m were down by 48.5% compared to the previous year.
Outgoing chief executive Ian Filby said the retailer had worked to develop its strategic and market position – but full-year results were hit by “the exceptional downturn in market demand we saw in the fourth quarter.”
Now, however, the business believes it is benefiting from purchases put off in the previous year.
“Overall, we expect the market to remain subdued into 2019, constrained by political risk and weak consumer sentiment,” said Filby. “Notwithstanding this, we believe the group is well positioned to become stronger in this current environment, boosted by investment and acquisition benefits, and we have excellent prospects for profitable growth and attractive cash flow generation over the longer term.”
The retailer continues its expansion into the Netherlands and Spain.
Image courtesy of DFS
