15th Sep 2022 20:19
(Alliance News) - DFS Furniture PLC reported a disappointing annual performance on Thursday, and analyst warned that a looming economic recession in the UK may weigh on the soft furnishings retailer's future profitability.
"The fight is on for consumers' remaining disposable cash and furniture companies look set to be heading for a hard landing as budgets are tightened amid the cost-of-living crisis," Susannah Streeter, analyst at Hargreaves Lansdown.
"Gone are the days when consumers were piling up spare cash during the pandemic, to splurge on living room upgrades to add comfort to lockdowns. Now in an era of make do and mend, orders are expected to decline by up to 15% even compared to the pre-Covid period," she continued.
In the 52 weeks to June 26, the Doncaster-based firm reported revenue grew 8.5% to GBP1.15 billion from GBP1.06 billion a year before.
However, pretax profit shrank to GBP58.5 million from GBP102.6 million.
Chief Executive Tim Stacey said the year had been the "most operationally challenging year" the firm can remember, with industry-wide Covid-related supply chain issues, double-digit cost inflation on raw materials and ongoing colleague absence and skill shortages.
Russ Mould, investment director at AJ Bell, warned that these would not be DFS' main concerns amid a cost-of-living crisis, however: "The idea of splashing GBP1,000 on a sofa will seem unfathomable to many people in the current climate, explaining why big-ticket retailers are so vulnerable if we're heading into a recession."
Susannah Streeter agreed: "As household bills mount for essentials like food and heating, a plush new sofa is a luxury many consumers are happy to do without."
This trend was highlighted in the latest British Retail Consortium-KPMG sales monitor, released in early September.
The sales monitor showed that UK retail sales slowed in August as the cost-of-living crisis caused consumers to reign in spending.
BRC Chief Executive Helen Dickson explained that white goods and homeware remained the "hardest hit" in the data.
On Friday, the Office of National Statistics will release its own retail sales data for August. Streeter suggested investors will keep a "keen eye" on the figures.
Streeter said added that "even" Dunelm which reported buoyant annual profits and sales on Wednesday would be "unlikely to be immune" to the budgetary squeeze amid rising input costs.
DFS shares closed down 5.2% on Thursday in London but the stock led a broader sell-off across the retail sector with peer Made.com plummeting 15% on Thursday.
Despite macroeconomic woes, Shore Capital remained confident in its outlook for the firm.
"Despite short-term pain, we are comforted by the fact that the company has gained market share during periods of furniture market decline, given its scale, brand strength and integrated retail strategy," the capital markets firm said.
By Heather Rydings; [email protected]
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