By Connor Campbell, Financial Analyst, Spreadex
Stock of the day: DFS Furniture PLC(LON:DFSD) (LON:DFSD)
As has tended to be the case since it debuted in early 2015, this year has seen DFS lurch between impressive highs and dire lows. For the first few months of 2017 the stock was going like gangbusters. An update in early February gave the stock a kick up the backside despite the firm stating the weakened pound was weighing on its margins, investors instead focusing on a 7% surge in gross sales for the 26 weeks to the end of January.
This pushed the stock back to the £2.50 mark until the end of March, when DFS’ half year results sparked the second stage of its rise. The company posted a 3.1% jump in pre-tax profit to £16.7 million off a 6.8% increase in revenue to £379.9 million. DFS also revealed that in the 2016 calendar year it broke £1 billion in sales for the first time in its history, allowing it to reward investors with a 9.5p per share special dividend and a 5.7% increase in its interim dividend to 3.7p per share. However, it wasn’t all good news, as the company once again reminded the market that cable’s decline had had ‘some impact’ on its first half margins.
Still, with that dividend in their pockets – and the announcement of the snap election in mid-April – investors continued to pour into the company, eventually sending it to an 8 month high of £2.85 by the start of May. It was here were its problems began. Pre- and post-election jitters seriously harmed the stock in early June, leaving it barely above £2.50, before crisis hit in the middle of the month.
On June 15th DFS unleashed an unexpected profit warning, plunging 20% to just below £2 after it stated that it had seen a ‘significant’ drop off in the number of people coming into its stores. The reason given for this decline was the general election, DFS arguing that ‘uncertainty’ regarding the result and questions surrounding the ‘macroeconomic environment’ had led to a ‘material’ fall in customer orders. In terms of hard figures DFS explained that it now expects core earnings to come in somewhere between £82 million and £87 million, well below the previous year’s £94.2 million AND the £96.1 million forecast.
Understandably this left DFS stranded, the stock bounced from £2 to £2.10 and back again for the rest of June and all of July. However, a bit of good, if surprising, news at the start of August has helped spark a nascent recovery. The company revealed that it was buying fast-growing rival Sofology – which has 37 UK stores and annual sales of £142 million – for £25 million, sending the stock to a current trading price of £2.27
Investors will want a few more details on the Sofology purchase on Thursday, as well as some signs that the issues highlighted in mid-June have abated, especially since sterling was recently trading at 11 month highs against the dollar.
DFS Furniture PLC has a consensus rating of ‘Buy’ with an average target price of £2.63.
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