Despite boasting record market share, DFS has revised its profit expectations for FY24 (ending 30th June) in the face of ongoing shipping disruption in the Red Sea and and "a weak upholstery market".
In the retailer's interim results update on 19th March, it said that it expected revenues of £1000m-£1015m and PBT(A) of £20-£25m, with an additional profit risk of up to £4m if Red Sea shipping delays continued through to its year-end date.
"Since that update, consumer demand in the upholstery sector has remained challenging," says DFS, "and Red Sea routing issues have persisted, resulting in delays to customer deliveries and higher freight costs."
As a result, the retailer now expects PBT(A) to be in the range of £10-12m, with the reduction in profit expectations driven by a combination of: a lower level of delivered customer orders, with £12-14m of delayed deliveries from the Red Sea disruption, which are expected to move into FY25 (FY24 revenues are now expected to be in the range of £995m-£1000m); higher shipping costs as a result of freight rates increasing above previous expectations in Q4; and a "weak upholstery market, partially mitigated by selective investments to stimulate required order volume levels in Q4".
DFS says the progress it has made in key areas has helped to partly mitigate the profit impact of the weak market: "Consumer demand in the upholstery sector has declined c-10% in volume terms YoY from a weak starting point, bringing overall market demand levels to record lows. The group has continued to operate through the period with record value market share of over 38.5%.
"Despite higher shipping costs and investments to drive required order intake volumes in Q4, we have continued to grow our full-year gross margin rate, which is expected to be up +140bps YoY. In addition, we have reduced our operating costs, which are expected to be down approximately £25m YoY. Together, these have limited the lower sales impact on our profitability."
DFS expects net bank debt at the end of the period to be £165-170m (of a total facility size of £250m).
Looking more closely at recent trading and into FY25, the retailers says it has been encouraged by an improving trend in its group order intake, which is up over +9% in Q4 to date, in line with its expectations, adding: "The recent improvement comes as we annualise weaker prior-year comparatives and also following successful initiatives to strengthen the product ranging and pricing in Sofology and reintroducing 4-year interest free credit at select times to maximise revenue and profit in this difficult trading environment.
"Whilst the economic outlook remains hard to predict we expect the widely predicted lower inflation and interest rate environment to have a positive impact on upholstery market demand levels, with the declines experienced across the last three years starting to reverse and the market slowly recovering in our FY25 period. We are well placed to capitalise on any market recovery given our market leadership position, the operational leverage in the business and the progress we are making on our cost base."
