DFS Furniture Crashes 20%+ After Shock Profit Warning. Is This A Dip-Buying Opportunity? – Forbes

Couch colossus DFS Furniture found itself careering lower in Thursday business after hitting the market with a shock profits warning.

The retail giant was last 21% lower from the midweek close, and had plunged to levels not seen since last July at 192p per share earlier in the session. And I believe investors should be braced for even more woe as distress signals from the UK high street become louder.

Going Down

DFS announced today that ‘the trading environment has… recently weakened beyond our expectation, with significant declines in store footfall leading to a material reduction in customer orders.

The company noted that these trends are being felt across the market, emanating from customer worries related to the inconclusive June general election as well as the uncertain macroeconomic environment.

As a consequence DFS now expects earnings in the year to July 2017 to range between £82m and £87m, down from the £94.4m profit it had enjoyed last year.

DFS feels the strain as political and economic troubles cause shoppers to tighten the pursestrings. Photographer: Erica Canepa/Bloomberg

Retailers Under Pressure

The home furnishings play has seen its share remain broadly robust in the months leading up to today’s release, market appetite for the stock holding up in spite of the rising stress on the UK high street.

Indeed, the retailer had affirmed its full-year profits expectations as recently as March, in spite of predicting tougher market conditions for the second half of the fiscal year.

DFS noted back then that ‘the flexibility of our cost base, our investments in infrastructure and our vertically integrated business model add to our confidence that we are very well positioned to respond to economic headwinds and cost pressures while continuing to grow our share of the UK retail furniture market.’

But DFS is clearly not immune from the pressures smacking much of the British retail sector, as inflation treads skywards and consumer confidence plummets. The consumer price inflation gauge hit a fresh four-year high of 2.9% in May, and sellers of so-called big ticket items in particular appear to be suffering badly — electricals giant AO World plunged last week after issuing a profit warning of its own.

Latest retail data from the Office of National Statistics certainly suggests that the situation continues to deteriorate. The body advised that total retail sales fell 1.2% month-on-month during May, worse than the predicted 0.8% decline. And on an annualised basis takings rose just 0.9%,the worst result for more than four years.

Perilous Projections

Prior to today’s result, the City had been expecting earnings to continue rising over at DFS, with increases of 1% and 3% pencilled in for the periods to July 2017 and 2018 respectively.

These numbers are about to fall, of course, and further sizeable reductions can be expected in the months ahead. I therefore believe that share pickers should give little regard to a ‘cheap’ forward P/E ratio of 8.3 times.

And this is not the only cause for concern, as predictions of bumper dividends could also fall disastrously wide of the mark.

DFS is predicted to pay dividends of 16.2p per share in 2017 and 17.6p next year, producing eye-watering dividends of 8.2% and 8.9%. However, these figures are covered just 1.5 times and 1.4 times respectively by already-redundant earnings estimates, falling woefully short of the established safety yardstick of 2 times and above.

With retail indicators likely to continue sinking in the months ahead — and with it DFS’ revenues outlook — I reckon investors should give the business an extremely wide berth.

 

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