Dfs Furn Regulatory News (DFS)

DFS Furniture plc (the "Group"), the market leading retailer of living room and upholstered furniture in the United Kingdom, today announces its interim results for the 26 weeks ended 27 December 2020 (prior year comparative period is the 26 weeks ended 29 December 2019).

Financial summary:

● Group revenue £572.6m, up 17.3% year-on-year

● Revenue excluding Sofa Workshop up 18.7% year-on-year to £567.5m driven by strong order intake in the period, as a result of pent-up demand from 'lockdown one', market share gains and a shift in consumer spending to the home

● Resilient trading performance through recent lockdown periods, leveraging our integrated retail proposition, with online revenues up 66.2% year-on-year

● Underlying PBT(A)1 up £59.9m to £76.5m, primarily as a result of the strong revenue growth.

● Reported PBT increased £56.2m to £72.1m

● Significant reduction in net bank debt1 to £38.2m (c.£100m excluding temporary working capital benefit) from £157.7m at previous financial year end with period end leverage1 at 1.1x

● £225m senior revolving credit facility term extended from August 2022 to December 2023 with two further one year extension options

● Order bank is currently over £65m higher in revenue terms than the prior year equivalent date, with the £200m higher order bank at Christmas-time providing resilience through the still ongoing retail lockdown in the second half to date

Operational and strategic highlights:

● Continued commitment to colleague and customer safety, health and wellbeing during the pandemic

● Evidence that Group market share has increased by c.2% in the period, extending our clear market leadership

● As showrooms reopen, we're targeting further market share gains from our well-positioned and resilient integrated retail business model

Strong strategic progress despite operational challenges of the pandemic, port disruption and raw materials supply:

● Drive the DFS core: continued improvements to our integrated digital and physical customer journey, service and product initiatives to further extend market leadership

● Build the platforms: Sofa Delivery Company roll-out underway; new manufacturing investment under consideration

● Unlock new growth: 3 new Sofology showrooms opened in H1; FY21 target of 6-10 openings remains intact

Meaningful progress against ESG Phase 1 Environmental (sourcing, packaging and emissions) targets and Social (gender, inclusion, community) targets in the period.

Tim Stacey, Group Chief Executive Officer said:

"This strong first half profit and cash flow performance is a true reflection of the supreme efforts put in by our teams right across the Group since the start of the pandemic. I am hugely grateful to every colleague for their constant focus on the safety, health and wellbeing of all their colleagues and also our customers.

Our business has proven to be resilient throughout the period despite showroom closures and a significant amount of external disruption in our supply chains. The investments we've made in our digital channels have generated exceptional revenue growth. Consequently our order bank remains well above normal levels and, subject to showrooms reopening by 12 April 2020, our central planning scenario is for an expected full year profit before tax outcome of approximately £105m, with further benefits to be realised in next year's financial results.

We're committed to our strategy to lead sofa retailing in the digital age with our proven integrated retail model. We expect to see a good level of activity in the home market as Covid-19 restrictions ease and, having accelerated the execution of our strategy and grown our market share, we are well set for future growth."

1 Definitions and reconciliations of KPIs including Alternative Performance Measures ("APMs") are provided at the end of this statement in Note 14 to the condensed consolidated financial statements

Enquiries:

DFS (enquiries via Tulchan)

Tim Stacey (CEO)

Mike Schmidt (CFO)

Phil Hutchinson (Investor Relations)

Tulchan

James Macey-White

Jessica Reid

+44 (0)20 7353 4200

dfs@tulchangroup.com

Analysts presentation

DFS will be hosting a virtual results analyst presentation at 9.00am today. A live webcast and the presentation slides will be available on the Group's website: ww.dfscorporate.co.uk.

About DFS Furniture plc

The Group is the clear market-leading retailer of living room furniture in the United Kingdom. We design, manufacture, sell and deliver to our customers an extensive range of furniture products. The business operates an integrated physical and digital retail network of living room furniture showrooms and web sites in the United Kingdom and other European countries, trading through our leading brands. The Group has been established and developed gradually over 50 years of operating history. We attract customers through our substantial and continued investment in nationwide marketing activities and our reputation for high quality products and service, breadth of product ranges and price points and favourable consumer financing options.

CHIEF EXECUTIVE'S OPERATING REVIEW

Overview

The Group delivered substantial progress in sales, profits and cash flow in the half, reflecting the benefit of pent-up demand early in the period, market share gains, a shift in consumer spending towards homeware categories and good cost control. Despite the ongoing impact of the pandemic, which required us to temporarily close many of our showrooms, and external supply chain disruption, we were able to continue taking orders, leveraging investments made in our online capabilities, as well as manufacturing and delivering safely to customers throughout the half.

These results reflect the supreme efforts of all of our colleagues who continue to apply our core Group values on a daily basis. We remain committed to our strategy to lead sofa retailing in the digital age, by focusing on our core strategic pillars, as well as working towards the medium-term ESG targets that we presented last September.

Strong, resilient and set for growth

Our Group benefits from four fundamental advantages that provide our business model with resilience and position us well for the future. We have navigated through the pandemic and reflecting the core strengths below, we believe that we are set for growth given our market share gain, our strategic opportunities and also the likely current pent-up demand in the homeware market.

1) Market leadership

As the clear market leader, scale is one of the major strengths of our business model. According to independent market research, pre-pandemic our Group had over 34% value share in the upholstery sub-sector of the living room furniture market and we are over three times the size of our nearest competitor. Furthermore, utilising proprietary datasets that we have developed with Barclaycard, we have observed recent, sustained Group market share growth of circa 2%, due to the performance of our online channels and also the exit of several competitors.

This scale provides us with cost advantages through leveraging our buying power with raw material and finished goods suppliers and minimising final mile logistics costs as a result of our customer postcode delivery density. We also enjoy purchasing economies of scale in advertising, insurance and interest-free-credit. Our market-leading showroom sales densities and online volumes also drive a range of operating efficiencies. Finally, we are also able to invest ahead of our competitors on our retail and operating platforms, our people and our technology.

2) Integrated retail business

A second core strength is the increasingly integrated nature of our retail business model. The continued investment in building the leading omnichannel business model in this sector allows us to meet fast-changing consumer shopping habits and positions us well for the future. We believe the combination of digital and physical is the right long-term approach to address consumers within the sofa market. Our market research shows that more than 85% of consumers research online prior to purchasing their sofa.

To this end we have a well-invested and growing online capability that we develop and enhance continuously. The combination of our high levels of brand awareness and a digital marketing targeting platform that identifies customers coming into the market, enables us to maintain a significant lead in sector search traffic, which is over 2.5x ahead of our next nearest specialist competitor. "DFS" is the most searched term for the sector ahead of "sofa" and "sofas" combined.

We know that a significant barrier to conversion online is the ability to visualise a product displayed digitally and so we offer the world's largest set of augmented reality sofa images through a web browser, some 12,500 3D images, allowing customers to visualise a sofa in any room in their home. We have also developed live "in-store" video communications that enable customers to interact with showroom colleagues from the comfort of their own homes.

A growing share of customers choose to transact entirely online, although the vast majority continue to visit our showrooms to conduct the all-important 'sit-test', with 'comfort' the number one reason why a customer selects a particular model. We are committed to maintaining an attractive showroom estate which benefits from regular refurbishments and technological enhancements. As the customer journey becomes increasingly integrated, we have adjusted our sales incentive model for showroom colleagues to support customers seamlessly throughout the purchase process.

We are comfortable committing to this channel-agnostic approach to customer engagement, as our 'cost to serve' online is lower than for transactions in our showrooms - utilising exactly the same fulfilment infrastructure while incurring lower or no showroom overheads. We also typically see those customers transacting digitally being more likely to self-serve for delivery arranging and any customer support queries, again reducing the cost to fulfil.

3) Sustainability

We are committed to building a sustainable business model, both in terms of our impact on the environment and preserving our long-term success as a Group. Our success has been driven by our strong brand awareness and reputation, our focus on great value and customer service, and the continual development of our operations. We have built-up our efficient infrastructure, superior scale and industry-specialised know-how over our 50 years of operating history. This gives us benefits in many of our physical and digital retail and logistics activities, whether through higher volumes, superior conversion or higher cost efficiency per transaction.

We launched our ESG strategy in September 2020, with a strong focus on the Environment based on our "sofa cycle" approach. We set out clear targets, which are included in the full ESG presentation available on our corporate website.

As the largest upholstery retailer in the UK, we aim to lead on the environmental challenges that exist in our industry. Our Sofa Rescue programme has already saved over 65,000 sofas from landfill, and we're taking it a step further by reviewing both materials and manufacturing methods to help the recyclability of our product.

We are also focused on tackling our carbon emissions. We have signed up for the BRC Climate Action Roadmap targets and are well on our way to meeting our Scope 2 targets by 2030. Though we have reduction plans for Scope 1, we are reliant on technological advances, such as emission-free 7.5 tonne trucks, to meet the 2035 target. Transparency and traceability focused on wood and leather in Phase One of our ESG targets have enabled us to ensure the raw materials used in our products are sourced responsibly and not contributing to deforestation, and we are on track to meet our 2025 FSC target. We are also expanding our supplier requirements to other aspects of the supply chain to include Leather Working Group certification and external certification for textiles. Not only will this ensure that there is rigorous third-party due diligence throughout our supply chains, but we are confident these will add value to our suppliers' value chains as well. And ultimately, as customer awareness grows, these certifications will also add value to the brands and products.

Our ESG strategy has been woven throughout our business, from Responsibility Champions to ESG Working Groups within each brand and external partners in place to support us. We're at the start of our ESG journey, but we've come a long way in a short amount of time and are excited about the opportunities ahead of us.

With a robust plan for 'E', we have turned our attention to 'S' and are working on a clear plan to further embed inclusion and diversity within the Group. The Group has a real 'family' ethos, and all our customers and all our people are already at the heart of everything we do, reflected in our three core values of 'Think Customer', 'Be Real', and 'Aim High'. The Group benefits from a high level of colleague loyalty and engagement and is regularly voted one of the best companies to work for in the UK. In terms of 'G', Governance is a core part of our status as a public listed company and we have all necessary governance mechanisms in place across to the Group to ensure we can achieve our targets and we are committed to complying with all relevant legislation and guidance as it develops.

4) Attractive homeware market

The homeware market has performed relatively well during this pandemic compared to other retail and leisure categories. We have observed strong levels of pent-up demand upon re-opening our showrooms after the previous lockdowns, with the vast majority of "lost" sales during enforced showroom closures being re-captured in subsequent weeks and months. As such, we would expect to benefit from a significant level of pent-up consumer demand post the current lockdown, and a positive market for the rest of 2021, subject to any further trading restrictions going forward.

In summary: We are set for growth

Superior shareholder returns is a long-term feature of our business. Economies of scale enable us to achieve market leading operating margins. Our made-to-order business model, relatively short lead times and supplier credit terms enable us to operate with negative working capital that releases cashflow as the business grows and drives high cash conversion and returns on capital employed. As we look forward, with the combination of the inherent strengths of our business model, a tailwind from pent-up demand and market growth, we expect to grow profits and cash in both the short and medium term.

Financial Results

Revenue rose 17% in the period, or 19% on a comparable basis (excluding Sofa Workshop). This performance reflects market share gains as well as the ongoing benefit of a shift in consumer spending to home categories. The Group saw a particularly strong order intake in Q1 due to latent demand following the end of the first UK lockdown and a resilient Q2 despite extensive showroom closures in November.

Underlying profit before tax and brand amortisation1 increased from £16.6m to £76.5m in the first half. Profits benefited from the drop-through effect of high revenue growth, cost control and lower retail rates payments.

Reflecting strong trading alongside a c.£60m favourable movement in working capital, net bank debt1 reduced by £119.5m in the period to £38.2m. As we reported in December, the group extended its banking facility until the end of 2023, which has removed restrictions on dividend payments. While we do not propose a dividend with the interim results, we see the potential to restart ordinary dividend payments in the near term, subject to outlook and operational performance.

Operational Update

The first half of FY21 presented a wide range of operational challenges and I'd like to thank all our colleagues for enabling the business to operate successfully during this period.

The ongoing Covid-19 pandemic has required us to remain very agile in response to Government regulations that have changed frequently and often at short notice. As in the first wave of the pandemic, our absolute priority was the safety and wellbeing of our customers and colleagues. Colleagues are regularly reminded to adhere to our health and safety "Golden Rules", introduced earlier in the pandemic.

A second lockdown resulted in the closure of the vast majority of our showrooms for several weeks in the autumn. While most of our showrooms re-opened briefly in early December, Tier Four lockdowns and a third national lockdown resulted in significant closure periods for all our UK showrooms in the run up to Christmas and through our post-Christmas sale; these showroom closures have continued into the second half of the year. Despite the closures, we continued trading very successfully online, and manufacturing and delivering to customers as well as offering service and repair visits. As the Group recognises revenues at the point of delivery of orders to customers, being able to safely manufacture and deliver to customers despite showroom closures allowed us to satisfy orders placed earlier in the year.

Gross sales1 via our online channel increased by 66.2% compared with a year earlier. Independent market research data continues to demonstrate that we are the clear market leader in the sale of sofas online in the UK. During the recent and ongoing periods of showroom closure we believe we have reaped the benefits of long-standing investment in our online capability, such as superior site load speeds giving a more responsive experience and leading visual search and augmented reality capabilities that build on our long-standing strength of imagery. 

Our online performance has contributed to a particularly increased market share during lockdown periods relative to specialist category competitors, as indicated by Barclaycard data. This does not alter our view that the right model to succeed in our sector is integrated retail, and we expect it is likely that our online penetration will reduce once showrooms are fully reopened.

The proprietary Barclaycard data also does show evidence that the Group is continuing to extend our market leadership with our market share increasing by in the region of 2% over the whole of the last six months. We believe that this gain is sustainable, and with no other change in market size, compared to a previous c.34% group market share, would imply more than a 5% growth in our recurring annual revenues. We believe, this measured share gain reflects both the exit of competitors, the shift of the market towards online and also the growth of the reach of the Group's physical retail estate.

As we highlighted in our December pre-close statement, the arrival of some of our imported products, and the consequent recognition of revenues, has been delayed by ongoing shipping disruption from the Far East and raw materials supply issues relating principally to foam availability in Europe. This, along with manufacturing capacity constraints internally and externally, resulted in longer than average lead times, which we are working hard to reduce in the second half. We appreciate customers' continued patience regarding deliveries as well as our sales and customer support teams for their efforts in keeping customers informed throughout this period.

The Group has spent the period since the Referendum preparing thoroughly for Brexit and we had plans in place for a variety of outcomes to government negotiations and the end of the transition period. The two principal risks to the Group from the EU departure were identified as consumer confidence-related impacts on consumer demand and border delays. While these uncertainties have been compounded by the effect on the global supply chain by the Covid-19 pandemic, very limited disruption has been experienced to date and we continue to believe that the Group is well placed in its key markets following the UK's departure from the EU.

Strategic Update

In spite of the operational challenges detailed above, the Group has remained focused on its strategy to lead sofa retailing in the digital age. Our strategy will transform the Group in the medium-term by focusing on three interrelated pillars - drive the DFS core, build the platforms for growth and unlock new growth. We continue to target a £40m medium term profit before tax benefit from the extensive range of initiatives targeted across the business.

Drive the DFS Core

The DFS brand is the largest and most profitable in the Group and the key priority of this strategic pillar is to drive the growth of the brand across all our channels. In the first half, the DFS brand delivered revenue and brand contribution growth of 21% and 35% respectively. We continue to invest in our digital and physical infrastructure in order to further improve our integrated retail customer journey.

One of the attractions of our well-invested omnichannel business model is that we can support customers to shop in the way that suits them, whether they prefer to shop purely online, solely in a showroom or a combination of the two. With more and more customers using the web to begin their sofa search process, many of our investments are focused on making this research stage as convenient as possible.

Online, we have introduced a more responsive checkout which has improved the customer experience. We are growing our 'visual search' database, enabling customers to take photos of a sofa they like in any setting and compare it with our extensive ranges online. We are also continuing to expand our augmented reality database, one of the largest in the retail sector, which allows a customer to visualise a sofa in 3D in their living room using a smartphone. In addition, we have introduced shared baskets so customers can conduct their research seamlessly across the platform, review options at a pace that works for them and complete their purchase whether the showroom is open or not.

We believe an attractive showroom experience is vital to the customer journey and have continued to invest in our network in the period. We refurbished six showrooms during the first half of the year, and have nine planned for the second half. Customers appreciate our appointment bookings facility, which drove conversion in the first half.

Dwell, our homeware and accessories brand, has also been integrated into the DFS platform so customers can now order an increasing range of Dwell furniture and accessories directly from the DFS retail channels. The space allocation in the combined DFS/Dwell showrooms is being optimised across the various product categories with a view to maximising revenue across the platform.

The second element of our 'Drive The Core' strategy is to continue developing new services to engage customers. We are conducting live 'video in store' trials, which allow customers to interact with a sofa expert and see products in the showroom environment. We currently offer this service in around 11 showrooms. During a period of unprecedented disruption, our sales colleagues have been able to deliver customer service even whilst their showrooms are closed, supporting customers over our web chat facility. We have also made improvements to our remuneration model to support a more seamless customer journey.

We are using data and customer insights more effectively to design and develop new products with greater appeal to both existing and emerging customer segments. New product launches in the first half include: the Vinson, our first 'smart' sofa; Boxsit, our sofa-in a-box concept targeting young, urban renters; and Sofables, an aspirational modular sofa perfect for growing families. Our new Halo Luxe range, launched in September and supported with its own TV campaign, has succeeded in attracting aspirational customers to the DFS brand.

DFS is also well-known for our exclusive brand partner collaborations and every year we roll-out new eye-catching models. One of our current success stories is the Patterdale, developed in partnership with the lifestyle brand Joules. We are also launching our successful French Connection Studio model in our first ECO fabric, made from recycled plastic bottles and textiles waste. One of the highlights in the second half is the launch of our new partnership with 'Grand Designs' for a new range of sofas combining design integrity and a sustainability ethos.

In summary, while our DFS brand enjoys a strong competitive position in the UK sofa retailing market we continue to see opportunities for further growth. We have continued to grow our market share in the first half as we've grasped the opportunities presented by recent structural changes in the market. Our specialist expertise and financial strength means we can continue to invest in those products and services which provide the greatest value to customers.

Build The Platforms for Growth

This strategic pillar focuses on Group-wide benefits from leveraging existing infrastructure and scaling systems, processes and data. As a market-leading, vertically-integrated business, we are targeting significant efficiency gains from our property, logistics, marketing and manufacturing activities.

We continue to make good progress securing property savings through a combination of rent reductions on leases approaching renewal and downsizing some showrooms in order to improve productivity and the customer proposition. We have secured a further £0.9m of annualised savings since the previous year end, which will start to be realised from the second half of this financial year onwards. This brings the total annualised saving since the program began to £5.2m and we are confident of achieving as a minimum the £6-8m targeted annual savings by Financial Year 2023 as previously communicated. In order to secure the maximum value benefit over the longer term, we only commit to new leases where appropriate terms are available, reflecting rental market trends and the Group's strength as an anchor tenant on many retail parks.

Turning to logistics, we continue to progress towards our objective of building a leading Group-wide supply chain platform, The Sofa Delivery Company. Our aim is to offer improved customer service and a more flexible working environment for colleagues whilst also reducing the Group's environmental impact. Our current year roll-out plans are on track as we work towards achieving annualised savings of £3m+ by the end of financial year FY22. In the first half of the year, we completed the IT systems integration across the Group, a key enabler for multi-brand order fulfilment. We have also made significant progress in the implementation of our Stockwise inventory management system across our showrooms and Customer Distribution Centres (CDCs). This roll-out is now close to completion for the DFS brand with the Sofology roll-out a priority for the second half. 

Following successful trials in the last financial year, we are in the process of launching The Sofa Delivery Company's 7-day, extended hours delivery model across the Group towards the end of the current financial year. Combined with other initiatives such as 'Track My Order' and eco-friendly delivery slots, The Sofa Delivery Company has a compelling proposition to meet our customers' busy lifestyles. A further objective is to complete the roll-out of The Sofa Delivery Company rebranding and vehicle livery across the CDC network. Over half of the network has been rebranded to date, with the remainder on track for completion by the financial year end. In a competitive market for large vehicle drivers, the Group is committed to being an attractive employer in the logistics industry, offering competitive rewards and attractive working conditions.

The Sofa Delivery Company is also at the forefront of the Group's ESG strategy, with a key role to play in meeting the Group's CO2 emissions and waste and recycling targets. At the end of the first half we met our target of making 100% of sofa packaging recyclable. The benefits of moving to the extended hours delivery model will be a reduction in miles driven due to tighter delivery radials (aided by our Apollo smart routing technology) and an overall reduction in the number of DFS Group delivery fleet vehicles following the introduction of new shift patterns.

We continue to drive our marketing transformation programme forward. At a macro level, there has been a continued focus on data aggregation and activation. The DFS Group now has over 35 internal & external data sources captured within a centralised data lake from which a powerful set of data insights dashboards are now being leveraged across the business. At a more micro level, we are running a series of combined marketing channel and communications tests to understand how best to further optimise our marketing spend.

The combined impact of these macro and micro initiatives is allowing us to understand our customers further and, as a result, drive increasingly efficient and effective digital and physical footfall whilst achieving £6m of savings in H1 FY21 relative to FY19 and FY20.

Unlock New Growth

Sofology revenue and brand contribution increased 10.3% and 35.5% respectively in the first half. The reported revenue growth, relative to order intake experienced, was suppressed by shipping delays and foam disruption, which has now started to normalise in the second half of the financial year.

As detailed in our year end results, one of our growth priorities is to accelerate the roll-out of the Sofology showroom estate. We remain on track to add 6-10 new showrooms in the current financial year. In the first half we opened new outlets in Hove, Cambridge and Maidstone, extending Sofology's coverage in the South-East. The new showrooms are powered by 100% renewable electricity and are equipped with digital retail technology to reduce unnecessary waste and lessen the showroom's impact on the environment. Customers can use the Group's Sofa Rescue initiative, a sustainable collection service for recycling old sofas, saving them from landfill.

Current year product launches are also in keeping with Sofology's reputation as an environmental leader. In the first half of the year we launched our first 'eco sofa', the Pioneer, in conjunction with our 'Green Friday' marketing campaign. The Pioneer sofa features zero foam, 100% recyclable springs, sustainably sourced timber, fabric made from recycled yarns plus a 20-year guarantee.

We continue to see the opportunity to grow the Sofology brand to 65-70 outlets in the medium term, targeting revenue of c.£300m at a pre-tax profit margin of 5-7%.

Dwell and International

Back in July, following a strategic review of our smaller brands, we took a decision to sell our Sofa Workshop business and completed the disposal in September 2020. We also restructured the Dwell operating model to enable its wide range of attractive products to be sold more seamlessly to DFS brand customers, as well as online. As indicated with September's FY20 results, we are reviewing growth options for our International business, which includes six showrooms in Holland and two in Spain. In the first half we opened a new Dutch showroom in Breda, with a product and marketing offer more tailored to the local market.

Manufacturing Review

We outlined some reflections on our manufacturing operations at the time of the final results and would like to provide a further update. While the Group's digital and logistics platforms have received a higher proportion of our total investment in the last few years, vertical integration remains a key source of competitive advantage for the Group, particularly given consumer desires for unique designs and shorter lead times as well as our commitment to meeting our ESG targets. The Covid-19 pandemic and the extended Brexit process has also highlighted the complexities of a global supply chain for upholstery.

DFS has manufactured sofas since the company was formed and we currently manufacture around 20% of all Group sofas across five UK sites with around 950 colleagues. A further c.20% is manufactured in the UK by long-established partners. We currently import around 60% of our sofas, of which half are manufactured in the Far East. There are many benefits from manufacturing our own sofas including: greater supply chain transparency, increased control over lead times, product differentiation and innovation, superior quality control, the ability to flex capacity around peaks in demand, as well as manufacturing margin benefits.

We are currently refining our investment plans for our manufacturing operations. However, our early feasibility work is clear that, in addition to delivering a range of operational benefits consistent with our ESG targets and customer proposition ambitions, an attractive financial returns opportunity exists. While we will provide further details in due course, we indicatively expect to commit to an incremental investment of £12-15m (across FY22 and FY23). This investment would be funded from internal cash generation and will also meet our strict financial appraisal criteria.

Increasing our Sales of Living Room Furniture and Beds

We are developing our plans to increase our presence in the £1.2bn Living Room Furniture market through an attachment model and the £3.7bn Bedroom market primarily through our online platforms, which will increase the total addressable market that we target.

The Living Room furniture market is a natural attachment opportunity for both DFS and Sofology. Utilising Dwell's infrastructure, warehousing and supplier relationships we are now offering customers the opportunity to "buy the look" or whole living room including, for example, coffee tables, side tables, rugs and mirrors. Our attachment rates are currently less than 5% per sofa order, but with over 750,000 sofa orders per year we have an opportunity to develop a material business.

The largest segment of the Homeware market is the Bedroom market. We believe that we can deploy the assets we already have such as our website traffic, our well-invested web platforms, differentiated brand partners, manufacturing capability and leading Interest Free Credit offer in order to address the Bed market primarily online. Early proof points are emerging with bed sales online through the DFS brand channel growing +159% post Christmas.

Outlook

This strong first half profit and cash flow performance is a true reflection of the supreme efforts put in by our teams right across the Group since the start of the pandemic. I am hugely grateful to every colleague for their constant focus on the safety, health and wellbeing of all their colleagues and also our customers.

Our business has proven to be resilient throughout the period despite showroom closures and a significant amount of external disruption in our supply chains. The investments we have made in our digital channels have generated exceptional revenue growth. Consequently our order bank remains well above normal levels and, subject to showrooms reopening by 12 April 2020, our central planning scenario is for an expected full year profit before tax outcome of approximately £105m, with further benefits to be realised in next year's financial results.

We are committed to our strategy to lead sofa retailing in the digital age with our proven integrated retail model. We expect to see a good level of activity in the home market as Covid-19 restrictions ease and, having accelerated the execution of our strategy and grown our market share, we are well set for future growth.

Tim Stacey

Group Chief Executive Officer

1Refer note 14 to the condensed consolidated financial statements for APM definitions.

FINANCIAL REVIEW

The financial performance of the Group in the first six months was strong, and we ended the period in a robust financial position. While the current national lockdown has reshaped the profile of our financial performance we remain well-positioned for the remainder of the financial year and into the next.

The volatile trading environment of the first half of the financial year has highlighted the relative advantages of our made-to-order, channel-agnostic business model that clearly leads sofa retail both online and in the physical setting. In an environment in which showroom trading has been periodically disrupted, we have been able to utilise our order bank to keep our manufacturing and delivery operations fully utilised and generating profits and cash flow. Furthermore, the growth in our well-invested online operations has significantly mitigated showroom order intake disruption. Our operating costs have been broadly unaffected by both the "lumpiness" of demand and the switch in order intake channel as we rely on exactly the same fulfilment operation for orders taken in-store and online, and our made-to-order approach avoids the need to redistribute local stockholdings. Finally, our negative working capital model has avoided a requirement to invest in stock to support revenue growth.

The high demand levels experienced overall have driven material year on year revenue growth. A robust retail gross profit margin and good cost control, supported by the suspension of UK retail business rates, has resulted in significant profit growth. Despite various showroom closures through our second quarter and throughout the third quarter to date, given the strength of our trading performance we have not drawn on either the Coronavirus Job Retention Scheme or other property closure-related grants in the current financial year.

The trading performance along with our negative working capital model has enabled us to de-lever with net bank debt1 reducing by £119.5m since June 2020 and we have fully repaid the HMRC VAT liabilities that were deferred from the previous financial year. Our period end position still benefits from transient working capital inflows, being principally increased customer deposits but also agreements in place to defer the payment of rent to landlords, and we therefore expect a working capital outflow of approximately £60m over the next six to twelve months. Notwithstanding this we expect that our financial leverage1 will be in our targeted 0.5x-1.0x range at the end of FY21.

In December we entered into a new three-year agreement for a £225m senior revolving credit facility with our existing syndicate of seven banks and adding two mutual one year extension options. Under the terms of this facility, previous restrictions on acquisitions and dividends were lifted.

As disclosed previously, we reached Christmas Eve with an order bank over £200m higher, in revenue terms, than typical seasonal levels, providing us with resilience heading into the second half of the financial year. Despite the current closure of the showroom network, the order bank presently remains at around £65m ahead of the prior year reflecting the ongoing strength of online order intake over the lockdown period.

Basis of financial presentation

Following the reorganisation of our Dwell business over the summer period as highlighted in our FY20 Annual Report we have this year combined the Dwell and DFS brand segments into one to reflect how these brands are now managed. As also previously communicated, we sold the Sofa Workshop business in September 2020. In order to aid comparison of continuing operating segments, the table below and related commentary present reported results excluding Sofa Workshop for both current and prior periods.

After a year of transition to IFRS 16 in FY20, we now report all current and prior period numbers on an IFRS 16 basis.

Sales and revenue

We experienced very high order intake in the first quarter driven by pent-up demand following the UK's first lockdown in the previous financial year. We then operated through a period of flux in the second quarter with a series of mandated showroom closures in different parts of the countries we operate in and with the vast majority of showrooms closed through November. Our order intake performance in this second quarter was resilient, benefitting from our historical investments in our online proposition, together with a redeployment of sales and administration teams to support the conversion and processing of significantly elevated online order intake.

The high opening order bank through the period enabled us to maintain a consistent, elevated level of customer deliveries despite various retail showroom closures. We however experienced some limitations on internal and external manufacturing capacity, raw material shortages and supply chain disruption that impacted the revenue we could recognise in this period, particularly in the second quarter. Group revenue increased 18.7% to £567.5m excluding Sofa Workshop, and including the disposed operations grew by 17.3%. While order intake performance at both the DFS and Sofology brands has been similarly positive, the lower rate of revenue growth in the period in Sofology (+10.3%) relative to the DFS brand (+21.0%) reflects higher levels of disruption of inbound supply experienced in the second quarter. These impacts on Sofology have now largely normalised.

Gross profit

Gross profit increased 17.3% to £324.5m in the period, excluding Sofa Workshop. Gross profit as a percentage of revenue decreased from 57.9% to 57.2% (excluding Sofa Workshop). This was primarily due to internal manufacturing operation (which captures an incremental manufacturing cash margin) continuing to operate at full capacity, as in the prior year, and therefore giving a lower year-on-year mix benefit. Adjusting for this mix effect, despite facing cost headwinds for raw materials and shipping, gross margin was broadly flat year-on-year due to growth in average order value. While we anticipate higher global shipping costs, a weaker hedged dollar exchange rate and foam supply restrictions to persist through the second half of the financial year these factors are industry-wide and are not expected to cause a deterioration of sustainable gross profit margins.

Operating costs and brand contribution1

Selling and distribution costs (excluding property costs) of £150.0m increased by £2.1m year on year excluding Sofa Workshop. Higher operating costs are to be expected given the increased sales volumes and the variable nature of costs in our delivery network and wage commission models. We also incurred c.£2m of Covid-19 associated costs such as PPE. Given the strength of trading overall, we have not submitted claims under the CJRS or other pandemic-related government financial support schemes in the current financial year.

Our higher operating costs were partially offset by a significant increase in the effectiveness of our marketing spend driven by improved targeting, which allowed a c.£6m net year-on-year reduction in spend in the first half.

Brand contribution1 of £174.5m for the half year represents an increase of £45.7m (excluding Sofa Workshop) driven by the higher revenues.

Property costs and administrative expenses

Under IFRS 16, property costs in the income statement include only business rates and a very small amount of rental charges where we occupy premises on a 'hold-over' basis (where the lease has expired) or for short term leases under a year long. Property costs decreased £14.4m year on year primarily due to the UK retail business rates relief which applies to the majority of our showroom estate.

Underlying1 administrative expenses of £40.1m increased by £6.1m due to investment to support the acceleration of our strategy, increased performance recognition payments across the business and some pandemic-related one-off operating costs. We also recognised a one-off increase in our payment protection insurance provision in connection with historical sales transactions.

Depreciation, amortisation and interest

Depreciation and amortisation charges (excluding brand amortisation) reduced by £2.3m year-on year to £41.8m. The reduction was driven by a lower level of capital expenditure over the past twelve months and a reduction in IFRS 16 property related charges. The IFRS16 property-related charges are as a result of savings secured on existing leases and from the assignment of leases following the disposal of Sofa Workshop. These savings are partially offset by the impact of entering leases for new Sofology showrooms.

Underlying interest charges of £17.4m were £1.3m lower year-on-year as a result of a lower IFRS 16 related charge and lower average net debt position across the period.

Profit before tax ('PBT')

PBT on an underlying basis and excluding brand amortisation1 has increased by £59.9m to £76.5m driven by the higher revenues.

Non-underlying costs of £3.7m were incurred in the period (FY20: Nil) in relation to the loss on disposal of Sofa Workshop (including legal fees and other related costs) and costs associated with the refinancing of the Group's revolving credit facility. Reported PBT of £72.1m was £56.2m higher than the comparative period.

Tax

The tax charge recognised in the interim financial statements has been calculated using the expected effective tax rate for the full year of 20.2% (FY20: 14.8%). This is higher than the applicable UK Corporation Tax rate of 19.0% (FY20: 19.0%), primarily due to disallowable depreciation on non-qualifying fixed assets. The FY20 effective tax rate was lower than normal for the Group due to losses incurred in Sofa Workshop which were not recognised as deferred tax assets and the non-deductible write down of goodwill.

EPS

Underlying basic earnings per share1 for the Group was 23.5 pence (FY20: 6.0

pence). Reported earnings per share was 22.5 pence (FY20: 6.0 pence).

Capital expenditure, cash flow and balance sheet

We have generated significant operating cash inflows in the period driven by the strong trading performance and our negative working capital cycle.

Our operating cash flow generation has allowed us to continue to invest in our stated strategy. In the first half of this financial year we opened three Sofology and two DFS brand showrooms, made good progress on finishing the transformation of our final mile logistics network and continued our investment in our data and digital capabilities. We plan to invest further in these areas and the majority of the current year capital expenditure which we expect to be between £35-37m will fall in the second half of the financial year.

Net bank debt1 reduced by £119.5m to £38.2m in the period and our leverage (measured as net bank debt / last twelve month operating cash flows before tax and excluding working capital movements, less lease payments) fell to 1.1x (FY20: 2.2x as measured on an IAS17 basis of net debt / trailing twelve month EBITDA1). In addition to the increased profits in the first half, the closing net bank debt position also benefits from the higher than usual closing order bank (and associated customer deposits). We therefore expect that the normalisation of the order bank to more typical seasonal levels, together with settlement of residual rent deferrals from the previous financial year, would generate a c.£60m working capital outflow over the next six to twelve months.

Our refinanced £225m banking facility covenants remain consistent with our facility pre Covid-19 at 3.0x maximum net debt / EBITDA and minimum 1.5x fixed charge cover, both measured on an IAS17 basis.

Dividend

We recognise the value placed by shareholders upon regular dividend payments and we have today published a revised Capital and Distribution policy on our corporate web site to guide on our future approach to dividends. Although I would strongly encourage our shareholders to read this document in full, I would summarise the key principles of our approach as:

1. To operate with a resilient, but efficient capital structure in the context of the principal risks the Group faces. We define this as operating broadly in the middle of a financial leverage range of between 0.5x-1.0x;

2. Prioritising investment in the long-term health of the Group, above other uses of cash flow generated, and committing to investments were we anticipate returns in excess of our cost of capital; and

3. Recognising dividends as an important element of our investment case for our shareholders, and aiming to maintain a payout ratio of between 40-50% of annual underlying cash generation.

We are also encouraged by the business's recent trading performance and the reduced financial leverage we are now operating at. The potential for a recommencement of dividends will depend on continuation of good trading and also how the principal risk environment changes over the next six months.

Outturn for the full financial year

The sofa demand cycle is robust and it is reasonable to believe that we will again experience the benefit of pent-up demand when our showrooms reopen. However our FY21 performance will inevitably be impacted by the short time period between the lockdown ending and the end of our financial year. This is because of the lead time between a customer order being placed, subsequent manufacture and the recognition of the associated revenues on delivery of our made-to-order products. Some scenarios are included below to illustrate the potential FY21 outturns, but also the potential for a build-up of order bank resilience for FY22, assuming a reopening as currently expected on 12 April 2021. For the avoidance of doubt, these scenarios reflect the benefit of the continued property rates suspension through to the end of June 2021.

Prior experience in the first national lockdown showed order intake for the 13 weeks following resumption of trading of +64%. Our "high scenario" is more conservative than this given late spring and summer are typically less favourable trading periods. Should we see a particularly strong uplift in order intake in the remaining weeks of FY21, due to lead times, a significant proportion of this order intake would likely be realised in FY22.

We recognise the risk that showroom reopenings are delayed beyond 12 April, and this would adversely impact the profit outturn for the current year. We would however expect any reduction in FY21 largely to represent a deferral of profits into FY22.

Conclusion

We have traded through a volatile last twelve months and we are emerging with clear indications of market share gain. We will need to manage through a further potentially turbulent period until the Covid-19 pandemic subsides and there may be other unforeseen events to deal with in the future. However this is a resilient business with a proven record of strong cash flow generation across all but the most extreme situations. I believe the Group is well positioned operationally and financially and with a sound strategy should continue to generate strong and improving returns.

Mike Schmidt

Chief Financial Officer

1Refer note 14 to the condensed consolidated financial statements for APM definitions. 

RISKS AND UNCERTAINTIES

The Group faces a number of risks and uncertainties in both the development and day-to-day operations of its business. A risk management process has been adopted to help the Group achieve its strategic objectives. The Board does not consider that the principal risks and uncertainties to have changed since the publication of the annual report for the period ended 28 June 2020. These comprise:

● Business continuity and resilience

● Implications of Brexit*

● Keeping core IT systems up and running and protected from cyber attacks

● Managing the business to high environmental, social and governance standards

● Financial risk and liquidity

● Changes to the regulatory environment

● Customer proposition and industry competition

● Transformation strategy

*While the Board notes that the end of the Brexit transition period has been reached, it believes the Group still remains exposed to potential future risks in relation to consumer demand and border delays (particularly, given the still-tightening restrictions on the Irish Sea crossing and the consequent impact on customs relationships with the EU overall). Border delays may impact the timing of when revenues are recognised and may result in increased transport and storage related costs.

Refer to pages 32 to 38 of the 2020 Annual Report (www.dfscorporate.co.uk) for a detailed explanation of these risks.

RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

• the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union;

• the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure Guidance and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure Guidance and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the Board

Tim Stacey Mike Schmidt

Chief Executive Officer Chief Financial Officer

9 March 2021

INDEPENDENT REVIEW REPORT TO DFS FURNITURE PLC 

Conclusion 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 27 December 2020 which comprises the Condensed Consolidated Income Statement, Condensed Consolidated Statement of Comprehensive Income, Condensed Consolidated Balance Sheet, Condensed Consolidated Statement of Changes in Equity, Condensed Consolidated Cash Flow Statement and the related explanatory notes. 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the 26 weeks ended 27 December 2020 is not prepared, in all material respects, in accordance with IAS 34 Interim Financial Reporting adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and the Disclosure Guidance and Transparency Rules ("the DTR") of the UK's Financial Conduct Authority ("the UK FCA").

Scope of review 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. We read the other information contained in the half-yearly financial report and consider whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements. 

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Directors' responsibilities 

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA. 

As disclosed in note 1, the latest annual financial statements of the Group were prepared in accordance with International Financial Reporting Standards as adopted by the EU and the next annual financial statements will be prepared in accordance with International Financial Reporting Standards adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006. The directors are responsible for preparing the condensed set of financial statements included in the half-yearly financial report in accordance with IAS 34 adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union. 

Our responsibility 

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review. 

The purpose of our review work and to whom we owe our responsibilities

This report is made solely to the company in accordance with the terms of our engagement to assist the company in meeting the requirements of the DTR of the UK FCA. Our review has been undertaken so that we might state to the company those matters we are required to state to it in this report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company for our review work, for this report, or for the conclusions we have reached. 

Frances Simpson

for and on behalf of KPMG LLP 

Chartered Accountants 

1 Sovereign Square

Sovereign Street

Leeds

LS1 4DA

9 March 2021

Unaudited condensed consolidated income statement

Unaudited condensed consolidated statement of comprehensive income

Unaudited condensed consolidated balance sheet

Unaudited condensed consolidated statement of changes in equity

Unaudited condensed consolidated cash flow statement

Notes to the unaudited condensed consolidated financial statements

1. Basis of preparation

This unaudited condensed consolidated interim financial information for DFS Furniture plc ("the Company") and its subsidiaries (together, "the Group") was approved for release on 9 March 2021.

The condensed consolidated interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and the Disclosure and Transparency Rules of the Financial Conduct Authority, and comprise the results for the 26 weeks ended 27 December 2020, the 26 weeks ended 29 December 2019, and the 52 weeks ended 28 June 2020. They do not include all of the information required for full annual financial statements, and should be read in conjunction with the consolidated financial statements of the Group for the 52 weeks ended 28 June 2020.

The financial information included in this interim statement of results does not constitute statutory accounts within the meaning of Section 435 of the Companies Act 2006. The statutory accounts for the 52 weeks ended 28 June 2020 have been reported on by the Company's auditor and delivered to the Registrar of Companies. The auditor's report for those accounts was unqualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report and did not contain a statement under Section 498(2) or (3) of the Companies Act 2006. The auditor's review report for the 26 weeks ended 27 December 2020 is attached.

Going concern

The financial statements are prepared on a going concern basis, which the directors believe to be appropriate for the following reasons.

The Group has a £225.0m revolving credit facility with a consortium of seven banks maturing in December 2023, with two one-year options to extend the facility, subject to mutual agreement. At the date of approval of these interim condensed financial statements, £[160]m of the revolving credit facility remained undrawn, in addition to cash in hand, at bank (£[40.0]m as at 5 March 2021).

Covenants applicable to the revolving credit facility are consistent with those on the previous facility (prior to the temporary alternative covenants in place from April 2020 to December 2020): 3.0x net Debt / EBITDA and 1.5x Fixed Charge Cover, and are assessed on a six-monthly basis at June and December. The Directors have prepared cash flow forecasts for the Group covering a period of at least twelve months from the date of approval of these interim condensed financial statements, which indicate that the Group will be in compliance with these covenants. These forecasts include a number of assumptions in relation to: duration and extent of Covid-19 related showroom closures in FY21 and FY22 and their impact on order intake; gross profit margins; and achievement of cost savings in line with the Group's strategic plans.

The Directors have also prepared severe but plausible downside sensitivity scenarios which cover the same period as the base case, including specific consideration of a range of impacts that could arise from the continued coronavirus pandemic. These scenarios included: more prolonged showroom closures; significantly reduced customer spending; and impacts on gross margin from regulatory and other changes. As part of this analysis, mitigating actions within the Group's control should these severe but plausible scenarios occur have also been considered. These mitigating actions included reducing discretionary advertising expenditure, a pause on expansionary capital investment and other measures to protect cash balances. These forecast cash flows, considering the ability and intention of the Directors to implement mitigating actions should they need to, indicate that there remains sufficient headroom in the forecast period for the Group to operate within the committed facilities and to comply with all relevant banking covenants during the forecast period.

1. Basis of preparation (continued)

The Directors have considered all of the factors noted above, including the inherent uncertainty in forecasting the impact of the coronavirus pandemic, and are confident that the Group has adequate resources to continue to meet all liabilities as and when they fall due for a period of at least twelve months from the date of approval of these interim condensed financial statements. Accordingly, the financial statements are prepared on a going concern basis.

2. Principal accounting policies

As required by the Disclosure Guidance and Transparency Rules of the Financial Conduct Authority, the accounting policies adopted in preparing the condensed consolidated interim financial statements are consistent with the policies in the Group's financial statements for the 52 weeks ended 28 June 2020, which were prepared under IFRS as adopted by the European Union. There are no new standards, amendments to existing standards or interpretations that are effective for the first time in the period ended 27 December 2020 that have a material impact on the Group's results.

The annual financial statements of the Group for the year ending 27 June 2021 will be prepared in accordance with International Financial Reporting Standards (IFRSs) adopted pursuant to Regulation (EC) No 1606/2002 as it applies in the European Union and in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006.

3. Segmental Analysis

The Group's operating segments under IFRS 8 have been determined based on management accounts reports reviewed by the Group Leadership Team. Segment performance is assessed based upon brand contribution. Brand contribution is defined as underlying EBITDA (being earnings before interest and tax excluding depreciation charges and non-underlying items) excluding property costs and central administration costs.

The Group reviews and manages the performance of its operations on a retail brand basis, and the identified reportable segments and the nature of their business activities are as follows:

DFS: the manufacture and retailing of upholstered and other furniture and related products through DFS and Dwell branded stores and websites.

Sofology: the retailing of upholstered furniture and related products through Sofology branded stores and website.

During the current financial year, the retail operations and management of the Dwell brand were combined with the DFS brand and accordingly they are now presented as one segment. Prior period comparatives have been restated to align with the revised presentation. Other segment activities comprise the retailing of upholstered furniture and related products through Sofa Workshop.

Segment revenue and profit

A geographical analysis of revenue is presented below:

Segment assets and liabilities

Segment assets comprise tangible and intangible non-current assets including goodwill and brand names, inventories, trade and other receivables, cash and cash equivalents. Segment liabilities comprises trade payables and current and non-current other liabilities and provisions.