Dfs Furn Regulatory News (DFS)

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For Immediate Release

DFS Furniture PLC ("DFS" or the "Group")

Update on the Impact of COVID-19 and New Financing Arrangements

22 April 2020 

On 25 March 2020, DFS released an update in response to the UK Government's announcement on 23 March 2020 which requested the closure of all "non-essential" retail stores and operations. Today, DFS is providing a further update on how the measures it announced to combat the spread of COVID-19 are impacting the Group's business and the actions it is taking.

Current Trading

The Group's key priority, as always, remains the health and wellbeing of its people. All of the Group's showrooms, manufacturing and two-man distribution operations in the United Kingdom, Ireland and Spain remain closed and deliveries continue to be suspended to protect DFS's people and its customers.

However, the Group's websites remain operational and continue to take orders. There has been strong momentum from the Group's online platform with www.dfs.co.uk online gross sales orders up by 24% over the period from 25 March 2020 to 19 April 2020. Consequently, The Group's order bank has risen to £194 million as at 19 April 2020 from approximately £185 million on 25 March 2020.

During the last three weeks, DFS's colleagues across the UK have been supporting their local communities. The Group has been delivering sofas and sofa beds to hospitals across the UK, enabling the NHS staff to get some much needed and well-deserved rest.

Protecting Our Business

As announced on 25 March 2020, the Group is undertaking a number of mitigating actions to protect its financial position. The Group has the following mitigating actions in place:

1. Operating cost base under tight control

a. Marketing spend rephased to autumn

b. c. 5,000 employees promptly furloughed

c. 20% reduction in pay of all Board members and 38 senior management employees who are still working

d. Discretionary operating expenditure tightly controlled

2. Working with our suppliers

a. Supplier payments rephased to limit the unwind of the Group's negative working capital position to c. £70 million

b. Far East finished goods suppliers are shipping customer orders to the UK, however have agreed payment upon customer delivery

3. Landlord discussions progressing well

a. Majority of landlords that have engaged with the Group to date have been co-operative given our strong position as an 'anchor' tenant

4. Capital expenditure commitments rephased

a. All but non-discretionary maintenance expenditure incurred in lock down period (c.£0.4m/month)

b. Gradual return of growth capex post COVID-19 lockdown with total capex at c.50% of recent levels in first year

5. Tax payment phasing benefits secured

a. PAYE/NIC deferral agreed, utilising COVID-19 VAT and import duty deferral scheme, longer term time to pay opportunity

b. £25 million reduction on business rates until April 2021

As a result of the agreements we have, or expect to put in place with our suppliers and landlords, cash operating costs during the lockdown are now expected to be less than £14 million per month.

Financing

The Board has also taken steps to increase the resilience of the business by strengthening the Group's balance sheet and liquidity position with additional financing.

The Group has a £250 million Revolving Credit Facility maturing in August 2022 which provides immediately available cash resources of £70 million. In addition to the existing facilities, the Group has received credit approval for a new 12-month bank facility of £70 million with its existing lending banks, which further strengthens the Group's balance sheet. This new bank facility is intended to cover the working capital unwind described above and will be repaid once deliveries resume. Existing covenants will drop away whilst this new bank facility is in place and for the six months following, but new financial covenants of minimum rolling quarterly EBITDA and cash covenants will apply. The Group also has undertaken to not pay dividends or conduct any acquisitions until either six months after the repayment of the incremental facility, or following the refinancing of the existing bank facilities. This new facility is subject to documentation on terms and conditions in line with the existing facilities and is conditional on the completion of the Placing.

DFS has separately announced today a proposed non pre-emptive equity placing of new ordinary shares representing up to 19.9% of its issued share capital (the "Placing") which will supplement the bank financing and further strengthen the Group's balance sheet, working capital and liquidity position.

DFS has consulted with a number of its major shareholders on the rationale for, and the structure of, the Placing prior to this announcement. The Directors believe that the Placing is in the best interests of shareholders and will promote the success of the Group. This view has been strengthened by the shareholder consultation that has been undertaken.

Directors and members of the senior management team of DFS, including the Chairman, CEO and CFO will be participating alongside the Placing and intend to contribute £445,000 in aggregate.

Depending on the results of the Placing, the Company may have to undertake a share split in order to reduce the nominal value of its ordinary shares before the Placing can be completed. If required, an explanatory Circular together with a notice of General Meeting will be sent to shareholders who will be asked to approve the share split, by means of two ordinary resolutions.

Outlook

It is clear that the lockdown is having a very significant impact on the Group's business. However, what is uncertain is the duration of the Company's store closures and delivery suspension and as such the effect it may have on the Group's financial performance. The cost saving and deferral measures we have put in place, together with the Placing and bank financing announced today, will make the Group significantly more resilient.

Based on their scenario planning, which includes a continuation of current levels of government and other stakeholder support throughout the lockdown, management believe that the cost saving and deferral measures they have put in place, together with the Placing and bank financing announced today gives the Company liquidity headroom through a pessimistic scenario of a lockdown to December 2020, followed by a historically weak sofa market.

Looking past the current crisis, the Group's operating model remains strong and is reinforced by a flexible cost base and ongoing actions to drive group efficiencies in operating overheads and marketing spend. The operating profit drop through of any revenue variances following re-opening of showrooms is expected to be approximately 45%. There will also be an £18 million benefit in FY21 from the business rates holiday, in addition to the benefits from actions on marketing and overheads. The Group's current order bank and latent customer demand is expected to mitigate a weaker macroeconomic environment following store re-openings. The Group can fulfil its order bank quickly once lockdown ends, with a third of the order book either in stock or in transit from suppliers.

With over 50 years of heritage, DFS is the leading retailer of living room furniture in the United Kingdom. The Group has historically been a strong, profitable and cash generative business, that has traditionally grown market share in periods of market weakness, and capitalised on market recovery. Management is confident that, given the support the Group continues to receive from its loyal employees, committed suppliers and understanding landlords, it can navigate the current uncertainty and be a stronger and more efficient business when the Company can be fully operational again.

Comment from Tim Stacey, Group Chief Executive

"The mitigating actions we have taken in response to COVID-19, alongside the new financing arrangements and Placing announced today, significantly increases the financial resilience of DFS for the months ahead. Alongside these actions, we also greatly appreciate the support and efforts from our loyal employees, committed suppliers and understanding landlords. Working together, we have made as much progress as possible to navigate these challenging times. While the outlook remains uncertain, DFS is well placed to navigate the coming months and the Board remains positive about the long-term prospects of the Group."

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The forecast financial information contained in this announcement was prepared based upon certain assumptions about the development and the impact of the COVID 19 pandemic over the remainder of the financial year 2020 which are based on publicly available information and are subject to a wide variety of significant uncertainties. The Company's actual financial results for the for the year ending 30 June 2020 and the six months ending 31 December 2020 may differ materially from the forecast financial information contained in this announcement.

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