Believable hype from DFS: The Investment Column

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The Independent Online
When it comes to enthusiasm, Sir Graham Kirkham of DFS Furniture is hard to beat. Records are not broken, they are "shattered". Opportunities are not significant, but "huge". As usual with his rapidly expanding furniture chain, the brio is backed up by results. Pre-tax profits were 18.6 per cent ahead to pounds 31.1m in the year to July, the dividend was increased by 20 per cent to 10p. There was also a special dividend of 10p per share for the second year running.

Like-for-like sales increases are healthy and the company claims its new stores in the London area are performing ahead of expectations.

But though DFS shares have been a wonderful investment - they have doubled in their two years on the stock market - there are certain worries. One is the plans by Sir Graham's two children to sell much of their 22 per cent stake. Though this does not necessarily indicate any lack of confidence in the company's prospects, it will cast a shadow over the share price and soak up any institutional demand for the shares.

Then there is the cost of the expansion into the South-east, which is exerting pressure on margins. DFS opened its first three stores in the London region earlier this year and now sees scope for up to 20. The higher costs meant operating margins fell from 16.9 per cent to 15.9 per cent last year. This year the company will carry pounds 1.5m of additional training and development costs with seven new stores due open towards the end of this financial year.

But the prospects remain bright. With 38 stores, DFS claims 9 per cent of the UK upholstery market. Its aim is a nationwide network of around 100 stores which would give it a share of around 25 per cent. Analysts are expecting profits of around pounds 38m this year. With the shares 22p lower yesterday at 514.5p, they trade on a premium rating of 22. Expensive but a strong hold.

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