DFS joins victims of furniture downturn

News Analysis: With its first profits fall for 28 years, the retailer has been hit by the 'feelbad factor'

DFS FURNITURE, the UK's largest upholstery chain, yesterday added to the gloom surrounding furniture retailers when it became the latest chain to reveal that a collapse in consumer spending had led to a slump in sales.

The sofa specialist, chaired by the former Tory party treasurer Sir Graham Kirkham, said orders in the past four weeks have been "well below our targets" as "the fear of recession is causing a well-documented decline in consumer confidence". Sir Graham hinted that orders since the middle of September were 20 per cent below the same period last year, despite price-cutting.

The gloomy trading update came as DFS, rocked by two profits warnings this year, unveiled its first profits fall in 28 years, posting a pre- tax profit of pounds 34.1m, down from pounds 38.1m a year ago. The news prompted City analysts to slash forecasts for DFS profits in 1999 by 20 per cent and sent the shares crashing to an all-time low.

DFS's troubles capped a desperate week for furniture retailers and their share prices. On Tuesday Harveys, the UK's sixth-largest chain, warned of lower sales and issued a surprise profits warning which wiped 40 per cent from its share price. Four days ago the smaller chain, Essex Furniture, was forced into administration due to a severe cash-flow shortage.

The dire state of the market was highlighted by the latest figures from the British Retail Consortium, which showed a 12 per cent fall in like- for-like-sales in the past six weeks.

City analysts and industry figures believe these numbers are symptomatic of a wider malaise in the sector, and point out that as the economy heads into a slowdown, furniture retailers' sales and margins will bear the brunt of consumer spending declines.

The falls in last month's like-for-like sales at Harveys and DFS is even more startling as it comes against a weak comparison: sales in September 1997 were heavily hit by the death of Diana, Princess of Wales.

The macro-economic reasons for the slump are clear. Sofas and armchairs are "big-ticket" items - expensive purchases between pounds 500 and pounds 2,000, which consumers usually finance through credit or savings. When the economy slows and people worry about jobs and salaries, they switch spending to basic items, such as food and clothes, and defer the purchase of comfy chairs until better times.

This is precisely what it is happening in Britain where, in the words of Harveys' managing director, Rob Templeman, "fear of unemployment has reduced consumer confidence to a pretty low ebb".

Clive Vaughan, research manager for the retail consultancy Verdict, says: "There is a complete collapse in consumer confidence. People are nervous about prospects: they got their fingers burnt in the last recession, and the last thing they want to do is go out and buy a three-piece suite."

At DFS, Sir Graham believes this "feelbad factor" is evident in the sharp drop in the number of people visiting furniture shops, a clear sign that customers are opting out of big buys. "It is not the case of customers coming into the stores and not buying, it is just less footfall," he says.

What can retailers do to weather the slump? Louise Von Blixen, retail analyst with broker SG Securities, says: "The only way to get some sales is to be more aggressive on promotions at the expense of gross margins."

Harveys, MFI and DFS have all taken this route in the past few weeks, leading to what one executive described as "a bonanza of jolly good deals". But price-slashing can be very costly in terms of margin erosion.

Jon Massey, the DFS chief operating officer, said that after the two profits warnings and slump in share price the company decided to sacrifice margins to boost the top line. "We said: 'Come what may, we have to beat City expectations of a pounds 34m profit and the only way was to go for market share'."

The result was a rise in sales in the second half, paid for by a 3 per cent drop in margins. Mr Vaughan at Verdict believes price promotions are unlikely to bring long-term solace to the struggling furniture retailers. "If you were worried you could lose your job next week, would you buy a three-piece suite which has been reduced from pounds 800 to pounds 500? It doesn't matter how much stores cut prices, if the demand is not there, it is not going to be there."

Industry experts claim that the real saviour for the sector would be a series of interest-rate cuts. Ms von Blixen says: "The latest cut is not large enough and arrived too late to improve consumer confidence in the short term. We believe consumer confidence will remain depressed until consumers see significant cuts in their mortgage payments and feel more secure about jobs."

Monetary easing would also make life easier for a number of stores, such as DFS, which provide interest-free credit. Under these plans, companies borrow money from a finance company at the going rate of interest. As interest rates remain high, retailers have to divert more cash flow to pay the interest and may be forced to put up prices.

But until rates are cut substantially, furniture chains will remain under pressure. Industry experts predict that Essex Furniture will not be the only casualty. They point out that the chains, which have expanded rapidly into out-of-town superstores, are more vulnerable when demand dries up.

In investment terms, there is little prospect of a rebound in the stores' share prices until sales and margins improve. As Ms von Blixen says: "We do not believe there will be a rerating across the board, since consumer confidence is expected to remain low."

Suggested Topics
Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Selby Jennings: Oil Operations

Highly Competitive: Selby Jennings: Our client, a leading European Oil trading...

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

Day In a Page

Isis in Iraq: Yazidi girls killing themselves to escape rape and imprisonment by militants

'Jilan killed herself in the bathroom. She cut her wrists and hanged herself'

Yazidi girls killing themselves to escape rape and imprisonment
Ed Balls interview: 'If I think about the deficit when I'm playing the piano, it all goes wrong'

Ed Balls interview

'If I think about the deficit when I'm playing the piano, it all goes wrong'
He's behind you, dude!

US stars in UK panto

From David Hasselhoff to Jerry Hall
Grace Dent's Christmas Quiz: What are you – a festive curmudgeon or top of the tree?

Grace Dent's Christmas Quiz

What are you – a festive curmudgeon or top of the tree?
Nasa planning to build cloud cities in airships above Venus

Nasa planning to build cloud cities in airships above Venus

Planet’s surface is inhospitable to humans but 30 miles above it is almost perfect
Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there