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
Angelina Jolie with her father Jon Voight
Bill Kerr has died aged 92
footballPremiership preview: All the talking points ahead of this weekend's matches
Arts and Entertainment
Warner Bros released a mock-up of what the new Central Perk will look like
tv'Friends' cafe will be complete with Gunther and orange couch
Keira Knightley poses topless for a special September The Photographer's issue of Interview Magazine, out now
ebooksAn evocation of the conflict through the eyes of those who lived through it
The Ukip leader has consistently refused to be drawn on where he would mount an attempt to secure a parliamentary seat
voicesNigel Farage: Those who predicted we would lose momentum heading into the 2015 election are going to have to think again
Arts and Entertainment
Cara Delevingne made her acting debut in Anna Karenina in 2012
film Cara Delevingne 'in talks' to star in Zoolander sequel
Mario Balotelli pictured in his Liverpool shirt for the first time
Life and Style
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

iJobs Job Widget
iJobs Money & Business

SAS Business Analyst - Credit Risk - Retail Banking

£450 - £500 per day: Orgtel: SAS Business Analyst, London, Banking, Credit Ris...

Project Manager - Pensions

£32000 - £38000 Per Annum Bonus, Life Insurance + Other Benefits: Clearwater P...

KYC Analyst, Birmingham - £200-£250 p/d

£200 - £250 per day + competitive: Orgtel: KYC Analyst, Key Banking Client, Bi...

Test Manager - Banking - Yorkshire - £450 per day

£400 - £500 per day: Orgtel: Test Manager - Banking - West Yorkshire - £400-£5...

Day In a Page

Ukraine crisis: The phoney war is over as Russian troops and armour pour across the border

The phoney war is over

Russian troops and armour pour into Ukraine
Potatoes could be off the menu as crop pests threaten UK

Potatoes could be off the menu as crop pests threaten UK

The world’s entire food system is under attack - and Britain is most at risk, according to a new study
Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Gangnam smile: why the Chinese are flocking to South Korea to buy a new face

Seoul's plastic surgery industry is booming thanks to the popularity of the K-Pop look
From Mozart to Orson Welles: Creative geniuses who peaked too soon

Creative geniuses who peaked too soon

After the death of Sandy Wilson, 90, who wrote his only hit musical in his twenties, John Walsh wonders what it's like to peak too soon and go on to live a life more ordinary
Caught in the crossfire of a cyber Cold War

Caught in the crossfire of a cyber Cold War

Fears are mounting that Vladimir Putin has instructed hackers to target banks like JP Morgan
Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years

Salomé: A head for seduction

Salomé's feminine wiles have inspired writers, painters and musicians for 2,000 years. Now audiences can meet the Biblical femme fatale in two new stage and screen projects
From Bram Stoker to Stanley Kubrick, the British Library's latest exhibition celebrates all things Gothic

British Library celebrates all things Gothic

Forthcoming exhibition Terror and Wonder: The Gothic Imagination will be the UK's largest ever celebration of Gothic literature
The Hard Rock Café's owners are embroiled in a bitter legal dispute - but is the restaurant chain worth fighting for?

Is the Hard Rock Café worth fighting for?

The restaurant chain's owners are currently embroiled in a bitter legal dispute
Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival

In search of Caribbean soul food

Caribbean cuisine is becoming increasingly popular in the UK ... and there's more to it than jerk chicken at carnival
11 best face powders

11 best face powders

Sweep away shiny skin with our pick of the best pressed and loose powder bases
England vs Norway: Roy Hodgson's hands tied by exploding top flight

Roy Hodgson's hands tied by exploding top flight

Lack of Englishmen at leading Premier League clubs leaves manager hamstrung
Angel Di Maria and Cristiano Ronaldo: A tale of two Manchester United No 7s

Di Maria and Ronaldo: A tale of two Manchester United No 7s

They both inherited the iconic shirt at Old Trafford, but the £59.7m new boy is joining a club in a very different state
Israel-Gaza conflict: No victory for Israel despite weeks of death and devastation

Robert Fisk: No victory for Israel despite weeks of devastation

Palestinians have won: they are still in Gaza, and Hamas is still there
Mary Beard writes character reference for Twitter troll who called her a 'slut'

Unlikely friends: Mary Beard and the troll who called her a ‘filthy old slut’

The Cambridge University classicist even wrote the student a character reference
America’s new apartheid: Prosperous white districts are choosing to break away from black cities and go it alone

America’s new apartheid

Prosperous white districts are choosing to break away from black cities and go it alone