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."Reuse content