The Investment Column: Uncomfortable time for DFS

Life is looking less than cushy for DFS, the fast-growing sofa retailer. The market certainly frowned on yesterday's full-year figures. Despite overall sales growth of 38 per cent to pounds 254m in the year to August, DFS reported just 2 per cent like-for-like sales growth. Only two years ago the company was turning in underlying sales growth of over 8 per cent. Operating margins in the year were also sharply down, falling from 15.8 per cent to 14.6 per cent, below the 15 per cent average for the furniture industry. DFS's share price fell 30.5p to 570p.

The company's rapid expansion southwards in the face of rising advertising and land costs is putting pressure on margins. Last year DFS opened six stores, taking the total to 44. Another 15 to 20 are planned over the next three years. Land costs are soaring, particularly in London where the group is expanding fast. DFS also spent some pounds 1m on prime-time television advertising on LWT and Carlton in the year to persuade shoppers in the South that there is an alternative to Ikea for sofas.

Meanwhile, demand is not what it should be. Sir Graham Kirkham, the chairman, said the company had seen few benefits of building society windfalls. The hot weather in August also apparently discouraged furniture shopping. A glance around the industry shows that DFS is not the only one struggling. Maples has gone into receivership and Airsprung is having a rotten time. The merger of H&C and Kingsbury may also increase pressure on DFS and Ikea remains a strong competitor in London.

There is no doubt that DFS is a quality player. Manufacturing on demand has meant stock levels at the group are falling, despite a 15 per cent increase in space, an impressive achievement.

However, the group's quality has long been reflected in the company's steep price-earnings multiple and the shares have marked time since hitting a 651p high at the start of the year. House broker NatWest Securities has reduced profit estimates next year from pounds 47.5m to pounds 45m. That puts DFS's shares on a forward earnings ratio of 20 times. High enough.

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