Final Results

D.F.S. Furniture Company PLC 11 October 2001 11 October 2001 DFS FURNITURE COMPANY plc PRELIMINARY RESULTS FOR THE 52 WEEKS ENDED 28 JULY 2001 'I take great pride in reporting a year of record profits' * Record profit before tax £50.1 million up 8.5% * Turnover £401.9 million up 12.5% * Like-for-like sales up 4.3% * Earnings per share 32.3 pence up 7.0% * Dividend per share 20.6 pence up 10.8% 'I take great pride in reporting a year of record profits, during which DFS has passed two important milestones. For the first time, we have produced pre-tax profits of over £50 million and sales of more than £400 million - generated from just 58 stores, five of which were trading for only part of the year. This is a considerable achievement in an intensely competitive market place. Performance in the current year to date has been in line with our budgets, with like-for-like order intake up 3% over the first ten weeks, despite a temporary downturn in customer numbers in the days immediately afterthe terrorist atrocities in the United States. If it were possible to ignore the international tensions and knock-on domestic concerns I would view the portents to date as very good. However, in light of the world situation, I think the trading environment is difficult for anyone to predict. I must reiterate, at the moment, all our key indicators are favourable and I take great comfort from our on-target performance to date and in the fundamental strengths of DFS: our rock solid balance sheet with its substantial cash, our significant freehold store base and the consistent strength of our cash flow. As the undisputed UK market leader in upholstered furniture, with the best store portfolio, the strongest product range and, above all, the most capable people in our industry, we are well placed to maximise whatever opportunities the market may afford. And, with more stores than ever in the pipeline, I remain confident of our prospects as we steadily increase our dominance in all parts of the United Kingdom.' Graham Kirkham, Executive Chairman Enquiries DFS Furniture Company plc Hudson Sandler Graham Kirkham, Executive Chairman Keith Hann Jon Massey, Chief Operating Officer Noemie de Andia Ian Bowness, Finance Director Tel: 020 7796 4133 Tel: 020 7796 4133 (on 11 October 2001) CHAIRMAN'S STATEMENT I take great pride in reporting a year of record profits, during which DFS has passed two important milestones. For the first time, we have produced pre-tax profits of over £50 million and sales of more than £400 million - generated from just 58 stores, five of which were trading for only part of the year. This is a considerable achievement in an intensely competitive market place. We have built our commanding sector leadership by offering customers the best choice, service and value-for-money in our industry, backed by a strong brand and distinctive marketing. Our lead is set to grow as we continue our planned expansion, with more new stores in the pipeline than ever before. RESULTS We have built successfully on the step-change in our performance last year, when pre-tax profits rose by almost 80%. Sales grew by 12.5% to £401.9 million, with like-for-like sales through our core of comparable stores increasing by 4.3%. As expected, in the second half like-for-like growth was 0.5% following the 8.5% increase reported in the first six months. This reflected tougher second half comparatives and, in particular, the absence of the exceptional promotional opportunities created in the prior year by the extra Bank Holiday and extended Millennium break. Despite deflationary pressure across our sector, our average order value was maintained in line with that of the previous year. Operating profit grew by 9.0% to £48.9 million, after new store pre-opening costs of £2.7 million, compared with £0.6 million in the prior year. This accounts for the slight movement in our reported operating margin, from 12.5% to 12.2%; the underlying margin, before pre-opening costs, was higher than in the previous year. After interest receivable of £1.2 million (2000: £1.3 million), profit before taxation increased by 8.5% to £50.1 million and earnings per share advanced by 7.0% to 32.3 pence. FINANCES We continue to enjoy a very strong balance sheet, with total cash balances at the year end of £97.2 million (2000: £99.6 million). Free cash balances were £29.8 million (2000: £44.1 million), reflecting the payment of a £20.7 million special dividend in November 2000. The retention of this cash is appropriate in view of the major store opening programme planned for the next three years and the flexibility which it provides to make freehold acquisitions as suitable opportunities arise. Balances associated with the Primback case continued to grow and stood at £67.4 million at the year end (2000: £55.5 million). Customs & Excise are seeking to recover monies due to them following the European Court ruling in their favour, though our legal advisers consider that a proportion of the amounts represented by the funds provided is no longer recoverable. We expect that the position will be resolved in the current year and any consequent release to our profit and loss account will be disclosed as an exceptional item. DIVIDEND The Board recommends a final dividend of 14.5 pence per share (2000: 13.1 pence), an increase of 10.7%. Together with the increased interim dividend of 6.1 pence (2000: 5.5 pence) paid in June, this makes a total dividend for the year of 20.6 pence (2000: 18.6 pence), an increase of 10.8%. We remain committed to a progressive dividend policy to provide shareholders with increases in their income that broadly reflect the growth of earnings per share over the medium term. STORES We opened five new stores during the year, all of which are trading successfully and will make a substantial contribution to operating profit in the current year. We entered the Scottish market in September with the opening of our leasehold store in Paisley, serving the Glasgow conurbation. This was supported by the opening of a leasehold store in Edinburgh on 26 December, when we also opened our freehold store in Swansea. Further leasehold store openings followed at Romford and at Speke in Liverpool, both of which began trading in March. A new leasehold store at Basildon began trading in the first week of the current financial year and further openings at Taunton and Belfast are scheduled towards the end of the first half. We are particularly excited by the prospect of opening our first store in Northern Ireland, which will provide access to an untapped market place and give us representation in all parts of the United Kingdom for the first time. We are progressing the development of a store in Borehamwood and have more sites in the pipeline than ever before, including further planned openings in Scotland. This programme is in line with our established target of opening 15-20 new stores over a three year period. In addition to these openings, we have continued to invest in our existing stores to ensure that all offer the highest standards of presentation and customer appeal. PRODUCTS The key to success in any retail market is providing what customers want, when they want it, at the price they want to pay. In our increasingly fashion-driven sector, DFS's high volume throughput and the flexibility created by our direct manufacturing participation have both helped us to keep pace with changing tastes and to capitalise on the latest trends. Last year some 60% of our range was replaced with completely new models. Our store size and the specialist nature of our business mean that we are able to display the widest product range in our sector, including classic designs as well as the latest in contemporary fashion, so maintaining our appeal across the broadest possible range of age and socio-economic groups. DFS BRAND AND MARKETING We have continued to project the DFS brand through distinctive, heavyweight advertising campaigns that ensure we stand out from the crowd. There is no doubt that these have contributed to changing perceptions of our business to one more in tune with contemporary fashion, as well as offering great choice, quality and value. Our website at www.dfs.co.uk has continued to complement our media advertising, enabling customers to refine their purchasing decisions by browsing through a wider range of products and providing a useful guide to their nearest DFS store. MANUFACTURING The assurance of dealing direct with a leading furniture manufacturer is a major component of DFS's customer appeal. As well as guaranteeing the exclusivity of our designs, our production capability gives us direct control of quality and lead times and provides a strong platform for collaboration with our external supplier partners in areas such as planning and buying. Our own three factories have achieved record levels of both output and efficiency this year and are well placed to expand their production alongside the planned growth of our retail business in the years ahead. We intend to maintain the proportion of in-house manufacturing at around 15 - 20% of sales, as we believe that this currently provides the optimum balance between direct control of our supply chain and effective open market purchasing, including the ability to take up appropriate opportunities overseas. SUPPLIERS Our close, long-term relationships with leading suppliers have continued to yield results, as we have worked together to plan for the growth of DFS's business. We have also developed new relationships with suppliers of products and services where appropriate. Efficiencies have resulted from the increased use of web-based and other electronic links for the transmission of orders and for credit processing. FURNITURE INDUSTRY AWARDS We were delighted to receive recognition as 'a clear leader in the industry' from the judges in the 2001 Furniture Industry Awards. DFS won the Business Excellence Award against competition from fellow finalists IKEA and the John Lewis Partnership. PEOPLE Our good progress this year reflects the commitment of all at DFS to meeting our customers' expectations. We have always been committed to recruiting and retaining the right people to sustain our growth and our continuing substantial investment in training and development programmes has made a major contribution to our success. So too has our good reputation as an employer, developed over many years as a family business. Together with our standing as the industry leader, this has played a key role in helping us to recruit the people we need to meet our store opening targets, against a background of almost full employment in many areas. In our interim report, we announced the establishment of a new Trading Board. I am pleased to report that our new structure is producing the expected benefits to our operational effectiveness and has given us a strong management framework on which to build the planned expansion of DFS in the years ahead. OUTLOOK Performance in the current year to date has been in line with our budgets, with like-for-like order intake up 3% over the first ten weeks, despite a temporary downturn in customer numbers in the days immediately after the terrorist atrocities in the United States. If it were possible to ignore the international tensions and knock-on domestic concerns I would view the portents to date as very good. However, in light of the world situation, I think the trading environment is difficult for anyone to predict. I must reiterate, at the moment, all our key indicators are favourable and I take great comfort from our on-target performance to date and in the fundamental strengths of DFS: our rock solid balance sheet with its substantial cash, our significant freehold store base and the consistent strength of our cash flow. As the undisputed UK market leader in upholstered furniture, with the best store portfolio, the strongest product range and, above all, the most capable people in our industry, we are well placed to maximise whatever opportunities the market may afford. And, with more stores than ever in the pipeline, I remain confident of our prospects as we steadily increase our dominance in all parts of the United Kingdom. Graham Kirkham Executive Chairman GROUP PROFIT AND LOSS ACCOUNT 52 WEEKS ENDED 28 JULY 2001 (52 WEEKS ENDED 29 JULY 2000) NOTES 2001 2000 £000 £000 Turnover 401,940 357,318 Cost of sales (341,773) (303,379) ---------------- ----------------- Gross profit 60,167 53,939 Administrative expenses (11,308) (9,114) ---------------- ----------------- Operating profit 48,859 44,825 Interest receivable 1,197 1,322 ---------------- ----------------- Profit on ordinary activities before 50,056 46,147 taxation Taxation on profit on ordinary (16,543) (14,959) activities ---------------- ----------------- Profit for the financial period 33,513 31,188 Dividends paid and proposed 1 (21,580) (39,913) ---------------- ----------------- Profit/(deficit) for the period 11,933 (8,725) ---------------- ----------------- ---------------- ----------------- Earnings per ordinary share 2 32.3p 30.2p ---------------- ----------------- ---------------- ----------------- Fully diluted earnings per ordinary 2 32.0p 29.0p share ---------------- ----------------- ----------------- ------------------ All activities were continuing throughout both the current and previous periods. There were no recognised gains and losses in either period other than those reported in the Group profit and loss account. GROUP BALANCE SHEET AS AT 28 JULY 2001 (29 JULY 2000) NOTES 2001 2000 £000 £000 Fixed assets Tangible assets 78,881 71,597 ---------------- ---------------- Current assets Stocks 13,354 11,721 Debtors: due within one year 6,611 5,411 Cash at bank and in hand 97,202 99,583 ---------------- ---------------- 117,167 116,715 Creditors: amounts falling due within (149,665) (159,651) one year ---------------- ---------------- Net current liabilities (32,498) (42,936) Total assets less current liabilities 46,383 28,661 Provisions for liabilities and (8,470) (6,740) charges ---------------- ---------------- Net assets 37,913 21,921 ---------------- ---------------- ---------------- ---------------- Capital and reserves Called up share capital 5,238 5,170 Share premium account 6,050 2,059 Revaluation reserve 4,345 4,396 Capital redemption reserve 78 78 Profit and loss account 22,202 10,218 ---------------- ---------------- Equity shareholders' funds 3 37,913 21,921 ---------------- ---------------- GROUP CASH FLOW STATEMENT 52 WEEKS ENDED 28 JULY 2001 (52 WEEKS ENDED 29 JULY 2000) NOTES 2001 2000 £000 £000 Net cash inflow from operating 4 62,720 81,024 activities Returns on investment and servicing 5 1,267 1,278 of finance Taxation (16,228) (9,015) Capital expenditure 6 (13,584) (9,419) Equity dividends paid (40,615) (26,884) Financing 7 4,059 - ---------------- ---------------- (Decrease)/increase in cash in the (2,381) 36,984 period ---------------- ---------------- ---------------- ---------------- Reconciliation of net cash flow to movement in net funds (Decrease)/increase in cash in the (2,381) 36,984 period Net funds at the beginning of the 99,583 62,599 period ---------------- ---------------- Net funds at the end of the period 97,202 99,583 ---------------- ---------------- NOTES TO THE ACCOUNTS 1. Dividends paid and proposed 2001 2000 £000 £000 Interim dividend paid 6,389 5,687 Final dividend proposed 15,191 13,546 Special dividend proposed - 20,680 ----------------- ----------------- 21,580 39,913 ---------------- ---------------- 2. Earnings per ordinary share The calculations of earnings per ordinary share and fully diluted earnings per ordinary share are based on the profit for the financial period of £33,513,000 (2000: £31,188,000). The weighted average number of shares used in the calculation of earnings per ordinary share was 103,745,633 shares in issue during the period (2000: 103,401,896). The weighted average number of shares used in the calculation of fully diluted earnings per ordinary share was 104,861,726 shares in issue during the period (2000: 107,726,499). 3. Reconciliation of movements in shareholders' funds 2001 2000 £000 £000 Profit for the financial period 33,513 31,188 Dividends paid and proposed (21,580) (39,913) ---------------- ---------------- Profit/(deficit) for the period 11,933 (8,725) Share issues 4,059 - ---------------- --------------- Net increase/(reduction) in shareholders' 15,992 (8,725) funds Shareholders' funds at the beginning of 21,921 30,646 the period ---------------- ---------------- Shareholders' funds at the end of the 37,913 21,921 period ----------------- ----------------- Notes to the accounts continued 4. Reconciliation of operating profit to net cash inflow from operating activities 2001 2000 £000 £000 Operating profit 48,859 44,825 Depreciation 6,219 5,251 Loss/(profit) on sale of fixed assets 81 (67) (Increase)/decrease in stocks (1,633) 777 Increase in debtors (1,270) (1,858) Increase in creditors and provisions 10,464 32,096 ---------------- ---------------- Net cash inflow from operating 62,720 81,024 activities ----------------- ----------------- The increase in creditors and provisions includes an amount of £11,957,000 (2000: £12,814,000) associated with the Primback case. 5. Returns on investment and servicing of finance 2001 2000 £000 £000 Interest received 1,267 1,278 ---------------- ---------------- 6. Capital expenditure 2001 2000 £000 £000 Purchase of tangible fixed assets (13,904) (9,790) Sale of fixed assets 320 371 ---------------- ---------------- Net cash outflow for capital (13,584) (9,419) expenditure ----------------- ----------------- Notes to the accounts continued 7. Financing 2001 2000 £000 £000 Issue of ordinary share capital 4,059 - -------------- ------------ 8. The financial information set out above does not constitute the Company's statutory accounts for the periods ended 28 July 2001 or 29 July 2000. Statutory accounts for 2000 have been delivered to the Registrar of Companies and those for 2001 will be delivered following the Company's Annual General Meeting. The auditors have reported on those accounts. Their reports were unqualified and did not contain statements under sections 237 (2) or (3) of the Companies Act 1985. 9. The annual report will be posted to shareholders on or about 2 November 2001 and will be available on request from the Secretary, DFS Furniture Company plc, Bentley Moor Lane, Adwick-le-Street, Doncaster, South Yorkshire, DN6 7BD. OPERATING AND FINANCIAL REVIEW TURNOVER Sales grew by 12.5% to £401.9 million over the year as a whole, with an increase of 13.7% in the first half followed by a rise of 11.4% in the second half. New stores made an increasing contribution to sales as the year progressed, with three opening during the first half and two more opening in March. Like-for-like sales, as expected, were stronger in the first half than the second, with an 8.5% increase in the first six months being followed by an 0.5% advance in the second half. This primarily reflected stronger comparatives in the prior year and in particular non-recurrence of the exceptional promotional opportunities we enjoyed in 1999/2000 as a result of the extended Millennium holiday period, including an extra Bank Holiday. Like-for-like sales over the year as a whole were up 4.3%, ahead of our budgets. It remains our policy to calculate like-for-like sales on a core of comparable stores, excluding new branches whose performance has been distorted by launch promotional activity in the current or prior year, together with any other branches whose trading profile has been affected by our new store developments. Our average order value was in line with that of the previous year, despite a generally deflationary trend across our sector. OPERATING PROFIT Operating profit grew by 9.0% to £48.9 million, with an increase of 9.4% in the first half being followed by a rise of 8.7% in the second. Our headline operating margin for the year was 12.2%, compared with 12.5% in the prior year. Although underlying operating margins continued to improve, driven by higher volumes, the headline figure reflected substantially increased pre-opening costs of £2.7 million associated with the five stores opened during the year and with the Basildon store which opened in the first week of the current financial year. This compares with total pre-opening costs in the previous year of £0.6 million. We have consistently adopted a conservative policy of charging all rental, staffing, training and marketing costs associated with new store developments to profit as they are incurred. INTEREST RECEIVABLE Interest receivable of £1.2 million was £0.1 million lower than in the previous year, reflecting slightly reduced average money market rates and the differential between those rates and the sums provided for interest payable to Customs & Excise on the balances associated with the Primback case. PROFIT BEFORE TAXATION As a result of the above, profit on ordinary activities before taxation was £50.1 million, an increase of 8.5% over the previous year. TAXATION The Group's tax rate for the year was 33.0% compared with 32.4% in the previous year, the increase being primarily due to the growth of cash balances associated with the Primback case. The Group's tax rate is expected to remain slightly above the standard UK corporation tax rate in future, because of the treatment of certain non-allowable costs. EARNINGS PER ORDINARY SHARE Earnings per ordinary share increased by 7.0% to 32.3 pence per share, slightly lower than the increase in profit before taxation reflecting both the increased tax charge and the issue of 1.4 million new shares during the year as a result of the exercise of options. The new shares issued led to an increase in the weighted average number of shares in issue from 103.4 million to 103.7 million. DIVIDENDS The recommended final dividend is 14.5 pence per ordinary share, an increase of 10.7% compared with the 13.1 pence paid in the previous year. Subject to the approval of the Annual General Meeting, the finaldividend will be paid on 7 December 2001 to those shareholders whose names are on the register on 2 November 2001. Including the interim dividend paid in June, which was increased by 10.9% to 6.1 pence, the total ordinary dividend for the year is 20.6 pence (2000: 18.6 pence), an increase of 10.8%, and is again covered 1.6 times by earnings per share. Since our flotation in 1993, DFS has paid a total of £111 million to shareholders in ordinary dividends, including this year's proposed final, and has returned a further £55 million through special dividends and share buy-backs. CAPITAL EXPENDITURE Capital expenditure for the year was £13.9 million, compared with £9.8 million in the previous year. This reflected the increased level of store opening activity, with the largest items of expenditure being the construction of our freehold Swansea store and the fitting-out of the five new stores opened during the year and of the Basildon store opened shortly after the year end. We also continued to invest in the refurbishment of existing stores. In addition, we undertook a major upgrade of our computer system, which has more than doubled the capacity of our central server and increased its speed of operation. This gives us the capability to handle our planned expansion for the foreseeable future. CASH FLOW The highly cash generative nature of our business means that DFS has always been able to fund its entire expansion programme from its own resources and to purchase store freeholds as suitable opportunities arise. BALANCE SHEET The Group continues to enjoy a very strong balance sheet, with no borrowings at either this or the prior year end. Total cash balances at 28 July 2001 were £97.2 million (2000: £99.6 million), comprising free cash of £29.8 million (2000: £44.1 million) and monies associated with the long-running Primback case of £67.4 million (2000: £55.5 million). The reduction in free cash balances reflects the payment of our record £20.7 million special dividend in November 2000. Monies associated with the Primback case have continued to accrue pending the resolution of the Customs & Excise appeal against the 1996 Court of Appeal ruling. The European Court of Justice pronounced in favour of Customs & Excise in May 2001 and Customs & Excise are now seeking to recover the monies due to them. However, as noted in the Chairman's Statement, our legal advisers consider that a proportion of the amounts represented by the funds provided is no longer recoverable. We expect that the position will be resolved in the current year and any consequent release to our profit and loss account will be disclosed as an exceptional item. OPPORTUNITIES AND RISKS DFS is the UK's leading specialist retailer of upholstered furniture, selling over 25,000 individual pieces of furniture each week. We have developed our unique retail and manufacturing formula over 32 years in business, during which we have attained market leadership by maintaining a strong specialist focus and constantly investing in our stores, systems, products, factories and people. We have made substantial gains in market share, from around 5% at the time of our flotation in 1993 to some 14% today. DFS achieves local market share in established stores of around double this level, supporting research which clearly indicates a capacity for over 100 DFS upholstery stores within the UK alone. The finance for all the Group's credit sales is provided through external financing companies, without recourse to DFS. We continue to monitor the introduction of the European single currency and its potential implications for UK retailers. As all our sales are made within the UK and the majority of our overseas purchases are invoiced in sterling, exchange rate risk has never been a material issue for the Group and we do not anticipate any significant short term impact on our operations from the introduction of the euro. DFS does not undertake speculative financial transactions and continues to pursue prudent treasury policies, investing its surplus funds only with top- rated financial institutions. Insurable risks are centrally monitored and controlled and are covered with leading UK and international insurance companies. All other aspects of risk management are kept under continuous review.

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