Preliminary Results

D.F.S. Furniture Company PLC 12 October 2000 DFS FURNITURE COMPANY plc PRELIMINARY RESULTS FOR THE 52 WEEKS ENDED 29 JULY 2000 'I am delighted to report an all-time record year for DFS' * Record profit before tax £46.1 million up 79% * Earnings per share 30.2p up 82% * Turnover £357.3 million up 21% * Dividend per share 18.6p up 25% * Record special dividend per share 20.0p 'Our success has been driven by the improvement and diversification of our product range, the growing impact of DFS as the brand of first choice and our commanding position as market leader. The doubling of our own manufacturing capacity has also made a contribution to our ability to improve margins while offering even better value and service to our customers. Like-for-like sales in the current year to date are stronger than the comparable period in 1999 with order intake also running ahead of our budgets. This encouraging start underpins our expectation of further real sales growth through our existing stores, complemented by the planned opening of six new stores. Our balance sheet remains very strong, reflecting the powerful cash generating capability of the business. We had no debt at the year end and total cash balances of £99.6 million. Our growth is planned, organic and healthy and with DFS stronger, bigger and fitter than ever, future prospects are bright as our dominance in the UK continues to increase.' Graham Kirkham, Executive Chairman Enquiries DFS Furniture Company plc Hudson Sandler Graham Kirkham, Executive Chairman Keith Hann Jon Massey, Chief Operating Officer Justin Strong Ian Bowness, Finance Director Tel: 020 7796 4133 (on 12 October 2000) Tel: 020 7796 4133 CHAIRMAN'S STATEMENT I am delighted to report an all-time record year for DFS, with pre-tax profits growing by 79.3% to £46.1 million. A remarkable performance taken in the context of an overshopped market place and an environment that has seen the collapse of a number of our competitors. This was achieved without the benefit of a single new store opening during the year. Our success has been driven by the improvement and diversification of our product range, the growing impact of DFS as the brand of first choice and our commanding position as market leader. The doubling of our own manufacturing capacity has also made a contribution to our ability to improve margins while offering even better value and service to our customers. RESULTS The positive trends reported in the first half continued throughout the year. Total sales grew by 20.9% to £357.3 million, including a like-for-like sales increase of 18.9% from our core of comparable stores. Pricing initiatives to improve our competitiveness meant that our average order value was 14.6% lower than in the previous year (individual sales transactions grew by more than one third on a like-for-like basis). Our operating margin improved substantially to 12.5%, compared with 8.3% in the prior year, and operating profit grew by 83.1% to £44.8 million. After increased interest receivable of £1.3 million (1999: £1.2 million), profit before taxation was up 79.3% at £46.1 million - the best result ever in the 31 year history of DFS. Earnings per share grew by 81.9% to 30.2 pence. FINANCES Our balance sheet remains very strong, reflecting the powerful cash generating capability of the business. We had no debt at the year end and total cash balances of £99.6 million (1999: £62.6 million), comprising free cash of £44.1 million (1999: £20.0 million) and a further £55.5 million (1999: £42.6 million) associated with the case of Primback Ltd, pending its final resolution by the European Court. DIVIDEND The Board recommends a final dividend of 13.1 pence per share (1999: 10.5 pence), an increase of 24.8%. Together with the increased interim dividend of 5.5 pence paid in June, this makes a total dividend for the year of 18.6 pence (1999: 14.9 pence), also an increase of 24.8%. We remain committed to a progressive dividend policy for the future, providing shareholders with increases in their income that broadly reflect the growth in earnings per share over the medium term. SPECIAL DIVIDEND In the light of our exceptionally strong cash generation during the year, the Board has once again reviewed the balance sheet and concluded that our free cash position substantially exceeds the current requirements of the business. We have always been committed to ensuring that shareholders derive full value from any such surplus and therefore have great pleasure in declaring a special (second interim) dividend of 20.0 pence per share. At £20.7 million this is the largest special dividend ever paid by DFS and will bring the total of cash returned to shareholders since our flotation at the end of 1993 to £144.0 million. We retain ample funds to pursue our planned expansion of the business, including the flexibility to take advantage of suitable freehold opportunities. STORES No new stores opened during the year and five established stores were completely refurbished: Kings Lynn, Grantham, Bradford, Coventry and Shrewsbury. Since the beginning of the current year we have opened a new leasehold store in Paisley, within the huge Glasgow conurbation, thereby taking DFS into the lucrative Scottish market for the first time. This new store began trading in September with order intake to date exceeding our expectations. Further openings in Scotland will follow with our leasehold store in Edinburgh planned to open towards the end of the first half. Our freehold store in Swansea will also open around this time and leasehold store openings are scheduled for the second half in Liverpool, Romford and Taunton, making a total of six new stores by the end of the current year. Further new store developments are firmly programmed for the next two years, including our first store in Northern Ireland at Belfast. The opening of our two Scottish stores ensures that DFS is represented close to most of the major population centres in the UK, making our national advertising evermore cost- effective. PRODUCTS In the past we have changed approximately 40% of our product range each year to ensure that we keep pace with changing fashions in home design. Last year, however, we sharply increased the pace of innovation, completely renewing over 60% of our range. The current breadth, depth and diversity of our products will ensure our continuing appeal to all ages and all socio-demographic groups. DFS BRAND, MARKETING AND E-COMMERCE The change of name of our five Northern Upholstery stores to DFS will be completed in November. This will allow us to push further and faster promoting the real brand values of DFS. During the year greater emphasis was placed on projecting DFS as a brand rather than solely concentrating on promotional offers. The ability to dominate our marketplace with a consistent brand communication programme will ensure we remain the store of first choice for an ever-growing number of customers. Our unique combination of choice, quality, reliability and value for money has been underlined by a new, fast-moving and contemporary style of advertising, highlighting that DFS is exclusive not expensive. Our established media advertising techniques have been successfully complemented by our new website at www.dfs.co.uk launched in April 2000. This has exceeded all our expectations and is already hosting around 10,000 user visits every week, enabling customers to browse a wider range of products than we can advertise on TV or in print. The enthusiastic initial response of consumers underscores our belief in the potential of this medium to complement our established retail business through the development of an interactive sales capability in the medium term. MANUFACTURING The acquisition of the Lincoln House factory in June 1999 has enabled us to double our manufacturing capacity so that we currently produce around 20% of all the furniture we sell - the highest proportion in our history. Our establishment as a major force in UK upholstery manufacturing has strengthened our buying ability and given us many important advantages including direct control of quality and delivery lead times and increased flexibility in the development of new products to keep pace with fashion trends. We have achieved substantial improvements in productivity and profitability through our investment in refitting and re-equipment of the Lincoln House facility. SUPPLIERS Our huge growth in volume and anticipated greater future needs have placed more pressure, demands and often investment requirements on our suppliers of both products and services. Our long term relationships have paid off with our suppliers giving us unstinting support and commitment and I feel it appropriate to express our hearty appreciation and thanks for all their efforts and ongoing contribution to our progress. PEOPLE Our excellent performance over the last year has been the direct result of a superb team effort by all who work for DFS. I take great pride in their willingness to give the total commitment necessary to ensure customer satisfaction throughout a year which has seen a huge increase in the volumes we both manufacture and sell. We are seeing real benefits from our past investment in training and development. We have also achieved efficiencies from our action to strengthen our management structure through the appointment of two new Operations Directors, with Keith Baker taking responsibility for London and the South, and David Payling for Scotland and the North. In an uncertain industry climate, which has led to the failure of a number of our competitors, the security and stability of DFS has given us excellent opportunities to recruit, train and develop the additional high quality people we need to sustain our planned expansion. OUTLOOK Like-for-like sales in the current year to date are stronger than the comparable period in 1999 with order intake also running ahead of our budgets. This encouraging start underpins our expectation of further real sales growth through our existing stores, complemented by the planned opening of six new stores. Margins are continuing to benefit from higher volumes, the increased cost-effectiveness of advertising and higher manufacturing participation. All these factors give me confidence in our ability to achieve further progress during the year ahead. Since we floated at the end of 1993, DFS has achieved a 213% sales increase in a market that we estimate to have grown by 65%. We have extended our geographical coverage, broadened our customer appeal and established an unrivalled reputation for choice, quality, service and value. The leading trade journal in our sector recently concluded that DFS is 'the undisputed king of upholstery retailing' in the UK. As the sector leader, we are strongly placed to continue the expansion of our store network and to exploit the new sales opportunities created by the internet. I believe that we have the right concept, the right retailing skills and, above all, the right people to deliver sustained long-term growth in profits, earnings and dividends to our shareholders. Our growth is planned, organic and healthy and with DFS stronger, bigger and fitter than ever, future prospects are bright as our dominance in the UK continues to increase. Graham Kirkham Executive Chairman GROUP PROFIT AND LOSS ACCOUNT 52 WEEKS ENDED 29 JULY 2000 (52 WEEKS ENDED 31 JULY 1999) NOTES 2000 1999 £000 £000 Turnover 357,318 295,486 Cost of sales (303,379) (262,176) ------------ ------------ Gross profit 53,939 33,310 Administrative expenses (9,114) (8,829) ------------ ------------ Operating profit 44,825 24,481 Interest receivable 1,322 1,259 ------------ ------------ Profit on ordinary activities before taxation 46,147 25,740 Taxation on profit on ordinary activities (14,959) (8,515) ------------ ------------ Profit for the financial period 31,188 17,225 Dividends paid and proposed 1 (39,913) (25,650) ------------ ------------ Deficit for the period (8,725) (8,425) ------------ ------------ Earnings per ordinary share 2 30.2p 16.6p ------------ ------------ Fully diluted earnings per ordinary share 2 29.0p 16.6p ============ ============ 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 29 JULY 2000 (31 JULY 1999) NOTES 2000 1999 £000 £000 Fixed assets Tangible assets 71,597 67,362 ------------ ------------ Current assets Stocks 11,721 12,498 Debtors: due within one year 5,411 3,550 Cash at bank and in hand 99,583 62,599 ------------ ------------ 116,715 78,647 Creditors: amounts falling due within one year (159,651) (110,061) ------------ ------------ Net current liabilities (42,936) (31,414) ------------ ------------ Total assets less current liabilities 28,661 35,948 Provisions for liabilities and charges (6,740) (5,302) ------------ ------------ Net assets 21,921 30,646) ------------ ------------ Capital and reserves Called up share capital 5,170 5,170 Share premium account 2,059 2,059 Revaluation reserve 4,396 4,537 Capital redemption reserve 78 78 Profit and loss account 10,218 18,802 ------------ ------------ Equity shareholders' funds 3 21,921 30,646 ============ ============ GROUP CASH FLOW STATEMENT 52 WEEKS ENDED 29 JULY 2000 (52 WEEKS ENDED 31 JULY 1999) NOTES 2000 1999 £000 £000 Net cash inflow from operating activities 4 81,024 48,460 Returns on investments and servicing of finance 5 1,278 1,258 Taxation (9,015) (12,195) Capital expenditure 6 (9,419) (15,906) Equity dividends paid (26,884) (14,949) Financing 7 - (2,619) ------------ ------------ Increase in cash in the period 36,984 4,049 ------------ ------------ Reconciliation of net cash flow to movement in cash Increase in cash in the period 36,984 4,049 Cash at bank and in hand at the beginning of the period 62,599 58,550 ------------ ------------ Cash at bank and in hand at the end of the period 99,583 62,599 ============ ============ NOTES TO THE ACCOUNTS 1. Dividends paid and proposed 2000 1999 £000 £000 Interim dividend paid 5,687 4,453 Final dividend proposed 13,546 10,857 Special dividend proposed 20,680 10,340 ------------ ------------ 39,913 25,650 ------------ ------------ 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 £31,188,000 (1999: £17,225,000). The weighted average number of shares used in the calculation of earnings per ordinary share was 103,401,896 shares in issue during the period (1999: 103,839,130). The weighted average number of shares used in the calculation of fully diluted earnings per ordinary share was 107,726,499 shares in issue during the period (1999: 103,839,130). 3. Reconciliation of movements in shareholders' funds 2000 1999 £000 £000 Profit for the financial period 31,188 17,225 Dividends paid and proposed (39,913) (25,650) ------------ ------------ Deficit for the period (8,725) (8,425) Purchase of own shares - (2,619) ------------ ------------ Net reduction in shareholders' funds (8,725) (11,044) Shareholders' funds at the beginning of the period 30,646 41,690 ------------ ------------ Shareholders' funds at the end of the period 21,921 30,646 ------------ ------------ 4. Reconciliation of operating profit to net cash inflow from operating activities 2000 1999 £000 £000 Operating profit 44,825 24,481 Depreciation 5,251 4,606 Profit on sale of fixed assets (67) (149) Decrease / (increase) in stocks 777 (219) (Increase) / decrease in debtors (1,858) 609 Increase in creditors and provisions 32,096 19,132 ------------ ------------ Net cash inflow from operating activities 81,024 48,460 ------------ ------------ The increase in creditors and provisions includes an amount of £12,814,000 (1999: £10,061,000) associated with the Primback case. 5. Returns on investments and servicing of finance 2000 1999 £000 £000 Interest received 1,278 1,258 ------------ ------------ 6. Capital expenditure 2000 1999 £000 £000 Purchase of tangible fixed assets (9,790) (16,300) Sale of fixed assets 371 394 ------------ ------------ Net cash outflow for capital expenditure (9,419) (15,906) ------------ ------------ 7. Financing 2000 1999 £000 £000 Purchase of own shares - (2,619) ------------ ----------- 8. The financial information set out above does not constitute the Company's statutory accounts for the periods ended 29 July 2000 or 31 July 1999. Statutory accounts for 1999 have been delivered to the Registrar of Companies and those for 2000 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 1 November 2000 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 Over the year as a whole we have made great progress. Sales grew by 20.9% to £357.3 million, with a 22.9% increase in the first six months followed by a 19.2% increase in the second half. On a like-for-like basis, sales grew by 18.5% in the first half and 19.3% in the second, making an increase of 18.9% for the full year. It is 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. The average order value was 14.6% lower than in the previous year, as we continued to sharpen our competitive position through pricing initiatives. OPERATING PROFIT Operating profit increased by 83.1% to £44.8 million, driven by a substantial improvement in our operating margin to 12.5%, compared with 8.3% in the previous year. Pre-opening costs associated with the current new store opening programme meant that the second half operating margin of 12.4% (1999: 8.5%) was slightly lower than the 12.7% (1999: 8.0%) reported for the first half. INTEREST RECEIVABLE Interest receivable of £1.3 million was £0.1 million higher than in the previous year, with the benefit of increased free cash balances largely offset by lower average interest rates and the differential in interest rates associated with the Primback case. PROFIT BEFORE TAXATION Profit on ordinary activities before taxation of £46.1 million was 79.3% higher than in the previous year. TAXATION The Group's tax rate for the year was 32.4%, compared with 33.1% in the previous year. Our tax charge is expected to remain slightly above the standard UK corporation tax rate because of the treatment of non-allowable costs. EARNINGS PER ORDINARY SHARE Earnings per ordinary share rose by 81.9% to 30.2 pence. The share buyback during the first half of the previous financial year meant that the average number of shares in issue this year was slightly lower at 103.4 million (1999: 103.8 million). DIVIDENDS The recommended final dividend is 13.1 pence per ordinary share, compared with 10.5 pence in the previous year, an increase of 24.8%. Subject to the approval of the Annual General Meeting, this will be paid on 8 December 2000 to those shareholders whose names are on the register on 3 November 2000. This follows the 25.0% increase in the interim dividend to 5.5 pence and makes a total ordinary dividend increase for the year of 24.8% to 18.6 pence, covered 1.6 times by earnings per share. SPECIAL DIVIDEND The special dividend referred to in the Chairman's Statement will be a second interim dividend of 20.0 pence per share, payable on 14 November 2000 to shareholders whose names are on the register on 11 October 2000. CAPITAL EXPENDITURE Capital expenditure was £9.8 million (1999: £16.3m). Major items of expenditure included the refurbishment of five existing stores and the refitting and re-equipment of the Lincoln House factory acquired in June 1999. CASH FLOW Our business is highly cash generative, enabling us to fund our entire expansion programme from our own resources, including the purchase of store freeholds. Record operating profits and strong cash controls have resulted in net cash inflow from operating activities (excluding Primback monies) increasing to £68.2 million in the year (1999: £38.4 million). BALANCE SHEET The Group's balance sheet remains very strong with no borrowings and total cash balances of £99.6 million at the year end, compared with £62.6 million in 1999. These balances include £55.5 million (1999: £42.6 million) associated with the Primback case, which is offset by a corresponding sum shown within creditors. Our working capital requirements remain minimal, with stocks comprising principally store displays, raw materials at the Group's factories and finished goods awaiting delivery. 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 31 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 figure 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 suppliers invoice us 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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