Armchair-ageddon at DFS?

Thursday, Jun 15 2017 by

I am an owner of SCS (LON:SCS) and so have looked at DFS Furniture (LON:DFS) to understand the main competitor in the industry. Some quick views on today's profit warning from DFS:

1) DFS's leveraged position looks great in good times but in a downturn it will be a moderate concern and an issue to be addressed by management. This has sheen and multiple impact.

2) My hunch is that DFS's aspirational brands will be more vulnerable to turndown or change in consumer sentiment. If you've got money you don't DFS it. SCS by comparison is sort of touch above basic level necessity to council estate chic :) I.e. the people SCSing it are already a bit tight on the money and don't have many pretensions about it.

3) Roll outs, foreign expansions and acquisitions have seemed potentially hubristic to me. I like that SCS sticks to its knitting by comparison.

4) I like SCS management. They've done it for a long time and they are sofa people through and through. They are disliked as they went under in the credit crisis and then when they IPO'd a few years ago there was a profit warning soon after (seemed just a hiccup though). By comparison, DFS management are financial managers. Good when times are good...but watch out when the decks need cleared.

On SCS's old credit problem: I was a 'professional' fund manager during credit crisis and I saw it coming and shorted it. However, most of my peers didn't have a scoobie and missed it....just like the SCS management didn't understand some of the technicalities of the credit market but as they ran a real business rather than an imaginary one (like financial ones, that were also helped by govt) they bore the brunt of their lack of understanding.


£ sensitivity
I'm uncertain on this but I think it looks worse for DFS than SCS. Despite DFS having a few proprietary manufacturing units in the UK they appear more exposed to overall imports.

Margin superiority of DFS
I don't have as good a handle on this as I should other than they have more scale and the aspiration element gives them pricing power…

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DFS Furniture plc is an upholstery retailer in the United Kingdom. The Company is engaged in designing, manufacturing, selling, delivering and installing a range of sofas, and other upholstered and furniture products. The Company's segment is engaged in the retailing of upholstered furniture and related products. Its other segments comprise the manufacture and distribution of upholstered furniture. The Company offers approximately 10 unit types per range, and a range of materials with approximately 50 colors available. Its branded upholstery ranges include Capsule Collection and Grand Tour. The Company operates approximately 100 retail stores in the United Kingdom, the Republic of Ireland and the Netherlands, an online channel, and approximately three upholstery factories in the United Kingdom. The Company's subsidiaries include Diamond Holdco 2 Limited, Diamond Holdco 7 Limited, DFS Furniture Holdings plc, DFS Furniture Company Limited and Coin Retail Limited (Jersey). more »

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ScS Group plc is engaged in the provision of upholstered furniture and flooring, trading under the brand name, ScS. The Company specializes in fabric and leather sofas, and sells a range of branded and ScS branded products sold under registered trademarks, including Endurance and SiSi Italia. The Company also offers a range of third-party brands, including La-Z-Boy, G Plan and Parker Knoll. The Company operates from approximately 100 stores nationwide along with an online sales and also has approximately 10 distribution centers across the United Kingdom. The Company has operations in retail park locations and in House of Fraser stores across the country-as far north as Aberdeen and as far south as Plymouth, offering a range of upholstered furniture and floorcoverings. The Company also runs a made-to-order sofas, furniture and flooring concession within House of Fraser. The concession operates from approximately 30 House of Fraser stores across the United Kingdom and online. more »

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7 Posts on this Thread show/hide all

ambrosia 15th Jun '17 1 of 7

very interesting when you say "By comparison, DFS management are financial managers"
I was a holder until just after ex div date, i sold but kept it on my watch list as the ebitda, price to free cashflow, pe ratio etc were all very attractive, now i'm wondering if i was suckered in with financial garnish

count myself very lucky to have not got burnt

weird thing is they just paid a rather large special divident, might have been smarter to use that to pay off some debt

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mojomogoz 15th Jun '17 2 of 7

In reply to post #194251

Well, if times are good they are smarter to keep the debt and payout to happy shareholders. When times get tougher they look less smart.

On balance, this seems like a sector to me where you are best without debt. They wont go under because of it but they may be prompted into reactive defensive management.

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Howard Marx 15th Jun '17 3 of 7

You might be the best captain of the best ship, yet you still wont be able to control the ocean.

DFS's problems may prove to be specific to themselves.

But the UK retail sales data today suggest the downtrun is broader. If so, probably best to sell all UK consumer cyclicals rather than rank managements and market positioning.

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mojomogoz 15th Jun '17 4 of 7

In reply to post #194263

That's a fair and reasonable point.

I am quite lowly invested or in things that are likely to be low to negatively correlated with broad market sentiment as I am not bullish primarily due to the absolutely fantastical valuation of US, high private debt levels (inc cos) and the lack of price for risk in the market generally. The specific negativity on the UK may be right but it feels a bit worked up to me too post Brexit vote.

However, some well run retail companies in the UK seem very cheap. SCS is very cheap. Cheap enough for nearly all but the worst outcomes. It may get cheaper. And the worst outcome is still possible due to the foreign financial dependence of the UK...but then I have a slightly contrary view on that as our fragility is well known and tested by the market and places like Europe have more to worry about when markets move on to country balance sheet worries. In a perverse-ish way I see the UK as a safe haven. We are having our stress and madness (see general election) ahead of the crowd

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mojomogoz 4th Oct '18 5 of 7

DFS Furniture (LON:DFS) just out with disappointment relative to a decent SCS (LON:SCS) result a few days before. These businesses are quite different in terms of both operational and financial management. I continue to believe SCS (LON:SCS) is a good investment. Perhaps wont fly much until they signal use for excess cash. But yield is high and sustainable and that should give a but of re-rating

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shipoffrogs 4th Oct '18 6 of 7

Don't SCS go bust in every recession to always emerge from the ashes; or is my memory failing me? Suspect it's cheap now for a very good reason.

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mojomogoz 4th Oct '18 7 of 7

In reply to post #404534

shipoffrogs that is almost unintentionally funny....see conversation taking place on yesterday's small cap report.

They went bust in 2008 specifically as their credit insurance got pulled during the crisis and that effectively created a confidence run on them. They also did over expand just before that but it does not appear that it was what drove the business to the wall.

You are probably right that that is why they are lowly rated. However, the mgt seem to have learned a lesson to be very conservative in their new incarnation and currently hold near £50m cash for £90m mkt cap. Note, partly as a result of over investment (or too rapid store opening) pre 2008 the cash earning are now above reported earnings on a durable basis due to depreciation effect and the cost of their store start up now being much lower.

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