DFS Furniture News | The Twelfth Magpie

Why I’d shun this almost 5%-yielding ‘superstock’ and what I’d buy instead

Kevin Godbold — Thu, 14 Mar 2019 10:09:54 +0000

I think DFS Furniture (LSE:DFS) is one of the most dangerous shares around for long-term investors right now.

Yet on one popular share research website, the stock has earned the label ‘superstock’ because of its tasty-looking indicators for value, growth and momentum. And I must admit, at first glance, DFS does look attractive with its price-to-earnings rating running just over 11 and the dividend yield at about 4.8%.

Trading well, but…

City analysts have pencilled in some chunky double-digit percentage increases in earnings for this year and next too, which adds to the superficial appeal of the share. But dig a bit deeper and the company starts to reveal weaknesses. For example, the record on earnings is patchy, the shares have moved up and down in big swings over the past few years, and net debt looks high.

Indeed, DFS’s business retailing living-room furniture is one of the most cyclical a company can participate in. Things look like they’re swinging along nicely now, but given a ‘half-decent’ general economic downturn, everything could come crashing down – profits, dividends, the share price. Everything could hit the floor together and leave the company struggling to pay the interest on its debt. That’s the big risk you take by owning shares in a cyclical firm such as DFS.

However, despite the risks, I would consider owning DFS shares short-term to catch a cyclical up-leg. But I’d keep one finger on the ejector button ready to press at the first sign of trouble. Meanwhile, today’s half-year results look trouble-free. Revenue rose just over 29% and by almost 10% on a pro-forma basis that adjusts for the full inclusion of the firm’s recent acquisition of a company called Sofology. Underlying pro-forma earnings per share shot up an impressive 90%.

There may be trouble ahead

But in another clue to the fragility of the sector, the directors held the interim dividend at last year’s level. That seems sensible to me because if a cyclical business doesn’t use its incoming cash flow to pay down its debt in the good times it could be in trouble with its borrowings in the bad times. So, it’s no good the firm giving away too much cash to shareholders now.

Chief executive Tim Stacey said in the report he expects the market “to remain particularly challenging in 2019,” which is a red flag for me. However, he thinks the firm’s investments in online channels, delivery networks and brands will “help mitigate” the current economic and political uncertainty. I admire his optimism, but wouldn’t bet on those things helping much if the economy turns down from here.

Rather than a cyclical outfit such as DFS, I’d rather place my long-term investments in shares backed by firms with more defensive operations such as National Grid, Unilever, Britvic,and many others. Another decent way of ironing out some of the cyclical risks is to spread your investment across many underlying companies. A neat way to do that is to invest in a low-cost index tracker fund, such as one that follows the FTSE100 or FTSE 250 indices.

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Britvic and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why I’d dump this 6%-yielder and buy the National Grid share price instead

Rupert Hargreaves — Thu, 10 Jan 2019 14:01:19 +0000

At the time of writing, shares in retailer DFS Furniture (LSE: DFS) support a dividend yield of 6.1%, significantly above the market average of around 4%.

This yield might look attractive for income seekers, but I don’t believe it’s sustainable. Instead, my money is on National Grid (LSE: NG).

Two different companies

National Grid and DFS are two very different companies. The former operates critical utility infrastructure across the UK and the United States, while the latter sells furniture in the UK.

There are positives and negatives to investing in both businesses. National Grid is attractive as an income investment because the enterprise has steady, predictable income from assets around the world that would be difficult to replicate if a competitor wanted to. However, the company is highly regulated and can only make as much profit as regulators will allow.

The company is currently in the process of responding to a new pricing regime regulator Ofgem is proposing that will take effect from 2021. Under the new regime, companies like National Grid will be able to charge less for their services, which could save households an estimated £45 a year, but cost the industry £6.5bn in total. If these changes are introduced, there’s a genuine chance that National Grid’s dividend will come under threat.

On the other hand, DFS’s income is more unpredictable, and the company’s outlook is dependent on the financial health of the UK consumer. Still at the moment, it appears that DFS is currently outperforming in a challenging consumer environment.

For the five months to the end of December 2018, the retailer reported sales growth of 10%, and like-for-like online sales growth across all brands of 22%. These are sort of numbers many retailers can only dream of right now.

Dividend credentials

What does this mean for the company’s dividend? Well for the time being, DFS’s dividend looks safe. The total distribution of £24m was covered twice by free cash flow in the financial year ending 28 August 2018, and 1.7 times by earnings per share.

Despite these figures, net debt has been increasing steadily since 2016, rising by around 16%, which tells me It’s spending more than it can afford. I’m worried about this in the current hostile consumer environment.

In comparison, National Grid’s dividend looks to me to be the much better investment. While there’s a risk that the group might face a cash squeeze under that new pricing regime in 2021, management’s efforts to expand into new markets, specifically North America, are paying off, and this could help protect the dividend. What’s more, unlike DFS, National Grid isn’t subject to consumer trends — there will always be a demand for electricity — so the business has greater visibility on earnings and can plan for the dividend, accordingly.

The bottom line

Considering all of the above, I would sell shares in DFS and snap up those in National Grid, instead. With a dividend yield of 6.2%, I think this FTSE 100 income champion could help improve your investment returns in 2019.

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Rupert Hargreaves owns no share menioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Have £1,000 to invest? This 7.5% yielder is absolutely crushing the FTSE 100

Roland Head — Thu, 04 Oct 2018 13:10:52 +0000

If you’re in the early stages of building a stock portfolio, putting money into a FTSE 100 tracker fund is a fairly safe option. Although the value of your investment could fall in a market slump, the index usually bounces back over time.

Even if your investment is showing a loss, you’ll continue to receive the FTSE’s 4% dividend yield, giving you a useful income.

The problem, of course, is that you can never beat the market by investing in a tracker fund. To outperform the FTSE 100, you’ll also need to invest directly in stocks and shares.

Today I’m going to look at a couple of household names you might want to consider.

Crushing the FTSE

My first choice is sofa and carpet retailer SCS Group (LSE: SCS). Despite the well-known pressures on high street retailers, SCS is doing pretty well.

The group’s share price has beaten the FTSE 100 by about 26% since my colleague Rupert Hargreaves covered the stock in October last year. And shareholders have also enjoyed a dividend yield of more than 7%, nearly double the payout from the big-cap index.

Figures published yesterday show that the Sunderland-based firm’s revenue rose by 1.3% to £337.3m during the 52 weeks to 28 July. Tight control of costs meant that the group’s operating profit rose by 10.5% to £13.2m, lifting its operating margin from 3.6% to 3.9%.

Even better than it seems

A key attraction of this business is that its costs are very flexible. By outsourcing production and making furniture to order, SCS enjoys strong cash generation and flexible costs.

The group’s net cash balance rose from £40m to £48m last year, and management said that 75% of costs are variable or discretionary. In my view, this combination of flexible costs and a cash buffer should mean a very low risk of financial distress, even in a recession.

Analysts expect SCS Group’s profits to be fairly flat over the next couple of years. But the 7.5% dividend yield is well supported. I think further gains may be possible.

Can this larger rival fight back?

DFS Furniture (LSE: DFS) is about five times larger than rival SCS. But size is no guarantee of better results.

DFS was forced to issue a profit warning in July, after sales fell significantly below management expectations during the hot weather. Today, the company revealed just how badly its profits were damaged.

The group’s full-year sales fell by 2% to £747.7m during the year to 29 July, excluding acquisitions. Including acquisitions, sales were 14% higher at £870m. But even this wasn’t enough to protect the group’s underlying pre-tax profit, which fell by 23.7% to £38.3m.

A debt bomb?

DFS Furniture’s operating margin fell from 6.1% to 3.4% this year, including acquisition and restructuring costs.

Lower profitability and the £25m acquisition of Sofology caused net debt to rise by 10% to £159m. Worryingly, this now represents 2.1 times underlying cash profits (EBITDA). That’s a big increase from last year’s figure of 1.75 times, and is well above the board’s target level of 1.5 times EBITDA.

Analysts expect profits to bounce back this year, with a 30% rise in earnings per share. This bullish outlook has left the shares trading on 11 times 2019 forecast earnings, with a prospective yield of 5.3%.

Personally, I’m not so keen. I think DFS looks risky and poor value when compared to SCS.

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Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Why I’d shun this 6%-yielder and buy this FTSE 100 dividend instead

Roland Head — Thu, 12 Jul 2018 10:50:18 +0000

Many of us had been enjoying the sunny weather and football — until last night — but it hasn’t been as much fun for sofa retailer DFS Furniture (LSE: DFS).

On Thursday morning the company issued a profit warning, blaming hot weather and shipping delays from the Far East. The company says orders during the current quarter have been “significantly lower than expected”.

This has contributed to a 4% fall in total like-for-like delivered revenues for the 49 weeks to 7 July (the firm’s financial year ends on 29 July). Earnings before interest, tax, depreciation and amortisation (EBITDA) are now expected to be lower than last year.

This could be serious

I’d normally write off today’s news as a one-off with little real significance. After all, customers planning to buy a new sofa are probably just waiting for a wet weekend to go shopping. Similarly, shipping delays are unlikely to be a long-term problem.

What concerns me here is that the fourth-quarter fall in sales continues a trend seen during the first half of the year, when revenue, excluding acquisitions, fell by 3.5%.

A second worry is that the business carries quite a lot of debt. Net debt was £172.3m at the end of January, equivalent to 2.17 times underlying EBITDA. That’s above my preferred safety threshold of 2x EBITDA.

Why I’d shun this stock

A look at the balance sheet suggests to me that DFS offers very little margin of safety for shareholders. In its half-year results, the group reported current assets — cash, stock and orders — worth £114.3m.

Set against this were current liabilities (bills due within one year) of £230.6m. In addition to this, the company had gross debt of £185.6m and £79.8m of “other liabilities”.

My reading of this is that DFS is dependent on stable sales to finance its debts and dividends. If sales and EBITDA fall, I believe the group could run into financial trouble. This would be bad news for shareholders, who could see big losses and might have to support a rights issue.

For these reasons, I view DFS as a stock to avoid. Although the forecast dividend yield of 5.8% may be tempting, I think there are much safer options elsewhere.

One consumer stock I’d buy

Furniture retailers aren’t the only consumer businesses which have seen a drop in sales during the hot weather. Travel firms have also seen lower levels of booking than expected. I expect this trend to reverse over the next few weeks, as people complete their summer holiday plans.

Although the good weather means that UK-based holidays might be more popular than usual, I believe that package holiday operators such as TUI Group (LSE: TUI), which owns Thomson Holidays, should still do well.

This firm has been my top pick in this sector for some time and has risen strongly, gaining nearly 40% over the last year. The good news is that the recent pullback in the share price has left the stock with a forecast dividend yield of 3.7% and a very reasonable forecast price/earnings ratio of 13.5.

This looks affordable to me, given that sales rose by 8.5% during the first half of the year. Bookings should peak over the next few weeks. In my view, this could be a good time to buy more.

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Could these 4 FTSE 250 big-yielding dividend bargains make you a million?

Royston Wild — Fri, 15 Jun 2018 13:50:29 +0000

The FTSE 250 is jam-packed with exceptional income shares that could well make you a fortune.

Having said that, there are also plenty of dirt-cheap big yielders sitting in the index that are investment traps waiting to rout your shares portfolio.

How do the dividend stocks I have analysed below stack up?

Marston’s

The difficult outlook for many of Britain’s listed publicans means that many dividend investors may be choosing to give Marston’s (LSE: MARS) a wide berth today. I reckon this could be a mistake.

Even though the leisure leviathan is expected to endure some earnings woes in the near term — a 3% bottom-line reversal is forecast for the year ending September 2019 — this isn’t the first time the company has encountered a little profits turbulence in recent years. Yet this has not precluded the annual dividend raise.

Marston’s is still delivering significant cash flows and should help it to ride out any current trading troubles and keep advancing the dividend. And further out, I’m confident the publican’s site expansion programme should allow it to capitalise on the rosy outlook for the pub-restaurant segment and help earnings, and thus dividends, to step higher.

City brokers share my glass-half-full approach and they are expecting the annual dividend at Marston’s to climb to 7.6p per share this year, from 7.5p in fiscal 2018. As a consequence, investors can enjoy a bulky 7.5% yield.

An ultra-low prospective P/E ratio of 7.3 times sweetens the investment case.

Rank Group

I am also confident that Rank Group (LSE: RNK) should continue offering market-smashing dividend yields long into the future.

As I mentioned last time out, the gambling giant is suffering more recently from falling footfall at its Grosvenor casinos and Mecca bingo venues. This would not deter me from investing, however, thanks to the exceptional revenues potential of the online betting market.

Turnover from this segment continues to grow by double-digit percentages and the group is understandably bulking up its presence here. Last month it snapped up Spanish bingo operator YoBingo.es for a fee that could rise to €52m. The business is the Iberian state’s second largest internet bingo operator and the move improves the multi-channel proposition of Rank’s existing Spanish operations.

While the business is expected to endure a 6% earnings fall in the year to June, its rapidly-improving balance sheet and solid long term profits picture — it’s expected to rebound starting with a 5% earnings rise next year — means that dividends are still expected to keep rising at an electric rate.

Last year’s 7.3p per share reward is anticipated to rise to 7.9p in the outgoing period, and again to 8.5p in fiscal 2019. Consequently yields for these years stand at 4.3% and 4.5%, respectively.

Throw a dirt-cheap P/E ratio of 12.3 times for the upcoming year into the equation too, and I reckon Rank is a hugely attractive investment destination today.

DFS Furniture

I’m much less enamoured by the earnings and thus dividend prospects for DFS Furniture (LSE: DFS), however.

My pessimistic view is at odds with that of the broader market, however, as reflected by the retailer’s stunning share price ascent since the dying embers of March (its market value has swelled by a third since the release of full-year trading details back then). In fact, this spike makes me concerned that buyers have set themselves up for a fall as pressure on consumers’ spending power increases.

DFS’ latest trading statement may have matched broker expectations but should have given little reason for cheer. Had it not been for the positive contribution made by the Sofology acquisitions, sales would have fallen during the six months spanning August-January.

And who would back DFS to bounce back in the current climate? Certainly not City analysts who have downgraded their earnings estimates since the half-year results, and are now expecting a 6% bottom-line decline in the 12 months to July.

What’s more, this anticipated profits drop means that the firm’s progressive dividend policy will fall. DFS currently expected to hold the dividend at 11.2p per share. However, I reckon a possible cut cannot be ruled out given its ballooning debt pile (up £36.7m year-on-year to £172.3m in January) and its medicore medium-term earnings outlook.

A prospective forward P/E ratio of 13.2 times may make DFS cheap, but it’s cheap for a very good reason. I think investors should give the business an extremely wide berth in the current economic environment.

N Brown Group

Of course, N Brown Group (LSE: BWNG) isn’t immune to the same tough retail environment as DFS.

However, the special fit fashion retailer’s lack of exposure to so-called big ticket items like furniture, allied with its focus on the niche segment — namely the increasingly-popular plus-size segment – should allow revenues to stay broadly afloat despite declining consumer appetite.

Indeed, its strength was laid out in first quarter trading numbers this week in which the Simply Be brand owner noted that revenues grew 0.4% during the three months to June. N Brown’s resilience also pays testament to heavy restructuring that has seen it ditch its mail order model and embrace the e-commerce phenomenon.

And its move online printed a new chapter this week when the retailer announced it was considering closing all its 20 stores. N Brown now sources three quarters of total revenues via the internet and so this is a logical long-term step to keep costs down in an age of falling footfall up and down the high street.

The current travails for Britain’s retail sector means that earnings are expected to just flatline in the 12 months to February. On the plus side, however, the dividend is expected to be held at 14.23p per share, meaning investors can enjoy a 7.9% yield. And a bargain forward P/E ratio of 7.8 times puts the icing on the cake.

The post Could these 4 FTSE 250 big-yielding dividend bargains make you a million? appeared first on The Twelfth Magpie.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Two 5%+ yields I wouldn’t touch with a bargepole

Royston Wild — Mon, 16 Apr 2018 13:50:25 +0000

As the turmoil surrounding the UK retail sector continues I cannot help but believe that DFS Furniture (LSE: DFS) remains a risk too far today.

British retail performance has been far from convincing of late, but it would have been even worse had it not been for solid figures from the grocery segment. Indeed, the latest retail sales monitor from the British Retail Consortium and KPMG last week underlined the stress facing sellers of non-edible goods, the gauge revealing that like-for-like sales of non-food items fell 1.8% during the three months to March.

Sofa seller struggling

This tough environment was underlined by DFS’s latest financial update in late March in which it revealed that, stripping out the impact of its Sofology acquisition, revenues had dropped 3.5% during the six months to January to £366.5m.

Reflecting the worsening trading landscape, the City is expecting DFS to print a 4% earnings drop in the year to July 2018. And this — combined with its ballooning debt pile as net debt surged to £172.3m as of November January from £135.6m earlier due to the aforementioned M&A activity — is predicted to put paid to the firm’s progressive dividend policy.

Indeed, fiscal 2017’s ordinary dividend of 11.2p per share is expected to remain on hold in the current year. Some investors may still be drawn in by a still-mountainous 5.3% yield, while City predictions of an 11% earnings bounceback next year (and subsequent lifting of the dividend to 11.4p and a consequent 5.4% yield) may tempt more dip buyers to nip in.

I do not think this is advisable, however. Sure, DFS may have kept the interim payout on hold at 3.7p per share last month. But I believe a reduction cannot be ruled out in the full-year payout as the troubles on the high street intensify and particularly as projected dividends are covered just 1.6 times by predicted earnings, some way below the accepted safety benchmark of 2 times.

I would ignore the huge yields and cheap forward P/E ratio of 11.7 times. The company simply carries too much risk right now.

Sales sliding

The murky outlook for the UK retail sector also makes me more than a little concerned over the dividend outlook of The Restaurant Group (LSE: RTN).

The Frankie & Benny’s and Chiquito owner may well have thrown a fortune at revamping its menus. But City analysts do not expect this to propel The Restaurant Group back into profits growth just yet — a 5% earnings reversal is predicted for 2018.

And so the company is finally tipped to reduce the dividend after three years of keeping it at 17.4p per share. A payout of 16p is forecast for this year

Supported by predictions of a 6% earnings improvement in 2019, glass-half-full investors will point to expectations that dividends are expected to rise again to 16.3p as a reason to be cheerful.

However, the steady sales slide over at The Restaurant Group shows no signs of slowing (like-for-like sales across its chains fell 3% during 2017), and this makes me, for one, highly doubtful of an earnings uplift any time soon.

I would ignore The Restaurant Group’s meaty yields of 5.7% and 5.8% for 2018 and 2019 respectively, as well as its low forward P/E ratio of 13.1 times and steer well clear, as the chances of sustained profit and dividend disappointment are high.

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One monster growth stock I’d buy for my ISA today

Roland Head — Wed, 04 Apr 2018 15:10:19 +0000

When I last wrote about flooring and carpet manufacturer Victoria (LSE: VCP), I commented that “momentum appears to remain strong”. I suggested that the share price still looked “reasonable” despite the stock having risen by about 1,000% since boss Geoff Wilding took charge in 2012.

Was I right? Well, the shares have since fallen by nearly 10% amid a wider market sell-off. But they rose on Wednesday after the company said that its full-year results should be ahead of expectations.

This revised guidance applies to the year ended 31 March. It means that for the fifth consecutive year, the performance will beat analysts’ forecasts.

Should you buy?

This company shows how value can be created for shareholders with a successful buy-and-build strategy. A rare combination of strong management, good timing and attractively-priced acquisitions has enabled Mr Wilding to transform the firm from a sleepy manufacturer into an £870m growth business.

Importantly, this has been done without high levels of debt. The group’s last-reported net debt of £98.6m only represented 1.8 times earnings before interest, tax, depreciation and amortisation (EBITDA). That looks reasonable to me given that profits are still growing strongly.

By manufacturing and distributing floorcoverings, Victoria avoids the risk of running retail stores and has achieved a high level of geographic diversity. Nearly 60% of earnings are now generated outside of the UK.

Management has advised shareholders to expect “further acquisition-led growth focused on Europe” and analysts expect earnings to rise by a further 50% during the 2018/19 year. With the shares trading on just 16 times 2018/19 forecast earnings, I believe this remains a growth buy.

A dividend-growth choice?

One thing Victoria lacks is a dividend. Mr Wilding’s focus is on reinvesting cash in further growth. So far this approach has been successful, but if you need an income from your shares, you might be tempted to consider UK-focused DFS Furniture (LSE: DFS).

This group, which owns brands including DFS, Sofa Workshop and Sofology, trades on a modest P/E of 10 and offers a forecast yield of 6.2%.

Be careful

However, I believe there are good reasons for this cheap valuation. Retailers like DFS often have a high proportion of fixed costs, which stay the same regardless of sales. This leads to a high level of operational gearing, which means that a small change in sales generates a larger change in profit.

That seems to be happening here. Sales excluding acquisitions fell by 3.5% to £366.5m during the half year to 27 January. But underlying EBITDA before acquisitions fell by 7.4% to £30m over the same period.

What’s going on?

DFS says that it’s facing “challenging market conditions”. The group expects to deliver an improved performance during the second half, helped by the recent acquisition of Sofology. My concern is that the balance sheet looks weak to me.

Current liabilities of £245.4m are more than double current assets of £114.3m. The group also has borrowings of £185.6m. This situation is sustainable while sales remain stable and customer deposits continue to flow. But if sales dry up at any point, I believe this business could rapidly run out of cash.

In my view, the DFS dividend is too generous and should be cut to speed up debt repayments. As things stand, there’s not enough margin of safety for me to want to invest here.

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Is the Micro Focus 7.5% yield too good to pass up now?

Ian Pierce — Wed, 28 Mar 2018 15:05:32 +0000

After a very poor trading update released last week spooked the market, shares of Micro Focus (LSE: MCRO) now offer investors a whopping 7.8% yield on a trailing basis. For income-starved investors, the question is whether this yield is too good to pass up or too good to be true?

The bad news is that the company’s policy of paying out a dividend that’s twice covered by after-tax profit means a substantial downgrade to earnings this year could see management rightfully cut the dividend. However, Micro Focus has also made much of its record of increasing dividends annually for over a decade. So it wouldn’t be unimaginable for management to maintain payouts even without being covered by earnings, as they did in H1.

The company’s balance sheet could take the hit of one year of uncovered earnings. Although net debt was 3.1x adjusted EBITDA, as of H1 results, this was already down from 3.3x immediately following the debt and equity-funded acquisition. This shows the underlying business remains cash flow positive despite the recent problems.

On a recent conference call with lenders, its CFO also disclosed he still expects the group’s leverage to fall to the target 2.7x next year. On top of this, the group’s term loans have no covenants and it has no repayments due until 2021, which gives management some leeway in delaying reaching deleveraging targets.

Now whether this makes Micro Focus a screaming buy right now is far from clear. The group has a long history of taking mature software assets and vigorously cutting costs. It still sounds as if cost cutting at HPE is going well with the recent sales and profit warning due almost entirely to self-inflicted IT problems and the loss of salespeople.

If the group can get a handle on these issues there’s plenty of money to be made for shareholders. But with further acquisitions off the table while the HPE problems are digested, I’d urge patience while we see what management’s plan to get things back on track looks like.

Gloomy days ahead?

Another troubled company that’s offering a knockout dividend is DFS Furniture (LSE: DFS) and its 6.6% yield. Unfortunately for shareholders, DFS’s problems don’t relate to fixable, short-term internal screw-ups. Instead, it’s rather broader industry-wide trends that include the weak pound dampening margins, sales declines as shoppers embrace e-commerce, and weak consumer confidence.

These factors collided in the group’s H1 to send pre-acquisition revenue down 3.5% to £366.5m, while pre-tax profits fell from £16.7m to £7m on the same basis. All is not lost as the CEO sounded a rather positive note about strengthening trading at the start of H2 and maintained guidance for a small uptick in underlying EBITDA for the year.

However, I see plenty of issues that will stop me from buying DFS’s shares right now. The first problem is the aforementioned headwinds facing most brick & mortar retailers. Then there are DFS’s low margins and rising net debt that hit 2.17 times underlying EBITDA at period end following a small bolt-on acquisitions. While its shares may trade at only 9 times earnings, fast-falling profits and rising debt, together with a weak outlook, leave me thinking it could be a big mistake to sink money into DFS right now.

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Ian Pierce owns shares of Micro Focus. The Motley Fool UK has recommended Micro Focus. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

I’d sell this dangerous 6% yielder without delay

Royston Wild — Thu, 08 Feb 2018 14:26:30 +0000

Home furnishings colossus DFS Furniture (LSE: DFS) defied predictions of doom and gloom ahead of Thursday’s half-year financial report, a 3% share price rise indicating a fairly stable set of numbers.

Indeed, today’s update would have prompted a collective sigh of relief from shareholders devastated by recent profit warnings.

Having said that, the release was not exactly flawless, underlining the pressures facing much of the retail sector. And demand for so-called big ticket items like sofas remains in danger of still sliding and, as a consequence, I am still not tempted to buy into the business right now.

Don’t get comfortable

In today’s update DFS advised that group sales grew 4% during the 26 weeks to January 27, with revenues in line with expectations despite challenging market conditions.

The retailer struck a robust tone for the remainder of the financial year following these numbers, too, commenting: “With the like-for-like trading momentum strengthening during the first half of the financial year, we continue to expect the second half to demonstrate a stronger year-on-year gross sales trend than the first half.” DFS did not disclose what like-for-like sales growth registered at in the period.

You have to bear in mind, however, that the sales growth DFS enjoyed in the first half was thanks to the acquisition of industry rival Sofology back in November. Excluding the contribution of its new unit, group sales actually fell 3.5% year-on-year.

And the Doncaster business cautioned that conditions are likely to remain trying as the year progresses, advising: “We recognise that the living room furniture retail market is likely to remain challenging in 2018, given current consumer confidence levels.”

Reflecting this difficult environment, City analysts expect earnings at the firm to continue receding. A 3% decline is forecast for the year to July 2018, the third consecutive dip is realised. And I can see this projection being heavily downgraded in the months ahead, along with the estimated 12% earnings rebound for fiscal 2019.

As a consequence, share pickers should pay little attention to DFS’s low forward P/E ratio of 10.9 times. I also think the company’s poor earnings outlook and creaking balance sheet (net debt rose to £144.5m as of July) mean investors should ignore its massive 5.6% prospective dividend yield, particularly as dividend coverage stands at just 1.6 times.

In the doghouse

The increasing strain on shoppers’ wallets would suggest that Pets At Home (LSE: PETS), like DFS, also remains a risk too far today.

The Square Mile is expecting the petcare specialist to suffer a second successive earnings slip in the year to March 2018, this time by 12%, which results in a cheap forward P/E ratio of 12.5 times.

And like the furniture play, I am not backing Pets At Home to satisfy broker projections of an imminent bounceback (a 1% rise is forecast for fiscal 2019) considering that the stormclouds are intensifying, not abating, over the UK high street.

The FTSE 250 company may have impressed the market last month with news of a 7.2% improvement in like-for-like revenues during the 12 weeks to January 4. However, it will have to work mighty hard to keep this momentum up.

And a meaty 4.4% dividend yield is not enough to lure me in either.

The post I’d sell this dangerous 6% yielder without delay appeared first on The Twelfth Magpie.

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Should I buy this dirt cheap stock to start earning passive income?

Why I’d buy easyJet plc over this beaten-up mid-cap

Paul Summers — Thu, 05 Oct 2017 13:00:57 +0000

Back in June, shares in mid-cap upholstery retailer DFS (LSE: DFS) suffered their worst day since listing. Over 20% was wiped from the company’s valuation after it issued a profit warning, blaming a weakening trading environment.

The stock may have recovered a little since then but it’s still nowhere near the 350p mark it achieved last November. Indeed, based on today’s final results (and the market’s reaction to them), I suspect the situation’s only going to get worse for the Doncaster-based business.

Challenging conditions

In the year to 29 July, DFS saw gross sales rise 1.1% to just under £991m. Thanks to “very challenging” market conditions in H2 and the weakness of Sterling, revenue climbed just 0.9% to £762.7m with pre-tax profit tumbling 22.3% to £50.1m. Worryingly, free cash flow also fell almost 25% to £57m, raising questions as to whether the special dividend of 9.5p paid earlier in the year (in addition to the total ordinary dividend of 11.2p) was entirely appropriate.

It wasn’t all doom and gloom. As well as the recent proposed acquisition of Sofology and a licencing partnership with Joules, the company reflected on progress made in expanding its UK store network with three new 10,000-15,000 sq ft stores opened over the reporting period. Trading in the Netherlands remained “in line with expectations” and the company opened its second store in Spain.

Nevertheless, while I don’t doubt the belief of management that DFS has “excellent prospects for the long term,” I struggle to see why investors would want to stick around for a reversal in the company’s fortunes, even if — trading on 11 times earnings — its shares might look a bargain buy in terms of valuation. The big-ticket nature of the products the company sells and the fact that consumers are likely to refrain from splashing out if inflation continues to rise both lead me to believe that there are far better opportunities elsewhere on the market.

Speaking of which…

While hardly immune to the tightening of purse strings, I think easyJet (LSE: EZY) could be a far better purchase for investors who suspect that the prevailing political and economic uncertainty won’t be enough to stop people from wanting to travel abroad.

As well as it being far more more likely that people will take a flight than purchase a replacement sofa, recent fiascos surrounding industry peers Ryanair and Monarch should do the company no harm at all. True, the former will be soon forgotten both by the market and passengers (just like the IT system failure at British Airways had no lasting impact on IAG‘s shares) but the latter could be beneficial in terms of reducing competition and increasing capacity.

Even if the £5bn cap, Luton-based airline will be saying ‘bon voyage’ to its highly regarded CEO Carolyn McCall in a few months time and a forecast 23.5% drop in earnings per share is predicted for the current financial year, things look set to turn around in 2018/19.

At 16 times forecast 2017 earnings, easyJet isn’t the cheapest airline stock to buy, but a price-to-earnings growth (PEG) ratio of just 0.9 suggests investors would still be getting a good deal for their money. While dividends are expected to be 26% less this year than they were back in 2015, a 3.1% yield is still adequate compensation for any concerns arising from Brexit.

The post Why I’d buy easyJet plc over this beaten-up mid-cap appeared first on The Twelfth Magpie.

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Paul Summers own shares in easyJet. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.