Archived article

Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

Near-term outlook for non-food retailers is negative
Thursday 17 Aug 2017 Author: James Crux

Falling real wages, faltering consumer confidence and imported inflation are now having a big impact on appetite for big purchases. British shoppers are tightening their belts, meaning the near-term outlook for purveyors of furniture, white goods and even motor cars is increasingly uncertain.

Sitting (increasingly) uncomfortably

On 15 June, living room furniture leader DFS Furniture’s (DFS) share price cratered on a profit warning that spooked the retail sector, material downgrades ensuing as DFS explained that trading had ‘weakened beyond our expectation’.

Subsequently, cash-generative made-to-order sofas seller DFS, which has announced the acquisition (3 Aug) of rival Sofology, has issued a second mild warning (10 Aug), cautioning earnings for the year ended 29 July will now be at the low end of the previously downgraded £82-£87m range.

Second half revenue disappointed owing to ‘significant declines in store footfall and customer orders across April, May and June’, blamed on general election jitters and economic uncertainty, exacerbated by warm weather in May and June.

ScS at the sharp end

Rival sofas seller ScS (SCS) is also at the sharp end of this faltering consumer confidence, having reported (9 Aug) a 5% drop in like-for-like orders in the second half of the year amid softer market conditions.

With consumers deferring spend on big ticket items, ScS’ like-for-like order intake for the year to 29 July eased off 0.7%, although CEO David Knight stressed impressive two year like-for-like order intake growth of 14.3% and assured ScS’ traded in line with expectations for the 52 weeks ended 29 July.


The Dixons debate

Shares is sticking with our positive stance on another big ticket specialist, Dixons Carphone (DC.). Shares in the electricals-to-mobile phones retail giant crashed following a savage downgrade (11 Aug) from ‘outperform’ to ‘underperform’ with a 230p price target by Exane BNP Paribas.

The note highlighted unhelpful structural trends in the UK mobile phone market and also questioned Dixons’ quality of earnings, particularly its recent changes to revenue recognition around insurance and warranty sales.

Shares in the Carphone Warehouse-to-Currys PC World brand owner have de-rated sharply on concerns about mobile profitability, director share sales and broader concerns about the UK economy.

Yet joint broker Deutsche Bank has issued a buy note and reiterated its 400p price target, seeing a number of levers which can be pulled to control profitability. Deutsche expects a reassuring first quarter update next month (7 Sep). It forecasts robust 4% like-for-like growth in Dixons Carphone’s core UK business that could foster more positive sentiment towards the stock.

‹ Previous2017-08-17Next ›