There’s a throng of great income shares in which I’d like to invest my hard-earned cash right now. But with the revenues column still sinking, DFS Furniture (LSE: DFS) isn’t one I’m prepared to take a gamble with.
Evidence suggests that many parts of the UK economy have enjoyed a ‘Boris Bounce’ following December’s general election. But the long-battered retail sector has received no such respite. Data from the Confederation of British Industry (CBI) illustrates perfectly the difficulties for the country’s retailers.
According to the body, total retail sales volumes remained flat for the third successive month in January. There will be no growth in February either, the CBI Distributive Trades Survey said.
The report said that “sales were seen as poor for the time of year” and that “they are expected to remain below seasonal norms in the year to February” too. Stock levels in relation to sales rose above the long-term average last month,while orders to suppliers also fell and are expected to slip again next month.
Sales sink
The CBI’s study was particularly worrying for DFS and its peers in the home furnishings market. It showed that lower demand for furniture was one of the reasons for January’s sales fall.
The extent of this sub-sector’s struggle was certainly on show in DFS’s latest trading statement released last month. Back then it advised that gross sales were down 6% in the six months to December. As well as contending with “strong comparatives”, it said that “a challenging consumer environment” — and particularly so in August and September — was responsible for the drop.
In better news, the small-cap retained its full-year profits expectations. Market consensus suggests profit before tax of around £51.2m for the period to June 2020 (compared with fiscal 2019’s £50.2m). This is based on the assumption that revenues will grow by low single-digit percentages in the second fiscal half.
Red alert!
I believe that even these modest top-line hopes could be considered a tad optimistic though. Consumer confidence is clearly at rock bottom, even in spite of that general election result and the subsequent improvement in Brexit visibility. And I worry that things could get even worse for retailers like DFS later this year amid tough trade talks between the UK and European Union. The issues that will come up could be particularly problematic for sellers of big-ticket items such as DFS.
The company’s share price has ballooned almost 20% over the past two months, though fading hopes of a retail bounce have seen it trek modestly lower in January. Still, a forward price-to-earnings ratio of 16.7 times suggests to me that DFS remains far too expensive.
A reading in and around the value benchmark of 10 times would be a better reflection of the retailer’s high risk profile, in my opinion. And that elevated multiple exacerbates the chances of a sharp share price drop before long. So forget about DFS’s big 4% dividend yield, I say, and put your money to work elsewhere.
