I’d sell this dangerous 6% yielder without delay

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.

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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.