SOFA giant DFS reported weak demand during its first quarter and said it expects no early improvement in trading conditions.
The Doncaster-based group said that despite the gloomy environment it believes it has the right strategy and team to get the business through the tough trading conditions.
In an update for the 13 weeks to October 29, DFS said sales fell 14 per cent, down from £150m to £128m.
Underlying profits fell 43 per cent to £8.7m, partly as a result of spending on the group’s expansion plans.
The group has carried out a £2m programme to fund retail and manufacturing expansion.
Despite the fall in profits DFS, which operates 82 stores, said it will press ahead with its future growth plans – creating 300 jobs in the coming months.
The company said it will open three new outlets by next July, which along with its ongoing investment in expanding its activities at three manufacturing sites in Nottingham, means it is on course to create 300 jobs on top of the 200 it has added in recent months.
DFS chief executive Ian Filby said: “This has been a period of heavy investment in the future of DFS, with the successful opening of seven new stores and a significant expansion of our UK manufacturing capability.”
The group opened five new stores during the first quarter, at Huddersfield, High Wycombe, Hereford, Colne and Old Kent Road at a cost of £1.6m.
DFS said customer orders at the new stores are ahead of expectations, but they made no contribution to sales in the 13-week period because of the lead time between order and delivery.
The group said it is on track to open a total of ten stores during the current financial year.
“This investment has been undertaken against a UK retail trading environment that has remained challenging,” said Mr Filby.
“As we anticipated, we have seen a continuation of the weak demand that began in the second half of our last financial year and was particularly evident during August.”
The group entered the current financial year with a smaller order bank than in 2010, mainly due to efforts to reduce delivery lead times for customers.
The introduction of a second production shift at two out of its three UK factories increased the proportion of sales derived from its own UK manufacturing base. This cost £400,000 during the first quarter.
“The investment will further increase the efficiency of our own production, improving our margins but also enabling us to shorten lead times to our customers on a larger part of our range,” said Mr Filby.
“We have successfully managed our margin and costs, deriving particularly significant benefits from more cost effective media buying.
“The financial strength of the business permits us to fund our continuing expansion programme from our own resources while generating substantial amounts of cash.”
Cash balances at the end of the first quarter were £47.2m, an increase of £24.9m compared with the same time last year.
DFS said that since the end of the quarter it has completed a £5m bond buyback and will return £17m of surplus cash to its shareholders as a dividend.
Mr Filby said the investment in new stores and manufacturing will continue to drive market share.
“We will also focus on margin, costs and cash generation to deliver a good financial performance over the year as a whole,” he added.
At a time when other retailers are axing staff, Mr Filby said the group has a policy of instant replacement to ensure all stores are fully staffed.
“Each of our stores have 20 or so people working there, which is considerably higher than our rivals,” he said. “We’ve got to make sure we have a full range of people.”
The company reported adjusted underlying earnings of £80m in the year to July 30, up 11.4 per cent on the previous year.
This was despite a 2.2 per cent decline in sales to £638.4m.
A major draw for customers is the group’s Interest Free Credit deal, which offers four years’ interest free credit.
“It’s a really important part of our armoury, “ said Mr Filby.
DFS said it is selling across the range not just at the cheaper end of the market.
The group said it is not expecting a recovery in the next financial year.