DFS Furniture plc

Hello everyone and welcome to our financial year 24 interim results presentation. I'm Tim Stacey, the Group CEO and I'm here with John Fallon, our CFO. Today I'll provide a brief overview of our performance and current market conditions before John runs through the financials. I'll then provide a strategic update and run through our profit expectations for the full year before John and I take questions from analysts. By way of introduction, there are three key messages that John and I will build on throughout the presentation as follows. First, and this is a continuation of the trend we saw in financial year 23, we continue to win, but in a very challenging upholstery market. The market has been weaker than we had based our full year guidance on, but we've continued to grow our market share up approximately 0.5 percentage points to a record high of 38.5%. Second, we're delivering on our cost programme announced in September last year. Gross operating costs have reduced by £22 million year on year, which more than offset £11 million worth of inflation and interest rate headwinds. Gross margins also continue to increase, up 220 basis points year on year, and overall our operations are in great shape. The operational performance has helped mitigate both the relatively weak market demand and inflationary cost pressures. Finally, we believe that the longer term fundamentals for the upholstery market remain positive and that we are well positioned for growth. Given market volumes are currently at record lows and the operational leverage within our business, the profit upside from market recovery is very significant and we remain confident in achieving our target 8% margin when the market returns. So here are some headline numbers to help illustrate the story of the half. Year-on-year order intake was down 1.1% in value terms reflecting the tough trading conditions but this was well ahead of the market which is down circa 10% in volume terms. As expected, gross sales or deliveries were down to a greater extent and this is due to the high opening order bank at the start of the previous financial year which had built up as a result of the pandemic period. We've made good progress on our Cost to Operate programme, reducing our operating costs by £22 million year-on-year and improving our gross margin rate by 220 basis points. Now, this has helped us deliver year-on-year underlying profit growth of £1.6 million. Finally, both brands, Sophology and DFS, customer service scores have continued to grow in the half, with the DFS brand's established customer scores up 62% year-on-year. Overall, then, on the factors that we can control, we believe that we've made some really good progress in the half. So on to our best view of the upholstery market. And well, it's fair to say that it's very challenging out there. Now, you may remember this slide from our previous presentation. Now, we entered the year with relatively low levels of market demand in volume terms, approximately 15% below pre-pandemic levels. We expected conditions to worsen in financial year 24 before eventually starting to recover. Market demand over recent periods has been hard to forecast. But to provide some guidance at the start of the year, we needed to put a stake in the ground. And whilst acknowledging that it would be a key sensitivity for our profit performance, we assumed that market volumes would decline by a further 5% year on year. Actual market volumes in the first half have been weaker than that though and are down circa 10% year on year and are now over 20% below pre-pandemic levels. We had a reasonable start to the year but September and October were tough with very low levels of footfall across all retail parks driven by the record hot weather at that time. The housing market has also been weak with transactions down 19% year on year. and this has had a pretty strong bearing on upholstery demand levels. More on that later. Demand did pick up towards the end of the half, but remained weak by historical levels. Our top-line performance has clearly been impacted by these trends, but based on our proprietary Barclaycard data, we've continued to grow our share in the sector. And as I mentioned before, given our market share position, we feel very well placed to capitalise when the market does pick up. Now it's worth looking at our market drivers to help understand current market demand and the recovery potential. Around 80% of sofa purchases are replacements with around 20% following house moves. In terms of replacements, historically there has always been a strong correlation over time between consumer confidence levels and market demand. Looking at the top left chart on this slide, the bars represent the upholstery market size in pound notes terms, and the dotted line is consumer confidence. Given the significant retail price inflation levels we've seen in the sector, we've split the final bar on this chart to indicate the approximate inflation adjusted market size. And as you can see, market volumes are currently at record lows. The top right chart here shows general consumer confidence levels and the climate for major purchase confidence measures over the last six years. And whilst the major purchaser score is currently 20 points below the pre-pandemic average, there are some green shoots from a slightly improving trend, implying that the upholstery market demand should pick up in the near future. Moving on to property transactions, the bottom left chart shows that property transactions are 14% below pre-pandemic averages and 19% down year-on-year based on ONS data. The subdued property market is clearly proving a drag on upholstery market demand. However, the bottom right chart shows that there's been a pickup in house purchase mortgage approvals in the last few months, which again implies that the upholstery market could pick up in the future. Typically, house transactions occur three months after approval, and Savills are forecasting a fairly significant year-on-year rise in residential property transactions of around 9% in calendar year 2025. A final source worth mentioning is Global Data, who are projecting upholstery market growth of around 2.8% in calendar year 2025 and 3% thereafter. So in conclusion, whilst it's hard to be specific as to the timing and pace of a recovery in the upholstery market, the key drivers are indicating that the market could bottom out in calendar year 2024 and then start to recover. In terms of the competitive dynamics in our sector, we've seen some historical trends continue and some new trends emerge. Along with us, we've started to see recently some more general home retailers growing their upholstery share, particularly in the low to mid price points. Independents, however, continued their downward trend, now representing around 26% of the market. And around 10 to 15 years ago, they represented over 40% of the market. So there are three key takeaways from the pie chart. First of all, independents still make up around a quarter of the market and we expect them to continue to decline. Secondly, we continue to win share despite the growing strength of the general home retailers. And finally, as I've said before, with our market share position at record levels and the operational leverage within the business, we feel well positioned to capitalize when the market recovers.

I'll now pass over to John to run through the financials.

Thanks, Tim. Hello to everyone watching today. I'm going to start with the main financial headlines. Firstly, revenue has declined year on year. And as expected, that revenue decline is greater than the order intake decline of 1.1%. As Tim mentioned, that's due to the unwinding of the high opening order bank through the prior year period. Despite revenues declining, our underlying profit before tax and brand amortisation increased year-on-year by £1.6 million to £8.7 million, supported by good progress on our Cost to Operate programme, helping us to grow our gross margin rate and reduce our operating costs. Underlying basic earnings per share also grew at a similar rate. Our reported profit before tax of £0.9 million includes £7.1 million of non-underlying charges in the period, of which £4.2 million were cash-related. This is in line with our expectations and the guidance we gave in September, but more on that shortly. As expected, net bank debt came down slightly compared to the same period last year, and is also down from the £140 million that we reported at the last year end. Leverage is also reduced and we continue to maintain good levels of headroom against our cash facilities and lending covenants. Moving on to top line performance then. The group's gross sales declined by 5.6% with both brands seeing a similar reduction driven by the lower order intake and the order bank benefit in the prior year. Across the period, market demand was volatile and weaker than we had expected. We did see year-on-year order intake growth in July and August, but this was more than offset by a challenging September and October driven by very low footfall during the unseasonably warm weather, followed then by some improvement in November and December. In the last two months of the half, we also saw a shift in product mix towards models with shorter lead times, which meant that we were able to deliver more orders and gross sales in the period. Group revenue of £505.1 million was 7.2% lower than half one FY23. This is a higher rate of decline than gross sales due to an increase in interest-free credit costs of £7 million year-on-year, primarily as a result of the higher Bank of England base rates. This impact was partially mitigated by changing our everyday interest-free credit offer to a maximum of 36 months. Looking forward, our interest-free credit costs will start to reduce when reductions in base rates are instigated by the Bank of England. At current participation levels, every 1% movement in the base rate changes the cost by £7-8 million on an annualised basis. Before I talk about gross margin and operating costs, a brief recap and update on our Cost to Operate efficiency programme that we announced last September. Overall, the objective remains to deliver P&L benefits of around £50 million on an annualised run rate basis by the end of FY26. This will help us to offset future cost inflation and support us in delivering our 8% PBT target. I'm delighted to say we're making good progress. Our gross margin rate, we've now delivered a third half year period of margin rate growth. On property costs, we've continued to benefit from further reductions in our retail rent roll, in addition to further savings from consolidating our sofa delivery company warehouses. Across operating costs, we've also started to make good savings through adapting and utilising more efficient operating models, and we're continuing to develop a future savings pipeline of opportunities. So overall, the key message is that we have made a good, positive start in each area and we remain on track to deliver the £50 million objective. We'll provide a further update on our progress in September. Moving on to gross margins. In rate terms, H1 FY24 was 220 basis points higher than the prior year and 100 basis points higher than the half-two rate in FY23. the Group's cash gross margin decreased by £10.4 million year-on-year in the period. That was driven by the lower sales volume, which contributed £14.5 million towards the overall cash reduction, and that was partially offset by the improvement in margin rate. As anticipated, freight rates normalised back to pre-pandemic levels at the start of the half, adding 380 basis points to the margin rate year-on-year. and that benefit more than offset the adverse movements on FX rates and interest-free credit costs. Underlying product margins improved by 160 basis points, supported by the cost of goods benefits we started to see towards the end of the half following the closure of our smallest factory and wood mill in October 2023, the associated redistribution of volumes across our supplier base and the retail price increases that started to be realised in the P&L from May 2023. So overall, we're pleased with the progress we continue to make towards our 58% margin rate target. On to operating costs then, and I'm pleased to say that we have reduced our operating costs significantly in the period. Total operating costs, which presented here include depreciation and interest, have reduced by £11.5 million year on year. We estimate that inflation added £7 million to the cost base, which is around 3%. In addition, interest costs were £3.6 million higher year-on-year, primarily as a result of the Bank of England base rate increases. In total, inflation and interest costs added a year-on-year cost headwind of almost £11 million. However, that was more than offset by cost reductions totalling just over £22 million. Breaking that down, Variable volume related costs reduced by £4 million as a result of the gross sales reduction. Marketing related spend was £3.9 million lower year on year after we took the decision to optimise our spend in this area given the tough trading environment. This was mainly achieved by temporarily reducing our beds and mattresses marketing spend and Tim will discuss this further later. The remaining £14.2 million of cost savings was delivered from across the cost base of the group. The majority of the savings came from a combination of more efficient operations in the sofa delivery company and our customer service operations and other good initial progress on our cost efficiencies programme across retail and central overheads. We also continue to benefit from property savings across our retail and distribution centre estates. More generally, we've been pleased to see the entire business becoming even more focused on good disciplined cost management as we respond to the challenges of the current macro environment. Moving on to net debt and cash, our net bank debt has remained relatively stable in the period. Reported net bank debt reduced from £140.3 million at the previous year end to £133.9 million at the end of the current period. However, adjusting for the payment timing of our prior year final dividend, net bank debt would have been broadly flat. As we highlighted in September, we recently completed the refinancing of our £250 million debt facilities, providing us with the significant cash headroom that we need for the next three to four years. Our £200 million RCF facility runs to September 2027, with an option to extend to January 2029, and our US private placement notes of £50 million mature on an even split between September 28 and 2030. Operating cash flow of £28 million was delivered net of £4.2 million of non-underlying costs that relate to the closure of one of our factories and wood mills mentioned earlier, as well as costs related to the refinancing. We expect full year non-underlying cash costs to be around £5 million, consistent with our previous guidance. First half capital expenditure was over £5 million lower year on year. We've continued to prioritise investment in our retail estate and digital assets to maintain and improve our customer offer as well as in the mid and back office functions to drive operating cost efficiencies. The small working capital inflow has been driven by lower stock levels and improvements towards more consistent standard supplier payment terms. Leverage reduced slightly from 1.9 times at the end of prior year to 1.6 times at the end of the first half, or 1.8 times after adjusting for the timing of that dividend payment, which is well within the covenant limit of three times. Over time, as revenues and cash flows recover as expected, we remain committed to reducing leverage to our target range of 0.5 to one times.

I'll now hand back over to Tim.

Thanks, John. I'll now provide a strategic and operational update, starting with our three pillars. And these are our DFS brand, the Sophology brand, and our home proposition. Now the market share gains I talked about earlier have been driven by the DFS brand, which is the largest in the group. The brand benefits from a well-invested retail estate and digital assets that support the customer across their buying journey and with strong exclusive brand partnerships. DFS has performed relatively well in the current market conditions with strong conversion rates and average order values, helping to mitigate the weak retail park footfall levels and online traffic. In the period, DFS launched a partnership with the Ted Baker brand, introducing three new exclusive ranges into our brand portfolio. And the image here on the slide is the Highgate range. Initial sales of all models have surpassed expectations. The Sophology brand, which has higher average retail price points, has not been able to match DFS's share gains in this environment. But good operational cost control has ensured that the brand profit contribution levels were maintained year on year. We are in the process of adapting the brand's product ranging and price proposition to best ensure it's well positioned for this type of market environment. I'm pleased to say that both brands have achieved growth in their net promoter scores to really good levels. DFS's established customer scores have improved by 62% and are now nearly back to pre-pandemic levels. Sophology has also achieved strong levels of improvement with its Net Promoter Established Customer Score improving to record levels in the last few months. Operationally, both brands are now in a much better position and have fully recovered from the post-pandemic supply chain disruption when customer orders were significantly delayed. In relation to our home strategic initiative, we've developed a dropship solution and new warehouse management systems at the back end of financial year 23, which provides really solid foundations to support growth in this area. Due to the weak market demand in upholstery, we took the decision to defer investing in marketing to build awareness of home and drive future sales growth, and instead focus our resources on optimising the profitability of our core upholstery business in the short term. The profitability of our home offer has, however, increased year on year as we've operated with improved gross margins and lower operating costs. We remain committed to driving the sales growth in home in the near future. Moving on to our platforms. Our platforms support our pillar brands and all play a key role in enabling our top line growth and improving the efficiency of our cost base. I'll cover each briefly now. First, sourcing and manufacturing. As John mentioned earlier, we closed the smallest of our three upholstery factories and one of our wood mills in October 23. Now these types of decisions are never easy and we understand the impact it can have on our colleagues. Following a consultation with 215 colleagues, we were able to retain 44 of them through providing employment elsewhere within the group, including at our recently formed sewing hub. We supported the remaining workforce through a comprehensive and meaningful outplacement support service. The ranges that were produced by the manufacturing site that's been closed have been redistributed across our existing supplier base, and this has contributed to reducing our cost of goods, supporting the gross margin improvements that we've delivered in the half. We're working on a number of initiatives to further evolve and optimize our global supplier mix and to support the delivery of our 58% gross margin target. On technology and data, we've used technology to help limit the impact of the high interest rate environment on our profit margins by expanding the capabilities of our intelligent lending platform, which we initially launched within the DFS brand. We've now rolled this out for Sophology, enabling Sophology to work with a wider group of lenders, resulting in cost synergies. We'll continue to obtain and make more use of data to drive insight and improve decision-making across our business, and I'll provide a good example of that when I talk about the Soph delivery company shortly. Our colleagues remain highly engaged and we've seen positive results from our colleague engagement survey with the overall NPS engagement score increasing 14 points from March 23 to September 23. We've also made good progress in developing our inclusive culture where everyone is welcome. Adding further colleague networks across gender, sexuality, religion, race and disability. Finally, on sustainability and the environment, I'm pleased to say that we have met our 10% target in absolute reduction of scope one emissions measured against our financial year 19 baseline. This has been achieved in part due to lower volumes, but also through various initiatives, such as moving to gas alternatives across our retail estate and the consolidation of our delivery fleets into the sofa delivery company. AI route planning tools, as well as the investment in our teams with driver efficiency training, have delivered great results and we're incrementally shifting our company car scheme and service vehicles to hybrid and electric models. We've made a significant amount of progress in developing our carbon reduction roadmap and remain on track to submit our net zero strategy to the science-based targets initiatives, the SBTI, for approval in June 2024. So I just wanted to touch briefly on our final mile two-person logistics business, the Sofa Delivery Company. Now this is a strong asset for the group and we're really proud and grateful to the 1,300 sofa delivery colleagues who have worked extremely hard in the last few years to deliver moments that matter for our customers. Having brought together the two discrete delivery arms from DFS and Sophology to form the sofa delivery company, sofa orders for both brands are stored and delivered through the same infrastructure, technology and resources across the UK. It wasn't an easy start having to be informed in the pandemic and having to deal with the very wide ranging challenges that that brought about. But I'm pleased to say that the operation has been firing on all cylinders for well over a year now. We use the latest technology and data to support and drive continuous performance improvements in the operation. For instance, we've used state-of-the-art dynamic AI-based routing software for our vehicles, scheduling delivery arranging, web-based supplier portals to book in, PDAs, customer real-time tracking solutions, and a group-wide stock management system. We also invest a lot in our colleagues. Our driver school programme supports, trains and invests in colleagues to obtain a HGV licence enabling them to earn a higher salary whilst also addressing a business issue due to the nationwide shortage of qualified 7.5 tonne lorry drivers. We now have over 120 graduates of this scheme and we're seeing a younger age demographic coming through who are incredibly loyal and delivering great customer service. Our data apprenticeship program also helps develop the IT, literacy and data skills of our colleagues in Soudelco out in the field. This in turn helps the teams utilize the data available supported by powerful dashboards such as the one shown here to help better understand their specific operations and drive continuous improvement. Bringing this all together, we are seeing our costs come down through achieving consistently higher van fill rates, greater use of our own fleet drivers and reducing delivery failures to customers. Overall, after adjusting for inflation, the cost base has reduced by 12% year on year and customer service levels have improved with the post-delivery net promoter score increasing by 16%. Moving on to the outlook for financial year 24. Market demand through January and February has been weak, deteriorating a further 6% to minus 16% in volume terms from the 10%, minus 10% year on year that we observed in half one. The group has not been immune to this and today we are providing an updated guidance set. with order intake and delivery lead times the two key sensitivities to our financial year 24 profit performance. Our revised guidance is as follows. Revenues of a billion to a billion and 15, which is 60 to 65 million pounds below our initial guidance. Given the good cost management we described earlier, we are reducing our profit before tax range by 10 million pounds to 20 to 25 million. Now for the key assumptions behind this guidance. As you can see from the chart on the bottom left, our order intake has continued to be volatile over the past 18 months or so. Now whilst this makes forecasting challenging, we are used to this and don't like to read too much into short-term trends. Our revised guidance expects some improvement in market demand, such that H2 market order volumes are down between minus 8 to minus 10% year on year, compared to the minus 10% we observed across half one. We expect this improvement to be partly supported by a weak Q4 in the prior year, as well as some potential for pent-up demand after what was an especially stormy and wet January and February. In addition, we expect an uplift in performance from an improved commercial offer with a number of spring campaign upweights landing imminently before the crucial Easter trading period. Based on these assumptions, the Group's year-on-year order intake performance is forecast to be in the range of minus 2 to minus 4% for H2 overall, which is below the H1 level of minus 1.1%. Year-end net bank debt is expected to be around £150 to £155 million, and as previously guided, this will be elevated by £15 million of temporary working capital outflows that occur in the 53rd week of this financial period. As with our guidance at the start of the year, the £20 to £25 million PBT range assumes no impact from the Red Sea issues. However, if the Red Sea issues do continue through to our year end, potential delays and delivery lead times could result in up to 4 million of profit being deferred into the following financial year. We're working hard to mitigate as much of this risk as we can. Finally, the Board has approved an interim dividend of 1.1 pence per share. Stepping back and thinking longer term, I wanted to reiterate what I said in September. We do expect market volumes to recover and when they do, the group is incredibly well placed to grow profitability significantly given the operational leverage within the business. We believe that the current market challenges are temporary and not structural. According to the ONS, there are more households in the UK than pre-pandemic and our research suggests that more rooms per house now have upholstery pieces. At the moment, the record low market volumes are significantly impacting our profitability, with consumer confidence and housing transactions dragging the market volumes down by over 20% compared to pre-pandemic levels. As I showed earlier, the market drivers have been weak, but there are signs of potential recovery. And as we know, this business's high operational leverage works positively as well as negatively. We've included an illustrative scenario here on this slide to show what we expect to happen to the profitability of the group as market volumes recover. Now, whilst we see no reason why market volumes would not fully recover, if we see market volumes recover by only three quarters of the approximately 20% reduction relative to pre-pandemic levels, we would expect profits to increase by circa £60 million given the operational leverage and we'd be operating at around a 7% PBT margin. In addition, further planned gross margin improvements, the home growth opportunity and additional market volume recovery provides us with a number of reasons to be confident in achieving our medium-term targets of 8% PBT. So, to conclude... Clearly, market conditions are very challenging at the moment, and market demand is at record lows. We can't control that, but we've made good progress on the things that we can control. Firstly, we continue to gain market share to record levels of circa 39%. Secondly, we're making good progress on our cost to operate program. Our gross margin rate continues to improve and we've taken cost out of the business and have a number of initiatives underway to help us achieve our £50 million cost reduction target. Thirdly, we are well set up to profitably grow our home offering. And finally, we believe that we are very well positioned to capitalise on the market recovery. and deliver our 8% PBT target in the medium term. Given our well-invested asset base, our strong operating leverage and the negative working capital of the business, we believe that we will see very good levels of free cash flow conversion and we will generate strong returns for our shareholders. This concludes our presentation.

There will now be a short pause before John and I take questions from analysts.

Well, hi, hopefully you can hear us okay. We've got questions from the analysts now. So I'll start with Andy, Andy Wade from Jefferies. Do you have any questions for John and I?

Okay, well, some really interesting stuff on the market there and the growth framework as well, so thanks for that. I guess the first one I want to ask, and I've already been asked it this morning, what makes you confident that the data you're looking at is right in terms of the market, that the market is running at minus 10 and that you're gaining market share? That's my first one.

yeah well i mean as you know we've discussed before the the data in our market is pretty hard to come by but we've got three or four different sources so the first one is our own proprietary uh barclaycard data that we look at that covers 50 of the market 13 retailers in our sector we get that on a monthly basis and that's cash transactions so that's deposits and cash transactions which we see consistently now for the last couple of years that's the first data point which is external The second data point is CACI, which is a volume based data, which we get a monthly as well. And then the third and fourth data points are probably more, we always talk to suppliers, we have a global supplier base. And so we're getting a lot of information for them about volumes coming in, obviously anonymized for our competitors, but They're telling us a lot about what's happening in the market. And then we also have brand partnerships with some of our brand partners that you know about. One in particular is a magazine group who have relationships across the whole of furniture. So all of these different data points. And then the final one wrapped up is global data, which is a little bit out of date because that takes into account reported accounts. So we try and... corroborate, collaborate, work together to try and get the best possible view. And that's the kind of view that we come up with, Andy, that says the volumes in the market for half one were down about 10%. That's CACI. We can see that correlate with the Barclaycard data. And certainly half two, we've seen a very similar trend across all the different data points, including supplier feedback and our partners' feedback. So That's the best we think we can do at this moment in time. We're as confident as we can be. And we've got, you know, two or three years worth of this quantitative data that gives us the confidence that what we're talking about is in the right direction.

Very clear. Thank you. Second one I wanted to ask was around NPS, some strong improvements in DFS there. Just wanted to ask what you see has been the key drivers there and how important Sodelco has been in that.

Yeah, I mean, Soudelco has been incredibly important. So the post-delivery scores that we're getting from Soudelco in terms of the quality of deliveries, on-time deliveries, the quality of our teams in people's homes are record levels. I think one of the biggest drivers is making sure that we deliver on the time scale that we promised to customers. That's a key driver. So, you know, one of the things that happened post-pandemic is that we weren't always delivering to the promised lead time. Now we're well over 90% in terms of on-time to customer, which helps. Our quality scores are also very strong. You know, we work with great partners across the world, but also our own factories have been fantastic in terms of quality scores. So I think it's on time to customer quality. And then in terms of our delivery teams through Sidelco, better than ever. Our store colleagues are always strong at high 90s. So when you put all of those things together, I think, you know, we have actually record scores in Sophology and now getting back to pre-pandemic scores for DFS as well.

Okay, very clear. And then the last one from me. Could you run through your position in terms of covenants, please, both before and after the Red Sea impact? I mean, you touched on the net debt to EBITDA one in the presentation, but I think the fixed charge one is a bit closer on that. So how much headroom and so on do you have on that?

Yeah, quite right. I mean, we're obviously continuing to monitor that as well as you'd expect. I mean, we gave some numbers in the presentation in terms of where we finished for the first half. If you look forward to the guidance that we've just updated, then firstly, just talk about cash. Our net debt position will be in a range of 150 to 155 million pounds based on the middle of that range, the 22 and a half million pounds. And that still gives us significant cash headroom to the total 250 facilities. And then in terms of leverage, we've also got good headroom on both the leverage and the fixed charge cover at that level. If you look at more stress scenarios, whether you take it down to that post Red Sea scenario or even go deeper than that, which we clearly model forward, then we've still got good headroom to both fixed charge cover and leverage. They're actually quite consistent in terms of how they progress down towards that sort of baseline level or that threshold level, should I say. So, yeah, we keep monitoring it. If you look at stressed downside scenarios, we've still got good headroom beyond that Red Sea scenario against both those covenant metrics.

Great stuff. Very clear. Thanks, guys.

Thanks, Andy. I'll now ask Jonathan Pritchard from Peel Hunt. Any questions, Jonathan?

Yeah, thanks. Good morning. Just looking ahead and we're seeing these terrible market volumes declined, etc. I don't expect you've seen anything sort of irrational from industry players so far, but they're going to be squeaking a bit and certainly the independents, as you say, are creaking too. It's an element that makes you a bit nervous that behavior could get a bit more irrational and actually sort of undermine some of the potential upside in the medium term.

no i mean i think we haven't seen anything yet jonathan from any of the kind of anything irrational or out of the norm in terms of competitive behavior um i certainly think you know what we have seen is some of the more general retailers you know really good retailers next and then elm coming in with shorter lead time products which we're responding to um we'll have a huge amount of product on the shop floor that's very short lead time five seven day delivery in quarter four of our quarter four, that is. But in terms of competitive behavior, I think it's always a very competitive market. And I think we're seeing some good cost of goods benefits coming through from our suppliers. And we're investing that appropriately in good promotional offers, which will have a very strong offer over Easter. So yeah, it's always a watching brief. We keep on a daily and weekly basis, as you can imagine, but we haven't seen anything yet. It's obviously one to keep an eye on as we go forward in the rest of this calendar year.

Okay, lovely. And just on the Red Sea, just give us another sort of level of granularity on what's sort of happening on a day-to-day basis. And are there any signs of,

Yeah, no, all the shipping lines that we work with, we work with three or four big shipping lines across the world. They're all routing around the Cape now. So that means in real terms of customers, it adds two weeks onto lead times from our Far East partners. So typically lead times from Far East will be 11, 12 weeks. So they're currently running at 13, 14 weeks. So that's the kind of the risk that we call now if that doesn't come back by year end, which one would assume would be challenging. What we've done to mitigate that is to work with some partners, particularly one of our biggest partners in the Far East to have a huge amount of stocked product available in the UK. So that's available on seven days. And we're hoping that customers will switch as we get into quarter four away from some of the long lead time products into the seven day model. That's how we're trying to mitigate the Red Sea issues at this moment in time. From a cost perspective, there are some small surcharges being added on just because it's a two-week longer shipping time, but nothing material and shipping rates remain favourable compared to where they were over the last couple of years.

Understood. That's all for me.

Thanks, Jonathan. Okay, I'll turn to David from Stiefel. Good morning. Good morning.

Yeah, good morning. First of all, on volume declines, obviously we've seen some signs of continued improvement in housing transactions, a bit of a green shoot. How much of that is a leading indicator for you and how much correlation do you have with that kind of housing market?

Yeah, I think the one thing we have seen is mortgage approvals improving in the first couple of months of Jan-Feb of this calendar year. So that's a small green shoot to grab hold of, isn't it? And typically, that housing moves drive about 20% of our business. So if we start to see an improvement year on year that will feed through typically three or four months after these mortgage approvals come through and people start to you know furnish their house etc so um you know you'd hope to see a little bit of a tick up in the next couple of months from from that um i'm not necessarily sure having looked at some of the house builders came out last week that it's going to be a stellar year in terms of housing um so i think it's it's it's probably a minor improvement on a on a pretty low base to be fair david

Got it. And then secondly, on kind of pricing and ASP in the market, as we talk about volume declines, inflation numbers for January suggested quite low inflation within kind of the household sector, perhaps with a lot of January sales. Are you seeing a lot of inflation going through or expecting a lot of inflation going through or are you thinking more flat prices for the rest of the year?

we're not seeing cost of goods inflation in fact it's starting to see cost of goods coming down slightly so we're certainly seeing a retail price level no planned significant retail price increase if anything a bit more investment into promotional pricing and promotions so I think certainly from a SOFA point of view, I definitely see pricing being flat or slightly coming down with cost of goods coming down as well across the world, actually. So there is still inflation clearly in the operating cost space, you know, with wages in the UK and utilities, et cetera. So we have still got to think about that and try and figure out ways to offset that through cost initiatives. But I think on a gross margin level, we're pretty, at this moment in time, touch wood, pretty stable on cost of goods.

Thanks very much.

Okay, Matt from Berenberg. Good morning.

Good morning all. Thanks for taking my questions. Just on gross margin, it looks as though that's improved throughout the half year. Would you mind quantifying what the exit rate is for gross margin and how you expect that to progress further throughout the second half of the year? It's the same question I have in reference to the album volume. I mentioned this Q4 comp as being a factor. Would you mind multiplying the Q4 comp and just talking through how material the bucking of that comp is versus your expectation for end market improvements given what looks to be an embedded assumption that there's a significant improvement in end market volume declines in the first two months of 6% to what looks to be close to around a 6% decline. sitting in that factor as well.

Yeah, okay. Maybe I'll give John a bit of time to think about that one. I think there's a pretty straightforward answer. In terms of the first one about gross margin exit rates, I think we exited the half. probably just over 56. I think the overall half was 56%. I think we exited just over 56 and we're currently trading a bit more than that. We'd look to see if we can get that closer to 57 as we exit half two. But I think as Jonathan alluded to, there is quite a lot of, promotional sort of effort going off from our competitors. So I think we'll be probably in the middle of 56 and a half, 57 as we exit half two. I think when you actually look at the gross margin bridge that's in the slide deck John went through, if it wasn't for interest-free credit and Forex, I think we'd be pretty close to our historical targets of 58. So as hopefully the Forex and the interest-free credit abate into FY25, we know we're exiting on an underlying basis close to the sort of longer-term target that we've got there. And we're working very closely with our supplier partners who are supporting us with great deals as we can look at our cost of goods benefits. So I think from a margin perspective, hopefully there's... some good signs to come as we get into FY25. Do you want to talk about Q4?

Yeah, and I'll probably start, Matt, by putting in the context of the half for a whole. So within that guidance, we're assuming that half year two order growth is in the range of negative two to negative 4%. So that compares to the negative 1.1% that we reported for the first half of the year. As we covered in the presentation, it has been tough in the first two, three months of the second half. And we do assume a recovery in the second half. um of um the half um in terms of what that sort of softer comparative is worth we estimate anywhere between five and seven percent at a market level um in terms of when you look at two-year comps or if we go back and we look at comparatives with fy19 as well then you know we get some confidence that if conditions are you know more normal we don't see a repeat of the extreme weather we got in may and June that that sort of real as an opportunity potentially as well we see pent-up demand coming out of Jan Feb and early March you know that wouldn't be unusual based on on history and and the the volatility that we see in the market as well there's probably been a little bit of weather that's affected customer shopping patterns in the first half a second half that could well you know give us an opportunity to come at a market level and for us too and Clearly, we're supporting all of that with our own plans as well. Tim's talked about what we're doing on stocked. That can help us in the second half of this period that we're in now. So definitely good reasons to believe, but as ever, the market remains difficult to forecast.

Okay, thanks, Matt. And finally, Saranja, UBS, are you on the line? Good morning.

good morning um thanks for taking the question um i have a few questions um the first one is similar to a question from earlier it's on pricing that you mentioned about you think about slack pricing shut you down um how does this pricing level compare to what you might have done in a normal environment so what's the sort of delta that we're looking at and also what might the promotional um or investment into promotional activity mean for gross margins that's the first one The second one is, thank you to providers of colour on cost. So thinking about for those cost items like wages, which can or might not be such a big separate depending on how the business works on it. How should we think about that obviously with with minimum wage going up, is it something where you have a cushion to not grow wages to the same extent? Or are there any elements that you can adjust, like bringing on CUS staff during kind of fail periods or something like that? Thirdly, on market share, thank you for sharing the coat around market share. You mentioned that general retailers are strengthening their position. In the medium term, so not sort of right now, but in the medium term, where do you think the biggest competition comes from in this space? Obviously, it's the largest player. You might need a certain more defensive position in terms of defending your market share, but also growing it. But where do you think the biggest competition comes from in this space? Thank you.

Yeah. Okay. Well, if I take the pricing one, you take costs, then I'll talk about market share. So on pricing, I think, as I said, although there probably will be a bit more promotional activity, we are seeing good support from our suppliers in terms of cost of goods benefits. So I don't see a huge dilution in margin percentage, as I was talking about earlier with Matt asked the question. So I think we are being supported well on that. don't see a huge pressure at this moment in time in terms of the moving from the 56 towards 57 by the end of this financial year. So that's probably the first one. In terms of cost, John?

Yeah, so how you approach this, Ranjha, on the wage front, and clearly it's not helpful to have the living wage increases from a P&L perspective, but we're really supportive of it in terms of doing the right thing for the colleagues who are the lowest paid in our business. We aren't hugely exposed to it in relative terms. We've not necessarily got a close proximity on wage rates that we've got to preserve a gap. But at the same time, we'll have to absorb that living wage increase for the colleagues that it applies to. And we're talking around about £3 million for us as an annualised impact from that. More broadly, inflationary pressures are generally subsiding. Utilities and energy costs have clearly come back towards us a little bit. Tim's talked about some of the margin costs coming more towards us. But yeah, there's other inflationary factors, generally, that we need to continue to work hard to absorb, mitigate. That's clearly where the cost savings programme comes into play. I mean, we've updated on that in the presentation today. I think we're really pleased with the progress that we're making, the level of engagement that we've got in the business. And, you know, our goals remain unchanged, really. That needs to be the programme and will be the programme that will, as a minimum, mitigate those cost inflation headwinds over the next couple of years for us.

Yeah, and I think in terms of competition, we drew out a slide there that shows the different aspects of competition. And I think for us, we look at, I'm not going to name names, but the general retailers are strong retailers, multi-category, got strong platforms, and we see those as competition. Clearly, we see the big online platforms as competition, particularly at the entry and end. and the lower end, but increasingly getting into the mid market as well. But on the other hand, we see, you know, we still see quite a significant independent sector, which has been in structural decline over the last ten years. And we see that continuing, especially, you know, in tough markets like this. It's It's very challenging and part of the reason why we've been developing the DFS brand to broaden the range, particularly at the top end, and it is broadened by introducing Ted Baker and the like, that really steals share from the top end as well from the independents. We're not really sitting here looking at defending the position. We're looking at growing the position, growing our core business, recognizing that some of the threats from the general retailers on short lead time products, we're responding very heavily with that with our supplier partners in partnership with them. So I think that's probably how I see it in the medium terms around just some really big challenges, but on the other hand, it's still a big sort of donor area that we look at to see if we can grow.

Thank you so much.

Okay. Well, I think that's everybody covered. Thank you very much for your attention and for listening to us and have a great rest of the day. Thank you.

Thank you.