DFS Furniture H2 2026 Earnings Report

DFS Furniture EPS Results

• Actual EPS: GBX 13.80
• Consensus EPS: N/A
• Beat/Miss: N/A
• One Year Ago EPS: N/A

DFS Furniture Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

DFS Furniture Announcement Details

• Quarter: H2 2026
• Date: 9/24/2026
• Time: Before Market Opens
• Conference Call Date: Thursday, September 24, 2026
• Conference Call Time: 4:00AM ET

DFS Group is the leading sofa retail specialist in the UK and since 1969 we’ve been passionate about making and selling high quality, great looking sofas.

DFS Furniture H2 2026 Earnings Call Transcript

Key Takeaways

• Positive Sentiment: FY 2026 financial performance strengthened materially: revenue increased 2.6%, gross margin reached 58.1%, and underlying profit before tax rose by approximately £15 million to £45 million. Free cash flow of £40.3 million reduced net debt to £69 million and leverage to 0.9 times, enabling the reinstatement of a 3 pence per share full-year dividend.
• Negative Sentiment: Consumer demand weakened in the second half, with full-year order intake down 1% and the first 12 weeks of FY 2027 down 2.5% year on year across both DFS and Sofology. Management is planning for a broadly flat market but remains comfortable with consensus profit before tax of approximately £48 million, implying moderate growth.
• Positive Sentiment: Management highlighted several medium-term growth levers, including DFS’s upholstery market share above 40%, at least 10 additional Sofology locations, 20-plus home-category mezzanine expansions, and broader beds and mattresses sales. Mezzanine trials have generated roughly 25% showroom sales increases, with estimated payback of three to three-and-a-half years and 25%–30% IRRs.
• Positive Sentiment: The Sofa Delivery Company has begun serving three external retailers and has capacity to add work equivalent to roughly 80% of its current spare capacity, creating a potential asset-light B2B revenue stream. Management also reiterated medium-term ambitions of £1.4 billion in revenue and an 8% profit-before-tax margin, supported by operational gearing if the upholstery market recovers.
• Neutral Sentiment: Home sales grew 10.9% but carry an approximately 50% margin, below the group’s 58% level, so continued expansion could dilute the reported group margin even while adding incremental cash. Management expects product-margin benefits to continue and has approximately three cents of favorable FX hedging for FY 2027 to help offset potential headwinds.

Presentation

[Tim Stacey, Group CEO at DFS Furniture]

Good morning, everyone. Welcome to the DFS Furniture plc full year results presentation for financial year 2026. I am pleased to be here today alongside our new CFO, Dominique Highfield, to take you through our presentation. Turning to the agenda for today's session, I will summarize the highlights of the year and then hand over to Dominique, who will share an overview of the financials. From there, I will outline our updated strategy and the capabilities that underpin our competitive advantages as a group. I will also provide an update on our outlook for the full year ahead. Finally, Dominique and I will take questions from the analysts that are here with us in the room. Turning to FY 2026, we delivered a strong performance in FY 2026 with our strategy delivering clear, tangible results.

[Tim Stacey, Group CEO at DFS Furniture]

Despite a subdued market backdrop, we generated revenue growth of 2.6% and met our strategic goal of 58% gross margin. The commercial discipline flowed to our bottom line. We delivered on our upgraded guidance with underlying profit before tax and brand amortization of circa GBP 45 million, up GBP 15 million year-on-year. Importantly, this operational momentum translated directly into cash and balance sheet strength. We generated GBP 40 million of free cash flow, allowing us to pay down bank debt and reduce our leverage ratio to 0.9x, down from 1.4x at the end of FY 2025. This performance and capital discipline has given the board confidence to reintroduce our ordinary dividend. Turning to our operational health, the business is performing at record levels. Customer satisfaction has hit new highs with DFS customer NPS scores up 7% year-on-year.

[Tim Stacey, Group CEO at DFS Furniture]

This is powered directly by our exceptional teams. Guided by our new DFS group purpose and values, college engagement scores have increased 19% year-on-year. Looking further ahead to growth opportunities, we are focused on what we can control from extending our market leadership in core upholstery, which is currently at record levels of over 40%, to unlocking further expansion in the home market, and finally, monetizing our platforms. Successful trial investments over the past year have validated our strategy and reinforced our confidence levels in our medium-term targets. In addition, when the upholstery market starts to normalize, our operational gearing will result in a high profit drop through and strong cash flow generation, and our sights are fixed on our medium-term targets of $1.4 billion of revenue and 8% PBT margin. In summary, our business is in great shape.

[Tim Stacey, Group CEO at DFS Furniture]

We are well-positioned, we have our scale and updated growth strategy, and it is paving the way for our medium-term potential to be unlocked. With that, I will now hand over to Dominique to walk us through the financials.

[Dominique Highfield, CFO at DFS Furniture]

Thanks, Tim. Before I get into the results, a brief reflection of my first five months. I joined DFS because I love customer-focused retailers, because of the culture Tim and the team have built, and because I believe DFS's sit test makes an AI-proof bricks and mortar offering. Everything I believed coming in has been confirmed, and what's genuinely impressed me since joining is how data-led this relationships-led business actually is, with a superb understanding of its customer and real pace on responding to how that customer now searches, whether that's ChatGPT or Google. Having joined two months before year-end, I want to start by recognizing Tim and the team's execution behind these results, and I am delighted to be here today to bring them to life for you. Turning to our financial results, we see robust P&L progression and strong cash generation.

[Dominique Highfield, CFO at DFS Furniture]

Revenue rose by 2.6% to just under GBP 1.06 billion. Combined with 160 basis point gross margin expansion and continuous cost discipline, underlying PBT increased by GBP 14.7 million to GBP 44.9 million. A key highlight of the financial year is the continued cash performance. We generated substantial free cash flow and reduced bank debt by GBP 38 million to GBP 69 million. Consequently, our bank leverage has fallen significantly to 0.9x, positioning us within our 0.5x-1x target. I will unpack the specific drivers over the next few slides. Let's get on to order intake and revenue together. The group delivered a resilient performance overall. Group order intake was down 1% year-on-year, but slightly ahead of the wider market. Performance was split into two distinct halves.

[Dominique Highfield, CFO at DFS Furniture]

A strong first half, +2.3% order intake, which led to an upgraded profit guidance in January, followed by a softer second half due to macroeconomic pressures. Despite the slowdown, strong margin and cost control enabled us to deliver upgraded profit guidance. Trading across the period also highlighted a divide in how consumers are spending. Higher income consumers remained active, while cost of living pressures caused more cautious spending amongst others. Against this backdrop, the DFS brand delivered full year order intake of -2% year-on-year. Our exclusive brand partnerships, however, continue to resonate with consumers in spite of subdued demand, generating positive year-on-year growth. Our home proposition also grew by 10.9% year-on-year, driven by expanding brand partnerships, targeted marketing, and increased capacity like the new mezzanine at DFS Stockton. Sofology outperformed the wider market with +2.6% order intake growth.

[Dominique Highfield, CFO at DFS Furniture]

This is driven by a more affluent customer base, strategic range refreshes, its first ever sale event, and an expansion of our four-year interest free credit. Importantly, what this performance across brands shows us is the value to DFS Group of having a multi-brand portfolio. FY 2025 was a tough comparator, having gained substantial market share. When we step back, our two-year performance highlights the underlying business strength with two-year group order intake up 9.1%. Gross sales grew 2.3% year-on-year, outpacing the 1% decline in order intake due to our made to order model lag. Revenue growth marginally exceeded gross sales due to lower interest-free credit subsidy costs from downward SONIA trends in the first half. Overall, the group delivered a strong full-year order intake performance building on the significant share gains achieved in the prior year. Moving on to gross margin.

[Dominique Highfield, CFO at DFS Furniture]

Our gross margin as a percentage of revenue improved by a further 160 basis points year-on-year to 58.1%, marking the group's fourth consecutive year of gross margin progression and achievement of our 58% target. While this waterfall shows the progression of margin rate, it is important to note the increased sales volume generated an incremental GBP 11 million of gross margin year-on-year. Product margins increased 70 basis points and contributed an incremental GBP 12 million. This was directly supported by our successful consolidation of our buying teams under a single group leadership structure and unlocking efficiencies through supplier rationalization. We have also achieved productivity gains within our own factories. This is a result of continued cost conscious culture over the previous few years.

[Dominique Highfield, CFO at DFS Furniture]

Margin tailwinds further aided our rate, with freight cost reductions contributing GBP 5 million as container rates normalized and a favorable U.S. dollar exchange rate providing a $4 million benefit, being $0.03 favorable year-on-year. In summary, a strong gross margin performance which saw us achieve our 58% target. Turning to operating costs. Underlying operating costs total GBP 569 million, an increase of 3%. Volume related costs such as variable distribution costs and sales commissions rose GBP 3 million in line with revenue. Statutory inflationary headwinds of GBP 11 million were concentrated in employment costs. We strategically invested into our brands with an extra GBP 7 million of targeted brand marketing, notably supporting Sofology's return to television advertising and expanding our home proposition. We also committed GBP 6 million into growth and technology investments, including our new Sofology Carlisle showroom.

[Dominique Highfield, CFO at DFS Furniture]

These investments were partially self-funded by GBP 4 million of further cost efficiencies and disciplined savings. Finally, as a result of continued strong cash generation and concentrated capital expenditure, our depreciation and debt charges reduced by GBP 6 million. We expect to reduce interest charges in the future as we continue to reduce our debt levels. In summary, group cost increases were contained to 3% in spite of inflationary pressures and investment into future growth due to continued debt reduction and strong cost control. Turning to cash flow. We delivered a cash inflow of GBP 40.3 million, underpinned by a robust EBITDA increase of GBP 5.7 million. We maintained disciplined investment in future growth with capital expenditure of GBP 27.6 million, funding store refurbishments across both retail brands, a new Sofology showroom, and the expanding of home mezzanines. Concurrently, lower average net debt reduced interest payments by GBP 4.9 million.

[Dominique Highfield, CFO at DFS Furniture]

We generated a working capital inflow of GBP 10.2 million, driven by longer supplier payment terms and a small year-end timing benefit. While this is lower than the FY 2025 inflow of GBP 24.9 million, we benefited in timing there from a strong second half trading ramp-up, and FY 2026 reflects the continued disciplined management. Reflecting the strength in balance sheets, we were pleased to reintroduce a modest interim dividend of one pence per share, a GBP 2.3 million cash outflow in the period. Importantly, cash management substantially reduced closing net debt by GBP 38 million to GBP 69 million, bringing leverage down to 0.9x. I would like to reiterate our capital allocation framework designed to balance these continued strengthening of our balance sheet with strategic growth investments and sustainable shareholder returns. Our first priority is to maintain a healthy balance sheet.

[Dominique Highfield, CFO at DFS Furniture]

We have made excellent progress here, bringing our leverage ratio down over two years from 2.5x down to 0.9x. Debt levels have not only halved over the last two years, but now place us within, but towards the top end of our 0.5x-1x target range. Continuing to reduce debt levels remains a key focus. Also a key focus is our second priority, supporting organic growth. We expect our maintenance capital spend to track at approximately 2% of revenue. For FY 2027, we anticipate a total CapEx spend of GBP 27 million-GBP 32 million, with growth investment focused strictly on high confidence, high return strategic projects that underpin our medium-term opportunities, which Tim will shortly talk through.

[Dominique Highfield, CFO at DFS Furniture]

Finally, with the balance sheet strengthened, the Board is pleased to recommend a final dividend of GBP 0.02 per share, bringing the reinstated full year dividend to GBP 0.03 per share. This importantly reflects our confidence in the business, our focused deleveraging, and disciplined investment for long-term growth. What do I want you to take out of my presentation today? We did see consumer demand impact order intake in the second half. But importantly, the performance has strengthened slightly heading into FY 2027. When we look internally at the proof points of our results, the group achieved its upgraded guidance while slightly outperforming the market due to our winning customer proposition and strategic focus execution. This, combined with gross margin progression and cost discipline, this drove PBT up 49% year-on-year.

[Dominique Highfield, CFO at DFS Furniture]

The upshot of which has meant strong cash generation, meaningful debt reduction, and the reinstatement of sustainable shareholder dividends. Thank you for listening. I'll hand over to Tim.

[Tim Stacey, Group CEO at DFS Furniture]

Thank you. Thanks, Dominique. Let's turn our attention to strategy and operational review. The resilient financial results that Dominique's just presented are the direct consequence of the strategic progress we've made. As we look forward, we've taken the opportunity to make some refinements to our strategy, which I wanted to talk you through now. Turning to our updated growth strategy, everything now begins with our new group purpose, which is furnishing better lives together. This new purpose frames our growth strategy. First, we'll play to win in the core sofa market by protecting our market leadership position and penetrating underserved customer segments and geographies where we still see clear space for growth. Second, we are building and scaling our home business. While broader home categories represent a total of a GBP 5 billion market opportunity, we are initially targeting the GBP 3 billion Beds & Mattresses segment.

[Tim Stacey, Group CEO at DFS Furniture]

By leveraging our brand trust, our marketing power, and our third-party partnerships, we believe that we can capture more furniture spend and increase customer frequency beyond the longer sofa purchase cycle. Third, we are monetizing our logistics platform, The Sofa Delivery Company, to serve other smaller furniture retailers as a profitable revenue engine. To successfully deliver across these three growth pillars, our business relies on three key enablers: our scale and vertical integration, our approach to data, technology, and AI, and our unique people and culture. By combining these enablers, we aim to create distinct competitive advantages that unlock sustainable long-term value. Before I go through the strategy in more detail, I thought it's worth providing some context as to how we see the market share.

[Tim Stacey, Group CEO at DFS Furniture]

Our group market share by value, as shown here on the dark green line at the top of the chart, has increased consistently over time to over 40% for the calendar year 2025 as measured by GlobalData. We took share mainly from retail park competitors from 2017 to 2022, with a significant increase in 2021 as a key competitor went out of business. More recently, we have taken share from across the competitor sets. Our retail park competitors, the dotted green line here, have recovered some of their share from 2022 onwards at the expense of home multiples and online pure-plays. You can see the share of home multiples has been relatively flat over time, with some new entrants emerging and some deprioritizing the upholstery. The share of online pure-plays peaked in the COVID pandemic and returned to normalized levels thereafter.

[Tim Stacey, Group CEO at DFS Furniture]

You can also see, finally, the independent share reducing, but then it has flatlined from 2022 onwards. I guess the key takeaway here is that whatever the environment that we have been operating, we have strengthened our market leadership position and are currently now at record levels of over 40%. That is 3x the size of our nearest competitor, and we do see further increases in future. Now on to market drivers and market size. Our market is heavily impacted by consumer confidence levels. Around 80% of sofa purchases are replacements, and consumers need to feel confident to make that big-ticket purchase. You can see that correlation on the right-hand chart, where we have plotted consumer confidence against market size back to 2006.

[Tim Stacey, Group CEO at DFS Furniture]

Since around 2022, we all know that consumer confidence has been running at relatively low levels as a result of heightened inflation and interest rates, resulting in cost of living pressures, as well as the ongoing geopolitical uncertainty. The remaining 20% of purchases are linked to house moves. A buoyant housing market results in more upholstery demand. As you can see on the bottom left chart, property transactions were actually recovering and in growth as interest rates started to reduce from their peak. However, for the last six months, interest rates have held flat for some time, and housing transactions have been relatively subdued. Finally, you can see on the right-hand chart, the market value is estimated at GBP 3.1 billion for calendar year 2025. And we have tried to illustrate here the inflation-adjusted market size, which reflects retail price inflation over the last few years.

[Tim Stacey, Group CEO at DFS Furniture]

That indicates that market volumes are still below 20% below normalized levels. The market has a long way to recover. And when it does, given our operational leverage and our market share in our business, the profit opportunity for this group is significant. Let us consider the medium-term opportunity as we see it, which is a four to five-year time horizon. While we will obviously navigate through the near-term macro challenges, our future destination remains unchanged. Our strategic building blocks provide a clear visible roadmap to our medium-term financial targets. Our confidence in these targets is anchored in the fact that we do not require a full recovery in the upholstery market to achieve them.

[Tim Stacey, Group CEO at DFS Furniture]

Our progression to a 6% PBT margin and GBP 70 million of PBT is built entirely on controllable levers. First, we will drive upholstery volume growth by leveraging our position as the clear market leader to capture further market share. We have seen good performances from recent investments such as the new Sofology Carlisle showroom and the Bolton refurbishment, and we see an opportunity to add at least 10 new Sofology showrooms with limited cannibalization. We also see an opportunity to enhance our Sofology like for like estate through further showroom enhancements and refurbishments. We are going to continue to invest in the DFS range expansion and development, including exclusive brands, where we see opportunity to serve underrepresented customers and geographies. Second, we will scale our home proposition, building on the 11% growth achieved this year, capturing non-upholstery spend across bedrooms and living rooms.

[Tim Stacey, Group CEO at DFS Furniture]

This provides a GBP 5 billion TAM opportunity, with our primary focus being to capture a greater share of the GBP 3 billion Beds & Mattresses segment. With the foundational infrastructure now all in place, we are well positioned to scale. We have expanded our high-profile exclusive brand partnerships into our home categories, and this continues to differentiate our offer, particularly in the beds and dining areas. We are confident we can deliver an incremental GBP 100 million of revenue through increasing our physical offer via mezzanine investments in DFS, supplemented by an enhanced online proposition. Following the success of trial mezzanine investments such as DFS Stockton and Aintree, we see scope to add a further 20+ mezzanines.

[Tim Stacey, Group CEO at DFS Furniture]

These cost around GBP 1.6 million of CapEx each, but we have seen an uplift in showroom revenue of circa 25%, paying back in three to 3.5 years and delivering an IRR in the range of 25%-30%. We have five of these now and good proof points on which to build a good business case. Third, we are monetizing our logistics platform, The Sofa Delivery Company, opening up a new business-to-business profit stream with minimal capital investment required. We are currently offering our leading two-person delivery service to three businesses, and we now have the technology and scale to integrate more at scale. These growth levers provide a route to an additional GBP 25 million of PBT, at which point we would be operating at around 6% PBT margin.

[Tim Stacey, Group CEO at DFS Furniture]

Delivering this will be supported by the GBP 27 million-GBP 32 million of total capital expenditure that Dominique outlined for FY 2027, increasing to around GBP 35 million over the medium term per year to fully fund these opportunities. Finally, as we have stated before, the upholstery market volumes are around 20% or more below the long-term average. Given our current market share and our operating gearing, we now only need 7% of that 20% to recover to achieve our 8% PBT margin and deliver over GBP 100 million of PBT. Moving on to our key enablers, starting with scale and vertical integration. Scale is a fundamental competitive advantage for the DFS group. As the clear market leader of the upholstery market, our integrated end-to-end platform gives us structural and commercial advantages across the value chain and underpins our 58% gross margin.

[Tim Stacey, Group CEO at DFS Furniture]

The scale secures exclusive supplier relationships, which allows us to bring in highly differentiated and exclusive product ranges to our customers. For example, exclusive brands in DFS now represent 45% of the total brand sales mix, featuring household names like French Connection, Joules, and Ted Baker, and we are really proud to work with them. We have also recently expanded these partnerships into our growing home category, and we are pleased with the performance we have seen in those brands to date. Our scale also gives us early access to product innovation. We are embedding the very latest technology directly into our furniture to drive higher average order values. Finally, on scale, it enables us to secure products at a relatively favorable cost of goods terms.

[Tim Stacey, Group CEO at DFS Furniture]

This, together with the fact that we run our own factories and we understand the cost of every element of a sofa, underpins our 58% gross margin. Scale in terms of marketing, we have recently teamed up with Craig Revel Horwood for Sofology's So Fussy campaign, and this has helped increase the brand awareness of that brand by 5% year-on-year. Moving on to data, technology, and AI. We have always viewed data and technology as critical drivers of our customer propositions and also our operational efficiency. I will start with a little bit of how we bring this to life across the customer journey. We inspire our customers with innovative products such as our CineSound collection, which brings integrated audio and cinema style comfort directly to your home.

[Tim Stacey, Group CEO at DFS Furniture]

That brand is doing fabulously well. In the discover phase, tools like the Bloomreach personalization and augmented reality in-room viewing bridge that gap between the digital and the physical in-store sit test. We also see generative engine optimization as a huge opportunity for our group, given the years of investment and initiatives we have made to improve our websites, our digital marketing, and our data. We are already visible on 88% of GEO searches in DFS. When it comes to transacting, features like our soft credit check capability and complete at-home ordering, where orders can be started in store and completed at home, remove friction from the customer journey. Support does not end at the point of order. Our AI chatbots and intelligent call routing deliver fast, proactive customer care all the way through to final delivery, helping support our record NPS scores.

[Tim Stacey, Group CEO at DFS Furniture]

Underpinning this entire customer journey are proven AI capabilities. Our philosophy at the DFS Group is to use AI to empower our people, believing ultimately that the human touch remains our ultimate differentiator. We use AI to reduce friction, freeing up our teams to focus on high value customer interactions. We are already seeing big wins on that where we are today. Across logistics, our proprietary Apollo routing engine uses real time data to optimize final mile schedules for The Sofa Delivery Company, driving a 20% reduction in overtime costs alongside an 18% cut in road miles. In terms of colleague capacity, automated query tools supported 17,000 customer tickets every month, while cutting admin handling times by five minutes per interaction. Looking forward, the accelerating pace of this technology creates massive opportunities as we shift from an AI assisted to an AI enabled business.

[Tim Stacey, Group CEO at DFS Furniture]

Firstly, around our people. We are upskilling our technology teams, allowing them model agnostic tools, but within a clear governance framework. Second, from a front end of the business, we are using AI tools in both web search, total search and our showrooms to drive that search to sale conversion. Finally, for back office efficiency. Now real value here we believe comes from reimagining end to end processes and moving from AI assisted tasks to full AI automation, which we think will boost capacity and drive down costs. Moving on to culture. Building our high performing resilient business is hugely enabled by an open, inclusive, and customer focused culture. Now we focus on this hugely as we understand that our people are our greatest asset and are right at the heart of our business.

[Tim Stacey, Group CEO at DFS Furniture]

This year we launched a new cultural framework designed and led by our next generation of leaders in FY 2026 as part of our leadership development program. This brings all areas of our group under a single core purpose, which is now defined as furnishing better lives together. This reflects our collective belief that our responsibility extends far beyond just selling furniture. We are equipping people for better everyday living in their homes and communities. Our purpose is supported by three core values, customer at our heart, better never stops, and everyone together. Our purpose is reinforced by our newly realigned DFS group charity partnership with BBC Children in Need, which addresses furniture poverty to help vulnerable families turn a house into a home.

[Tim Stacey, Group CEO at DFS Furniture]

We have thriving colleague networks, each sponsored by a senior executive, and these remain central to advancing our inclusion agenda by connecting like-minded colleagues, driving meaningful change across all aspects of the group. This year saw the launch of our seventh network, the Man Kind network, bringing together men across the group to support one another and champion positive mental health. Now the impact of embedding this culture is clearly visible in all of our metrics. Our latest internal Your Say survey showed a further strengthening in workforce sentiment with overall colleague engagement rising 19% year-on-year. Our teams are more aligned, more motivated than ever before, and we cannot thank them enough for their dedication and passion for our group.

[Tim Stacey, Group CEO at DFS Furniture]

Okay, turning now to outlook. Just here I want to address both the near term realities of the trading environment, but also reiterate the confidence we have in the medium term potential of our group. Starting with the near term on the left hand side of the chart. Clearly macroeconomic pressures persist and the consumer backdrop remains delicately balanced. Our core planning assumption for the whole year is that the market will remain relatively flat. Against this backdrop, we expect to deliver moderate profit growth year on year driven by our compelling customer propositions and a continued focus on cost control and capital discipline. We remain comfortable with the company compiled consensus, which currently sits at around GBP 48 million of profit before tax.

[Tim Stacey, Group CEO at DFS Furniture]

Looking at our current performance, trading through the first 12 weeks has been in line with our expectations with order intake at -2.5% year-on-year. We believe this represents an encouraging performance in light of the exceptional weather across July and August, and is actually an improving trajectory relative to the second half of FY 2026. Finally on cash, as Dominique outlined, our CapEx guidance for the year is set between GBP 27 million and GBP 32 million of cash CapEx, and that will be focused on proving high return projects that support our growth agenda. Looking beyond the near term, we believe the group is exceptionally well placed to deliver the medium term financial targets. We have multiple levers within our control, growing our upholstery market share, growing our share in home, and monetizing our platforms.

[Tim Stacey, Group CEO at DFS Furniture]

Second, market demand. The business is now in the strongest position it has ever been to capitalize when the market starts to recover. In conclusion, we have delivered a strong financial performance in FY 2026. We have grown profit significantly, achieved the gross margin target, generated strong free cash flow, and deleveraged our balance sheet further. Operationally and from a customer perspective, the business is in great shape. All of our internal operating metrics are flashing green, and we will strive to get better under the better never stops mindset. We have a new group purpose and values, an updated growth strategy, a highly efficient vertically integrated platform. We have got clear scale and growth levers ahead of us to achieve our profit and cash flow targets.

[Tim Stacey, Group CEO at DFS Furniture]

Finally, I would like to thank our entire team across our stores, our factories, our distribution centers on the road, our customer service teams, and our support centers for their exceptional execution this year. Thank you for your time this morning. Dominique and I will now be very happy to take any questions you may have.

[Ben Hunt, Analyst at Panmure Liberum]

Morning, Ben Hunt from Panmure Liberum.

[Tim Stacey, Group CEO at DFS Furniture]

Morning, Ben.

[Ben Hunt, Analyst at Panmure Liberum]

Just intrigued if you could sort of flesh out a few more details on Carlisle and Bolton and Stockton with the mezzanine. Scrolling down some of the numbers, it looks like you are sort of making pretty good margin on those mezzanine sales that you were talking about. Why only 20? Is that a sort of a particular, is there anything constraining that or, I mean, given the returns, it feels like you would want to do as more as you can. But any findings or anything you can sort of Wax Lyrical on that would be great.

[Tim Stacey, Group CEO at DFS Furniture]

Wax Lyrical, that is a great opportunity. Thank you.

[Ben Hunt, Analyst at Panmure Liberum]

It is a bit short, isn't it?

[Dominique Highfield, CFO at DFS Furniture]

Careful what you wish for, Ben.

[Tim Stacey, Group CEO at DFS Furniture]

Yeah. Sofology, I think we have 56 stores in Sofology now. From all of the data we see, and we have huge amounts of data because DFS has 115, so we know the towns and cities where there is white space for Sofology. We have all the customer data as the sorts of demographics that a Sofology store would attract. Carlisle is a classic example. Nearest stores geography-wise, you are talking Gateshead, and you are talking backing into Scotland. So we can see the white space. We are looking for the right micro location, and as soon as we put that down there with the right sort of marketing, we see good profit opportunities. Payback on that sort of investment is in the region of 2.5 to three years, and we see at least 10 locations across the U.K. to put those down.

[Tim Stacey, Group CEO at DFS Furniture]

I think the key thing for us is finding the right micro location. We know all of the towns and cities, it is just finding the right locations in the next few years. But good payback on them, clear returns on capital, so happy with that. The Bolton refurbishment is taking one of our really, really strong stores in Bolton, great retail park, and just giving it what we have learned from a DFS in terms of reformat, refreshing it, working with the teams to create a really lovely environment for customers, and we do see an uplift in sales performance. Typically, when we have done it in DFS, we have seen at least a 5% uplift in like for like. So that is another good business case for us. Stockton is one of five mezzanines we have put into DFS stores.

[Tim Stacey, Group CEO at DFS Furniture]

Now what we have seen consistently, just to reiterate the numbers, is around a 25% increase in sales in that particular location. The investment is around GBP 1.5 million, GBP 1.6 million. But what you also have, and this is slightly the reason, Ben, around the constraint on them, is you are in the store, and you are relatively disrupting that store for around 18 weeks, so around four months. As you can imagine, putting a mezzanine in and doing it in the right way from a health and safety and a colleague point of view. We keep the store trading, so we have to be careful about disrupting the big stores. But in terms of the returns, we are seeing 25% uplift in sales. Gives us a good drop through on profit.

[Tim Stacey, Group CEO at DFS Furniture]

I think the kind of payback is around about 3.5 years, IRR between 25% and 30%. So now we have done five of them, we are seeing that consistent return. We have identified the stores that we would like to go to. I think if our, he will be listening, our property director, he is rubbing his hands thinking, "Yes, we are going to be busy." I do think there is 20 at least. We said 20+s.

[Ben Hunt, Analyst at Panmure Liberum]

Is the GBP 100 million linked to 20 or is that could go beyond?

[Tim Stacey, Group CEO at DFS Furniture]

About half of the GBP 100 million revenue growth is linked to the mezzanine rollout, and it is over a four to five-year period. We have got to balance the trying to pay down the debt, making sure we are investing across the piece, not just mezzanines, investing in our maintenance capital, investing in our showroom refurbs, as well as paying returns to shareholders. That is kind of the balance we are trying to strike, Ben, in terms of the pace of how we do the rollout of mezzanines.

[Jonathan Pritchard, Analyst at Peel Hunt]

Jonathan Pritchard at Peel Hunt. Two, if I may. The 58% gross margin, you have hit your target. I know you have not set a new target. Does that mean because 58% is what you think is the right answer and therefore if there was a tailwind, if there was an opportunity, you might reinvest any sort of excess margin back into the product, back into the proposition? Secondly, range expansion within DFS, within sofas. Just a bit more color on that perhaps. You talked about underpenetrated areas, geographically, demographically. Without being commercially sensitive, what sort of things are they?

[Tim Stacey, Group CEO at DFS Furniture]

Okay, it is a good question. If I take that one, then you do the margin. I will give you a good example. Central London, our market share is relatively lower than the rest of the country. Most of our stores are all sort of around the kind of the circle of the M25, Brent Cross, these sorts of places. Central London and the flats we all know is a huge opportunity. We can see that data. We have just launched a range in partnership with Manoir actually, called On Cloud 9. Basically, imagine a sofa in a box, like a mattress in a box, and you can lift. You literally open up the box and the sofa appears.

[Tim Stacey, Group CEO at DFS Furniture]

It has got no wooden frame, and it can be lifted up into flats, into lifts, and it creates this amazing sofa, and it is a hugely exciting opportunity, particularly for Central London. It is that sort of thing that we are looking at. What we are looking at from the data is where our market, because we can see every postcode that we deliver into across the country. We can see where our market share is by postcode. We know in Central London, big opportunity. What is the product innovation that is going to unlock that? Those products are priced very, for GBP 699, GBP 799, great value. They actually sit beautifully and can be delivered in a box, and quickly, within three or four days, which is typically customers in Central London would want. Good margins, very excited about it. That is a sort of example.

[Tim Stacey, Group CEO at DFS Furniture]

Through to you then look at some like the Amanda Holden range, which is a big first for us in terms of a real influencer and a public figure. She has got a fantastic style, and that appeals to a segment of customers that perhaps we were not getting to. That is how we think about using brands and looking at the data to try and unlock some opportunities. Okay?

[Dominique Highfield, CFO at DFS Furniture]

Margin?

[Tim Stacey, Group CEO at DFS Furniture]

Talk about margin sustainability.

[Dominique Highfield, CFO at DFS Furniture]

Yeah. We are really pleased to have hit our 58% target on margin and growing 160 basis points. I think it is fair to assume that remains constant. We have got some tailwinds coming through to offset the headwinds, so we are keen to keep that target as is. I think your question around would we invest it further, what we are seeing at the moment is if we do have additional margin, we have an opportunity to invest in our performance marketing, which is a strong lever to help drive revenue and top-line growth. We do see that come through. We have got a very clever profit model. People much clever than Tim and I. Sorry, Tim. We understand our customer, and how to drive extra revenue through that performance marketing lever.

[Tim Stacey, Group CEO at DFS Furniture]

Yeah. That is true. Anne, hello.

[Anne Critchlow, Analyst at Berenberg]

Thanks. It is Anne Critchlow from Berenberg. Two questions, please. You have just referenced performance marketing, but I wondered if you could give me a bit more detail about marketing plans in general, any particular weighting into the first half and second half, and what your thoughts are about the conventional traditional marketing channels and digital and AI, and the split of how spend might shift over the years. Then secondly, just any thoughts on the replacement cycle. Looking forward perhaps to 2028, which I guess would be seven-ish years since the pandemic bubble, and whether that played any part in your sort of medium term targets, and thoughts there? Thank you.

[Tim Stacey, Group CEO at DFS Furniture]

That's a good question.

[Anne Critchlow, Analyst at Berenberg]

Thank you.

[Tim Stacey, Group CEO at DFS Furniture]

I think in terms of marketing, we're actually really excited about the GEO opportunity, and the teams have been working really hard with good partners to measure exactly where we are in terms of visibility with total search, including the ChatGPTs of this world. The good news for us is that all of the work that we've done for many years on SEO and search and all of those things, will actually pay dividends here. The data feeds that we have, the domain scores that we have for our website, which are relatively strong, the SEO scores are relatively strong. Plus the fact that on key external reference sites, such as Trustpilot, where we have nearly 700,000 reviews at 4.9 stars, those are key reference points when you look at the total search universe.

[Tim Stacey, Group CEO at DFS Furniture]

We're working already on alpha tests with Google, with ChatGPT and others, we are at the forefront of this, and the teams are quite excited about expanding our data feeds, looking at all of the imagery that we can create per SKU for both DFS and Sofology, so that we can appear when customers are searching, as they are doing more and more in this country. We're seeing things like zero clicks. When you use the AI tool, people then don't go to the website. We need to appear where customers are searching. We understand that universe more. We've got great strength in data feeds. I think more and more of our investment will go to that, Anne, over time. But we still see TV as really important to us, and it's a hugely successful returning channel. It's that blend.

[Tim Stacey, Group CEO at DFS Furniture]

I think in terms of 50/50, it is pretty flat year-on-year. I am not thinking there is a huge difference in terms of what we are doing. Still see TV as really important to get that awareness out there, but increasingly getting more sophisticated in that total search area. I think the clever people in our teams, as well as the partners that we use, are pretty excited about that opportunity for us. I hope that answers the question. I think in terms of replacement cycle, you are right. The replacement cycle is typically every seven years. The last time there was a big boom in sofas was the summer of 2020, post-COVID. We know that. So in fact, we are due one next year. Now, it is the million-dollar question, isn't it, as to when the market recovers. We cannot wait for that.

[Tim Stacey, Group CEO at DFS Furniture]

We are positioning ourselves to do that. We have the scale and the capacity to upscale. We do not need to invest any more fixed costs. In our warehouse and our manufacturing partners, we have got the scale to flex up. I would love to see that coming through. It is not necessarily part of our four-year plan because it would be a guess as to when it is going to happen. But we are ready when it does. And with the market share at 40%+, we know that the drop-through is about 40% on a profit basis. So, for those who can do the math, we need about 1/3 of that to recover. Holding our share, holding our margins will generate significant profit.

[Tim Stacey, Group CEO at DFS Furniture]

I would love to see it come as soon as possible, but I think, and actually, there were some proof points coming through back end of last calendar year, January, February. You could start to see it coming, and then unfortunately, various world events happened, which I am not qualified to comment on.

[David Hughes, Analyst at Shore Capital]

Hi, David Hughes from Shore Capital. A couple from me, if I may. Firstly, on the Sofa Delivery Company, obviously we have talked before about it is a big differentiating factor for you and the push into kind of the B2B side of things. How much capacity do you have to take on additional work, assuming the market stays roughly where it is at the moment in terms of your own sales? Then secondly, just talking around home vs upholstery. Obviously you are seeing some really good growth come through in the home side of things. How does that impact the margin mix and what kind of moving parts should we expect there?

[Tim Stacey, Group CEO at DFS Furniture]

Yeah, good question. Dominique, you take that one. On Sofa Delivery Company, we have three third-party partners that we are now working with successfully. I think it is fair to say they are delighted with the service that we provide. We focus on customer service, but we also give them a really competitive price, and they want us to do more. I think without going into commercial sensitivities too much, the guys have said we are very much open for business and want to take more in. Please drop me an email after this. We have probably about another, of the spare capacity we have at today's levels, we have probably got about another 80% of that which we can sell. I cannot go into too much detail, it is too sensitive, but there is plenty of opportunity for partners to work with us.

[Tim Stacey, Group CEO at DFS Furniture]

We only really have, because of all the fixed costs that we already have, it is only a variable cost that we will have on top of that, and therefore, the prices that we can offer these third parties are really competitive with a great service. So, it is exciting. The technology has all been opened up now, all of our APIs are ready. We have a portal, so we can ingest data from third parties and give them that great service any time from now.

[Dominique Highfield, CFO at DFS Furniture]

Home margin. So home, you are right, David, it grew nearly 11% this year, and the margin is slightly lower, so it is approximately 50%. We will see the percentage rating change. However, the important thing is, it is all incremental cash. I think that is really the important thing there. So we have that GBP 3 billion TAM in sofas and a GBP 5 billion TAM in home, and we are really well positioned to take a nice slice of that. So whilst it is this lower percentage margin, it is a nice cash incremental margin.

[Tim Stacey, Group CEO at DFS Furniture]

I think it goes a little bit to Jonathan's point as well. If the 58% is the total group number, you will get a bit of dilution as home grows. If we do try and grow the upholstery margin, that is probably going to balance out a little bit, David, over time.

[Hai Huynh, Analyst at UBS]

Thank you. It's Hai Huynh from UBS. Had a couple questions, please. The first one is on the shape of the current trading and also the breakdown in kind of the dynamics between the brands, DFS and Sofology, for that -2.5% number, and the shape through the 12 weeks, whether the exit rate is a bit higher than before, than the beginning. My second question is your margin drivers for next year. So without accounting for the FX and freight, how are you going to drive your product margins going forward, given that you've already done the bulk buying, the group buying, supplier rationalization?

[Tim Stacey, Group CEO at DFS Furniture]

You take the second one. In terms of the shape, it actually from a 2.5% number is pretty much exactly the same for DFS and Sofology, so no real difference across the 12 weeks. It's very difficult to kind of talk about entry and exit for Q1 because it can be, if you're looking at it on a weekly basis, having been here 15 years, very volatile. At the start of the period, July, if you remember, World Cup's on and we're all very hopeful about England and it's all very hot, so footfall's down and so you can be down. The exit point, if you'd have asked me two weeks ago, was very strong. We had a record August bank holiday, fantastic, but the last two weeks have been pretty sunny.

[Tim Stacey, Group CEO at DFS Furniture]

We don't really look at it week-on-week, kind of look at it quarter-on-quarter. Quarterly, -2.5% is better than quarter four, is better than quarter three, and that's despite the hot weather. So that's how we see it. I think it's important the next couple of months for us, so October, November, a big bookings month for a big order intake for us in terms of guarantee Christmas. We kind of like the sun to switch off, a bit of light drizzle, and get back to just being normal. We don't like the 25 degrees high. Some people do, but we don't.

[Dominique Highfield, CFO at DFS Furniture]

From a margin perspective, Hai, you're right, we did see about 70 basis points of product structural improvements in last year, and those aren't one-off. They will continue to see those benefits come through. We'll annualize the ones we made last year, and we'll also continue to see those gains come through. The other thing worth noting in our margin, the reason we have confidence over our 58%, is that we also have the tailwind of FX. We're largely hedged for FX, GBP 0.03 favorable into FY 2027. So we've got that nice protection there on our margin.

[Tim Stacey, Group CEO at DFS Furniture]

Yeah. Is that okay?

[Dominique Highfield, CFO at DFS Furniture]

Okay.

[Tim Stacey, Group CEO at DFS Furniture]

Okay. I think we've covered all the questions. Thank you very much for your attention and have a great rest of the day.

[Dominique Highfield, CFO at DFS Furniture]

Okay.

Participants

Executives

• Tim Stacey, Group CEO
• Dominique Highfield, CFO

Analysts

• Ben Hunt, Analyst at Panmure Liberum
• Jonathan Pritchard, Analyst at Peel Hunt
• Anne Critchlow, Analyst at Berenberg
• David Hughes, Analyst at Shore Capital
• Hai Huynh, Analyst at UBS