July 12, 2018 / 11:32 AM / a month ago

UPDATE 2-DFS, Dunelm warn on profit as consumer mood darkens

* DFS sees tough market conditions for the next 12 months

* Dunelm blames weaker footfall at stores

* Sunny summer also seen weighing on business

By Noor Zainab Hussain and Sangameswaran S

July 12 (Reuters) - British furniture retailers Dunelm and DFS provided more signs of a darkening consumer mood on Thursday, a summer heatwave and operational issues adding to headaches as both warned on full-year earnings.

Sofa specialist DFS said orders had been significantly lower due to exceptionally hot weather and added that it expected tough market conditions would prevail for the next 12 months.

Dunelm’s results were propped up by a 42 percent rise in online sales, but the home furnishings group said an 8.9 million pound charge and 8.5 million pounds trading loss related to the website businesses it bought two years ago would drag profit down below expectations.

Shares in both firms fell in morning trade.

“High Street retailers have been struggling recently and the good spell of weather has encouraged the public to enjoy the sun rather than hit the shops,” CMC Markets analyst David Madden said.

Dunelm has been investing heavily in its online business as it struggles to stay competitive in the face of weakening customer numbers at the more than 170 stores it operates.

It bought home furnishings website Worldstores.co.uk along with Kiddicare.com and Achica.com in 2016 but has had to work hard to integrate the platforms into its own offering, divesting Achica in 2018.

Like-for-like sales at its stores fell by another 4.6 percent in the fourth quarter while those through its online channels grew 42 percent from a low base. Overall, like-for-like sales in the fourth quarter ending on June 30 were roughly flat.

Gross margins, which had been falling, rose 40 basis points, although the company added that reported gross margin for the quarter would have been down about 50 basis points if the company accounted for losses to clear excess inventory.

RETAIL BLUES

Recent surveys showed British consumers and businesses became more pessimistic about the economy’s prospects in June, suggesting Brexit worries and global trade spats may be taking their toll.

Retailers such as DFS and Dunelm have also long relied on Britons’ ability to borrow cheaply and confidently on the back of a 20-year housing boom which, especially in the wealthier counties of southern England, is showing signs of ending.

Shares in DFS, which runs just over 100 stores in Britain and Ireland, have struggled since the company’s flotation in 2015 and Thursday’s moves took them back to close to record lows from 2016.

The company said earnings before interest, taxes, depreciation and amortization (EBITDA) were likely to come in below the 82.4 million pounds ($108.77 million) it reported in 2017.

Analysts had been expecting EBITDA of 84.51 million pounds for the year ending July, according to Thomson Reuters Eikon data.

The retailer said it had also suffered from disruption in shipping deliveries of made-to-order products from Asian suppliers. Its guidance on EBITDA assumed the arrival of products before the end of the financial year.

Peel Hunt analysts argued that fundamentals remained strong. “If DFS has a cold, we’d imagine that the competition are in retail hospital,” they said.

Reporting by Sangameswaran S in Bengaluru Editing by Patrick Graham and Keith Weir

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