DFS Furniture plc (DFS) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the DFS financial results for 2022. We're here in London, which is the center of a national period of mourning. And before we begin, on behalf of our business, I'd like to express our profound sadness at the passing of Her Majesty, Queen Elizabeth II. And we join millions of people in the United Kingdom and around the world in mourning the loss of an inspirational and selfless leader. Now let's turn to the results. I'm Tim Stacey, Group CEO, and I'm here with Mike Schmidt, our Group CFO. Now our presentation today will cover 5 areas. Firstly, I'll begin with a brief introduction and summary of our progress in the year. Secondly, Mike will deliver the financial overview. And thirdly, I'll present my strategic update. And finally, I'll give an update on the current outlook before finishing with a Q&A with Mike and myself. So I'm pleased to report a set of results in which we've seen revenue growth of 20% and underlying profit growth of 14.6% versus the pre-pandemic comparator. We've reduced net debt since the pandemic period to GBP 90 million and will return over GBP 75 million to shareholders in the calendar year 2022. All of this has been achieved despite the unprecedented operational challenges we've had to face during the year. We launched our established -- we launched and established our new pillars and platform strategy, and we have evidence that this is working with over a 3 percentage point gain in market share since FY '19. Now I've already mentioned that the growth in revenues and profits was achieved during unprecedented operational challenges. This included industry-wide COVID disruption affecting our end-to-end supply chain leading to extended manufacturing lead times, Far East shipping disruption, high levels of colleague absence and reduced U.K. transport availability and reliability. Now on top of this, we've had to navigate double-digit industry-wide inflationary cost pressures, and we've carefully absorbed these into our product range pricing. Despite the current challenging economic environment, we remain committed and confident and focused on achieving our long-term strategic goals, which we outlined in our Capital Markets Day back in March, and we'll talk about this more later in the presentation. I think stepping back from the current climate, it's important to remember that this group has historically always taken market share when times are tough. And we are very confident that the group is well positioned to repeat this and emerge from the latest economic challenges in an even stronger position. Now here's a reminder of the new strategy which we launched at our Capital Markets Day back in March. Our vision is to lead furniture retailing in the digital age. And we intend to achieve this through our pillars and platform strategy. The retail pillars are our brands, DFS and Sofology, with home sold via these 2 brands. Our group platforms underpin the growth of the brands, starting with sourcing and manufacturing, technology and data, our logistics platform, which we've been investing in for a number of years through the Sofa Delivery Company, and our vital people and culture platform because in the end, we believe that we are a people business. The wraparound of all of this is ESG, which is always at the forefront of our strategic operations. And we recognize that as the market leader, we have a massive opportunity to lead on ESG for our sector. So in summary, this is how we plan to organize our business for the next cycle of growth over the coming years. Stepping back from the current trading environment, we think that it's important to set out the structural advantages that this business enjoys. As the clear sector leader, we believe that we have the broadest and best customer proposition through our integrated retail approach, our brands and our brand partnerships and of course, our fantastic teams across our business. The strength of this proposition is illustrated by the fact that DFS is still the #1 search for term on Google in our sector ahead of sofa and sofas. Now this advantage has enabled us over the years to establish efficient group platforms through which we leverage our scale to achieve sector-leading margins and cash generation. We have a proven, resilient and well-invested business with a strong balance sheet. And the combination of these elements allows us to invest for the future and also ride any short-term headwinds. We'll continue to invest in our growth agenda. Our home ambitions, our digital data capability and innovate in the ESG space. Looking in the short term, clearly, there are economic headwinds, but we actually see this as an opportunity to gain share. And in the long term, these fundamental advantages of our business model underpin our confidence as a management team in the longer-term ambitions and also enable us to generate strong cash flows, more of which from might later. I think over the years I've been doing this, we've learned to look through the short-term trading fluctuations. Of course, we have to navigate these tactically, and we've got plenty of levers to do so. But in the end, we are focused on the medium- to long-term opportunity for this group. And when you frame the opportunity in this way, we're very confident that our long-term ambition, as previously stated, is still there. Now to illustrate the point, the chart on the left here, it shows our market share trajectory over the last decade or so. So whatever the trading commissions, this group has continued to execute its strategy and gain market share with our value market share now sitting at around 36%. You can see there are some clear jumps, especially when the sector is challenged due to both exits and acquisitions. As the pie chart on the right shows, we are the clear market leader with our nearest competitor having only circa 10% market share. Our market share growth is driven by like-for-like volume in DFS, new store openings in Sofology and the relative strength of our e-commerce and digital platforms. In short, we see this next period of time as an opportunity to gain share and come out even stronger on the other side. So now I'll pass it over to Mike, who will present the financial overview.

Good morning. Thanks, Tim. So I'll start with some context on the whole year. But before I do that, I should emphasize that the majority of the comparisons that I will be using are to financial year 2019, which is the last full undisrupted pre-pandemic period. We also commonly exclude from these comparisons of discontinued activities Sofa Workshop and international operations in the Netherlands and Spain that are now closed. So turning to the results. Overall, we saw the value of revenues increasing by 20.1% versus the pre-pandemic comparator. There are 3 factors behind the revenue growth. Firstly, the group ended the financial year with a strong opening order bank. Secondly, we saw positive order intake volume growth relative to financial year 2019. But then thirdly, we saw average order value growth from price increases that offset inflationary pressures, but also within that new premium ranges that drove the mix upwards. Against this, we -- against this materially higher revenue picture, we also saw increased operating costs caused by the macro environment and also by a volatile pattern of trading that I'll come back and talk about shortly. As Tim has touched on, this has really been the most operationally challenging period that the current leadership team can remember. But despite those challenges, our overall reported profit performance is positive relative to pre-pandemic levels with an underlying profit before tax and brand amortization result of GBP 60.3 million from continuing operations in the year. So that's 14.6% higher than the pre-pandemic comparator. And we also closed the year with a robust and, I believe, efficient financial position with net bank debt of GBP 90 million and leverage of 1.1x, and this supports the declaration of our final dividend of 3.7p together with the extension to our current buyback program of GBP 10 million. So I mentioned that trading was volatile, and you can see this illustrated here in our quarterly volume trends -- volume and value growth trends relative to the pre-pandemic period. You can see that we saw very strong trading in the first quarter and also in the third quarter with double-digit growth in each of volumes and value there. The third quarter, in particular, was pleasing for us, given it was our key winter sale period and it came following a very weak second quarter that had been impacted by extended customer lead times ahead of Christmas. Also, as we confirmed externally previously, we saw weak fourth quarter trading, most likely driven by consumer fears on the cost of living. So this volatility really operationally internally created operating and customer service challenges for us, that you can see the impact of, as we step through the gross profit and operating cost bridges. Looking first at gross profits. Cash gross profit increased overall by 2.5% to GBP 605.9 million compared to the FY '21 period. However, it also decreased as a percentage of revenue from 56.2% in FY '21 to 52.7%, which is primarily due to the dilutive impact of the pass-through of inflation. So diving into the detail behind that. We saw, firstly, the benefits of additional volumes, driving GBP 14 million of margin, but a negligible impact on the gross margin percentage. Secondly, inflation pass-through and product range mix effects led to GBP 12 million more cash gross profit or 2% growth in our cash gross profit, but diluted the percentage gross margin by 1.9 percentage points. I think against that, in line with many retailers, we experienced significant inflationary pressures across our entire industry cost base. I think the statistic from the ONS estimates across this furniture sector as a whole, this was 18%, and that's something that's been absorbed within the business. We particularly use our scale to mitigate the impact of this inflation on our customers and only sought to pass on the cost rises on a pound-per-pound basis. Finally, our gross profit has been impacted by the end-to-end costs of operating in the current post-COVID environment. So particularly in the first half, we saw significant increases in our inbound logistics costs. And furthermore, in order to create additional working space within our warehouse network, we accelerated the clearance of ex-display and customer returns at a lower margin. And then also in managing the customer service impact of longer and less predictable lead times we saw increased costs in our business from customer allowances and also returns provisioning. The combined impact of this disruption was GBP 13.7 million reduction of our cash gross profit and a 1.2 percentage point reduction in our gross margin percentage. This is an area that we're already seeing the signs of normalization in financial year 2023, and we do believe it provides some benefit into the future. So now moving on to our operating cost base. We show this excluding property costs, I should say, as those were heavily affected by the IFRS 16 changes and also rates relief. But looking at the non-property operating costs, they increased overall by GBP 30 million year-on-year, but this is a decrease when measured as a percentage of the overall group's revenues, reflecting the scale efficiencies of our platforms coming through. Inflation was a big driver of increased cash costs, particularly wages within our business with particularly high increases seen for skilled drivers and manufacturing colleagues. We also invested GBP 5.5 million in increasing the capacity of our final mile delivery network following the significant gross sales growth of the group. And then finally, the industry-wide COVID disruption has resulted in approximately GBP 14.9 million of inefficiency from colleague absence and reduced trunking predictability in addition to increasing the size of our customer service teams, again, to look after a much larger order bank. We do believe that there's an opportunity in 2023 from a normalization and the disruption cost that will be realized through our routine operational execution, and we believe that this will be a good balance and counter to the full year effect of the inflationary trends that we have seen coming through in previous monthly periods. Ultimately, though, the point that I really would focus on is the cost as a percentage of revenues are stepping down. As we leverage our group platforms, and we see this as a sustaining efficiency opportunity for us in the future. Turning to cash generation. So despite the cash benefits from significant profits, net debt has increased in the year by GBP 71 million to GBP 90 million, as we expected. This firstly reflects last year's transitory working capital benefits normalizing by GBP 29 million. But secondly, and more significantly, the capital return program that together has amounted to GBP 61.6 million in the period. CapEx of approximately GBP 45 million was higher than normal due to catch-up of deferred spend from the pandemic period, and the acceleration of the store refit rollout guided to previously. The final couple of items broadly offset with the bank interest and tax countered by the other category, which primarily relates to finance lease interest. Our group leverage ratio closed, therefore, is 1.1x, which is slightly above the upper end of our 0.5 to 1x target leverage range. While we would generally operate target operating at the midpoint of this range, our weaker fourth quarter of trading reduced our earnings and has increased our reported leverage ratios. Overall, though, I'd reflect that we're significantly less leveraged than we were pre-pandemic, with over GBP 120 million of bank facility headroom at year-end. We also expect to remain operationally cash generative in all of the scenarios that Tim will shortly outline. So as we enter this more challenging trading period, we feel we have a resilient financial model and structure. So as just mentioned, our cash capital expenditure spend for 2022 was GBP 45.6 million, which reflected the acceleration of the store rollout program at DFS. And actually, as we look forward to next year, we expect this to be slightly lower beneath GBP 40 million. We think this is a level that is justified by the return on capital that we generate and is actually a level that upholstery competitors struggle to match, which serves to grow the gap in customer proposition over time. Looking at where we spend our capital, we typically see total spend split equally -- broadly equally between logistics, property and technology. Just less than half, around 46% last year, is in the renewal of assets. And this particularly relates to our in-house delivery fleet and maintenance of our property estate, but also we make a base level of maintenance spend in our technology assets. On the growth side, we have a robust approach to measuring our returns. We typically will be seeking over a 20% return on capital employed on a post-tax basis and short-term cash paybacks. Looking at what the gross investment comprised last year, we saw a slightly unusual high-growth spending in logistics where we were increasing our warehousing space by opening a couple of new sites to reflect the scale of the business. In property, we were particularly active opening 8 new showrooms as well as rolling out our new DFS showroom format across 47 stores. And we've continued this program into 2023. And we're still seeing evidence that the refitted stores give at least a 5% sales increase across the like-for-like refitted state. Finally, we did also add a number of critical digital tools for our group platforms that drive efficiency in the group and are key to our long-term plans to get to 8% profit margins. So before I conclude and hand back to Tim, I thought it would be helpful to offer a reminder on the relatively flexible way our cost base should move with volumes. There's lots of detail on the slides that I'm happy to talk to. But the big picture, 59% of our gross sales are sort of sticker price -- sticker selling prices are directly variable, either product costs, finance subsidy, inbound freight or VAT, around a further 25% is semi-variable or discretionary. That's things like sales commission, bonus influence pay, marketing spend and vinyl mile logistics. And that all together means that we're well placed to mitigate reductions revenues in order to limit the impact on profitability. That's something that Tim will come back and talk to. I do also call out on the right-hand side a number of cost drivers, a couple of those in there. I know there's particularly active questions on. Energy costs are actually quite small for the group, less than GBP 5 million. And we have forward board cover for the next 12 months at a similar cost to the last 12 months. Interest rates are a potentially larger impact with 1 percentage point being GBP 10 million of cost increase. However, would reflect that as the interest environment changes, the value of that interest-free credit benefit offered to customers increases. And we also do have the ability to flex the customer proposition to mitigate some of this impact, should we choose to do so. Stepping back, though, the key messages I'd highlight on this slide is -- but firstly, we do have a big opportunity from operating efficiently following reduced COVID disruption. And then secondly, across all of these factors, we're monitoring and managing very tightly all of the other moving factors to protect profit and our customer proposition. So moving on to the final slide and showing how we've delivered on our fundamental financial principles that I always come back to. Firstly, we believe it's important to drive sales growth as part of value creation. Growth in the revenue since the pre-pandemic period has been largely driven by 3 percentage points growth in DFS market share. And in Sofology, this has been driven due to the Sofology new store openings and the DFS brand, driven by like-for-like gains, aided by store refits. On underlying profit before tax and brand amortization, this has increased 14.6% overall versus FY '19. It's been driven by the increased scale of the group. And looking beyond 2023, we do believe still that an 8% profit margin is achievable, driven by the higher volumes you normally expect and underpinned by our platform strategy. We focus critically on return on capital employed as a business to ensure we invest our resources wisely, and we are achieving returns at our targeted high-teens levels. And finally, on capital returns. We do have a history of returning funds to shareholders with approximately a gross GBP 200 million returned or declared since IPA. We're continuing that trend today with the announcement of a 3.7p final dividend alongside an extension to the ongoing share buyback. The switch to a buyback from a dividend where approximately GBP 10 million that we would otherwise have considered utilizing as a larger final ordinary dividend is worth dwelling on. Through the start of this week, the group has invested just over GBP 21 million in share buybacks, thereby reducing the number of shares in issue by 5.8% and leading to similar earnings per share accretion. The post-tax trailing return on investment on these buybacks to date is 11.9% And based on reasonable medium-term projections, we estimate an internal rate of return for this program of over 30%, which we believe emphasizes the highly attractive returns we believe are available to shareholders, and it also demonstrates the belief that we have in the prospect of this business. So whilst it's been an incredibly challenging year, we are pleased that we have grown our profits and revenues compared to pre-pandemic. And while the current environment is definitely challenging with the risk of consumer demand weakness, we do believe we will emerge stronger relative to others, and we therefore remain focused on our long-term strategic approach and development. I'll stop there. Thank you, and back to you, Tim.

Okay. Thanks, Mike. So I'll now provide an update on our strategy that we presented at the Capital Markets Day back in March. And hopefully, you're all familiar by now with our pillars and platform strategy with the 2 retail players with home together and underpinned by our group enabling platforms. So let's start with some of the highlights from the DFS brand first. DFS continues to grow, gaining share and remains the largest and most profitable brand in the sector by far. And firstly, I want to talk about some of the DFS brand marketing. Our new Watch your Thing brand campaign showcases the fact that the DFS brand has the biggest and widest range of sofa styles in the market. This campaign embraces all brand touch points across marketing, the retail channels and includes our expert online and in-store colleagues who are committed to helping customers find their thing. The campaign launched at Christmas last year and has started really strongly, improving the DFS brand perceptions for those customers who have engaged with the communications. Now this is evidenced by a very significant shift in our brand connection score of 8 percentage points, which for context puts DFS in the top 3 retail brands in terms of brand connection in the U.K. Secondly, our exclusive brands are a key way of differentiating our product range from the rest of the market. and they broaden our appeal to a wider range of customers. This year, we strengthened our portfolio with one of our most successful brand launches ever, our new store away collection, which was developed in partnership with the largest furniture manufacturer in the world. We've also launched our first-ever DFS vegan collection, which is fully endorsed by Peter and is unique in the market. Thirdly, we continue to invest in our store format program, which has been rolled out to nearly 47 DFS stores with improved lighting, space optimization, better zoning of product styles, we've modernized the DFS showrooms and improved the consistency of the brand look and feel across all channels. The refit program has led to an increase of at least 5% sales -- like-for-like sales across the estate and a typical refit cost is around GBP 300,000, leading to a payback period of under 24 months. Finally, I'd like to talk about one of our technology initiatives, which has been now rolled out across the DFS brand, which is our intelligent lending platform. This platform transforms interest-free credit, which is a key part of our offer for customers, colleagues and our finance partners. The introduction of ILP has reduced the order-taking process by around 15 minutes on average, which enables colleagues in store to serve more customers at peak times and therefore, drives improvements in store conversion. It also allows customers to complete at home, soft credit searches and a simpler second-line referrals that increases our customers' likelihood of obtaining the credit that's right for them. Look, in summary, DFS is arguably in the strongest position it's ever been and I'm very optimistic about the future of the brand and its potential for further profitable growth. Next, we move on to our Sofology brand, which has continued to grow and develop through FY '22. Now we set out to differentiate Sofology within the market as the boutique sofa brand on a retail park. Sofology's distinctive brand advertising builds on this differentiation, and we use well-known actors who are equally celebrated for their own individual sense of style. This year, Helena Bonham Carter has played a key role in Sofology advertisement, and her unique style and creativity has proved a really strong fit for the Sofology brand. In terms of product, Sofology continues to be at the forefront of sofa design and innovation and new product launches this year included the collaboration with George Clarke, the well-known and well-loved designer and TV presenter. Now this collection is a natural fit with the Sofology target customer who wants style, comfort and strong design credentials. Our aim to turn Sofology into a nationwide business has progressed rapidly during this year with 7 new stores opened in FY '22 to give a total of 55 stores by the year-end. We've opened an additional store in September and a further 1 planned for the remainder of FY '23. Finally, Sofology have also successfully leveraged our group platforms and most notably here, Sofa Delivery Company. We've now combined and integrated the 2 delivery networks that used to be DFS and Sofology into one, which gives both cost efficiencies and a better service for our customers. Turning to the home opportunity. We view the beds and mattresses segment as a key long-term opportunity to grow our addressable market for the group. With a market size of around GBP 3 billion per annum, our ambition is to grow our share in this segment to around 4%. Now we're able to utilize many of the group's existing assets, including our sourcing and manufacturing capability for upholstered furniture, our web and logistics platforms, our marketing expertise and data and our differentiated brand partnerships. With over 700,000 customers each year shopping with us already, many of them utilizing interest-free credit, we have a really strong opportunity from our existing customer base. Now a key element to achieving this strategy is to raise product awareness. And to that end, we've been investing in above-the-line marketing as well as digital marketing to drive awareness of the bed and mattress offer, particularly DFS. Indeed, we released our first non-Sofa TV advert earlier this year, focusing on our bed range. We've seen strong growth with our online bed sales increasing by 94% versus FY '19. In terms of our supply chain capability, we're using our existing customer delivery network and assets to consolidate beds and mattress deliveries in our large warehousing facilities in Milton Keynes. And we're going to continue to build our capability and foundation to support this growth opportunity over the next few years. Now the growth within these 3 retail pillars is enabled by our 4 group enabling platforms. Firstly, sourcing and manufacturing. Now we already have a significant competitive advantage from our sourcing and manufacturing platform. We've been producing make-to-order sofas in our own factories for over 50 years. And for over 20 years, we've developed partnerships around the world with the biggest furniture manufacturers. The capacity and design style and business model here are hard to replicate, and our scale gives us cost price advantages and design advantages. Still, we look to continue to improve the efficiency and performance of our own manufacturing sites. And during the year, we commenced the refurbishment of our own Doncaster manufacturing facility. Work on this site is set to be completed in the first half of 2023. Now we move on to our technology and data platforms. And over the past few years, the group has invested significantly in its collection and use of data and technology. And our ambition with these data platforms is to unlock new growth for our brands but also to drive operational efficiencies through our cost base. We're currently investing in our integrated retail intelligence systems, so IRS, let me call it, which integrates over 35 data sources to provide a 360-degree view of our group. This cloud-based solution incorporates AI and machine learning provides insights across every element of the customer journey. Ultimately, the use of data gives our colleagues the power to make faster and better data-led decisions. Thirdly, our group logistics platform, the Sofa Delivery Company, was launched in June 2020 with the objective of providing the best service -- best delivery service in the market for our customers and our colleagues. Now this involves merging the DFS and Sofology delivery networks into a single combined network which improves the service for our customers as well as driving cost efficiencies. The Sofa Delivery Company operates in 4 days on, 4 days off shift pattern, which provides an attractive work-life balance for our teams, but it enables us to offer extended delivery hours to our customers 7 days a week. The final stage of development unlocking further cost efficiencies this year. The Sofa Delivery Company is developing into a really strong and unique asset for our group. Finally, our people and culture platform. Now we take great pride in the people and culture we have in our group. And in recent years, we've progressed key changes to our culture, introducing more flexible ways of working in our support offices in our CDCs, in our stores, a new reward structure in DFS retail. Our mission here is to make everyone feel welcome in our group, which supports our plan to be an employer of choice. Personally, I'm very proud of the progress we're making on diverse and inclusion and the energy momentum and support we have from our colleagues in this space feels totally unstoppable. And during the year, we've made other key changes, including integrating the previously separate teams of finance and HR and technology into group centers and this has allowed us to be more efficient and share best practice. Turning to ESG. We launched our ESG strategy in September 2020 with a strong focus on the environment and sustainability, and that was based on our sofa cycle approach. We've continued to make significant progress in this space, and we now understand our carbon footprint and able to report our total carbon footprint, including Scope 3 emissions for the last 4 years. Now although there are clearly specific challenges to the group and the industry to overcome in order to become net 0 by 2040, we now have the data and foundations on which to build a credible and science-based plan. Moving on to social. We launched our diversity inclusion strategy last year and have continued to drive the conversations around other forms of inclusion and diversity with our internal education and engagement activity alongside the creation of longer-term plans across all of our brands and operating teams and offices to make a measurable difference to the makeup of our workforce. Finally, we look at governance, and the group continues to maintain a robust corporate governance framework the practice and policies to manage and deliver long-term success for this company, including, but not limited to, the Board composition, audit committee, the structure, executive compensation and whistleblowing. Next, we move on to the final section of our presentation, our outlook and summary. Firstly, a reminder of our winning, we believe, a winning integrated approach to retail. We believe that in our sector, it's the combination of the physical and digital channels, that's the right approach here. Utilizing the assets that we've got across the group has served us well over the last few years, enabled us to gain market share of around 3 percentage points. And this approach is backed up by the competitive advantage that I outlined earlier. This means that we are confident and we stand by our long-term ambitions that we set out back in our Capital Markets Day back in March. Now although short-term trading conditions are challenging, we know that in times of market downturns and historically, DFS as the market leader emerges in a much stronger position with a greater market share. Our ambition for the medium to long term remains to grow revenues to GBP 1.4 billion by FY '26 - '27. Secondly, we expect greater profit margins with higher revenues leveraging the efficient operating platforms in order to deliver an 8% profit before tax margin in the medium term. And finally, we are confident in the continued strong free cash flow generation, which is underpinned by the conversion of our profit before tax into a post-tax cash flow of about 75%. Now moving into the short term and our outlook for FY '23. Our profit expectations for this year are influenced by sector volume declines versus pre-pandemic levels as a result of the wider economic uncertainty we're currently observing in the U.K. Now what we'd always say, it's hard to extrapolate the short-term sector trends into the future, but we want to be totally transparent, and what we've seen so far in quarter 1 is definitely weaker sector volumes, as you'd expect. Now more recently, we've observed a reasonable recovery in the volumes in September towards the high end of the range that's presented here. July and August were, however, towards the low end of those scenarios. But we believe that there are some transient factors that would like to have particularly impacted demand in the market over those months, including very high levels of consumer uncertainty on the cost of living crisis and domestic energy prices. Certainly, the reopening of holiday travel and also the relatively hot weather. All of these things combined to reduce footfall in July and August, which we have seen repeat a bit of a bounce back in September, these last few weeks. Now we have always seen fluctuations in our quarterly demand patterns, as illustrated by Mike earlier. But in the absence of any significant recovery in consumer confidence and in the light of the ongoing cost of living crisis in the U.K., we present these scenarios as our most informed view at this stage of the new financial year we're 12 weeks in. Now it's worth noting that the worst we've ever seen in the market in recent years was back in the financial crisis 2008, '09, where the market contracted by about 12%. It's worth also noting that DFS outperformed the market and declined by 4%, given some of the exits that occurred at that time. Now in all of these scenarios, we reflect the revenue benefits of the 3% market share gain that we've captured since FY '19. We reflect the GBP 30 million higher order bank in terms of revenue terms as we enter the year. And we also reflect significant growth in average order values that we've seen since FY '19. Our retail margin percentages are assumed to be similar in each scenario. We have a number of self-help levers that we can and have already pulled in order to protect earnings and cash generation. While at the same time, playing to win in order to gain market share in the short term and remain extremely competitive value to consumers. So final slide. Look, in summary, there's probably 3 points I'd like to make. Firstly, we've emerged from the most operationally challenging year that we can ever remember in a stronger position in the market. Secondly, we know from history, when the environment is challenging, DFS has been able to build on its market position and gain share. And thirdly, we believe that these fundamental business model strengths will help us secure not only short-term sector gains, but also ultimately underpin our long-term ambitions and cash flow generation. Finally, I'd just like to say a few thank yous, if I may. A huge thank you to every single one of our colleagues and partners that we work with across the group. Your resilience and energy and determination and hard work have enabled us to navigate what was hopefully a once-in-a-generation challenge that we faced. I'm so proud of you all and proud to be your leader. I also want to take this opportunity to thank, we call him Biggest Mike for his tremendous support and service to our business over the last 8 years. And finally, to our Chairman, without my glasses, I can't see him. But he's here, Mr. Ian Durant, who's retiring in November. I wish him well on the golf course, and again thank him for his wise counsel and help during my time as CEO. Okay. So thanks very much for listening. I'd now like to open up for questions.

Jonathan Pritchard from Peel Hunt. Two from a sort of space angle, really. We saw beds and mattresses on the Capital Markets Day at Milton Keynes. What's the potential for that? Has that changed? Or is there a potential for that to go into a number of more stores? And then this -- the crisis we're in, the downturn we're in. Do you think that will open up a space or a rent opportunity on a 12- to 36-month view? And then IFC, any changes in customer behavior where IFC is concerned over the last sort of 2 quarters?

Good. So take the beds and mattresses in stores. So we -- you've seen, we're trialing in a number of stores, different approaches to home, particularly focused on beds and mattresses. It's fair to say we're looking at increasing some of the space. We've put some mezzanines into a couple of stores to see how that works, and we've seen some encouraging signs there. I think our focus is online, to be clear. And we've massively increased the range of beds that we've offered across all styles and price points, and we're really advertising heavily digitally, and we're seeing some really strong growth there. So that's our primary focus, and we'll test and learn over the coming year about our in-store offer. I think in terms of space and rent opportunities, we continue to be in a strong position in terms of negotiations with landlords. And in the next few years, we've got a number of leases that are coming up for renewal. We're still seeing really good opportunities to probably get 20% to 25% savings as we come to renew. We're keen to -- going back to the integrated retail point, we're keen to have that physical presence though and invest in the stores to make that experience very tactile and good for customers. So we do believe in having stores, and we just -- over time, we'll reduce the cost of having those stores. Finally, on IFC, I'll let Mike build on this. But we haven't actually seen a change in the Sofology pattern of business from an IFC penetration, has been pretty flat at 50-50. What we've seen in the last 6 to 8 weeks is a slight increase now in some of the penetration at DFS in terms of more takeoff of IFC, which we have a very strong IFC offer, and we welcome that, it drives average order as and cash profit. I expect that to continue as we go into the autumn and as interest rates perhaps rise. I don't know if, Mike, you want to comment on any.

No, I think we agree with our credit providers, minimum accept rates. We continue to see really good accept rates for our customers. So not seeing any trends there. And then alongside that, we carry on seeing significant interest in that sort of credit book from our interest-free credit lenders as well. So it's a key part of our proposition. And I think we feel it continues to be well set in this environment where, I guess, consumer spending could be a little bit tighter.

Mike here from Berenberg. A couple from me, please. One on the market share gains since FY '19. I wondered if you could give a bit of color around where those gains have come from and perhaps where you expect them to come from over the next 6, 12 months? And then secondly, obviously, very sad to see Mike go. Tim, I wondered what sort of qualities you're looking for in the new CFO?

Are you looking for a job, Mike?

If you offer.

That's really -- yes, I think it's fair. The market share gains, certainly, unfortunately, for Harveys, they I think over COVID we took quite a bit of share from Harveys when they left the market in about June 2020, particularly at DFS took quite a bit of share there. I think we do see structurally over a period of time, and I think the ONS data back is that the smaller players, and that's players between GBP 250,000 and GBP 10 million turnover have demised over the last few years. They've probably gone down by about 4.5%, and that will be typically your independent businesses. And that's where I think we're taking some share at the top end. And I probably expect that to continue, Mike, with the pressures on -- structurally on that sector. So that's where I think we can see some share gain going forward. And particularly as we open new Sofology stores in key locations. We've just opened in Southampton, which is a fantastic site down there, and we will gain share there. We've opened in places like Bristol. So we know that we get location and we gain share, and DFS continues to pick up share at the top end in particular. Qualities of the CFO. I think, look, it's -- we're active in the market looking, and there's so many great people interested. So I'll hope to update you sooner rather than later on that. I'd look for someone a bit like Mike, if I'm honest.

George from Numis. First one, can you just talk a bit on more recent data and kind of the slowdown in volumes? How that's trending across different brands, different consumer groups? Any kind of intel that you're able to share there? Secondly, just similarly on market share trends and it feels like much of the market share gains were taken from Harveys when they exited. When we go into a downturn, and cetology more premium pace. So if consumers are trading down. Do you see a bit of kind of market share stabilization? And then just clarifying on the capital returns. I think it was GBP 8 million of the GBP 25 million buyback in the second half of the year. The GBP 21 million figure that you referenced earlier, does that suggest there's been a bit of an acceleration since the year-end? And then last one is just can you just remind us as volumes rebase, how we should think about working capital for the group?

Yes. Good questions. Right. So in terms of slowdown in volumes, I think probably from a market perspective, we've seen the slowdown pretty evenly across both brands. I think in terms of consumer behavior, what we've actually seen is just lower people in the market, a lower footfall in the parks and lower searches. It's not particularly at this stage. It's a bit too early to say what customer segments. It just seems to be a lower base, full stop. And the pattern of trading conversion is still strong and average order value is still strong. And I don't think our position certainly DFS in the premium space and DFS is the mass retail, and we've got entry price points all the way to the top. So we're not seeing huge trade downs at all at this stage. We're still seeing a good average order value and a good mix being sold through because we're competitive at all the price points. Sofology is a little bit more premium, a little bit higher average order value. It seems to be a bit more resilient in terms of the cash versus interest rate credit split, which kind of indicates a slightly higher and more affluent customer perhaps. So I think it's just a general less people in the market over that July, August period for the reasons we've outlined. Market share gains, you're right. The big jump in 2020 was around Harveys. We've managed to maintain that. But we're seeing continually pockets of share gain when we open new stores of Sofology, or we refit a new DFS store, we see that business increase. So I think it will keep coming from the independent sector, George, rather than any major players. Mike, do you want to talk about the capital share buyback and the acceleration?

Yes. So on the capital returns piece, yes, I think we report the shares we're buying back daily, and there has been a bit of a step-up in the level of daily purchases. I think we see that as being great news because we're looking at the returns that are available. And I think as our brokers who ask a way here will attest. We have been giving them very strong encouragement to get out there and to look to sort of get that sort of share capital deployed at the returns that are available today. I think on the -- in terms of looking to the future, though, we do see that increase, that step-up in profitability. We were reconfirming our Capital Markets Day ambitions. And I think if you do the math on that, we don't see a material step-up in our capital investment requirements. I think the positive around that is that, that gives us a really good choice to have for our shareholders around what we will do with the excess cash generation that getting to those profit levels would imply. And we do have a published capital returns and distribution policy that I think gives the approach -- the parameters of the approach that the Board would take. But clearly, there will be a choice there in the future as we sort of deliver on that sort of profit uplift that we anticipate.

Can you talk about the working capital implications of the rebase of volume.

In terms of working capital implications. So as we ended the year, we still saw a slightly higher customer order lead times. And so we were holding more deposits than we normally would expect. And so we've guided to that. We've guided to the working capital outflow that we would expect to see as a result of lower volumes in the business. And so we are guiding to sort of about GBP 15 million outflow would take place overall. In addition, do be aware that the special capital return program is continuing. And so that's another thing, as you called out, another GBP 15 million or so. I think fundamentally, as we look at the 3 scenarios, the business is operating cash generative in all of the scenarios. And those are the sort of 2 key factors outside that, that would also sort of sit there in thinking about where our future level of debt would turn out.

Andy Wade from Jefferies. Just a couple from me. First one, cancellations. Are you seeing any change in cancellations given obviously a bit more pressure on the consumer and with still an extended delivery time? And the second one, obviously, a bit far out, a bit crystal ball like. But if we assume a sort of flat market going into FY '24, how confident would you be about resuming a growth trajectory there? And what do you think or what have you got under your control that you can see going into FY '24?

Yes, a good one. So the quick answer on cancellations is actually, they've dropped over the last few months as we've started to unwind the order bank. So our lead times are now largely back to normal levels for the vast majority of our supply partners and products that we offer. So circa 4 weeks from our own factories, circa 5 to 6 weeks from Europe, and 11 to 12 weeks from China and Far East, which is in [indiscernible] as normal. And typically, what we saw through the pandemic period and as the extended lead time is customers are canceling. It was just the lead times are too long. Not -- so that they've dropped down and that should give us, as Mike pointed to, some upside on the gross margin in FY '23. I'm not seeing any evidence of cancellations as a result of distressed consumer as a result of the economic conditions we're in at this stage. I think 2024, I wish I knew the answer to that. But I think logically, if it was a flat market going into '24, there are things in our control from a cost perspective. There are some quite material things that should go in our favor in the future, such as freight rates. So the freight rates from the Far East, as you all know and will follow. Back end of the autumn last year, $15,000, $16,000 spot rate, and I think today is at $7,000 or $8,000, so -- and that trend should come down. And that is a decent proportion of our business. And so that should normalize, Andy, into large into '24, we have contracted rates for a calendar year. So we'll have another contract for the calendar year '23, which will be, we'd imagine, materially lower levels, we'd hope, materially lower levels in this year. So that should give us an upside in terms of profitability. I think we continue to see the benefits of the new store openings, the strength of our digital offer. So even if the market volume is flat, we'd expect to do slightly better than that. And then we, as you'd imagine, we have an ongoing cost program to try and mitigate inflation, but also to make our business as efficient and as effective as possible. And that includes things like property. We'll start to see some further benefits of the Sofa Delivery Company integration coming through on a full year basis. So I think we've got a number of self-help levers, if you like, where even if it's a flat market, we should start to, we believe, return to some good earnings growth in '24. Anything to add?

No. I mean I think you called it out when I was talking to the operating cost space. There was a level of disruption back in 2022. That provides an offset to the full year effect of inflation in '23 and the efficiency that we see coming through subject to the sort of inflationary environment we ultimately see. I think we sort of see that sort of operating cost base being sustainable. But the opportunity, as Tim says, is on gross margin, where we see some of the gross margin coming back in, and we will be restoring that sort of gross margin percentage.

Yes. Okay. Any more questions from the floor? Are we going to the virtual questions? Or are we not? We're not. Okay. Well, thank you very much for your time and attention and for coming across today, and it's nice to see you all, and thanks very much. See you all soon. Okay.