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The sofa experts
Annual report and accounts 2017
DFS is the leading
retailer of living room
and upholstered
furniture in the UK.
As the sofa experts we are able to
offer our customers an unbeatable
combination of great products,
great service and great value.
Turnover to meet some of the sofa experts team
Financial Statements
Consolidated income statement
Consolidated statement of
comprehensive income
Consolidated balance sheet
Consolidated statement of
changes in equity
Consolidated cash flow statement
Notes to the consolidated
financial statements
Company balance sheet
Company statement of
changes in equity
Notes to the Company
financial statements
Shareholder information
71
72
73
74
75
76
95
96
97
99
Strategic Report
Summary of the year
Our business
Chair’s statement
Market overview
Our business model
Strategy for growth
Strategy in action
Risks and uncertainties
Chief Executive’s report
Key performance indicators
Financial review
Corporate responsibility
Governance
Board of Directors
Directors’ report
Corporate governance statement
Audit Committee report
Nomination Committee report
Directors’ remuneration report
Directors’ responsibilities statement
Independent auditor’s report
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2
4
6
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Our sofa experts
DFS has been built on long-term
investments in British craftsmanship,
manufacturing and people. Here are
just a few of the inspiring team
behind our sofas:
Design
Manufacture
Lauren Harris, Designer
Design Studio, Long Eaton
Lauren’s role at DFS ranges
from designing products and
selecting fabrics to ultimately
creating the future looks of DFS
products. With her background in
fine art, Lauren has a meticulous
eye for detail which helps her
design beautiful and quality
pieces of furniture.
Michael Coleman, Upholsterer
Lincoln House factory
Michael started out as an
apprentice with us where he
trained in both the traditional and
modern methods of upholstering.
Eighteen years on, Michael has
mastered both methods so you
know that whatever style of sofa
you choose, it will be made to the
highest possible standard.
Find out what we've been working on
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Find out what we've been working on
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To see our team in action in
our recent TV adverts, visit
www.youtube.com/user/dfs
Retail
Service
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Samuel Osieyo, Sales Advisor
Sidcup store
With so many styles, colours and
fabrics to choose from at DFS,
talented sales advisors like Sam
are vital to answer any questions
and help our customers find their
perfect sofa.
Dawn Randall,
Quality Administrator
Northern Upholstery factory
Dawn has worked as a quality
administrator for the past two
years. She's on hand to answer
any enquiries about orders
and to help keep everything
on track.
Find out what we've been working on
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Find out what we've been working on
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Summary of the year
Financial
Gross sales
£990.8m
1.1% (FY16: £980.4m)
EBITDA
£82.4m
12.7% (FY16: £94.4m)
Underlying earnings per share
18.7p
21.1% (FY16: 23.7p)
Final dividend
7.5p
per share proposed, giving a total
ordinary dividend of 11.2p for the year
1.8% (FY16: 11.0p)
Revenue
£762.7m
0.9% (FY16: £756.0m)
Profit before tax
£50.1m
22.3% (FY16: £64.5m)
Leverage
1.75x
20.7% (FY16: 1.45x)
Special dividend
9.5p
paid in the year giving total returns to
shareholders of 20.7p per share
Operational
• Very challenging furniture market environment in the
second half leading to revenue and profit impacts for FY17
• Strategic progress maintained:
Broadening our appeal to customers
– Continued strong metrics of Aardman
marketing campaign
– 20% growth in partnership brand upholstery
orders and new Joules partnership to produce
their first sofa collection
– Announcement of acquisition of Sofology in
FY18, subject to regulatory approval
UK store network development
– Three new 10-15,000 sq. ft. DFS stores
opened in UK and ROI
– Opening of a third small store trial in Crawley
International development
– Netherlands trading in line with expectations
– Second store opened in Spain (Malaga)
Full utilisation of retail space
– 17 Customer Distribution Centres operating at year end
– 39 DFS stores with converted warehouse space
at year end
Omnichannel
– Continued double digit growth in revenue
• Record level of customer satisfaction scores (NPS)
P o s t p u r c h a s e
N P S
8 5 . 2%
( F Y16: 8 3 . 9%)
E s t a b l i s h e d
c u s t o m e r N P S
3 4 . 2%
( F Y16: 31. 2%)
DFS Annual report and accounts 2017
1
Our business
DFS is the leading living room furniture
retailer in the UK – passionate about making
and selling high quality, great looking sofas
and other furniture since 1969
What we do
At DFS, we have almost 50 years of experience
in designing, manufacturing, selling, delivering and
installing an extensive range of sofas and other living
room furniture products.
Our products are complemented by our market-leading interest-free
credit offer, British Standards accreditation, long-term guarantees and
comprehensive after-sales service. Through our broad core DFS product
range, together with our premium branded partnerships and our subsidiaries
Sofa Workshop and Dwell, we really do offer something for everyone.
Our heritage and focus make us the clear UK living room furniture experts.
Through our scale, specialism and in-house manufacturing expertise we
are able to offer our customers strong combination of great products,
great service and great value.
Design & inspire
Retail
Employees
4,292
9.4% (FY16: 3,923)
We inspire our customers through our dominant
and distinctive advertising that encourages
customers to consider a sofa purchase, through
our in-house design and buying expertise, which
ensures that we are always at the forefront of
home furnishing trends, and using our market-
leading, interactive website – where our live chat
video service allows us to engage with our
customers face-to-face.
Our nationwide showroom network is staffed by a
knowledgeable, well-trained and highly motivated
retail sales team; they are complemented by our
transactional website, apps and telephone call
centres to deliver a market-leading omnichannel
experience that is available to our customers 24
hours a day, 365 days a year.
Manufacture
Service
Our five UK factories produce more than a quarter
of the furniture we sell; this vertical integration
enhances our competitive edge by improving
efficiency, enhancing buying insight, strengthening
quality control and substantially reducing delivery
lead times for our made-to-order products.
We employ our own delivery crews to provide a
full installation service to our customers. Top
quality aftercare is also guaranteed, with a
nationwide team of 200 specialist upholsterers on
hand to visit customers in their homes and
address any service issues.
See our business model to find out more
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Our subsidiary brands
Our locations
While we are famous for and primarily focused on the DFS brand that
drives the majority of Group revenues and profits, we are also proud and
excited to own two complementary, strongly-branded and fast-growing
subsidiaries, that we expect to contribute meaningfully as part of our
Group in future.
Today the DFS Group employs more than 4,200
people and operates 120 retail stores in the UK,
the Republic of Ireland, the Netherlands and Spain,
a comprehensive online channel, over 20 distribution
centres and our own five factories in the UK.
A retailer of stylish modern
furniture, lighting, bedding and
home accessories, operating from
30 stores, mostly co-located
alongside DFS showrooms, and a
successful e-commerce platform.
Offers high-quality, handmade,
British sofas that can be customised
in size or fabric to meet customers’
exact specifications. Operates 20
stores, the majority of which are
located in ‘Cathedral Cities’.
UK & ROI
• DFS stores
• Sofa Workshop stores
• Dwell stores
• Factories
DFS/Dwell/Sofa Workshop
UK & ROI
• DFS stores
• Sofa Workshop stores
• Dwell stores
• Factories
DFS/Dwell/Sofa Workshop
The Netherlands
Spain
Marseille
Corner sofa
Dwell
DFS Annual report and accounts 2017
3
Chair’s statement
A challenging year for the Group
This is my first statement as Chair of the DFS
Board. Since joining the Board in May 2017 I
have spent time visiting many areas of our
business including design studios, stores,
factories, CDCs and central functions. I have
met customers and joined sales assistants on a
sales training course. I have been impressed by
the pride, energy and enthusiasm of the
colleagues I have encountered and gained
valuable insights into the uniqueness and
strengths of the DFS business model.
Overview
This year has been a challenging one for the Group. Although we
saw strong revenue growth in the first six months of the financial
year, continuing uncertainty in the economy led to a significant
deterioration in the consumer market which impacted sales in the
second half of the year. The continued weakness of Sterling
against the US Dollar has also created a headwind for gross
margins, some of which we have been able to mitigate through
the actions that we have taken. As a consequence although
revenue was slightly ahead of last year, we have experienced a
decrease in reported profit before tax.
Against this markedly tougher trading environment the Group has
continued to progress its strategy and has maintained its
investment in the business. This has included the acquisition,
subject to regulatory approval, of Sofology. In addition to the
anticipated synergies from scale benefits arising from the
acquisition, the inclusion of another strong distinctive brand in the
Group’s portfolio further broadens our appeal to customers.
In the light of the market-wide downturn in demand, revenue
growth in the existing store estate is likely to be harder to achieve
over the financial year ahead than in the recent past. Therefore
while management will continue to pursue the levers of our
growth strategy, opportunities to drive operating efficiencies and
product margin growth will also be areas of focus. We will also
see the benefits of the recent successful refinancing of the
Group’s debt on favourable terms.
Further details on our strategic plans can be found in the Chief
Executive’s Review on pages 20 to 23.
Ian Durant | Chair of the Board
Against a markedly tougher trading
environment, the Group has maintained its
investment in the business.
4
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People
The commitment of our colleagues to delivering outstanding
customer service and our continued investment in developing our
people have again been illustrated by further increases in Net
Promoter Scores, a measure of customer satisfaction. I would like
to thank everyone in the DFS team for their continued hard work
and dedication.
Board
In May 2017, I succeeded Richard Baker as Non-Executive Chair.
Under his leadership DFS achieved substantial growth and
transformed from private ownership to a publicly listed company
while retaining the key strengths that have made the business
successful for almost fifty years. On behalf of the Board I would
like to thank Richard for his invaluable contribution to the
business over the last seven years.
There were no other changes to the Board during the year. The
Governance section of this report on page 40 provides further
details of the activities of the Board and its committees.
Dividend
Notwithstanding the current subdued sales environment, our
longer term expectations for the future earnings and cash flow
generation of the business have enabled the Board to recommend
maintaining a final dividend of 7.5 pence (FY16: 7.5 pence),
taking the full year ordinary dividend to 11.2 pence
(FY16: 11.0 pence). Together with the special dividend of
9.5 pence paid in June 2017, total dividends per share for
FY17 were 20.7 pence (FY16: 11.0 pence). The Chief Financial
Officer’s Review on pages 26 to 27 provides further information
on our dividend policy.
Conclusion
Historically, DFS has been able to build its position in the UK living
room furniture market during challenging trading conditions by
successfully leveraging its fundamental strengths in store sales
densities, scale of operations, flexible cost base and vertically
integrated business model. Therefore while we expect the trading
environment to continue to be very challenging in the short term, the
Board considers the Group has excellent prospects to continue to
deliver attractive shareholder returns over the longer term.
Ian Durant
Chair of the Board
4 October 2017
Investment
proposition
Leading scale
…which allows us to offer
customers a proposition
that competitors struggle
to match, while generating
sector-leading margins
and cash returns.
Our vertically integrated model
brings advantages in cost,
customer service and
responsiveness. Our scale –
with upholstery sales greater than
those of our next four specialist
competitors combined –
confers considerable cost benefits
across the value chain.
Unmatched consumer
recognition, and high
customer satisfaction
…built upon our almost 50 years of expert focus, sustained
investment in memorable advertising, ongoing innovation,
and comprehensive physical and online presence.
Proven ability to achieve above
market growth
…across all stages of the economic cycles that we have
experienced throughout our long operating history.
We have grown gross sales by more than £240m since 2012,
and seen consistent growth in our share of the UK upholstery
market over the long term.
Attractive, long term
shareholder returns
…with strong profitability and free cash generation
underpinning both value growth and cash returns to
shareholders.
See our business model for more information
8
DFS Annual report and accounts 2017
5
Market overview
Over the long term we have
captured market share, achieving
our success through offering great
service, choice and value
Hardy
Fabric sofa
DFS
We are the clear leader in the
living room furniture market.
Living room furniture
market share 2016
18.3%
0.3%pt vs 2015
New furniture will be located at the heart of
a customer’s home for a number of years.
As a result, most customers will perform
significant research and typically visit
multiple retailers in order to find the right
products for them. This depth of research
often encourages customers to prefer to
choose to purchase from Specialist Chains
and Independents that have the specialist
sales staff and breadth of product range to
appeal to the broadest range of customers.
This trend can be seen in the combined
market share of these two categories now
accounting for approximately two-thirds of
retail sales and having grown from 2010
to 2016.
Steady growth trends over long-
term periods
Between 1995 and 2016, the UK upholstered
furniture segment of the furniture market has
grown by 2.9% per annum on a compound
annual growth basis, driven by a c.7 year
replacement cycle and underpinned by
demographic trends.
The segment is principally driven by three key
factors: consumer confidence, housing
market activity and consumer credit
availability.
Although the outlook is uncertain and the
trading market in the first half of calendar year
2017 has been challenging, current levels of
consumer confidence still remain significantly
above those seen during the financial crisis
and the number of housing transactions and
the rate of consumer credit growth have not
as yet changed markedly.
Large potential customer base
DFS has a specialist focus on the retail
upholstered furniture segment which
accounts for over two thirds of the living room
furniture market. The UK living room furniture
market was estimated by GlobalData to be
valued at just over £4.5 billion in 2016. We
also offer a selected range of beds, dining
and other furniture giving access to other
segments in the market.
Clear leader in the segment
DFS is the clear leader in the living room
furniture market with 18.3% share by value
(as estimated by GlobalData for 2016). We
see three broad categories of companies
actively competing in the living room
furniture retail market: Specialist Chains
such as DFS, ScS, Harveys, Sofology,
Furniture Village and Oak Furniture Land /
Sofastore; Independents that are typically
single store operations; and General
Merchandisers such as Ikea, John Lewis,
Next, Argos, Debenhams and all other
retailers including DIY chains
and supermarkets.
6
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Consumer confidence1
-9.0
(2016: -3.3)
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Housing transactions (‘000s2)
-2.5%
(2016: +0.3%)
Net unsecured lending
growth3
9.8%
(2016: average 10.1%)
Key market drivers
Consumer confidence
Levels of consumer spending,
particularly for big ticket items,
are influenced by general consumer
confidence. While levels of consumer
confidence have been impacted by
the outcome of the EU Referendum,
as of September 2017, they remain
well above the lows seen in 2008.
1. GfK Consumer Confidence average of
individual scores for each year
Housing market
Independent research conducted on
our behalf suggests that c.20% of
upholstery purchases are triggered
by a house move. Housing market
transaction volumes are well above
levels seen between 2008-2012
albeit still at levels significantly
beneath the 2006 peak.
2. HMRC - number of residential property
transactions completions with a value
over £40,000 for England and Wales,
seasonally adjusted
Consumer credit
Upholstered furniture typically has
relatively high unit prices and thus
the availability of consumer credit
can facilitate purchases and
upselling. Consumer credit
availability has steadily improved
since 2010 lows.
3. Bank of England - 12 month average
growth rate of total (excluding the
Student Loans Company) sterling net
unsecured lending to individuals (in %)
seasonally adjusted
Consumer confidence1
Sept 2017
2016
2015
2014
2013
2008-12
2006-07
Housing transactions p.a. (‘000s2)
2017 YTD
2016
2015
2014
2013
2008-12
2006-07
Net unsecured lending growth3 (%)
Aug 2017
2016
2015
2014
2013
2009-12
2006-08
-9.0
-3.3
3.1
-2.6
-18.6
-26.0
-6.2
-2.5%
1,230
1,226
1,223
1,067
893
1,644
9.8
10.1
7.7
5.9
3.6
-0.5
5.6
See our business model for more information
8
DFS Annual report and accounts 2017
7
Our business model
Our vertically integrated model and
other sources of competitive advantage
bring significant advantages in cost,
customer service and responsiveness
What we do
Design & inspire
Retail
Manufacture
• We inspire consumers to consider a
purchase through sustained and
memorable advertising and
best-in-class website.
• We have a specialist in-house design
team that drives our range innovation.
• We have a national network of well-
• We are one of the largest manufacturers
invested showrooms staffed by well-
trained and highly motivated sales teams.
• Our leading website, apps and call
centres serve to complement our
physical presence.
of upholstered furniture in the UK.
• Our three finished goods and two
sub-component factories each benefit
from a highly experienced workforce.
How our approach is different
• Our marketing budget is many times
bigger than any other specialist
competitor, giving the clear leading share
of voice in sector advertising.
• With our high sales densities we are able to
invest significantly in both the physical store
environment and also in training and pay for
the teams that look after our customers.
• Through in-house design we ensure our
ranges stay on-trend, rapidly following
fashion-led and seasonal themes.
• Our high brand awareness also makes us
an anchor tenant for many retail park
landlords allowing us to secure prime
units on attractive terms.
• Few of our competitors benefit from
in-house manufacturing which gives us
cost insight, first-hand knowledge of how
to drive quality standards and also
lead-time advantages.
• By flexing our in-store ranging through
the year we are able to keep our factories
operating at close to peak capacity thereby
spreading their fixed costs most efficiently.
8
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How our approach is different
Creating value for stakeholders
Customers
Unrivalled range, spanning styles, price points, in-house
and Exclusive brands, supported with exceptional
service and 15 year guarantees.
Average post-purchase NPS
>80%
Employees
Outstanding training, attractive pay and rewarding career
paths.
Over five years’ service
44%
Suppliers
Longstanding, mutually beneficial partnerships.
Customer orders sourced
from British factories
c.40%
Shareholders
Attractive growth and cash returns.
Cash returns to shareholders
since March 2015
>£70m
Community
Charitable contributions, employment and apprenticeship
opportunities, and taxes.
Raised for charitable causes
in FY17
>£4m
DFS Annual report and accounts 2017
9
Service
• We back our products with a comprehensive
installation service, a 15 year structural
guarantee and a team of over 200 upholsterers
to address any after-sales issues.
• We make our products more affordable
through interest-free credit and demonstrate
quality through established independent
accreditations.
• Through direct control over the customer
experience we can ensure we deliver
high quality service.
• Our substantial scale allows us to
operate vertically integrated service
activities while maintaining very efficient
operating costs.
Strategy for growth
Strategic priority & description
Progress 2017
01 Broadening our product and brand appeal
Building on our leadership across all segments of the
upholstered furniture market we aim to increase our appeal
to older and more affluent ‘aspirational customers’ while
retaining our core mass market appeal.
The DFS tradition of making all products to order, and our
own UK manufacturing base, have provided a strong
platform to achieve this by broadening the DFS product
range, developing exclusive brand partnerships with leading
brands such as French Connection, Country Living and
House Beautiful and acquiring complementary businesses.
• We set a target to reach a share in the ‘aspirational’ customer segment
of 25% by the end of FY18, however we have now achieved this target
a year ahead of schedule.
• We have achieved this target without weakening our strong share in
and focus on our other core customer segments.
• Building on this success, in August 2017 we announced a partnership
to design, manufacture and retail an exclusive range of Joules branded
upholstery and agreed terms to acquire Sofology.
See our strategy in action
12
02 Exploit UK and ROI roll-out opportunities
We see continued potential to build on our nationwide
store coverage by both opening three to five profitable
new stores each year in the traditional 10-15,000 sq ft
DFS store format and by developing smaller stores of as
little as 2,500 sq ft in high footfall urban locations.
Our proven, bespoke customer catchment area model
enables us to predict accurately where future store
opening opportunities exist.
• Three new larger format stores were successfully opened in FY17 at
Salisbury, Truro and Ashford, and we also opened a third smaller urban
store in Crawley.
• We have identified and secured further locations for additional 10-15,000
sq ft stores that are each predicted to generate over £500,000 of
incremental EBITDA net of existing store cannibalisation.
03 Establish presence in international markets
Our ability to extend the DFS brand to new markets
was first demonstrated by our successful expansion
into the Republic of Ireland, where we opened our first
store in 2012, and is continuing with our more recent
developments in The Netherlands and Spain.
• We continue to be encouraged by the results of our trial in
The Netherlands. We now have five stores operational with a sixth store
due to open in Eindhoven in November 2017. To continue the learnings
from this trial we will conduct a national marketing test campaign in 2018,
to understand the potential opportunity from further roll-out.
• The DFS Spain operation acquired in October 2015 has benefited from
showroom refurbishment and the opening of a second store in Malaga.
04 Full utilisation of store retail space
Releasing former warehouse space in our store estate
enables us to generate incremental retail sales while
consolidating warehousing and delivery in lower cost
and more logistically efficient offsite locations.
A store-in-store concept to expand the Dwell brand
alongside DFS has been proven to deliver a superior sales
and profit performance in relevant catchments compared
with trials of using the additional space to retail beds and
dining furniture.
05 Maintain online leadership
We have the clear market-leading online platform in our
sector, accounting for over 40% of upholstery segment
web traffic, and a proven track record of growing
margin-enhancing sales through this channel.
With most customers now beginning their research on
potential furniture purchases online, our website
provides both inspiration to visit our physical stores and
the opportunity to make direct purchases through a
convenient, interactive platform that is available 24
hours per day throughout the year.
• In FY16 we accelerated our planned Customer Distribution Centre
(“CDC”) conversion programme, and as at the end of FY17 we had a
total of 17 CDCs with the final two CDCs opening in early FY18.
See our strategy in action
15
• Sales completed online continued to show double digit growth
during FY17.
• Integrating online technology into our stores through the roll-out
of “Swoosh” furniture visualisation technology across the DFS
estate demonstrates our ability to offer our customers a true
omnichannel proposition.
10
DFS Annual report and accounts 2017
01 Broadening our product and brand appeal
02 Exploit UK and ROI roll-out opportunities
03 Establish presence in international markets
04 Full utilisation of store retail space
05 Maintain online leadership
KPIs
Targets
Growth in partnership
brand sales
• We will continue to grow sales of branded products ahead of DFS retail sales.
• We will not compromise our strong range and focus on our other core
customer segments.
20%
(2016: 33%)
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Number of DFS stores
(UK & ROI)
113
(2016: 109)
• We will open between three and five UK and ROI stores each financial year using
our large and medium 10,000-15,000 sq ft formats.
• Each of these traditional formats is targeted to achieve cash payback within two
years on the initial c. £1m operating and capital expenditure (including incremental
logistics assets).
• We will continue to test and learn from our trial small-format
(2,000-5,000 sq ft) stores.
Number of international stores
7
(2016: 3)
• Building on our success in the ROI, we aim to develop a profitable national network
of 10-20 stores in The Netherlands, which leverages our UK infrastructure and
proven operating model.
• We will continue development of our Spanish store presence to profitably serve
significant ex-pat communities in Southern Spain, giving us a foothold in the overall
Spanish market.
Stores with converted
warehouse space
36
(2016: 19)
• We will open six further Dwells in FY18 and five further Sofa Workshops.
• Completion of retail space conversion will take place in FY19.
• Retail space released by our CDC openings will either be converted into new Dwell
or Sofa Workshop stores, allow us to downsize our retail footprint, or be used to sell
an extended range of furniture.
• Once fully rolled out in FY19, our programme is targeted to deliver incremental
annual EBITDA of an average of £650,000-£700,000 per CDC.
Online growth rate
10.7%
(2016: 15.6%)
• We will continue to maintain a share of over 40% of upholstery segment web traffic.
• Our significant investment in key future online technologies, in particular mobile
web, personalisation and strengthening the omnichannel customer experience
will continue.
DFS Annual report and accounts 2017
11
Strategy in action
01
Aspiration and exclusivity
Building on the success that we have seen with
our French Connection, House Beautiful and
Country Living ranges, we have announced an
exclusive partnership with Joules, the British
modern-country brand famous for their
distinctive colours, prints, details and quality. We
will see the first range of Joules sofas,
handmade to order in our own British factories,
launched in DFS stores ahead of our key
post-Christmas trading period.
We are delighted to be working with
these great British brands. We bring our
sofa expertise and they each bring their
own unique style.
—Philip Watkin, Director of Design
Design Studio, Long Eaton
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DFS Annual report and accounts 2017
St Ives
Country Living range
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Strategy in action
continued
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Supply Chain Investment
04
Through our retail space conversion initiative we
are transforming the physical infrastructure of
our customer delivery operations into a modern
and cost-efficient network of larger CDC
warehouses. Accompanying this infrastructure
investment we have also invested heavily, in
partnership with a leading data science provider,
to develop a bespoke delivery arranging and van
routing technology platform. This platform is
now successfully operating in 16 CDCs and will
roll out fully in FY18, leading to significant
improvements in vehicle utilisation and
increased availability of choice for customers
on delivery windows.
Our customers are getting a more
convenient delivery service as well as a
wider range of products in-store.
—Muz Hussain, Area Manager
East Midlands
DFS Annual report and accounts 2017
DFS Annual report and accounts 2017
15
15
Risks and uncertainties
The Group faces a number of
risks and uncertainties in both the
development and day-to-day
operations of its business
Link to strategic priority
01 Broadening our product
and brand appeal
02 Exploit UK and ROI
roll-out opportunities
03 Establish presence in
international markets
04 Full utilisation of
store retail space
05 Maintain online
leadership
Movement
p Increase
Unchanged
p Decrease
How we manage risk
Identify
Evaluate
Mitigate
The Directors confirm that
they have made a robust
assessment of the
principal risks and
uncertainties facing the
Group, including those that
would threaten its business
model, future performance,
solvency or liquidity.
These risks are discussed
opposite, together with the
Group’s related mitigating
activities. Other risks
which are currently either
not known to the Group
or are not considered
material could also impact
the Group’s reported
performance or assets.
The Group has an
established risk register
which is coordinated and
analysed by the Group’s
Internal Audit function to
facilitate regular review of
key risks by the Directors.
Each identified risk is
allocated to a member of
the Executive Board. The
Directors maintain overall
responsibility for risk
management throughout
the Group and oversee the
implementation by the
Executive Board and
operational management
of processes to manage
these risks. The Audit
Committee reviews the
Group’s internal risk
register on a regular basis.
See corporate governance for more on how risk is managed
40-46
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Risk
Link to
strategy
Mitigation
Economy and consumer market conditions
The retail market for upholstered furniture in the
UK is highly competitive. The Group’s success is
therefore dependent on its ability to compete
effectively, particularly during peak trading
periods.
The Group’s products represent a significant
discretionary spend for customers and demand
is heavily influenced by factors affecting the
economies in which the Group operates
including (but not limited to) consumer
confidence, income levels, interest rates, the
availability of credit and the level of housing
market activity.
Product and innovation
Maintaining the reputation of, and value
associated with, the Group’s brands and product
offering is central to the success of the business.
A failure to predict changes in customer tastes
or the impact of changes in the competitor
environment could reduce the Group’s revenues
and market share.
Expansion of retail store network
The growth of the Group depends on its ability
to open and operate new stores on a timely and
cost-effective basis while continuing to increase
sales at existing stores. This includes
successfully achieving incremental sales from
retail space released by roll out of Customer
Distribution Centres.
Competition for desirable retail sites has
historically been significant, which may reduce
the availability and/or increase the rental costs of
such sites. Successful execution of any new
store roll-out also depends upon a number of
other factors, including the hiring, training and
retention of qualified personnel and the
capability of the Group’s existing information
technology and distribution systems to
accommodate new stores.
01
02
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01
02
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04
The Group continues to make substantial investments in
marketing to maintain its leading brand status. Marketing
strategy is supported through econometric and customer
insight analysis. The Chief Marketing Officer is a member of
the Executive Board.
Detailed sales information by product and store is reviewed
daily, enabling changes to product selection, incentive
structures and advertising strategy to be made on a dynamic
basis to optimise sales.
The Group’s interest-free credit offer allows customers to
spread the cost into affordable monthly payments.
Products and services are continually reviewed to ensure
they suit customers’ needs, are competitively priced, offer
good value and are supported by excellent customer service,
in order to enhance the Group’s market-leading position. Our
in-house design teams enable reaction to emerging trends
and new entrants to the market. External design partners are
also incentivised to generate new product concepts on a
regular basis.
Quality Level Agreements are in place with all upholstery
suppliers, reinforced with internal quality control procedures
to rapidly identify and rectify product liability and recall
issues. Compliance with fire regulations and other quality
standards is supported by independent external testing.
The Group has a focus on offering outstanding customer
care and service. This is underpinned by our established use
of Net Promoter Score (“NPS”) at all touch points of the
consumer journey to ensure our brand is growing, trusted
and appealing.
The Group continuously reviews the location and format of its
stores and their contribution to overall results. A detailed
appraisal model is applied to assess the payback period and
expected profitability of each potential new store, including
its impact on existing stores in the area. Appraisals are
subject to thorough review and approval by the Board before
any investment is made.
The Group’s property portfolio is reviewed regularly to ensure
it remains appropriate and cost-effective for the needs of
the business.
The Group has an established supporting infrastructure in
place to recruit and train new employees and fit out and open
stores to schedule.
DFS Annual report and accounts 2017
17
Risks and uncertainties
continued
Link to
strategy
05
Risk
Website and IT systems
The Group’s websites are a key component of its
omnichannel proposition and a failure to review
and innovate in this competitive area could
impact achievement of the Group’s strategic
growth plans.
Websites and other parts of the Group’s
operations depend upon the continued
availability and integrity of its IT systems.
01
01
Consumer finance
The majority of the Group’s sales are to
customers that utilise its interest-free finance
offerings, which are provided by external finance
houses that, in return for a fee, bear the risk of
customer default. Credit standards with respect
to customer finance offerings typically tighten
during periods of economic downturn, which
may limit the Group’s ability to offer customer
finance on commercially acceptable terms and/
or may increase the amount of the fee payable to
the external providers of customer finance.
Supply chain
A large portion of the Group’s products are
supplied by a core of manufacturers, with many
produced in continental Europe and Asia. The
Group’s internal manufacturing operations also
supply a significant proportion of goods sold
and may not wholly be able to compensate for
the failure of any of the Group’s key external
suppliers to satisfy their delivery obligations.
Increases in finished goods and underlying
commodity prices may negatively impact the
Group’s trading margins.
Mitigation
Movement
The Group continues to make substantial investment in both
website development and marketing to maintain its market-
leading position. An established team of experienced staff in
this field are supported with ongoing relationships with
external partners.
The Group engages with independent third parties to actively
monitor both customer satisfaction with its digital services
and the emergence of new online competitors.
Full back up and business continuity procedures, comprising
both internal and third party resources, are in place and are
regularly reviewed, tested and updated. Technical security
measures against data loss through a systems breach are in
place and regularly reviewed and updated. Third party
penetration testing is carried routinely to check the resilience
of the Group’s systems to cyber-attack.
The Group has longstanding relationships with a number of
finance houses, with long term contracts in place with two
providers which more than cover the total requirement for
customer finance. These arrangements enable a
redistribution of business in the event of withdrawal by one or
more providers, and surety on acceptance rates and fee
levels. These key metrics are continuously reviewed to
ensure that each provider remains competitive.
An increase in LIBOR that affects the cost of providing credit
may be mitigated by revising the customer offer in line with
maintaining market leader status.
The Group maintains flexible supply arrangements to
facilitate switching between suppliers where necessary and
uses a variety of freight forwarders to avoid reliance on any
one transport link.
Supplier performance is monitored against operational and
quality targets and reviewed by senior management. All
external upholstered furniture suppliers are frequently
inspected by the Group to ensure working conditions and
quality standards are maintained.
Fixed prices are negotiated for finished goods and the scale
of the Group enables it to achieve significant cost savings
with supplier partners. The Group’s in-house manufacturing
capacity provides insight into production costs and the
ability to create cost efficient designs.
In response to the significant change in foreign currency
exchange rates following the EU Referendum, the Group has
established detailed plans to actively manage its cost base
and supply chain to mitigate these risks as far as possible.
Foreign currency hedging is in place twelve months ahead to
provide stability of prices of overseas sourced raw materials
and finished goods.
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Link to
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Mitigation
Movement
People
The success of the Group depends significantly
on its ability to attract and retain a workforce
that includes experienced sales, product design
and production personnel and to retain
members of its senior management team, many
of whom have significant experience in the
Group’s business and industry.
The physical nature of our products and
handcrafted production processes involves a
number of manual activities, increasing the
complexity of health and safety compliance.
Financial risk and liquidity
A downturn in the macroeconomic environment
may impact the Group’s ability to obtain
financing.
An increase in interest rates could increase the
Group’s financing costs. The Group is also
exposed to foreign currency exchange risk on
certain purchases sourced from overseas.
Regulatory environment
The Group is subject to increasing levels of
compliance requirements in many of its activities
from regulatory and other authorities and is
subject to regulatory risk with potential for
significant financial impact or reputational
damage.
Changes to the regulatory environment
surrounding DFS product warranty insurance
could impact the sales of these products.
Changes in other legislation which may have
significant retrospective or future economic
effects could also impact operating results.
01
02
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05
02
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05
01
02
03
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05
Employee remuneration is structured to be at attractive levels
and to incentivise employees towards results that are aligned
with the objectives of the Group. In addition, senior
management across the business may participate in equity in
the Group or in longer term incentive plans operating over a
three year cycle.
Working practices and policies are under review with the aim
of improving the diversity of the Group’s people and making
DFS an attractive employer for all.
Succession planning is operated throughout the business to
identify short and long term successors to key roles. A high
performance training programme is in place for individuals
identified for key roles.
The Group continued to make significant investment in
training employees in health and safety requirements.
Dedicated internal teams are supported where needed by
external advisers in specialist areas.
The Group regularly reviews its financing arrangements to
ensure it has adequate funds in place and financing costs
are kept to a minimum. In August 2017 the Group’s existing
£200 million term loan was replaced with a new five year
£230 million revolving credit facility. The new facility is
expected to result in a significant saving in financing costs.
Foreign exchange and interest rate risks are managed
through the use of appropriate hedging arrangements in
accordance with its Board-approved treasury policy, with
details reviewed by the Board on a regular basis. No financial
instruments are entered into for speculative purposes.
Comprehensive training and monitoring programmes
(including external audits and mystery shoppers) are in place
to ensure that employees are appropriately skilled to deliver
high levels of customer service and maintain regulatory
compliance.
A Reputational Risk Committee is in place to monitor
management information and review processes and
procedures to ensure our customers are treated fairly. This
includes rigorous oversight and escalation processes to
maintain the status of limited permission to offer consumer
finance granted by the FCA.
Forthcoming General Data Protection Regulations could
increase compliance costs for the Group and affect the ways
in which customer data is used. A detailed project,
supported by external advisors, is underway to determine the
impact and ensure the Group’s continuing compliance with
data protection requirements.
Viability reporting
In accordance with the revised UK Corporate Governance Code,
the Directors have assessed the prospects of the Group over a
period significantly longer than 12 months from the date of approval
of the financial statements.
This assessment was based on the current position of the Group
and the key risks and uncertainties as discussed on pages 16 to 19
of this Annual Report and considered a period of four years from 29
July 2017. A period of four years was selected by the Directors
since it reflects the period over which the Group’s various growth
initiatives are anticipated to have a key impact on the business
profile and corresponds to the Group’s normal planning cycle.
This assessment included sensitivity and stress-testing analysis
of the impact of reduced revenues and a decrease in gross
margin both separately and collectively. The analysis takes into
account the high level of variable and discretionary spend in the
Group’s business model and the existence and effectiveness of
other mitigating actions the Group could take, including the
restriction of dividend payments.
In developing the viability assessment it has been assumed that
the Group’s £230.0 million revolving credit facility (in place from
August 2017) will continue to be available at least until its
maturity in August 2022.
Those risks which could significantly affect the future viability of the
Group were identified and their potential impacts on the financial
performance and viability of the Group were assessed under a
number of severe but plausible scenarios.
Based upon this assessment, the Directors have confirm that
they have a reasonable expectation that the Group will be able
to continue in operation and meet its liabilities as they fall due
over the four year assessment period.
DFS Annual report and accounts 2017
19
Chief Executive’s report
Strategic progress maintained in a
challenging market
Overview
While our results reflect the impact of the very challenging UK
furniture market environment that developed in the second half of
our financial year, we have continued to make progress with our
established long-term strategic initiatives designed to strengthen
our business for the future. These include forging a new exclusive
brand partnership with Joules; the continuing roll-out of the Dwell
and Sofa Workshop brands; strong double-digit growth in our
market-leading online business; further progress in Spain and our
international trial in The Netherlands; the achievement of record
customer satisfaction as measured by the Net Promoter Score
mechanism; being named as “Best Improver” and in the “Top 30
Big Companies” within the Sunday Times Best Companies to
Work For survey; and the acquisition, subject to regulatory
approval, of the distinctive and complementary Sofology business.
Strategic update
DFS’s performance has long been underpinned by an efficient
operating platform, which we are working to develop further. Our
scale enables us to realise cost advantages relative to other
specialist furniture competitors across a range of activities, from
buying and advertising through to warehousing and two-man
customer delivery. Following investment in technology and
infrastructure, DFS’s operating platform is now being leveraged
by our subsidiaries Dwell and Sofa Workshop, and we believe that
as our CDC roll-out completes further Group efficiency
opportunities will be delivered. With the announced acquisition of
Sofology we believe that our operating platform will be further
enhanced through the combination, driving the release of
synergies throughout the Group. However, and critically, each
brand’s operating management will retain direct control over all
aspects of the customer experience, thereby ensuring a
distinctive brand position is maintained.
Our key strategic levers for the delivery of future growth continue:
Broadening our appeal to customers
We have focused on extending our appeal to an even broader
range of customers, to enhance our position as the UK leader in
living room furniture across all customer segments. I am pleased
to report that, a year ahead of plan, we have achieved our
long-term target to gain a 25% share of the “aspirational
consumer” market, without diminishing our appeal to those
customers traditionally most focused on value. We believe that
this progress can continue and we have seen very strong brand
metrics from our recent Aardman campaigns, in particular on
‘brand love’, ‘acceptability’ and also critically the ‘call to action’.
Alongside our material progress in changing the style and content
of all our marketing and customer communications, the sustained
appeal of our Exclusive and Partnership Brands has made an
important contribution to this rebalancing of the DFS business.
Ian Filby | Chief Executive Officer
We have continued to make good progress in
the implementation of our strategy in all key
areas, while our financial performance reflects
the currently challenging UK furniture market.
We believe our strategic investment has
strengthened the long-term position of the
Group and enhanced our ability to deliver
future growth.
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DFS Annual report and accounts 2017
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We have continued to develop new ranges under the French
Connection, Country Living and House Beautiful brands. We have
also continued to benefit from the sale of selected ranges from our
own Sofa Workshop brand within the DFS store estate.
Further plans are in place for the ongoing growth of our externally
branded ranges within DFS. Reflecting this focus and the scale that
these external brands now have within DFS, we have amended our
branded sales key performance indicator definition to only include the
external partnership brands sold, currently French Connection,
Country Living, House Beautiful and G-Plan.
DFS store network development
Our well-established programme of opening new 10-15,000 sq ft
DFS stores in the UK and Republic of Ireland at the rate of three to
five per annum has continued to plan, with a new store in Ashford
opening in the second half, following first half openings at Salisbury
and Truro. A further three new full-size stores are scheduled to
open in the current year at Wednesbury, Rugby and Haverfordwest.
A major refit of our Croydon store is also currently underway, as
part of a redevelopment of the whole retail park. This will deliver a
substantial reduction in our property costs there, and is scheduled
to open before Boxing Day.
Since the year end we have announced an important expansion of our
brand portfolio with the signing of a new brand partnership with the
lifestyle brand Joules to produce their first sofa collection. This will be
produced in our own factories and its roll-out to DFS stores will begin
late in 2017.
The acquisition of Sofology will also add a strong, distinctive brand
and business to the Group’s portfolio, further broadening our
appeal to customers. Leveraging the strength of the DFS Group
operating platform creates the potential for some £4 million of
near-term synergy benefits in the purchasing of advertising,
interest-free credit, upholstery and other services. In the medium to
longer term there is scope for further revenue synergies, and for
better utilisation of both companies’ warehousing facilities and
delivery fleets, together with potential for further Group benefits
through shared innovation in the future.
The proven ability of DFS and Sofology to trade well alongside each
other in multiple locations means that there will be no store
closures as a result of the acquisition and Sofology’s store opening
programme will continue with the added benefit of DFS’s own
insights, CACI store model, and strong landlord relationships. As
with the previous acquisitions of Sofa Workshop and Dwell,
Sofology will retain full, independent control of its customer
experience and all customer-facing activities.
As previously announced, completion of the acquisition is
conditional on clearance from the Competition and Markets
Authority (“CMA") and the Financial Conduct Authority (“FCA"). We
are pleased to report that FCA clearance has been received, while
the CMA merger notice was filed on 2 October 2017 and its 40
working day Phase 1 investigation is now underway and scheduled
to complete no later than 27 November 2017. Should a Phase 2
referral be required, the transaction is then likely to complete in late
spring 2018.
Our small format store operating model development work continues,
and we intend to open a fourth small store in a further location
outside the M25, following our opening at Crawley in November
2016.
We have a clearly defined new store pipeline in place to maintain
our established rate of expansion over the next two years, subject
to final negotiation.
International development
Our measured strategy of international development continues to
progress in line with our plans. In The Netherlands, we opened
three new stores during the year at Villa Arena, Heerlen and Den
Haag and will open a further new store at Eindhoven in the autumn.
This will result in a total of six stores in the country, providing
sufficient scale and spread for us to begin a trial on the potential
sales uplift from national marketing in 2018. This will fall within the
scope of our budgeted operating loss in The Netherlands, which we
expect to be in the range of £2-3 million for a further year.
In Spain, we opened a second store in Malaga during the year, to
make DFS more accessible to the substantial British expatriate
community there, and also made our interest-free credit proposition
available to both British and Spanish customers within the country.
Notwithstanding the uncertainties surrounding Brexit, the business
has performed well and made a contribution to operating profit
during the year.
Retail space optimisation
Our accelerated programme of establishing Customer Distribution
Centres (“CDCs"), to consolidate our DFS store delivery operations
into larger and more efficient offsite facilities, had delivered 17
operational UK CDCs by the end of the year, serving a total of 72
stores. Of these, 39 had benefited from the conversion of their
former warehouse space to retail use by the year end, while the
weighted average of converted stores operational through the year
was 36. We will complete the CDC opening programme early in the
current financial year, with the commissioning of a further two
distribution centres.
DFS Annual report and accounts 2017
21
Chief Executive’s report
continued
We opened 15 new co-located Dwell stores within former DFS
warehouse space during the year, and now have a total of 30 stores
across the UK. Driven principally by new store openings we were
pleased to see Dwell’s gross sales in the period grow by 36% to
£40 million. The investment in pre-opening costs, establishing new
store teams, double-running costs for the new national distribution
centre in Milton Keynes together with the impact of cost of goods
inflation following exchange rate movements, contributed to the
generation of a small operating loss at Dwell in the year. Dwell’s
enlarged operations are becoming better-established and are thus
expected to return to profitability in FY18, while also continuing to
generate strong sales growth. We now plan six further co-located
Dwell store openings in the current financial year, with a final ten
co-located openings to be completed in FY19.
Sofa Workshop achieved double-digit percentage sales growth and
solid profitability during the year, and we have achieved pleasing
results by replacing stand-alone stores in Exeter and Edinburgh
with co-located stores alongside DFS. A further five such co-
locations are planned for the current year to bring the total store
estate up to 25. While ensuring that we retain Sofa Workshop’s
distinct identity in branding, staffing and customer service, we are
creating the potential for valuable synergies and enhancing existing
profitability by bringing its logistics and technology platforms within
the DFS Group.
Omnichannel
An effective web presence is of critical importance given the
multiple roles the site now plays: as a showroom when customers
begin their research, as a significant transactional channel, and now
as a key tool in customer service. We have retained our strong
market leadership, with dfs.co.uk continuing to attract over 40% of
all online specialist-sector traffic, and unique website visitor
numbers continuing to grow.
We have maintained our level of investment in the channel to
enhance our customers’ experience, providing them with improved
visibility and control while also reducing our own customer service
costs. This is particularly evident in customers’ increasing use of
the online channel to make enquiries, track the progress of orders,
and complete payments. During the year we also launched a
transactional clearance web channel, offering our ex-showroom
models at significant savings with live stock availability, allowing us
to clear our limited stock more effectively.
Operating efficiencies
We believe our strategy will continue to drive growth in excess of
the living room furniture market over the long-term, however we
also recognise that with the currently uncertain consumer retail
environment our Group must be prepared for a range of short-term
scenarios for market growth. While we expect to benefit from the
cost flexibility intrinsic within our business model should market
volumes decline, we are also undertaking a number of actions to
strengthen our gross margin and thereby drive operating profit
growth.
As we outlined previously, during FY17 we have sought to mitigate
the impact of foreign exchange related cost of goods inflation
primarily through new product introduction and range
respecification, with limited product price changes. This
programme has made substantial progress, however the full
benefits are only partly reflected within the financial results just
reported, with further benefits expected to be delivered in FY18.
Furthermore. with the benefit of historical and ongoing investment
in our Group technology and logistics infrastructure we have
identified opportunities to improve customer service while reducing
costs. As an example, since the start of August 2017, we have
commenced a closure programme for our national distribution
centre activities, with all finished goods now delivered direct to our
CDC network, and we are pursuing a number of efficiencies in retail
processes that have been enabled through the use of new
technology.
Customer service
Delivering the highest standards of service to all our customers is
central to the DFS Group proposition. Our approach relies both on
proactive training and Net Promoter Score (“NPS”) linked
incentivisation of our staff, combined with a feedback system that
allows us to accurately measure and track the satisfaction of
customers throughout their purchase down to product, store,
factory and employee level.
I am pleased to report a further improvement in our overall
post-purchase NPS to a record 85.2% during the year, compared
with 83.9% in the prior year, and an improvement in established
customer satisfaction (surveyed six months after orders are placed)
to 34.2%, compared with 31.2% in FY16.
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Corporate responsibility
At DFS, we believe in responsible business. We want to interact
with our customers, colleagues, shareholders, suppliers and the
people in the communities in which we operate in a way that has a
positive impact on society and the environment while supporting
the Group’s longer term commercial and strategic objectives.
We are committed to promoting a positive health and safety culture
throughout DFS and improving our environmental performance of
our operations year-on-year. We have continued to invest in
improving our processes and practices to ensure that we operate
safe, secure and responsible workplaces no matter where they are.
Our exceptional team of more than 4,200 people is central to
achieving our success and ongoing investment in the training and
development of all of our people remains a priority for the Group.
Reflecting the vital role our store colleagues have in delivering
outstanding customer service and driving retail performance, we
have reinforced our long-standing sales skills programmes with the
introduction of leadership training for all managers in the retail
organisation. We are also proud of our award-winning
apprenticeship programme, which is now delivering highly-skilled
colleagues to our business, and this year we have established a
Diversity Working Group to develop and implement new and
ongoing initiatives to ensure our teams better reflect our customer
base. We are pleased to receive external recognition for excellence
in employee conditions by the continuation for the fourth year of
our Top Employer certification from the Top Employers Institute,
and also our recognition within the Sunday Times’ Top 30 Best Big
Companies to Work For.
Outlook
The UK furniture market continues to be very challenging and the
outlook for the sector remains uncertain. Since early July our order
intake has however been satisfactory, seeing a limited decline in
year-on-year like-for-like order intake that we believe is consistent
with the overall furniture retail market and is within the range of our
expectations for the full year.
Historically, DFS has been able to build its market leading position
and generate strong cash flow for shareholders in all environments
by leveraging its fundamental strengths in store sales densities,
scale of operations, flexible cost base and vertically integrated
business model. We therefore intend to maintain our plans for
growth investment and we believe the acquisition of Sofology
further strengthens the Group’s position and creates additional
opportunities for earnings growth in the future.
Although Group sales will inevitably be affected by the market
environment, we have identified opportunities to drive operating
efficiencies and reduce financing costs that are expected to deliver
near-term benefits, particularly in the second half of the financial
year. Furthermore some pre-opening and similar costs will not
recur. Based on these plans and the current market environment,
we would expect to achieve modest, second-half weighted profit
growth and good cash generation in the current financial year and
we continue to have excellent prospects for the longer term.
Ian Filby
Chief Executive Officer
4 October 2017
DFS Annual report and accounts 2017
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Key performance indicators
Measuring performance
Financial KPIs
Gross sales (£m)
Underlying EBITDA (£m)
+1.1%
-12.7%
2017
2016
2015
2014
2013
990.8
980.4
913.1
853.4
804.3
2017
2016
2015
2014
2013
82.4
94.4
89.2
82.3
83.8
Description
Gross sales represents the total amounts
payable by external customers for goods
supplied by the Group, including aftercare
products (for which the Group acts as an
agent), delivery charges and value added
and other sales taxes.
Description
Underlying EBITDA means underlying
earnings before interest, taxation,
depreciation and amortisation, (adjusted in
FY14 for £2.3m relating to start-up losses
of acquired businesses and prior period
bonus adjustments).
Performance
Weakening consumer demand has limited
FY17 sales growth.
Performance
Underlying EBITDA reflects lower sales
growth and impact of foreign exchange
rates on gross margin.
Free cash flow (£m)
Cash conversion (%)
ROCE (%)
-24.6%
2017
2016
2015
57.0
75.6
70.7
2017
2016
2015
69.2
80.1
79.2
2017
2016
2015
18.7
21.2
21.2
Description
Free cash flow is Underlying EBITDA, less
cash capital expenditure and changes in
working capital.
Performance
The reduction in free cash flow reflects
lower EBITDA combined with increased
capital investment.
Description
Cash conversion is free cash flow expressed
as a percentage of Underlying EBITDA.
Performance
Cash conversion percentage was impacted
by increased capital expenditure on new
store openings and retail space conversion
programme.
Description
Return on Capital Employed (“ROCE") is
post-tax operating profit before non-
underlying items plus operating lease
charges expressed as a percentage of
the sum of: property, plant & equipment,
computer software, working capital and
8x operating lease charges.
Performance
ROCE has decreased primarily due to the
lower EBITDA.
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Non-financial KPIs
Number of DFS stores
+4
Net promoter score (%)
Post purchase customer satisfaction
Net promoter score (%)
Established customer satisfaction
+1.3% pt
+3.0% pt
2017
2016
2015
113
109
105
2017
2016
2015
85.2
83.9
78.8
2017
2016
2015
34.2
31.2
21.9
Description
Number of UK and Republic of Ireland stores
trading at the end of the financial period.
Description
Average across all DFS stores based on
post purchase customer satisfaction surveys.
Description
Average across all DFS stores based on
established customer satisfaction surveys.
Performance
The increase in UK and Republic of Ireland
stores is in line with our longstanding target
of 3-5 stores per year.
Performance
Continued improvement in strong post-
purchase scores.
Performance
Established customer surveys are six
months after order. Further progress
achieved in FY17.
Online growth rate (%)
10.7%
Growth in partnership
brand sales (%)
Stores with converted
warehouse space
20%
36
2017
2016
2015
10.7
15.6
17.5
2017
2016
2015
20
33
94
2017
2016
2015
36
19
8
Description
Year-on-year change in sales generated by
internet/telephone/live chat channels.
Performance
Continued strong growth in
omnichannel sales.
Description
Year-on-year change in value of sales
orders of external partnership brand
product ranges.
Performance
New ranges have continued to be
developed with our partner brands
(French Connection, House Beautiful,
Country Living).
Description
Weighted average number of DFS stores
during the financial period where former
warehouse space has been converted into
retail space.
Performance
The acceleration of our CDC opening
programme has continued throughout FY17.
DFS Annual report and accounts 2017
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Financial review
Continued investment in growth
Nicola Bancroft | Chief Financial Officer
The current challenges within our market
sector and the continued uncertainty of the
wider economy have required us to plan and
prepare for a range of possible scenarios for
the year ahead.
Although the financial year began with a continuation of the
positive trading that we had experienced in FY16, at the time of
our interim results we noted the increased risk of a softer market
environment in the remainder of the year. The weakening in
demand proved unexpectedly severe and resulted in a material
change to our outlook for the full financial year, as outlined in our
June trading update. Against the backdrop of this tougher trading
environment we have maintained our investment in the business
to deliver growth in the longer term, while taking actions to meet
the challenges of the market in its current phase, the benefits of
which will be more fully realised in FY18.
Sales and revenue
The slow-down in trading in the second half resulted in full year
performance at a lower rate than the 7% gross sales growth
reported at the interim. Group gross sales for the full financial
year increased by 1.1% to £990.8 million (FY16: £980.4 million) and
Group revenue was £762.7 million, up 0.9% on the previous year
(FY16: £756.0 million). The full year increase was driven by the
continued growth in our Dwell and Sofa Workshop brands, which
offset a small (0.6%) decrease in DFS revenue.
Gross margin
Gross profit for the year reduced by 10.3% to £120.5 million
(FY16: £134.3 million). The weakening of Sterling against the US Dollar
continued to represent a significant challenge to gross margin, which
decreased by 200 basis points to 15.8% (FY16: 17.8%).
We reported at our interim results that the action plans we have
pursued on our sourcing and range mix, together with efficiencies
in marketing and other parts of our cost base, were beginning to
have an effect. Although we made further progress on these to
generate an improved gross margin in the second half, the
decrease in sales volumes in the latter part of the year,
exacerbated by additional cost pressures from European
suppliers limited the overall benefit of these initiatives.
We have chosen to continue to invest heavily in our marketing
spend, which is a key driver of our business and the living room
furniture market overall. While we saw some media cost inflation
early in FY17, this had reversed by the end of the financial year
and we expect this deflationary trend to persist into FY18.
We continued the substantial growth programme in Dwell, which
opened 15 stores and a new national warehouse
in the financial year, doubling the size of its retail network.
In pursuing this growth strategy, we have incurred some significant
non-recurring costs associated with pre-opening store costs,
embedding high quality new store teams and double-running
of the new national Dwell warehouse. These costs, together with
the industry-wide headwind of exchange rate linked cost of goods
inflation have led to an EBITDA loss in FY17 of £1.7 million
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(FY16: £0.3 million EBITDA profit). We expect the full benefits of the
15 FY17 Dwell new store openings will be realised during FY18, and
for Dwell to return an operating profit in the year.
As we move forward into FY18 we will continue to give priority to our
strategic development and the maintenance of our value for money
proposition and competitive price points. As a consequence of our
six CDC and eight UK and international new store openings in FY17
and further openings planned for FY18, we expect our property
costs (rent and rates together) to increase by c.£5 million in FY18.
Offsetting this impact however we expect revenue growth from the
additional retail space and have also identified further opportunities
to drive operating efficiencies and product margin growth, as
detailed in the Chief Executive’s Review.
Our US Dollar purchases are fully hedged for the year ahead, giving
us certainty on buying prices, however also implying we will face,
before mitigating action, an overall £7 million expected headwind
on product margin in the first half of FY18.
Given benefits flowing from the cost inflation mitigation and
operating efficiency plans previously established, and those
currently being implemented we however anticipate that our full year
gross margin will be above that seen in FY17, driven by a higher
gross margin in the second half of FY18.
Central costs
Administrative expenses decreased by 4.5% to £38.1 million
(FY16: £39.9 million). As anticipated in last year’s report, investment
in Dwell and Sofa Workshop’s central infrastructure, group-wide
share based payment expenses and other plc-related costs
increased in FY17, however this was more than offset by savings in
bonuses and other incentive payments as a result of the lower
profits, and other savings.
Operating profit and EBITDA
The net impact of the sales and margin effects noted above was a 12.7%
decrease in EBITDA for the year to £82.4 million (FY16: £94.4
million), with a reduced EBITDA margin of 10.8% (FY16: 12.5%).
Reflecting the additional capital investment from the CDC and retail
space optimisation programme, depreciation and amortisation
charges increased to £21.9 million (FY16: £18.6 million) resulting in
operating profit of £60.5 million (FY16: £75.8 million). We expect
that depreciation and amortisation charges will again rise in FY18
towards £25 million, reflecting historical levels of investment.
Finance costs
Interest payable primarily relates to the Group’s senior bank facility
of £200 million (together with an undrawn revolving credit facility
of £30 million). Shortly after the year end the Group completed a
successful refinancing of this debt, with a new £230 million revolving
credit facility in place until August 2022. The terms of this new facility
allow us to flex the level of borrowings to more closely meet short term
requirements and is therefore expected to reduce our total financing
costs by c.£1 million pa for a comparable level of gearing.
Tax
The effective tax rate for the year was 21.1% (FY16: 22.0%,
excluding non-underlying credit received last year), higher than the
UK Corporation Tax rate applicable in the period of 19.67% (FY16:
20.0%). The variance to the applicable rate is primarily due to
disallowable depreciation on non-qualifying assets.
Earnings per share
Changes in the Group’s capital structure as a consequence of the IPO
in 2015 have now annualised and earnings per share calculations are
now comparable on an underlying basis. Excluding the effect of the
exceptional tax credit in FY16, earnings per share for FY17 were
18.7 pence, a decrease of 21.1% on the prior year.
Capital expenditure
Cash capital expenditure for the year of £28.3 million
(FY16: £24.5 million) was in line with the £28-30 million guidance
we gave last year. Investment was primarily connected to the
acceleration of the CDC and retail space optimisation programme,
new store openings in the UK and Europe and further investment in
our omnichannel infrastructure.
The CDC warehouse opening programme is due to be completed
during the first half of FY18 and we therefore anticipate cash capital
expenditure for next year to be at a more typical level of between
£24-26 million.
Cash flow and balance sheet
The Group continues to be strongly cash generative and despite
the lower profit, record capital expenditure and the payment
of a £20.1 million special dividend, we closed the financial year with
net debt of £144.5 million(FY16: £137.1 million). While this gearing ratio
of 1.75 times EBITDA (FY16: 1.45 times) is outside our previously
stated target at year end of 1.5 times due to the reduced profits in
FY17, the Board will target returning to the guidance range over the
next two financial years, subject to any potential requirement to pay
consideration in excess of the initially announced £25 million for the
acquisition of Sofology per the contingent consideration
arrangements.
Dividend
The positive trading performance in the first half and continued
strong cash generation of the business allowed us to declare and
pay a special dividend of 9.5 pence per share in addition to an
ordinary interim dividend of 3.7 pence per share.
The weaker performance in the second half and resulting lower
profit for the full year meant that adhering to our stated policy of
distributing 45-50% of profits after tax would have resulted in a
significant reduction in final dividend in contrast to our commitment
to a progressive full-year dividend. This pay-out ratio remains our
intention in the longer term and the strong long-term profit growth
and cash returns that we expect the business to deliver in the
future will allow us to return to within our policy range over time.
The Board has therefore proposed maintaining the final dividend at 7.5
pence (FY16: 7.5 pence) taking the full year ordinary dividend to 11.2
pence, an increase of 1.8% on last year (11.0 pence per share) and
representing a distribution of 60% of profit after tax.
Returning capital to shareholders remains an important part of our
strategy, subject always to the capital requirements of the
business, including acquisitions, and the current trading
environment.
Nicola Bancroft
Chief Financial Officer
4 October 2017
DFS Annual report and accounts 2017
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Corporate responsibility
At DFS, we believe in
responsible business
We want to interact with our customers,
employees, shareholders, suppliers and
the people in the communities in which
we operate in a way that has a positive
impact on society and the environment
while supporting the Group’s longer term
commercial and strategic objectives. We
don’t view corporate responsibility as a
separate business activity, so each
member of our Executive Board takes
responsibility for relevant matters within
their area.
Our priorities and areas of focus are
summarised opposite:
Our approach
The Board
Oversight of CSR matters and performance
Executive Board
Responsibility for focus areas
Areas of focus
People | Customers | Environment
Product & suppliers | Community
Who benefits
Employees | Communities | Suppliers
Customers | Shareholders
People
Focus areas:
• Training and development
• Health & safety
• Diversity
• Fair reward
Find out more
Customers
Focus areas:
• Customer satisfaction
• Service
Find out more
Products & suppliers
Focus areas:
• Quality & safety
• Sustainability & ethical sourcing
• Modern slavery
Find out more
Environment
Primary responsibility:
Chief People Officer
Primary responsibility:
Chief Marketing Officer
Chief Operating Officer
Primary responsibility:
Chief Commercial Officer
Focus areas:
• Energy use & CO2 emissions
• Waste & recycling
Primary responsibility:
Chief People Officer
Chief Commercial Officer
Find out more
Community
Focus areas:
• Engaging our people
• Giving something back
Find out more
Primary responsibility:
Chief People Officer
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People
Our exceptional team of more than 4,200
people are central to achieving our success
and ongoing investment in the training and
development of all of our people remains a
priority for the Group.
This year we have again delivered close to 4,000 days of formal
training, accredited to National Standards, in a diverse range of
areas including customer service, health and safety, sales and
administration and management skills.
We are also proud of our award-winning apprenticeship
programme, which is now delivering highly-skilled employees to
our business (see pages 30-31).
DFS firmly believes in the benefits of a diverse workforce. The
gender analysis of employee numbers is reported to the operating
board on a monthly basis and monitored against targets for sales
and management teams. DFS has established a Diversity Working
Group to develop and implement new and ongoing initiatives to
further improve our gender balance. The gender balance of
employees at July 2017 is as opposite:
Sunday Times Top 30
Big Companies List
26th
Best Improver
Gender analysis
Directors
2017
2016
n Female
n Male
3 (50%)
3 (50%)
n Female
n Male
2 (33%)
4 (67%)
Senior managers
2017
2016
n Female
n Male
2 (25%)
6 (75%)
n Female
n Male
2 (22%)
7 (78%)
All other employees
2017
2016
n Female
n Male
1,473 (34%)
2,867 (66%)
n Female
n Male
1,378 (34%)
2,702 (66%)
DFS Annual report and accounts 2017
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Corporate responsibility
continued
DFS aims to reward our employees fairly. In
addition to competitive salaries all employees
are able to influence their earnings through
reward schemes linked to performance. We
also offer a Sharesave scheme to all UK and
Republic of Ireland employees to give them
the opportunity to share in the longer term
success of the Group.
During the year we introduced Workplace
by Facebook as an internal communications
tool, providing a flexible and innovative
means of sharing information and
connecting people right across the
business. This is an exciting development
to our ongoing routes of communication
with employees which include manager
briefings, company presentations and
conferences as well as regular newsletters,
including a monthly update directly from the
Chief Executive.
Employee views are sought through regular
feedback sessions with Directors and an
active programme of employee engagement
surveys, the results of which are
communicated back to staff. This year we
were delighted to be recognised as Best
Improver in the Sunday Times Top 30 Big
Companies List, reaching 26th place.
DFS aims to support the health and welfare
of our employees and their families through
a variety of initiatives including life and
critical illness cover, and an employee
assistance service. It is the policy of the
Group to support the employment of
disabled people, wherever possible,
both in recruitment and by retention of
employees who become disabled whilst
in the employment of the Group as well
as generally through training and
career development.
We are pleased to receive external
recognition for excellence in employee
conditions by the continuation for the fourth
year of our Top Employer certification from
the Top Employers Institute.
Health & safety
We are committed to promoting a positive
health and safety culture throughout DFS,
and have continued to invest in training and
in improving our processes and practices to
ensure that we operate safe and secure
workplaces no matter where they are.
All our store managers attend a
comprehensive three-day external training
course, while production and supply chain
managers and supervisors complete
four-day IOSH certification. Other areas
of the business receive focused training
according to need. All employees complete
online training modules to ensure
awareness of DFS ‘house rules’ for health
and safety and these are reinforced with
monthly safety messages to refresh and
remind on particular subjects.
Our dedicated health and safety team has
also been working to improve reporting and
oversight of health and safety matters.
Reporting procedures have been improved
to facilitate more comprehensive and timely
capture of incidents. Although this is
expected to increase the number of
reported incidents in the short term, we
believe the enhanced data obtained is
essential in continuing to improve our
performance. In addition, we have refined
our internal audit procedures to increase
the focus on key areas of health and safety.
Monthly health and safety governance
meetings with operational directors are
chaired by the Chief People Officer to review
incidents and activities in detail and share
experience and best practice. Full reports are
provided to each Operating Board and
Reputational Risk Committee meeting.
In last year’s report we highlighted an active
investigation by the Health & Safety
Executive into an incident in one of our
factories in 2015. Formal proceedings were
concluded in March 2017 which resulted in
a fine for the Group in line with the amount
provided for in last year’s accounts. While
the nature of this incident was disappointing
we are confident that the significant
improvements we have made in the
management, control and monitoring of
health and safety have greatly reduced the
risk of a similar event in the future.
The health and well-being of our
employees, customers and partners is
extremely important to DFS and in the year
ahead we plan further enhancements to our
training and audit programmes to
consolidate our progress to date.
Apprentices
Two years ago we launched our modern
apprenticeship programme with the
recruitment of eleven young people to train as
service upholsterers. The programme rapidly
expanded and we have since taken on two
further groups of service managers as well as
two groups in both our Retail and
Manufacturing operations. During the two
year programme, participants achieve formal
qualifications in their chosen field, complete
the Duke of Edinburgh Gold Award and gain
crucial work experience. Throughout the
programme our apprentices are supported by
business mentors and appointed pastoral
carers to give them the best chance of
success. The high quality of our programme
has earned it the Youth Employment Talent
Management & Recruitment Award at the UK
Employee Experience Awards for the third
year in succession.
We have been delighted with the excellent
progress they have made and many from
the earlier groups now hold permanent
positions in the business. The success of
the programme has therefore been
two-fold: firstly providing young people with
an opportunity to genuinely develop their
talents and become productive employees
and secondly to build resource for the
business in areas where there may
otherwise be a skills shortage.
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Our dedication to bringing comfort into
people’s lives doesn’t stop at sofas
Going for gold
DFS is a longstanding partner of the Duke of Edinburgh Award and our
apprentices complete the demanding Gold Award as part of their training
programme. This involves a twelve month volunteering commitment, a sport/
physical section, a residential challenge and a three-night expedition in
addition to a skills section centred on their work area. These challenges help
to build valuable life skills of resilience, teamwork and leadership in addition
to the technical expertise learned in their chosen field.
Dylan Cropper was one of our first Service Manager Apprentices, joining the
scheme in October 2014. After successfully completing his training in our
Lincoln store, Dylan relocated to Leeds to take up a permanent position in
our Birstall store in November 2015. Dylan was also invited to give a speech
to Prince Philip at an event at St James’ Palace to talk about his experience
of the Gold Award and his apprenticeship. He did such a good job of this
that he then spoke to a much larger audience at our company conference!
Dylan Cropper:
Front row, second from right.
DFS Annual report and accounts 2017
31
Corporate responsibility
continued
Building leadership
As part of our continuing investment in the development of
the DFS team, we have this year launched a significant
programme to build the skills of our operational leaders.
FED (Future, Engage, Deliver) is a leadership approach
designed to drive highly engaged and motivated teams and to
facilitate a collaborative way of working. We have brought
together cross-functional groups of leaders by region to
experience two-day workshops in each of the key
components of the programme:
Future is all about co-creating shared priorities and pulling
together a plan. Engage sessions focus on building big
relationships to enable effective delivery of the plan, while
Deliver ensures we are on track and translates the actions
into business benefit.
In partnership with Steve Radcliffe Associates (the founders
of the programme), some 200 retail operations managers
have completed six days of development this year, with
positive impacts already being experienced. In the year ahead
we will embed the approach in our retail operations and
commence implementation across the wider business.
Customers
Our customers are at the very heart of our
business, so in pursuit of our vision of DFS
being a world-class British business we need to
deliver an outstanding experience for our
customers, at all times. Our ‘Customer Promise’
details what our customers can expect from us
and is central to our customer-focused
approach.
To ensure we deliver the highest levels of customer service we
make significant investment in employee training and
incentivisation. Staff performance and customer satisfaction are
monitored through regular inspections, surveys and mystery
shoppers, which are carried out through an independent
consumer research group.
Customer referral is the perfect indicator of excellent customer
satisfaction and we use Net Promoter Score (“NPS”) as a measure of
recommendation, which provides us with an internationally
recognised predictor with proven links to business success.
Established Customer NPS forms a component of remuneration for
employees throughout the business, including salespeople,
management and head office teams and Executive Directors.
Esquire
Corner recliner
DFS
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Products & suppliers
DFS goes to great lengths to ensure the quality
and safety of all the products it sells.
All our upholstery ranges are tested to British Standards
(Contract Level 1) for strength and durability, including frames,
arms, sofa-bed mechanisms and recliner actions. These tests
replicate the effect of repeated actions such as a 100kg person
sitting down 100,000 times (the equivalent of once a day for 274
years). Our own detailed quality checks are supported by the use
of independent safety specialists, and all upholstered furniture
items are offered with a 15 year guarantee.
Fire safety is also of paramount importance so all our products are
tested by independent organisations such as the Furniture Industry
Research Association (“FIRA") to ensure they meet our rigorous
standards policy.
We also recognise the importance of sustainability in our products
and work closely with our suppliers to ensure all the wood we use
comes from sustainable sources.
We have longstanding relationships with our upholstery suppliers
and close contact with them is maintained through frequent visits
by our operational and senior management. DFS has led the
industry in establishing quality level agreements with all suppliers;
these set targets for ways of working and service outcomes
together with a dedicated forum for working in partnership with
suppliers to monitor and improve performance, including
compliance with our ethical trading requirements.
Modern slavery
DFS is not willing to tolerate or condone modern slavery in any
part of our operations or supply chain and will take all the
appropriate actions to assist the abolition of modern slavery. We
have developed a series of steps to mitigate the risks of slavery or
human trafficking within the business, including: formal
communication with new and established suppliers, regular visits
to suppliers (both announced and unannounced), establishing a
supplier Code of Conduct and delivery of awareness programmes
and appropriate training to all employees. Further details can be
found in our full Modern Slavery Statement which is published on
our website.
We recognise that the commitment to a no-tolerance policy to
human rights abuse is a continual journey and we will continue to
assess the effectiveness of our programme through our already
established Reputational Risk Committee.
Sofa testing
The bottom test
Sofas have to put up with a lot of
bottoms bouncing on them, so
the ‘bottom test’ as we politely
like to call it, simulates the wear
and tear of a 100kg weight sitting
down over 100,000 times. That’s
the equivalent of a baby elephant
kicking back on your couch once
a day for 274 years.
The arm test
Sofa arms have to be durable
too. After all, you lean on them,
lever yourself up on them and
move the sofa around with them,
not to mention balancing your
cuppa on them. That’s why our
‘arm test’ replicates a 40kg
weight resting on them over
30,000 times.
The hammer test
We all love those fun moments
on the sofa, whether it’s the kids
doing jumping jacks or Dad
kicking back after work, we’ve
got it covered. Our impact test
reproduces these movements in
every direction to make sure
every sofa is up to the task.
Find out more at dfs.co.uk
DFS Annual report and accounts 2017
33
Corporate responsibility
continued
A healthy partnership
Back in 2012, DFS decided to help
in the fight against coronary heart
disease – the UK’s biggest killer –
by offering our customers the chance
to have their unwanted sofas taken
away for free and resold by the
British Heart Foundation. We are very
proud that this scheme has to date
raised more than £13 million to help
fund life-saving heart research.
Raised for the
British Heart Foundation
£13m
Employees trained
in CPR skills and
defibrillator awareness
1,000+
In addition, our association with the
British Heart Foundation has supported
the training of more than 1,000 new
and existing employees in CPR skills
and defibrillator awareness that will help
more people survive an out of hospital
cardiac arrest. Defibrillators are
installed in all our new stores and
CDCs. This year we also ran a week
of health and well-being activities
across our business as part of the
British Heart Foundation’s “Wear it,
Beat it” campaign.
For more information on the
British Heart Foundation, visit bhf.co.uk
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Environment
Community
DFS aims to improve the environmental
performance of our operations year on year,
with particular focus on energy efficiency,
reducing waste and reducing the impacts of our
distribution.
We have an Energy Management Policy in place to support the
reduction of the Group’s energy use where practical and
consistent with the operational needs of the business.
Greenhouse gas data
Tonnes CO2e
2017
2016
13,766
15,733
29,499
10,969
17,122
28,091
Intensity measure
(Tonnes CO2e per employee)
2016
2017
3.2
3.7
6.9
2.8
4.3
7.1
Scope 1
Scope 2
Total
Electricity use is a key component of the Group’s CO2 emissions.
Significant reductions in electricity useage have been achieved
with the further roll out of low energy lighting schemes, which now
cover 75% of our store estate. In addition, the use of automated
meters to monitor and investigate unusual movements has
enabled better control on usage of both gas and electricity.
Our customer distribution centres are now all equipped with
balers to facilitate the recycling of both cardboard and polythene
used in packaging materials and this has resulted in a more than
10% increase in the volume recycled. We were also pleased to
achieve zero waste to landfill from our head office operations and
93% landfill diversion from our other operational sites.
As our business grows, we have continued to refresh our delivery
fleet with more efficient models and are investing in telemetry
systems to support efficient driving patterns. The CO2
performance of our company car fleet continues to improve and
at an average of 103g/km is 15% below the UK national average
for new registrations.
DFS is proud to support a number of local and
national charities to help us give something
back to the people who live and work where we
do.
The partnership between DFS and the British Heart Foundation
goes from strength to strength as it reaches its fifth successful
year (see opposite).
We have also continued our support for BBC Children in Need for
a fourth year, raising £750,000 through a variety of activities
including offering customers a chance to win their entire order for
free by entering a monthly draw. Next year we have pledged to
raise a full £1 million for this incredible charity, which funds life
changing projects for disadvantaged children across the UK.
DFS remains a Gold Partner of the Duke of Edinburgh’s Award,
supporting young people to develop new skills for work and life
and contribute to their communities. This includes our
apprentices, who complete the Gold award as part of their
apprenticeship programme. We also support Gaisce – The
President’s Award, in the Republic of Ireland.
In addition to the major national charities above, DFS supports a
number of charities and initiatives based locally to our operations
across the UK and in Europe, particularly those promoting
opportunities for young people. We also offer a matched funding
plan for DFS team members raising money for a charity of their
choice. Charitable donations made by the Group during the year
amounted to £181,050 (2016: £263,099).
This Strategic Report was approved by the Board on 4 October
2017.
On behalf of the Board
Ian Filby
Chief Executive Officer Chief Finance Officer
Nicola Bancroft
DFS Annual report and accounts 2017
35
Board of Directors
Meet the team
Ian Durant (59)
Non-Executive Chair
Ian Filby (58)
Chief Executive Officer
Nicola Bancroft (53)
Chief Financial Officer
Date of joining DFS
May 2017
Date of joining DFS
September 2010
Date of joining DFS
January 2013
Experience
Ian has a background in international
finance and commercial management and
previously held non-executive roles with
Home Retail Group plc, Greene King plc
and Westbury plc.
Prior to this, he held several Finance
Director/CFO roles at Liberty International
plc, Sea Containers and Thistle Hotels plc
as well as various associate companies of
the Jardine Matheson group.
Qualifications
BA (Hons) in Development Studies,
Economic and Social History from Kent
University, Fellow of the Institute of
Chartered Accountants in England and
Wales and Fellow of the Association of
Corporate Treasurers
External appointments
• Chair of Capital and Counties
Properties plc1
• Chair of Greggs plc1
• Trustee and Chair of Finance and
Investment Committee of Richmond
Parish Lands Charity
Experience
Ian has 36 years of retail experience,
primarily at Alliance Boots, where his
most recent roles were Retail Brand
Development Director and Trading Director.
He was also previously Interim Chief
Executive Officer of Nectar and Non-
executive Chair of Shoe Zone plc.
Qualifications
MA (Hons) in Chemistry from Cambridge
University
External appointments
• Member of the British Retail
Consortium Board
• Chair of the British Retail
Consortium Policy Board
• Trustee of Pennies charity
• Director of IFF Life and Business
Solutions Ltd
Experience
Nicola has 29 years of experience in the
retail sector and previously worked for
Alliance Boots where she held a series
of senior finance roles, including
Commercial Finance Director and Retail
& Transformation Finance Director. On
joining DFS, as Commercial Finance
Director, she established the commercial
finance function and was responsible for
strategic planning, financial planning,
business intelligence and finance
partnering providing support to
all business areas.
Qualifications
BA (Hons) in Accounting and Finance and
fellow of the Chartered Institute of
Management Accountants
External appointments
None
N
36
DFS Annual report and accounts 2017
Committee membership key
A
N
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Audit Committee Member
Nomination Committee Member
Remuneration Committee Member
A
N
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Committee Chair
Committee Chair
Committee Chair
None
In preparation for the IPO in March 2015, all of the directors were appointed to the board
of DFS Furniture plc in February 2015 with the exception of Nicola Bancroft who was
appointed in August 2016 (following the retirement of Bill Barnes in July 2016) and Ian
Durant who was appointed in May 2017 (following the stepping-down of Richard Baker).
1 Chair of the Nomination Committee
2 Chair of the Remuneration Committee
3 Chair of the Audit Committee
Luke Mayhew (64)
Senior Independent Non-Executive
Director
Gwyn Burr (54)
Independent Non-Executive Director
Julie Southern (57)
Independent Non-Executive Director
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Date of joining DFS
October 2014
Date of joining DFS
December 2014
Date of joining DFS
February 2015
Experience
Luke previously served for 13 years on the
Board of John Lewis Partnership,
including as Managing Director of the
Department Store division. He also spent
five years at British Airways plc and seven
years at Thomas Cook Group plc in senior
positions. He was also previously Chair of
the British Retail Consortium, a Non-
Executive Director of WH Smith plc and
Brambles Ltd, and Chair of Pets at Home
Group Limited.
Experience
Gwyn previously served on the operating
board of J Sainsbury plc with
responsibility for marketing, customer
service, human resources, corporate
responsibility and corporate
communications, as well as key
sponsorship schemes including the
Paralympic Games programme. Before
that, she held various management
positions within the supermarket
group Asda.
Experience
Julie was previously with Virgin Atlantic for
13 years, firstly as CFO for ten years
before taking on the role of Chief
Commercial Officer. Prior to joining Virgin
Atlantic, she was Group Finance Director
of Porsche Cars GB and Finance and
Operations Director of WH Smith’s
subsidiary HJ Chapman & Co. Up to
December 2016 she was an Independent
Non-Executive Director of Gate Group
Holdings AG.
Qualifications
BA (Hons) in Politics, Philosophy and
Economics from Oxford University and a
Masters in Economics from the University
of London
Qualifications
BA (Hons) in Economics and History from
Bradford University
Qualifications
MA (Hons) in Economics from Cambridge
University and member of the Institute of
Chartered Accountants in England and
Wales
External appointments
• Independent Non-Executive Director
of InterContinental Hotels Group plc2
• Trustee of BBC Children in Need
• Director of the National Youth
Orchestra of Great Britain
• Director of Platinum Sports
Management Ltd
• Governor of the Southbank Centre
External appointments
• Independent Non-Executive
Director of Metro AG
• Independent Non-Executive
Director of Hammerson plc2
• Independent Non-Executive
Director of Just Eat plc2
• Non-Executive Director of
Sainsbury’s Bank plc
External appointments
• Independent Non-Executive
Director of NXP Semiconductors N.V.
• Independent Non-Executive
Director of Cineworld Group plc3
• Independent Non-Executive
Director of Rentokil Initial plc3
• Independent Non-Executive
Director of Stagecoach Group plc2
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DFS Annual report and accounts 2017
37
Directors’ report
Introduction
The Directors present their Annual Report and audited financial
statements for the 52 weeks ended 29 July 2017, in accordance
with section 415 of the Companies Act 2006. Certain disclosure
requirements for inclusion in this report have been incorporated
by way of cross reference to the Strategic report and the Directors’
remuneration report, and should be read in conjunction with
this report.
The following also form part of this report:
• greenhouse gas emissions, which can be found on page 35;
• employees, which can be found on page 29;
• the Corporate Governance statement, set out on pages 40 to 46;
and
• our strategy and objectives, set out on pages 10 to 15.
Information regarding the Company’s charitable donations can be
found in the corporate responsibility report on pages 28 to 35.
No political donations were made in FY17 (FY16: £nil).
The Company
DFS Furniture plc (the “Company”) is a company incorporated and
domiciled in the UK, with registration number 07236769.
The shares of the Company have been traded on the main market
of the London Stock Exchange throughout the 52 weeks ended 29
July 2017. The Company has no overseas subsidiaries but operates
branches in the Republic of Ireland, Spain and the Netherlands.
Results and dividends
The Group’s results for the year are set out in the consolidated
financial statements on pages 71 to 94. The Company only results
of DFS Furniture plc are set out on pages 95 to 98. The Directors
have declared an interim ordinary dividend of 3.7 pence per share,
and a special dividend of 9.5 pence per share, both of which were
paid on 21 June 2017, and also proposed a final dividend of 7.5
pence per share to be paid in respect of the 52 weeks ended 29
July 2017. It is intended that the final dividend will be paid on 27
December 2017 to all shareholders on the register on 8 December
2017. The Company’s shares will trade ex-dividend from 7
December 2017.
Directors
The Directors of the Company who held office at the date of this
Annual Report and their biographical details can be found on pages
36 to 37. Following recommendations from the Nomination
Committee, the Board considers that all Directors continue to be
effective, committed to their roles and able to devote sufficient time
to discharge their responsibilities.
All of the Directors were appointed to the Company on 2 February
2015 with the exception of Nicola Bancroft who was appointed on 1
August 2016 and Ian Durant who was appointed on 2 May 2017. In
accordance with the Company’s Articles of Association, all of the
Directors will retire from office and seek re-election, with exception
of Ian Durant who will seek election, at the Company’s Annual
General Meeting on 1 December 2017.
Directors’ interests
Information about the Directors’ interests in the Ordinary Shares of
the Company on 29 July 2017, or date of appointment if later, and
any subsequent changes as at 4 October 2017 is set out in the
Directors’ remuneration report on pages 54 to 64.
Directors’ indemnities and insurance
In accordance with the Companies Act 2006 and the Company’s
Articles, the Company has purchased and maintains directors’ and
officers’ liability insurance cover which remains in place as at the
date of this report. A review is carried out on an annual basis to
ensure that the Board remains satisfied that an appropriate level of
cover is in place.
Employees
As at the year end the Company employed 4,354 employees (as set
out in the gender analysis table on page 29).
Articles of Association
The Articles of Association of the Company can only be amended
by special resolution at a general meeting of the shareholders. No
amendments are proposed at the 2017 AGM.
Annual General Meeting (‘AGM’)
The Company’s next AGM will take place on 1 December 2017 at
DFS Head Office, 1 Rockingham Way, Redhouse Interchange,
Adwick-le-Street, Doncaster, DN6 7NA at 2.30pm, and the Chair of
each of the Board’s Committees will be present to answer
questions put to them by shareholders. The Annual Report and
Accounts and Notice of the AGM, including the resolutions to be
proposed, will be sent to shareholders at least 21 clear days prior
to the date of the meeting.
To encourage shareholders to participate in the AGM process, the
Company proposes to offer electronic proxy voting through the
CREST service and all resolutions will be proposed and voted on at
the meeting on an individual basis by shareholders or their proxies.
Voting results will be announced through the Regulatory News
Service and made available on the Company’s corporate website.
Share capital
Details of the Company’s share capital are set out in Note 21 to the
consolidated financial statements. The Company has one class of
Ordinary Shares and, as at 4 October 2017, the Company had an
issued share capital of 213,030,601 Ordinary Shares of £1.50 each.
The rights and obligations attached to these shares are governed
by UK law and the Company’s Articles of Association. Holders of
Ordinary Shares of the Company are entitled to receive notice and
to attend and speak at general meetings. On a show of hands,
every shareholder present in person or by proxy (or duly authorised
corporate representatives) shall have one vote and, on a poll, every
member who is present in person or by proxy shall have one vote
for every share held.
Other than the general provisions of the Articles of Association and
prevailing legislation, there are no specific restrictions on the size of
a holding or on the transfer of the Ordinary Shares. The Directors are
not aware of any agreements between holders of the Company’s
shares that may result in the restriction of the transfer of securities or
on voting rights. No shareholder holds securities carrying any special
rights or control over the Company’s share capital.
Authority to purchase own shares
At the last AGM of the Company on 2 December 2016, the
Company was authorised to purchase a maximum of 10% of the
Company’s issued share capital. This authority will expire at the
close of the next AGM on 1 December 2017 unless revoked, varied
or renewed prior to that meeting.
38
DFS Annual report and accounts 2017
Since the date of the last Annual Report, no shares have been
purchased by the Company and 858 treasury shares have been
utilised to satisfy the exercise of SAYE options. As at the date of this
Annual Report, 1,499,142 Ordinary shares of £1.50 each are held by
the Company as treasury shares with the expectation that they will be
utilised to satisfy future share-based employee-award obligations.
A resolution will be proposed at the 2017 AGM to renew this authority.
Authority to allot shares
At the last AGM of the Company on 2 December 2016, the Company
was granted a general authority by its shareholders to allot shares up
to an aggregate nominal amount of £105,765,301 (or up to
£211,530,601 in connection with an offer by way of a rights issue).
Going concern
The Group remains highly cash generative and currently has
sufficient medium and long term facilities in place, including a
£230.0 million revolving credit facility in place until August 2022, of
which £200.0 million is currently utilised at the date of this Annual
Report. Further details of these facilities and the Group’s financial
management objectives are detailed in the financial statements.
On the basis of their assessment of the Group’s financial position,
forecasts and projections, the Company’s Directors have a reasonable
expectation that the Company and the Group will be able to continue
in operational existence as detailed in the Viability Statement on page
19. Thus they continue to adopt the going concern basis of accounting
in preparing the annual financial statements.
As at the date of this Annual Report, no shares have been issued
under this authority. This authority will expire at the conclusion of the
2017 AGM unless revoked, varied or renewed prior to that meeting.
Auditor and disclosure of information to auditor
Each of the Directors at the date of this report confirms that:
A resolution will be proposed at the 2017 AGM to renew this authority.
which the Company’s auditor is unaware; and
• so far as he/she is aware, there is no relevant audit information of
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Major interests in shares
As at 2 October 2017, being the last practicable date prior to the
publication of this report, the Company had been advised of, and
subsequently disclosed, the following significant notifiable interests
in the Company’s voting rights:
Number of
voting rights
% voting
rights
Date of last
notification
Jupiter Asset Management
12,391,391
5.9% 23 Oct 2015
Pelham Long/Short Small Cap
Master Fund Ltd
Franklin Templeton Fund
Management Ltd
12,292,942
5.8% 11 Apr 2016
11,950,000
5.6% 11 Apr 2016
UBS Investment Bank
11,105,669
5.3% 27 Sept 2017
SK Family Investment LLC
10,611,623
5.0% 28 Sept 2017
Royal London Asset
Management Ltd
Canaccord Genuity
Group inc.
8,589,347
4.1% 16 Jun 2017
8,000,000
3.8% 20 Sept 2017
Aviva plc & subsidiaries
6,376,176
3.0% 14 Feb 2017
These interests may have changed since the Company received
notification. However, notification is not required until the next
applicable threshold is crossed.
• he/she has taken all the reasonable steps that he/she ought to
have taken as a Director to make himself/herself aware of any
relevant audit information and to establish that the Company’s
auditor is aware of the information.
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The confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
KPMG LLP has expressed its willingness to continue in office as
auditor and a resolution to re-appoint it as the Company’s auditor
will be proposed at the forthcoming AGM.
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Subsequent events
On 2 August 2017, DFS Furniture Company Ltd, a wholly-owned
subsidiary of the Company, exchanged contracts to acquire all the
outstanding share capital of Sofology Limited, subject to regulatory
approval, for an initial enterprise value of £25.0 million, on a debt-free
cash-free basis, subject to a potential further earn-out payment.
On 2 August 2017, DFS Furniture Holdings plc, a wholly-owned
subsidiary of the Company, converted its existing borrowings
(comprising a £200.0 million term loan and £30.0 million revolving
credit facilities) to a new five-year £230.0 million revolving credit
facility structure, maturing in August 2022, with an additional
£100.0 million uncommitted accordion feature.
This report has been approved by the Board of Directors and has
been signed on its behalf by:
Financial risk management
The Company’s objectives and policies on financial risk
management, including information on credit, liquidity and market
risks can be found in note 23 to the financial statements.
Paul Walker
Group Company Secretary
4 October 2017
DFS Annual report and accounts 2017
39
Corporate governance statement
Introduction
Dear Shareholder
I am pleased to introduce DFS Furniture plc’s Corporate governance
report for the year, being my first as the new Non-Executive Chair,
having succeeded Richard Baker on 2 May 2017.
For the period up to my appointment on 2 May 2017, this report is
based on information and advice received from my Board
colleagues, Company management and advisors. The introductory
briefings I have received, along with my observations and
experiences since my appointment, are consistent with a Group
which is committed to continually developing high standards of
corporate governance.
In this report, we include a description of how the Company has
applied the principles and provisions of the Governance Code and
provide details of the Governance structure and framework.
Board composition
Following the change in the Chair of the Board noted above, the
Board is currently comprised of an independent Non-Executive
Chair and two Executive Directors along with three independent
Non-Executive Directors. The Governance Code recommends
that at least half the board of directors of a UK listed company,
excluding the Chair, should comprise non-executive directors
determined by the board to be independent in character and
judgement and free from relationships or circumstances which
may affect, or could appear to affect, the directors’ judgement.
As a result, we continue to be compliant with the Governance
Code in this regard.
In last year’s annual report, we noted an area of ongoing
non-compliance with the Governance Code due to fact that
Richard Baker, the Company’s former Non-Executive Chair, was,
for the purposes of the Governance Code, not considered to
have been independent on his appointment as Chair in 2010 due
to his role as an Operating Partner at Advent. As a consequence
of my appointment on 2 May 2017 and, in particular, my
independence on that date, this area of non-compliance no
longer exists.
As we move into 2018, potentially the economic and political
conditions remain uncertain, however I am confident that DFS’s
Board and governance structures provide a sound base for the
Group to be best placed to respond to the challenges and
opportunities ahead.
I look forward to welcoming shareholders to my first DFS Annual
General Meeting, to be held in Doncaster on 1 December 2017,
and to receiving and answering your questions.
Ian Durant
Chair of the Board
4 October 2017
Ian Durant | Chair of the Board
I am confident that our Board and
governance structures provide a sound
base for the Group to respond to the
challenges and opportunities ahead.
Key governance activities
The main governance issues addressed by the Board, and
its Committees, during the year include:
• assessing the financial performance and future strategy
of the Group, in the context of the recent challenging
trading environment and market expectations
• considering potential strategic acquisitions, including the
approval of the conditional acquisition of Sofology Ltd
• monitoring health and safety performance throughout
the Group, to promote both compliance and best
practice
• planning and managing the selection process of the new
Non-Executive Chair of the Board, to succeed Richard
Baker in May 2017
• implementing the EU Audit reforms resulting in an
updated policy regarding non-audit services and the
appointment of Deloitte LLP as tax advisor to the Group
• considering the effects and implementation of future
changes to lease accounting, developments in FCA
regulatory compliance and the requirements of the
General Data Protection Regulation
• reviewing Executive and senior management pay, and
management succession planning, to ensure stakeholder
engagement while rewarding excellent performance and
aiding retention and recruitment
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Governance framework
DFS Furniture plc Board
Members:
Independent Non-Executive Chair
3 Independent Non-Executive Directors
2 Executive Directors
Audit Committee
Remuneration Committee
Nomination Committee
Members:
3 Independent Non-Executive
Directors
Members:
3 Independent Non-Executive
Directors
The Audit Committee’s role is to assist
the Board with the discharge of its
responsibilities in relation to financial
reporting, internal controls, risk
management, compliance and audit.
The Remuneration Committee
recommends the Group’s policy on
executive remuneration and
determines the levels of remuneration
for Executive Directors, the Chair of the
Board and senior management.
Members:
Independent Non-Executive Chair
3 Independent Non-Executive
Directors
The Nomination Committee assists
the Board in reviewing the structure,
size and composition of the Board
and succession planning for
senior management.
See committee report
47
See committee report
54
See committee report
52
Executive Board
DFS Annual report and accounts 2017
41
Corporate governance statement
continued
Compliance with the UK Corporate Governance Code 2016:
Introduction
The Board is wholly committed to upholding high standards of
corporate governance and following a rigorous structure for the
supervision, control and management of the Group.
The UK Corporate Governance Code (“Governance Code”), the
latest version of which was published by the Financial Reporting
Council in April 2016, applies to financial years beginning on or
after 17 June 2016. A copy of the Governance Code can be found
at www.frc.co.uk.
The Corporate Governance report that follows, which incorporates
reports from the Audit and Nomination Committees on pages 47 to
53 together with the Strategic Report on pages 1 to 35, the
Directors’ Remuneration Report on pages 54 to 64 and the
Directors’ Report on pages 38 and 39, describes and explains how
the Company has applied the relevant provisions and principles of
the Governance Code, and the Financial Conduct Authority’s
Listing Rules and Disclosure and Transparency Rules throughout
the year.
Compliance statement
The Company has adopted the “Governance Code” since
admission of the Company’s shares to the main market of the
London Stock Exchange on 11 March 2015. Up to 1 May 2017, the
Company has applied all of the main principles of the Code with the
exception of “A.3.1 The Chairman was not independent on
appointment”, the explanation for which is noted in the Chair’s
introduction to Corporate Governance. However, from 2 May 2017,
following the appointment of Ian Durant as Chair of the Board, the
Company has been fully compliant with the Governance Code.
The role of the Board
The Board currently consists of three Independent Non-Executive
Directors, an Independent Non-Executive Chair and two Executive
Directors. Biographies of all members of the Board appear on
pages 36 to 37.
The Board is collectively responsible for the long-term success of
the Company and for leading and controlling the Group and has
overall authority for the management and conduct of the Group’s
business, strategy and development. The Board is also responsible
for ensuring the maintenance of a sound system of internal control
and risk management (including financial, operational and
compliance controls and for reviewing the overall effectiveness of
systems in place) and for the approval of any changes to the
capital, corporate and/or management structure of the Group.
The Chief Executive Officer (CEO) and Chief Financial Officer (CFO)
are members of the Board and two levels of management sit below
the Board: the Executive Board and the Operating Board, each of
which are led by the CEO. The CEO and CFO therefore act as a
bridge between Management and the Board. The Board delegates
to management the day-to-day running of the business within
defined parameters and Board meetings are scheduled to coincide
with key events in the corporate and trading calendar.
The Board has adopted a formal schedule of matters reserved for
its approval and has delegated other specific responsibilities to its
Committees. This schedule sets out key aspects of the affairs of
the Company which the Board does not delegate, including:
• approval of the annual Group budget and strategic four year
business plan and review of performance against them, including
approval of growth activities into new markets or countries;
• approval of the interim/annual report and accounts and any
preliminary announcement, including approval of dividend policy/
payments;
• approval of treasury policies, material guarantees, granting of
security and entry into/material amendment of loan facilities;
• approval and review of the management of balance sheet foreign
exchange exposure;
• approval of material finance and operating leases and approval
of major investments including corporate/capital acquisitions/
disposals;
• approval of changes to the Group’s capital structure including
reductions of capital and share issues/buybacks;
• approval of recommendations from the Audit, Remuneration or
Nomination committees;
• ensuring satisfactory dialogue with shareholders based on a
mutual understanding of objectives;
• approval of changes to the structure, size and composition of the
Board and any other control structure;
• maintenance of a sound system of internal controls and risk
management, including approval of the Group’s risk register;
• any decision likely to have a material impact on the Group from
any financial, operational, strategic or reputational perspective.
All Directors have access to the advice and services of the
Company Secretary, who has responsibility for ensuring
compliance with the Board’s procedures. All the Directors have the
right to have their opposition to, or concerns over, any Board
decision noted in the minutes. During the year, no such opposition
or concerns were noted. The Board has adopted guidelines by
which Directors may take independent professional advice at the
Company’s expense in the performance of their duties.
The Chair, both previous and current, and the Non-Executive
Directors met several times, in aggregate, throughout the year
without the Executives present.
Board committees
Subject to those matters reserved for its decision, the Board has
delegated to its Audit, Nomination and Remuneration Committees
certain authorities. There are written terms of reference for each of
these Committees, all of which have been reviewed and amended,
where appropriate, during the year. The reviewed terms of reference
were adopted by the Board on 26 June 2017 and are available on the
Group’s corporate website, www.dfscorporate.co.uk. Separate
reports for each Committee are included in this Annual Report from
pages 47 to 64.
42
DFS Annual report and accounts 2017
Role of the Chair and Chief Executive Officer
Up to 1 May 2017, the Board was chaired by Richard Baker, who was appointed in 2010 whilst the Group was under Advent’s private
ownership. From 2 May 2017, the Board has been chaired by Ian Durant. The Chair of the Company is responsible for leading the
Board and ensuring its effectiveness in all aspects of its role. Ian Filby is the Chief Executive Officer and is responsible for managing
the profitable operation of the Company to create shareholder value by promoting the long term success of the Company. The role is
distinct and separate to that of the Chair and clear divisions of accountability and responsibility have been agreed by the Board and
are set out in writing, as summarised below:
Role of the Chair
Role of the Chief Executive Officer
• managing the business of the Board including organising
• managing the Group’s physical, financial and human
and chairing regular meetings;
resources;
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• ensuring the submission to the Board by the Chief Executive
of objectives, policies and strategies for the Group, including
the Group business plan and annual budget;
• keeping under review with the Board the general progress
and long term development of the Group and ensuring that
effective strategic planning for the Group is undertaken;
• facilitating the contributions of Non-Executive Directors to
the leadership of the Group;
• holding meetings with the Non-Executive Directors without
the Executive Directors present, as appropriate;
• ensuring effective communication between the Board and
the Company’s shareholders;
• acting on the results of the Board’s annual review of its and
its Committees’ and individual Directors’ performances; and
• appraising the performance of the Chief Executive Officer
and making appropriate recommendations as to his or her
remuneration to the Remuneration Committee.
Role of the Senior Independent Director (SID)
• planning the Group’s strategies effectively;
• ensuring that the Group complies with all relevant legislation
and regulatory requirements;
• allocating duties and responsibilities to Directors;
• reviewing the performance of the other Executive Directors
and making appropriate recommendations as to their
remuneration to the Remuneration Committee;
• managing the Group’s relations with shareholders,
customers, suppliers, regulators, other public organisations,
other companies and the media; and
• keeping the Chair and other Non-Executive Directors
informed in respect of all relevant matters.
The Governance Code recommends that the Board of Directors of a company with a premium listing on the official list of the London
Stock Exchange (“Official List”) should appoint one of the Independent Non-Executive Directors to be the Senior Independent
Director to provide a sounding board for the Chair and to serve as an intermediary for the other Directors when necessary. The Senior
Independent Director should be available to shareholders if they have concerns which the normal channels through the Chair, Chief
Executive Officer or other Executive Directors have failed to resolve, or for which such channels would be inappropriate. Luke
Mayhew was appointed as the Senior Independent Director and has served in this capacity throughout the year.
DFS Annual report and accounts 2017
43
Corporate governance statement
continued
Board balance and independence
As mentioned in the Chair’s introduction, DFS has been fully compliant with the recommendations of the Governance Code in this area since 2
May 2017. During the period preceding this, although non-compliant, any perceived risks were mitigated with appropriate safeguards.
In particular, these safeguards included a relationship agreement (“the Relationship Agreement”) in place with its previous principal
shareholder, Advent, and with the previous Chair, Richard Baker.
The principal purposes of the Relationship Agreement were to ensure that:
• the Group and its subsidiaries are capable of carrying on their business independently of Advent and/or Richard Baker;
• all transactions and arrangements between the parties are conducted at arm's length and on normal commercial terms; and
• neither party take any action or propose a shareholder resolution that would have the effect of preventing the Group from complying
with its obligations under the Listing Rules.
The Company confirms that the terms of the Relationship Agreement were fully complied with up to its termination on 8 November 2016,
being the date upon which the ownership/control of the ordinary share capital/voting rights of the Company by Advent and Richard Baker,
in aggregate, fell below 15%.
Under the terms of the Relationship Agreement, Advent was entitled to nominate for appointment to the Board one Nominee Director, to
be approved as being suitable by the Nomination Committee, subject to the same ownership/control terms noted above. During the period
from the date of the last annual report to the termination of the Relationship Agreement on 8 November 2016, this entitlement remained in
force but was not exercised.
Board skills matrix
Principal skills and experience
Retail
Customer
Service/
Marketing
People
Operations
International
Regulatory
Finance
Ian Durant
Chair
Ian Filby
Chief Executive Officer
Nicola Bancroft
Chief Financial Officer
Luke Mayhew
Senior Independent Non-Executive Director
Julie Southern
Independent Non-Executive Director
Gwyn Burr
Independent Non-Executive Director
Length of appointments
Non-Executive appointments to the Board are for an initial period of three years, are subject to annual re-election by shareholders at the
Company’s annual general meeting and to any requirements of the Listing Rules, and are contingent on continued satisfactory performance.
Board length of service
Gender analysis
Executive/Non-Executive
analysis
n 0-3 years
n 3-6 years
n 6+ years
3 (50%)
2 (33%)
1 (17%)
n Female
n Male
3 (50%)
3 (50%)
n Executive
n Non-Executive
2 (33%)
4 (67%)
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Information, meetings and attendance
During the year, the Board met on seven occasions to review
operational, trading and strategic performance, including the approval
of the updated strategic four year plan and budget for the next
financial year. In addition, two scheduled telephone meetings were
held to review important trading periods, and a further four ad-hoc
telephone meetings were held to review corporate acquisition activity,
and market announcements regarding trading performance.
The Board has a full programme of Board meetings planned for
the year ahead and intends to meet seven times, with additional
telephone meetings to review important trading periods, as
appropriate. At these meetings, the Board will monitor the
Company’s performance against the agreed strategy and business
plan and review specific business areas, including Health and
Safety and regulatory matters, in order to maintain and enhance
a broad and thorough understanding of the business model.
A summary of meeting attendance for the year is as follows:
Meetings and attendance
Date of
appointment
Audit
Committee
Remuneration
Committee
Nomination
Committee
Board
Total meetings
in financial year
13
Richard Baker 3 Feb 2015
9/91
Ian Durant
2 May 2017
4/43
Ian Filby
3 Feb 2015 13/13
Nicola Bancroft 1 Aug 2016 13/13
Luke Mayhew 3 Feb 2015 13/13
Gwyn Burr
3 Feb 2015 11/134
Julie Southern 3 Feb 2015 13/13
3
–
–
–
–
3/3
3/3
3/3
4
–
–
–
–
4/4
4/4
4/4
6
3/42
0/03
–
–
6/6
5/64
6/6
Notes:
1. Richard Baker stepped down from the Board on 1 May 2017 and
therefore was only eligible to attend nine Board meetings in the year.
2. Richard Baker was only eligible to attend four Nomination Committee
meetings in the year, due to the subject matter of the other two meetings
deeming his attendance inappropriate. He was unable to attend one
meeting (due to illness) but received the papers, provided advance input
and received a full detailed briefing shortly after.
Ian Durant was appointed to the Board/Nomination Committee on 2 May
2017 and therefore was only eligible to attend four Board meetings and
no Nomination Committee meetings in the year.
3.
4. Gwyn Burr was unable to attend two telephone Board meetings and one
Nomination Committee telephone meeting (due to prior commitments)
but received the papers, provided advance input for all meetings and
received a full detailed briefing shortly after.
All Directors are invited to attend the Audit Committee, the Chair of
the Board is invited to attend the Remuneration Committee, and the
Chief Executive Officer is invited to attend both the Remuneration
and Nomination Committees (where appropriate). Members of the
Executive Board are also invited to attend committee meetings
as appropriate.
At each Board meeting, the Board receives and discusses reports
from each of the Executive Directors. In addition, and as part of the
process of maintaining an awareness of the Company’s activities and
assessing the ability of the management team, members of the senior
management team are invited to attend Board meetings to present
papers to the Board. This process also affords senior managers the
opportunity to bring matters to the attention of the Board.
The Chair, in conjunction with the Group Company Secretary, is
responsible for ensuring that the Directors receive accurate, timely
and clear information. Prior to each scheduled Board meeting,
a pack is circulated in respect of the most recent financial period
which includes an update on key performance targets, trading
performance against budget and includes detailed financial and
non-financial data and analysis. Board packs are distributed in the
week prior to each meeting to provide sufficient time for Directors
to review their papers in advance. If Directors are unable to attend
a Board meeting for any reason, they nonetheless receive the
relevant papers and are consulted prior to the meeting and their
views are made known to the other Directors.
Conflicts of interest
The duties to avoid potential conflicts and to disclose such
situations for authorisation by the Board are the personal
responsibility of each Director. All Directors are required to ensure
that they keep these duties under review and to inform the
Company Secretary on an ongoing basis of any change in their
respective positions.
The Company’s conflict of interest procedures are reflected in its
Articles of Association (“Articles”). In line with the Companies Act
2006, the Articles allow the Directors to authorise conflicts and
potential conflicts of interest, where appropriate. The decision to
authorise a conflict can only be made by non-conflicted Directors. The
Board considers conflicts or potential conflicts at each Board meeting.
The Articles require the Company to indemnify its officers, including
officers of wholly-owned subsidiaries, against liabilities arising from
the conduct of the Group’s business, to the extent permitted by law.
For a number of years, the Group has purchased Directors’ and
officers’ liability insurance and this is anticipated to continue.
Development
All Directors have received induction training on joining the Board
and, as part of the annual Board evaluation, the development
needs of each Director are appraised. All Non-Executive Directors
have met key members of senior management and advisors to the
Company, many of whom have given presentations to the Board
and Committee members during various Board and Committee
meetings, in order to continue the development of their
understanding of the Group and the issues it faces.
In particular, with regard to the appointment of Ian Durant as Chair,
a bespoke induction programme was developed and delivered in
order to provide a comprehensive and detailed introduction to the
business model, its people and operations, as well as the current/
future strategic issues.
DFS Annual report and accounts 2017
45
Corporate governance statement
continued
Board evaluation
The Board carried out its second review of its own effectiveness,
and that of its various Committees, during the year. This review was
undertaken following the second anniversary of the IPO, and
therefore coincided with the period during which the change of
Chair occurred. As a consequence, the review was facilitated by
the Senior Non-Executive Director and the Company Secretary and
involved each Director (including the previous Chair) completing a
formal questionnaire on the performance of the Board and each of
the Board committees, considering the balance of skills, diversity,
independence and knowledge of the Company on the Board, how
the Board works together, and other factors relevant to its
effectiveness.
The consensus was that the Board, and its Committees, had
performed effectively and had addressed many of the areas
previously identified as requiring further attention. Nevertheless,
the Board recognised areas for on-going development which
should form the focus for the Board, and its new Chair, in the
following year.
The Governance Code provides that evaluation of the Board of
FTSE 350 companies should be externally facilitated at least every
three years. Therefore, in-line with this best practice, it is intended
that such a review will take place during 2018.
The Senior Independent Director, Luke Mayhew, together with the
Independent Non-Executive Directors, evaluated the performance
of the previous Chair and discussed the results with him.
Election of Directors
The Board can appoint any person to be a Director, either to fill a
vacancy or as an addition to the existing Board. Any Director so
appointed by the Board shall hold office only until the next following
AGM and shall then be eligible for election by shareholders.
In accordance with the Articles, Ian Durant will be offering himself
for election, along with all the other Directors for re-election,
at the AGM to be held at DFS Head Office, 1 Rockingham Way,
Redhouse Interchange, Adwick-le-Street, Doncaster, DN6 7NA,
on 1 December 2017, full details of which are set out in the notice
of meeting accompanying this Annual Report.
As noted above, following the formal internal evaluation process of
the effectiveness of the Board, the Board is satisfied that each
Director remains competent to discharge his/her responsibilities as
a member of the Board.
External appointments
The Executive Directors may accept outside appointments
provided that such appointments do not in any way prejudice their
ability to perform their duties as Executive Directors of the
Company. Ian Filby continues to be a director of IFF Life and
Business Solutions Limited, a trustee of the Pennies charity and a
member of the British Retail Consortium Board. The Board
considers that these appointments do not adversely impact his
ability to carry out his role. Nicola Bancroft does not currently hold
any outside appointments.
The Non-Executive Directors’ appointment letters anticipate a
minimum time commitment of two days per month, recognising that
there is always the possibility of an additional time commitment and
ad hoc matters arising from time to time, particularly when the
Company is undergoing a period of increased activity. The average
time commitment inevitably increases where a Non-Executive
Director assumes additional responsibilities such as being
appointed to a Board Committee.
Relations with shareholders
In accordance with the Code, the Board recognises that it has
responsibility for ensuring that a satisfactory dialogue with
shareholders takes place and any major shareholders’ issues
and concerns are communicated to the Board through the Chair.
As part of its investor relations programme, the Executive Directors
have maintained an active dialogue with its key stakeholders,
including institutional investors, during the year in order to discuss
issues relating to the performance of the Group including strategy
and new developments.
In particular, the Company communicates with both the institutional
and private shareholders through the following means:
Interaction with all shareholders
• The Company’s corporate website (www.dfscorporate.co.uk),
where investor information and news is regularly updated.
• The Annual Report, which sets out details of the Company’s
strategy, Business Model and performance over the past
financial year and plans for future growth.
• The Annual General Meeting, where all shareholders have
the opportunity to vote on the resolutions proposed and to
put questions to the Board and executive team.
• Presentations of full-year and interim results to analysts and
shareholders, which are also available on the Company’s
corporate website.
Interaction with institutional shareholders
• The Chief Executive Officer, Chief Financial Officer and
Director of Corporate Finance hold meetings with institutional
investors following the full-year and interim results.
• The Chair meets with institutional shareholders where
appropriate.
Interaction with private shareholders
• Dial-in facility to live presentations of the full-year and
interim results.
• Dedicated email point of contact to answer shareholder
questions and queries.
Investor relations activity, analysis of the share register, comments
by analysts, views of major shareholders and advice from the
Company’s brokers are all ongoing items of review by the Board in
order to maintain an understanding of market perceptions.
The Non-Executive Directors are available to discuss any matter
stakeholders might wish to raise. The Chair and Non-Executive
Directors are also available to attend investor relations meetings or
to request meetings with investors or analysts independently of the
Group’s management, if required.
DTR Disclosure
The disclosures required under DTR 7.2 of the Disclosure and
Transparency Rules are contained in this report, and the Audit
Committee and Nomination Committee Reports, except for
information required under DTR 7.2.6 which is contained in the
Directors’ Report on pages 38 and 39.
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Audit Committee report
Julie Southern | Chair of the Audit Committee
As Chair of the Audit Committee, I am
committed to keeping its activities
proactively under review in the light of
regulatory and reporting developments.
Chair’s introduction
I am pleased to present this year’s Audit Committee report.
The Committee plays an important role in the governance of the
Company and this report sets out details of the work undertaken
by the Committee during the year. The Committee's main
activities focused on the integrity of financial reporting, the
quality and effectiveness of both the internal audit function and
the external audit, ensuring appropriate systems of internal
control and reviewing all aspects of risk facing the Group.
As noted last year, the internal audit function has continued to
expand its scope and focus and I am pleased that all subsidiary
trading companies have been fully integrated within the Group
internal audit programme. This has helped to ensure consistent
and appropriate internal controls are being applied across the
whole of the DFS Group, while also sharing and developing best
practice to enhance business processes and support the Group
Health and Safety function.
In addition, during the year, the Committee has overseen the
implementation of the EU Audit reforms resulting in the approval
of an updated policy regarding the provision of non-audit
services by the auditor and the appointment of Deloitte LLP as
tax advisors to the Group. Furthermore, in common with other
newly-listed companies, the Company was subject to an enquiry
from the Financial Reporting Council and I am delighted to
confirm all issues were addressed to their satisfaction.
As Chair of the Audit Committee, I am committed to keeping its
activities proactively under review in the light of regulatory and
reporting developments. It is therefore satisfying to note that we
have considered both the effects of, and implementation plan for,
the future changes to lease accounting and the introduction of
the General Data Protection Regulation, both of which are likely
to have a significant impact on the Group.
Lastly, I am pleased to report the composition of the Committee
has remained unchanged since the last annual report and I
would like to thank the Company and my fellow Committee
members for their contributions during the year and look forward
to continued progress in the future.
Julie Southern
Chair of the Audit Committee
4 October 2017
DFS Annual report and accounts 2017
47
Audit Committee report
continued
Composition
The Audit Committee is chaired by Julie Southern and its other
members are Luke Mayhew and Gwyn Burr.
The Governance Code recommends that all members of the Audit
Committee are Non-Executive Directors, independent in character
and judgement and free from any relationship or circumstance
which may, could or would be likely to, or appear to, affect their
judgement and that one such member has recent and relevant
financial experience. The Board considers that, by virtue of her
current and former executive and non-executive roles, details of
which are set out on page 37, Julie Southern has recent and
relevant financial experience and the Company complies with the
requirements of the Governance Code in this respect. Furthermore,
all Committee members have extensive relevant commercial and
operational experience in large retail/customer-facing organisations
which both benefit the Committee and collectively illustrate its
competence relevant to the sector in which the Group operates.
Biographies of the Independent Non-Executive Directors are
included on pages 36 and 37 and a summary of their main skills
and experience is shown on page 44.
The Chief Executive Officer, Chief Financial Officer and Chair of
the Board attend meetings of the Audit Committee by invitation,
as do KPMG LLP’s Audit Partner and members of the Executive
Board and senior management as appropriate. The Company
Secretary also attends by invitation in order to maintain a record
of the meetings.
Roles and responsibilities
The Audit Committee assists the Board in discharging its
responsibilities with regard to the oversight of:
• financial reporting;
• internal controls and risk management systems;
• compliance, whistleblowing and fraud; and
• internal and external audit.
In particular, this includes:
• monitoring the integrity of the financial statements of the Group,
including its annual and half-yearly reports, and any other formal
announcement relating to its financial performance including a review
of any significant financial reporting judgements contained therein;
• reviewing the Group’s processes and procedures for ensuring
that material business risks are properly identified and managed;
• reviewing the adequacy and effectiveness of the Group’s internal
financial controls and risk management systems;
• receiving regular reports on significant litigation and compliance
issues;
• reviewing the Group’s arrangements with regard to employee/
contractor whistleblowing, fraud detection, prevention of bribery
and money-laundering;
• monitoring and reviewing the effectiveness of the Group’s internal
audit function in the context of the Group’s overall risk
management system;
• overseeing the Group’s relationship with its external auditor,
including their appointment, remuneration, independence and the
effectiveness of the audit process; and
• developing and implementing a policy on the supply of non-audit
services by the external auditor.
The ultimate responsibility for reviewing and approving the annual
report and accounts and the half-yearly reports remains with the
Board. The Audit Committee will give due consideration to laws and
regulations, the provisions of the UK Corporate Governance Code
and the requirements of the Listing Rules.
The Audit Committee reviews the content of the annual report and
accounts and advises the Board on whether, taken as a whole, they
are fair, balanced and understandable and provide the information
necessary for shareholders to assess the Company’s position and
performance, business model and strategy.
Activities of the Audit Committee
The Audit Committee of the Group met three times during the year
and attendance at those meetings is shown on page 45. At each
meeting, standing agenda items relating to internal audit,
reputational risk, whistleblowing and litigation issues were reviewed.
In addition, the other matters covered at each meeting are
summarised in the table below:
September 2016
March 2017
June 2017
• approval of the full year results for
• approval of an updated policy
• review and approval of KPMG LLP’s continuing
FY16
• review of the FY16 full year external
audit, including KPMG LLP’s
performance and subsequent re-
appointment
• review of the risk register/profile
• review of cyber security arrangements
• approval of an updated dilapidations
policy
• approval of the search for alternative
tax advisors for the Group following the
recent introduction of EU Audit
reforms*
regarding the provision of non-audit
services by the auditor
appointment, audit strategy and fees for the audit of
the FY17 full year results
• review of the risk register/profile
• received, along with the rest of the
Board, an external presentation on
developments in FCA Regulatory
Compliance
• review of the Group’s IT security arrangements
• review of fraud management policies
• initial review of the effects of forthcoming changes
to lease accounting
• approval of the plan to implement the requirements
• considered a limited-scope enquiry
of the General Data Protection Regulation
from the Financial Reporting Council
(“FRC”) regarding disclosures made in
the 2016 Annual Report**
• review of the results of the second evaluation of the
Committee’s effectiveness***
• approval of updates to the Committee’s terms of
reference following their annual review****
* As a direct result, Deloitte LLP was subsequently appointed in place of the
auditor, KPMG LLP, who was no longer able to provide such services.
** Following positive interaction with the FRC, the enquiry was subsequently
*** Performed by internal questionnaire and follow-up discussion.
**** Updated terms of reference were adopted by the Board on 26 June 2017 and
are available on the Company’s corporate website at www.dfscorporate.co.uk.
concluded to their satisfaction and the Committee welcomed the
feedback received.
48
DFS Annual report and accounts 2017
Following the FY17 year end, at the September 2017 meeting, the
Committee reviewed and approved, for consideration by the Board,
the financial results for the 52 weeks ended 29 July 2017 including
a review of the full year external audit. As part of that review
process, the members of the Committee reviewed the Annual
Report, the adequacy of the disclosure with respect to going
concern and viability reporting in order to conclude whether the
Annual Report taken as a whole was fair, balanced and
understandable.
This additional review by the Audit Committee, supplemented by
advice received from external advisors during the drafting process,
assisted the Board in determining that the report was fair, balanced
and understandable at the time that it was approved. The
Committee considered the appropriateness of preparing the
accounts on a going concern basis, including consideration of
forecast plans and supporting assumptions and concluded that the
Company’s financial position was such that it continued to be
appropriate for accounts to be prepared on a going concern basis.
Significant issues considered in relation to the
financial statements
The Committee, together with management and the Group’s
external auditor, considered the following significant matters in
relation to the financial statements and how these were addressed.
Impairment of intangible assets
The Group holds significant goodwill in the business following the
acquisition of the DFS Group in 2010 by Advent and the DFS
Group’s subsequent acquisition of The Sofa Workshop Limited. In
addition, the Group has recognised the value of the respective
brands of Sofa Workshop, Dwell and DFS Spain as intangible
assets. As required by accounting standards, management have
completed an annual impairment review of the carrying value of
these assets for each cash-generating unit, and in total, details of
which are set out in note 9 to the financial statements. This review
concluded that no impairment charge was required.
Provisions
Several of the Group’s provisions, which primarily relate to the
estimated cost of the retail customer guarantees provided, claims
relating to historical sales of Payment Protection Insurance, and the
valuation of finished goods stock, continue to require significant
judgement in assessing their appropriateness and quantum.
Management have considered the rationale and basis for these
provisions to assess their reasonableness and adequacy which has
been reviewed and agreed by the Group’s external auditor in
conjunction with their substantive testing.
Viability reporting
The Committee, along with the Group’s external auditor, has
reviewed management’s assessment of the prospects of the Group
for the four years from 29 July 2017, being the period over which
the various growth initiatives are anticipated to have a key impact
and which corresponds to the normal planning cycle. This review
included the challenging of assumptions and stress-testing of the
scenario modelling and concluded that the Board is able to make
the viability statement on page 19 of the Strategic Report.
Assessment of effectiveness of the external audit process
The Audit Committee oversees the relationship with the external
auditor and considers the re-appointment of the Company’s
auditor, KPMG LLP, before making a recommendation to the Board
to be put to shareholders. As part of this responsibility, the
Committee approved the audit plan for the 52 weeks ended 29
July 2017 and reviewed the auditor’s findings and management
representation letters. Prior to recommending the appointment of
KPMG LLP at the forthcoming AGM to the Board, the Audit
Committee reviewed the audit process, the performance of the
auditor and its ongoing independence, taking into consideration
input from management, responses to questions from the
Committee and the audit findings reported to the Committee.
Based on this review, the Committee concluded that the external
audit process had been run efficiently and that KPMG LLP has
been effective in its role as external auditor.
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Approach to appointing the external auditor and how objectivity
and independence are safeguarded relative to non-audit services
The Audit Committee does not currently consider it necessary to
have a bespoke policy for the rotation of the external audit firm
other than continuing to comply with the audit tender rules applying
to the Company.
Following the implementation of the EU Audit reforms, the Audit
Committee has agreed a policy intended to maintain the
independence and integrity of the Company’s auditor when acting
as auditor of the Group’s accounts. The policy governs the
provision of non-audit services provided by the auditor and, in
summary, categorises the types of non-audit services as:
• prohibited - services that have the potential to impair or appear
to impair the independence of their audit role
• permissible (subject to approval limits) - services which primarily
relate to work that is outside the required scope of the statutory
audit, but is consistent with the role of the external statutory auditor
• services to be considered on case-by-case basis - all other
services of an advisory or other nature that do not compromise
the independence of the external auditor.
In any event, within each of the Group’s legal entities, the
cumulative total of non-audit fees paid to the external auditors
within each financial year must not exceed 70% of that financial
year’s audit fee.
The above policy has been adhered to throughout the year and, as
a direct result, Deloitte were appointed as the Group’s tax advisers
therefore reallocating the vast majority of recurring non-audit
engagements which, historically, the auditor had undertaken.
Independence safeguards
The current audit firm was appointed while the Group was under
private ownership and has served the DFS business for over 20
years. In accordance with best ethical standards, external auditors
are required to adhere to a rotation policy whereby the audit
engagement partner is rotated after five years but can only serve
for up to two years following the initial listing of the Group in March
2015. Therefore, our current external auditor, KPMG LLP, has
introduced a new engagement partner, Chris Hearld, who has taken
responsibility for the audit for the first time this year.
DFS Annual report and accounts 2017
49
Audit Committee report
continued
The Company is fully committed to continually developing the
highest standards of corporate governance and therefore the Audit
Committee will continue to apply the practice that the audit should
be put out to tender at least every ten years.
The effectiveness of the internal audit team, and its level of
resource, is reviewed by the Committee at least annually. This
assessment includes the ongoing review of the:
• audit agenda and operational plans (including resource
As a consequence, KPMG LLP may remain as external auditor until
the completion of the 2025 annual audit, however, the Committee
will continue to consider annually the need to tender the audit for
audit quality or independence reasons. There are no contractual
obligations in place that restrict the choice of statutory auditor.
The external auditor is also required periodically to assess whether,
in its professional opinion, it is independent and those views are
shared with the Audit Committee.
The Committee has authority to take independent advice as it deems
appropriate in order to resolve issues on auditor independence. No
such advice has been required to date.
Independence assessment by the Audit Committee
The Committee is satisfied that the independence of the external
auditor is not impaired and notes that the audit firm’s engagement
partner rotation policy has been complied with. Furthermore, the
level of fees paid for non-audit services, details of which are set out
in note 3 to the financial statements, does not jeopardise its
independence.
requirements);
• results of the audit fieldwork and any significant issues
highlighted; and
• management of any corrective actions implemented.
Internal control and risk management
The Board is responsible for the overall system of internal controls
for the Group and for reviewing its effectiveness. In accordance
with FRC guidance, it carries out such a review at least annually,
covering all material controls including financial, operational and
compliance controls and risk management systems.
The system of internal controls is designed to manage rather than
eliminate the risk of failure to achieve business objectives and can
only provide reasonable and not absolute assurance against
material misstatement or loss. The Group has operating policies
and controls in place covering a range of issues including financial
reporting, capital expenditure, business continuity and information
technology, including cyber security, and appropriate employee
policies. These policies are designed to ensure the accuracy and
reliability of financial reporting and govern the preparation of
financial statements.
The Committee has assessed the performance and independence
of the external auditor and recommended to the Board the
re-appointment of KPMG LLP as auditor until the AGM in 2018.
In particular, a Reputational risk committee, comprising
management from all relevant areas of the business, meets on a
monthly basis to review key regulatory areas including:
Internal audit
Following last year’s recommendation to the Board, the scope and
focus of the internal audit function has continued to be developed
during the year and all subsidiary trading companies are integrated
within the Group internal audit programme.
As guided by the biannual review of the risk register/profile and
specific business requirements, emphasis continues to be placed on:
• key identified risk areas (e.g. compliance monitoring, Fire &
• complaints management relating to legacy Payment Protection
Insurance issues;
• FCA regulated credit broking activities relating to the provision of
interest-free credit to customers;
• data protection in all areas of the business, including detailed
plans regarding the forthcoming implementation of the General
Data Protection Regulation;
• health and safety across all business activities and
premises; and
Furniture Regulation compliance, ethical production & margin
management), focusing on owner verified controls to ensure that
the company strategy is being achieved;
• compliance with the Modern Slavery Act, within both internal
manufacturing and supply chain operations as well as our
external supplier base.
• the store environment, particularly in relation to conduct risk; and
• production and supply chain, to ensure consistent
implementation of operational/compliance procedures, including
Health and Safety.
Return site visits are also scheduled to ensure that agreed remedial
actions are taking place to address unsatisfactory performance.
Internal audit reports continue to be issued to key management
highlighting significant issues and making relevant recommendations.
High level reporting is made to the Operating Board on a monthly
basis, and to the Audit Committee three times per year.
This committee places emphasis on key metrics and management
information designed to provide oversight of performance and
highlight any potential detriment or risk to the Company while seeking
to achieve the very best customer outcomes and provide a safe
environment for staff, customers and data alike. During the year, this
management information has continued to be developed and refined
in direct association with the ongoing review of the risk register.
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DFS Annual report and accounts 2017
The Board is ultimately responsible for the Group’s system of
internal controls and risk management and discharges its duties in
this area by:
• holding regular Board meetings to consider the matters reserved
for its consideration;
• receiving regular management reports which provide an
assessment of key risks and controls;
• scheduling annual Board reviews of strategy including reviews of
the material risks and uncertainties facing the business;
• ensuring there is a clear organisational structure with defined
responsibilities and levels of authority;
• ensuring there are documented policies and procedures in place;
Whistleblowing
The Group is committed to the highest standards of openness,
honesty, integrity and accountability and, as a result, has a
whistleblowing policy in place. This policy is intended to make
employees or third parties aware that they should report any serious
concerns or suspicions about any wrongdoing or malpractice on the
part of any employee of the Group. Examples include fraud,
breakdown in internal controls, misleading customers, bribery,
dishonesty, corruption and breaches of data protection or health and
safety. This facility was reviewed during the year and it was agreed
that appropriate arrangements are in place for proportionate and
independent investigation of such matters.
and
• scheduling regular Board reviews of financial budgets and
forecasts with performance reported to the Board monthly.
During the year, there were seven instances of whistleblowing all of
which were fully investigated and addressed in accordance with
the policy.
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In reviewing the effectiveness of the system of internal controls, the
Committee will continue to:
• review the risk register compiled and maintained by senior
managers within the Group and question and challenge where
necessary;
• regularly review the system of financial and accounting controls;
and
• report to the Board on the risk and control culture within the Group.
In respect of the Group’s financial reporting, the Finance
Department is responsible for preparing the Group financial
statements using a well-established process and ensuring that
accounting policies are in accordance with International Financial
Reporting Standards. All financial information published by the
Group is subject to the approval of the Audit Committee.
There have been no changes in the Company’s internal control
during the financial year under review that have materially affected,
or are reasonably likely to materially affect, the Company’s control
over financial reporting.
The Board, with advice from the Audit Committee, is satisfied that
an effective system of internal controls and risk management is in
place which enable the Company to identify, evaluate and manage
key risks and which accord with the guidance published by the
FRC. These processes have been in place since the start of the
financial year and up to the date of approval of the accounts.
Further details of specific material risks and uncertainties facing
the business can be found on pages 16 to 19.
Control environment
The Board is committed to business integrity, high ethical and
moral values and professionalism in all its activities. The Group has
policies in place for:
• anti-bribery;
• equal opportunities; and
• gifts and entertainment.
Accountability
The Board is required to present a fair, balanced and
understandable assessment of the Company’s financial position
and prospects. The responsibilities of the Directors and external
auditor are set out on pages 65 and 70. As set out in the Directors’
report, the Directors consider the Company’s business to be a
going concern.
Julie Southern
Chair of the Audit Committee
4 October 2017
DFS Annual report and accounts 2017
51
Nomination Committee report
Chairman’s introduction
My role as Interim Chair of the Nomination Committee commenced
in December 2016, following the announcement of Richard Baker’s
intention to step down as Chair of the Board and this Committee,
and continued up to the appointment of Ian Durant as his
successor in May 2017. Given this interim role, and my membership
of the Committee throughout the year, I am pleased to present this
year’s Nomination Committee report.
The main activity of the Committee during the year was the
performance of a rigorous selection process to replace Richard,
who had been the Chair of the Board for the past 7 years, and who
had guided DFS through its recent changes in ownership, resulting
in the successful IPO in 2015. On behalf of the Board and the
Company, I would like to express our gratitude for his service and
leadership over those years.
The role of the Nomination Committee is to ensure we have the
appropriate skills, knowledge, experience and diversity on the
Board and in senior management positions, both now and in the
future, in order that DFS continues to compete successfully.
I am pleased to welcome Ian Durant as the new Chair of the Board.
His experience and skills fit the needs of the business and the long
term interests of shareholders well. We are now fully compliant with
the provisions of the Governance Code given Ian’s independence
from DFS on his appointment on 2 May 2017.
The year has also seen the strengthening of the senior
management team and further investment in their development.
As the incoming Chair of the Nomination Committee, I am sure Ian will
be encouraged by the 50:50 gender balance on the Board and will
support the development of the Board and the senior executive.
Luke Mayhew
Senior Independent Non-Executive Director
(Former Interim Chair of the Nomination Committee)
4 October 2017
Luke Mayhew | Senior Independent Non-Executive Director
I am pleased to welcome Ian Durant as the
new Chair of the Board. His experience
and skills fit the needs of the business and
the long term interests of shareholders well.
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DFS Annual report and accounts 2017
Diversity
Whilst the Company pursues diversity, including gender diversity,
throughout the business, the Board has not committed to any
specific targets. However, we are pleased our Board has three
female Directors and therefore a 50:50 gender split. We will
continue to give due consideration to talent, balance and
diversity when making new appointments to the Board and look
to this approach being applied across the business.
Luke Mayhew
Senior Independent Non-Executive Director
(Former Interim Chair of the Nomination Committee)
4 October 2017
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Composition
During the year, the Nomination Committee was chaired by Richard
Baker up to his announcement to step down as Chair of the Board
in December 2016. From this time, he also stepped down as Chair/
member of the Nomination Committee and, as a result, Luke
Mayhew, Senior Independent Non-Executive Director and member
of the Committee throughout the year, assumed the role of Interim
Chair during the search for a replacement. This Interim Chair
position concluded following the appointment of Ian Durant in May
2017. The other members are Gwyn Burr and Julie Southern who
have served on the Committee throughout the year.
The Governance Code recommends that a majority of the
Nomination Committee be Non-Executive Directors, independent in
character and judgement and free from any relationship or
circumstance which may, could or would be likely to, or appear to,
affect their judgement. As such, the Board considers that the
Company complies with the Governance Code.
Only members of the Committee have the right to attend
Committee meetings, but the Committee may invite others,
including the Chief Executive Officer, the Chief People Officer and
external advisers, to attend all or part of any meeting if it thinks it is
appropriate or necessary or pursuant to the terms of any
agreement with shareholders.
The Nomination Committee will meet as often as it deems
necessary but in any event at least once a year.
Roles and responsibilities
The Nomination Committee is responsible for regularly reviewing
the structure, size and composition of the Board and its
committees (including an appraisal of skills, knowledge, experience
and diversity, including gender) and for making recommendations
to the Board with regard to any changes.
It is also responsible for identifying and nominating for the approval of
the Board, candidates to fill Board vacancies as and when they arise.
The Committee’s terms of reference were reviewed, and amended
where appropriate, during the year and the revised terms of
reference adopted by the Board on 26 June 2017, details of
which are available on the Company’s corporate website at
www.dfscorporate.co.uk.
Activities of the Nomination Committee
The Nomination Committee formally met six times during the year
and the main activities included:
• management of the market-wide selection process, engaging the
services of Spencer Stuart (who are independent of the
Company), for the replacement of Richard Baker as Chair of the
Board resulting in the appointment of Ian Durant on 2 May 2017;
• ongoing review of the talent and succession planning for the
Board and senior management, including assessment of their
training and development needs (resulting in the permanent
appointment of a Chief Marketing Officer and Chief People Officer
during the year, as part of the restructured Executive Board);
• internal review of the Committee’s effectiveness;
• review of Directors’ time commitments and independence; and
• consideration of the re-election of Directors at the AGM.
DFS Annual report and accounts 2017
53
Directors’ remuneration report
Gwyn Burr | Chair of the Remuneration Committee
Despite a challenging end to the year, there
have been many notable successes which
highlight the continued progress that we
are making against our long-term growth
strategy.
PART A: ANNUAL STATEMENT
Dear Shareholder,
The key purpose of the Remuneration Committee is to develop
and implement a remuneration policy that allows the Company to
attract, incentivise, motivate and retain the key talent that the
business needs in order to successfully deliver its strategy. This
report sets out a summary of the Director’s Remuneration Policy
(“Policy”) that the Company has in place and how we sought to
implement it during the year.
We had a strong start to Financial Year 2017 and there have been
many notable successes for the Company over the year including
the recent acquisition of Sofology (subject to regulatory
approval), our partnership with UK lifestyle brand Joules, the
recent completion of refinancing on favourable terms to enable
approximately £1 million of cost savings, payment of our first
special dividend as well as our continued store roll-out. All of
these successes highlight continued progress against DFS’
long-term growth strategy.
Notwithstanding the progress we have made against our
strategy, the Committee recognises that the past year has been a
challenging one for shareholders with the softening of the UK
retail market contributing to turbulent financial performance
which has in turn had a negative impact on share price and
earnings. This has naturally fed into disappointing remuneration
outcomes for the year with the annual bonus pay-out of 37.5% of
the maximum for the CEO and 38.0% for the CFO whilst the IPO
award under the Long-Term Incentive Plan (“LTIP”) vested at nil.
The Committee is aware that trading conditions remain
somewhat volatile in the retail sector but we are confident in our
long term strategy and our executives are focused on the delivery
of sustainable performance against our agreed targets.
As a Committee, we remain focused on ensuring that DFS’ Policy
aligns with the interests of its shareholders. The Policy that we
have in place was approved at the 2015 AGM (99.91% voted for)
and we are not proposing to make any changes as we believe the
current Policy is fit-for-purpose. However, we are required to
review our Policy every three years. This means that over the next
12 months the Committee will undertake a review of the current
Policy and following consultation with our major shareholders, will
seek approval for a new Policy at the 2018 AGM.
I would like to take the opportunity to thank my fellow Committee
members for their invaluable help over the past twelve months.
Along with other members of the Committee, I am committed to
hearing, and take an active interest in, your opinions as
shareholders and look forward to consulting with our
shareholders during our 2018 Policy review process. If you would
like to discuss any further aspect of our remuneration strategy I
would welcome your views.
Gwyn Burr
Chair of the Remuneration Committee
4 October 2017
54
DFS Annual report and accounts 2017
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This report has been prepared in compliance with The Large and Medium-sized Companies and Groups (Accounts and Reports)
(Amendment) Regulations 2013 (the “Regulations”) as well as the Companies Act 2006. This report is set out in the following
key sections:
Contents
PART A: ANNUAL STATEMENT
PART B: OUR REMUNERATION AT A GLANCE
PART C: 2017 ANNUAL REPORT ON REMUNERATION
1. Executive Director Remuneration
2. Implementation of remuneration policy
for the Executive Directors for 2018
3. Consideration by the Committee of matters
relating to directors’ remuneration for 2017
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58
58
59
61
What remuneration decisions did we make as a
result of performance over 2017?
As you will have read earlier in this Annual Report, whilst we
had a positive start to the year, our results this year largely
reflect the impact of a very challenging environment for the UK
furniture sector. Against this backdrop we delivered:
• Gross sales up by 1.1% to £990.8 million;
• Underlying EBITDA down 12.7% to £82.4 million;
• A special capital return to shareholders of 9.5 pence per share;
• Positive cash flow with net debt closing at 1.75x EBITDA; and
• Continued progress against customer satisfaction scores
with average Established Customer Net Promotor Score
increasing from 31.2% to 34.2%.
The Group’s remuneration arrangements for Executive
Directors seeks to closely align remuneration outcomes with
the execution of the business strategy through incentive
arrangements which reward for delivering short and long-term
strategic objectives which create value for our shareholders.
We rigorously assessed the 2017 Annual Bonus against gross
sales, PBT, cash flow, NPS and personal performance targets
(each measure is equally weighted at 20%). The Committee
determined that Ian Filby and Nicola Bancroft would receive a
cash bonus equal to 37.5% and 38.0% of the maximum
opportunity, respectively. This is a result of the Group’s strong
NPS performance towards the maximum of the target range
and Ian and Nicola’s achievement of stretching personal
performance objectives relating to customers, employees and
shareholders. Full details of the performance measures and
targets can be found on pages 58 and 59.
The Committee also assessed performance for LTIP awards
granted upon IPO. Disappointingly, both the relative TSR and
EPS growth targets were not met and as a result, vesting was nil.
Matters to be approved at the 2017 AGM
4. Chief Executive Officer and employee pay
5. Non-Executive Director Remuneration
6. Directors’ shareholding and share interests
61
62
63
7. Services contracts and letters of appointment 64
8. Shareholder voting
64
Looking forward to 2018
We reviewed base salaries for Ian Filby and Nicola Bancroft
and determined that salaries will be increased by 2% to
£438,702 and £244,800, respectively. This is in line with the
average increase for the wider employee population.
Both Ian Filby and Nicola Bancroft will continue to be eligible
to receive an Annual Bonus of up to 100% of salary in cash
subject to the achievement of stretching targets relating to
gross sales, PBT cash flow, NPS and personal performance.
These targets and the actual performance levels achieved will
be disclosed retrospectively in next year’s report.
In October 2017, we plan to grant annual awards under the LTIP
equal to 130% of salary to Ian Filby and 100% of salary to Nicola
Bancroft. The Committee considered the performance conditions
for these awards taking into account continued market slowdown
and uncertainty impacting the UK retail sector. To ensure the LTIP
awards continued to remain fit-for-purpose as a retention and
motivational tool to execute our strategy, we have:
• Set EPS growth targets so that threshold vesting occurs at
4% p.a. and now with maximum vesting occurring at 10%
p.a.; and
• Set maximum vesting for TSR for both comparator groups
(FTSE 250 Index and FTSE 350 Retailers Index) at 10% p.a.
above the Index Return.
The Committee made these decisions following careful
consideration of the Group’s business plan and the wider
market context and firmly believes that the targets remain
appropriately challenging but realistic.
When assessing actual performance against these targets, the
Committee will consider the Group's overall performance on
both an absolute and relative basis and reserves the right to
exercise discretion to make downward adjustments to vesting
outcomes to ensure payments under the LTIP are fully justified
by overall corporate experience. Any discretion exercise by the
Committee will be fully explained to shareholder in the relevant
year's Remuneration Report.
We have not presented our Policy in this report since, as noted
earlier, it is not subject to a shareholder vote at the 2017 AGM on
1 December 2017. The Policy is available to view in full on the
Company’s website at dfscorporate.co.uk.
The Board also reviewed fees for Non-Executive Directors and
an additional fee of £7,000 has been introduced in 2018 for the
Chairs of the Audit and Remuneration Committees to reflect
the additional time commitment required for these roles.
DFS Annual report and accounts 2017
55
Directors’ remuneration report
continued
PART B: OUR REMUNERATION AT A GLANCE
Ahead of the detailed 2017 Annual Report on Remuneration, we have summarised below the key elements of our Policy, the key
remuneration outcomes for 2017 and how we intend to implement it in 2018.
(i) Summary of our Directors’ Remuneration Policy
Element
Key features of Policy
Executive Directors
Base salary
• Set at a level which is sufficiently competitive to recruit and retain individuals of the appropriate
calibre and experience.
Benefits and pension
• Market competitive benefits package provided.
• Maximum contribution to personal pension scheme or cash in lieu is equal to £50,000.
Annual bonus
LTIP
• Maximum award equal to 100% of salary p.a.
• Performance period is one Financial Year with pay-out, in cash, based on
achievement against a range of financial and non-financial targets.
• Maximum award equal to 150% of salary p.a. (300% of salary in exceptional circumstances).
• Awards vest after three years subject to the achievement of certain performance measures.
Shareholding requirement
• 200% of salary for Executive Directors.
Non-Executive Directors
Fees
• Non-Executive Directors may receive a base fee and additional fees for the role of
Senior Independent Director and Chairmanship of certain committees.
• Our full Policy can be found online at dfscorporate.co.uk.
• Both incentive plans incorporate malus and clawback provisions.
(ii) How did we perform in 2017?
Key 2017 business highlights
• Gross sales up 1.1% to £990.8 million.
• Underlying EBITDA down 12.7% to £82.4 million.
• A special capital return to shareholders of 9.5 pence per share
• Strong cash flow with net debt closing at 1.75x EBITDA.
• Positive progress on customer satisfaction scores
with average established customer Net Promoter Score
increasing from 31.2% to 34.2%.
2017 annual bonus assessment: At the start of the 2017 Financial Year, we set stretching performance targets
for the Annual Bonus plan. Below we summarise the targets and the outcomes for both Ian Filby and Nicola Bancroft.
Measure (weighting)
Gross sales (20%)
PBT (20%)
Cash flow (20%)
Net Promoter Score (20%)
Personal (20%) - IF/NB
Target
Actual
% of maximum
achieved
£1,044.7m
£990.8m
0.6%
£65.0m
£43.6m
33.0%
–
£50.1m
£38.1m
34.2%
–
–
19.4%
– 17.5%/18.0%
Based on an assessment against the 2017 bonus scorecard the Committee determined that Ian Filby would receive a bonus of
£161,288 (37.5% of maximum) and £91,200 for Nicola Bancroft (38.0% of maximum).
The 2017 bonuses for Ian Filby and Nicola Bancroft will be paid in cash.
LTIP vesting: The IPO award was granted in March 2015 and was assessed against relative TSR and EPS growth performance
targets at the end of FY17. Based on the assessment of actual performance against targets, the final level of vesting of these awards
was determined to be nil.
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Nicola Bancroft
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200
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400
500
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700
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(iii) Levels of remuneration for 2017 and executive
shareholdings
(iv) Implementation of Policy for 2018
Executive Directors
Element
Base salary
Ian Filby
£438,702
Pension and benefits £50,000
Nicola Bancroft
£244,800
£40,000
Benefits will be provided in line with
Policy for 2018
Annual Bonus
100% of salary
100% of salary
2018 measures
Measures
Weighting
Gross Sales
PBT
Cash Flow
20%
20%
20%
Net Promoter Score 20%
Personal Objectives 20%
LTIP – to be granted
in October 2017
130% of salary
100% of salary
2018 measures
Measures
EPS growth
Weighting
50%
Relative TSR growth
vs FTSE 250 exc Inv
Trusts
25%
Relative TSR growth
vs FTSE
350 General
Retailers
25%
Shareholding
requirement
200% of salary
200% of salary
Non-Executive Directors
Fees
• Chair – £180,000
• Senior Independent Director – £60,000
• Audit/Remuneration Committee
Chair – £57,000
• Independent Non-Executive Director
– £50,000
Full details on how we plan to implement Policy in 2018 are set
out on pages 59 to 60.
Single figure remuneration
Below we summarise the remuneration paid to the Executive
Directors over the past two financial years:
Ian Filby
Nicola Bancroft
2017
2016
2017
N/A
0
100
200
300
400
500
600
700
800
£'000
Base salary
Taxable benefits
Bonus
Long-term incentives
Pension
Other
Level of shareholdings
Below we present a summary of the level of shareholdings for
both the Executive Directors at 29 July 2017.
Ian Filby
Nicola Bancroft
% of base salary
200
681
200
345
0
100
200
300
400
500
600
700
800
Shareholding requirement
Value of beneficially owned shares
At the year-end the value of both Executive Directors' shares
exceeded the shareholding requirement of 200% of salary.
Ian Filby
Nicola Bancroft
2017
2016
2017
N/A
0
100
200
300
400
500
600
700
800
£'000
DFS Annual report and accounts 2017
57
Directors’ remuneration report
continued
PART C: 2017 ANNUAL REPORT ON REMUNERATION
This 2017 Annual Report on Remuneration contains details of how the Company’s Policy for Directors was implemented during the
Financial Year ended 29 July 2017. The policy was approved by shareholders at the 2015 AGM on 4 December 2015. A copy can be found
within the 2015 Directors’ Remuneration Report available on the Company’s website www.dfscorporate.co.uk.
This report has been prepared in accordance with the provisions of the Companies Act 2006 and the Regulations. An advisory resolution
to approve this report and the Annual Statement will be put to shareholders at the AGM on 1 December 2017.
1. Executive Director Remuneration
Single figure remuneration table – audited
The remuneration of Executive Directors showing the breakdown between components with comparative figures for the prior Financial
Year is shown below. Figures provided have been calculated in accordance with the Regulations.
Ian Filby
Nicola Bancroft
Base salary
£’000
Taxable
benefits1
£’000
2017
2016
2017
20163
430
425
240
–
25
23
13
–
Bonus
£’000
161
306
91
–
Long-term
incentives
£’000
Pension
£’000
Other
£’000
–
–
–
–
502
50
35
–
–
–
94
–
Total
£’000
666
804
388
–
Notes
1. Taxable benefits comprise car and fuel allowance, private medical insurance (including cover for spouses and dependants), relevant professional subscriptions,
seasonal gifts and reimbursement of home telephone line and telephone expenses - the values of which has been included in the Taxable Benefits column.
Ian Filby waived his entitlement to a pension contribution from the Group and a charitable donation of £50,000 (2016: £50,000) has been made as an alternative.
2.
3. Nicola Bancroft was appointed as Chief Financial Officer and an Executive Director on 1 August 2016. As Nicola did not serve as an Executive Director in FY2016, no
figures are included.
4. Nicola Bancroft opted for a company car of lower value and received an allowance for the difference.
Annual bonus outcomes for the Financial Year ending 29 July 2017 – audited
For 2017 the Chief Executive Officer and the Chief Financial Officer had a maximum annual bonus opportunity of 100% of salary. For each
Executive Director, the 2017 annual bonus determination was based on performance against five performance measures namely: Group
gross sales, Group underlying profit before tax ("PBT"), Group underlying cash flow, Net Promoter Score and personal objectives.
The table below provides information on the targets for each measure, actual performance and resulting bonus payment for each
Executive Director:
Performance measure
Group gross sales (£m)
Group underlying PBT (£m)
Group underlying cash flow (£m)
Net Promotor Score
Personal objectives - IF/NB
Overall extent to which the bonus
targets were achieved
Weighting
(% of maximum
bonus opportunity)
Threshold
performance target
(0% of performance
measure maximum
opportunity earned)
Target
level of
performance
Maximum performance
target (100% of
performance measure
maximum opportunity
earned)
Actual
performance
outcome
% of performance
measure maximum
opportunity earned
20%
20%
20%
20%
20%
988.5
1,044.7
1,063.5
990.8
0.6%
60.2
39.1
65.0
43.6
68.2
45.1
50.1
38.1
–
–
31.2%
33.0%
34.3%
34.2%
19.4%
See summary of assessment below
17.5%/18.0%
37.5% of maximum for the Chief Executive Officer
38.0% of maximum for the Chief Financial Officer
Notes
1. Between threshold, target and maximum, pay-out for the measures was calculated on a straight-line basis.
2. Gross sales and underlying PBT are presented on the income statement on page 71. Underlying cash flow means the net movement in cash and cash equivalents
during the Financial Year as adjusted for cash flows associated with non-underlying items.
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Performance against the personal objectives and the Committee’s assessment of performance for both Executive Directors is set out in
the table below:
Director
Personal objectives set at the start of the year
Assessment against the targets
Ian Filby
•
Ensure a safe environment for all employees and customers.
•
•
•
•
Successfully implement the CDC network on-time and
on budget and exceed Dwell's budgeted profit.
•
Develop the next generation multichannel business plan.
•
Develop the senior team, both individually and collectively.
•
Nicola Bancroft •
Ensure a safe environment for all employees and customers.
•
•
•
•
•
Develop the new finance leadership team structure and
an effective internal audit capability.
Facilitate a high quality strategy dialogue with the Group
Board.
Successfully manage external reporting and market
expectations.
Create robust plans for the use of capital.
•
•
•
Timely reporting of health and safety and risk mitigation
activities undertaken throughout the year with no major
instances.
On time development of CDC rollout within budget
delivering good customer outcomes.
Approval of the next 4 year multichannel business plan.
Personal development plans for the Executive Board in
place and approved by the Nomination Committee.
Timely reporting of health and safety and risk mitigation
activities undertaken throughout the year with no major
instances.
Transition of the leadership of the finance function with all
reporting requirements achieved.
Ongoing system for Group Board dialogue regarding
strategy.
Satisfactory investor reaction and feedback.
•
Delivery of capital expenditure budgets.
As a result of the performance results shown above, the bonuses awarded to the Executive Directors are £161,288 for Ian Filby (37.5% of
maximum) and £91,200 for Nicola Bancroft (38.0% of maximum). The 2017 bonuses for Ian Filby and Nicola Bancroft will be paid in cash.
No part of the bonus will be subject to deferral and no discretion was exercised by the Committee when determining the bonus outcomes.
LTIP vesting for the year ended 29 July 2017 – audited
The IPO award was granted in March 2015 and was assessed against the performance targets at the end of FY17. The final level of vesting
of these awards was nil as set out in the table below.
Performance measure
Earnings-per-Share
TSR vs FTSE 250
(exc Investment Trusts)
Total
Weighting
(% of maximum
bonus opportunity)
Threshold
performance target
Maximum
performance target
(20% of performance
measure maximum
opportunity earned)
(100% of performance
measure maximum
opportunity earned)
Actual performance
outcome
% of performance
measure maximum
opportunity earned
50%
23p
29p
18.7p
Equal to
Index
performance
Index
performance
+ 12% p.a.
13.1% p.a.
below Index
performance
n/a
50%
100%
0%
0%
0%
Defined benefit pension
The Executive Directors do not have a prospective right to a defined benefit pension by reference to qualifying service.
Payments to past Directors or for loss of office – audited
Bill Barnes stepped down from the Board effective 30 July 2016 and continued to serve as an employee until 31 August 2016. He did not
receive any loss of office payment. In his capacity as an employee until 31 August 2016 he received total of £46,781 in the year, which
comprises base salary (£25,014), payments for accrued lieu days (£8,659), payments in lieu of accrued holiday (£9,813) and payments in
lieu of pension contributions (£3,295). Bill Barnes also received an annual bonus of £223,326 for FY16, which was disclosed in the 2016
Remuneration Report but paid in October 2016.
2. Implementation of remuneration policy for the Executive Directors for 2018
Base salary
In setting salary levels for the 2018 Financial Year for the Executive Directors, the Committee considered a number of factors, including
individual performance and experience, pay and conditions for employees across the Group, the general performance of the Company, pay
levels in other comparable companies and the economic environment. The salaries for 2018 and the relative increases are set out below.
Ian Filby
Nicola Bancroft
Base salary
2018
2017
% change
£438,702 £430,100
£244,800 £240,000
+2.0%
+2.0%
DFS Annual report and accounts 2017
59
Directors’ remuneration report
continued
Pension and benefits
The maximum contribution to a personal pension scheme or cash in lieu is equal to £50,000 for Ian Filby and £40,000 (less employers NI
cost) for Nicola Bancroft. Ian Filby has waived his entitlement to a pension contribution from the Group and a monthly charitable donation
will be made instead.
Benefits will be provided to the Executive Directors in line with the Policy.
Annual bonus
Consistent with the Policy the maximum and threshold bonus potentials for 2018 are:
Ian Filby
Nicola Bancroft
Threshold bonus
Maximum bonus
0% of salary
0% of salary
100% of salary
100% of salary
For FY18, performance measures comprise: Group gross sales, Group underlying profit before tax, Group underlying cash flow, growth in
Established Customer Net Promoter Score and personal objectives. Each performance measure shall have a 20% weighting.
The Committee is of the opinion that the precise performance targets for the Annual Bonus are commercially sensitive and that it would be
detrimental to the interests of the Company to disclose them before the start of the financial year. Actual targets, performance achieved
and awards made will be published at the end of the performance period so shareholders can fully assess the basis for any pay-outs.
LTIP Awards
Details of the LTIP Awards to be made in October 2017 are provided below.
Ian Filby
Nicola Bancroft
Conditional Share Award
Conditional Share Award
130% of salary
100% of salary
Three years
Three years
Nil
Nil
Type of award
Maximum value of
award at grant date
Vesting period
Exercise price
The awards will vest subject to achieving two challenging measures, namely Adjusted EPS (50% weighting) and Relative Total Shareholder
Return (50% weighting). The targets are contained in the table below:
Measure
Weighting
Performance period
Performance target
(% of Award)
Vesting
Adjusted earnings per share
50% 3 financial years ending FY20
Less than 4% per annum
4% per annum
0%
20%
Total Shareholder Return versus FTSE 250
Index (excluding Investment Trusts)
25% 3 financial years ending FY20
Below Index return
Equal to Index return
0%
20%
Total Shareholder Return versus FTSE 350
General Retailers Index
25% 3 financial years ending FY20
Below Index return
Equal to Index return
0%
20%
10% p.a. above the Index return
100%
10% p.a. above the Index return
100%
10% per annum
100%
Notes
1. Growth in Total Shareholder Return will be calculated on a simple average annual growth rate and split evenly between the two peer group indices.
2. Adjusted earnings per share will be calculated on a compound annual growth basis.
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3. Consideration by the Committee of matters relating to Directors’ remuneration for 2017
The Committee complies with the UK Corporate Governance Code. The Committee makes recommendations to the Board, within agreed
terms of reference, on remuneration for the Executive Directors and Chair of the Board and has oversight of remuneration arrangements
for senior management. The Committee’s full terms of reference are available on the Company’s website at www.dfscorporate.co.uk.
Members of the Committee during 2017 were:
• Gwyn Burr (Chair)
• Luke Mayhew
• Julie Southern
Further details regarding members of the Committee and their attendance at meetings during the course of the year are available on page
45 of this Annual Report.
None of the Committee members has any personal financial interest (other than as shareholders) in the decisions made by the Committee,
conflicts of interests arising from cross-directorships or day-to-day involvement in running the business. The Chair, the Chief Executive
Officer and the Chief Financial Officer attend meetings at the invitation of the Committee, but are not present when their own remuneration
is being discussed. The Committee is supported by the Chief People Officer, Finance and Company Secretariat functions.
During the year, there were four Committee meetings. The matters covered at each meeting are covered in the table below:
September 2016 (2 meetings)
January 2017
June 2017
• Salary review for Executive Board
• Market practice and corporate governance
• Review of Remuneration Committee Terms
members
update
of Reference
• 2016 bonus scorecard assessment
• Approving the 2017 bonus scorecard
• Approving the 2017 LTIP Awards
• Approving the 2016 Directors’
Remuneration Report
• Reviewed levels of shareholding
• Review of Non-Executive Director’s fee
• Remuneration benchmarking
• Preliminary review of gender pay gap
analysis
• Initial discussions on the 2017 Director’s
Remuneration Report
• Annual bonus and in-flight LTIP
performance updates
• Update on corporate governance, 2017
AGM season and market trends
• Treatment of special dividend equivalents
for LTIP participants
The Committee received external advice in 2017 from PwC during the year. The Committee appointed PwC as its advisers after a tender
process in July 2015. PwC are considered by the Committee to be objective and independent. PwC are members of the Remuneration
Consultants Group and, as such, voluntarily operate under the code of conduct in relation to executive remuneration consulting in the UK.
The Committee reviewed the nature of all the services provided during the year by PwC and was satisfied that no conflict of interest exists
or existed in the provision of these services. The total fees paid to PwC in respect of services to the Committee during the year were
£104,000. Fees were determined based on the scope and nature of the projects undertaken for the Committee.
4. Chief Executive Officer and employee pay
Total Shareholder Returns and Chief Executive Officer pay since IPO
The Committee believes that the current Executive Director Policy and the supporting reward structure provide clear alignment with the
Company’s performance. The Committee believes it is appropriate to monitor the Company’s performance against the FTSE 250 Index as
it represents a broad equity market against which the Company compares itself.
The chart below illustrates our Total Shareholder Return performance against the FTSE 250 Index since 5 March 2015, the date of IPO, to
the end of FY17, being 29 July 2017.
R
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s
a
b
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R
140
120
100
80
60
DFS Furniture plc
FTSE 250 Index
Mar 2015
Jul 2015
Nov 2015
Mar 2016
Jul 2016
Nov 2016
Mar 2017
Jul 2017
DFS Annual report and accounts 2017
61
Directors’ remuneration report
continued
Chief Executive Officer
Single figure of total remuneration (£’000)
Bonus pay-out (% maximum)
Long-term incentive vesting rates (% maximum)
2017
2016
2015
666
37.5%
0%
804
71.9%
n/a
790
85.2%
n/a
Percentage change in the Chief Executive Officer’s remuneration
The table below compares the percentage increase in the Chief Executive Officer’s pay with the wider employee population. The Company
considers DFS employees other than those whose remuneration includes piecework or commission, and excluding the Executive
Directors, to be an appropriate comparator group.
% change from FY16 to FY17
Chief Executive Officer
Employee pay
Base salary
Benefits Annual bonus
+1.2% +8.7%
–
+1.2%
-47.4%
-39.9%
Relative importance of spend on pay
The table below sets out the overall spend on pay for all employees compared with the returns distributed to shareholders.
Significant distributions
Employee spend
Distributions to shareholders (ordinary dividends and purchase of own shares)
Distributions to shareholders (special dividends)
2017
2016
% change
£141.6m £132.9m
£31.0m2
£23.7m
–
£20.1m
+6.5%
-23.5%
n/a
Notes
1. The above figures are taken from notes 4, 20 and 21 to the financial statements.
2. Figure includes £6.6m relating to the FY15 interim dividend paid in FY16.
5. Non-Executive Director remuneration
Single figure remuneration table – audited
The remuneration of Non-Executive Directors showing the breakdown between components, with comparative figures for the prior year, is
shown below. Figures provided have been calculated in accordance with the Regulations.
Director
Ian Durant1
Richard Baker2
Luke Mayhew
Gwyn Burr
Julie Southern
Andy Dawson3
Notes
1.
Ian Durant was appointed to the Board on 2 May 2017.
2. Richard Baker resigned from the Board on 1 May 2017.
3. Andy Dawson resigned from the Board on 25 April 2016.
Fees to be provided in FY18 to the Non-Executive Directors
The following table sets out the annual fee rates for the Non-Executive Directors:
Chair fee
Senior Independent Director fee
Chair of Audit/Remuneration Committee fee
Independent Non-Executive Director fee
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DFS Annual report and accounts 2017
Fees
£’000
45
–
158
210
60
60
50
50
50
50
–
–
Other
£’000
–
–
–
–
–
–
–
–
–
–
–
–
Total
£’000
45
–
158
210
60
60
50
50
50
50
–
–
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2018
£
180,000
60,000
57,000
50,000
2017
£
210,000
60,000
50,000
50,000
% change
-14.3%
nil
+14.0%
nil
Fees for the Chair of the Board were set at £180,000 on his appointment in May 2017. For Non-Executive Directors, base fees have not
changed for FY18 but an additional fee of £7,000 has been introduced in FY18 for the Chairs of the Audit and Remuneration Committees to
reflect the additional time commitment required in these roles. Non-Executive fees will be kept under review for future periods.
6. Directors’ shareholdings and share interests
Shareholding and other interests at 29 July 2017 – audited
Directors’ share interests and, where applicable, achievement of shareholding requirements are set out below. In order that their interests
are aligned with those of shareholders, Executive Directors are expected to build up and maintain (as relevant) a personal shareholding
equal to 200% of their base salary in the Company.
Director
Ian Filby
Nicola Bancroft
Ian Durant
Richard Baker
Luke Mayhew
Gwyn Burr
Julie Southern
Total
Shareholding at 29 July 2017
Number of
beneficially
owned shares1
% of salary
held
Shareholding
requirement
met
Interests in shares under the LTIP
(Conditional shares)
Subject to
conditions
Vested but
unexercised
Unvested
SAYE awards
Total at 29
July 2017
1,313,208
371,352
–
1,324,402
31,621
–
3,921
3,044,504
681%
345%
n/a
n/a
n/a
n/a
n/a
Yes
Yes
n/a
n/a
n/a
n/a
n/a
435,139
135,143
n/a
n/a
n/a
n/a
n/a
570,282
–
–
n/a
n/a
n/a
n/a
n/a
–
9,782
–
n/a
n/a
n/a
n/a
n/a
9,782
1,758,129
506,495
–
1,324,402
31,621
–
3,921
3,624,568
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1. Beneficial interests include shares held directly or indirectly by connected persons.
2. Shareholding requirement calculation is based on the share price at the end of the year (£2.23 at 29 July 2017).
At 2 October 2017 there had been no movement in Directors’ shareholdings and share interests from 29 July 2017.
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LTIP awards granted in 2017 – audited
The table below sets out the details of the LTIP Awards granted on 15 November 2016 where vesting will be determined according to the
achievement of certain performance measures. Non-Executive Directors do not receive LTIP awards.
Director
Type of award
Ian Filby
Conditional Share Award
Nicola Bancroft
Conditional Share Award
Face value/maximum
value of award at grant date
(£/% of salary)
Number of shares
Percentage of award
receivable for threshold
performance
Performance
period end date
Exercise
price
559,130
130%
240,000
100%
249,612
20%
27 July 2019
107,143
20%
27 July 2019
Nil
Nil
Notes
1.
2. Awards will only vest subject to the achievement of the performance conditions which will be measured at the time the Group publishes its full year financial results.
In line with the Rules of the plan, awards were determined using an average share price prior to grant of £2.24.
The awards will vest subject to achieving two challenging performance measures, namely Adjusted EPS (50% weighting) and Relative
Total Shareholder Return (50% weighting). The targets are contained in table below:
Measure
Weighting
Performance period
Performance target
(% of Award)
Vesting
Adjusted earnings per share
50% 3 financial years ending FY19
Less than 4% per annum
4% per annum
13% per annum
Total Shareholder Return versus FTSE 250
Index (excluding Investment Trusts)
25% 3 financial years ending FY19
Below Index return
Equal to Index return
12% p.a. above the Index return
FTSE 350 General Retailers Index
25% 3 financial years ending FY19
Below Index return
Equal to Index return
12% p.a. above the Index return
Notes
1. Growth in Total Shareholder Return will be calculated on a simple average annual growth rate.
2. Adjusted earnings per share will be calculated on a compound annual growth basis.
0%
20%
100%
0%
20%
100%
0%
20%
100%
DFS Annual report and accounts 2017
63
Directors’ remuneration report
continued
SAYE awards – audited
The following table details SAYE awards granted to Executive Directors during the year:
Director
Ian Filby
Number of awards
Date of grant
Vesting date
Exercise Price
9,782 7 December 2016
31 January 2020
£1.840
Dilution
The Company intends to fund its share incentives through a combination of new issue and market purchased shares. The Company
monitors the levels of share grants and the impact of these on the ongoing requirement for shares. In accordance with guidelines set out
by the Investment Association (“IA”) the Company can issue a maximum of 10% of its issued share capital in a rolling 10-year period to
employees under all its share plans.
7. Service contracts and letters of appointment
When setting notice periods, the Committee has regard to market practice and corporate governance best practice. Executive Directors’
service agreements can be terminated by not less than six months’ prior written notice given by the Executive or by not less than 12
months’ prior written notice given by the employer. The table below summarises the service contracts and letters of appointments for our
Executive Directors.
Director
Ian Filby
Nicola Bancroft
Date of contract
13 July 2010
1 August 2016
Notice period
6 months (Executive) or
12 months (Company)
Details of external appointments of Executive Directors are provided in the Corporate Governance Statement on page 46. Executive
Directors are allowed to retain fees for any external appointments.
The Non-Executive Directors do not have service contracts but are appointed under letters of appointment which provide for a review
after an initial three year term terminable by either the Non-Executive Director or the Company with one month’s prior written notice. Each
Non-Executive Director is subject to annual re-election at the Company’s AGM.
The table below sets out the dates that each Non-Executive Director was first appointed as a Group Director (all Directors were
subsequently appointed to the current parent company, DFS Furniture plc on 2 February 2015 as part of the IPO process).
Director
Ian Durant
Luke Mayhew
Gwyn Burr
Julie Southern
Date of appointment
2 May 2017
1 October 2014
1 December 2014
2 February 2015
All service contracts and letters of appointment are available for viewing at the Company’s registered office and at the AGM.
8. Shareholder voting
The table below shows the binding vote approving the Policy in 2015 and the advisory vote to approve the 2016 Annual Report on
Remuneration at the AGM on 2 December 2016.
Votes for
%
Votes against
% Votes withheld
174,166,632
146,335,436
99.91
99.90
153,151
151,099
0.09
0.10
0
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2015 Directors’ Remuneration Policy
2016 Annual Report on Remuneration
By order of the Board
Gwyn Burr
Chair of the Remuneration Committee
4 October 2017
64
DFS Annual report and accounts 2017
Directors’ responsibilities statement
The Directors are responsible for preparing the Annual Report and
Accounts and the Group and Company financial statements in
accordance with applicable law and regulations.
Responsibility statement of the Directors in respect of the
annual financial report
We confirm that to the best of our knowledge:
Company law requires the Directors to prepare Group and
Company financial statements for each financial year. Under that
law they are required to prepare the Group financial statements in
accordance with IFRSs as adopted by the EU and applicable law
and have elected to prepare the Company financial statements on
the same basis.
Under company law the Directors must not approve the financial
statements unless they are satisfied that they give a true and fair
view of the state of affairs of the Group and Company and of their
profit or loss for that period. In preparing each of the Group and
Company financial statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• the financial statements, prepared in accordance with the
applicable set of accounting standards, give a true and fair view
of the assets, liabilities, financial position and profit or loss of the
Company and the undertakings included in the consolidation
taken as a whole; and
• the Strategic Report and Directors’ Report includes a fair review
of the development and performance of the business and the
position of the issuer and the undertakings included in the
consolidation taken as a whole, together with a description of the
principal risks and uncertainties that they face.
We consider the Annual Report and accounts, taken as a whole, is
fair, balanced and understandable and provides the information
necessary for shareholders to assess the Group’s position and
performance, business model and strategy.
• make judgements and estimates that are reasonable and prudent;
• state whether they have been prepared in accordance with IFRSs
On behalf of the Board
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Chief Executive Officer
4 October 2017
Nicola Bancroft
Chief Financial Officer
as adopted by the EU;
• assess the Group and parent Company’s ability to continue as a
going concern, disclosing, as applicable, matters related to going
concern; and
• use the going concern basis of accounting unless they either
intend to liquidate the Group or the parent Company or to cease
operations, or have no realistic alternative but to do so.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and enable them to ensure that
its financial statements comply with the Companies Act 2006. They
have general responsibility for taking such steps as are reasonably
open to them to safeguard the assets of the Group and to prevent
and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also
responsible for preparing a Strategic Report, Directors’ Report,
Directors’ Remuneration Report and Corporate Governance
Statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of
the corporate and financial information included on the Company’s
website. Legislation in the UK governing the preparation and
dissemination of financial statements may differ from legislation in
other jurisdictions.
DFS Annual report and accounts 2017
65
Independent auditor’s report
Independent auditor’s report to the members of DFS Furniture plc only
1. Our opinion is unmodified
We have audited the financial statements of DFS Furniture plc (“the Company”) for the year ended 29th July 2017 which comprise the
Consolidated Income Statement, the Consolidated Statement of Comprehensive Income, the Consolidated Balance Sheet, the
Consolidated Statement of Changes in Equity, the Consolidated Cash Flow Statement, the Company Balance Sheet, the Company
Statement of Changes in Equity, and the related notes, including the accounting policies in note 1.
In our opinion:
• the financial statements give a true and fair view of the state of the Group’s and of the parent Company’s affairs as at 29th July 2017 and
of the Group’s profit for the year then ended;
• the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted
by the European Union;
• the parent Company financial statements have been properly prepared in accordance with UK accounting standards, including FRS 101
Reduced Disclosure Framework; and
• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the
Group financial statements, Article 4 of the IAS Regulation.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities
are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit
opinion is consistent with our report to the Audit Committee.
We were appointed as auditor by the Directors on 6th July 2015. The period of total uninterrupted engagement is in respect of the three
financial years ended 29th July 2017. We have fulfilled our ethical responsibilities under, and we remain independent of the Group in
accordance with, UK ethical requirements including the FRC Ethical Standard as applied to listed public interest entities. No non-audit
services prohibited by that standard were provided.
Overview
Materiality: Group financial statements as a whole
Coverage
£2.4m (2016:£3.25m)
4.8% (2016: 5%) of Group profit before tax
100% (2016: 100%) of Group profit before tax
Risks of material misstatement
vs 2016
Recurring risks
New: Valuation of DFS Trading
Limited goodwill
p
Guarantee Provision
New: Recoverability of parent
company’s investment in DFS
Trading Limited
tu
p
2. Key audit matters: our assessment of risks of material misstatement
Key audit matters are those matters that, in our professional judgment, were of most significance in the audit of the financial statements
and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those
which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the
engagement team. We summarise below the key audit matters, in decreasing order of audit significance, in arriving at our audit opinion
above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those
procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the
purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that
opinion, and we do not provide a separate opinion on these matters.
66
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The risk
Our response
Valuation of DFS
Trading Limited
goodwill
(£479.6 million;
2016: £479.6 million)
Refer to page 49 (Audit
Committee Report),
page 79 (accounting
policy) and page 85
(financial disclosures).
Forecast-based valuation
There is a risk, particularly in light of
current political and economic
uncertainty and more challenging
market conditions, that the business
may not meet expected growth
projections in order to support the
carrying value of goodwill in relation to
DFS Trading.
This risk has become more significant in
light of recent trading performance for
DFS falling behind internal and market
expectations for the year ended 29 July
2017.
The Group support the goodwill balance
through a value in use calculation that
has underlying assumptions of varying
sensitivities. The assumptions with the
most material impact if found to be
incorrect are those related to revenue,
margins, terminal growth rate, and the
discount factor.
Guarantee Provision
(£7.0 million;
2016: £7.9 million)
Refer to page 49 (Audit
Committee Report),
page 79 (accounting
policy) and page 89
(financial disclosures).
Subjective valuation
The guarantee provision reflects the
estimated cost of fulfilling the
obligations arising from the product
guarantee provided to retail customers
of DFS Trading Limited. The directors
apply judgement in determining the
provision model and make assumptions
in respect of key variables: average cost
per claim, volume of claims, and the
average period over which calls are
received.
Historical data around service calls and
cost per call, which have been used to
inform the above-noted assumptions,
may not represent developments which
could occur post year end.
Our procedures included:
• Historical comparisons: Analysing the Group’s previous
projections against actual outcomes to assess historical reliability
of the forecasting.
• Benchmarking assumptions: Comparing the Group’s trading
forecasts against current trading performance and against
anticipated growth in the furniture retail sector, and investigating
any significant deviations, in order to challenge the assumptions
present within the forecasts. This was performed through review
of industry projections and using our knowledge of DFS Furniture
Plc and the retail sector.
• Sensitivity analysis: Performing sensitivity testing over revenue,
margins, terminal growth rate, and discount factor in order to
determine their impact on the value in use calculations. The
sensitivity analysis of revenue was informed by the market
benchmarks we reviewed.
• Our sector experience: Engaging our own valuation specialists
to assess and challenge the discount rate by obtaining the detail
of the inputs used in the discount rate calculation, benchmarking
each input against our own expectations, and comparing the
overall rate to an expected range based on our own benchmarks.
• Assessing transparency: Considering the adequacy of the
Group’s disclosures around the carrying value of goodwill and the
impairment analysis.
Our results
• We found the resulting estimate of the recoverable amount of
goodwill to be acceptable.
Our procedures included:
• Historical comparisons: Comparing the amount provided in the
prior year which was expected to reverse in the following year to
actual utilised amounts in the current year to assess historical
accuracy of the provision.
• Historical comparisons: Comparing expected volumes of calls
and average cost per claim against historical data.
• Expectation vs. outcome: Forming an expectation of the
year-end provision balance by reference to the costs of the
service team over a period of time commensurate with the
average period over with calls are received, and investigating any
significant variances.
• Sensitivity analysis: Performing sensitivity testing on certain
inputs to the calculation of the provision including average cost
per claim, average period over which calls are received and the
percentage of orders on which calls are received, in order to
determine their impact on the calculations and to assess the
sensitivities disclosed by the group.
• Assessing transparency: Determining whether the Group’s
disclosures in relation to the provision, the assumptions on which
it is based and sensitivities around those assumptions are
adequate.
Our results
• We found the resulting estimate of the guarantee provision to be
acceptable.
DFS Annual report and accounts 2017
67
Independent auditor’s report
continued
2. Key audit matters: our assessment of risks of material misstatement continued
The risk
Our response
Recoverability of
parent company’s
investment in DFS
Trading Limited
(£238.7 million;
2016: £238.7 million)
Refer to page 97
(accounting policy and
financial disclosures).
Low risk, high value
Of the carrying amount of the parent
company’s investments in subsidiaries
of £238.7 million, which represents 61%
of the company’s total assets, the
majority is attributable to the investment
in DFS Trading Limited. Recoverability
of this investment is not considered a
significant risk of misstatement or
subject to significant judgment.
However, due to its materiality in the
context of the parent company financial
statements, this is considered to be the
area that had the greatest effect on our
overall parent company audit.
Our procedures included:
• Tests of detail: Comparing the carrying amount of the investment
in DFS Trading Limited with the subsidiary’s accounting records
to identify whether its net assets, being an approximation of its
minimum recoverable amount, was in excess of the carrying
amount.
• Tests of detail: Comparing the carrying amount of the investment
in DFS Trading Limited with the value in use amount for that
cash-generating unit over which we performed the procedures
described in the valuation of goodwill key audit matter.
Our results
• We found the recoverable amount of the investment in DFS
Trading Limited to be acceptable.
3. Our application of materiality and an overview of the scope of our audit
Materiality for the Group financial statements as a whole was set at £2.4m, determined with reference to a benchmark of Group profit
before tax.
Materiality for the parent Company financial statements as a whole was set at £2.4m (2016: £3.2m), determined with reference to a
benchmark of Company total assets, of which it represents 0.6% (2016: 1%).
We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £0.12m, in addition to other
identified misstatements that warranted reporting on qualitative grounds.
The Group team performed the full-scope audits for Group purposes of all 8 (2016: all 8) of the Group’s components, including the audit of
the parent Company. The components were audited to component materialities, which ranged from £0.04m to £2.4m, having regard to the
mix of size and risk profile of the Group across the components.
Group profit before tax
£50.1m (2016: £64.5m)
Group materiality
£2.4m (2016: £3.25m)
£2.4m
Whole financial statements
materiality (2016: £3.25m)
£2.4m
Range of materiality at
8 components (£0.04m to £2.4m)
(2016: £0.04m to £3.0m)
£0.12m
Misstatements reported to the
Audit Committee (2016: £0.16m)
Profit before tax
Group materiality
68
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Group revenue
Group profit before tax
Group total assets
100%
(2016: 100%)
100
100
100%
(2016: 100%)
100
100
100%
(2016: 100%)
100
100
Full scope for Group audit purposes 2017
Full scope for Group audit purposes 2016
Full scope for Group audit purposes 2017
Full scope for Group audit purposes 2016
Full scope for Group audit purposes 2017
Full scope for Group audit purposes 2016
4. We have nothing to report on going concern
We are required to report to you if:
• we have anything material to add or draw attention to in relation to the Directors’ statement in note 1 to the financial statements on the
use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and
Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
• the related statement under the Listing Rules set out on page 19 is materially inconsistent with our audit knowledge.
We have nothing to report in these respects.
5 We have nothing to report on the other information in the Annual Report
The Directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion
on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as
explicitly stated below, any form of assurance conclusion thereon.
Our responsibility is to read the other information and, in doing so, consider whether, based on our financial statements audit work, the
information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work
we have not identified material misstatements in the other information.
Strategic report and directors’ report
Based solely on our work on the other information:
• we have not identified material misstatements in the Strategic Report and the Directors’ Report;
• in our opinion the information given in those reports for the financial year is consistent with the financial statements; and
• in our opinion those reports have been prepared in accordance with the Companies Act 2006.
Directors’ remuneration report
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the
Companies Act 2006.
Disclosures of principal risks and longer-term viability
Based on the knowledge we acquired during our financial statements audit, we have nothing material to add or draw attention to in relation
to:
• the Directors’ confirmation within the Strategic Report on page 16 that they have carried out a robust assessment of the principal risks
facing the Group, including those that would threaten its business model, future performance, solvency and liquidity;
• the Risks and Uncertainties disclosures describing these risks and explaining how they are being managed and mitigated; and
• the Directors’ explanation in the viability reporting of how they have assessed the prospects of the Group, over what period they have
done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation
that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including
any related disclosures drawing attention to any necessary qualifications or assumptions.
Under the Listing Rules we are required to review the viability reporting. We have nothing to report in this respect.
DFS Annual report and accounts 2017
69
Independent auditor’s report
continued
Corporate governance disclosures
We are required to report to you if:
• we have identified material inconsistencies between the knowledge we acquired during our financial statements audit and the Directors’
statement that they consider that the Annual Report and financial statements taken as a whole is fair, balanced and understandable and
provides the information necessary for shareholders to assess the Group’s position and performance, business model and strategy; or
• the section of the Annual Report describing the work of the Audit Committee does not appropriately address matters communicated by
us to the Audit Committee.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions
of the UK Corporate Governance Code specified by the Listing Rules for our review.
We have nothing to report in these respects.
6. We have nothing to report on the other matters on which we are required to report by exception
Under the Companies Act 2006, we are required to report to you if, in our opinion:
• adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from
branches not visited by us; or
• the parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with
the accounting records and returns; or
• certain disclosures of Directors’ remuneration specified by law are not made; or
• we have not received all the information and explanations we require for our audit.
We have nothing to report in these respects.
7. Respective responsibilities
Directors’ responsibilities
As explained more fully in their statement set out on page 65, the directors are responsible for: the preparation of the financial statements
including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Group and parent
Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going
concern basis of accounting unless they either intend to liquidate the Group or the parent Company or to cease operations, or have no
realistic alternative but to do so.
Auditor’s responsibilities
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement,
whether due to fraud, other irregularities, or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of
assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when
it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they
could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. The risk of not
detecting a material misstatement resulting from fraud or other irregularities is higher than for one resulting from error, as they may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control and may involve any area of law and
regulation not just those directly affecting the financial statements.
A fuller description of our responsibilities is provided on the FRC’s website at www.frc.org.uk/auditorsresponsibilities.
8. The purpose of our audit work and to whom we owe our responsibilities
This report is made solely to the Company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in
an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone
other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed.
Chris Hearld (Senior Statutory Auditor)
for and on behalf of KPMG LLP, Statutory Auditor
Chartered Accountants
1 Sovereign Square
Sovereign Street
Leeds
LS1 4DA
4 October 2017
70
DFS Annual report and accounts 2017
Consolidated income statement
for 52 weeks ended 29 July 2017 (52 weeks ended 30 July 2016)
Gross sales
Revenue
Cost of sales
Gross profit
Administrative expenses
Operating profit before depreciation and amortisation
Depreciation
Amortisation
Operating profit
Finance income
Finance expenses
Profit before tax
Taxation
Profit for the year
Statutory earnings per share
Basic
Diluted
2016
Non-
underlying
£m
–
–
–
–
–
–
–
–
–
–
–
–
9.9
9.9
Total
£m
980.4
756.0
(621.7)
134.3
(39.9)
94.4
(16.4)
(2.2)
75.8
0.3
(11.6)
64.5
(4.2)
60.3
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Note
Total
£m
Underlying
£m
1,2
990.8
980.4
762.7
(642.2)
120.5
(38.1)
82.4
(19.4)
(2.5)
60.5
0.2
(10.6)
50.1
(10.6)
39.5
756.0
(621.7)
134.3
(39.9)
94.4
(16.4)
(2.2)
75.8
0.3
(11.6)
64.5
(14.1)
50.4
2
2,3
5
5
6
7
7
18.7p
18.6p
23.7p
23.5p
4.6p
4.6p
28.3p
28.1p
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DFS Annual report and accounts 2017
71
Consolidated statement of comprehensive income
for 52 weeks ended 29 July 2017 (52 weeks ended 30 July 2016)
Profit for the year
Other comprehensive income
Items that are or may be reclassified subsequently to profit or loss:
Effective portion of changes in fair value of cash flow hedges
Net change in fair value of cash flow hedges reclassified to profit or loss
Income tax on items that are or may be reclassified subsequently to profit or loss
Other comprehensive expense for the year, net of income tax
Total comprehensive income for the year
2017
£m
39.5
1.8
(5.8)
0.8
(3.2)
36.3
2016
£m
60.3
(0.6)
(4.1)
0.9
(3.8)
56.5
72
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Consolidated balance sheet
at 29 July 2017 (30 July 2016)
Non-current assets
Property, plant and equipment
Intangible assets
Deferred tax assets
Current assets
Inventories
Other financial assets
Trade and other receivables
Cash and cash equivalents
Total assets
Current liabilities
Trade payables and other liabilities
Provisions
Other financial liabilities
Current tax liabilities
Non-current liabilities
Interest bearing loans and borrowings
Provisions
Other financial liabilities
Other liabilities
Total liabilities
Net assets
Equity attributable to owners of the Company
Share capital
Share premium
Merger reserve
Treasury shares
Cash flow hedging reserve
Retained earnings
Total equity
Note
2017
£m
2016
£m
8
9
12
13
11
14
15
19
16
17
19
16
15
21
21
21
21
21
74.2
491.8
9.8
575.8
36.6
–
24.5
61.0
122.1
697.9
65.1
491.2
9.1
565.4
34.9
3.1
26.4
66.7
131.1
696.5
(165.6)
(5.1)
(3.5)
(3.8)
(159.3)
(6.6)
(0.1)
(3.0)
(178.0)
(169.0)
(198.8)
(5.2)
(3.5)
(67.3)
(198.3)
(5.1)
(6.1)
(67.4)
(274.8)
(276.9)
(452.8)
(445.9)
245.1
250.6
319.5
40.4
18.6
(3.7)
(7.0)
(122.7)
245.1
319.5
40.4
18.6
(3.7)
(3.0)
(121.2)
250.6
These financial statements were approved by the Board of Directors on 4 October 2017 and were signed on its behalf by:
Ian Filby
Chief Executive Officer
Company registered number: 7236769
Nicola Bancroft
Chief Financial Officer
DFS Annual report and accounts 2017
73
Consolidated statement of changes in equity
Balance at 1 August 2015
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense) for the year
Dividends
Purchase of own shares
Share based payments
Balance at 30 July 2016
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense) for the year
Dividends
Share based payments
Balance at 29 July 2017
Share
capital
£m
319.5
Share
premium
£m
40.4
Merger
reserve
£m
18.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
319.5
40.4
18.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Treasury
shares
£m
Cash flow
hedging
reserve
£m
Retained
earnings
£m
Total
equity
£m
–
–
–
–
–
(3.7)
–
(3.7)
–
–
–
–
–
1.7
(156.3)
223.9
–
(4.7)
(4.7)
–
–
–
60.3
0.9
61.2
(27.3)
–
1.2
60.3
(3.8)
56.5
(27.3)
(3.7)
1.2
(3.0)
(121.2)
250.6
–
(4.0)
(4.0)
–
–
39.5
0.8
40.3
(43.8)
2.0
39.5
(3.2)
36.3
(43.8)
2.0
319.5
40.4
18.6
(3.7)
(7.0)
(122.7)
245.1
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Consolidated cash flow statement
for 52 weeks ended 29 July 2017 (52 weeks ended 30 July 2016)
Operating profit
Adjustments for:
Depreciation, amortisation and impairment
Gain on sale of property, plant and equipment
Share based payment expense
Decrease/(increase) in trade and other receivables
Increase in inventories
Increase in trade and other payables
(Decrease)/increase in provisions
Tax paid
Non-underlying prior year tax credit received
Net cash from operating activities
Cash flows from investing activities
Proceeds from sale of property, plant and equipment
Interest received
Acquisition of subsidiaries
Acquisition of property, plant and equipment
Acquisition of other intangible assets
Net cash from investing activities
Cash flows from financing activities
Interest paid
Payment of deferred consideration on acquisition
Payment of finance lease liabilities
Purchase of own shares
Ordinary dividends paid
Special dividends paid
Net cash from financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Note
26
2017
£m
60.5
21.9
(0.8)
2.0
1.9
(1.7)
2.2
(1.5)
84.5
(9.7)
–
74.8
1.0
0.2
–
(25.2)
(3.1)
(27.1)
(7.3)
–
(2.3)
–
(23.7)
(20.1)
(53.4)
(5.7)
66.7
61.0
2016
£m
75.8
18.6
(0.6)
1.2
(1.1)
(6.6)
11.6
1.2
100.1
(11.4)
5.9
94.6
0.8
0.3
(1.5)
(21.9)
(2.6)
(24.9)
(8.7)
(2.3)
(1.7)
(3.7)
(27.3)
–
(43.7)
26.0
40.7
66.7
DFS Annual report and accounts 2017
75
Notes to the consolidated financial statements
at 29 July 2017
1 Accounting policies
DFS Furniture plc (“the Company”) is a company incorporated and domiciled in the United Kingdom.
The consolidated financial statements consolidate those of the Company and its subsidiaries (together referred to as “the Group”).
The parent Company financial statements present information about the Company as a separate entity and not about its group.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these
consolidated financial statements. Judgements made by the Directors, in the application of these accounting policies that have significant
effect on the financial statements and estimates with a significant risk of material adjustment in the next year are discussed in note 1.16.
1.1 Basis of preparation
The consolidated financial statements have been prepared and approved by the directors in accordance with International Financial
Reporting Standards as adopted by the EU (“Adopted IFRS”). The financial statements are prepared on the historical cost basis except for
certain financial instruments and share based payment charges which are measured at their fair value. The financial statements are for the
52 weeks to 29 July 2017 (last year 52 weeks to 30 July 2016).
The Company has elected to prepare its parent Company financial statements in accordance with UK GAAP; these are presented on
pages 95 to 98.
Going concern
The Group remains highly cash generative and currently has sufficient medium and long term facilities in place, including a £230.0 million
revolving credit facility in place until August 2022. Further details of these facilities and the Group’s financial management objectives are
detailed in the financial statements.
On the basis of their assessment of the Group’s financial position, forecasts and projections, the Company’s Directors have a reasonable
expectation that the Company and the Group will be able to continue in operational existence as detailed in the viability reporting on page
19. Thus they continue to adopt the going concern basis of accounting in preparing the annual financial statements.
1.2 Basis of consolidation
The consolidated financial statements incorporate the financial statements of the Company and entities controlled by the Company
(its subsidiaries). Control exists when the Group is exposed to or has rights to variable returns from its investment with the investee and
has the ability to affect those returns through its power over the investee. In assessing control, potential voting rights that are currently
exercisable or convertible are taken into account.
The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the date that
control commences until the date that control ceases. The acquisition method is used to account for the acquisition of subsidiaries. All
intra-group transactions, balances, income and expenses are eliminated on consolidation.
1.3 Gross sales and revenue
Revenue is measured at the fair value of the consideration receivable by the Group for the provision of goods to external customers, being
the total amount payable by the customer (“gross sales”) less: value added and other sales taxes, the costs of obtaining interest-free
credit on behalf of customers and the amounts payable to third parties relating to products for which the Group acts as an agent. For
products where the Group acts as an agent, the amount recognised in revenue is the net fee receivable by the Group.
Many of the Group’s customers choose to take advantage of the interest-free credit that the Group makes available. This credit is provided
by external finance houses, who pay the Group the gross sales value of the customer order on delivery, less a fee for taking responsibility
for payment collection and bearing the full credit risk for any future default by the customer. The fee due to the finance house varies
depending on the amount borrowed by the customer, the length of the repayment term and the LIBOR rate at the time of the transaction.
In calculating reported revenue in accordance with IFRS the Group is required to deduct these fees from the value of the customer order.
Reported revenue will therefore vary depending on the proportion of customers who choose to take up the interest-free credit offer, the
average duration of the interest-free loan period and the prevailing LIBOR rates.
For the purposes of managing its business the Group focuses on gross sales, which is defined as the total amount payable by customers,
inclusive of VAT and other sales taxes and prior to any accounting adjustments for interest-free credit fees or aftercare product costs. The
Directors believe gross sales is a more transparent measure of the activity levels and performance of its stores and online channels as it is
not affected by customer preferences on payment options. Accordingly gross sales is presented in this Annual Report in addition to
statutory revenue, with a reconciliation between the two measures provided in note 2 to the financial statements.
Both gross sales and revenue are stated net of returns and sales allowances, and are recognised when goods have been delivered to the
customer, the revenue and costs in respect of the transaction can be measured reliably and collectability is reasonably assured.
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DFS Annual report and accounts 2017
1 Accounting policies continued
1.4 Expenses
Non-underlying and exceptional items
Items that are material in size, unusual or non-recurring in nature are disclosed separately in the income statement in order to provide an
indication of the Group’s underlying business performance. The principal items which may be included as non-underlying are:
• significant profit or loss on the disposal of non-current assets
• impairment charges
• significant non-recurring tax charges or credits
• costs associated with significant corporate, financial or operating restructuring, including acquisitions or the establishment of
operations in new geographical territories
Material finance income or expenses associated with significant changes in the Group’s borrowings are disclosed separately as
exceptional items below operating profit.
Royalty payments
Royalties payable to brand partners are charged to cost of sales when the related branded product is delivered to the customer.
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Operating lease payments
Payments made under operating leases are recognised in the income statement on a straight-line basis over the term of the lease. Lease
incentives received are recognised in the income statement as an integral part of the total lease expense.
Finance lease payments
Minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability. The finance
charge is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of
the liability.
Finance income and expenses
Finance expenses comprise interest payable, finance charges on finance leases recognised in profit or loss using the effective interest
method and unwinding of the discount on provisions and other liabilities measured at present value. Finance income comprises interest
receivable on funds invested, dividend income, and net foreign exchange gains.
Interest income and interest payable is recognised in profit or loss as it accrues, using the effective interest method. Dividend income is
recognised in the income statement on the date the Group’s right to receive payments is established.
1.5 Employee benefits
Defined contribution plans
Payments to defined contribution pension plans are recognised as an expense in the income statement as they fall due.
Short-term benefits
Short-term employee benefit obligations are measured on an undiscounted basis and are expensed as the related service is provided.
Share based payments
The fair value of equity settled share based payments is recognised as an expense over the vesting period of the related awards, with a
corresponding increase in equity. Fair values are calculated using option pricing models appropriate to the terms and conditions of the
awards. The amount charged as an expense is regularly reviewed and adjusted to reflect the achievement of service and non-market
based performance conditions.
1.6 Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent
that it relates to a business combination, or items recognised directly in equity or other comprehensive income.
Current tax is the expected tax payable or receivable on the taxable income or loss for the year, using tax rates enacted or substantively
enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years.
Deferred tax is provided on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for taxation purposes. The following temporary differences are not provided for: the initial recognition of goodwill;
the initial recognition of assets or liabilities in a transaction that is not a business combination and that affects neither accounting nor
taxable profit or loss, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the
foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying
amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date.
At interim reporting periods the tax charge is calculated in accordance with IAS 34, adjusted for material non-taxable items.
A deferred tax asset is recognised on deductible temporary differences only to the extent that it is probable that future taxable profits will
be available against which they can be utilised. Deferred tax assets are reviewed at each reporting date and are reduced to the extent that
it is no longer probable that the related tax benefit will be realised.
DFS Annual report and accounts 2017
77
Notes to the consolidated financial statements
at 29 July 2017
continued
1 Accounting policies continued
1.7 Foreign currency
Transactions in foreign currencies are translated to the respective functional currencies of Group entities at the foreign exchange rate
ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are retranslated to the functional currency at
the foreign exchange rate ruling at that date. Foreign exchange differences arising on translation are recognised in the income statement
except for differences arising on qualifying cash flow hedges, which are recognised directly in other comprehensive income.
1.8 Business combinations
Subject to the transitional relief in IFRS 1, all business combinations are accounted for by applying the acquisition method. Business
combinations are accounted for using the acquisition method as at the acquisition date, which is the date on which control is transferred
to the Group.
Goodwill is initially measured at cost, being the excess of the acquisition cost over the Group’s interest in the assets and liabilities
recognised. When the excess is negative, a bargain purchase gain is recognised immediately in profit or loss.
Costs related to the acquisition, other than those associated with the issue of debt or equity securities, are expensed as incurred.
Any contingent consideration payable is recognised at fair value at the acquisition date. If the contingent consideration is classified as
equity, it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes to the fair value of the
contingent consideration are recognised in profit or loss.
Acquisitions prior to 31 July 2011 (date of transition to IFRSs)
IFRS 1 grants certain exemptions from the full requirements of Adopted IFRSs in the transition period. The Group and Company elected
not to restate business combinations that took place prior to 31 July 2011. In respect of acquisitions prior to transition, goodwill is included
at 31 July 2011 on the basis of its deemed cost, which represents the amount recorded under UK GAAP which was broadly comparable
save that goodwill was amortised. On transition, amortisation of goodwill ceased as required by IFRS 1.
1.9 Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses.
Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property,
plant and equipment.
Leases in which the Group assumes substantially all the risks and rewards of ownership of the leased asset are classified as finance
leases. Where land and buildings are held under leases the accounting treatment of the land is considered separately from that of the
buildings. Leased assets acquired by way of finance lease are stated at an amount equal to the lower of their fair value and the present
value of the minimum lease payments at inception of the lease, less accumulated depreciation and less accumulated impairment losses.
Lease payments are accounted for as described in 1.4 above.
Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property,
plant and equipment. Land is not depreciated. The estimated useful lives are as follows:
50 years
• buildings
3 to 10 years
• plant and equipment
4 years
• motor vehicles
Depreciation methods, useful lives and residual values are reviewed at each balance sheet date.
1.10 Intangible assets and goodwill
Goodwill
Goodwill is stated at cost less any accumulated impairment losses. Goodwill is allocated to cash generating units and is not amortised but
is tested annually for impairment.
Other intangible assets
Expenditure on internally generated goodwill and brands is recognised in the income statement as an expense as incurred.
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and accumulated
impairment losses.
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DFS Annual report and accounts 2017
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1 Accounting policies continued
1.10 Intangible assets and goodwill continued
Amortisation
Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets unless such
lives are indefinite. Intangible assets with an indefinite useful life and goodwill are systematically tested for impairment at each balance
sheet date. Other intangible assets are amortised from the date they are available for use. Estimated useful lives are as follows:
3 years
• computer software and website costs
20 years
• acquired brand names
1.11 Inventories
Inventories are stated at the lower of cost and net realisable value. The cost of finished goods manufactured by the Group includes direct
materials, direct labour and appropriate overhead expenditure.
1.12 Impairment
The carrying amounts of the Group’s tangible and intangible assets other than goodwill are reviewed at each reporting date to determine
whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. For goodwill,
and intangible assets that have indefinite useful lives or that are not yet available for use, the recoverable amount is estimated each year at
the same time.
An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount. Impairment losses are
recognised in profit or loss.
An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in prior periods are
assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there
has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the
asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no
impairment loss had been recognised.
1.13 Provisions
A provision is recognised in the balance sheet when the Group has a present legal or constructive obligation as a result of a past event,
that can be reliably measured and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions
are determined by discounting the expected future cash flows at a pre-tax rate that reflects risks specific to the liability.
Details of provisions recognised are in note 19 and the related significant estimates and judgments in note 1.16.
1.14 Non-derivative financial instruments
Non-derivative financial instruments comprise investments in equity and debt securities, trade and other receivables, cash and cash
equivalents, loans and borrowings, and trade and other payables.
Trade and other receivables
Trade and other receivables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost
using the effective interest method, less any impairment losses.
Trade and other payables
Trade and other payables are recognised initially at fair value. Subsequent to initial recognition they are measured at amortised cost using
the effective interest method.
Cash and cash equivalents
Cash and cash equivalents comprise cash balances and call deposits.
Interest-bearing borrowings
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition,
interest-bearing borrowings are stated at amortised cost using the effective interest method.
DFS Annual report and accounts 2017
79
Notes to the consolidated financial statements
at 29 July 2017
continued
1 Accounting policies continued
1.15 Derivative financial instruments and hedging
Derivative financial instruments
Derivative financial instruments are recognised at fair value. The gain or loss on remeasurement to fair value is recognised immediately in
profit or loss. However, where derivatives qualify for hedge accounting, recognition of any resultant gain or loss depends on the nature of
the item being hedged (see below).
Cash flow hedges
Where a derivative financial instrument is designated as a hedge of the variability in cash flows of a highly probable forecast transaction,
the effective part of any gain or loss on the derivative financial instrument is recognised directly in the hedging reserve. Any ineffective
portion of the hedge is recognised immediately in the income statement.
When the forecast transaction subsequently results in the recognition of a non-financial asset or non-financial liability, the associated
cumulative gain or loss remains in the hedging reserve and is reclassified into profit or loss in the same period or periods during which the
asset acquired or liability assumed affects profit or loss.
For other cash flow hedges the associated cumulative gain or loss is removed from equity and recognised in the income statement in the
same period or periods during which the hedged forecast transaction affects profit or loss.
When a hedging instrument expires or is sold, terminated or exercised, or the Group revokes designation of the hedge relationship but the
hedged forecast transaction is still expected to occur, the cumulative gain or loss at that point remains in equity and is recognised in
accordance with the above policy when the transaction occurs. If the hedged transaction is no longer expected to take place, the
cumulative unrealised gain or loss recognised in equity is recognised in the income statement immediately.
1.16 Significant areas of estimation and judgment
In the application of the Group’s accounting policies, the Directors are required to make judgments, estimates and assumptions that affect
the value of reported assets, liabilities, revenues and expenses. The estimates and associated assumptions are based on historical
experience and other relevant factors, but may differ from actual results. Significant areas of estimation for the Group include the costs of
meeting customer guarantees and the period over which guarantee claims arise (note 19), the selling prices applied in determining net
realisable values of inventories (note 13) and the assumptions underlying the value in use calculation for the impairment of goodwill
(note 9).
1.17 New accounting standards
A number of new or revised standards and interpretations have been issued which are not yet effective or endorsed by the EU, including
IFRS 15 Revenue from Contracts with Customers, IFRS 9 Financial Instruments and IFRS 16 Leases, and which have not therefore been
applied by the Group in these financial statements. The Directors have determined that of these, only IFRS 16 is expected to have a
material impact on the future financial statements of the Group since it would require the substantial majority of the Group’s operating
lease commitments (c£646m on an undiscounted basis as shown in note 25 of the financial statements) to be brought on to the balance
sheet, resulting in the recognition of significant lease assets and liabilities which would be depreciated and amortised separately. IFRS 16
would first apply to the Group for the financial year ending July 2020.
80
DFS Annual report and accounts 2017
2 Segmental analysis
The Group’s operating segments under IFRS 8 have been determined based on management accounts reports reviewed by the Board.
Segment performance is assessed based upon earnings before interest and tax excluding depreciation charges and non-underlying items
(“underlying EBITDA”).
The Group has only one reportable segment, which derives its revenues from the retailing of upholstered furniture and related products.
Activities included in other segments comprise the manufacture and distribution of upholstered furniture.
External sales
Internal sales
Total gross sales
2017
£m
990.8
–
–
990.8
2016
£m
980.4
–
–
980.4
2017
£m
0.6
88.9
(89.5)
–
2016
£m
1.2
91.0
(92.2)
2017
£m
991.4
88.9
(89.5)
–
990.8
Retail
Other segments
Eliminations
Gross sales
Total segments gross sales
Less: value added and other sales taxes
Less: costs of interest-free credit and aftercare products
Revenue
Retail underlying EBITDA
Other segments underlying EBITDA
Depreciation & amortisation
Operating profit
Finance income
Finance expenses
Profit before tax
A geographical analysis of revenue is presented below:
United Kingdom
Europe
Total revenue
3 Operating profit
Group operating profit is stated after charging/(crediting):
Depreciation on tangible assets
Net gain on disposal of property, plant and equipment
Amortisation of intangible assets
Cost of inventories recognised as an expense
Write-down of inventories to net realisable value
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2016
£m
981.6
91.0
(92.2)
980.4
2016
£m
980.4
(152.0)
(72.4)
756.0
2016
£m
87.4
7.0
94.4
(18.6)
75.8
0.3
(11.6)
64.5
2016
£m
734.2
21.8
756.0
2016
£m
16.4
(0.6)
2.2
315.2
0.4
2016
£m
0.1
0.1
0.1
0.3
2017
£m
990.8
(153.8)
(74.3)
762.7
2017
£m
75.3
7.1
82.4
(21.9)
60.5
0.2
(10.6)
50.1
2017
£m
736.6
26.1
762.7
2017
£m
19.4
(0.8)
2.5
326.4
0.6
2017
£m
0.1
0.1
–
0.2
Auditor’s remuneration:
Audit of these financial statements
Audit of the financial statements of Group subsidiaries
Amounts receivable by the Company’s auditor and its associates in respect of:
Taxation compliance services
DFS Annual report and accounts 2017
81
Notes to the consolidated financial statements
at 29 July 2017
continued
4 Staff numbers and costs
The average number of persons employed by the Group during the year, analysed by category, was as follows:
Production
Warehouse and transport
Sales and administration
The aggregate payroll costs of these persons were as follows:
Wages and salaries
Social security costs
Other pension costs
Share based payment expense (equity settled)
5 Finance income and expense
Finance income
Interest income on bank deposits
Total finance income
Finance expense
Interest payable on senior loan facility
Bank fees
Fair value lease adjustment unwind (note 15)
Unwind of discount on provisions
Finance lease interest
Total finance expense
6 Taxation
Recognised in the income statement
Current tax
Current year
Non-underlying prior year tax credits
Adjustments for prior years
Current tax expense
Deferred tax
Origination and reversal of temporary differences
Deferred tax rate change
Adjustments for prior years
Deferred tax expense
Total tax expense in income statement
82
DFS Annual report and accounts 2017
Number of employees
2017
1,136
837
2,319
4,292
2017
£m
124.7
12.4
2.5
139.6
2.0
141.6
2017
£m
0.2
0.2
(7.1)
(0.2)
(2.9)
(0.1)
(0.3)
2016
1,100
796
2,027
3,923
2016
£m
117.7
11.6
2.4
131.7
1.2
132.9
2016
£m
0.3
0.3
(7.9)
(0.3)
(3.0)
(0.1)
(0.3)
(10.6)
(11.6)
2017
£m
11.3
–
(0.8)
10.5
(0.7)
0.6
0.2
0.1
10.6
2016
£m
10.6
(9.9)
(0.4)
0.3
2.8
1.0
0.1
3.9
4.2
6 Taxation continued
Reconciliation of effective tax rate
Profit before tax for the year
Tax using the UK corporation tax rate of 19.67% (2016: 20%)
Non-deductible expenses
Deferred tax rate change
Non-underlying prior year tax credits
Adjustments in respect of prior years
Total tax expense
2017
£m
50.1
9.8
0.8
0.6
–
(0.6)
10.6
2016
£m
64.5
12.9
0.5
1.0
(9.9)
(0.3)
4.2
During the prior year a tax credit of £9.9m resulted from a settlement in the Group’s favour of certain outstanding items relating to prior
years with HM Revenue and Customs for which no benefit had previously been recognised.
The Finance Act 2016, which was substantively enacted in September 2016, included provisions to reduce the rate of UK corporation tax
to 19% with effect from 1 April 2017 and 17% with effect from 1 April 2020. Deferred taxation is measured at tax rates that are expected to
apply in the periods in which temporary timing differences are expected to reverse based on tax rates and laws that have been enacted or
substantively enacted at the balance sheet date. Accordingly, 17% has been applied when calculating deferred tax assets and liabilities at
29 July 2017.
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Income tax recognised in other comprehensive income
Effective portion of changes in fair value of cash flow hedges
Net change in fair value of cash flow hedges reclassified to profit or loss
Deferred tax asset in respect of share based payments
2017
£m
0.3
(0.9)
(0.2)
(0.8)
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2016
£m
(0.1)
(0.8)
–
(0.9)
7 Earnings per share
Statutory earnings per share
Basic earnings per share is calculated by dividing the net profit or loss for the financial period attributable to ordinary equity holders of the
parent Company by the weighted average number of ordinary shares outstanding during the period. The weighted average number of
shares reflects the movements in share capital detailed in note 21 and the impact of movements in treasury shares held by the Company.
Changes in the Company’s capital structure with no corresponding change in resources are reflected as if they had occurred at the
beginning of the earliest period presented.
Diluted earnings per share is calculated using the same net profit or loss for the financial period attributable to ordinary equity holders of
the parent Company, but increasing the weighted average number of ordinary shares by the dilutive effect of potential ordinary shares.
Basic total earnings per share
Diluted total earnings per share
Profit for the year attributable to equity holders of the parent Company
2017
pence
18.7
18.6
2017
£m
39.5
2017
No.
2016
pence
28.3
28.1
2016
£m
60.3
2016
No.
Weighted average number of shares in issue for basic earnings per share
Dilutive effect of employee share based payment awards
Weighted average number of shares in issue for diluted earnings per share
211,530,721
753,518
212,896,904
1,222,417
212,284,239
214,119,321
DFS Annual report and accounts 2017
83
Notes to the consolidated financial statements
at 29 July 2017
continued
7 Earnings per share continued
Underlying earnings per share
Underlying basic earnings per share and underlying diluted earnings per share are calculated by dividing the profit for the period
attributable to ordinary equity holders of the parent Company, as adjusted to exclude the effect of non-underlying items, by the same
weighted average numbers of ordinary shares above used for basic and diluted earnings per share respectively.
Profit for the year attributable to equity holders of the parent Company
Exceptional tax credit
Underlying profit for the year attributable to equity holders of the parent Company
Underlying basic earnings per share
Underlying diluted earnings per share
8 Property, plant and equipment
Cost
Balance at 1 August 2015
Additions
Disposals
Balance at 30 July 2016
Additions
Disposals
Balance at 29 July 2017
Depreciation and impairment
Balance at 1 August 2015
Depreciation charge for the year
Disposals
Balance at 30 July 2016
Depreciation charge for the year
Disposals
Balance at 29 July 2017
Net book value
At 1 August 2015
At 30 July 2016
At 29 July 2017
2017
£m
39.5
–
39.5
2017
pence
18.7
18.6
Land and
buildings
£m
Plant and
equipment
£m
Motor
vehicles
£m
5.5
1.0
–
6.5
1.2
–
7.7
0.8
0.1
–
0.9
0.2
–
1.1
4.7
5.6
6.6
77.5
17.7
–
95.2
19.6
–
114.8
35.4
11.3
–
46.7
13.7
–
60.4
42.1
48.5
54.4
16.9
5.4
(2.5)
19.8
7.9
(3.1)
24.6
6.1
5.0
(2.3)
8.8
5.5
(2.9)
11.4
10.8
11.0
13.2
2016
£m
60.3
(9.9)
50.4
2016
pence
23.7
23.5
Total
£m
99.9
24.1
(2.5)
121.5
28.7
(3.1)
147.1
42.3
16.4
(2.3)
56.4
19.4
(2.9)
72.9
57.6
65.1
74.2
Leased plant and machinery
Included in the total net book value of motor vehicles is £5.3m (2016: £4.3m) in respect of assets held under finance leases. Depreciation
for the year on these assets was £2.3m (2016: £1.9m).
Capital commitments
At 29 July 2017 the Group had contracted capital commitments of £3.4m (2016: £3.4m) for which no provision has been made in the
financial statements.
84
DFS Annual report and accounts 2017
9 Intangible assets
Cost
Balance at 1 August 2015
Additions
Acquisition
Balance at 30 July 2016
Additions
Balance at 29 July 2017
Amortisation and impairment
Balance at 1 August 2015
Amortisation charge for the year
Balance at 30 July 2016
Amortisation charge for the year
Balance at 29 July 2017
Net book value
At 1 August 2015
At 30 July 2016
At 29 July 2017
Computer
software
£m
Brand
names
£m
Goodwill
£m
Total
£m
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a
i
484.0
–
1.0
485.0
–
485.0
–
–
–
–
–
495.9
2.6
1.5
500.0
3.1
503.1
6.6
2.2
8.8
2.5
11.3
484.0
485.0
485.0
489.3
491.2
491.8
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9.4
2.6
–
12.0
3.1
15.1
6.4
2.1
8.5
2.4
10.9
3.0
3.5
4.2
2.5
–
0.5
3.0
–
3.0
0.2
0.1
0.3
0.1
0.4
2.3
2.7
2.6
Acquisition
On 1 October 2015, the Group acquired the trade and assets of DFS Spain for cash consideration of £1.5m. This acquisition was made to
facilitate the expansion of the Group’s operations in Europe and to secure the rights to the use of the DFS brand name in Spain. The
goodwill of £1.0m arising from the acquisition is attributable to the workforce and operations of the acquired business.
The identifiable assets acquired and liabilities assumed comprised the intangible asset of the DFS Spain brand name which had a fair
value of £0.5m at acquisition.
The carrying amount of goodwill is allocated to the following cash-generating units:
DFS Trading Limited
The Sofa Workshop Limited
DFS Spain
Goodwill
2017
£m
479.6
4.4
1.0
485.0
2016
£m
479.6
4.4
1.0
485.0
Goodwill is tested annually for impairment on the basis of value in use. The key assumptions underlying the calculations are those
regarding expected future sales volumes, changes in selling prices and direct costs and the discount rate applied.
Cash flow forecasts are prepared from the latest financial results and internal budgets for the next four years, which take into account
external macroeconomic indicators as well as internal growth expectations. Selling prices and related costs are based on past practice
and expected future changes in the market. A terminal value was then calculated on the basis of the four year plan and the expected
long-term growth rate for the UK living room furniture sector of 2.9%. These cash flow forecasts were then discounted at a pre-tax
discount rate of 9.7% (2016: 10.2%). The discount rates are estimated based on the Group’s weighted average cost of capital, risk
adjusted for an individual unit’s circumstances.
The Group has applied sensitivities to assess whether any reasonably possible changes in assumptions could cause an impairment that
would be material to these consolidated financial statements. A discount rate in excess of 12% would need to be applied in order for there
to be any indication of an impairment. Even with an assumption of no further growth beyond FY17, the calculated value in use remained
above the carrying value. A potential indicator of impairment could arise if there was no growth in future cash flows over the four year
budgeted period and the terminal growth rate was also reduced to 2%.
DFS Annual report and accounts 2017
85
Notes to the consolidated financial statements
at 29 July 2017
continued
10 Investments in subsidiaries
The following companies are incorporated in England & Wales, are wholly owned by the Group and have been consolidated:
Diamond Holdco 2 Limited1
Diamond Holdco 7 Limited1
DFS Furniture Holdings plc1
DFS Furniture Company Limited1
DFS Trading Limited1
Coin Retail Limited (Jersey)2
Coin Furniture Limited3
The Sofa Workshop Limited4
DFS Spain Limited1
Registered offices:
1 1 Rockingham Way, Redhouse Interchange, Adwick-le-Street, Doncaster DN6 7NA.
2 13-14 Esplanade, St Helier, Jersey JE1 1BD.
3 The Pavilion, 118 Southwark Street, London SE1 0SW.
4 Venture House 4th Floor, 27-29 Glasshouse Street, London W1B 5DF.
11 Other financial assets
Current
Foreign exchange contracts
Principal activity
Intermediate holding company
Intermediate holding company
Intermediate holding company
Intermediate holding company
Furniture retailer
Intermediate holding company
Furniture retailer
Furniture retailer
Furniture retailer
2017
£m
–
2016
£m
3.1
Foreign exchange contracts comprise forward contracts which are used to hedge exchange risk arising from the Group’s overseas
purchases (note 23).
12 Deferred tax
Deferred tax assets and liabilities are attributable to the following:
Accelerated capital allowances
Fair value lease creditor
Revaluation of derivatives to fair value
Tax losses carried forward
Share based payments
Other temporary differences
Net tax assets
The deferred tax movement in the year is as follows:
At start of period
Charged to the income statement:
Accelerated capital allowances
Fair value lease creditor
Tax losses carried forward
Share based payments
Other temporary differences
Recognised in the statement of comprehensive income
At end of period
86
DFS Annual report and accounts 2017
2017
£m
2.7
4.0
1.2
1.0
0.5
0.4
9.8
2017
£m
9.1
–
(0.3)
0.3
0.3
(0.4)
0.8
9.8
2016
£m
2.7
4.3
0.6
0.7
–
0.8
9.1
2016
£m
12.1
0.8
(0.6)
0.4
–
(4.5)
0.9
9.1
13 Inventories
Raw materials and consumables
Finished goods and goods for resale
Provision for net realisable value
2017
£m
4.8
37.9
42.7
(6.1)
36.6
2016
£m
4.2
36.3
40.5
(5.6)
34.9
In applying its accounting policy for inventory, the Group identifies those items where there is a risk that net realisable value does not
exceed cost, due to either the age or condition of the item. An estimate of the net realisable value of such items is made based on the sale
of similar items in the past and their carrying value reduced by an appropriate provision.
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14 Trade and other receivables
Trade receivables
Prepayments and accrued income
Other receivables
2017
£m
10.4
13.7
0.4
24.5
No interest is charged on trade receivables; the Group bears no credit risk in respect of amounts due from retail customers under
interest-free credit arrangements. Prepayments and accrued income do not include impaired assets.
15 Trade payables and other liabilities
Current
Payments received on account
Trade payables
Other creditors including other tax and social security
Accruals and deferred income
Finance lease liabilities
Non-current
Fair value lease creditor
Accruals and deferred income
Finance lease liabilities
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2016
£m
12.5
13.1
0.8
26.4
2016
£m
24.9
76.3
25.1
31.2
1.8
2017
£m
24.9
81.9
29.5
27.2
2.1
165.6
159.3
2017
£m
20.0
42.7
4.6
67.3
2016
£m
20.6
43.1
3.7
67.4
Trade payables do not bear interest and are paid within agreed credit terms. Property lease incentives are classified as non-current to the
extent that they will be credited to the income statement more than one year from the reporting date.
On the acquisition of the DFS business by the current parent Company in 2010 a number of fair value adjustments were made, including
the recognition of a liability representing the present value of certain unfavourable lease obligations as assessed at the date of acquisition.
This fair value lease creditor is released to the income statement over the remaining life of the related leases (expiring in 2030), with the
unwind of the discount recognised as a finance expense (note 5).
DFS Annual report and accounts 2017
87
Notes to the consolidated financial statements
at 29 July 2017
continued
16 Other financial liabilities
Non-current
Interest rate derivatives
Current
Foreign exchange contracts
2017
£m
3.5
3.5
2016
£m
6.1
0.1
Foreign exchange contracts comprise forward contracts which are used to hedge exchange risk arising from the Group’s overseas
purchases (note 23). Interest rate derivatives are used to hedge interest rate risk on the Group’s floating rate debt (note 23).
17 Other interest-bearing loans and borrowings
This note provides information about the contractual terms of the Group’s interest-bearing loans and borrowings, which are measured at
amortised cost. For more information about the Group’s exposure to interest rate and foreign currency risk, see note 23.
Senior loan facility
Unamortised issue costs
2017
£m
200.0
(1.2)
198.8
2016
£m
200.0
(1.7)
198.3
The senior loan facility bore interest at a rate of 3 month LIBOR plus 2.0% and was repayable in full on 12 March 2020. After the balance
sheet date the Group refinanced the senior loan facility with a new senior revolving credit facility of £230.0m of which £200.0m was initially
drawn down on 7 August 2017. The revolving credit facility bears interest at a rate of 3 month LIBOR plus 2.1% and is repayable in full on
2 August 2022. The revolving credit facility is secured on a first priority basis with fixed and floating charges over substantially all of the
assets of the Company and DFS Furniture Holdings plc.
Finance lease liabilities
Finance lease liabilities are payable as follows:
Less than one year
Between one and five years
More than five years
2017
2016
Minimum
lease
payments
£m
2.3
4.8
–
7.1
Interest
£m
Principal
£m
(0.2)
(0.2)
–
(0.4)
2.1
4.6
–
6.7
Minimum
lease
payments
£m
2.0
3.9
–
5.9
Interest
£m
Principal
£m
(0.2)
(0.2)
–
(0.4)
1.8
3.7
–
5.5
18 Employee benefits
Defined contribution pension plans
The Group operates a number of defined contribution pension plans under which contributions by the employees and the Group are
administered by trustees in funds separate from the Group’s assets. The costs of these schemes are charged to the income statement as
they become payable under the rules of the scheme. The total pension cost of the Group for the year was £2.5m (2016: £2.4m).
88
DFS Annual report and accounts 2017
19 Provisions
Balance at 30 July 2016
Provisions made during the year
Reclassification from accruals
Provisions used during the year
Provisions released during the year
Unwind of discount
Balance at 29 July 2017
Current
Non-current
Guarantee
provision
£m
Property
provisions
£m
Other
provisions
£m
7.9
5.5
–
(5.8)
(0.6)
–
7.0
4.7
2.3
7.0
2.0
0.1
0.3
(0.2)
–
0.1
2.3
0.2
2.1
2.3
1.8
–
–
(0.8)
–
–
1.0
0.2
0.8
1.0
Total
£m
11.7
5.6
0.3
(6.8)
(0.6)
0.1
10.3
5.1
5.2
10.3
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The Group offers a long-term guarantee on its upholstery products and in accordance with accounting standards a provision is
maintained for the expected future cost of fulfilling these guarantees on products which have been delivered before the reporting date. In
calculating this provision the key areas of estimation are the number of future claims, average cost per claim and the expected period over
which claims will arise. The Group has considered the sensitivity of the calculation to these key areas of estimation, and determined that a
10% change in either the average cost per claim or the number of expected future calls would change the value of the calculated provision
by £0.7m. The Directors have therefore concluded that reasonably possible variations in estimate would not result in a material difference.
Property provisions relate to onerous contracts and other obligations in respect of the Group’s property leases including an estimate of
dilapidation costs based on anticipated lease expiries and renewals. Other provisions relate to payment of refunds to customers for
payment protection insurance policies and other regulatory costs.
20 Dividends
The following dividends were recognised and paid during the year:
Interim ordinary dividend for FY15
Final ordinary dividend for FY15
Interim ordinary dividend for FY16
Final ordinary dividend for FY16
Interim ordinary dividend for FY17
Special dividend for FY17
Pence per
ordinary
share
3.1p
6.2p
3.5p
7.5p
3.7p
9.5p
2017
£m
–
–
–
15.9
7.8
20.1
43.8
2016
£m
6.6
13.2
7.5
–
–
–
27.3
The Directors recommend a final dividend of 7.5p in respect of the financial period ended 29 July 2017 (“FY17”), resulting in a total
proposed dividend of £15.9m. Subject to shareholder approval it is intended that this dividend will be paid on 27 December 2017. DFS
Furniture plc shares will trade ex-dividend from 7 December 2017 and the record date will be 8 December 2017. This dividend has not
therefore been recognised as a liability in these financial statements.
21 Capital and reserves
Share capital
Ordinary shares of £1.50 each
Allotted, called up and fully paid
At the start and end of the financial period
Number of
shares
‘000
Ordinary
shares
£m
213,030
319.5
Share premium
The share premium account represents the surplus of consideration received for issued ordinary share capital over its nominal value. This
arose on the issue ordinary shares on 11 March 2015.
Merger reserve
The merger reserve arose on the issue of shares in the Company in exchange for minority interests in the issued share capital of a
subsidiary company on 10 March 2015.
DFS Annual report and accounts 2017
89
Notes to the consolidated financial statements
at 29 July 2017
continued
21 Capital and reserves continued
Treasury shares
Where the Company purchases the Company’s equity share capital into treasury (treasury shares), the consideration paid, including any
directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled,
reissued or disposed of.
During the period ending 30 July 2016 the Company purchased 1,500,000 of its own ordinary shares at a total cost of £3.7m for the
purpose of satisfying employee share based payment awards. During the year 858 of these shares were used to satisfy employee share
based payment awards.
Cash flow hedging reserve
The cash flow hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging
instruments related to hedged transactions that have not yet occurred.
22 Financial instruments: categories and fair value
Financial assets
Derivatives in designated hedging relationships
Loans and receivables
Cash
Financial liabilities
Derivatives in designated hedging relationships
Senior loan facility
Amortised cost
Finance lease obligations
2017
£m
–
10.8
61.0
2016
£m
3.1
13.3
66.7
(7.0)
(198.8)
(162.1)
(6.7)
(6.2)
(198.3)
(162.3)
(5.5)
All derivatives are categorised as Level 2 under the requirements of IFRS 7 as they are valued using techniques based significantly on
observed market data.
The Directors consider that the fair values of each category of the Group’s financial instruments are the same as their carrying values in
the Group’s balance sheet.
23 Financial instruments: risk management
The objectives, policies and processes governing the treasury activities of the Group are reviewed and approved by the Board. The
Group’s documented treasury policy includes details of authorised counterparties, instrument types and transaction limits and principles
for the management of liquidity, interest and foreign exchange risks. As part of its strategy for the management of these risks the Group
uses derivative financial instruments. The Group does not enter into or trade financial instruments, including derivative financial
instruments, for speculative purposes.
Liquidity risk
The Group manages its cash and borrowing requirements to ensure that it has sufficient liquid resources to meet its obligations as they
fall due while making efficient use of the Group’s financial resources.
The table below shows the maturity analysis of the undiscounted remaining contractual cash flows (including interest) of the Group’s
financial liabilities:
2017
Trade and other payables
Finance lease liabilities
Senior loan facility
Other liabilities
Derivatives: net settled
Derivatives: gross settled
Cash in flows
Cash out flows
Total cash flows
Less than
1 year
£m
1 to 2
years
£m
2 to 5
years
£m
–
2.9
203.4
0.6
206.9
1.2
–
–
Over
5 years
£m
–
–
–
2.3
2.3
–
–
–
Total
£m
151.8
7.1
212.6
11.2
382.7
4.7
(95.4)
98.2
–
1.9
4.6
3.3
9.8
1.7
–
–
11.5
208.1
2.3
390.2
151.8
2.3
4.6
5.0
163.7
1.8
(95.4)
98.2
168.3
90
DFS Annual report and accounts 2017
23 Financial instruments: risk management continued
2016
Trade and other payables
Finance lease liabilities
Senior loan facility
Other liabilities
Derivatives: net settled
Derivatives: gross settled
Cash inflows
Cash out flows
Total cash flows
Less than
1 year
£m
152.4
2.0
5.6
5.4
165.4
1.4
(37.4)
34.0
163.4
1 to 2
years
£m
–
1.7
5.6
2.8
10.1
1.3
–
–
2 to 5
years
£m
–
2.2
209.9
0.6
212.7
2.2
–
–
11.4
214.9
Over
5 years
£m
–
–
–
2.1
2.1
–
–
–
2.1
Total
£m
152.4
5.9
221.1
10.9
390.3
4.9
(37.4)
34.0
391.8
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Interest rate risk management
The Group’s operating profit is affected by the cost of providing interest-free credit to its customers. A fall in LIBOR rates would have a
positive impact on operating profit and a rise in LIBOR rates would impact operating profit negatively. However, with the current low LIBOR
rates any increases or decreases at present would largely be mitigated by the LIBOR ‘floor’ mechanisms used by the external providers of
credit to the Group’s customers. Excluding the effect of these floors, an increase in LIBOR of one percentage point would reduce the
Group’s reported revenue by 0.5%.
The Group was exposed to interest rate risk on its senior loan facility, which bore interest at a floating rate of 3 month GBP LIBOR plus
2.00%. In order to provide some certainty over the future cash flows associated with this debt, the Group entered into four participating
interest rate swaps. The effect of these instruments was to fix the interest rate payable on the senior loan facility to a maximum level while
allowing the Group to retain some benefit on a proportion of the facility where 3 month LIBOR remained below 1.39%. The swaps covered
the full £200.0m of the senior loan facility for its duration until March 2020. These instruments continue to be suitable in providing certainty
over the future cash flows of the new senior revolving credit facility following the refinancing that took place after the end of the financial
period and will therefore be redesignated as hedges for the new facility. The fair values of the Group’s interest rate derivatives are
as follows:
Interest rate swaps
Derivatives in designated hedging relationships
2017
£m
2016
£m
(3.5)
(6.1)
Foreign exchange risk management
The Group is exposed to the risks of exchange rate fluctuations on the purchase of products denominated in foreign currencies. Currency
requirements are assessed by analysis of historic purchasing patterns by month, adjusted as appropriate to take into account current
trading expectations. The Group’s treasury policy allows for the use of forward foreign exchange contracts to hedge the exchange rate risk
arising from these anticipated future purchases between 9 and 18 months in advance. These contracts are designated as cash flow
hedges.
The table below summarises the forward foreign exchange contracts outstanding at the period end:
Derivatives in designated hedging relationships
US Dollar
2017
2016
Notional
amount
£m
Fair value
£m
Notional
amount
£m
Fair value
£m
98.2
(3.5)
34.0
3.0
The carrying amounts of the Group’s foreign currency denominated monetary assets and monetary liabilities at the reporting date are as
follows:
US Dollar
Euro
Assets
Liabilities
2017
£m
7.3
3.5
2016
£m
–
2.7
2017
£m
(5.9)
(1.0)
2016
£m
(1.7)
(0.3)
DFS Annual report and accounts 2017
91
Notes to the consolidated financial statements
at 29 July 2017
continued
23 Financial instruments: risk management continued
Foreign currency sensitivity analysis
The Group’s primary foreign currency exposures are to US Dollars and the Euro. The table below illustrates the hypothetical sensitivity of
the Group’s reported profit and closing equity to a 10% weakening of these currencies against Sterling, assuming all other variables were
unchanged. The sensitivity rate of 10% represents the Directors’ assessment of a reasonably possible change, based on historic volatility.
The analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the period end for a
10% change in foreign currency rates. The analysis assumes that exchange rate fluctuations on currency derivatives that form part of an
effective cash flow hedge relationship affect the cash flow hedging reserve in equity.
Positive figures represent an increase in profit or equity.
US Dollar
Euro
Income statement
Equity
2017
£m
(0.1)
(0.3)
2016
£m
0.2
(0.2)
2017
£m
(9.5)
–
2016
£m
(3.9)
–
A 10% strengthening of the above currencies against the Sterling at the period end would have had the equal but opposite effect on the
above currencies to the amounts shown above, on the basis that all other variables remain constant.
Financial risk management
Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual
obligations, and arises principally from the Group’s investment securities.
Investments of cash, borrowings and derivative instruments are transacted only through counterparties meeting the credit rating and
investment criteria specified in the Group’s treasury policy. The Group’s exposure and the credit ratings of its counterparties are regularly
reviewed. Concentrations of risk are mitigated through the use of multiple counterparties and by counterparty limits which are reviewed
and approved by the Board.
The Group does not have any significant credit risk exposure to any single counterparty or any group of counterparties having similar
characteristics.
Capital management
The capital structure of the Group consists of debt, as analysed in note 26, and equity attributable to the equity holders of the parent
Company, comprising issued capital, reserves and retained earnings as shown in the consolidated statement of changes in equity. The
Group manages its capital with the objective that all entities within the Group continue as going concerns while maintaining an efficient
structure to minimise the cost of capital. The Group is not restricted by any externally imposed capital requirements.
24 Share based payments
The Group has three share based payment schemes in operation:
Long Term Incentive Plan (“LTIP”)
The LTIP is a discretionary executive reward plan that allows the Group to grant conditional share awards or nil-cost options to selected
executives at the discretion of the Remuneration Committee. The scheme is focused on the senior leadership roles in the Group, including
Executive Directors. The maximum value of LTIP awards granted to an individual is 150% of base salary, although the Remuneration
Committee may in exceptional circumstances increase this to 300%.
LTIP awards vest after a three year performance period (other than those granted shortly after Admission which will vest on 31 July 2017)
subject to the achievement of performance measures based on earnings per share and total shareholder return targets. Further
information on LTIP performance targets and awards made to Directors is given in the Directors’ Remuneration Report on pages 54 to 64.
Restricted Share Plan (“RSP”)
The RSP is also a discretionary reward plan under which conditional share awards or nil-cost options may be granted to individuals in key
executive roles in the Group, excluding Executive Directors and other recipients of LTIP awards. Awards may not exceed 50% of an
individual’s salary for a particular financial year.
RSP awards vest after a three year performance period (other than those granted shortly after Admission which will vest in July 2017) and
are not subject to other performance conditions.
92
DFS Annual report and accounts 2017
24 Share based payments continued
Save as Your Earn (“SAYE”)
SAYE schemes are currently available to all employees in the UK and Republic of Ireland, with invitations to participate generally issued on
an annual basis and subject to HMRC rules. The current maximum monthly savings limit for the schemes is £500. Options are granted at
the prevailing market rate less a discount of 20% and vest three years from the date of grant.
The movements in outstanding awards under each of the schemes are summarised below; no awards vested or were exercised during the
year and at 29 July 2017 no outstanding awards were exercisable.
Outstanding at the beginning of the year
Granted
Forfeited
Exercised
Cancelled
Outstanding at the end of the year
Weighted average remaining contractual life (months)
LTIP
No.
RSP
No.
SAYE
No.
971,057
677,755
(179,942)
–
–
706,769 1,641,058
913,201 2,431,159
(111,731)
(83,173)
–
(858)
– (1,185,772)
1,468,870 1,536,797 2,773,856
16.5
20.9
28.0
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Fair value calculations
The LTIP, RSP and SAYE awards are all accounted for as equity-settled under IFRS 2. The fair value of LTIP awards which are subject to a
market based performance condition (total shareholder return) is calculated using a stochastic (Monte Carlo) option pricing model. RSP
awards, SAYE awards and LTIP awards subject to a non-market based performance condition (earnings per share) are valued using a
Black-Scholes option pricing model. The inputs to these models for awards granted during the financial period are detailed below:
Grant date
Share price at date of grant
Exercise price
Volatility
Expected life
Risk-free rate
Dividend yield
LTIP
RSP
SAYE
15 November 2016
£2.19
Nil
26.0%
3 years
0.3%
–1
15 November 2016
£2.19
Nil
–2
3 years
–2
5.0%
7 December 2016
£2.33
£1.84
26.0%
3.1 years
0.3%
5.0%
Fair value per share
Market based performance condition
Non-market based performance condition / no performance condition
£1.56
£2.19
–
£1.88
–
£0.44
1. LTIP participants are entitled to receive dividend equivalents on unvested awards therefore dividend yield does not impact the fair value calculation
2. Volatility and risk-free rates do not impact the fair value calculation for awards with no exercise price or market based performance condition
As the Company had only limited share price history at the date of grant, expected volatility was based on a proxy volatility determined
from the median volatility of a group of appropriate comparator companies within the FSTE All Share index. Expected life has been
assumed to equate to the vesting period of the awards.
The total share based payment expense included in administration costs in respect of the above schemes was £2.0m (2016: £1.2m).
DFS Annual report and accounts 2017
93
Notes to the consolidated financial statements
at 29 July 2017
continued
25 Operating leases
Non-cancellable operating lease rentals are payable as follows:
Less than one year
Between one and five years
More than five years
2017
£m
64.6
247.5
333.9
646.0
2016
£m
62.6
237.9
366.4
666.9
The Group has entered into operating leases in respect of stores, warehouses and equipment. These non-cancellable leases have
remaining terms of between 3 months and 20 years. The majority of the Group’s operating leases provide for their renewal by mutual
agreement at the expiry of the lease term.
During the year £61.6m was recognised as an expense in the income statement in respect of operating leases (2016: £58.9m). At 29 July
2017, future rentals receivable under non-cancellable leases where the Group is the lessor were £11.8m (2016: £12.7m).
26 Net debt
Cash in hand, at bank
Cash and cash equivalents
Senior loan facility
Finance lease liabilities
Total net debt
2016
£m
66.7
66.7
(198.3)
(5.5)
(137.1)
Cash flow
£m
(5.7)
(5.7)
–
2.3
(3.4)
Other
non-cash
changes
£m
–
–
(0.5)
(3.5)
(4.0)
2017
£m
61.0
61.0
(198.8)
(6.7)
(144.5)
27 Related parties
Key management personnel
At 29 July 2017, Directors of the Company held 0.8% of its issued ordinary share capital (2016: 3.2%), and a further 0.2% (2016: 0.4%) was
held by other key management personnel.
The compensation of key management personnel (including the Directors) is as follows:
Emoluments
Company contributions to money purchase schemes
2017
£m
2.6
0.1
2.7
2016
£m
2.7
0.2
2.9
28 Post balance sheet event
On 7 August 2017 the Group’s £200m senior loan facility maturing in March 2020, together with an unutilised £30m revolving credit facility
was replaced with a new £230m revolving credit facility maturing on 2 August 2022, with an additional £100m uncommitted accordion
feature. The new facility bears interest at a rate of 3 month LIBOR plus 2.1%.
94
DFS Annual report and accounts 2017
Company balance sheet
at 29 July 2017
Note
2017
£m
2016
£m
29
30
31
32
238.7
236.7
198.0
198.0
(47.5)
(3.7)
389.2
431.0
319.5
40.4
18.6
(3.7)
14.4
319.5
40.4
18.6
(3.7)
56.2
431.0
33
389.2
Fixed assets
Investments
Current assets
Amounts due from group companies
Current liabilities
Amounts due to group companies
Net assets
Capital and reserves
Called up share capital
Share premium
Merger reserve
Treasury shares
Retained earnings
Equity shareholders’ funds
These financial statements were approved by the Board of Directors on 4 October 2017 and were signed on its behalf by:
Ian Filby
Chief Executive Officer
Nicola Bancroft
Chief Financial Officer
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DFS Annual report and accounts 2017
95
Company statement of changes in equity
at 29 July 2017
Balance at 1 August 2015
Profit for the year
Other comprehensive income/(expense)
Total comprehensive expense for the year
Dividends
Purchase of own shares
Share based payments
Balance at 30 July 2016
Profit for the year
Other comprehensive income/(expense)
Total comprehensive income/(expense) for the year
Dividends
Share based payments
Balance at 29 July 2017
Share
capital
£m
319.5
Share
premium
£m
40.4
Merger
reserve
£m
18.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
319.5
40.4
18.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Treasury
shares
£m
Retained
earnings
£m
Total
equity
£m
333.5
127.3
–
127.3
(27.3)
(3.7)
1.2
431.0
–
–
–
(45.0)
127.3
–
127.3
(27.3)
–
1.2
56.2
–
–
–
(43.8)
2.0
14.4
(43.8)
2.0
389.2
–
–
–
–
–
(3.7)
–
(3.7)
–
–
–
–
–
319.5
40.4
18.6
(3.7)
96
DFS Annual report and accounts 2017
Notes to the Company financial statements
at 29 July 2017
29 Accounting policies
Basis of preparation
The financial statements are prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (“FRS 101”).
In these financial statements the Company has applied the exemption available under FRS101 in respect of the following disclosures:
• a cash flow statement and related notes
• comparative period reconciliations
• disclosures in respect of transactions with wholly owned subsidiaries
• disclosures in respect of capital management
• the impact of new but not yet effective IFRSs
As the consolidated accounts of the Company include the equivalent disclosures, the Company has also taken the exemption available
under FRS 101 in respect of IFRS 2 Share Based Payments disclosures of group settled share based payments. Under Section 408 of the
Companies Act 2006, the Company is not required to present its own profit and loss account. The Company’s profit for the period was £nil
(2016: profit of £127.3m).
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The Company proposes to continue to adopt the reduced disclosure framework of FRS 101 in its next financial statements.
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these
financial statements.
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Going concern
The Company heads a group which is highly cash generative, with sufficient medium and long term facilities in place to enable it to meet
its obligations as they fall due. The Directors are therefore satisfied that the Company will be able to continue in operational existence as
detailed in the Group’s Viability Statement on page 19 and have therefore continued to prepare the Company’s financial statements on the
going concern basis.
Investments
Investments are stated at cost, less provision for any impairment.
Amounts due from and to group companies
Amounts receivable from or payable to other companies within the Company’s group are recognised initially at fair value and subsequently
measured at amortised cost less any provision for impairment.
Taxation
Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent
that it relates to a business combination, or items recognised directly in equity or other comprehensive income. Deferred tax is provided
on temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for
taxation purposes.
Share based payments
Awards (options or conditional shares) granted by the Company over its own shares to the employees of subsidiary companies are
recognised in the Company’s own financial statements as an increase in the cost of investment in subsidiaries. The amount recognised is
equivalent to the equity-settled share based payment charge recognised in the consolidated financial statements. The corresponding
credit is recognised directly in equity.
Treasury shares
Where the Company purchases the Company’s equity share capital into treasury (treasury shares), the consideration paid, including any
directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled,
reissued or disposed of.
30 Investments
Cost and net book value
At the start of the financial period
Additions
At the end of the financial period
Shares in subsidiary
undertakings
2017
£m
2016
£m
236.7
2.0
238.7
235.5
1.2
236.7
Details of the Company’s investments are given in note 10. Additions in the current and prior year relate to capital contributions made in
respect of share based payments schemes for the Group’s employees.
DFS Annual report and accounts 2017
97
Notes to the Company financial statements
at 29 July 2017
continued
31 Debtors
Amounts due from subsidiary undertakings
32 Creditors: amounts due in less than one year
Amounts due to subsidiary undertakings
2017
£m
2016
£m
198.0
198.0
2017
£m
47.5
2016
£m
3.7
33 Treasury shares
During the period ended 30 July 2016 the Company purchased 1,500,000 of its own ordinary shares at a total cost of £3.7m for the
purpose of satisfying employee share based payment awards.
98
DFS Annual report and accounts 2017
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Shareholder information
Contacts
Chief Executive Officer
Ian Filby
Chief Financial Officer
Nicola Bancroft
Group Company Secretary
Paul Walker
Investor Relations
Mike Schmidt
Corporate website
www.dfscorporate.co.uk
Registered office
DFS Furniture plc
1 Rockingham Way
Redhouse Interchange
Adwick-le-Street
Doncaster
DN6 7NA
Corporate advisers:
Auditor
KPMG LLP
Remuneration adviser
PricewaterhouseCoopers LLP
Shareholder Enquiries
The Company’s registrar is Equiniti. They will be pleased to
deal with any questions regarding your shareholding or
dividends. Please notify them of your change of address
or other personal information. Their address details are:
Equiniti
Aspect House
Spencer Road
Lancing
West Sussex BN99 6DA
Equiniti is a trading name of Equiniti Limited.
Equiniti helpline: 0371 384 2030. Overseas holders should
contact +44 (0)121 415 7047.
Lines are open 8.30am to 5.30pm, Monday to Friday (excluding
public holidays).
Shareholders are able to manage their shareholding online and
facilities include electronic communications, account enquiries,
amendment of address and dividend mandate instructions.
For institutional investor enquiries, please contact:
FTI Consulting
200 Aldersgate
Aldersgate Street
London
EC1A 4HD
+44 (0)20 3727 1000
Brokers
UBS Limited & Jefferies International Limited
Financial Calendar
Registrar
Equiniti
FY17 full year results
Annual General Meeting
Record date for FY17 final dividend
Payment date for FY17 final dividend
FY18 half year results
Payment date for FY18 interim dividend
5 October 2017
1 December 2017
8 December 2017
27 December 2017
March 2018
June 2018
DFS Annual report and accounts 2017
99
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2
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DFS Furniture plc
1 Rockingham Way
Redhouse Interchange
Adwick-le-Street
Doncaster
DN6 7NA
www.dfscorporate.co.uk
www.dfs.co.uk