Invest-ability daily 23/09/21: Sofa, so good

Why there could be value in the unloved home retail sector

It is often said that large-ticket purchases are discretionary. I don’t know if you have ever tried living in a house without a sofa, but I guarantee that owning one is anything but discretionary. I have been longing to crash out in front of Netflix for three weeks since I moved into my new cottage now – the last week of waiting to go seems interminable. A first-world problem maybe, but that’s the world in which I live.

I have had to purchase lots of expensive things to furnish my new place – along with the soon to arrive sofa I’ve needed a fridge, mattresses and entire kitchen’s worth of small appliances and crockery. I’ve tried my very best to buy everything as locally as possible, including picking up lots of bits from the numerous antique outlets that pepper the Suffolk countryside. That hasn’t been entirely possible, though – the mattress may have come from the incredible Wightman’s of Bungay, a hundred-and-fifty-year-old family-run business in the middle of this pretty town, but in the end the fridge had to come from AO and the sofa from Habitat, now part of the Sainsbury’s empire.

The case of the fridge is particularly instructive of the ongoing consolidation of trade into the hands of fewer, larger companies. Local electrical retailers I visited either didn’t have the ranges or even stock, essentially forcing me into the hands of the big players – scale clearly matters in the refrigeration supply chain, good news for AO which reported some very decent trading in July and now looks like one of the potential long-term winners in the UK online retail market. And again, a fridge is hardly discretionary – I can tell you that having lived without one for a week. AO’s shares have pulled back sharply from their covid-led bounce last year, and it’s worth running the slide rule over them again at the current level.

Sofa seller DFS also reported some very good numbers today – even though my business went elsewhere – raising its dividend after record sales and profits in the year to June 2021. Although not a pure-play online retailer, it’s reaping the benefits of investment in its digital channels and market strength having bought the Sofology brand a couple of years ago (where I have previously spent lots of money). Its shares have fully recovered from their early-pandemic savaging, but are still hardly expensive, partly because investors may be concerned that the bumper 2021 results may have benefited from pent up demand – sofas may not be discretionary, but they are not regular purchases, and indeed, sales and profits are expected to be lower in the two years ahead according to SharePad data.

Like many businesses, the company did also warn that it could suffer from problems in the logistics industry – sofas are hard to move after all. And more generally, there are economic ill-winds blowing that could hit consumer confidence and cause household spending to stall. But then again, the fickle world of retail has never really offered its investors a good night’s sleep – if you want one of those, head to Wightman’s.

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