Investors have lost confidence in furniture retailer MFI, sending shares to a five-year low as rumors of downsizing and low post-Christmas sales abound. While a slow housing market has affected the fortunes of the furniture industry, MFI has also suffered from supply chain problems and a lack of focus.
MFI's management may have to undertake a discounted rights issue to shore up company finances, and there is speculation that senior store managers will be brought together to discuss a downsizing of the business. The news that HM Revenue & Customs has finally agreed to reach a GBP21.8 million settlement concerning its VAT dispute with MFI provides some consolation for the beleaguered furniture retailer.
However this does little to treat the savage wounds inflicted on the business over the past 18 months. Despite repeated attempts, sales have yet to recover from the combination of horrendous supply chain problems and a wrong-footed strategy to move upmarket while deserting its core customers. Rumors abound that despite a GBP4 million advertising campaign in December, the January sale has been far from a success. Confirmation of these fears is apparent with seemingly desperate offers, such as 80% off Hygena kitchens, stretching into February.
With consumers looking to rein in non-essential expenditure, furniture is an obvious target for cutbacks. The fortunes of this sector are closely correlated to the housing market and there are signs that it is picking up, following a subdued 2005. We expect the sharp rise in mortgage approvals at the end of 2005 will continue in 2006 and feed through to the housing market during the second half of this year, providing a ray of hope for MFI and the furniture sector as a whole.
But in its weakened state MFI is poorly equipped to benefit from any upturn. We expect a resurgence from DIY retailers B&Q and Homebase as confidence in the housing market returns, making life even more difficult for MFI. The entry of Danish furniture retailer Ilva in May will serve to further heighten the competitive bar in the sector. Only a leaner and more focused MFI will be able to overcome these challenges if it wishes to prosper in the long run.