SCS Group's profits plunge despite £100 million takeover deal

SCS Group (LSE: SCS), a prominent sofa seller, reported a significant dip in pre-tax profits for its latest fiscal year, just a day after it greenlit a takeover bid amounting to nearly £100 million.

The company disclosed that pretax profits for the 52 weeks concluding on July 20 nosedived to £6.0 million, a stark contrast from the previous year’s £16.4 million. This alarming dip was exacerbated by a £2.8 million loss attributed to Snug, a furniture retailer that SCS had rescued from administration in January.

Furthermore, SCS saw a 1.7% drop in revenues, down to £325.9 million from the previous year’s £331.6 million, despite Snug contributing £4.2 million to the latest year’s revenue.

A significant factor contributing to this financial setback was the reduction in the gross margin, which shrunk to 44.4% in the financial year 2023, down from the previous year’s 45.3%. This was primarily attributed to the escalated costs of extending credit to customers, albeit partly offset by incremental price adjustments.

Despite these financial headwinds, SCS remains committed to its shareholders, declaring a final dividend of 10.0p per share, culminating in a full-year payout of 14.5p – an encouraging 7.4% increase from the previous year. In addition to this, the company has recently concluded a substantial £7.0 million share buyback.

The final dividend had been previously announced by SCS on Tuesday, in conjunction with the news of the takeover agreement inked with Italian peer, Poltronesofa Spa. Under the terms of the takeover, SCS shareholders will receive 270p in cash for every 280p per share, translating to a valuation of SCS equity at £99.4 million. This move prompted a remarkable 64% surge in SCS shares on Tuesday, although the price dipped slightly by 0.4% to 270.00p on Wednesday morning.

Poltronesofa Spa, headquartered in Reggio Emilia, is an established sofa retailer boasting 167 stores in Italy, 106 in France, and an additional 27 scattered across the rest of Europe. SCS, on the other hand, operates 100 stores within the UK. The takeover serves Poltronesofa’s objective of penetrating the UK market as part of its broader strategy for pan-European expansion, as articulated by SCS on Tuesday.

SCS expects the takeover to conclude in the first quarter of 2024. As for its recent trading performance, the company reported a commendable 5.9% growth in like-for-like orders during the second half of the year. However, this growth experienced a slowdown, dwindling to 2.7% in August, a mere 0.3% in September, and plunging into negative territory with a 4.4% drop in October. Nevertheless, overall order intake in the 12 weeks leading to October 21 remained consistent with the previous year, according to the company’s statement.