Sofa giant DFS today warned of a "very challenging" furniture market as annual profits tumbled by more than a fifth.
Shares in the London-listed firm fell more than six per cent in early trading.
Gross sales rose by 1.1 per cent to £990.8m, while revenue was up 0.9 per cent to £762.7m.
Earnings before interest, tax, depreciation and amortisation (Ebita) fell by 12.7 per cent to 82.7m.
Profit before tax was 22.3 per cent down at £50.1m.
Earnings per share fell 21.1 per cent to 18.7p.
DFS's leverage jumped, with debt 1.75x earnings, compared with 1.45x at the same time last year.
The firm said a special dividend of 9.5p would be paid, taking total dividends to 20.7p.
Read more: There's not much to cushion the blows at DFS
Why it's interesting
DFS' free cash flow fell by almost a quarter to £57m. In addition, its cash conversion – the percentage of earnings that translate in cash – dropped from 80.1 per cent to 69.2 per cent.
Despite a reduction in how much cash DFS is generating, the firm said it would maintain its final year dividend of 7.5p. The company has previously stated an aim of returning 45-50 per cent of profits to shareholders. But with cash generation in decline, this means the payout ratio will spike to 60 per cent of profit before tax.
Meanwhile, the firm's lending is also higher than its targets and it may have to fork out a further £25m in relation its purchase of Sofology.
"We closed the financial year with net debt of £144.5m (FY16: £137.1m)," the firm reported today.
"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 £25m for the acquisition of Sofology per the contingent consideration arrangements."
What the company said
DFS chief executive Ian Filby said: "We have continued to make good strategic progress across all our key areas of growth, while our financial performance reflects the current challenges of the UK furniture market. In particular we were delighted to announce the acquisition of Sofology and the exclusive licensing partnership with the British lifestyle brand Joules."
Historically DFS has been able to build its market leading position and generate strong cashflow for shareholders in all environments by leveraging its fundamental strengths. Our recent strategic investments and operating efficiency programme support our confidence in our ability to deliver modest profit growth and cash returns in the current financial year and we continue to have excellent prospects for the long term.