So, I’m looking at shares that have recently reported business strength. When a company reports trading that’s better than management expectations, it can understandably result in a rising share price. Not just for the day, but for months or even years.

Future stock market returns

One example is Future (LSE: FUTR), a global platform for specialist media. In May, it reported record first-half revenue and profit, materially ahead of market expectations. Its share price responded positively on the day and has risen even higher since then.

I reckon these hot UK shares have further momentum that could drive the share price higher over the summer. Management also expects full-year results to be “materially ahead” of market expectations.

Future has two main divisions — media and magazines. The performance was driven by digital advertising and e-commerce growth in the media division. It also reported record user engagement with online user growth of 31% year-on-year.

A word of warning, however. The company remains cautious about the wider macroeconomic outlook associated with Covid-19.  Also, changing user habits could affect Future’s advertising revenues. With an increasing use of mobile devices, Future will need to ensure its advertising offering stays relevant.

That said, these UK shares are still cheap in my opinion. Offering growing earnings, reasonable profit margins and a glowing outlook, I’m tempted to add some to my Stocks and Shares ISA.

So far so good

DFS Furniture (LSE:DFS) recently reported a strong trading performance. Total orders were up a staggering 92% in Q4 vs the same period in 2019.

This performance was driven by customers who’d been waiting for showrooms to open post-lockdown. In addition, it looks like people have increased their spending on home items in the past year. A combination of higher savings and spending more time at home seem to have sparked the desire for a new sofa.

It’s worth pointing out that more recent revenue growth could be affected by sector-wide shipping delays, Covid-19 disruption of factory production and higher raw material costs.

Overall, the business is still set for growth. Its share price is up by 69% over the past year, but I still think there’s room for further gains.

UK shares to sit and hold onto

I think the trends that DFS is seeing bode well for SCS (LSE:SCS) too. In fact, I’m tempted to buy both. SCS has a stronger balance sheet with plenty of cash. It also reported strong performance in its last interim results. That was several months ago in March, so I reckon it’s likely due another update soon.

Some of the best UK shares to invest in are those of smaller companies, in my opinion. With a market capitalisation of £115m, I’d say SCS falls firmly in this group.

The downsides that SCS is facing are likely to be similar to DFS, namely higher material costs and shipping delays. That said, I see SCS as a well-managed company and it’s well-funded too. At a price-to-earnings ratio of 13x its shares are relatively cheap, in my opinion. 

In conclusion, I’d consider buying all three shares this summer. 

The first is DFS Furniture (LSE: DFS), which among all three has reported the sharpest uptick and seen big share price gains. Next, is the Go-Ahead Group (LSE: GOG), which delivered a mixed update and saw an almost unchanged share price. Last, is the greeting card retailer Card Factory (LSE: CARD), that investors have given a thumbs down to today.

To assess whether to buy them for the long term or not, however, I looked at their stories in a little more detail. Here is what I think

#1. DFS Furniture: I’d buy on a dip

The retailer actually expects to earn profits in its current financial year ending June 27. This is the standout feature for me in its latest trading update. As we know well, the last year has been awful for retailers. A slew of companies have gone under. That DFS Furniture has actually managed to not just survive, but actually thrive in this environment is a huge win, in my view.

It has been rewarded by investors too. Its share price is up a big 12% today following its update, reaching multi-year highs of 304p. This brings its annual price rise up to 78% now. I reckon this year could be even better for the company as the economy comes back to life. I would buy it on a dip, since it has run up quite a bit.  

#2. Go-Ahead Group: reopening incomplete

FTSE 250 travel company, Go-Ahead Group also released a somewhat positive trading update for the year due to end in July. Passenger numbers are the highest since the pandemic, but they are still less than they were pre-pandemic. I reckon this can change over time though as we start travelling with greater confidence and fewer restrictions. Only then will travel stocks have truly reopened. 

Another challenge here is that some of its rail contracts are approaching their end. It is in discussions for new contracts, but I do not know if they will come through and what they will be like. I think this makes its situation a bit more uncertain.

Investors have responded little to the update. Its share price is almost flat from yesterday, although it is still up around 7% over the year. But as the pandemic recedes, I reckon that it can do better. It has been a buy for me and I maintain that position. 

#3. Card factory: Wait and watch

Card Factory is down almost 4% so far after it released results for the year ending January 31. The numbers were predictably bad, considering the lockdown. 

But I found the post-reopening update disappointing. It said that the initial surge in demand has subsided after the pent-up demand was met. Still, I think there is potential in the stock going by its robust online performance and an improved consumer demand outlook. Its share price is still up 42% from a year ago. Just to be sure, though, I will wait for another update before buying the stock. 

Market interest in the retailer has rocketed after it released a pre-close update for its financial year. At 317p per share, the DFS Furniture share price hit its most expensive since spring 2016 early on Thursday. It was recently trading 11% higher on the day at 302.5p.

DFS’s share price rises as demand booms

In an encouraging update for the year to June 2021, DFS Furniture said that orders have soared in recent weeks. So far in the final quarter order intake is up 92.1% year-on-year, a surge that reflects “customers waiting for showrooms to reopen post-lockdown and increased consumer spending on home categories.”

During the second half, total orders were up 14%, while market share gains remained at around 2%. And it saw online sales rocketing 222.5% in the third quarter, a period when almost all of the company’s stores were shuttered due to Covid-19.

Forecasts upgraded

Trading has been so strong, in fact, that DFS has upgraded its full-year profit forecasts, despite ongoing Covid-19 pressures and supply chain issues.

The retailer now reckons it will generate underlying profits of at least £105m for financial 2021. This is better than the £101.7m DFS had forecast back in December. The company had swung to a loss of £56.8m in the last fiscal year.

Furthermore, DFS has predicted underlying profits of between £66m and £96m in financial 2022, ahead of market consensus. It said that the recent upsurge in orders will be recognised in the upcoming year.

Finally, DFS has elected to reinstate dividends thanks to its strong cash generation and sunny outlook. It plans to pay a 7.5p per share final dividend for the outgoing financial year.

This is what I’m doing now

Looking ahead, chief executive Tim Stacey said that “we will continue to invest in key strategic initiatives such as our digital channels, our showrooms and our Sofa Delivery Company final mile logistics capability.” He also pledged further investment in UK manufacturing and capacity as well as expansion into other homeware categories.

As a UK share investor, I’m impressed by DFS’s ability to keep growing profits despite current difficulties. It is testament to the company’s strong multi-channel presence and its market-leading proposition. But the company isn’t out of the woods yet, as supply problems in the form of raw materials and container shortages, allied with a fresh spike in Covid-19 cases, could well derail its recovery.

Today the DFS share price commands a forward price to earnings (or P/E) ratio of around 15 times. It’s not cheap enough to tempt me in and so I’m happy to sit on the sidelines for the moment.

UK stock markets have already been rising on greater investor confidence, and could continue to do so as companies’ financials get healthier. Retail is an example of a segment that could benefit. 

Retail returns to good health

According to a retail sales measure developed by the British Retail Consortium and consulting firm KPMG, the UK’s retail sales rose by 1% in February from the month before.

January was a poor month by this measure, as retail sales had actually shrunk from the month before as the UK locked down again.

I am inclined to believe that the pickup in February will continue as the re-opening process starts slowly but steadily. Latest company numbers support this view too.

Robust performance, rising share price

Earlier today the FTSE 250 stock DFS Furniture (LSE: DFS) reported a strong set of numbers. Its revenue grew by 17% for the half-year ending 27 December 2020. Its pre-tax profit was up 56%. Going forward, it expects a healthy 2021 as it can reopen stores. 

DFS Furniture’s share price gained 6% on the news today. I think going by the expected pickup in consumer demand, DFS’s own outlook, as well as its past performance, its share price could do well for the foreseeable future. 

The one word of caution about DFS is that unlike its revenues, its profits have not risen consistently, even though it has remained profitable. Yet, I think its recent performance has added to its credentials, since it has come at a difficult time. 

I especially like its online sales growth of 66% in its latest results, which could be positve in the future as sales become increasingly digital. For this reason I think this is a stock to buy.

A UK share to hold for the long term

Another retailer to take note of today is the FTSE 100 luxury brand Burberry (LSE: BRBY). It probably had a rougher 2020 than many other stocks.

Because of its dependence on Chinese demand, the Burberry stock had started falling in January last year. By the time the stock market crash hit the UK, its price had collapsed spectacularly, to less than half the value at which it started the year. 

But it is trudging its way back up, having regained a large part of its former value. In fact, going by Chinese growth forecasts this year, this UK share can continue to do quite well. In its last trading update, the company said that it has “confidence in its prospects”, which is encouraging too. Further, it has repaid its Covid-19 loan to the UK government. 

One challenge with Burberry is its unbelievable earnings ratio of 380 times. This, though, is only because of the hit on its earnings, not because its price has gone through the roof in absolute terms. 

I suspect this situation will correct itself as its profits become healthier. Going by Burberry’s brand value and its ongoing appeal, this is one I can hold for the long term. 

DFS Furniture (LSE: DFS) is a UK share that’s in particular danger of sinking in the week ahead. It’s not just the broader decline in market sentiment that could drag it lower. I’d caution that the release of interim results on Tuesday (March 10) could send investors dashing for the exit.

Retail conditions remain weak

The furniture retailer didn’t fill me with confidence last time out in January. Back then it said that gross sales were down 6% on an annual basis during the six months to December. DFS said that “the challenging market environment impacting footfall and the performance in the strong prior year period” caused the meaty top-line reversal.

On the plus side, the retailer added that order intake had strengthened more recently. It said that its critical Winter Sale period had got off to a “satisfactory” start too. But recent industry data suggests that the business might have struggled to keep this recent momentum going.

The British Retail Consortium (BRC) and KPMG’s latest retail report underlined the sector’s ongoing difficulties. It said that British like-for-like retail sales were flat between December 29 and February 1, that key winter selling season for DFS. This compares with the 1.8% rise punched in the corresponding period a year earlier.

Commenting on the results, Helen Dickinson, chief executive of the BRC commented that “across the UK, retailers are facing tighter margins as a result of weak consumer demand and increasing costs, including sky-high business rates.”

She added that “recent political uncertainty and a decade of austerity appear to have ingrained a more thrifty approach to shopping among consumers.” That’s bad news for furniture sellers like DFS. But it’s not just continued Brexit concerns that threaten to keep confidence at rock bottom and shoppers out of furniture stores. The recent coronavirus breakout is also likely to have taken a bite out of sales of non-discretionary items of late, and particularly demand for more expensive goods like furniture.

Profit projections about to fall?

In that January trading statement, DFS maintained its expectations for the full financial year (to June 2020). But this was based on the assumption of “low-single-digit revenue growth” in the second half.

I reckon the retailer may be about to scale back its predictions. In fact, I fear that a downgrade to its pre-tax profit forecasts could be announced very soon, the coronavirus outbreak worsening already-weak consumer sentiment.

So forget about DFS’s cheap forward P/E ratio of 12.8 times and bulging 5% dividend yield. This a share to be avoided at all costs given the high chances of more sharp share price falls, I think.

Evidence suggests that many parts of the UK economy have enjoyed a ‘Boris Bounce’ following December’s general election. But the long-battered retail sector has received no such respite. Data from the Confederation of British Industry (CBI) illustrates perfectly the difficulties for the country’s retailers.

According to the body, total retail sales volumes remained flat for the third successive month in January. There will be no growth in February either, the CBI Distributive Trades Survey said.

The report said that “sales were seen as poor for the time of year” and that “they are expected to remain below seasonal norms in the year to February” too. Stock levels in relation to sales rose above the long-term average last month,while orders to suppliers also fell and are expected to slip again next month.

Sales sink

The CBI’s study was particularly worrying for DFS and its peers in the home furnishings market. It showed that lower demand for furniture was one of the reasons for January’s sales fall.

The extent of this sub-sector’s struggle was certainly on show in DFS’s latest trading statement released last month. Back then it advised that gross sales were down 6% in the six months to December. As well as contending with “strong comparatives”, it said that “a challenging consumer environment” — and particularly so in August and September — was responsible for the drop.

In better news, the small-cap retained its full-year profits expectations. Market consensus suggests profit before tax of around £51.2m for the period to June 2020 (compared with fiscal 2019’s £50.2m). This is based on the assumption that revenues will grow by low single-digit percentages in the second fiscal half.

Red alert!

I believe that even these modest top-line hopes could be considered a tad optimistic though. Consumer confidence is clearly at rock bottom, even in spite of that general election result and the subsequent improvement in Brexit visibility. And I worry that things could get even worse for retailers like DFS later this year amid tough trade talks between the UK and European Union. The issues that will come up could be particularly problematic for sellers of big-ticket items such as DFS.

The company’s share price has ballooned almost 20% over the past two months, though fading hopes of a retail bounce have seen it trek modestly lower in January. Still, a forward price-to-earnings ratio of 16.7 times suggests to me that DFS remains far too expensive.

A reading in and around the value benchmark of 10 times would be a better reflection of the retailer’s high risk profile, in my opinion. And that elevated multiple exacerbates the chances of a sharp share price drop before long. So forget about DFS’s big 4% dividend yield, I say, and put your money to work elsewhere.

Yet on one popular share research website, the stock has earned the label ‘superstock’ because of its tasty-looking indicators for value, growth and momentum. And I must admit, at first glance, DFS does look attractive with its price-to-earnings rating running just over 11 and the dividend yield at about 4.8%.

Trading well, but…

City analysts have pencilled in some chunky double-digit percentage increases in earnings for this year and next too, which adds to the superficial appeal of the share. But dig a bit deeper and the company starts to reveal weaknesses. For example, the record on earnings is patchy, the shares have moved up and down in big swings over the past few years, and net debt looks high.

Indeed, DFS’s business retailing living-room furniture is one of the most cyclical a company can participate in. Things look like they’re swinging along nicely now, but given a ‘half-decent’ general economic downturn, everything could come crashing down – profits, dividends, the share price. Everything could hit the floor together and leave the company struggling to pay the interest on its debt. That’s the big risk you take by owning shares in a cyclical firm such as DFS.

However, despite the risks, I would consider owning DFS shares short-term to catch a cyclical up-leg. But I’d keep one finger on the ejector button ready to press at the first sign of trouble. Meanwhile, today’s half-year results look trouble-free. Revenue rose just over 29% and by almost 10% on a pro-forma basis that adjusts for the full inclusion of the firm’s recent acquisition of a company called Sofology. Underlying pro-forma earnings per share shot up an impressive 90%.

There may be trouble ahead

But in another clue to the fragility of the sector, the directors held the interim dividend at last year’s level. That seems sensible to me because if a cyclical business doesn’t use its incoming cash flow to pay down its debt in the good times it could be in trouble with its borrowings in the bad times. So, it’s no good the firm giving away too much cash to shareholders now.

Chief executive Tim Stacey said in the report he expects the market “to remain particularly challenging in 2019,”  which is a red flag for me. However, he thinks the firm’s investments in online channels, delivery networks and brands will “help mitigate” the current economic and political uncertainty. I admire his optimism, but wouldn’t bet on those things helping much if the economy turns down from here.

Rather than a cyclical outfit such as DFS, I’d rather place my long-term investments in shares backed by firms with more defensive operations such as National Grid, Unilever, Britvic,and many others. Another decent way of ironing out some of the cyclical risks is to spread your investment across many underlying companies. A neat way to do that is to invest in a low-cost index tracker fund, such as one that follows the FTSE100 or FTSE 250 indices.

This yield might look attractive for income seekers, but I don’t believe it’s sustainable. Instead, my money is on National Grid (LSE: NG).

Two different companies

National Grid and DFS are two very different companies. The former operates critical utility infrastructure across the UK and the United States, while the latter sells furniture in the UK.

There are positives and negatives to investing in both businesses. National Grid is attractive as an income investment because the enterprise has steady, predictable income from assets around the world that would be difficult to replicate if a competitor wanted to. However, the company is highly regulated and can only make as much profit as regulators will allow. 

The company is currently in the process of responding to a new pricing regime regulator Ofgem is proposing that will take effect from 2021. Under the new regime, companies like National Grid will be able to charge less for their services, which could save households an estimated £45 a year, but cost the industry £6.5bn in total. If these changes are introduced, there’s a genuine chance that National Grid’s dividend will come under threat.

On the other hand, DFS’s income is more unpredictable, and the company’s outlook is dependent on the financial health of the UK consumer. Still at the moment, it appears that DFS is currently outperforming in a challenging consumer environment. 

For the five months to the end of December 2018, the retailer reported sales growth of 10%, and like-for-like online sales growth across all brands of 22%. These are sort of numbers many retailers can only dream of right now.

Dividend credentials 

What does this mean for the company’s dividend? Well for the time being, DFS’s dividend looks safe. The total distribution of £24m was covered twice by free cash flow in the financial year ending 28 August 2018, and 1.7 times by earnings per share. 

Despite these figures, net debt has been increasing steadily since 2016, rising by around 16%, which tells me It’s spending more than it can afford. I’m worried about this in the current hostile consumer environment.

In comparison, National Grid’s dividend looks to me to be the much better investment. While there’s a risk that the group might face a cash squeeze under that new pricing regime in 2021, management’s efforts to expand into new markets, specifically North America, are paying off, and this could help protect the dividend. What’s more, unlike DFS, National Grid isn’t subject to consumer trends — there will always be a demand for electricity — so the business has greater visibility on earnings and can plan for the dividend, accordingly.

The bottom line 

Considering all of the above, I would sell shares in DFS and snap up those in National Grid, instead. With a dividend yield of 6.2%, I think this FTSE 100 income champion could help improve your investment returns in 2019.

Even if your investment is showing a loss, you’ll continue to receive the FTSE’s 4% dividend yield, giving you a useful income.

The problem, of course, is that you can never beat the market by investing in a tracker fund. To outperform the FTSE 100, you’ll also need to invest directly in stocks and shares.

Today I’m going to look at a couple of household names you might want to consider.

Crushing the FTSE

My first choice is sofa and carpet retailer SCS Group (LSE: SCS). Despite the well-known pressures on high street retailers, SCS is doing pretty well.

The group’s share price has beaten the FTSE 100 by about 26% since my colleague Rupert Hargreaves covered the stock in October last year. And shareholders have also enjoyed a dividend yield of more than 7%, nearly double the payout from the big-cap index.

Figures published yesterday show that the Sunderland-based firm’s revenue rose by 1.3% to £337.3m during the 52 weeks to 28 July. Tight control of costs meant that the group’s operating profit rose by 10.5% to £13.2m, lifting its operating margin from 3.6% to 3.9%.

Even better than it seems

A key attraction of this business is that its costs are very flexible. By outsourcing production and making furniture to order, SCS enjoys strong cash generation and flexible costs.

The group’s net cash balance rose from £40m to £48m last year, and management said that 75% of costs are variable or discretionary. In my view, this combination of flexible costs and a cash buffer should mean a very low risk of financial distress, even in a recession.

Analysts expect SCS Group’s profits to be fairly flat over the next couple of years. But the 7.5% dividend yield is well supported. I think further gains may be possible.

Can this larger rival fight back?

DFS Furniture (LSE: DFS) is about five times larger than rival SCS. But size is no guarantee of better results.

DFS was forced to issue a profit warning in July, after sales fell significantly below management expectations during the hot weather. Today, the company revealed just how badly its profits were damaged.

The group’s full-year sales fell by 2% to £747.7m during the year to 29 July, excluding acquisitions. Including acquisitions, sales were 14% higher at £870m. But even this wasn’t enough to protect the group’s underlying pre-tax profit, which fell by 23.7% to £38.3m.

A debt bomb?

DFS Furniture’s operating margin fell from 6.1% to 3.4% this year, including acquisition and restructuring costs.

Lower profitability and the £25m acquisition of Sofology caused net debt to rise by 10% to £159m. Worryingly, this now represents 2.1 times underlying cash profits (EBITDA). That’s a big increase from last year’s figure of 1.75 times, and is well above the board’s target level of 1.5 times EBITDA.

Analysts expect profits to bounce back this year, with a 30% rise in earnings per share. This bullish outlook has left the shares trading on 11 times 2019 forecast earnings, with a prospective yield of 5.3%.

Personally, I’m not so keen. I think DFS looks risky and poor value when compared to SCS.

On Thursday morning the company issued a profit warning, blaming hot weather and shipping delays from the Far East. The company says orders during the current quarter have been “significantly lower than expected”.

This has contributed to a 4% fall in total like-for-like delivered revenues for the 49 weeks to 7 July (the firm’s financial year ends on 29 July). Earnings before interest, tax, depreciation and amortisation (EBITDA) are now expected to be lower than last year.

This could be serious

I’d normally write off today’s news as a one-off with little real significance. After all, customers planning to buy a new sofa are probably just waiting for a wet weekend to go shopping. Similarly, shipping delays are unlikely to be a long-term problem.

What concerns me here is that the fourth-quarter fall in sales continues a trend seen during the first half of the year, when revenue, excluding acquisitions, fell by 3.5%.

A second worry is that the business carries quite a lot of debt. Net debt was £172.3m at the end of January, equivalent to 2.17 times underlying EBITDA. That’s above my preferred safety threshold of 2x EBITDA.

Why I’d shun this stock

A look at the balance sheet suggests to me that DFS offers very little margin of safety for shareholders. In its half-year results, the group reported current assets — cash, stock and orders — worth £114.3m.

Set against this were current liabilities (bills due within one year) of £230.6m. In addition to this, the company had gross debt of £185.6m and £79.8m of “other liabilities”.

My reading of this is that DFS is dependent on stable sales to finance its debts and dividends. If sales and EBITDA fall, I believe the group could run into financial trouble. This would be bad news for shareholders, who could see big losses and might have to support a rights issue.

For these reasons, I view DFS as a stock to avoid. Although the forecast dividend yield of 5.8% may be tempting, I think there are much safer options elsewhere.

One consumer stock I’d buy

Furniture retailers aren’t the only consumer businesses which have seen a drop in sales during the hot weather. Travel firms have also seen lower levels of booking than expected. I expect this trend to reverse over the next few weeks, as people complete their summer holiday plans.

Although the good weather means that UK-based holidays might be more popular than usual, I believe that package holiday operators such as TUI Group (LSE: TUI), which owns Thomson Holidays, should still do well.

This firm has been my top pick in this sector for some time and has risen strongly, gaining nearly 40% over the last year. The good news is that the recent pullback in the share price has left the stock with a forecast dividend yield of 3.7% and a very reasonable forecast price/earnings ratio of 13.5.

This looks affordable to me, given that sales rose by 8.5% during the first half of the year. Bookings should peak over the next few weeks. In my view, this could be a good time to buy more.