Have you seen the recent TV ad for Dormeo mattresses? If you are like me you will view the Dormeo brand as good, quality and perhaps expensive. You will be delighted that you can purchase a Dormeo memory foam mattress for £160. This is 50% off the purchase price and a memory foam pillow thrown in for good measure. Very good you may think, but then there is no such thing as a free lunch.

Good offers are often a rouse used by businesses to raise cash quickly. A review of the Dormeo UK Ltd financial statements for 2018 will provide some insight into the financial position of the business. Sales in 2018 increased by 58% to £22,691k. However, operating profit was only £293k, 1.3%. Operating profit in 2017 was £266k.

The balance sheet confirms a tangible net worth of £1,075k. Very little tangible asset but stocks of £2,770k and debtors of £5,096k. Stock in 2017 was £1,099k.

The cash flow is revealing. Cash from operating activities was £(1,793)k, in 2017 cash from operating activities was £(309)k. Cash from operating activities is negative because profits are low and working capital is absorbing significant amounts of cash. Stocks and debtors absorbed £2.7m in 2018.

So, we have a business that has increased its sales by 58%, but has nearly £1,800k of negative cash flow. The notes to the financial statements reveal that stocks have been written down by £387k to net realisable value. There was a similar write down of £255k in 2017. Debtors include £3,188k of trade debtors and £1,026k owned by group companies.

Importantly there is a loan from the parent company of £2,744k and no external debt. The loan from the parent company is at a very low-interest rate and has no fixed repayment date. Dormeo UK Ltd is owned by Studio Moderna Brands, a business which has a strong presence in Central and Eastern Europe. The business describes itself as:

“Studio Moderna: Leading omnichannel, multi-brand and direct-to-consumer electronic retailer in Central and Eastern Europe, with vertically-integrated network reaching more than 360 million consumers across 21 countries.”

Studio Moderna Group is privately owned and is an e-commerce, direct to consumer group. The financial statements of Dormeo UK Ltd and the website of Studio Moderna Group make for interesting reading.

The Dormeo brand is 15 years old and has been built on Italian designed mattresses manufactured in Europe and sold directly to the public.

We can confirm that Dormeo is capable of generating sales but, currently, not able to generate operating cash. Any discussion about brand management and operating as part of a large private group is the subject for another article.

However, we have been talking about warning signs that may indicate underperformance or potential trading difficulties. Special offers that are too good to be true or significant marketing campaigns to secure revenue may well be an indicator of a business that is in difficulty. Such warning signs could be of benefit to lenders and consumers alike.

Author: Bill Liddell, Director.