Homewares market leader Dunelm (DNLM) delivered a stronger than expected performance over the second quarter including Christmas, a showing made doubly impressive considering unhelpfully mild autumn weather and weak UK consumer confidence.
Investors are getting cosy with the stock, bid up 11.3% to 644p on the news Dunelm now expects to deliver full year pre-tax profit ‘modestly ahead’ of even the most optimistic of forecasts.
Cash generative curtains, cushions, quilts and kitchenware seller Dunelm has successfully re-focused on its core business and Dunelm brand. This and other self-help measures certainly paid off over what experts predict may have been the worst Christmas for retailers since the recession of 2008.
LOOK AT THESE LIKE-FOR-LIKES
Having enjoyed positive footfall trends and a rise in the average value of transactions, Dunelm reports 9% total like-for-like revenue growth for the second quarter ended 29 December and including the peak Christmas period.
Dunelm’s like-for-like store revenue rose 5.7% to £246.4m, while comparable online sales on Dunelm.com shot up by a forecast-busting 38% to £36.1m.
MANAGEMENT IS CAUTIOUSLY OPTIMISTIC
Dunelm is guiding to first half pre-tax profit of ‘approximately £70m’, up from £60m last year when profits were held back by £6.9m of losses from 2016 acquisition Worldstores. However, management remains cautious about the full year outlook ‘given unprecedented levels of uncertainty currently facing consumers and businesses in the UK’.
And yet, ‘if the homewares market continues to grow at a similar rate to that experienced in the first half’, Dunelm expects to deliver full year pre-tax profit ‘modestly ahead of the top of the range of current analysts’ forecasts’, a range pitched at between £108m to £112m before today.
RAPID DIGITAL DEVELOPMENT
CEO Nick Wilkinson is prioritising the development of Dunelm’s multichannel proposition to shoppers. 'The positive like-for-like revenue growth both in stores and online, highlights the strength of our customer offer,’ insists Wilkinson.
‘Our multichannel proposition is improving all the time, and we are looking forward to introducing our new web platform in the summer, using more flexible technology which will allow us to better serve our customers in a changing retail landscape.'
Significantly for profitability, Dunelm has closed the Worldstores and Kiddicare websites and flags a marked recovery in gross margin.
This reflects the elimination of lower margin Worldstores sales and an improved core Dunelm gross margin, boosted by improved sourcing and currency benefits. Worldstores is no longer a major distraction, as its websites have been closed and the online capabilities rolled into dunelm.com.
THE EXPERTS’ VIEW
Russ Mould, investment director at AJ Bell, comments: ‘Retail slump, what retail slump? Today’s update from homewares seller Dunelm looks great. Probably the most significant takeaway is a 9% like-for-like revenue increase in the second quarter, which included Christmas.
‘Online sales were up strongly but unlike some retailers this was not dragged down by store sales which were also up by an impressively robust 5.7%.
‘The flagged double-digit increase in first half profit may be flattered somewhat by the resolution of problems relating to the integration of WS Group, encompassing the Worldstores, Kiddicare and Achica brands, acquired in 2016.
‘This could also explain why management are not getting carried away, expressing caution on the outlook thanks to “unprecedented levels of uncertainty”.
‘It is good to see Dunelm is not resting on its laurels with plans to launch a new, more flexible web platform this summer. In an unforgiving retail environment, delivering the best possible customer experience is crucial.’
Meanwhile, Stifel explains: ‘Dunelm has brought forward its trading update owing to significantly better sales and profit performance in the first six months of the year. The overall picture is one of a business thriving under the current leadership team following several years of multichannel investment.’
Numis Securities comments: ‘This is a solid update from Dunelm and, although there is limited colour on the reasons behind (and therefore sustainability of) the like-for-like upswing, we are encouraged by the improving trends.
'Dunelm remains a high quality retailer at its core and our suggestion in October that the business may have passed an inflection point is reinforced by this update.'
