Cushions, quilts and curtains seller Dunelm (DNLM) is the biggest mid-cap faller on news ‘softer than expected’ trading dragged its pre-tax profit 26% lower in the 26 weeks to 31 December.

The specialist homewares retailer blames a weaker market and supply chain disruption for a year-on-year drop in pre-tax profits from £75.5m to £55.9m. Investors are spooked by the update, marking the stock 8.5% lower to 626p.

Dunelm, whose like-for-like sales over Christmas disappointed, reports overall half year sales up 2.8% to £460.5m. This reflects a boost from the acquisition of furniture retailer Worldstores; sales from Dunelm stores open for at least a year softened by 1.6%.

Dunelm graph

Nevertheless, UBS analyst Andrew Hughes reiterates his ‘buy' rating as he believes Worldstores will help Dunelm, expanding towards a 200 store target, to grow significantly.

In the short-term, the acquisition could involve between £30m and £40m in extra costs. However Hughes is optimistic that by 2019, Worldstores will contribute an estimated £10m of earnings before interest and tax whilst expanding Dunelm's online offering.

Investors can also draw succour from an 8% dividend hike to 6.5p from Dunelm, a sign of management's confidence in the firm’s medium-term outlook, copper-bottomed balance sheet and strong cash generation.

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Issue Date: 08 Feb 2017