Shares in Leicester-headquartered homewares leader Dunelm (DNLM) are in demand. In morning trade the stock is 3.5% higher to a new 12-month high of 742p as the bedding, curtains and kitchenware seller delivers a spike in first half pre-tax profit despite the difficult consumer backdrop.

Relatively new chief executive (CEO) Nick Wilkinson is certainly putting his stamp on the business. A renewed focus on the core Dunelm brand with a strengthened product offering is driving homewares market share gains, although management are understandably cautious in terms of the outlook.

MULTICHANNEL MARVEL

For the 26 weeks to 29 December, like-for-like sales rose 6.9%, reflecting growth both in stores and via the important online channel. Underlying pre-tax profit grew almost 17% to £70m and Dunelm’s gross margin improved 170 basis points to 50.3% due to improved sourcing, foreign exchange benefits and the removal of less profitable Worldstores lines.

During the half, Wilkinson simplified the business by closing both the Kiddicare and Worldstores websites, transferring winning lines to dunelm.com.

In the period, fun animal character lines such as Lulu the llama and Anzo the sausage dog lamps proved stars of the show, while Dunelm’s sumptuous velvet chairs, cushions and lamp shades are also going down a treat with consumers.

Renowned for its strong free cash flow generation, Dunelm also rewards shareholders by raising the half time dividend by 7.1% to 7.5p.

TEMPERING THE EXUBERANCE

Wilkinson insists it has been ‘a good first six months with our strong performance reflecting the focus we have placed back on the core Dunelm business. The like-for-like revenue growth, both in stores and online, demonstrates the progress we are making in improving our multichannel proposition whilst maintaining the breadth and depth of our specialist customer offer in homewares. On top of this, good operational discipline and keeping things simple, is driving a better financial performance.’

However, in the outlook statement, Wilkinson seeks to manage expectations following an exceptionally strong half. ‘As previously highlighted, we are cautious about the outlook for the remainder of the financial year due to the continuing political uncertainty in the UK,’ explains Wilkinson.

He remains ‘confident in delivering market expectations for the full year’, with the consensus of analysts’ estimates in the £114m-to-£118m range, ‘assuming no material change in the macro-economic environment.’

When it comes to Brexit, Dunelm, like other retailers, is exposed to any impact on currency and consumer confidence. Finance director Laura Carr points out Dunelm imports less than 1% of its goods from EU countries, yet Dunelm has ‘identified some risks arising from potential disruption at “deep-sea” ports in the period following exit. Actions have been taken within the business and throughout our supply chain to mitigate these risks, such as purchasing incremental stock of some best-selling lines and securing additional supply chain capacity.’

THE EXPERT’S VIEW

Russ Mould, investment director at AJ Bell, comments: ‘Homewares retailer Dunelm builds on a strong January trading update with first half results showing big growth in revenue, profit and, crucially, cash flow. Borrowings have been significantly reduced.’

‘The results are achieved despite weak consumer sentiment and suggest the company’s evolving proposition both online and in store is resonating with shoppers – with customer numbers increasing markedly.’

‘Indeed, unlike many of its rivals this is not a case of internet sales coming to the rescue of ailing bricks and mortar stores. The online side is growing faster but both parts of the business are currently heading in the right direction.’

‘A more flexible web-based platform is due to launch in the summer and this could help reinforce the company’s position.’

‘Despite the robust trading, Dunelm cannot escape the dreaded B-word, stockpiling its best-sellers in case of disruption to its supply chain around the UK’s departure from the EU.’

‘Dunelm is the latest company to announce such plans as the 29 March exit data looms on the horizon.’

‘While it remains confident of meeting expectations it is unsurprising to see the firm express caution in the face of the continuing Brexit uncertainty and there certainly seems a risk that the sensible precautions the company is taking could result in a hit to profitability.’

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Issue Date: 13 Feb 2019