UK homewares leader Dunelm (DNLM) rallies 6.4% to 649.5p, investors comfort levels with the unloved stock increasing on in-line full year results and news of a positive start to the new financial year.

Favourable cooler and wetter weather has given recent like-for-like sales a boost, while Dunelm also outlines ambitious top line targets and assures its search for a new CEO is underway.

Leicester-headquartered Dunelm’s shares have de-rated materially of late amid softer homewares and furniture markets, though earnings downgrades have mostly been driven by the short-term impact of investments and changes across the business to enable future growth.

Dunelm towels

RELIEF RALLY

Investors are relieved as full-year figures reveal a 15.2% drop in profit before tax to £109.3m for the year to 1 July. This is in-line with expectations on total sales up 8.5% to £955.6m, while a 3.6% dividend hike to 26p sends a confident signal.

The reduction in profits includes a £10.7m loss from Worldstores, the online home and garden products purveyor acquired in November 2016 as a springboard for the value-for-money bedding, curtains and kitchenware purveyor’s online growth and range expansion.

Trading was also impacted by the unusually warm weather in the first quarter of the financial year, which had a dampening effect on footfall.

Andy Harrison, Dunelm’s chairman, says his charge ‘made good strategic progress over the year, most notably with the acquisition of Worldstores, which moves us closer to our goal of being the biggest and best multichannel homewares retailer in the UK. Over the medium-term we are aiming to double our sales to £2bn, with 30%-40% from our increasingly important online channel.’

Core Dunelm sales (stripping out Worldstores) for the 52 weeks grew 2.3% in total to £901.1m, with a 0.5% like-for-like decrease and 2.8% growth from space expansion.

While Harrison expects the trading climate ‘to remain challenging with the disposable income of UK consumers under pressure’, he highlights ‘a full programme of management actions underway to further improve the Dunelm customer proposition, both online and in-store, increase our business efficiency and support our colleagues.’

KEEPING ITS COOL

Furthermore, forward-looking investors welcome Harrison’s comments that ‘sales in the first two months of the new financial year have started positively, with good like-for-like sales boosted by favourable weather comparatives. We expect to open a total of 8 new stores in the first half of the year of which 4 are already open. An encouraging start.’

Dunelm’s search for a new CEO is underway following the surprise departure of John Browett last month, a shade over two years after joining the company.

Dunelm - SEP 2017THE ANALYSTS’ VIEW

Cantor Fitzgerald Europe is sticking with its ‘buy’ recommendation and 780p price target, arguing fiscal 2017 ‘should be viewed as a year of transition reflecting necessary investment for future growth before a return to earnings growth in full year 2018 and 2019. We believe Dunelm offers a rare combination of space expansion and multi-channel growth coupled with strong cash generation and a market leading position in the UK homewares market.’

N+1 Singer argues Dunelm has the ‘hall-marks of a compelling investment case’, being number one in a highly fragmented market – its share of 7.9% is relatively low for a market leader and there’s growth to shoot for in the £12bn UK homewares market – a highly cash generative company and having significant geographic expansion potential.

‘Today’s update and positive start to Q1 underpins our assessment that the recent sell off and inflection point represent a great entry point for this stock,’ writes the broker.


Issue Date: 13 Sep 2017