Dunelm is one to keep after these Q1 results

After posting record annual sales last month, Dunelm Group (LSE:DNLM)’s star remains in the ascendant, with future expansion planned to maintain momentum.

A fresh marketing campaign has been launched to coincide with the launch of the autumn and winter ranges, alongside collaborations with the likes of Disney and the Natural History Museum.

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Meanwhile, another new store was opened in the first quarter, taking the estate to 180 and with three more planned this quarter towards the immediate target of 200 outlets. At the same time the digital business, which now accounts for 35% of overall sales, is receiving more care and attention in order to attract new customers.

Despite the group’s reputation as a value offering on home furnishings, which is particularly powerful at present given the economic backdrop in the UK, Dunelm improved gross margin over the 13-week period ended 30 September by 1.2%, helped in part by foreign exchange and reduced freight cost tailwinds. With total sales rising by 9% in the quarter, the group remains upbeat on prospects, with another investor attraction being the ordinary yield of 4.1%, which is boosted to 7.9% including the recent special dividend.

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Any deterioration in consumer sentiment would inevitably have an effect on Dunelm, even if there are currently few signs of customers voting with their feet. In addition, the 25% rise in the share price over the last year, which compares to a marginal gain of just 0.9% for the wider FTSE250, has raised some valuation concerns.

For its part, Dunelm continues to deliver even though the market consensus of the shares suggests that the price may be up with events for now and coming in at a 'hold', albeit a strong one.

Market snapshot

Investors seem unsure as to which way to turn at the moment, with rising tensions in the Middle East driving some investors towards haven assets as risk aversion increasingly takes hold.

At the same time, the dawning realisation that interest rates in the US are likely to remain higher for longer has taken some of the wind from the sails of what had been a high-flying equity market.

The current earnings season has started strongly, with the vast majority of companies having reported so far beating expectations. There have inevitably been some exceptions, with disappointing dealmaking earnings weighing on Morgan Stanley (NYSE:MS) and the prospects of higher costs on United Airlines Holdings Inc (NASDAQ:UAL). More positively, Procter & Gamble Co (NYSE:PG) topped expectations, while Tesla Inc (NASDAQ:TSLA) and Netflix Inc (NASDAQ:NFLX) posted strong gains after the bell on the release of their latest numbers. 

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Investors are increasingly keen to see pure earnings growth, as opposed to increased profits largely enabled by cost-cutting measures, such that the bar could be raised for expectations as the season unfolds.

In the meantime, the main indices remain ahead in the year to date, with the Dow Jones having added 1.6%, the S&P500 12% and the Nasdaq 27%.

The weak session on Wall Street spilled over to Asian markets, with the UK in turn unable to break away from a more difficult recent trading range. The FTSE100 opened squarely in the red, with a broad markdown and with some pressure on the banks ahead of third-quarter earnings which will be released next week.

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The strength of the US dollar, which is being sought as a haven asset, at least provides some insurance for a premier index which has a large exposure to overseas earnings, and the US in particular. This has enabled the FTSE100 to eke out a small if unconvincing gain of 1.2% so far this year.