Dunelm profits plunge triggers fresh dive

Dunelm unravelled to a four-year low Wednesday, after a half-year profits slump triggered City downgrades. Despite ramping up its online business, a drop in like-for-like revenue at the cushion to curtains chain is disappointing, and losses at the recent Worldstores acquisition will be hefty.

Sales rose 2.8% to £460 million in the first half, with November's acquisition of online homes and garden retailer Worldstores adding £8.1 million. Strip out the new business and sales were just 1% higher.

Take out new Dunelm stores and like-for-like sales fell 3.1% to £389 million. A 20% revenue burst at its online business did soften the blow, narrowing the group decline in like-for-like sales to 1.6%.

However, Dunelm's website must work harder and the company is still legally committed to an expensive store roll-out programme. It already has 157 out-of-town superstores. How many Dunelm stores does Britain need? Management think it's 200, with five more due in the current financial year.

Clearly, trading wasn't easy in the first half. Warmer-than-expected weather in the first quarter reduced the number of people visiting its stores. Include the cost of its heavy investment programme, £3 million to open a new warehouse, and higher operating costs, and pre-tax profit fell 13.6% to £65.2 million.

Profit fell by a quarter to £55.9 million including exceptional costs relating to its acquisition of Worldstores - £8.5 million was paid to administrators.

Dunelm had to wear a £1.8 million loss on Worldstores in the first five weeks of ownership and, in the short term, now thinks losses for the current financial year will be at the top end of previous expectations of £5-£10 million.

UBS now reckons losses from the acquisition will total £10 million in 2017, plus core Dunelm costs £2.5 million higher.

While the group's been protected from any severe currency headwind thanks to hedging, things will get tougher in the second half of the year.

Although cash generation halved, an 8% increase in the dividend to 6.5p puts Dunelm on a 4% yield, which is pretty decent. Yet, a forward price/earnings (PE) ratio for the current year of 13.8 still looks generous.

And the market isn't convinced. After Wednesday's initial sell-off to 610p, Dunelm shares had lost a quarter of their value in 2017 alone. They now trade 38% below 2016 highs.

Some in the City are more upbeat, however. Even though UBS analyst Andrew Hughes has had his red pen out, downgrading 2017 profit forecasts by 4% to £115 million and slashing his target price, he still thinks there is decent upside. The new objective comes down from 950p to 890p, but still implies over 40% upside.

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