ii view: Dunelm confident, but share drop is uncomfortable

Supply chain challenges have been flagged as digital sales continue to grow. We assess prospects. 

First-quarter trading update to 25 September

• Total sales up 8.3% to £388.8 million

Chief executive Nick Wilkinson said:

“Whilst we are not immune to the challenges being widely reported, we feel well placed relatively to manage them. In particular, we have good stock levels across our stores, warehouses and supplier partners, a low proportion of seasonal ranges within our product offer, and also benefit from a higher propensity for customers to substitute products within homewares categories, given our broad range.”

ii round-up:

Home-furnishing retailer Dunelm Group (LSE:DNLM) made a robust start to the new financial year and remains confident that it can manage through current supply chain challenges.

Total first-quarter sales rose by 8.3% to £388.8 million, aided by its summer sale, improved product availability and some new ranges of furniture. 

Dunelm shares rose by more than 4% in early UK trading, but were 1% down at lunchtime. They're now down 15% in the past month, although have almost doubled since pandemic induced market lows back in March 2020. Shares for clothing and homewares retailer Next (LSE:NXT) are up by close to 120% during that time, while shares for DIY retailer Kingfisher (LSE:KGF) have risen by almost 130%.

Dunelm digital sales continued to grow, rising by 20% in the quarter, and now account for a third of total group sales - up from just under 30% this time last year. 

Previously raised full-year profit expectations have been maintained, and Dunelm is outperforming the homewares market.

A second quarter trading update is scheduled for 13 January. 

ii view:

Dunelm was founded in 1979 as a market stall business, selling ready-made curtains. Today it sells around 50,000 product lines. Most of its 175 stores are out-of-town and are located to reach over 65% of the UK population within a 20-minute drive. It became a multi-channel retailer in 2005, launching its own website.

For investors, cautionary comments regarding the uncertain macro outlook cannot be ignored. Supply chain challenges still need to be navigated, while rising costs for consumers may eventually crimp spending.  

But sales momentum remains and Dunelm is being rewarded for investing in its digital channels. Room for market share gains persists, while the price/earnings (PE) ratio now stands at a discount to the three-year average. In all, with sales growth ongoing and the dividend having previously recommenced following a break for Covid, there appears room for upside over the longer term.   

Positives: 

• Growing digital sales
• Net cash held

Negatives:

• Supply chain challenges
• Cautious economic outlook comments

The average rating of stock market analysts:

Buy