ii view: Dunelm has tough March but sticks with profit target

Third-quarter trading update to 30 March

• Revenue up 3% to £435 million
• Digital related sales up 1% to 37%

Chief executive Nick Wilkinson said: 

“Whilst discretionary spend remains under pressure, our relevant and attractive product offer continues to resonate with customers as they shop across our broad ranges to find quality and value for all areas of the home.  

"Looking ahead, we are excited about strengthening our customer offer, and the breadth of growth opportunities this presents. Consumer behaviour continues to be difficult to predict, however we remain confident in our ability to navigate current conditions whilst delivering further sustainable growth and market share gains."

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ii round-up:

Homewares retailer Dunelm Group (LSE:DNLM) today pointed to challenging trading and softer demand in March but left its full-year profit expectations unchanged. 

Sales in the third-quarter to the end of March rose 3% year-over-year to £435 million, down from growth of 4.5% in the first half. However, profit for the year to late June is still expected to match City estimates of around £202 million, up from last year’s £193 million. 

Shares in the FTSE 250 company fell 6% in UK trading having come into this latest news down around 2% year-to-date. That’s below a slight gain for DIY retailer Kingfisher (LSE:KGF) and in comparison to a 0.5% retreat for the FTSE 250 index itself. 

Dunelm sells items ranging from curtains and bedding to furniture and paints. Four new store openings year-to-date take its total to 183, with digital related revenues climbing 1% from the end of the first half to 37% and potentially helped by moves to improve its website speed.

The retailer’s gross profit margin improved 0.6% during the quarter, with the full-year margin now expected to increase 1.1 percentage points year-over-year, up from a previously guided 1 percentage point rise, and helped by ongoing operational improvements. 

A fourth-quarter trading update is scheduled for 18 July.    

ii view:

Starting out as a curtain stall in Leicester market and coming to the stock market in 2006, Dunelm today sells around 70,000 products both from its stores and online. Employing around 11,000 people, the retailer plans to grow its UK outlets to around 200. Product lines include specialist own brands and labels such as Dorma and Fogarty, with many stores now offering a Pausa coffee shop.  

For investors, elevated borrowing costs continue to leave consumer disposable income pressured. Supply chain disruption and increased costs caused by shipping avoiding the Red Sea also warrants consideration. So do heightened costs more broadly such as wages, while a price-to-net asset value ratio above the three-year average may suggest the shares are still not obviously cheap, despite recent share price weakness.

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More favourably, digital related sales are growing, new stores are being opened, the retailer’s product range now stretches into furniture and DIY, while management remains focused on costs, with operational improvements being made where possible. 

Challenging and volatile trading as described by management gives reason for caution, and the stock is near the bottom of its 12-month range. That said, Dunelm has returned more than £1 billion to shareholders over the last 10 years and trades on a forecast dividend yield of around 4%.

Positives: 

• Growing sales
• Attractive dividend yield (not guaranteed)

Negatives:

• Uncertain economic outlook
• Elevated business costs

The average rating of stock market analysts:

Strong hold