What's new
■ Solid first half performance
■ Capex up sharply
■ New chief executive takes over
Retailers have had a mixed time of late, with a supposedly solid recovery in consumer spending during the final months of 2010 suddenly grinding to a halt in snow-strewn December. So a mere 1.2 per cent decline in like-for-like sales in the first half of Dunelm's financial year was a creditable performance. The homeware retailer was up against strong comparables; like-for-like sales rose 15.4 per cent during the same period in 2009.
Higher margins meant profits were ahead of the previous year, up by 5 per cent to £48.5m. The company generated substantial cash flow, ending 2010 with cash of £34.3m in the bank despite ploughing £23.1m into its store estate during the six-month period. The company now has 100 stores but believes it can double this before the market becomes saturated, meaning that much of its growth potential in the coming years will depend upon its ability to maintain the expansion of the estate. Nick Wharton, who joined from Halfords, has now taken on the chief executive role full time with former chief executive Will Adderley retained as executive deputy chairman.
The company admitted concerns over UK consumer spending and input costs such as cotton, which could affect margins. It has committed orders for cotton through to July 2011, so the second half of the financial year to June 2011 is covered, but beyond that margins could come under pressure if raw material costs remain high.
FinnCap says...
Hold. Dunelm is a straightforward rollout story and, as such, one of the more predictable growth stories. One simply needs to believe that management can keep on doing what it has been doing. The business is highly cash generative and easily capable of funding further rollout. However, in what looks like being a difficult retail environment, we think that this potential is largely reflected in a fully justified premium rating. Management, like many in the sector, views the short-term outlook cautiously. We have already adopted a similarly cautious approach to full-year forecasts.
Singer says...
Fairly priced. Store expansion remains key to the investment case and the pipeline for new stores remains encouraging. Management remain cautious on the consumer environment but they believe the business can use its strengths to trade successfully through these tough conditions and enhance its strategic position along the way. Prior to today's announcement, full-year pre-tax profit consensus stood at £84.9m and we do not anticipate any significant changes to our own or market estimates at this stage.
