BULL POINTS:
■ New store openings delivering sales growth
■ Healthy balance sheet
BEAR POINTS:
■ Facing tough consumer conditions
■ Underlying sales are tumbling
■ Pressure on profit margins
■ Demanding share rating
A glance at last month's retail sales figures might encourage the belief that retail conditions in the UK are finally improving. After all, retail sales volume increased 1.3 per cent in the year to March. But such optimism looks misplaced. Earlier this month, the Bank of England warned that the economy remains weak, with higher fuel prices set to help keep inflation unpleasantly high and restrain demand. Add that to the government's austerity measures, which have yet to really bite, and consumers are still under the cosh. That's bad news for all retailers - especially for those operating at the discretionary end of the market, such as soft furnishings retailer Dunelm.
| IC TIP RATING | |
|---|---|
| Risk rating | Medium |
| Timescale | Medium-term |
| What do these mean? Find out in our | |
A closer look at March's retail sales shows that the modest recovery was driven by areas such as computers, telecommunications and, amid fine weather in recent weeks, at garden centres. Sales in household goods, which is much closer to Dunelm's speciality, actually fell 7.7 per cent in the year. That pressure was also evident in the group's third-quarter trading update last month, which reported that like-for-like sales had slipped by 1.3 per cent in the 13 weeks to 2 April. In contrast, the group's like-for-like sales rose by 3.2 per cent in the same period of 2010.
True, the statement added that Dunelm's gross profit margin had improved by 1.5 percentage points. But that's not as positive as it seems - management also said that current inflationary pressures will leave such gains 'unlikely to be maintained'. That was enough for broker Peel Hunt to cut back its profit estimates for Dunelm last month. The broker reduced its forecast for 2010-11's full-year pre-tax profit by nearly 4 per cent and its 2011-12 pre-tax profit estimate by almost 9 per cent.
| ORD PRICE: | 466p | MARKET VALUE: | £939m | |
| TOUCH: | 466-467p | 12-MONTH HIGH/LOW: | 581p | 319p |
| DIVIDEND YIELD: | 2.0% | PE RATIO: | 16 | |
| NET ASSET VALUE: | 69p | NET CASH: | £34.3m | |
| Year to end-Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2007 | 355 | 37.8 | 12.3 | 3.8 |
| 2008 | 392 | 49.1 | 16.8 | 5.5 |
| 2009 | 424 | 53.5 | 18.8 | 6.0 |
| 2010 | 493 | 76.8 | 27.1 | 8.0 |
| 2011* | 539 | 82.7 | 29.0 | 9.5 |
| % change | +9 | +8 | - | +19 |
*Peel Hunt estimates (earnings adjusted - not comparable) Normal market size: 1,000 Matched bargain trading Beta: 1.1 *Peel Hunt estimates (Earnings not comparable with earlier periods) | ||||
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In fact, Dunelm's programme of store openings is the chief reason why it's expected to deliver any growth at all. Dunelm opened two new superstores during the third quarter - in Scarborough and Truro - and there are a further 10 stores in the pipeline, most of which will open during 2011-12. The new stores explain why Dunelm's total third-quarter sales grew 9 per cent year-on-year. True, at the moment not many retailers can point to any kind of growth story and, with a healthy net cash pile, Dunelm looks well-placed to support that programme. That said, the wisdom of pursuing ambitious expansion in the midst of an enduring squeeze on consumers is another matter.
