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Dunelm looking toppy

Homeware retailer Dunelm has delivered robust sales growth - but tough consumer conditions are a worry and the toppy share price rating leaves no room for error
September 20, 2012

With the British Retail Consortium (BRC) revealing that August's like-for-like UK retail sales had slipped 0.4 per cent year-on-year, it's clearly a tough time to be a retailer. Admittedly, some of that weakness was down to consumers diverting their attention to the Olympics. But, with the UK economy shrinking by 0.5 per cent in the second quarter, consumer sentiment isn't set to recover anytime soon - bad news for all consumer-facing businesses, including homeware retailer Dunelm.

IC TIP: Sell at 661p
Tip style
Sell
Risk rating
Medium
Timescale
Long Term
Bull points
  • Recent trading has been strong
  • Returning capital to shareholders
Bear points
  • Retail conditions remain weak
  • Costs are rising fast
  • Modest web presence
  • Shares expensively rated for a retailer

Not that Dunelm has been a poor performer - far from it. When the group released full-year results last week, the business appeared to buck the weakening trend within the retail sector by revealing like-for-like sales growth of 3.1 per cent for the year to end-June. Dunelm experienced an especially robust final quarter with like-for-like sales for the 13 weeks to end-June surging over 10 per cent. Accordingly, Dunelm grew operating profit by 14.3 per cent in the financial year to £95.2m and, buoyed by a cash-rich balance sheet, management plans to return £65.8m of excess capital in November, worth 32.5p a share, through a B/C share scheme.

Indeed, Dunelm's quality isn't in doubt - the uncertainty arises over whether it can maintain such a quality performance. The UK's exceptionally wet summer, for instance, meant a big one-off boost for retailers such as Dunelm, as rain-weary consumers made their way to the shelter of its superstores instead of spending their cash on outdoor pursuits. Management estimates that at least half of the growth seen in the last quarter was weather-related - so, with more typical weather conditions having apparently returned, the weak consumer backdrop looks like much more of a threat. It's a threat that Dunelm acknowledges. "Looking ahead, we remain cautious of the UK consumer environment and its impact on our trading in the near term," said chief executive Nick Wharton.

DUNELM (DNLM)

ORD PRICE:661pMARKET VALUE:£1,337m
TOUCH:659-662p12-MONTH HIGH/LOW:685p391p
DIVIDEND YIELD:2.3%PE RATIO:17
NET ASSET VALUE:102pNET CASH:£65.2m

Year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
200942453.518.86.00
201049276.827.18.00
201153883.629.711.5
201260396.235.314.0
2013*669107.139.515.0
% change+11+12+11+7

*Peel Hunt estimates

Normal market size: 1,100

Matched bargain trading

Beta:0.53

And, even though online sales usually represent the fastest-growing segment for most retailers, it could be quite a while before Dunelm can significantly supplement its growth profile from the web. That's because the group generated just 2.5 per cent of its sales in the last financial year from the so-called multi-channel sources - essentially, using the web to reserve, collect in-store or arrange home delivery. In contrast, catalogue retailer Argos generates nearly half of its sales from such multi-channel sources.

Then there's the pace of the group's expansion plans to worry about. Dunelm opened 14 new superstores in the year to end-June with a further four new openings since the period ended - bringing the total estate to 118 stores. Management is actually targeting a 200-strong store estate which, assuming a similar opening rate to that seen last year, suggests a five- or six-year timescale. The trouble is that such a relatively heady pace of store expansion comes with a big price tag and total operating costs jumped 12.3 per cent year-on-year to £197m. While, with consumer confidence looking so uncertain, the overall wisdom of such a fairly aggressive expansion strategy must be in doubt. Although the group's hefty cash pile does offer a good deal of comfort.