Chris St John, manager of AXA Framlington UK Mid Cap Fund (GB00B64W4Q70), explains why he invests in homeware retailer Dunelm (DNLM).
"Our aim is to generate strong consistent returns over the long term by investing in companies with high revenue growth and sustainable profit margins," said Mr St John. "We therefore like core compounders - companies with strong balance sheets and the ability to generate consistent compounding returns over time, such as Dunelm.
"Dunelm is a retailer operating in the homewares space, delivering quality products across a broad price spectrum. It differentiates itself by offering a range of products from the value end to branded luxury. The company has shown over a prolonged period how to execute a business plan well, and its management team's knowledge of the business and its market is exceptional.
"For example, the company's deputy chairman, William Adderley, even knows the sequence of the traffic lights outside the Ipswich outlet, which he argues influences the store's footfall!
"The company has a focused growth plan with the following clearly defined targets:
■ Like-for-like store sales growth.
■ New store growth.
■ Profit and sales growth in the home delivery channel.
"Dunelm has a strategy in place to roll out new stores in a controlled manner and plans to increase these from 149 to 200.
"The company has already been able to demonstrate its ability to translate growth into returns: its share price at initial public offering in October 2006 was 170p, and by mid-March this year had grown to 912p. Total cash returned over this period as dividends and special distributions has been 298p. Dunelm's disciplined management team has struck an appropriate balance between rewarding equity holders and reinvesting in the business and new opportunities.
"With strong cash-generative growth and a management team committed to working for the equity holder, Dunelm has built a strong business. It is reaping the benefits of healthy expansion and, more importantly, delivering returns to shareholders."
