Dunelm offers special dividend despite falling profits

The fall in Dunelm’s (DNLM) reported interim profits was in line with market expectations, as an uptick in winter sales was undermined by a 170 basis point reduction in the gross margin. Nevertheless, shareholders will still benefit from a 40p special dividend.

The homewares retailer drove up its market share in key categories in the half-year, with demand for energy-saving products such as heated air systems and thermal curtains on the rise as households got to grips with the energy crisis. Overall customer numbers increased by 5.7 per cent, and footfall also benefited from increased shopping frequency.

Management is placing emphasis on the group’s ongoing digital adoption. The development of a new online payment platform has enabled Dunelm to expand its payment options, introducing Apple Pay and 'Pay in 3', in the period under review. The digital push also extends to the development of a personalised approach to attracting and developing customers as part of what management refers to as its “marketing ecosystem”. On a more prosaic level, the retailer is also exploring further options for parcel shop collections as it adapts to changing consumer trends.

The share price has surged since the last quarter of 2022, leaving Dunelm trading at 17 times consensus earnings, which is quite lofty relative to peers, and seemingly ambitious given softening consumer confidence. The company is still delivering the goods: it delivered free cash flow of £102mn with an 84 per cent conversion rate. Net finance costs of £4.4mn included interest on IFRS 16 lease liabilities of £2.6mn, but it would be reasonable to assume this burden will decrease as digital sales – 34 per cent of the total and rising – gain in prominence. Hold.

Last IC view: Hold, 753p, 14 Sep 2022