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Dunelm still working on Worldstores

The acquisition has expanded the homewares retailer's capabilities, but has yet to deliver below the top line
September 13, 2017

Homewares retailer Dunelm (DNLM) once again reported slipping like-for-like sales in these full-year results, but the fall of 0.5 per cent was modest in comparison with the half-year stage. As before, this was attributed to unusually warm weather leading to decreased footfall. On the bright side, though, online sales were up 24 per cent, excluding the acquired Worldstores operations, and now account for 8.5 per cent of the underlying business, up from 7 per cent in the previous year. Same-store sales were reportedly better in the first two months of the 2018 financial year thanks to more favourable weather, but management noted the trading climate was likely to remain challenging as the disposable income of UK consumers came under pressure.

IC TIP: Hold at 670p

Dunelm has put a lot of emphasis on its acquisition of Worldstores, which delivered the lion's share of statutory revenue growth. Chairman Andy Harrison believes the combination has brought Dunelm closer to its goal of becoming “the biggest and best multichannel homewares retailer in the UK”.

As a result, it is targeting a doubling of sales to £2bn in the medium term, of which 30-40 per cent is to come from online shopping. It’s an ambitious goal, but the retailer points out that its market share remains low. It controls 7.9 per cent of the £12bn homewares market, which it describes as "relatively low for a market leader". Its share of the £11bn furniture market is even lower at around 1 per cent.

As a gesture of its confidence, the board has increased the ordinary full-year dividend by 3.6 per cent (see table), even though the costs from the Worldstores acquisition mean dividend cover is now below the group’s policy target. Management says the company retains its “strong balance sheet and strong underlying cash flow”, but statutory numbers show a decrease in cash conversion (net operating cash flow against pre-exceptional operating profit) to 71 per cent from 115 per cent, and an increase in net gearing from 80 per cent to 111 per cent. However, the acquisition should improve product ranges, home deliveries and technological capabilities. Expectations are for it to near break-even by the end of the 2018 financial year, before adding £10m to pre-tax profits in 2019.

Analysts at N+1 Singer are forecasting adjusted pre tax profit of £122m, giving EPS of 48.2p in 2018 (from £109m and 42.8p in 2016).

DUNELM (DNLM)   
ORD PRICE:670pMARKET VALUE:£1.35bn
TOUCH:669.5-671p12-MONTH HIGH:925pLOW: 541.5p
DIVIDEND YIELD:3.9%PE RATIO:18
NET ASSET VALUE:55p*NET DEBT:111%
Year to 1 JulTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201367710840.216.0
201473011644.020.0
201583612347.521.5
201688112950.525.1**
201795692.436.326.0
% change+8-28-28+4
Ex-div:02 Nov   
Payment:24 Nov   
*Includes intangible assets of £27.5m, or 14p a share **Excludes 31.5p special dividend