- New openings in the Christmas quarter
- High premium to net asset value
The fact that Dunelm (DNLM) had a merrier Christmas in 2023 than in 2022 was no small feat. The homeware retailer's sales surged 18 per cent in the three months leading up to the 2022 holiday season compared with the same period in 2021, which it said was partly due to the timing of its winter sale. In the Christmas period just gone, sales grew again, albeit by a much less stellar 1 per cent.
This was a sharp slowdown from the 9 per cent seen in the previous quarter. So the market reaction to this trading update was muted, because this is a leveraged business priced according to bullish growth expectations. It trades at 13.9 times consensus forecast earnings for the year to June 2024, a forecast the company said it is on track to meet. That is above peers such as Next (NXT).
So, while sales growth is encouraging, the market wants to see more, which could be problematic. Dunelm opened three more shops in the Christmas quarter, bringing the total to 183, but further openings cost money. With interest rates still high, the question is how Dunelm will fund future expansion when its net debt is more than double its total equity.
One answer might be more growth in digital sales, which nudged up two percentage points to 37 per cent of Dunelm's overall revenue. Delivering to a new location from an existing warehouse is cheaper than opening a new shop in the area, but it won't necessarily capture as many new customers.
In short, we see future growth in this business, but we are not as bullish as the rest of the market at the current price.
Last IC view: Hold, 1,075p, 20 Sep 2023
