Dunelm increases sales and its dividend

The market evidently expected more of Dunelm (DNLM), as its share price dipped slightly in early trading despite the homeware retailer posting a bump in revenue and pre-tax profit for the last six months of 2023. A drop in reported earnings per share (EPS) was largely triggered by a change in corporation tax, and management would probably point to a 4.2 per cent hike in the number of active customers as a more telling metric, together with the overall rise in volumes. There was also a 160 basis point increase in the gross margin – a solid outcome given the challenge of efficient cost pass-through, and ongoing supply chain challenges. The company put the improved trading partly down to a good Christmas, and said it is on track to hit the market consensus of full-year pre-tax profit of around £202mn. 

The dividend increase might tempt some investors. If you include the newly announced special dividend alongside regular payouts, the income yield touches 6 per cent. Considering the level of debt, such generosity can be questioned, even if the bulk of those borrowings constitute IFRS16 leases. That lease burden could fall over time, assuming digital channels – which now account for 36 per cent of total sales – continue to ratchet up, but the homewares group does still intend to deepen its London footprint.

Management admits that trading conditions are precarious and believes the UK's growth prospects are poor. So, on balance, we think this company is priced about right. The shares trade at 14.5 times consensus earnings for the year to June 2024, in line with industry peer Next (NXT). However, unlike Next, which has been soaring past market forecasts, Dunelm's as-anticipated performance means there's not much value hidden away. We maintain our rating. Hold.

Last IC view: Hold, 1,075p, 20 Sep 2023