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Dunelm builds market share as outlook darkens

Analysts have reduced their profit forecasts as headwinds threaten progress
September 14, 2022
  • Strong post-period trading
  • Gross margin down

The headline figures in homeware retailer Dunelm’s (DNLM) full-year results were as expected after July’s encouraging trading update. But while investors will be pleased with the bump in the ordinary dividend (if not the cut to the special dividend), chief executive officer Nick Wilkinson’s statement that “the operating and economic environment is extremely challenging” highlights the volatile outlook for both the company and the sector.  

Further market share gains across categories in the UK helped drive Dunelm’s sales upwards. According to GlobalData, the company’s homewares share was up by 140 basis points to over 10 per cent and it now takes around 2 per cent of the furniture market. An 8.5 per cent increase in active customers and 16 per cent jump in higher spending repeat customers didn’t hurt either.

Digital sales were 2.5 times ahead of pre-pandemic figures, but were down by 11 percentage points to 35 per cent of total revenue in the year against a period which included store closures. And while gross margin contracted by 40 basis points to 51.2 per cent, this was mostly to do with a return to normal seasonal trading for event lines.  

This is all quite positive. But the fact is that homeware retailers face a range of headwinds which make the outlook a fundamentally uncertain one. As Stifel anaylsts noted in their initiation note on Dunelm last month, consensus sales growth forecasts for the 2023 financial year look “too optimistic given the spending shift back to holidays and events, the rising cost of living, inflationary pressures, interest rates and the likelihood of a housing market slowdown”. Profit warnings over recent months from sector-related peers such as DFS Furniture (DFS), Made.com (MADE), and Wickes (WIX) demonstrate this well.

While Dunelm’s management said that trading for the first 10 weeks of the new financial year have been “robust” and that the company is on track meet consensus analyst expectations of a pre-tax posting of £178mn, it is worth noting that according to Stifel analysts the consensus profit position has fallen by 6 per cent over the last 5 weeks. Elevated inventory levels could also catch the company out.

The shares trade at 9 times broker Peel Hunt’s financial year 2023 earnings forecast – Dunelm isn’t expensive. But they have fallen by over 50 per cent over the past 12 months, and we think they look exposed to further falls, at least in the short to medium-term, despite a strong performance in the year. We move to hold.

Last IC view: Buy, 1,285p, 09 Feb 2022

DUNELM (DNLM)   
ORD PRICE:753pMARKET VALUE:£ 1.52bn
TOUCH:750-753p12-MONTH HIGH:1,558pLOW: 660p
DIVIDEND YIELD:5.3%PE RATIO:9
NET ASSET VALUE:88pNET DEBT:169%
Year to 2 JulyTurnover (£bn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
20181.059336.326.5
20191.1012650.228.0
20201.0610943.4nil
20211.3415863.735.0
2022 (53-week period)1.5821384.540.0
% change+18+35+33+14
Ex-div:10 Nov   
Payment:05 Dec   
NB: Dividend yield does not include respective special dividends of 65p and 37p for FY 2021 and 2022.