Buy leaner, meaner Dunelm

Dunelm sells homewares and furniture across the UK through a network comprising 169 ‘superstores’, three high street stores, and a website. In recent years it has been expanding its store portfolio in the south of England, but has also opened new outlets in the North, Scotland and Jersey. 

The Worldstores business has proved a major drag on the wider group in recent years. Underlying pre-tax profits fell 15.2 per cent to £109.3m in the year to July 2017 and a further 6.7 per cent in the following year. Gross margin slipped 90 basis points in each of the years, reaching 48 per cent. 

Not all of the deal’s negative effects were so easy to put a number on. Chief executive Nick Wilkinson – who joined in February 2018 – noted in the group’s 2018 annual report that the integration of Worldstores had been “substantial”, adding it “reduced our focus on some of our operating disciplines”. His response has been decisive, closing all websites except for dunelm.com, cutting lower-margin lines, disposing of lifestyle and luxury discounter Achica and consolidating the whole business under the Dunelm brand. Of course, external factors have also been playing a role in the group’s performance, and last year’s extremely dry summer led to a decline in store footfall that was given as the key reason for a fourth-quarter profit warning. 

However, the group appears to have turned a corner. Brokers upgraded profit expectations in response to a second-quarter trading update in January, confounding expectations seeded by the difficult wider market. The half-year results were in line, but the group’s outperformance continued in the third and fourth quarters of the year. Gross margins have likewise turned around, rising 170 basis points to 50.3 per cent in the six months to December 2018. This improvement to continue into the second half of the year.

Worldstore did strengthen the group’s offering and growth, too. As of the most recent results online home delivery, reserve and collect and tablet-based revenues comprised 15.7 per cent of total sales, up from 11.8 per cent last year.

The acquisition strengthened the group’s online offering and online growth has been made a focus. As of the most recent results online home delivery, reserve and collect and tablet-based revenues comprised 15.7 per cent of total sales, up from 11.8 per cent last year.

Cash generation has also been returning from the anaemic levels hit following the Worldstores acquisition. It rose from 14.2m in the year to the end of June 2017 to £52.9m in the 2018 financial year, and in the first half of the current year was £91.2m. First-half net debt fell 46 per cent to to £72.9m. 

The group has a policy of considering special payments when the average net debt falls below 0.25 times cash profits. At the half-year results the figure was 0.48 times, and broker Peel Hunt reckons an additional payout is possible as soon as the autumn (not factored in to the table below). What's more, special payments should be sustainable based on the broker's view that the company is capable of producing about £60m of surplus cash a year (about 3 per cent of the current market capitalisation)