Dunelm starting to find favour in this tough market

On a number of attributes it can surely lay claim to be one of the safest holdings in the current economically stretched market: it is a value proposition; it sells chiefly low-ticket items; it has cash in the bank; it has a conservative management handling a controlled expansion programme; and it delivers a decent return on cash invested.

These factors undoubtedly contributed greatly to its interim management statement this week that showed turnover for the 43 weeks to April 26 had increased 12.2 per cent on the previous year and like-for-like sales had grown by 4.5 per cent.

And in the most recent nine-week period it confirmed its strong progress with like-for-likes increasing 6.6 per cent, which Landsbanki highlighted as particularly impressive, as it means Dunelm has out-performed the mighty John Lewis (in its home categories) for the fourth consecutive quarter.

To fully ram home the message that this is a retailer that is at the top of its game in a very tough market Will Adderley, chief executive of Dunelm, stated: “Looking ahead to our next financial year, like most retailers we anticipate a challenging economic and trading background. However, we have proved our resilience in the past and with the benefits of a stronger stream of new openings starting to feed through, I am confident in the prospects for our overall business performance.”

Helping these openings is the rapidly weakening retail property market that is providing a cash-in-the-bank Dunelm with the opportunity to pick up decent rents on out-of-town units. This could well see it exceed the mooted target of opening 12 new stores in 2009 having already signed the leases on six units so far this year.

This is all positive stuff for the company that takes a very low-key stance - unlike the retailer that floated at the same time Sports Direct. The result being that a number of brokers reckon it is worth a 'Buy', including Landsbanki, which has set a target price of 220p.

This would take it to just above its peak for the year of 218p, which it reached back in October, and would represent a decent uplift from its current 171p that it moved to after a three per cent gain on the back of this week's strong statement. This still puts it on a lowly PE of 10x for 2008 that falls to 9x for 2008 so this suggests the company is hardly over-priced.

This remains a surprise as its fundamentals look ever-stronger in the current tough market. It is not the first time that we have said it in this column, but we'll say it again: it surely is only a question of time before the company is re-rated. Even though it has already enjoyed an increase in its share price of around 20 per cent over the past quarter we believe there is still more to come.