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City viewpoint: Plenty still in-store for Dunelm, despite the sun

Unlike many retailers and the general public, the out-of-town homewares specialist Dunelm will probably be hoping for the sun to stay in and the rain to pour down as decent weather deters shoppers from visiting its stores. By Glynn Davis, City editor


City viewpoint: Plenty still in-store for Dunelm, despite the sun

If the sun beats down then consumers are more likely to splash out on summer wear, garden equipment and barbecues and the prospect would be for forecasts for Dunelm in 2010 to possibly be pegged back slightly.

This would reverse the upgrade made at the end of April that followed the company's interim management statement, which showed like-for-like sales ahead by 2.3 per cent since the first half. Singer

Capital reckons the numbers will be significantly down on a like-for-like basis in the back-end of the half.

The decent weather in May could be a contributor to the decline of late in the Dunelm share price. As predicted in this column on a number of occasions over the past year, the company finally gained some recognition in the City and its shares moved up from 112p last July to a 12-month peak of 273.25 on April 27. But they have since given back some of the gain to stand at a current 242p.

This weather issue represents the one downbeat note on Dunelm and the longer term prospects for the company remain strong. It has a number of attractive aspects for investors. Chief among them is its value proposition - despite the tough economic conditions the business has seen little evidence of trading down by consumers.

The only noticeable change in shopping behaviour at its stores is a slight fall in the number of items in the average shopping basket. In fact, such is the attractiveness of its pricing architecture that gross margins were reported as having increased for the 43 week period to April 25 on the back of Dunelm not having to resort to excessive markdowns to clear any unwanted stock.

This has given the management the confidence to put in place a strong pipeline of new stores, which at present comprises seven planned new openings in the next financial year. This, however, looks likely to be boosted to possibly double that number as the company is well placed to take advantage of the favourable property market.

Singer Capital calculates that an additional five stores on top of Dunelm's forecasted openings would bump-up sales estimates by five per cent and profit forecasts by as much as 10 per cent. Although such a step-change in growth would require investment in the group's infrastructure, management has previously proved adept at integrations without tripping up badly like many other companies. Such a move would consume additional capital expenditure but it is likely that this would receive a positive response from the City.

The company also continues to develop its product mix and new categories continue to be added with trials being undertaken in complementary product areas. Its internet business is also in its infancy as the company is yet to even put its full range online. Although we have no actual numbers to judge how well it is doing online it must surely be enjoying decent rates of growth from what will be undoubtedly a very low base.

Unlike many other retailers that are turning to the internet to offset their flagging in-store sales the crux of the investment argument at Dunelm is still very firmly focused on physical store growth with the internet as the icing on the cake. On that basis, the company still looks a pretty tasty proposition for investors.

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