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Dunelm's attributes increasingly recognised

We've long been fans of Dunelm at The Retail Bulletin and since we last highlighted the company's virtues in June the market has gradually come to recognise the strengths in its business model. This has been further fuelled by the impressive preliminary figures that has helped push the shares up to new highs. By Glynn Davis, City editor


Dunelm's attributes increasingly recognised

Back in June the share price was around the 240p level, but with the boost from the full-year numbers they now stand at 314p, and analysts are looking to increase their profit estimates for the new financial year by between six per cent and eight per cent.

Although the pre-tax profit of £52.5 million (for the 53 weeks to July 4) was in-line with consensus forecasts the real kicker was the current trading performance with like-for-like sales up 16.1 per cent for the first 10 weeks of the new financial year (admittedly against weak comparatives of a negative 5.7 per cent).

Adding to the party atmosphere at Dunelm was the strength of its margins, which increased by 180bps year-on-year. This will have been helped by the company’s price proposition that is focused strongly on value, which results in an average basket price of less than £30.

Investec Securities reckons some of the improvement in the like-for-like performance is down to a combination of Woolworths and Roseby’s demise, tactical marketing spend, increased ranging of special buys, and growth in trading space that saw a pick-up in Q4.

The addition of space is a crucial component of the Dunelm story and it is imperative that the company keeps its store openings programme rattling along. Maybe it is telling that the ‘growing the store portfolio’ was listed as Priority 1 in its full-year results statement.

The plan is to open 12 superstores in the current year (three are already open), which Investec says equates to a space contribution of 10 per cent, but this could be notched up further if the company can take advantage of the weak property market. It has £40 million of undrawn funds that it can point in the direction of new stores.

And the good news for investors is that some of this looks likely to be spent with Adderley stating: “With little occupier demand for ‘big box’ retail warehousing space, we believe that we are well positioned to continue our store roll-out programme over the next few years.”

Singer Capital Markets believes the company has the capacity to handle 15 openings in a year, which it believes would be good news as the broker calculates that five new stores above current opening numbers would boost sales estimates by at least five per cent and profits by between five per cent and 10 per cent.

Sensibly the conservative Adderley can’t help adding in the results statement that this growth strategy will only be delivered “whilst maintaining our disciplined and demanding approach to return on investment”. This control is one of the attractions of Dunelm as you can absolutely be guaranteed that the wheels are unlikely to come off the business through unfocused capex.

One other area that is to receive investment is the online store that currently only warrants a brief mention in the full-year results statement. But it could be worth much more to the business because for the foreseeable future the company’s limited store coverage (82 superstores) means most of the population remains at a distance from any of its outlets.

Its shares on the other hand are much more accessible but after the strong rise over recent months it might be worth investors letting some of froth subside before moving in. The long-term rationale, however, for buying into Dunelm remains unaltered.

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