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Dunelm has delivered a solid, broad-based Q1 performance. Investments in marketing and higher labour costs are expected to make profits more H2-weighted, but at this early stage FY26 PBT remains in line with Board expectations, supported by cost mitigation efforts and steady top-line growth. We remain Hold-rated on Dunelm: while sales momentum continues, we believe the business will struggle to drive profit growth meaningfully above the c.+5% expected this year and on 14.4x CY26E P/E, we see better value opportunities elsewhere.
Dunelm Group plc
Dunelm^ (DNLM, NR at 1,148p) - A step up in growth
Dunelm shares have lost some ground and now trade on c.14x FY26E PE with a c.7% yield. Today’s update provides a welcome reminder of the relevance of the group’s offer with consumers, and the significant opportunities ahead. We maintain Buy, TP 1,375p.
FY25 results – Another solid year Dunelm has reported a 2.7% increase in adjusted PBT to £211m versus company-compiled market PBT expectations of £211m (range: £209m-£214m) and INVe £213.5m. This includes £5m of other operating income related to insurance receipts related to store fires and rental income (c£2m expected to be on-going). Sales have already been reported up 3.8% to £1,771m. FY gross margin was up 60bps to 52.4%, helped by strong full price sales in Q4 and a small tailwind from FX. relentless opex inflation, mainly labour, resulted in PBT margin down 0.1% to 11.9%. A FY DPS of 44.5p has been declared with a 35p special having been paid earlier in the year. This is Nick Wilkinson’s last set of results before retirement with Clodagh Moriarty taking over as CEO from 1st October. As expected, there is little new strategic news with its current 3 strategic priorities - to elevate its product offer; to connect with more customers; and to harness its operational capabilities - continuing to pay off and deliver growth. Current trading - yet to see signs of a sustained consumer recovery Management says it is pleased with the start to the current year, though it is yet to see signs of a sustained consumer recovery. It remains cconfident of gaining further market share as it progresses towards its 10% medium term market share target. Guidance is for the usual 5-10 new stores in FY26. As a result, we expect little change in consensus forecasts. Company-compiled consensus FY26 adjusted PBT is £221m (range £213m-232m) versus INVe PBT £226m. Gross margin should see a moderate tailwind from FX and a small headwind from freight in FY26 with other input costs currently broadly stable, according to management. Forecast/TP/Recommendation under review The share price is up 3%/4%/16% over 1 mth/3 mths/YTD. Dunelm is valued towards the upper end of the sector valuation range, trading on a CY26E PE c.14.9x which reflects its high quality growth history, highly cash generation model and longer-term growth opportunities, in our view. Dunelm has a strong market position, good momentum, and continues to take market share in a highly fragmented marketplace.
PBT was in line with Q4 guidance, reflecting a stronger H2 profit performance driven by accelerated sales growth and robust gross margins in Q4, partly offset by higher opex in H2. Looking ahead, while cost headwinds are set to persist, planned mitigation measures and steady top-line growth should be sufficient to underpin forecasts, which assume c.5.5% PBT growth and 5% sales growth in FY26 — achievable, though not assured. We remain cautious on Dunelm, with the valuation (15.8.x FY26E PE) leaving little room for error
Dunelm^ (DNLM, NR at 1,241p) - FY25 Results - A strong finish for Mr Wilkinson
Outgoing CEO Nick Wilkinson hands over a business in great shape, demonstrating increased relevance with customers and significant potential for future growth. We reiterate our 1,375p TP and Buy rating.
Few surprises expected in FY25 results, given the comprehensive FY update in July At its in-line FY update in July, management confirmed that it expected FY25 PBT to be in-line with company-compiled market expectations at that time, for PBT of £210m (range: £207m-£215m) vs INVe £213.5m. FY25 revenues were already reported, up 3.8% to £1,771m, with online penetration up 3pps to 40%, and management guided to the FY gross margin being up 60bps to 52.4%, helped by strong full price sales in Q4 and a small tailwind from FX. We forecast an FY DPS of 44.7p, with a special dividend of 35p already paid out post interims. Little new expected on strategy ahead of Clodagh Moriarty taking over as CEO on 1st October With Nick Wilkinson retiring and Clodagh Moriarty taking over as CEO from 1st October, we expect little new in terms of strategy with management continuing to focus on delivering against its ‘3 pillars of growth’: elevating the product offer; connecting with more customers; and harnessing its operational capabilities. We do not expect a change in strategic direction given how successful the current strategy has been in delivering market share and profit growth. The focus will be on any indication of current trading. Management last commented that demand remained volatile with no sign of a consumer recovery. If anything, the long-expected consumer recovery has been pushed out to next year given recent economic data and intense speculation around the potential for a further increase in the consumer tax burden in the upcoming UK Autumn Budget. That said, this does not mean that Dunelm cannot continue to take market share and grow. Undemanding valuation Valuation (CY26E PE c.14.1x) does not reflect the attractive cash generation and longer-term growth opportunities, in our view. Dunelm has a strong market position, good momentum, and continues to take market share in a highly fragmented marketplace.
Dunelm^ (DNLM, NR at 1,141p) - FY25 Trading: Home and Dry
This is another solid performance following a strong Q3, despite unfavourable trading conditions - clearly Dunelm is winning share. With PBT now underpinned at £210m, our prior concerns about Dunelm’s inability to offset cost inflation, have not materialised. While headwinds will persist into next year, cost mitigation and steady top-line growth seem sufficient to support forecasts, which assume c. 6% PBT growth and 5% sales growth in FY26 — achievable, but by no means guaranteed. We remain cautious on Dunelm - the valuation leaves little room for error - but given the sustained strong trading performance throughout H2, we move to HOLD
Management expecting FY24 PBT to be in-line with current market expectations Despite the continued volatility in the marketplace, Q4 was a good quarter, with management expecting FY24 PBT to be in-line with current market expectations (company-compiled consensus PBT £210m; range £207m-£215m, vs INVe £213.5m). 4Q total sales grew 4% YOY, an expected slow down on 3Q’s +6.3% which benefitted from a soft March comp last year and better weather (2Q +1.6%; 1Q +3.5%). Furniture was called out as continuing to perform well with outdoor furniture and decorative sales helped by better weather. Q4 included the summer sale. 4 new stores were opened in Q4 and the group acquired the Designers Guild brand and archive. FY total sales up were 3.8% to £1,7741m (consensus £1,748m) with online penetration up 3pps to 40%. FY gross margin is now expected to be up 60bps to 52.4%, ahead of guidance of 51.5% to 52%, helped by strong full price sales in Q4 and a small tailwind from FX. No sign of a market recovery but confident of ability to take market share. No change to our PBT estimates On outlook, management is yet to see signs of a consumer recovery, but is confident of the group’s ability to take market share. FY26 consensus expectation is for adjusted PBT of £220m (range £211m-£232m, versus INVe £227m). We expect to maintain our PBT forecast although the shape may change slightly to reflect the FY25 outcome. Awaiting new CEO in October but expect little change in strategic direction Share price is up 6.8% YTD/+1.5% 12 months. Valuation (CY26E PE c.13.6x; ordinary div yield 4.2%) does not reflect the attractive cash generation and longer-term growth opportunities, in our view. Dunelm has good momentum and continues to take market share in a highly fragmented market. Management remains focused on delivering against its ‘3 pillars of growth’, which are elevating the product offer; connecting with more customers; and harnessing its operational capabilities. Clodagh Moriarty takes over from Nick Wilkinson, who is retiring, as CEO from 1st October.
Stronger-than-expected 4Q performance underpins forecast upgrades, a solid outturn for the year. Dunelm’s long-term record remains impressive, a 15-year TSR of c.14%. Looking ahead, we believe Dunelm looks well set to continue to outperform. Reiterate Buy, TP 1,375p.
We view Dunelm as a retail coiled spring, with investment and increased capabilities placing it in pole position for eventual consumer recovery.
While this is a strong result following a softer performance in Q2, we continue to worry that Dunelm will struggle to hurdle inflationary cost headwinds and simultaneously grow PBT to £218m by FY26E - as expected by consensus. Such headwinds look set to remain elevated for the next 18 months, see recent note: Dunelm - Pushing water uphill (27 pages). Following today’s result, required Q4 consensus sales growth need only be flat for full year sales expectations to hold. However, expectations for 5% sales growth next year are by no means “in the bag” following multi-year supernormal sales growth. We nudge our PBT forecasts up by c. 1% reflecting a stronger H2 result.
Dunelm^ (DNLM, NR CP at 948p) - 3Q Trading: Digital performance drives sales
The recent market turmoil left Dunelm’s shares trading near 2 ½ year lows, now on c.12x PE with a c.9% yield. For what we view as a ‘must-own’ sector holding generating c.50% ROCE, strong margins and double-digit TSR, this represents a clear buying opportunity in our view. TP 1,375p.
In our post-results chat with the CEO, we discuss key growth drivers and the increasing confidence across the business in how Dunelm comes to market to drive active customers, frequency and, ultimately, market share. Click below to watch our video.
PBT is a touch soft and there is evidence of slowing underlying top line momentum - sales per customer fell in the period and market share gains have moderated. Still, management has done well to control opex and current trading has been ‘encouraging’. We continue to worry that Dunelm will struggle to hurdle inflationary cost headwinds (and grow profits - as expected by consensus) which look set to remain elevated for the next 18 months, in the face of anaemic top line growth, see recent note Dunelm - Pushing water uphill (27 pages). Whilst a special dividend is reassuring, and the valuation is by no means demanding (on CY25E PER 12.7x) we see a real risk of outer year profit downgrades. Separately, Nick Wilkinson, CEO, has informed the Board of his intention to retire.
Dunelm^ (DNLM, NR CP at 971p) - No change to guidance despite higher costs
1H25 performance solid Dunelm reported 0.2% growth in 1H25 PBT to £123.2m, versus Visible Alpha consensus of £124.8m. Total sales, which have already been reported, grew 2.4% to £894m. Digital continued to grow faster with 39% of total sales generated through digital channels (1H24 36%). Gross margin was up 10bps to 52.8% (1H24 52.7%) which did not offset the 50bps increase in opex/sales ratio to 38.6% (1H24 38.1%). A 3.1% growth in DPS to 16.5p (1H 16p) is proposed, with a special dividend of 35p declared. Nick Wilkinson, CEO, has announced he is retiring and will stay on until a replacement is found Reiterating FY25 expectations Management is encouraged with 2H trading to date. It has reiterated that it expects FY25 PBT to be within the range of market expectations. Company-compiled consensus FY25 PBT is £209m with a range £204m-£214m (INVe £213.5m). An acceleration in 2H performance is needed, with management confident it has levers it can pull through the P&L (e.g. gross margin is now expected to be at the top end of 51.5%-52% range) plus further space addition (5 new superstores in 2H). Management is pleased with the trading of Home Focus in Ireland, which it acquired in 1H. Taking 1H performance and the average consensus FY25 sales expectation of £1,767m and PBT of £209m, this implies 2H sale growth of 4.7% and 2H24 PBT growth of 4.1% YoY. FY capex guidance has been increased to £60m-70m (prev £50m-60m) as Dunelm is looking to buy a freehold site in the Greater London area. Valuation undemanding given cash generation and longer-term growth opportunities in a highly fragmented market Dunelm has good momentum and continues to take market share in a highly fragmented market. Management remains focused on delivering against its ‘3 pillars of growth’, which are elevating the product offer; connecting with more customers; and harnessing its operational capabilities. The share price is down 2%,12%/11% over 1mth/3 months/12 months, impacted along with the rest of the sector by a difficult macro-outlook short term, as demand remains volatile, and a material opex headwind to offset in April. The shares may struggle to perform in the short-term as a result, but we believe the valuation (CY26E PE c.11.5x) does not reflect the attractive cash generation and longer-term growth opportunities.
Dunelm has announced another 35p special dividend alongside today’s results, underpinning an 8%+ dividend yield on c.12x PE. With growth prospects likely to accelerate beyond the market’s 3-4% CAGR in the end, we reiterate Buy, TP 1,375p.
Previously, high LfL volume sales growth and modest cost efficiencies have ensured that Dunelm could increase profits – in spite of inflationary headwinds. Today, we worry that the elevated operating cost inflation, expected over the next two years, coupled with more conservative sales growth, will mean that management must now find substantial further cost efficiencies to meet FY26E EBIT consensus forecasts. In the meantime, recent Q2 trading has shown evidence of slowing sales momentum. Given multi-year high LfL sales growth, we fear there is an increasing risk that sales growth will remain subdued or even turn negative – an outcome not reflected in consensus forecasts. While the valuation (CY25E PER 12.9x) now reflects more conservative profit growth expectations, we see a real risk of outer year profit downgrades - which is not reflected in the valuation. We maintain our SELL recommendation and target price of 825p ahead of the interim results on 11th February.
Q2 sales are a touch soft at 1.6% and we worry that having defied gravity - enjoying multi-year supernormal sales growth (5yr CAGR: 9%) - Dunelm’s run may be running out of steam. Still, the market backdrop has not been helpful, and it is comforting that Dunelm has continued to gain share. That said, management’s language around outlook is vague - expecting PBT to be within ‘the range’ of market expectations. Likewise, efforts to mitigate additional labour cost pressures will occur over the ‘medium-term’. Following today’s result, pre-statement required H2 consensus sales growth is beginning to look stretching requiring +7.6% growth in H2. We downgrade our forecasts to 2% below the lower end of the forecast range and now see limited PBT growth in FY26 given the poor market backdrop, margin pressures and slowing top line momentum. The pre-statement valuation on FY26E PER 12.7x is by no means cheap. Our target price falls to 825p -11x FY26E PER, on our new forecasts. Consequently, we move our recommendation to SELL.
Solid sales performance with tight cost control over 1H 2Q total sales up 1.6% (Q1 +3.5% YoY) to £490m is a little on the weak side, we feel, given comps eased QoQ but it is still a solid performance given the generally weak consumer backdrop and there was a tough comp on a 2 year perspective so hard to forecast. Sales continued to remain volatile across the quarter with no real trends across the range. Management called out the furniture categories, which is a newer category the group has moved into, as performing particularly well, from its sofa collections through to smaller items such as dining chairs and coffee tables. Gross margin was up 10bps YoY over the whole of 1H with retail prices broadly stable. Management expects FY gross margin to be in the upper half of its guided range of 51 – 52%. No change to guidance/consensus expectation expected PBT for FY25 is still expected to be within the range of market expectations. Company-compiled FY25 PBT is £213m, with a range £207m-£217m (INVe £213.5m). The acquisition of Homefocus in Ireland at the end of November, which added 13 small stores, has an immaterial impact on numbers in the current year and the unexpected National Insurance headwind everyone faces from April will start in the current year given Dunelm’s June year end. Management comments that Initiatives to drive productivity across the business are underway and anticipates mitigating the upward pressure on costs over the medium term. Undemanding valuation We see this as a solid performance from Dunelm and we note that Christmas is not the most important time of year for the business, unlike other retailers. The share price is down 6%,16%/4% over 1mth/3 mth/12 months, with the shares hit along with the rest of the sector by a deteriorating macro backdrop in recent months and weak Christmas trading updates from the sector. The shares may struggle to perform short term as a result, but we believe the valuation (CY26E PE c.12x) does not reflect the attractive cash generation and growth opportunities. Dunelm has good momentum and continues to take market share in a highly fragmented market.
Dunelm^ (DNLM, NR CP at 1,030p) - 1H trading - sales growth in a tough market
From FY19-25E, Dunelm has delivered c.8% revenue CAGR and 9% PBT CAGR, generating £1bn of FCF and paying out dividends of £960m. Trading on 13x PE, we reiterate our 1,375p TP and Buy recommendation.
Dunelm continues to deliver strong returns for shareholders. Trading on c.14x PE, and offering a c.8% yield, the group’s double-digit TSR credentials remain as attractive as ever. Reiterate Buy, TP 1,375p.
Dunelm^ (DNLM, NR CP at 1,132p) - Upholstery on the up?
Dunelm^ (DNLM, Hold at 1,132p) - Upholstery on the up?
Not material to forecasts, we make no changes following today’s acquisition (there are no numbers in the statement either). However, this is a strategically interesting move from Dunelm. Reiterate Buy.
Dunelm^ (DNLM, NR CNP at 1,193p) - 1Q trading - Steady growth in a tough market
1Q25 – Positive start to the year Q1 total sales are +3.5% YoY, driven by volume; this was against a tough comp last year (1Q23 +9.2%) and Q424 sales +4.1% YoY. The comparative gets much softer as the year progresses. Digital sales now represent 37% of sales, up 2% YoY. Sales growth was broad-based across categories, with positive results coming through from investments in made-to-measure and click & collect, where over half of SKUs on dunelm.com are now available for collection in store. Gross margin was up 20bps with management continuing to expect FY gross margin of 51% to 52%. No change to consensus expected given so early in the year No change to consensus expected given it is so early in the year. Company-compiled FY25 PBT is £213m, with a range £210m-£218m. Trading conditions remain volatile, according to management, and they are yet to see any meaningful change in underlying consumer confidence. We see upside risk to forecasts when consumer spending habits return to normal, given Dunelm’s momentum and recent market share gains. Valuation (CY25E PE of 14.5x) does not reflects its attractive cash generation and growth opportunities in our view. Shares are down 2%/+9% on a 3 month/YTD.
Trading on c.15x FY25E PE, Dunelm shares still offer c.7% dividend yield (including the special), reflecting the group’s high ROCE and strong cash conversion. We see upgrades to be had as Dunelm continues to take share. We reiterate our Buy recommendation and 1,375p TP.
A strong start to the year suggests momentum into the important Q2 is strong. We know the summer was “flattish” when it came to general consumer activity, but momentum and trends appear to be a little more “upbeat” since the start of September. This Q1 period cover the 13 weeks ending 28 Sep and we feel trading has picked up as we move through the quarter. Looking into FY’25E, the group expects further volume driven sales growth, market share gains, 5-10 new store openings, a stable gross margin and 3-4% operating cost inflation. We believe Dunelm is a clear winner of the turmoil in UK retail over the last five years and remains geared into any consumer recovery. The shares trade at 16x 12m forward P/E multiple, 9x EV/EBITDA multiple and has delivered 7% average dividend yield including specials over the last four years which appears attractive. We remain HOLD given the relative valuation vs many undervalued peers but note the improving sentiment and momentum as we head into Christmas.
Updating forecasts following slightly better FY24 results, driven by robust sales performance (+4.1%) in a declining market and tight cost control (EBIT margin +40bps to 12.5%). It delivered volume growth (+6.2%) ahead of sales, driven by online and instore, increasing market share to 7.7% (FY23 +7.1%). Digital participation was 37% (FY23 36%) and 5 new stores were added. Upgrade FY25E/FY26E PBT by 4%/6%, reflecting FY24 PBT beat and FY25 guidance. Sales growth is expected to be volume-driven, gross margin in 51-52% range, with opex inflation of 3-4% and PBT margin broadly flat. Material market share opportunity to unlock (targeting 10% market share over medium term). Dunelm’s value proposition, with a good offer across good/better/best, continues to resonate well. It is well positioned to capitalise on a market recovery and remains focussed on 1) elevating product offer, 2) connecting with more customers via stores (5-10 a year) and digital development, marketing optimisation and personalisation, and 3) driving efficiency by leveraging scale and investing in data and tech capabilities. Strong cash generation with a well-established capital allocation framework and a history of returning surplus capital via special dividends. Whilst not in our forecasts, on current capex forecasts we estimate that Dunelm could return at least 25p-35p per annum (2.1%-3.0%) as a special dividend. With economic indicators improving, we upgrade to BUY. We believe Dunelm’s valuation (CY25E PE of 14.5x) does not reflects its attractive cash generation and growth opportunities. We see upside risk to forecasts when consumer spending habits return to normal, given Dunelm’s momentum and recent market share gains. After reappraising its growth prospects, we raise our TP to 1,285p (prev 1,000p), which is now based on a CY25E PE of 16x and supported by the potential for ongoing double digit TSR p.a..
We sat down with Dunelm CEO Nick Wilkinson to discuss the group’s growth plans, medium-term market share target, and progress in the furniture market.
Dunelm delivered a strong FY’24 with sales up +4.1% yoy and adjusted PBT up +6.6% yoy, a commendable performance in a tough end consumer market with the Group continuing to take market share. Looking into FY’25E, the group continues to see a challenging consumer environment but expects further volume driven sales growth, market share gains, 5-10 new store openings, a stable gross margin and 3-4% operating cost inflation. We believe Dunelm is a clear winner of the turmoil in UK retail over the last five years and remains geared into any consumer recovery. The shares trade at 16x 12m forward P/E multiple, 8.9x EV/EBITDA multiple and has delivered 7% average dividend yield including specials over the last four years which appears attractive, but we remain HOLD given the uncertainty in the timing of a consumer recovery.
Dunelm’s offer is resonating strongly with customers against a challenging backdrop. Continued digital enhancements and further personalisation should reap increasing benefits. With strong cash returns underpinning double-digit TSR, we reiterate Buy, TP 1,375p.
At a time when most retail updates remain negative, Dunelm has delivered another robust performance, implying continued market share gains. Against a backdrop of improving macro conditions, medium-term forecast assumptions look conservative. We reiterate Buy, TP 1,375p.
Q4 trading update, 13 weeks ending 29th June 2024 Reporting Q4 sales of £399.5m, +5% YoY versus consensus sales growth expectations of c. 3.5% YoY (Visible Alpha). This compares with growth of 2.6% YoY at Q3 and 4.5% YoY at H1. We estimate that the LfL sales growth in the period was c. 2.5% YoY - for reference, Q4 comparatives were neutral on a 1-year basis. Following ‘challenging’ trading over Q3, aside from outside furniture, management believes it has won further market share, describing sales growth as fairly consistent across all categories in the quarter. Digital sales were also strong, with Q4 digital sales penetration at 40% - a touch ahead of the Q3 YTD trend at 36%. Pleasingly, full year gross margins are +170bps (versus H1: +160bps, Q3: +60bps) and ahead of previous full year guidance (+110bps). This arithmetically implies Q4 gross margins were up as much as c. 400bps YoY in Q4 (on our estimates). The gross margin performance in H2 has been driven by lower year-on-year freight rates and a strong summer sale period. Outlook and view Management now believes PBT is likely to be slightly ahead of current market expectations for FY24, with company-compiled consensus at £200m. As such, management’s outlook, while cautious on macro uncertainty, remains confident in its ability to deliver further market share gains over the medium term. We continue to remain wary of the ‘super normal’ sales growth experienced by Dunelm since the pandemic. Expectations for sales growth next year of 6% YoY could prove demanding and we have concerns that, with c. 40% of opex relating to wages - which are growing at over 10% across the industry – margin headwinds exist here. We note that, based on today’s guidance, opex (as a % of sales) is up 160bps YoY implying 8% YoY growth across H2 (H1: +9% YoY). Should this trend continue, expectations for ‘high-single-digit’ profit growth in FY25 is by no means, ‘in the bag’.
Dunelm delivered a strong end to the year with 4Q sales up +5% yoy (consensus +4%) and full year gross margin expansion of +170bps yoy, well ahead of guidance of +110bps. In a tough end consumer market, this is a very commendable performance as the group continues to take market share. FY’24E PBT is expected to be slightly ahead of current consensus expectations of £200m. We believe Dunelm is a clear winner of the turmoil in UK retail over the last five years and remains geared into any consumer recovery. The shares trade at 14x 12m forward P/E multiple, 8.1x EV/EBITDA multiple and has delivered >7% dividend yield including specials over the last four years which appears attractive, but we remain HOLD given the uncertainty in the timing of a consumer recovery.
Q3 trading update, 13 weeks ending 30th March 2024 Q3 sales growth was £435m, +3% YoY (+9% 2YoY, +53% 4YoY) versus growth of +1% YoY (+19% 2YoY, +50% 4YoY) at Q2. (Visible Alpha Consensus Q3 sales growth expectations: +2%). Management describes the homewares and furniture markets as having been ‘challenging in the period’ and that trading conditions have continued to be ‘volatile’, with March seeing softer levels of demand. As anticipated, FX headwinds and lower freight rate benefits mean that Q3 gross margin gains have moderated to 60bps YoY (H1: +160bps YoY), albeit a touch ahead of previous implied H2 gross margin guidance to be up 40bps YoY. Consequently, in spite of Red Sea surcharges, full year gross margin guidance has been upped to +110bps (previously: +100bps). In the meantime, management is on track to hit its store opening target for FY24, with 4 new stores open to date and a further two (including one relocation) planned to open by the end of the year. Elsewhere, management has managed Red Sea disruption such that availability has remained ‘generally’ strong. Outlook: Management believe conditions remains difficult to predict but that it expects FY24 PBT to be ‘broadly’ in line with market expectations (company-compiled consensus FY24 PBT: £202m, range £200m - £205m). View Is 3% good enough at Q3? Typically, Q3 sales tend to be on average 8% below Q2 sales at Dunelm, which implies sales growth today should have been c.+5% and there is no evidence of demand being pulled forward into Q2. Furthermore, following today’s result, Q4 required sales growth is +8% YoY to meet full year expected sales growth of +5% YoY. While increased gross margin guidance is pleasing, don’t forget that opex guidance (-100bps YoY) could prove a stretch given it implies that YoY growth needs to slow to c. 6% in H2 having been +9% in H1. We note that c. 40% of opex relates to wages, which are growing at over 10% across the industry. We remain wary of the ‘super normal’ sales growth experienced by Dunelm since the pandemic. And we feel that the tone of this statement feels ‘soft’. The valuation, on 13.6x FY25E PE, offers little room for disappointment. HOLD maintained.
Dunelm has proved one of the strongest organic growth stories in the sector, despite the challenging consumer backdrop, a point reflected in the group’s 10-year TSR CAGR of 10%, or 19% over the past five years. We reiterate our Buy recommendation and 1,375p TP.
It is time digital proficiency within UK retail was given greater consideration. Many retailers have revised profit outlooks to flat for the year ahead as cost pressures continue to persist, particularly in relation to staff. Operators often purport to be digitally native but lack credentials surrounding systems suitability and/or data utilisation. We cover this throughout the note to determine whether more meaningful top line growth can be produced across our coverage. We would like ASOS to show it has made discernable progress on driving a more relevant proposition. It last reported a -9% decline in active customers and -6% decline in order frequency because of measures taken to improve customer profitability at the expense of shorter-term revenue growth. We continue to believe gross margin investment into markdown is currently ASOS’ main marketing tool, and we await further progress from its own-brand ‘Test & React’ efforts. This is expected to constitute 10% of own brand sales in FY24. We appreciate a significant amount of work has taken place to reduce stock intake and inventory from an elevated position (£1bn in 2022) but the yoy reduction in newness recorded in P4 is not conducive to establishing a credible fashion offering. We would therefore need to see this equation rebalanced going forward and reduce our target price to 390p accordingly. We consider there to be a significant degree of self-help within the business that will assist in driving growth and international potential. Principally this covers systems and warehousing projects replication following the successful scalability of Pretty Little Thing (PLT). As a result, Boohoo pursued an acquisitive strategy to form a portfolio of 16 brands. Management reaffirmed its medium-term aspirations of a 6-8% EBITDA margin predominantly through cost recovery and a return to volume growth in core markets. A phased onboarding of brands to its new US distribution facility in the year ahead (Boohoo and Karen Millen) comprise a proportion of the £125m Group cost saving programme. We undertook a thorough assessment of Dunelm’s (DNLM) digital efforts and ambitions to grow share in the Homewares and Furniture market in our thought piece, Bedding down strategic ambitions. This section therefore intends to provide a more narrowly defined consideration for digital capabilities, updated to reflect DNLM’s product and data event late last year. Management outlined a path to unlocking an additional £300m of sales in the mid to longer term (beyond 2027) at its 2023 CMD, suggesting £130-150m of PBT and a 6.5% Group operating margin. HFD is facing significant volume decline in its end markets, management now expects FY24 forecasts to be in the range of £35-40m (PGe c£37m) from £48-53m previously (~27% downgrade at midpoint). Given strong cyclicality within the business, a transition from a predominantly store-focused traditional Retail operation to harnessing a relationship-based model through Autocentres should leave HFD well positioned, if it can evidence a transition beyond ‘needs-based’ Retail. JD Sports (JD) is a well-established sporting goods retailer that has been listed since 1996. It has a strong track record of generating returns (10-year revenue CAGR ~25%) and most recent advances have seen a change to its senior management team deploy an expansionist strategy (c300 store openings planned pa), as unveiled at its 2023 CMD. We are conscious of industry pressures that have forced JD to move to a more promotional position in the market to generate sales. We initiate with a Hold recommendation and 135p TP. We appreciate on valuation grounds JD Sports trades at a discount to the non-food UK retail sector (c9x FY25 PE) but we need to be convinced at a strategy level as it embarks on further international expansion. Albeit not a marketplace per se, Moonpig benefits from the concept of cross side virality, that is recipients of its cards often become senders, increasing lifetime value and decreasing customer acquisition costs. It is well placed to gain market share as the industry is expected to see a further shift online (c15% of market value in 2022). Most recently its H1 FY24 results significantly outperformed profit expectations (+600bps above consensus EBITDA). We expect gross margin improvements to follow on from the 58.5% delivered at the interims, owing to continued operating efficiencies and a higher contribution from gifting in the year ahead. We initiate coverage with a BUY recommendation and target price of 290p, representing c40% upside. We started this note looking at developments in retail service provision, particularly aggregation which is of significance to Next’s Platform Plus and Total Enterprise Platform operations. Management has presented assumptions for continuing store operations but Online is the growth story here. We outline the significant operational progress in its approach to technical infrastructure and warehousing developments that will continue to be evidenced in the year ahead. Albeit Next trades at a premium to the non-food UK Retail sector (c11.5x) on 14.5x FY24 PE, it remains a preferred pick. Management guidance tends to be conservative (particularly at outset of new financial year) and capacity constraints have been addressed, providing momentum that should coincide with improving consumer sentiment over the course of the year. Extensive in-house digital initiatives have been taking shape at PETS since 2020 and remain central to strategic developments in the year ahead. Its Puppy & Kitten club has delivered strong growth following c4.7m new pet registrations (in the UK) since the onset of COVID. This has since extended across pet cohorts as a result of its colocation strategy (75% of Retail space exists next to Vets). Transition to its new warehouse and the associated disruption (c3% Retail LFL impact in Q2, subdued retail LFL of +3% in Q3 post rectification) was documented across the interims and the more recent Q3 update. Our more in-depth piece (Barking up the right tree?) honed in on market dynamics within Food but also took a broader look at PETS new transactional website and new practice management systems that will enhance customer data quality across the Group. Coverage across the lifecycle provides greater LTV metrics that other operators in UK retail are seeking to replicate. SMWH’s business model is a special case and one that can be characterised as defensible. It is to an extent reliant on the lack of e-commerce accessibility in Travel locations (opposing the virtual/legacy retailers we cover), particularly airside at airport terminals. Recent developments and a full separation from former parent Travis Perkins has moved Wickes to a position where it can become more digitally native. That is not to say it has not faced challenges along the way. Do-it-for-me (DIFM – kitchens and bathrooms) was impacted across Q3/Q4, with its fulfilment solution being the final software programme to transition. A slower pace of delivered sales was recorded as a result and Wickes is now facing a reduced number of leads in the market this year. Local Trade is continuing to successfully attract new customers (+18% in FY23), translating to double digit sales growth in Q4. We consider the proposition to be distinctly different from larger format home improvement retailers with large legacy asset bases. Wickes is continuing to emerge as a company with significant consumer branding attributes as opposed to being solely seen as a trade distribution channel.
DNLM HFD JD/ MOON NXT PETS SMWH WIX ASC DEBS
Dunelm Group’s (DNLM’s) H124 results demonstrated the benefits of its strategy of broadening its addressable market by strengthening the core offer and expanding into newer categories, while also growing the store base and marketing more effectively. This is driving growth in the active customer base, who shop with greater frequency, leading to further market share gains in a static market. The broadening appeal of its products is demonstrated by growth being broad-based by geography, customer age and income group.
Dunelm trades at a PE of 13.5x, for a double-digit TSR and c.8% dividend yield, with medium-term forecast assumptions remaining conservative. We reiterate Buy and our 1,375p TP.
A solid H1 performance leaves FY24 PBT expectations unchanged (PGe £204.5m). Valuation has moved more favourably over the last twelve months with DNLM now trading on 13.4x (vs c17x) FY25E PER. We are minded to await resonance of the all-important Spring/Summer product launches that should coincide with increasing consumer confidence, before moving more positive on recommendation. Management continues to demonstrate tight operational control (~50% gross margin) and we believe further embedding of dynamic enabling tools will drive customer frequency. We slightly increase our DCF derived target price to 1185p (previously 1140p) and maintain our HOLD recommendation. News: Management is pleased with H2 trading to date. DNLM’s last reported a Q2 revenue performance of +1% in January, up against a tough comparative from a strong Winter Sale, the H1 figure of +4.5% was in line with our expectations. A gross margin performance of 52.7% was preannounced with an outperformance on freight rates delivering a +160bps benefit. We note this is expected to normalise in line with the historical average across H2 to deliver a full-year increase of +100bps, as the company manages Red Sea disruption. A disciplined approach to brand marketing and product mastery has enabled DNLM to grow market share 50bps in the period to derive a joint Homewares (Furniture and Homeware) share of 7.6%. Today’s update includes an interim dividend of 16p and a special dividend of 35p, returning leverage to its target range (0.2-0.6x net Debt/EBITDA). Estimates: Our PBT expectations for FY24 remain unchanged at c£205m but we can see potential for forecast upside assuming a strong start to Spring/Summer trading. Valuation: Historically we struggled to look through near-term valuation metrics as DNLM traded on c17x PER this time last year. DNLM is a premium operator and valuation has moved more in line with the UK non-food retail sector. We are now more enthused by range formulation with shorter lead times and customisable builds driving market share. This will become more apparent with refreshed Spring Summer ranges. We expect to see DNLM’s in-house data agenda bear fruit over the balance of the year. Conclusion: We have previously expressed the benefit DNLM derives from its direct sourcing model, allowing for strong cost control whilst establishing category authority in extended ranges. We remain neutral on recommendation as consumer uncertainty remains near term, but we believe management is acting more decisively on strategic advances that are beginning to deliver improved sales densities and an uplift to customer frequency.
Initial Equity Trading Comments - 14 February 2024
Dunelm Group plc Deliveroo plc Class A
Dunelm has outperformed in a tough market. The highlight for us is that the group’s strengthening customer proposition is raising flags to signal future growth prospects, as KPIs improve. c.14x PE for double-digit TSR and a c.8% dividend yield. We reiterate our Buy rating and 1,375p TP.
Key Stocks Dunelm # (DNLM LN) (Buy, TP 1,375p) - Home & dry (Wednesday 14 February, 1H results) SEGRO (SGRO LN) (Add, TP 790.0p) - 2H23 stabilisation in values expected (Friday 16 February, FY results) Moneysupermarket.com (MONY LN) (Add, TP 305.0p) - Insurance leading the way (Monday 19 February, FY results) Bunzl (BNZL LN) (Add, TP 3,200p) - No change to FY24E guidance expected (Monday 26 February, FY results) CVS Group # (CVSG LN) (Buy, TP 2,750p) - Strong acquisition pipeline and healthy LFL sales (Thursday 29 February, 1H results) Stocks Previewed accesso Technology, Antofagasta, Bunzl, CVS Group #, dotdigital, Dunelm #, Empiric Student Property #, Gleeson, Hammerson, InterContinental Hotels Group, Jupiter Fund Management, Keywords Studios, Man Group, Moneysupermarket.com, Morgan Sindall, Pan African Resources #, Plus500, SEGRO, Shaftesbury Capital #, TBC Bank, Team17 #, TUI, Unite
DNLM PAF GLE SGRO TBCG MONY ANTO IHG PLUS JUP MGNS BNZL UTG CVSG HMSO EMG SHC ESP ACSO DOTD EVPL TUIN KYYWY
Q2, 13 weeks to 30th December 2023 Q2 total sales are up +1.0% YoY (FY24 Q1: +9% YoY) against tough comparatives last year when underlying sales grew by +14% YoY. Management believes Q2 sales were driven by volume and that it gained share in a market that was volatile. Gross margins are trending above full year guidance (full year: +100 bps YoY) and at H1 were are up +160bps YoY - having been +120bps YoY at Q1 - helped by tailwinds from lower freight rates. However, management expects gross margins headwinds in H2 but remains comfortable with guidance. Outlook and view Management expects no change to PBT expectations – the company-compiled consensus average of analysts' expectations for FY24 PBT is £202m, +4% YoY with a range of £199m to £207m. We note, that versus Q1, sales have grown +24% QoQ - in line with Dunelm’s historic trend of growing sales by c. 20% QoQ between Q1 and Q2 - and that today’s result effectively implies that total sales need to be c. +6% in H2, to meet existing pre-statement full year consensus sales growth estimates of +5% YoY. Whilst today’s result is certainly respectable, given tough comparatives following Dunelm’s strong ‘supernormal performance’ over the last three years, we worry that momentum is more at risk of slowing in the absence of any obvious catalyst to forecasts. The valuation, on 13.6x FY25E PE offers little protection in such an event.
Dunelm continues to deliver against a tough consumer backdrop. Medium-term growth expectations look conservative, especially in light of a return to new store openings, with ongoing investment in the offer driving share. 14x PE for double-digit TSR and a c.9% dividend yield. Buy.
Dunelm has delivered +1% sales growth in Q2, a performance that continues to be volume driven. FY24 market PBT expectations remain unchanged at £202m (PGe c£205m). We expect the prelims in February to reflect continuous developments in relation to digital capabilities, with the aspiration of delivering revenue generating potential medium term (digital now constitutes 37% of total sales). DNLM’s Capital Markets Event in November showcased further range engineering that will be key to unlocking category and transaction value growth. We are happy to retain our HOLD (1,140p TP) with the expectation that improving consumer sentiment coincides with Spring Summer range renewals in Q3. News: DNLM has delivered a respectable H1 sales performance of +4.5%, in line with our expectations. Heading into today’s update, management were mindful of the strong comparative period due to the timing of its Winter Sale (+18% yoy, +14% underlying). We are therefore reassured Q2 sales remained in positive territory at +1% (PGe +1.6%) and expect its every-day-low-price (EDLP) value proposition and extensive price architecture to have provided protection against a heightened promotional backdrop. Room refreshes is a category that continues to perform well (encouraging industry data versus broader market decline across Black Friday). We note its new brand marketing landed in September (Q1), generating strong community interest. Q2 saw the opening of three new stores (183 stores in total), with plans to open 5-10 over the next two years. Estimates: Our FY24 PBT expectations remain unchanged at c£205m and continue to expect a +100bps improvement yoy (+160bps in H1). We adjust our FY25 PBT forecast to £220m (£225m) to reflect additional wage costs following implementation of further national minimum wage increases. Valuation: Strong EBIT margins of 12% have long been a feature at DNLM. Beyond the current year, valuation is not demanding on 13.1x FY25 PER, we expect shares to react more positively as we enter a marked phase of increased customer appetite and the all-important Summer Sale. Conclusion: We continue to believe the competitive environment remains supportive for DNLM’s operating model. Extended range sells online and management’s attitude towards smaller concept stores remains clear cut at a time when peers are actively assessing options in Home divisions (eg. M&S). DNLM’s direct sourcing allows for category authority and the implementation of new customisable builds within Furniture, whilst maintaining strong operating cost controls. Albeit confident the opportunity remains for DNLM to grow ATV beyond £14, we are happy to stay neutral on recommendation until management are more affirmative on top line growth.
Initial Equity Trading Comments - 15 December 2023
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We discuss Watches of Switzerland, Dunelm#, Marks & Spencer, amongst others.
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Dunelm’s CMD gave insight into the group’s wider team, product development and digital capability. There were no medium-term targets and flag planting, rather we came away with greater confidence in the group’s on-going growth potential. We reiterate our 1,375p target price. On 13x PER, a clear Buy.
Yesterday, Dunelm hosted “At home with Dunelm” – with presentations on product mastery and digital capabilities. In summary, we felt the product collections on show were ‘bolder’ than usual and it is clear that there has been investment into improving the design team with evidence of talent sourced from peers, such as made.com. The digital capabilities presentation provided more of a reassurance than insight, in our view. Developing product mastery Management was keen to emphasise the strength of its design team – which consists of a network of 300 designers controlled by one team, that has grown sizably in recent years. Here, its designers are creating unique trends that tend to evolve around a central colour palette, allowing buyers to coordinate across the breadth of the offer whilst also allowing customers to create ‘whole room solutions’ and thus buy into the Dunelm brand. We learned that, while product is refreshed yearly, a typical product lifestyle can last up to three years with some classic collections such as ‘Churchgate’ lasting multiple seasons. Digital capabilities and marketing Emphasis here was on enhancing the digital experience and the showcasing of product online. Having previously concentrated on developing the back-end architecture, focus has turned to the front-end, using 3 capabilities: ‘Micro frontends’, ‘Design System’ and ‘Experimentation’. This should ensure the new website features can be released 3x faster, thus helping improve the look and feel of the website to be closer in line with pure play operators. In the meantime, 3rd party solutions such as Syndigo and Relex are helping to optimise demand and supply forecasting, enabling Dunelm to increase the size of the range being showcased online and improve availability - in stores where Relex has been deployed, availability can improve by c. 2ppts In terms of digital marketing, with its team of 50 data specialists, data and analytics capabilities are helping to provide more insight into customer behaviour, while ‘incrementality testing’ is being used to optimise marketing spend. Management is also looking to increase the depth of its customer engagement using personalisation by targeting low-propensity customers, improving open and click through rates, and providing better product recommendations from machine-leaning models.
While 1Q comparatives were weak, 9% (largely) volume driven growth provides a clear sense of the scale of momentum and traction with consumers. Trades on 13.9x PER, offering c9% dividend yield (including special). We reiterate our Buy rating and 1,375p target price.
Q1 delivered sales growth of +9%. It is early in the year, but we look forward to seeing how the next twelve months evolve from a digital infrastructure perspective, as more is outlined at the upcoming November capital markets day. We remain holders with a 1140p price target.
Dunelm^ (DNLM, Hold at 1,037p) - Strong Q1 trading amid market uncertainties
Q1, 13 weeks ending 30th September, 2023 Q1 total sales are +9% YoY, having been described as “pleasing” for the first 11 weeks of Q1 at the Finals in September. Q4 FY23 sales were +6.3% YoY. Last year, the Q1 comparative was soft (-8.2% YoY) on a YoY basis, given the postponement of the June Summer Sale into July in the prior year. We note sales are +49% versus Q1 FY20, which compares to +44% in Q4 (versus Q4 FY19) - pre-pandemic comparatives were broadly neutral. As in Q4 last year, performance has been driven by volume, and growth has been described as ‘broad-based’. One new store was opened during the quarter and a further three stores are expected to open before the end of Q2. Therefore, management believes it is on track to achieves its full year target of opening 5 to 10 stores (including relocations). Elsewhere, gross margins are +120bps YoY, in line with FY24 guidance issued at the Finals, given net tailwinds from freight and foreign exchange rates. Outlook and view Management cites that, while the environment is uncertain, it is ‘well placed to deliver ongoing sustainable growth’. As a reminder, full year consensus estimates assume total sales growth of c. 5% YoY this year, implying sales growth needs to be 4% YoY for the remaining quarters of the year. Comparatives become very tough in Q2 (LY: +17.5% YoY). Consensus FY24 PBT is £203m, +5.3% YoY. We worry that forecast momentum is likely to fade from here, as gross margin gains in FY24 are offset by opex investments - opex (as a % of sales) is expected to increase by 100bps this year. In the meantime, we were surprised by the pronounced slowing in active customer growth across H2 FY23 - when sales growth decelerated following the blowout Q2 FY23 performance. As forementioned, comparatives now become harder going forward.. The valuation leaves little room for disappointment on 14.1x FY24E PE
We suspect next week’s 1Q update will provide some momentum behind the shares, which have pulled back since last month’s final results. The stock trades on c.14x PE offering c.10% yield, including the special (4.5% ordinary). Buy, TP 1,375p.
For Home Retailers Kingfisher and Dunelm, we think the recent results were better than appreciated. For Kingfisher, the PBT miss was primarily due to one-offs while higher D&A also meant cash conversion improved. However, recent data points to UK Home Improvement are starting to normalise, whil
Dunelm Group plc Kingfisher Plc
FY23 Prelims were inline: with full year profitability impacted by well versed cost headwinds in H1 which started to abate throughout H2 - helped by further opex cost efficiencies and lower freight costs. Gross margin gains will be offset by opex investment in FY24: Going forward, while gross margins are expected to increase by 100bps YoY, opex costs will remain under pressure, owing to wage inflation and further ‘investment for growth’ which will be predominately focussed on digitalisation and brand marketing. As such, management also now expects opex (as a % of sales) to increase by 100bps this year. Opex keeps going up? We query how much of this ‘growth investment’ is merely investment required to maintain the infrastructure necessary to sustain Dunelm’s ‘total system sales’. We estimate that sales densities will have increased by as much as 46% from FY19 to FY24E, yet pre-property opex (as a % of sales) will also increase by 380bps on our estimates, see Figures 1 and 2, overleaf. Intuitively, we would have thought the step up in sales densities, in recent years, would have at least created some operational leverage. Top line momentum could now fade, rather than re-accelerate from here, in our opinion. We were initially enthusiastic (earlier in the year) that some of the momentum witnessed in Q2 FY23 - when sales increased 17.5% YoY - would continue for the remainder of the year. Instead, H2 sales slowed to a c. 6% YoY growth run-rate (despite relatively neutral pre-pandemic comparatives). We note that growth in active customers was broadly flat in H2 (as were market share gains); while implied existing customer purchase frequency improved, we wonder whether acquiring new sales is becoming harder. Going forward, sales growth comparatives become more challenging, see Figure 3 overleaf.
Following a preannounced sales delivery of £1,638m in July, DNLM has delivered FY23 PBT of £192m. We maintain our Hold and 1140p TP but are more enthused by DNLM’s decision to update the market on its ambitions in the digital arena at its CMD in November, providing support for range extensions and advancing efforts in market share gains medium term.
Dunelm^ (DNLM, Hold at 1,083p) - Slight beat; Confident FY24F outlook
Finals, 52 weeks ending 1st July 2023 Pre-reported full year sales are £1,639m +6% YoY helped by active customer growth of +2.8% and Dunelm winning +40bps of market share in combined furniture and homewares markets. PBT is £193m, -7.8% YoY and in line our forecasts (INVe: £192m, Consensus: £191m). Pre-reported full year gross margins are c. 50.1%, -110bps (H1: +80bps) as guided, with margins impacted by a return to more normal patterns of customer behaviour in Sale events, as well as the impact of higher input cost prices. Looking towards next year, management cites that it has good visibility on costs for FY24 and expects “net tailwinds” from falling material and freight prices. We note opex growth slowed in H2 to c. +5% YoY (H1: c. +10% YoY) reflecting efficiencies to offset wage inflation. Free cash flow is £160m (LY: £153m) helped by lower inventory levels (-£12m) and lower capex compared to last year. Next year management expects to increase capex as it accelerates store openings to 5 to 10 (versus 3 in FY23). The final dividend is 27p (LY: 26p) and Net debt is £31m (LY: net cash £24m) after paying £163m in dividends, including a special dividend at the Interims. Outlook and view Management is pleased with current trading and expects both sales and PBT growth - driven by volume in F24. For reference we would ordinarily expect sales to be flat QoQ in Q1 FY24, which would imply sales growth being up at least +6.5% YoY in current trading - given sales were -8.2% YoY at Q4 FY22. We note consensus expects sales to be up c. 5% YoY and for PBT to be +7% YoY in FY24, which would require just +30bps YoY of EBIT margin improvement. Looking forward, we expect the improving macro environment (falling inflation and freight rates and a lower dollar) to benefit the margin outlook, implying consensus expectations look undemanding, whilst consistent solid market share gains point to Dunelm’s strong proposition. The valuation is now 14.5x FY24 PE.
The new year has started well, with management clearly increasingly confident of converting future growth opportunities through the steady digitalisation of the business, supporting growth in stores, active customers and market share. Strong cash returns underpin c.9% yield.
Macro concerns have kept forecast assumptions conservative, 5% medium-term revenue growth and flat margins. There is upside here, in our view, underpinned by Dunelm’s clear revenue drivers. The 10-year 10% TSR CAGR deserves a premium rating in our view, Buy.
Q4 delivered +6% sales growth bringing FY23 revenue to £1,638m (vs PGe £1637m), management now expects to slightly exceed previous FY23 market expectations of £188m. DNLM’s robust operating control provides greater stability in an uncertain consumer environment with the September prelims presenting an opportunity to revisit strategic developments around the Total Retail system. Our DCF derived TP increases to 1140p (previously 1050p) with an unchanged Hold recommendation.
Initial Equity Trading Comments - 20 July 2023
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Dunelm^ (DNLM, Hold at 1,113p) - Slightly ahead
Dunelm’s sales base is c.50% ahead of pre-Covid levels, underpinned by a clear focus on the customer offer, ongoing gains in active customers and frequency. Yielding c.9% on c.14x PE, the shares remain a core Buy in our view.
Dunelm^ (DNLM, Hold at 1,137p) - Strong Q3; FY guidance reiterated
With the support of a more benign competitor backdrop DNLM’s performance in Homewares is commendable, helping to deliver +6% sales growth in 3Q against a tough comparative period. Commentary surrounding the operational performance of added fulfilment capacity in the prior year would help us form a firmer view of prospects in Furniture. We reiterate the view that a detailed Capital Markets Event would distil messaging surrounding the scalability debate further, we maintain our Hold recommendation accordingly.
Q3 trading, 13 weeks to 1st April 2023 Reporting Q3 sales growth of £423m, +6% YoY (+79% 2YoY, +49% 4YoY) versus growth of +17.5% YoY (+32.6% 2YoY, +57.4% 4YoY) at Q2. The timing of the winter sale benefitted the sales growth rate in Q2 by c.4ppts, and negatively impacted the underlying growth rate in Q3 by the same amount. On this basis, pre-covid (4YoY) underlying growth was broadly similar across the quarters. Digital sales penetration remains at 36% - in line with YTD trends and, pleasingly, new stores opened in the period have performed ahead of expectations. For reference, Q3 comparatives were tough on a one-year basis and very soft on a two-year basis (Q3 FY22: +68.6% YoY; Q3 FY21: -16.8% 2YoY) owing to store closures during periods of lockdown. Q3 gross margins are -30bps YoY (H1: -170bps), which includes a tailwind of 50bps from the timing of the winter sales. Consequently, despite a “dynamic outlook” for input prices, management’s focus on costs means it expects full-year gross margins to be c. 50%, that is, c. -120bps YoY (in line with previous guidance), which implies gross margins will be down c. -40bps in Q4. Outlook & view Management continues to expect to meet full-year market expectations with consensus PBT at £185m. Once again, Dunelm appears to be defying trends observed by other ‘pandemic winners’ - whose momentum has recently stalled. It therefore continues to win market share in all channels, which points to a strong proposition. We continue to believe that there is scope for consensus to nudge up closer towards our top-of-the-range PBT forecast at £194.5m – given the decent underlying momentum seen in Q3. The valuation is now 14.9x FY24 PE.
Dunelm continues to offer an impressive 8%+ dividend yield, underpinned by 40%+ ROCE and strong cash conversion. With earnings momentum likely to move forward in the coming months, the shares remain one of our sector top picks, backed by a material runway of market share potential. Buy, TP 1,375p.
We initiate coverage of Dunelm (DNLM) with a Hold rating and 1,100p fair value. Dunelm is a standout performer in the Retail sector, with strong growth potential driven by an own-brand focus, direct sourcing and strategic store rollouts. However, we believe the valuation already fully reflects the opportunity, with the shares trading at a c.15x FY24F P/E ratio, at the top end of the UK Retail sector. In our view, though, this is one to keep on the watch list – with a solid balance sheet and consistent earnings growth, Dunelm is well positioned to capitalise on changing consumer trends.
Dunelm's top-line acceleration came alongside better profitability, as supply chain inefficiencies dropped away. We think unchanged profit expectations reflects conservative guidance and that further proposition improvements will underpin strong sales and profit growth. We raise FY23e PBT forecasts
Q2 trading accelerates: We have been impressed by the meaningful acceleration in Q2 sales growth at +18% YoY (+48.8% 3YoY) versus Q1: -8% YoY (+36% 3YoY). Dunelm appears to be defying trends set by other “pandemic winners”, maintaining sales momentum despite tough comparatives (see Figures overleaf). Even after adjusting for the timing of the Winter Sale in Q2, we estimate underlying LfL gross profits improved from being down c. 8% YoY in Q1 to +8% YoY in Q2. … and Q2 momentum is likely to continue: We see little reason why the Q2 momentum will stall either. There appears to have been no “demand pull-forward” event accounting for the acceleration, indeed, management continues to highlight (at the interims) that growth has been broad-based across all categories and channels. Despite the broad-based trend of shoppers returning to physical stores, Dunelm’s digital sales were particularly strong in the run-up to Christmas. We also note that growth (for the 12 months to December 2022) appears to be broadly split between increased purchase frequency as well as active customer growth, with the latter likely to drive further repeat business. The addition of 10k SKU in H1 is also likely to continue to attract new customers in H2 as well, in our view. Proposition intact: We have previously harboured fears that Dunelm’s proposition was lacking. Yet once again market share is up- +160bps YoY in homewares (for the 12 months to December 2022) - with decent market share gains in both mature and immature categories. As such, management now believes there is still significant runway to increase market share further, with investment into digitalisation helping to drive further sales growth. Valuation: While the shares have enjoyed a decent re-rating of late, we believe sentiment is likely to be driven by further upgrades. In the meantime, Dunelm offers a total dividend yield of 7.1% this year and earnings growth of c. 6% p.a. (FY23E- FY25E), meaning the valuation is undemanding.
DNLM trades at 16.9x FY6/23E PER, a premium to the UK non-virtual sector on c13x. As we attempt to look through near term valuation metrics, we have continuously emphasised the need for an update to strategic ambitions (last set out immediately before the appointment of the current CEO in 2017), further digital disclosure and store renewal/opening performance before we can be more enthused by growth potential here. Management finally seems prepared to engage in such discussion albeit we consider many of the more dynamic enabling tools to be in their infancy. At this stage we are unable to decipher the implications and internal view of balancing digital versus physical assets and the returns they yield. We remain Holders with a 1050p target price.
While forecasts remain unchanged given consumer uncertainty, we see more upside than downside risk. Medium-term growth prospects remain compelling, as do shareholder returns. Buy.
Despite normalisation headwinds for Homewares, Dunelm was the fastest growing Non-Food UK Retailer over Christmas. Leading value credentials supported store performance. But more distinctly was the acceleration online as investment into fulfilment operations is delivering proposition improvements,
DNLM has held PBT expectations of £178m for FY23 after delivering c18% sales growth in 2Q. Both gross margin (51.1% in 1H) and online mix (35%) remained resilient as retailers attempt to predict more normalised underlying trading patterns emerging from the first peak trading period post-covid. Both our view and the investment case has not changed since our in-depth publication in December. We are happy to remain Holders with a 1050p target price whilst we await a strategic update to detail progress against its 2017 CMD targets and initiatives around developing a truly “Total Retail System”.
Dunelm is pursuing a huge market share opportunity, delivering 40%+ ROCE and high cash generation, with FCF coming back to shareholders through special and ordinary dividends, an 18mth yield of c.23% (PHe) .
Q2, 13 weeks to 31st December 2022 Q2 total sales have accelerated sharply and are up 18% YoY (+48% 3YoY) , (FY23 Q1: -8% YoY, +36% 3YoY). The timing of the Winter Sale benefitted sales by 4ppts in the period which reverses in Q3. Management saw broad based sales across all categories with strong growth in both stores and online. Today’s result effectively implies that total sales can afford to fall c. 7% in H2 to meet existing pre-statement full year consensus sales growth estimates of -3% YoY. By way of reference, pre-pandemic sales comparatives are broadly neutral. Gross margins are in line with guidance and were down 170bps YoY in Q2, having been -130bps at Q1, with a modest headwind of c.30bps from the timing of the Winter Sale. Management has good visibility on input costs for the remainder of FY23 as well as FX and therefore guidance for full year margin of c.50% remains unchanged with gross margin in H2 anticipated to be lower than H1 - due to the two Sale events in the period. We note pre-pandemic gross margins eased going into H2. Outlook & view FY23 guidance remains unchanged, and as such management now expects PBT to be above market expectations of £172m. Before speaking to management, we would expect FY23 consensus expectations to rise at least 10%, given the strength of the Q2 print. This is clearly a strong result despite tough pandemic comparatives, proving that Dunelm has the ability to win share in all channels without compromising margin. Forecasts, TP and recommendation placed Under Review.
Dunelm (DNLM) needs to refresh its strategy in our opinion – a lot has changed since the last statement in 2017. DNLM delivers strong cash generation and a premium EBITDA margin above the UK non-food and virtual retailers we follow. Robust cost discipline and enabling systems appear to be embedded and with functionality seemingly up to speed, we are generally supportive of DNLM’s strategy to date. Further digital disclosure is, however, needed to assess the effectiveness of DNLM’s customer acquisition to deliver its aspirational market shares of 13% in Homewares and 4% in Furniture. We reiterate our Hold rating and update our target price to 1050p.
13 weeks to 1st October 2022 Q1 total sales are -8% YoY, in line with the first 10 weeks of trading when sales growth was described as “down”, and having been +1.7% YoY in Q4 last year. Prior year comparatives were tough given the postponement of the June Summer Sale last year into July. Versus pre-pandemic levels, sales are +36% 3YoY (Q4 FY22: 36% 3YoY). Interestingly Digital participation remains unchanged YoY at 33% - albeit +14%ppts 3YoY. Elsewhere gross margins are down 130bps YoY, in line with management’s comments at the recent Finals - for gross margins to “normalise back to 50%” (LY: 51.2%). Outlook FY23 guidance remains unchanged despite the challenging macroeconomic environment. Management also comments that whilst exchange rate movements have been particularly volatile in recent weeks, Dunelm is well hedged for the remainder of FY23. View As a reminder, full year consensus estimates assume that total sales growth will be broadly flat this year. Following today’s print, total sales growth for the remainder of the year will need to be c. +3% YoY for full year consensus sales to be met while the comparative over Q2 and Q3 get tougher going forward on a 1 year basis. Expectations are therefore starting to look stretching. While Dunelm’s healthy market share performance indicates an intact proposition, cyclical pressures are mounting. However, the valuation on 11.1x FY23E PE looks undemanding versus historic levels.
Dunelm shares trade on 10.8x PE, and offer 5.3% ordinary yield. On a three-year view, we forecast >40% ordinary and special yield.
We regard Dunelm’s category (Homewares), leading value credentials, strong market share momentum and historically stable margins as offering a more defensive earnings outlook than that currently appreciated. In particular, we take comfort from the strong earnings performance and early bounce in the
Just a minute We have just a minute to discuss each of our topics. This week: • The savvy consumer • Dunelm’s# shopping list • The week ahead with JD Sports# John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Ruben.Pathmanathan@peelhunt.com #Corporate client of Peel Hunt To watch this week’s episode of Just a Minute, please click the image below
DNLM JD/ DFS
53 weeks ended 2nd July, 2022 Pre-reported full year sales are £1,553m +16% YoY (+47% 2YoY). PBT is £209m +32% YoY and in line with our forecasts. Pre-reported full year gross margins are 51.2%, -40bps (H1: +80bps) - due to the extra Summer Sale in the year. Free cash flow is £153m (LY: £108.5m), helped by strong cash generation despite some investment into inventory - which is c.+30% YoY - owing to building up inventories to mitigate supply chain disruption earlier in the financial year. The final dividend is 26p (LY:23p). Net debt is £23.8m (LY: net cash £128.6m) after paying £282.1m in dividends including a special dividend of £207m. Outlook Following the “solid” start to July, trading remains “robust” for the first ten weeks of the year. However, sales are currently “down” YoY having been -6.5% YoY at Q4 FY22. In the meantime, management remains mindful of inflationary pressures and continues to expect gross margins to return to their long run average in FY23 (c. 50%). However, management expects to meet consensus expectations (consensus FY23 PBT: £178m). View Previously, we had concerns that Dunelm’s proposition lacked authority, leaving it exposed to potential structural pressures, yet its consistent trading outperformance throughout FY22, coupled with market share gains of 140bps YoY in the Homewares, and healthy active customer and sales per customer growth - up 8.5% YoY and 7% YoY respectively – has assuaged such concerns. However, with wider macro-economic pressures mounting, market forecasts may not be reflecting such risks. We note that pre-statement consensus continues to expect flat YoY sales growth this year (despite tough two-year comparatives) with growth returning to +4% YoY in FY24, as well as pre-tax margins declining just 200bps. With this said, the valuation on c.10x FY23E remains undemanding. It is difficult to balance the risk of further forecast downgrades against a valuation that appears to price in much of this risk, but at this juncture we are wary of turning more positive. HOLD
Record FY22, resilient current trade Dunelm’s 4Q in July confirmed the record end to FY22, with a final upgrade of PBT expectations to £209m, up c.35% YoY. 1Q trading is down against last year’s strong reopening, exacerbated by the hot summer and non-consistent sale timing. Still, performance is said to be robust, with the business on track to hit market expectations for FY23E. There is no sign of trading down, or weakness in any category. Indeed, Dunelm enters FY23E with record brand awareness, active customers and an intent to double down on value. We see strong market share growth and a 35+% three-year dividend return. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Ruben.Pathmanathan@peelhunt.com
FY22 in the bag With full year sales growth pre-reported (at +16% YoY) we expect PBT to be £210m - in line with recent guidance, meaning Dunelm is likely to have achieved its best margin performance in 6 years - despite inflationary headwinds arising in H2 and elevated online penetration levels - now at 35% (versus 20% in FY19) - which we had previously worried would dilute margins at the contribution level. Preliminary FY22 results are scheduled for 14th September. All eyes on FY23 Since the pre-close statement in July, we worry that headwinds have worsened in terms of inflationary pressures, higher energy costs and now weaker sterling. Further still, with holiday behaviour normalising and unseasonably hot weather over the summer period, top line performance is likely to have deteriorated since FY22 Q4’s -6% YoY, especially given that Q1 last year was buoyed by the summer Sale being delayed from Q4 FY21. View We note that consensus continues to expect flat YoY sales growth this year (despite tough two-year comparatives) with growth returning to 4% YoY in FY24, as well as pre-tax margins declining just 200bps. If trading has deteriorated more in Q1 (than in Q4 FY22), then LfLs will need to be modestly positive for the remainder of the year, in order for top line forecasts to hold. Further still, we note in yesterday’s ABF Foods update, that higher energy costs (now 4x higher than pre-crisis levels) are likely to negatively impact margins by c. 200bps alone in its Primark business. Previously, we had concerns that Dunelm’s proposition lacked authority, leaving it exposed to potential structural pressures, yet its consistent trading outperformance throughout FY22, and more recently in Q4, assuaged such concerns. However, with wider macro-economic pressures mounting, market forecasts may not be reflecting such risks. With this said, the valuation on 9.7x FY23E remains undemanding. It is difficult to balance the risk of further forecast downgrades against a valuation that appears to price in much of this risk, but at this juncture we are wary of turning more positive. HOLD
A tough consumer backdrop plays to Dunelm’s value credentials, enhancing market share potential. We forecast a three-year dividend yield of 31-46% across our scenarios.
Prior concerns: We had previously been concerned that Dunelm’s strong performance during the pandemic (sales are up over 40% since FY19) would prove short-lived, with demand likely being pulled forward from outer years. With Covid restrictions easing this year, we further worried that consumers would start to switch spending back to leisure categories. Such a trend appears to be evident at other home and furniture retailers – we note several high-profile profit warnings recently, including Made.com, Maisons du Monde, Westwing, Home24 and Procook. Yet Dunelm appears to be bucking the trend, given FY22’s performance - especially in Q4 (and in current trading) given tough comparatives and a challenging macro-economic backdrop. It is clear that Dunelm’s run of consistently winning market share has continued, signalling that its proposition is more robust than we had feared. PBT also points to a strong margin outcome this year: with FY22 PBT expected to be c. £210m, Dunelm is likely to have achieved its best margin performance in 6 years – despite inflationary headwinds arsing in H2 and elevated online penetration levels - now at 35% (versus 20% in FY19) - which we had previously worried would dilute margins at the contribution level. Forecasts and valuation: We make small changes to our forecasts reflecting growing margin pressures building next year as well as factoring in softer top line growth in FY23E. We still believe that there is a risk to consensus forecasts - which assume top line growth of 4% to 5% p.a. (FY22 – FY24 CAGR). However, the valuation is now on a historically low multiple at just 11.5x FY23E PE implying material downgrades are expected - which may prove to be too pessimistic an assumption.
4Q Trading Update
Q4 trading update, 13 weeks ending 25th June 2022 Full year sales £1,552m, +16% YoY (+47% 2YoY), with Q4 sales of £358m, -6% YoY (+90% 2YoY). Consensus expectations for FY22 sales were £1,550m (+16%YoY) and discrete FY22 Q4 sales at £355m (-6.5% YoY). This follows quarterly sales growth of Q1: +8.3% YoY (+48.1% 2YoY), Q2: +12.9% YoY (+26.2% 2YoY), Q3: +69% YoY (+40% 2YoY). Q4 comparatives were tough on a one-year basis – given re-opening of stores following closures in Q3 last year. However, comparatives were soft on a two-year basis, with sales down 28.6% YoY in Q4 FY20 when stores were closed in the period. Full year gross margins are broadly in line with expectations at 51.2%, -40bps (H1: +80bps, Q3: +30bps) implying Q4 gross margins of c. -350bps against tough comparatives - gross margins were +460bps in Q4 last year after Dunelm delayed its Summer Sale into Q1 FY22. Outlook Management expect FY22 PBT of £207m – broadly in line with consensus expectations, and trading in the first half of July has been “solid”. Management is mindful of inflationary pressures and now expects gross margins to return to their long run average in FY23 (c. 50%). Our View Q4’s performance shows resilience as does current trading - clearly Dunelm is winning market share which points to a strong proposition. While margin pressures are being factored into consensus forecasts, we still believe that top line sales growth expectations look demanding with consensus expecting a further c. 4% to 5% p.a. growth (FY22 - FY24 CAGR) on top of exceptionally high growth in FY21 and FY22. However, the valuation - now on 10.9x FY23E PE - implies material downgrades which may prove too pessimistic.
Dun well: 4Q sales beat Dunelm’s 4Q sales performance came in a touch ahead of expectations. There is no sense that momentum is faltering as the group continues to take market share, guiding to full-year PBT of £210m, marginally ahead of our £206m forecast. The new non-exec, Alison Brittain, current Whitbread CEO, looks like a very high quality recruit. Nerves persist regarding a consumer retreat in the autumn, but Dunelm’s cash flows currently indicate a potential dividend pot of £650m to FY25, a 40% yield. Cash attraction aside, Dunelm typically accelerates market share gains in tougher trading environments. On 10.6x PE, it is a clear Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Ruben.Pathmanathan@peelhunt.com
Get it Dun: Outstanding cash returns Dunelm accelerated market share gains over the financial crisis, growing revenues while the market declined. Today, it benefits from 96% brand awareness, strong digital capabilities and a much broader customer base. Our forecasts point to a cumulative dividend pot of c.£650m to FY25, a c.40% yield. Given the inherent cash generation of the model, the level of return is compelling even on materially more cautious forecasts. We believe the medium-term prospects are outstanding, driven by the group’s strong value credentials and wider customer proposition. Buy on 10.5x PE, 10% FCF yield. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com, Ruben.Pathmanathan@peelhunt.com 24-page note
Q3 trading, 13 weeks to 26th March 2022 Reporting Q3 sales growth of £399m, +69% YoY (+40% 2YoY) versus InvE: £375m, +58.7%YoY, (+32% 2YoY), and growth of +8.3% YoY (+48.1% 2YoY) at Q1 and +12.9% YoY (+26.2% 2YoY) at Q2. Q3 comparatives were very soft on both a 1-year and 2-year basis (Q3 FY20: flat YoY; Q3 FY21: -16.8% YoY) owing to store closures during periods of lockdown. Gross margins were +30bps (H1: +80bps), which was ahead of management’s expectations owing to a slightly lower proportion of sales from discounted lines during its Winter Sale. Consequently, full year guidance for gross margins is to be flat YoY versus down 30-50bps previously - implying gross margins will be down c. 200bps in Q4. Keep in mind that gross margins were +460bps in Q4 last year with Dunelm delaying its Summer Sale. During the quarter, net debt was £14m (LY net cash: £40.2m) after payment of the £75m special dividend announced at the Interims, and inventory levels are £224m (LY: £193m) with management building a higher level of inventories to mitigate against ongoing supply chain disruption. Outlook Following the confident outlook delivered at the Interims in February, management continues to expect to meet full year market expectations with consensus PBT at £207m View Going forward, the cost outlook will become tougher, in our view, and sales comparatives will start to become harder in Q4 (certainly on a 1-year basis). We continue to believe that recent elevated demand has brought forward sales from outer years, therefore sales growth expectations look to be a stretch - with consensus expecting a further c. 5% p.a. growth in both FY23 and FY24 on top of exceptionally high growth in FY21 and YTD FY22. We feel there is a real risk consumers either divert spending back towards leisure (given the lifting of Covid restrictions) or hold back spending given the growing “cost of living” crisis. Whilst the PE valuation on c. 14x FY23E is by no means demanding, the downgrade risk is growing from here, in our view.
3Q beats on sales and margins, gaining market share 3Q revenues are up 69% YoY, 40% against two years ago, and came in c.£15m ahead of PHe. Gross margin were also up 30bps YoY, with full year guidance now lifted to flat margins (vs PHe -50bps), but we are leaving our forecasts unchanged to reflect increased stockholding costs. Dunelm is running away with it; our FY23E sales are up 50% against FY19, EBIT is 68% ahead. Market share continues to build quickly, while Dunelm generates a 35%+ ROCE, an 8% FCF yield. In our view a tighter consumer environment is likely to drive an acceleration in Dunelm’s market share and on c.13x PER, Dunelm is a clear Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
New CFO appointed, 3Q trading preview Dunelm has announced the appointment of Karen Witts as CFO. Karen joins the board on 9 June, and is a seasoned CFO with extensive sector experience. There was no trading update today; the 3Q statement is due to be released on 14 April. We expect 3Q to have been another strong quarter for Dunelm, up nearly 30% on pre-Covid levels. Dunelm’s consumer relevance and market share gains are plain to see. A growing active customer base, increasing value credentials present an opportunity to build share in a tightening consumer environment. Trades on just 13x PER, with a huge yield (c.18% ord & spec potential). Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
26 weeks ending 25th December 2021 H1 PBT is £140.8m (H1 FY21: £112m, H1 FY20: £84m), in line with recent upped H1 guidance which implies a PBT margin of 17.7% (H1 FY21: 15.6%, H1 FY20: 14.3%). This also implies that an H2 PBT outcome of £57.2m (H2 FY21: £45.4m, H2 FY20: £25.5m) is required to meet full year current PBT consensus (FY22: £198m). H1 sales (akin to LfLs) were pre-announced at +10.6% in H1 (Q1: +8.3%, Q2: +12.9%). Similarly, pre-announced gross margins are up 80bps in H1 (Q1: -10bps, Q2: +160bps) and full year guidance (for gross margins to be down 30-50 bps) remains unchanged – implying that gross margins are expected to be broadly “flat” in H2 on our estimates. As such, IFRS 16 opex looks to be c. -170bps 2YoY, driven by operating leverage and despite online penetration being +13%pts 2YoY. In line with our expectations, given the strong performance on costs in H1, management expects opex (as a % of sales) to be slightly less than previous medium-term guidance (at 38% of sales) this year, allowing for some investment in the proposition and expected higher digital penetration in H2. As pre-announced, net cash is £48m (H1 FY21: £141m) with inventories at £204m (FY21 H1: £167m; FY20 H1: £157m), reflecting stock build to counter supply chain disruption. Outlook: Sales to date in H2 are “encouraging” and are in line with H1 2YoY trends (i.e. +36%). Comparatives in this period are very soft on a 1-year basis (sales were down 17% last year) following store closures last year. Therefore, management continues to expect to meet recently upgraded PBT guidance and given the net cash position, in line with historic trends, management intends to pay a special dividend of 37p. View There is little new news in today’s interims, although clearly the drop-through margin on additional sales in the period looks impressive despite higher online penetration. Going forward, the cost outlook will become tougher in our view and sales comparatives start to become harder in Q4 (certainly on a 1-year basis). We continue to believe recent elevated demand has brought forward sales from outer years, therefore sales growth expectations look to be a stretch – especially if consumers divert spending back towards leisure. We would like to see further evidence of sustained momentum before we can become comfortable with the PE valuation on c. 17x CY22E (see initiation note here).
Interim results Dunelm’s interims were in line with upgraded guidance. The surprise was a second special dividend in six months, another 37p (c.£76m), giving confidence in our view that Dunelm offers a 19-month yield of 19%, on 15.6x PE. Once again, management brings greater insight into the scale of market share gains and customer penetration, which only serves to highlight the potential ahead. Dunelm is moving in tandem with consumers, as range investment and strong value credentials, supported by capacity investment and improved infrastructure is driving online traffic, in-store sales densities and engagement. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com 2-page note
H1 sales remained robust despite a) loosening Covid restrictions – more consumer spending towards leisure vs home improvement and b) Omnicron fears in December, impacting footfall over Q2. Nor, it would appear, have sales been buoyed by any significant step up in marketing, or has discounting been used to drive demand, given the strong gross margin performance (+80bps in H1). Dunelm has clearly continued to win further market share, with performance driven by new customers and sustained spending levels from existing customers, while basket sizes have remained flat as we understand it. H1 PBT margin performance has also been strong with H1 PBT now expected to be £140m, implying that PBT margins will be 17.6%, +200bps on a 1yr basis (+330bps on a 2yr basis), this despite margin dilutive online participation up 13ppts vs. 2yrs ago, at 33%. With gross margins contributing to only some of this performance (+80bps), it is clear that Dunelm is now finally benefiting from operational leverage coming through, perhaps from its investment into its online proposition and its spend on logistics, IT and tech? Questions and forecasts: We upgrade forecasts by c.17% this year and by c.11% next year, implying broadly flat profit growth in FY23E (see details overleaf). So what is Dunelm doing right? Has it benefitted from reduced competition? Has it held back investment into its proposition to defend margins? How is it mitigating cost pressures so effectively? To some extent the Q2 period has benefitted from softer 2yr comparatives – we note there has been some cooling in sales growth momentum versus 3yrs ago (see Fig 1) - however, we would not wish to be accused of being churlish. Perhaps we are “tilting at windmills” with our pessimism but we still feel, given the current fast changing environment, that more evidence of sustained momentum is required to assuage our valuation concerns. Our TP moves to 1150p (from 1000p). Maintain Sell.
Q2, 13 weeks to 25th December Against a softer comparative - on both a 1-year and 2-year basis - Q2 total sales (akin to LfLs) are up +12.9% YoY or +26% 2YoY (FY22 Q1: +8.3% YoY, +48% 2YoY). Performance in the Q2 points to market share gains and performance has been broad-based across all categories, particularly furniture. H1’s result implies that total sales would now only need to be c.+8% (+41% 2YoY) in H2 to meet existing pre-statement full year consensus sales growth estimates of +9.5% YoY. Strong sell through has meant gross margins are up +160bps in Q2 (Q1: -10bps, H1: +80bps) such that management now expects full year gross margins to be down -30bps to -50bps (previously down -50bps to -75bps), implying that gross margins are expected to be “flat” in H2 versus down c. -100bps to -150bps in H2 previously, on our estimates. Management expects that it will be able to largely mitigate the impact of inflation on commodity costs and freight rates by working closely with suppliers and managing the mix. Elsewhere net cash was £48m (LY: £141m) and inventories are £204m (LY: £167m) implying good stock availability. Outlook: Management now expects H1 PBT of £140m (H1 FY21: £112m, H1 FY20: £84m) and as such expects full year PBT to now be materially ahead of expectations (£167-£190m). View Our prior concern has been that if spending on home improvement begins to normalise back to pre-pandemic levels - as consumers likely switch spending back to leisure - Dunelm would struggle to maintain positive momentum as expected by market forecasts. In our recent note, "Navigating around a cul-de-sac", 07/10/2021, we believed that outer year consensus sales and profit expectations looked stretched, given the likelihood that recent elevated demand has been pulled forward and that growing the active customer base (predominately through the online channel) would prove costly, while a margin dilutive channel shift could mean that returning margins back to pre-pandemic levels could prove tricky. While we still harbour concerns, clearly the strong trading performances in Q1 and Q2 negates our negative view and while the valuation on 20x CY22E PE is by no means undemanding, the H1 performance points to material upgrades. Momentum is clearly in Dunelm’s favour for now. We put our recommendation under review.
Record 2Q update driven by strong market share gains Dunelm is a business on form. The customer proposition continues to resonate strongly with consumers, reflecting strong range curation, value credentials and accelerating digital capabilities. YoY growth of 13% is ahead of our forecast expectations and the underlying market, while strong sell-through in seasonal product increases GM by 160bps in the quarter. 1H profits are expected to come in at £140m, c.£18m ahead of PHe; we upgrade FY22E PBT by £27m to £206.1m. With continued momentum across the business, we see growth in actives and share of wallet driving market share gains. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Dunelm shares appear to have reacted positively to the improved outlook at Maisons du Monde (“MdM”, Not Rated), despite MdM operating in different markets. Even so, we would still highlight that MdM’s outlook remains sobering, with new guidance implying 2YoY LfLs and margins will be down significantly for the remainder of the year. We retain our Sell on Dunelm. Brief summary of MdM Q3 trading, (3 months ended September) Q3 LfL sales were -3% (+6% vs FY19) having been +35% during H1 (+12% vs FY19) following tough comparatives in Q3 last year. Growth was driven by online in France and stores abroad. Most significantly, the full year outlook improved with management now expecting total full year sales growth of “up in low teens” (previously “up high single digit”) and, despite management highlighting visible cost pressures, FY EBIT margins are now expected to be between 9% and 9.5% vs previous guidance of +50bps at 7.9%; we note EBIT margins were up materially in H1. Read-across/our view Whilst MdM operates in different markets, Dunelm shares appear to have responded positively. It might be argued that given MdM’s improved outlook, the trend towards home improvement that arose during the pandemic is being sustained in Europe and that industry-wide global supply chain issues are no worse than feared. Can the same be said for the UK? We would remind investors that whilst the outlook at MdM has improved, new guidance still implies that 2-year LfLs will be down by around 10% in Q4 with 2-year EBIT margins down 290bps in H2 (versus c.-540bps previously) - see overleaf for further details. On this basis, MdM management clearly expects the trend towards home improvement is likely to normalise closer to pre-pandemic levels and that margins will sharply deteriorate in H2 owing to cost pressures. Conversely, at Dunelm, consensus assumes LfLs will grow c. 8% this year (with further moderate growth thereafter) - despite a bumper FY21 when LfLs were up c.26%, implying LfLs are up significantly on a two year view. We continue to believe that such expectations are demanding if spending on home improvement begins to normalise back to pre-pandemic levels, as consumers likely switch spending back to leisure. We note there are already signs of ‘lockdown winning’ categories seeing slowing growth, as evidenced in BRC data and recent results reported by, inter alia, ASOS, boohoo, AO World and Next Homewares. See our recent initiation report (Navigating around a cul-de-sac, 07/10/2021) for further details.
Q1, 13 weeks ending 25th September Q1 total sales are +8.3%, in line with the first 10 weeks of trading – when sales growth was described as up in “high-single-digit” territory (as we understand). As a reminder, full year consensus estimates assume total sales growth of c. 9.5% and we note Q1 benefitted from the postponement of the June Summer Sale into July. As expected, gross margins were down 10bps, reflecting the Summer Sale timing impact which was offset by a higher mix of full price sales, and sourcing gains to offset anticipated cost price increases. Full year guidance remains for gross margins to be down 50bps to 75bps, but management also now expects H1 gross margins to be “flat to slightly up” implying gross margins are expected to be down c. 100bps to 150bps in H2 given the period will contain two Sale periods. Elsewhere, net cash was £209m (LY: £175m) and inventories were £168m (Q1 FY21: £136m, Q1 FY20: £161m) implying good stock availability. Outlook: Management is mindful of industry-wide supply chain disruption and inflationary pressures building, but believes it has some relative immunity given “a lower proportion of seasonal ranges within its offer”; as such, it expects to meet full year expectations. View Going forward, we estimate that total sales will need to be c. +10% for the remainder of the year for full year consensus expectations to be met, and whilst comparatives ease over the remaining three quarters we still think expectations are demanding if spending on home improvement begins to normalise back to pre-pandemic levels, as consumers likely switch spending back to leisure. We note there are visible signs of ‘lockdown winning’ categories already showing signs of slowing growth, as evidenced in BRC data and recent results reported by, inter alia, ASOS, boohoo, AO World and Next homewares. As outlined in our recent initiation (see here: Dunelm: "Navigating around a cul-de-sac", 07/10/2021), we believe that outer year consensus sales and profit expectations look stretched given the likelihood that recent elevated demand has been pulled forward and that growing the active customer base (predominately through the online channel) will prove costly, while a margin dilutive channel shift could mean returning margins back to pre-pandemic levels will prove tricky. Recent industry-wide margin headwinds are another yet headache. On 18.8x CY22E PE, in our opinion the valuation provides little protection against the risk of downgrades.
1Q trading update confirms strong positioning for peak Dunelm’s 1Q update adds three weeks of trading data to the positive commentary and upgrades from September, confirming 8.3% growth, outperforming the homewares market. Dunelm is moving into peak with good stock availability. Trading on 18x PE, offering a 30% ROCE, double-digit EPS growth, 7% yield and ongoing market share gains, we believe Dunelm is well placed to keep outperforming. Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Growth and sustainability We sat down to discuss Dunelm’s growth prospects and ESG credentials with CEO Nick Wilkinson following the recent release of FY21 results and upgrades. The short video in this note covers Dunelm’s growth prospects and a discussion around Dunelm’s ESG journey and the need to take the consumer with them, another instance of how investors and companies appear to be the agents of change, rather than the consumer. We continue to see upward pressure on numbers as Dunelm’s market share moves towards 10%, driving double-digit EPS growth and a combined prospective dividend yield of >6%. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com Click on the image below to watch our interview with Dunelm’s CEO .
FY21 Results home work
Final results: upgrades & dividends The FY21 results came out in line with 4Q’s upgraded guidance. The board has declared full-year ordinary dividends of 35p and a 65p special, a combined yield of c.8%. Despite stores being closed for 35% of trading days, total revenues increased by 26% YoY and market share increased by 160bps. Current trading momentum is also tracking ahead of expectations, with growth across all channels despite tough comparatives, the catalyst for 8.4% profit upgrades today. Trading on 18x PE, offering a 30% ROCE, double-digit EPS growth, 7% yield and ongoing market share gains, Dunelm is just getting started. Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Dunelm shares are -9% since their 4Q trading update with investor concerns around the 4Q exit rate and increased FY22 investment. We think these concerns are overdone, pointing to evidence to support ongoing share gains which demonstrates strong returns on investment and leave outer year forecasts
Strong start, strong finish . . . Dunelm’s 4Q trading update showed revenue up 43.9% against 2019, well ahead of the homewares market and broadly in line with our last upgrade from mid-quarter. However, gross margins were also up 460bps on FY20, reflecting a lack of sales period, much stronger than expected. The net result is that PBT for FY21E is expected to be c.£158m, £9m ahead of our previous forecast. Accelerated investments are planned to support growth next year, although we still upgrade PBT forecasts by another c.£3m. Our cash forecasts support ordinary and special dividends of over £350m (>12% yield) over the next 14 months. Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Trading for the first 7 weeks of 4Q was +59% vs 2019, with significant market share gains since stores re-opened. With visibility growing on the recovery of its predominantly out-of-town store estate and with the digital business continuing to evolve, we have growing conviction in the outer-year ma
Exploding out of lockdown; strong trading drives upgrades Dunelm has seen two-year sales growth of 59% for the first seven weeks of Q4 (stores only open for five weeks), with margins benefiting from a lack of discounting/sales periods. Online and store sales remain buoyant as pent-up demand, good shopping weather and consumer spending power met Dunelm’s strong customer offer, mopping up market share. We upgrade FY21E PBT by c.15% to £149m, with FY22E upgraded by c.4% to £162m. Trading conditions are clearly favourable, but Dunelm continues to outperform materially, growing its active customer base and existing customer spending levels. Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Everything your Newcastle needs We visited the Newcastle-under-Lyme store this week, which represents the group’s latest thinking on store format and merchandising. It is a great store; this is not about new-fangled concepts, rather the store is lighter and brighter, more spacious, easier to navigate and there has been a step-up in merchandising. The new decor and make & mend departments show promise, but fundamentally this is a store that customers should find more compelling and inspirational. As an aside, the store and the retail park were busy; the consumer is out shopping and Dunelm is leaping out of lockdown. Maintain Buy and 1,600p TP. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com To watch the video of John discussing Dunelm, please open the note and click on the image like the one below. 9-page note
Management expanded on comments at the Interims of “never been more confident about the future”. The resilient 3Q performance illustrated the step change in their digital proposition, which has been unlocked by investment into technological and operational infrastructure. Management is confident th
On your marks, get set… Dunelm’s Q3 sales were stronger than expected, representing over 83% of PY revenues despite all stores being closed for the majority of the quarter. We’re upgrading FY21E PBT by 8.4% or £10m as a consequence. With stores reopening next week, we are confident of a strong customer response; back in H1 Dunelm’s sales growth was more than double the market growth rate of c.10%. Further digital improvements, range development and new customer recruitment all point to a market-beating performance ahead, with net cash on the balance sheet a pre-cursor to a potential autumn special dividend. Buy. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Interim results highlight a stronger business Dunelm’s H1 performance has been outstanding. While headline numbers have already been guided to, it is the market data (Dunelm categories +21% vs market +9.7%), and growth in customer activity (2x traffic, higher conversion rates, growing NPS, scope for increased frequency) which demonstrates a business with momentum which far exceeds any macro trends. There’s a lot going on, and management continues to build on digital capabilities and the wider product offering, coupled with increased focus on sustainability. The interim dividend is back, with a special expected to follow. BUY. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Dunelm is set to emerge from COVID as a bigger, better business. Its timely launch of the new web platform in Dec 19 meant the business was well placed to capitalise on the step change in online penetration. Dunelm now operates a leading store and online proposition, completing its Total Retail tra
Strong 2Q despite lockdown Dunelm has announced 2Q sales of £360m, up 11.8% YoY, pretty much in line with our original forecast despite November’s lockdown and the advent of Tier 4. Customers shifted online, with digital sales more than doubling, including c.30% of prior year sales being covered by click & collect when stores closed. After repaying furlough, 1H PBT is expected to be up 34% YoY, actually ahead of FY20. With the majority of stores now closed and Dunelm not taking furlough funding, we downgrade FY21 PBT by c.£40m to c.£120m, but make no changes to future years noting Dunelm’s accelerating market position. John.Stevenson@peelhunt.com, Jonathan.Pritchard@peelhunt.com
Dunelm has reported total sales growth of 6.2% and LFL of 5.0% for 2Q, comprising in-store LFL of 1.2% and online LFL of 32%. This compares with 2Q 2018/19 in-store and online LFLs of +5.7% and +37.9%. It has also reported Gross Margin up by 110bps against +190bps in the corresponding quarter.
Dunelm Group (DNLM LN) Positive performance puts paid to previous problems – shares to rise | Liontrust Asset Management (LIO LN) Good flows but uncertainty prompts caution | N Brown Group (BWNG LN) Unchanged FY EPS but Product sales weak. FCF/DPS hit by more PPI | Renold (RNO LN) H1 trading in line, FY19 expectations reiterated
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Dunelm’s new CEO is taking steps to address recent underperformance and build the core brand. These include closing or selling the loss-making Worldstores (WS) businesses; developing a new web platform and introduction of ‘click and collect’; and launching a marketing campaign to raise the brand profile and acquire new customers. Assuming plans are executed successfully, we see upside to consensus forecasts.
Dunelm Group (DNLM LN) Resilient Q4 sales but heatwave means higher Sale stock (4% d/grade) | Liontrust Asset Management (LIO LN) FuM +9% in Q1, forecasts unchanged | Mobile Streams (MOS LN) Full year update | ReNeuron Group (RENE LN) In-line FY results highlight hRPC deal & upcoming Phase III start in Stroke | Xaar (XAR LN) Joint investment with Stratasys in newly formed Xaar 3D Ltd
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After an unscheduled warning in May, guidance prudently baked in a continuation of weak end-market demand and consensus EPS reduced by 7%/9% in FY18/FY19 respectively. It would be premature to say this was purely weather-led, but John Lewis weekly data certainly supports this argument. Either way, tough conditions are forcing capacity out of what is still a highly fragmented market with share up for grabs. Mothercare’s downsizing highlights this and Dunelm’s ambitions for Kiddicare are likely to be met quicker as a result. Executing a more extensive roll-out in FY19 will be key to capturing the £10-15m EBIT (c80% RoIC) that potentially exists in the brand.
Dunelm Group (DNLM LN) Kiddicare - competitor closures and sales transfer | Harwood Wealth (HW/ LN) Interims in line, returns from consolidation continue |
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Dunelm has reported positive Q3 trading today. LFL growth of 4.6% included 1.2% in-store and 35.7% online. While this included a small Easter timing gain (of c0.5%), this performance is considerably better than the market had feared/been pricing in. The group’s store/service strategy and step-change in online capability means strong share gains are being made as it further distances itself from the discounters and independents in what remains a highly fragmented market. As expected margin was slightly down and guidance for an uplift in Q4 (and H2 overall) remains intact, with prior end-of-season now mostly dealt with and spr/sum 18 seasonal stock under control. As a result expectations for the full year are unchanged versus expectations that were previously downgraded by c4% at the interims 8 weeks ago.
Dunelm (DNLM LN) Robust Q3 trading should restore sentiment vs valuation anomaly | Microsaic Systems (MSYS LN) Agreement with Knauer | Scapa Group (SCPA LN) FY18 outturn in line, overcoming currency headwinds | Summit Therapeutics (SUMM LN) FY results highlight busy year; 48-week PhaseOut DMD data due in Q3
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Interims are a slight miss due to costs, and increased cost guidance, especially WS losses, points to downgrades of c4% this morning, which is disappointing so soon after the pre-close. The dividend was better than expected though driven by confidence in the future potential, which hasn’t changed, and cash generative dynamics. Significant investment in the last 2-3 years, incl. areas with rapid payback, and a low-ticket bias (£30 ATV), mean DNLM isn’t reliant on the backdrop. In particular, integration benefits from WorldStores have turbo-charged its online and category capability, further distancing it from the discounters. Key to today is a positive update on strategic growth initiatives, and reassurance on reversing H1 gross margin mix dilution (H2 margin expected to be c+100bps). But the additional costs/losses at WS are a disappointment. Whilst the previous lack of clarity about the growth strategy has been addressed (CMD, 11 Oct), recovering confidence in Dunelm’s potential and online growth may be set-back today, albeit temporary. Weakness in the shares, should it materialise, would present an opportunity.
Interims on Tues are expected to reveal a c£2-3m PBT decline (c3-5%) to c£63m, driven mostly by a full period of WorldStores ownership (vs 5 weeks H1’17). Given the wide range of growth and integration initiatives underway, updates on progress will inform sentiment for H2 and into FY19. We see a lot of potential from these in the absence of any execution risk or phasing delays. Given sentiment towards the margin decline in H1 (which was mix driven), a detailed update on their expectation of growth in H2 will also be important for sentiment. Having last increased PBT in H1’16, the key to the investment case is restoring the group to growth again and the building blocks look to be in place for c36% growth in H2 and therefore 12% for the full year. Recent weakness looks to be an opportunity.
Upgrades look extremely likely today, as hoped, driven by a vastly improved Q1 trading performance. While soft comps and seasonal clearance formed part of the 9.3% LFL growth, underlying growth looks to be c3% with certain initiatives still building e.g. online range extension from WS. This Q1 has already banked >2% to the FY LFL number, so these dynamics suggest consensus of +1.5% LFL could be woefully pessimistic. We also highlight the scope for cost ratios to be enhanced as a function of scale economies, leverage and mix. We expect today’s CMD event in Stoke to more clearly articulate the growth strategy than has been the case to date and other positive operating dynamics. Upgrades and a very undemanding rating means the buy case remains very much intact.
While end markets have weakened, DNLM has the hall-marks of a compelling investment case –> no.1 in a highly fragmented market, significant geographic expansion potential, major investments in infrastructure/systems to drive growth (especially online) and unlock efficiencies, and highly cash generative. But the stock has de-rated to just 11x P/E in response to d/grades, mostly driven by short term losses/costs, which don’t recur. Consensus expects no ‘underlying’ PBT growth in FY18 and RoIC to halve over 3 years, which will only be corrected by either upgrades (+ special returns), or asset write-downs. The latter looks unlikely in our view, whereas payback analysis on investment points to higher growth/PBT vs consensus. Over 2 years the TSR would be 60% in the event DNLM re-rates to 10x EV/EBITDA on this consensus (i.e. base case), including only ordinaries (no specials). Today’s update and positive start to Q1 underpins our assessment that the recent sell off and inflection point represent a great entry point for this stock.
The shares have fallen 25% YTD due to a combination of disruptions/ weak trading earlier in FY17, mistrust/ poor understanding of the opportunity presented by the WorldStores (WS) acquisition, and in reaction to the recent profit warning from DFS. In this context, today’s +3.8% LFL sales update is very encouraging particularly given the drag from heatwave/election, as it confirms an acceleration online (now 20% of sales) courtesy of early WS integration benefits. However, lower margin means forecasts being nudged down a further 2-3%. Overall the tenor of the statement reads very positively, though, underpinned by the strategic initiatives which were commenced 2 years ago and by WS where management is ‘more confident than ever’. With the group returning to forward EPS growth (c10% CAGR) and trading on just 12x (4.6% yield), any further weakness presents an opportunity for investors taking a longer view.
Whilst Dunelm has a strong track record since IPO, the EPS CAGR halved to 7.5% in FY13-16E vs. FY10-13, and FY16 marks the fewest new stores for 7 years. This is all set to change though. Strengthened leadership is deploying a more focused strategy at a time when the spending outlook is becoming more favourable. The quality of EPS will be further enhanced and the FY16-19 CAGR should trend up towards 15%. Special returns will continue (£0.25bn over 3 years). The shares should therefore outperform.
