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.