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.