Interactive Investor

Dunelm defies Covid-19 as shares hit all-time high

1st September 2020 13:02

Graeme Evans from interactive investor


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Home furnishings retailer booms as consumers spend more cash on their homes and less on holidays.

Dunelm (LSE:DNLM) has picked up where it left off prior to the Covid-19 lockdown, after strong sales in July and August helped the highly-regarded FTSE 250 index stock set a new record.

The remarkable performance since shares tumbled from 1,404p in February to 660p a month later has seen Dunelm rally back by 129% to 1,511p. 

This includes today's 6% rise after an unscheduled update revealed trading has been materially ahead of initial expectations.

Dunelm is one of a handful of stocks weathering the current retail storm, with others including B&M European Value (LSE:BME). The discount chain is poised to replace ITV (LSE:ITV) or British Land (LSE:BLND) in the FTSE 100 index later this month after its value soared to an all-time high near £5 billion.

B&Q and Screwfix owner Kingfisher (LSE:KGF) has also traded well, while recent updates from DFS Furniture (LSE:DFS) and Topps Tiles (LSE:TPT) have indicated that consumers are using the money they would have otherwise spent on holidays for improving their homes. Robust levels of property market transactions have also helped bolster demand levels.

These trends are also benefiting Dunelm, whose brief update on summer trading was published just nine days before it is due to publish results for the year to the end of June.

Sales rose 59% year-on-year in July, driven by the timing of Dunelm's summer sale and pent-up demand following lockdown store closures, before an improvement of 24% in August.

Dunelm noted the resilience of the homewares market, positive footfall growth at its mainly out-of-town superstores and continued strong demand for its home delivery offer.  

Peel Hunt described the performance as outstanding, prompting the broker to raise its price target from 1,400p to 1,600p and lift its pre-tax profit forecast for the 2021 financial year by 22% to £139.9 million.

It added: “A combination of more time at home, a lack of holiday and leisure spending and stretched replacement cycles has pushed home-related sales to the top of the retail league table.”

Despite today's upgrade, the economic uncertainty means the company is still unable to provide meaningful guidance on the financial outlook. However, it added:

“We remain confident in our ability to adapt to the environment and are well positioned to continue to grow market share.”

It continues to benefit from last year's migration to a new web platform, which has increased its online capacity and allowed it to introduce ‘click and collect’ services in its 170-store estate.

More details are expected on the split between online and store sales when the company reports results on September 10, but in the meantime Peel Hunt thinks that online penetration can grow from 13% in the 2019 financial year to the mid-to-high 20s this year.

“As well as the boost in online trends, Dunelm will also be benefiting from the steady attrition in market share from the failure of weaker retailers,” Peel Hunt added.

Analysts at JP Morgan Cazenove note that Dunelm shares are trading at a material premium to the rest of the sector on a 2021 price/earnings multiple of about 30 times. They have a neutral stance on the stock, but add that sales for the opening two months of the first quarter were well ahead of their own forecast of 10% higher.

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Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

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