Interactive Investor

Dunelm is one to keep after these Q1 results

The home furnishings chain has traded sideways for the past six months, but the business is doing well and management is expanding its empire. Our head of markets studies first-quarter results. He also issues an update on overseas markets.

19th October 2023 08:23

by Richard Hunter from interactive investor

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      After posting record annual sales last month, Dunelm Group (LSE:DNLM)’s star remains in the ascendant, with future expansion planned to maintain momentum.

      A fresh marketing campaign has been launched to coincide with the launch of the autumn and winter ranges, alongside collaborations with the likes of Disney and the Natural History Museum.

      Meanwhile, another new store was opened in the first quarter, taking the estate to 180 and with three more planned this quarter towards the immediate target of 200 outlets. At the same time the digital business, which now accounts for 35% of overall sales, is receiving more care and attention in order to attract new customers.

      Despite the group’s reputation as a value offering on home furnishings, which is particularly powerful at present given the economic backdrop in the UK, Dunelm improved gross margin over the 13-week period ended 30 September by 1.2%, helped in part by foreign exchange and reduced freight cost tailwinds. With total sales rising by 9% in the quarter, the group remains upbeat on prospects, with another investor attraction being the ordinary yield of 4.1%, which is boosted to 7.9% including the recent special dividend.

      Any deterioration in consumer sentiment would inevitably have an effect on Dunelm, even if there are currently few signs of customers voting with their feet. In addition, the 25% rise in the share price over the last year, which compares to a marginal gain of just 0.9% for the wider FTSE250, has raised some valuation concerns.

      For its part, Dunelm continues to deliver even though the market consensus of the shares suggests that the price may be up with events for now and coming in at a 'hold', albeit a strong one.

      Market snapshot

      Investors seem unsure as to which way to turn at the moment, with rising tensions in the Middle East driving some investors towards haven assets as risk aversion increasingly takes hold.

      At the same time, the dawning realisation that interest rates in the US are likely to remain higher for longer has taken some of the wind from the sails of what had been a high-flying equity market.

      The current earnings season has started strongly, with the vast majority of companies having reported so far beating expectations. There have inevitably been some exceptions, with disappointing dealmaking earnings weighing on Morgan Stanley (NYSE:MS) and the prospects of higher costs on United Airlines Holdings Inc (NASDAQ:UAL). More positively, Procter & Gamble Co (NYSE:PG) topped expectations, while Tesla Inc (NASDAQ:TSLA) and Netflix Inc (NASDAQ:NFLX) posted strong gains after the bell on the release of their latest numbers. 

      Investors are increasingly keen to see pure earnings growth, as opposed to increased profits largely enabled by cost-cutting measures, such that the bar could be raised for expectations as the season unfolds.

      In the meantime, the main indices remain ahead in the year to date, with the Dow Jones having added 1.6%, the S&P500 12% and the Nasdaq 27%.

      The weak session on Wall Street spilled over to Asian markets, with the UK in turn unable to break away from a more difficult recent trading range. The FTSE100 opened squarely in the red, with a broad markdown and with some pressure on the banks ahead of third-quarter earnings which will be released next week.

      The strength of the US dollar, which is being sought as a haven asset, at least provides some insurance for a premier index which has a large exposure to overseas earnings, and the US in particular. This has enabled the FTSE100 to eke out a small if unconvincing gain of 1.2% so far this year.

      These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

      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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