ii view: digital sales help Dunelm drive up profit forecasts

Digital sales growing, cash in the bank and store outlets due to re-open. Buy, sell or hold?

Third-quarter trading to 27 March

• Total sales down 17% year-over-year to £236.6 million
• Entire estate of 174 stores closed as of 5 January
• Digital sales more than trebled since the third quarter last year
• Net cash held of £40.2 million, up from net debt of £36.4 million this time last year

Guidance: 

• Expects pre-tax profit to be modestly ahead of current City forecasts

Chief executive Nick Wilkinson said:

"In a quarter when we were largely unable to open our stores, it has been very encouraging to see the strength of our digital channels which have enabled us to cover over 83% of sales from the same period last year.  This resilient performance is testament to the commitment and dedication of our teams, who continue to adapt and innovate the Dunelm customer proposition. 

"We are now looking forward to re-opening, with colleagues ready to welcome back customers through our doors.  We have worked hard to rebuild inventory levels and our stores are well stocked across our extensive product range.”

ii round-up:

Home furnishing retailer Dunelm (LSE:DNLM) expects a strong consumer response to the reopening of its stores following pandemic lockdowns, with full-year pre-tax profit now forecast to marginally exceed City forecasts of up to £125 million.

Sales for this latest quarter fell by 17% year-over-year to £236.6 million as all 174 of its outlets closed under virus restrictions from early January. But digital sales including click and collect more than trebled compared to the same quarter 2020.

Dunelm shares rose by more than 2% in UK trading, leaving them up over 70% since the early pandemic this time last year. Shares for clothing and homewares retailer Next (LSE:NXT) are up over 90% from a year ago, while shares for DIY retailer Kingfisher (LSE:KGF) have more than doubled. 

Dunelm’s 13 stores in Scotland re-opened on the 5 April. Its 156 stores in England and Wales are due to re-open on 12 April. A click and collect service is due to go live for its five Northern Ireland stores on the same day. 

Its newest store in Newcastle-Under-Lyme and its refurbished and extended store in Banbury will also open on the 12 April following the lifting of virus restrictions. The new store will also offer a 'Make & Mend' department aimed at encouraging product repair and re-use, as well as an extended home decorating offer.

Cash held at the end of March totalled £40.2 million, up from a net debt position of £36.4 million this year last year. It also has access to £175 million of approved banking facilities which remain unused.

A fourth-quarter trading update is scheduled for 14 July. 

ii view:

Dunelm was founded in 1979 as a market stall business, selling ready-made curtains. Today it sells around 50,000 product lines. Most of its stores are out-of-town and are located to reach over 65% of the UK population within a 20-minute drive. It became a multi-channel retailer in 2005, launching its own website.

For investors, management’s upgraded profit forecast assumes a pending opening of most stores and no further virus restrictions. An estimated price/earnings ratio above the UK general retail average also suggests the shares not obviously cheap. And like other retailers, it continues to suffer minor disruption within its global supply chain.

But its greatly increased digital related sales offer reassurance, with a move into net cash potentially aiding dividend prospects. An estimated dividend yield in the region of 2% is not to be dismissed in the current ultra-low interest rate environment. And its 'make & mend' initiative is possibly a nod to wider environmental concerns. In all, and while the shares look broadly up with events, accelerated digital sales and potential for more stores appears to underwrite continued long term investor support. 

Positives: 

• Growing digital sales
• Net cash held

Negatives:

• Valuation not obviously cheap
• Other homeware stores selling food have stayed open

The average rating of stock market analysts:

Strong hold