ii view: Dunelm ups year ahead profit forecast

Growing digital sales and the planned payment of a special dividend. We assess prospects.

Full-year results to 26 June 

• Revenue up 26% to £1.34 billion
• Pre-tax profit up 45% to £158 million
• Net cash of £129 million, up from £45.4 million
• Ordinary dividend of 35p per share (2020: nil)
• Special dividend of 65p per share (2020: nil)

Guidance:

• Expects full-year 2022 pre-tax profit to be modestly ahead of the top of the range of analysts' expectations

Chief executive Nick Wilkinson said:

"The digital investments we had made enabled us to rapidly adapt to the changing environment and deliver strong growth and an improved customer experience. We are emerging from the pandemic as a stronger and better business, having transitioned from being a physical retailer with digital aspirations to being a proven, digital first, multichannel retailer.

"Our business plans will deliver for all our stakeholders, and include our commitment to a Net Zero Pathway, with an absolute reduction in emissions of 50% by 2030."

ii round-up:

Home furnishing retailer Dunelm (LSE:DNLM) pushed higher its expectation for profit over the year ahead as it reported strong digital sales and profit for the year just finished.

Pre-tax profit for the year to 26 June rose 45% to £158 million. Digital sales climbed to 46% of total sales under previous pandemic store closure lockdowns. Digital sales stood at 27% of total sales the prior year. The final dividend was restarted with an ordinary payment of 35p per share being declared along with a special dividend payment of 65p per share.

Dunelm shares rose by more than 6% in UK trading, having already doubled from pandemic induced market lows back in March 2020. Shares for clothing and homewares retailer Next (LSE:NXT) are up by a similar 120% during that time, while shares for DIY retailer Kingfisher (LSE:KGF) have risen by close to 140%.

Dunelm sales rose by a quarter compared to the prior year despite stores being closed for more than a third of the time. And by fifth compared to the pre-pandemic 2019 full year. 

The gross profit margin under increased digital sales climbed to 51.6% from the prior year’s 50.3%. Pre-tax profit for the year to the end of June 2022 is now expected to marginally exceed the top end of analyst forecasts at £175 million. 

Accompanying management outlook comments did add some caution, flagging ongoing supply chain disruption and inflationary pressures from raw materials. But then pointed to encouraging trading over the first ten weeks of the new financial year. 

A first-quarter trading update is scheduled for 14 October.

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 175 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, cautionary comments regarding the uncertain macro-outlook and rising input costs should not be ignored. An estimated price earnings (PE) ratio above the three and 10-year averages also suggests that the shares are not obviously cheap. 

But another upgrading of profit expectations does point to ongoing trading momentum, with investments in its digital offering helping online related sales to rise by 115% over this latest financial year. Market share gains are being made and while it is the homewares market leader, its market share stands at an undemanding 9.1%. Giving potential for added expansion. In all, and with the current analyst consensus estimate of fair value standing at £14.84, room for further long-term upside looks to persist.  

Positives: 

• Growing digital sales
• Net cash held

Negatives:

• Valuation not obviously cheap
• Rising input costs

The average rating of stock market analysts:

‘Buy’