ii view: Dunelm’s Christmas boom overshadowed by outlook uncertainty

Renewed Covid store closures and a share price up around 80% since March. Buy, sell or hold?

Second-quarter trading to 26 December

• Total sales up 11.8% to £360.4 million
• Total digital sales up to 40% from 21%

Guidance: 

• Offering no current full-year estimates

Chief executive Nick Wilkinson said:

"Our strong performance continued into the second quarter, whilst we adapted to the various restrictions and resulting store closures across our estate. 

"We enter 2021 with further restrictions and our primary focus remains the health and wellbeing of our colleagues and customers across the business.

"Beyond this near-term uncertainty, we've never felt more confident about the future.  Our scalable proposition combines an in-store and digital offer which, with agile technology, we will continue to develop at pace.”

ii round-up:

Home furnishing retailer Dunelm (LSE:DNLM) today reported a robust near 12% gain in pre-Christmas second-quarter sales, but offered an uncertain outlook given that all its 174 stores now remain closed under Covid lockdowns. 

Unlike in the first March lockdown, homewares have not been classified as essential retail by the government. As such, management is unable to offer meaningful guidance for the full year, instead flagging expectations for modest weekly losses while planning for a return to more normal trading patterns in its fourth quarter. 

Dunelm shares fell by more than 7% in UK trading, leaving them up around 80% since late March pandemic lows. Shares for fellow homewares and clothing retailer Next (LSE:NXT) have more than doubled, while Marks & Spencer (LSE:MKS) shares are up by more than 40% since March. 

Despite store closures under the second November lockdown, first-half pre-tax profit to the end of December is expected to come in at around £112 million. That's up from last year’s £83.6 million, aided by a more than doubling of its online home delivery business. Its home delivery services continue to operate as normal.

Given store closures in the current third quarter and a lack of management guidance, analysts are now expected to cut full-year profit forecasts. Current Bloomberg consensus is for £152 million.  

Dunelm also pointed to the disruption of goods supplied from Asia, given port operational challenges and global container shortages during the second quarter, although it said delays are now only two to three weeks. 

First-half results are pencilled in for 10 February. 

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, continued moves to sharpen its online offering provide some reassurance. A doubling in digital related sales over the latest quarter has fed into a robust sales performance. A move to net cash of £141 million from a net debt position this time last year should also not be overlooked. Neither should longer term plans to expand the store portfolio to around 200 outlets from the current 174. 

But closed stores and uncertainty over their reopening is a worry for investors. Asia supply disruption adds to its current challenges, while previous management hopes to soon recommence dividend payments could prove premature given renewed lockdowns. For now, and with the shares sat on an estimated 2021 price/earnings (PE) ratio broadly in line with the general retail sector, the shares appear up with events. 

Positives: 

• Net cash held
• Growing online sales

Negatives:

• Offering no current full-year guidance
• Dividend payments suspended

The average rating of stock market analysts:

Strong hold