Dunelm shares: Upgrade cycle not over
By Graeme Evans from interactive investor
Up 70% already in 2019, this quality operator is well-fancied and tipped to keep outperforming.
Dunelm (LSE:DNLM) continues to defy expectations after another profits upgrade extended the home furnishing chain’s remarkable share price rally for 2019 to a whopping 81%.
One of the stand-out performers in the FTSE 250 index so far this year, Dunelm is reaping the rewards of several self-help factors ranging from continued online expansion through to product innovation and greater use of in-store technology.
The weather has also been in its favour, with this summer’s cold and wet conditions more beneficial for home retailers than last year’s heatwave. Like-for-like sales growth has been “very good” in recent weeks, leading to updated guidance for profits of around £125 million in the year to the end of June. That’s about 4% higher than the £120 million consensus forecast.
City analysts previously upgraded their forecasts in April after a third-quarter performance described by one broker as “incredible and outstanding”. The upgrades have left shares trading on a forward price/earnings (PE) multiple of 17 times, which represents a 30% sector premium.
Source: TradingView Past performance is not a guide to future performance
Despite the uncertain market conditions, analysts at Stifel think that premium is justified for a number of reasons. They cite the internally-driven growth trends, as well strong cash generation and prospect that this could result in special dividend payments in 2020.
They said: “Today’s announcement caps a tremendous recovery year for the group. Our assumptions for FY20 are for more modest growth, led by internal initiatives.”
These include the launch later this year of a new technology platform, with click & collect services likely to be included as part of this roll-out.
Online offers huge potential for Dunelm, given that only 12% of total sales came from Dunelm.com in February’s interim results. CEO Nick Wilkinson said recently: “We are fully aware that we are still playing catch up as a multichannel retailer, having grown up as a store-based retailer.”
Last week’s share price surge of 8% to 980p means Dunelm is back within sight of its record 1,054p set in 2013. Peel Hunt reiterated its price target of 1,000p today, while UBS said its upside scenario on the stock implied 1,200p fair value.
They are currently forecasting 5% like-for-like sales growth in 2020, with Dunelm set to benefit from the loss of competition as £1 billion of capacity is removed from the marketplace. They also looked for an acceleration of sales from click & collect and continued customer acquisition from successful advertising, which has included slots on ITV’s This Morning.
UBS, which currently has a 930p target price, said: “A key development that would likely cause us to consider turning more positive is evidence of acceleration in like-for-like sales, underpinned by faster online growth and/or greater share gain from capacity exits.”
Dunelm is one of a number of retailers to successfully resist the current retail uncertainty. Other higher quality, high momentum plays identified in our recent Stockopedia column included JD Sports Fashion (LSE:JD.), Boohoo (LSE:BOO), Sports Direct (LSE:SPD), Next (LSE:NXT), Pets at Home (LSE:PETS)and WH Smith (LSE:SMWH).
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