It is a marathon rather than a sprint for Dunelm (LON:) as it pursues its ambitions and these numbers represent further solid progress, even if the initial market reaction suggests otherwise.
There are of course wider hurdles in this pursuit. The group itself concedes that it has yet to see signs of a sustained consumer recovery, which is unsurprising given the wider domestic economic backdrop. The measures announced in the last Budget have affected Dunelm as indeed the retail sector as a whole, with higher National Insurance and National Living Wage costs providing a £21 million headwind which will inevitably carry forward.
From a broader perspective, the spectre of US tariffs have borne down on some economic activity, while the UK government may have to make further inroads on tax in an effort to balance its books. The imminent departure of the CEO will add another level of uncertainty, although his replacement looks set to hit the ground running given her previous experience.
Yet Dunelm has managed to negotiate an improvement which has spanned recent years, and seems set fair for further expansion underpinned by a healthy financial position. Indeed, 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 period from 51.8% to 52.4%, helped in part by foreign exchange and reduced freight cost tailwinds.
Equally importantly, a 3.8% increase in total sales to £1.77 billion was achieved through a combination of higher volumes and average item values, as opposed to headline price increases. This adds another string to the group’s bow as being a value destination. The improvement also led to an increase of 2.7% in pre-tax profit to £211 million, which enabled the group to maintain its progressive and attractive dividend policy.
The current yield now stands at 3.6% which, including the special dividend jumps to 6.4%, a clear invitation to income-seeking investors.
Nor is the group waiting for any consumer recovery to take hold as it continues to refine its offering and move into new areas. In the period, the group opened six new superstores, including an important move into the London geography with a site at Westfield, White City and there are more to come in the locality.
The acquisition of Home Focus in Ireland helps the group to dip its toes into overseas waters, while the group also continues to invest in its business, such as the introduction of a facility to manufacture its made-to-measure shutters and blinds.
Dunelm is also reaping the benefits of an improved online offering, where digital now represents 40% of overall sales, with its home delivery and, in particular Click & Collect options gaining increasing traction. The launch of an app later this year will fan the options out further, all of which should move the dial towards the group’s 10% target of market share in the medium term, where this figure improved to 7.9% in the period.
The group is upbeat and its more recent progress is meaningful. This has led to a share price performance which has yet to fully reflect the improvement and the initial reaction to the numbers is disappointing. The opening decline mars a price which had risen by 74% over the last three years, although remaining 19% shy of the high achieved in October 2020.
Over the last year, the shares had also drifted by 0.2% despite a bounce of 29% over the last six months, which compares to a gain of 5% for the wider . However, with no immediate valuation concerns as a result, attractive shareholder returns and an ambitious strategy, investors are warming to prospects with the market consensus of the shares as a buy likely to remain intact.