Homewares retailer Dunelm’s (DNLM) annual profits dropped for the second successive year as shoppers continued to shun physical stores, preferring to purchase goods over the internet, prompting the value for money curtains, kitchenware and cushions retailer to sell excess stock at knock-down prices to the detriment of margins.
However shares in the Leicester-based soft furnishings seller rally 3% to 525p on relief results are at least in line with July’s year-end trading update.
‘The UK retail environment remains challenging,’ concedes new CEO Nick Wilkinson, ‘but against this difficult background we have traded in line with expectations during the current financial year to date.’
SOFT PROFITS SHOWING
Market leader in the £13bn UK homewares market, Dunelm sells an array of competitively priced bedding, curtains, cushions and pillows as well as kitchenware, lighting, wall art and rugs.
For the year to 30 June, underlying profit before tax (PBT) fell 6.7% to £102m with Dunelm absorbing a full year of losses from the lower margin Worldstores business, a 2016 acquisition designed to help accelerate Dunelm’s online participation.
Acquired from administration for a song, Worldstores has been earnings dilutive but management is progressing with the integration of the business under the core Dunelm brand.
Profits fell despite a 9.9% increase in group sales to £1.05bn with like-for-like sales up 4.2%, which suggests that Dunelm is heavily discounting to maintain market share, generating sales growth at the expense of profit.
Gross margin decreased by 90 basis points to 48%, not helped by the weak pound, and Dunelm also incurred increased costs due to the higher mix of online revenue.
CUSHIONING THE BLOW
Cushioning the blow for investors is the news Dunelm is upping the full year dividend by (a rather modest) 1.9% to 26.5p, reflecting its strong cash generation - free cash flow grew from £14.2m to £52.9m last year - and robust balance sheet.
Yet the broader UK retail space remains tough with footfall to brick and mortar stores subdued, a softer property market means people are updating soft furnishings less frequently and Wilkinson concedes ‘our rate of market share gain has slowed’.
‘In the near term, we have a number of self-help opportunities to improve profitability and cash generation after a difficult and disappointing full year 2018,’ explains Wilkinson.
‘I am determined that we grasp these opportunities quickly so as to return to profit growth. Over the medium term I see plenty of opportunity for us to drive growth as the leading multichannel specialist, helping more customers to create a home they love.
'This is a new and exciting chapter for Dunelm as we fully embrace digital retailing.'
