Shares in homewares market leader Dunelm (DNLM) jumped nearly 20% on Thursday after the company said it will probably beat profit expectations this year.
That sparked a 19% rally in the share price to 992p, the highest the stock has been since nudging above £10 in March 2016.
Stronger than anticipated gross margins and a firm grip on costs led the board to state that pre-tax profit will be ‘higher than our previous expectations’, with a large helping hand from a smooth transition to its new web platform.
WHY INVESTORS ARE COSYING UP TO DUNELM
Dunelm’s sales continue to grow strongly in the second quarter including Christmas, although the anticipated forecast ‘beat’ assumes consumer demand doesn’t falter should a surprise general election result cause shoppers to scale back spending on non-essentials.
The value-for-money bedding, cushions and kitchenware purveyor flagged stronger than expected gross margins thanks to sourcing gains (buying products more cheaply) and better sell through, adding that operating costs remain ‘well controlled and in line with our expectations’.
Dunelm also assured the market that its transition to a new website had gone smoothly. With Christmas looming, customers have ‘responded well’ to the new website and during the critical transition period Dunelm didn’t see ‘any adverse impact to our performance, maintaining our strong sales growth both online and in stores.’
Upgrading its recommendation from ‘add’ to ‘buy’, Peel Hunt enthused: ‘The transfer over to the new technology platform has been extremely well executed, with no negative search engine optimisation (SEO) effect, delivering a lightning-fast experience for customers and significantly improved capabilities.’
READ MORE ABOUT DUNELM HERE
‘Key to its latest bullish trading update is a good customer response to its new website,’ commented AJ Bell investment director Russ Mould. ‘That’s going to be a huge relief to the company as there is always a fear that new IT projects won’t work properly on initial deployment.
‘Also in its favour is an improvement in margin which has to be commended given how the general direction of travel for retailers is margin compression in a world of heavy discounting.’
DEFYING THE DOOM & GLOOM
Led by chief executive officer Nick Wilkinson, Dunelm is defying the wider UK retail doom and gloom. Its shares have surged higher on a string of positive updates and earnings forecast upgrades.
However, the shares did pull back in October after the Leicester-headquartered retailer posted a less than stellar first quarter update. This showed a slowdown in in-store like-for-like sales for the three months to 28 September as the homewares market softened towards the end of Q1.
WHAT THE EXPERTS ARE SAYING
AJ Bell’s Mould added: ‘Last year Dunelm had a very strong festive period with 9% like-for-like sales growth in the 13 weeks to 29 December. The management team has historically been very cautious with regards to predicting earnings which helps to keep expectations from getting too high.
‘No-one knows how the general election result will impact consumer spending patterns and so the company has understandably avoided giving too bullish a comment about its outlook.’
Upgrading its year to June 2020 pre-tax profit estimate by 5% to £139m, Peel Hunt stressed that its forecasts ‘still show restraint ahead of the forthcoming election and would offer further upside in the event of a more stable political and consumer backdrop.’
