Shares in Dunelm (DNLM) rallied 2.5% to £10.86 after the UK homewares leader reported a 69% jump in third quarter total sales to £399 million, some £15 million ahead of broker Peel Hunt’s estimate.
There was also relief as the company said it expects to deliver full year pre-tax profits in line with the latest £195 million to £215 million consensus forecast range despite a ‘highly uncertain’ economic outlook with ‘significant headwinds and increasing pressures’ facing the consumer.
Q3 SALES SURGE
Total sales for the third quarter ended 26 March 2022 were significantly higher than the same period in 2021 when Dunelm’s stores were closed to customers and only Click & Collect and home delivery services were available.
Impressively, third quarter sales were 40% higher than the comparable quarter of 2020, when the final three weeks were impacted by the start of the pandemic.
Third quarter gross margins were up 30 basis points year on year against expectations of a decline due to Dunelm’s first full January sale for the first time in two years.
And despite inflationary pressures, Dunelm now expects the full year gross margin to be broadly similar to last year, which is better than analysts feared.
The only minor negative was inventory costs, where the retailer now anticipates bearing ‘additional stockholding costs’. Whilst extra costs are slightly disappointing, having a well-stocked business is a competitive advantage and reflects Dunelm’s focus on ensuring good availability for customers.
MARKET SHARE GAINS
The cash-generative curtains, quilts and kitchenware purveyor also pointed to continued shares gains in both the homewares and furniture markets in the quarter, based on GfK data.
Innovations like its partnership with the Natural History Museum show Dunelm is thinking of new ways to broaden and deepen its market appeal.
The retailer reiterated that roughly 85% of its growth over the past five years has been driven through market share gains. ‘Given our broad product range, low average item and basket values, coupled with our focus on providing great value at all price points, we feel well placed despite the uncertainties in the current environment,’ it insisted.
Dunelm also said its new ‘Summer Living’ products performed ‘particularly well during March, as customers looked to ready their homes and gardens for summer’.
EXPERT VIEWS
Peel Hunt reiterated its ‘buy’ rating on Dunelm with a £17.50 price target, stressing that the retailer ‘continues to deliver double digit sales growth against a market that has gone backwards over 3Q. There is no sign of consumers retreating as yet, but there is clearly a tougher backdrop ahead.’
However, the broker believes ‘a tighter consumer environment is likely to drive an acceleration in Dunelm’s market share.’
Danni Hewson, financial analyst at AJ Bell, said ‘Dunelm is getting the basics of retail exactly right, serving up what people want, when and where they want it.
‘A big part of the recent transformation of the group has been the development of its online proposition and it is not sitting on its laurels here, continuing to refine and improve things.
‘There are costs associated with keeping up with shoppers’ needs, including footing the bill for having lots of extra inventory to mitigate any supply chain problems.
‘Ultimately this is much better than visitors to its stores regularly coming away without the item they wanted and eventually becoming disillusioned with the brand.
‘It is impressive that despite these extra costs and rising freight and raw material inputs the company is for now able to sustain and even improve margins.
‘There may be tough times ahead as the cost of living crisis continues to bite into Britons’ household budgets, however Dunelm and its management look to be doing everything under their control to set the business on the right path.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor () own shares in AJ Bell.
