Dunelm accelerates new store openings as profits fall

Dunelm’s (DNLM) profits slipped despite record annual sales as the homewares retailer was hit by higher costs and warned that consumer behaviour remained “unpredictable”. But growth in customer numbers and market share gains highlighted that shoppers are giving a thumbs up to the company’s diversified product and price ranges, as the results confirmed that the pace of new store openings is being quickened. 

Active customer numbers were up 3 per cent as the company increased its curated product offering by around 20,000 items, with better retention rates and pleasing growth from younger and less well off groups. Across the furniture and homewares markets, Dunelm made share gains of 40-basis points.

The demand outlook looks bright, with management expecting volumes to drive sales and profit progress in the new financial year. And the company is accelerating its new stores programme. It now plans to deliver five to 10 new stores each year across 2024 and 2025, after three new sites opened their doors in 2023.  

The digital side of the business continues to grow, making the company somewhat of an outlier as online sales in the wider sector fall back in the post-pandemic landscape. Online took 36 per cent of Dunelm's total sales in the year, up from 34 per cent at the half-year point last December. 

Free cash flow rose £7mn to £160mn, with an operating profit to cash conversion rate of 81 per cent up from 70 per cent last year. The balance sheet performance supported an increase in the ordinary dividend, and while there was no additional special dividend announced on top of the 40p per share payout confirmed earlier in the year an increase looks likely at the interim results point. 

A gross margin of 50.1 per cent was down by 110-basis points from last year, a solid result given the inflationary background. Further down the income statement operating costs rose by 5 per cent, below the headline rate of price rises, as the company offset £20mn of inflation through efficiencies.

Analysts at Investec “expect the improving macro environment (falling inflation and freight rates and a lower dollar) to benefit the margin outlook, implying consensus expectations look undemanding”.

That may be so, but we think the valuation already prices in the growth opportunity. A rating of 14 times forward consensus earnings, while below the 5-year average of 17 times, keeps us where we are. Hold.

Last IC view: Hold, 1,166p, 15 Feb 2023