Dunelm Group — Appealing offer

Research: Consumer

Dunelm Group — Appealing offer

Dunelm Group’s (DNLM’s) H124 results demonstrated the benefits of its strategy of broadening its addressable market by strengthening the core offer and expanding into newer categories, while also growing the store base and marketing more effectively. This is driving growth in the active customer base, who shop with greater frequency, leading to further market share gains in a static market. The broadening appeal of its products is demonstrated by growth being broad-based by geography, customer age and income group.

Russell Pointon

Written by

Russell Pointon

Director of Content, Consumer and Media

Consumer

Dunelm Group

Appealing offer

Retail

QuickView

19 February 2024

Price

£11.11

Market cap

£2,246m

Share price graph

Share details

Code

DNLM

Listing

LSE

Shares in issue

202.1m

Business description

Dunelm is the UK’s leading homewares retailer, albeit in a very fragmented market. Management expects to take market share through product innovation and enhancing the consumer experience, with an increasing focus on more sustainable options.

Bull

Fragmented markets with significant potential to increase market share (7.2% in FY23).

Conservative balance sheet with targeted average net debt/EBITDA of 0.2–0.6x (excluding leases and short-term fluctuations in working capital).

Frequently pays special dividends in addition to ordinary dividends.

Bear

The markets for homewares are highly competitive with limited brand allegiance.

End markets are sensitive to changes in consumer incomes, discretionary spending and to changes in consumer tastes and preferences.

Overseas supply makes purchases vulnerable to changes in foreign exchange rates and freight rates as well as potential disruption and/or delays.

Analysts

Russell Pointon

+44 (0)20 3077 5700

Milo Bussell

+44 (0)20 3077 5700

Dunelm Group’s (DNLM’s) H124 results demonstrated the benefits of its strategy of broadening its addressable market by strengthening the core offer and expanding into newer categories, while also growing the store base and marketing more effectively. This is driving growth in the active customer base, who shop with greater frequency, leading to further market share gains in a static market. The broadening appeal of its products is demonstrated by growth being broad-based by geography, customer age and income group.

Volume gains, cost efficiencies funding growth

DNLM’s H124 year-on-year revenue growth of 4.5% to £872m included an impressive 6% volume increase, partially offset by lower price/mix from category expansion. A more favourable gross margin, up by 1.6pp year-on-year to 52.7% (due to lower freight rates and disciplined promotion), and efficiencies in operating costs (0.7% of sales), partially mitigated the growth in operating costs (incremental 3.9% of sales) from underlying inflation, higher volume and investment in the customer proposition. Therefore, operating profit grew by 4.2%, marginally below revenue growth. The higher UK corporate tax rate and investment in the store estate caused a slight reduction in free cash generation relative to sales. The cash generation enhanced the already conservative balance sheet (net cash £6.2m end-December 2023) and enabled another special dividend of 35p/share (H123: 40p/share), alongside a higher interim dividend of 16p/share (H123: 15p/share).

Confident in meeting consensus profit expectations

Management reaffirmed that its FY24 profit expectations are in line with the companycompiled consensus, which is for an average PBT of £202m within the £199–207m range. The average implies 4.9% y-o-y growth in H224, almost exactly in line with H124’s achieved 4.8% growth. The expected full-year outturn includes a less favourable, but still healthy, gross margin progression (+100bp vs FY23) than achieved in H124 due to an increasing forex headwind and lower tailwind from changes in freight costs, as well as the typical lower H2 margin due to promotional activity.

Discount to recent multiples, attractive dividend yield

DNLM is trading at a discount (FY24e EV/sales, excluding leases, multiple of 1.3x) to its average multiple since FY17 (1.4x), despite consensus estimating similar levels of profitability for FY24 (operating margin of 12.2%) to the average since FY17 (11.9%). The FY24e P/E multiple of 14.9x is also at a discount to the postFY17 average of 15.4x.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

*EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/22

1,581

212.8

83.6

40.0

13.3

3.6

06/23

1,639

192.7

75.0

82.0

14.8

7.4

06/24e

1,721

202.8

74.6

68.9

14.9

6.2

06/25e

1,810

217.0

80.2

65.7

13.9

5.9

Source: Refinitiv at 16 February 2024. *Fully diluted.

EDISON QUICKVIEWS ARE NORMALLY ONE-OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2024 Edison Investment Research Limited (Edison).

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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