Dunelm Group — Getting the house in order

Dunelm Group — Getting the house in order

Dunelm’s new CEO is taking steps to address recent underperformance and build the core brand. These include closing or selling the loss-making Worldstores (WS) businesses; developing a new web platform and introduction of ‘click and collect’; and launching a marketing campaign to raise the brand profile and acquire new customers. Assuming plans are executed successfully, we see upside to consensus forecasts.

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Dunelm Group

Getting the house in order

General retail

QuickView

26 September 2018

Price

534p

Market cap

£1079m

Share price graph

Share details

Code

DNLM

Listing

LSE

Shares in issue

202m

Business description

A multi-channel homeware and furniture retailer with 169 out-of-town superstores, four high-street stores and a website offering home delivery, reserve and collect, and Collect+.

Bull

Opportunity to expand product ranges, including differentiated furniture offer.

Introduction of ‘click and collect’ and focus on building the multi-channel proposition.

Cautious approach to new store openings.

Bear

Potential disruption to trading during launch of new web platform.

Failure of marketing campaign expenditure to generate new customer sales.

Failure to reduce operating costs/sales ratio within the core business over the medium term.

Analysts

Kate Heseltine

+44 (0)20 3077 5700

Paul Hickman

+44 (0)20 3077 5700

Dunelm’s new CEO is taking steps to address recent underperformance and build the core brand. These include closing or selling the loss-making Worldstores (WS) businesses; developing a new web platform and introduction of ‘click and collect’; and launching a marketing campaign to raise the brand profile and acquire new customers. Assuming plans are executed successfully, we see upside to consensus forecasts.

Robust sales growth, disappointing end result

In the current retail climate, delivering FY18 total sales growth of 10% is, in our view, a credible result. Notably, store like-for-like sales remained positive while online sales grew by 37.9%. So it is disappointing that these gains were eliminated by an £11m trading loss from the acquired WS businesses and 90bp erosion of the core Dunelm gross margin, attributable to FX and an increase in the obsolete stock provision. Underlying PBT declined by 6.7% to £102m, in line with expectations.

Curtailing WS losses

The new CEO, Nick Wilkinson, has taken swift and decisive action to close the Worldstores.com and Kiddicare.com websites, while continuing to transfer profitable lines to Dunelm.com. As a result, approximately two-thirds of WS operating costs of £34m will be eliminated and recovery in the core gross margin exiting Q418 is expected to more than offset the dilutive impact of WS lines.

Developing the core business

Crucial steps are being taken to enhance and integrate the multi-channel offer that had arguably lagged peers. A new in-house web platform will be launched in early 2019 supporting click and collect, improved home delivery options and an anticipated 35% increase in the number of lines over the next 18 months. The company wants to achieve a portfolio of 200 stores, with c.3-5 openings per year. Its plans are backed by a c £4m marketing campaign to raise the brand profile and acquire customers, partly funded by redirecting existing marketing spend.

Potential upside; attractive dividend yield

Following a positive market reaction to the recent results, the shares trade on a 12.2x FY19e P/E multiple. Assuming the strategic initiatives can be executed on with limited disruption to trading, we see potential upside to the current consensus forecasts. The company generates strong FCF, supporting an attractive dividend yield. Net debt/EBITDA remains broadly flat y-o-y at 0.89x.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

06/17

955.6

109.3

42.8

26.0

12.5

4.9

0618

1,050.1

102.0

40.1

26.5

13.3

5.0

06/19e

1,082.6

110.8

43.9

27.6

12.2

5.2

06/20e

1,130.9

115.5

46.8

28.9

11.4

5.4

Source: Bloomberg

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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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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