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
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General retail |
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26 September 2018 |
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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.
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Consensus estimates
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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Disclaimer
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Disclaimer
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Research: Investment Companies
Securities Trust of Scotland (STS) aims to provide long-term growth in income and capital through investing in global equities. The current manager, Mark Whitehead, was appointed in May 2016 and adopted an unconstrained, bottom-up approach to identify high-quality companies that can be long-term structural winners. The portfolio holds a relatively concentrated number of high-conviction stocks, which the manager believes gives the portfolio both defensive characteristics, as well as delivering sustainable dividend growth. The board has a progressive dividend policy. In August 2018, it announced a refresh of the trust’s marketing strategy, materially increasing its budget, and the appointment of a new non-executive director with extensive marketing expertise.