Interactive Investor

Breakout at Dunelm after special divi

10th February 2016 12:50

Harriet Mann from interactive investor

With a good set of maiden interim results under his belt, Dunelm's new boss John Browett has just announced a special dividend, guaranteeing his official tenure at the cushions and bedding retailer begins with a bang. A more optimistic wider market has also given the shares a leg-up above a line of technical resistance. Some in the City, however, remain sceptical.  

Double-digit sales growth took first-half revenue to £448 million, underpinned by a 4.6% increase in like-for-like store turnover to £377 million. Demand for its home delivery service also surged, with sales surging by a quarter to £28 million - albeit from a lower base.

More of Dunelm's winter sales fell in the period just gone, adding £10 million to revenue, or roughly 2.6% over the half year. As this will reverse in the next quarter, the group has adjusted life-for-like sales growth to 2% for the six months.

Although the winter sale predictably depressed margins, direct sourcing, better buying and fewer promotional deals helped drive a 30-basis-point improvement in gross margin to 50.7%. Cash profit increased 14% to £88.7 million and pre-tax profit rose 10.7% to £75.5 million. Earnings per share jumped 11% to 29.3p and free cash flow improved by two-thirds to £76.7 million, which is nearly all being returned to shareholders.

As well as hiking the interim dividend by 9% to 6p, management will pay a £64 million special dividend worth 31.5p a share, giving a prospective yield of over 6%.

This performance is in-line with the group's three-part growth strategy to boost sales, increase its estate and expand its delivery channel. Focusing on London for its store roll-out programme, the group now has 157 shops, 151 of which are out-of-town. Management have kept their 152-superstore target for the year, which Haitong Research has described as "underwhelming".

These are two of the eight projects new boss Browett reckons will propel the retailer forward, the others including; online, stock management, operations, store format, its new Made to Measure service, furniture and supply chain. Haitong describes this approach as "sensible retailing, if a little conservative", but wants more information on its execution.

Fixing the business

Of course, this investment doesn't come cheap, with operating spend increasing by 10% to £151.4 million in the period. Management forked out on IT capability improvements, store portfolio growth, its delivery service and in-home consultation service. As operating costs came in under Haitong's forecasts thanks to lower depreciation charges, pre-tax profit beat the analysts' expectations.

"We are working hard to build an even better business for the future. We want to improve the shopping trip for customers both in store and online," boss Browett says. "As we work through all the product ranges, including furniture and Made to Measure, I am confident that we can find even more ways to improve value for money for our customers."

Haitong's Ben Hunt isn't convinced, however: "Much of the new measures proposed today suggest a 'fixing' of the business rather than new growth proposals. That all said, is Browett preparing the platform for something more eventful later?

"The valuation certainly seems to expect this, with decent growth being priced in on a 2016E price/earnings ratio of 17. We wonder if it can be executed. For now we remain 'neutral'."

Jumping as much as 10% to 905p Wednesday, Dunelm's shares broke above the negative trading channel established over the past two months, during which time the share price fell by over 20%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Related Categories

    UK shares
    Consumer goods and services
    Growth Investor