Brokers keep the faith with Dunelm

11th Apr 2012 07:19

After a decent start to the year things got tougher in February and March at home-ware retailer Dunelm, with like-for-like (LFL) sales growth slowing during the quarter.Total sales in the first quarter of 2012 came in at £154.1m, giving total sales growth over the equivalent period of 2011 of 10.7%, but that figure included contributions from stores opened over the previous 12 months by the fast growing bedding, curtains and cushions seller. Stripping out new stores, LFL sales at Dunelm were 0.6% ahead of the same period of 2011. Broker Panmure Gordon had predicted third quarter LFL sales growth of 2.5%, and said the under-performance was "due in part to great March weather and the threat of the fuel strike".In the nine months to the end of March LFL sales were ahead by 1% on the prior year, with total sales at £454m. That is a slight easing on the 1.1% LFL sales growth rate seen at the halfway point of the group's financial year.The company said trading conditions were "challenging". The stores did well in January but footfall was depressed in February and March.Gross margin increased by 30 basis points (three-tenths of a percentage point) over the equivalent three-month period of 2011. Dunelm says for the full year margins will be 20 basis points better than in fiscal 2011/12.Two stores were opened between January and March (including one relocation). Over the full financial year Dunelm expects to open 15 new stores (including two relocations).Nick Wharton, Chief Executive, commented: "Our focus on the development of our Simply Value for Money proposition and growth both through new stores and through our multi-channel offering has seen Dunelm achieve a solid sales performance in what remains a very demanding retail environment. He added though that: "It is prudent to remain cautious about the wider economy".Broker Panmure Gordon, a buyer of the stock, is keeping the faith and leaving its earnings forecasts unchanged."This result indicates that Dunelm continues to grow Home-wares market share, using BRC [British Retail Consortium] sub-sector data as a reference," Panmure Gordon analyst Jean Roche said. "We think that the home-wares market is likely to be stimulated in H2 [the second half] by the Olympics and the Jubilee and that Dunelm is in pole position to benefit from this. Our 600p price target remains well below our DCF [discounted cash flow] valuation of 699p and we remain buyers," the broker asserted.Fellow broker Peel hunt said the trading update was in line with its expectations."We continue to look at the potential for direct sourcing and Dunelm becoming 'established as a national brand' as upside to future forecasts, while weexpect a special dividend of up to £50m to be announced with the 2012E final results," said Peel Hunt analyst John Stevenson."With the store roll-out, on-line developments and potential for direct sourcing underpinned EPS [earnings per share] growth over the medium term, Dunelm continues to be the leading organic growth story in the sector, with KPIs [key performance indicators] and performance metrics continuing to top our sector league tables," Stevenson added.Peel Hunt rates the shares a "buy" and has a target price of 550p.BS