UPDATE: Dunelm Cautious On FY11 Amid Tax Rises, Spend Cuts

13th Jul 2010 11:37

(Adds analysts' comments, detail.) By Hannah Benjamin Of DOW JONES NEWSWIRES LONDON (Dow Jones)--U.K. homeware retailer Dunelm Group PLC (DNLM.LN) Tuesday said trading in fiscal 2011 is expected to be much tougher on year, even though it ended the last fiscal strongly and expects to top analysts' operating profit expectations. The firm--which sells products such as curtains, bedding, cushions and fabrics--said it doesn't expect to be able to maintain the rate of comparable sales growth it had in fiscal 2010, as consumers absorb tax increases, public sector cuts and possible interest rate rises amid the U.K. government's bid to pay down the country's deficit. Dunelm increased its gross margin on year during fiscal 2010, ended July 3, but said continuing to do so will be difficult given uncertainty over sterling and recent increases in freight costs affecting imported products. Nonetheless, it had a stronger finish to fiscal 2010 than analysts had expected, with the gross margin expected to rise 190 basis points on the year to 46.8%. The margin improvement and successful management of old stock during the second half in turn boosted operating profit. It didn't say what operating profit it now expects to make, but according to FactSet Dunelm is expected to make a fiscal 2010 pretax profit of between GBP52.5 million and GBP75.5 million. The firm, which trades from 94 superstores and 10 older format high-street stores, said comparable sales ticked up 0.8% in its second half, compared with growth of 15% in the first half. Total sales rose 11% to GBP238.6 million, slowing from 26% growth in its first half. Dunelm said the slowing sales growth was due to more of its winter sale falling in the first half than in previous years. Comparable sales actually turned marginally negative in the final 10 weeks of its second half, Dunelm said, but this was still a better performance than analysts had expected. Numis Securities analyst Andy Wade estimates that comparable sales fell about 3% in the final 10 weeks, ahead of his expectations of a 5% fall. He keeps a "buy" rating on the stock and lifted his fiscal 2010 pretax profit forecast to GBP75.1 million from GBP73.8 million. Seymour Pierce analyst Freddie George raised his fiscal 2010 pretax profit estimate to GBP76 million from GBP75 million previously but left his fiscal 2011 pretax profit estimate unchanged at GBP82 million, given Dunelm's caution on the outlook. In spite of the tricky trading environment likely to come, Dunelm remains confident of trading from up to 200 superstores in the U.K. and has recently signed leases for eight new stores that will open in fiscal 2011. "We continue to see significant headroom for U.K. expansion and view this potential as a key differentiator between Dunelm and many of its retail peers," Singer Capital Markets analyst Matthew McEachran told clients. -By Hannah Benjamin, Dow Jones Newswires; 44-20-7842-9298; [email protected] Order free Annual Report for Dunelm Group PLC Visit http://djnweurope.ar.wilink.com/?ticker=GB00B1CKQ739 or call +44 (0)208 391 6028 (END) Dow Jones Newswires July 13, 2010 06:37 ET (10:37 GMT)