RBC has turned more bullish on Dunelm Group PLC (LSE:DNLM), upgrading the homewares chain to 'outperform' from 'sector perform' and nudging its price target to 1,300p from 1,200p. The shares rose 3% to 1,153p on Monday.
The broker argues that the stock, which has de-rated over the past two years despite steady profits, now looks too cheap for a retailer with Dunelm’s cash generation and market position.
Trading at 13.5 times forecast 2026 earnings, below its long-term p/e average of about 16 times, the valuation “looks undemanding for a high-quality business,” RBC’s Manjari Dhar said.
Margins are heading in the right direction. Dunelm, which sources around a third of its products in US dollars, is benefiting from the weaker dollar against sterling, feeding through to a 50–100 basis point boost to gross margin in the first nine months of the year.
That, together with efficiency drives such as self-checkouts, should more than offset higher staff costs.
RBC thinks Dunelm’s strong control over costs and design-led product development leave it well placed to ride out consumer uncertainty. Furniture has been a standout performer, helped by its combination of value pricing and faster delivery times.
Cash returns remain a big part of the story. Dunelm has paid out more than £500 million in special dividends over the past decade and could announce another 25p special payout in February, the analysts said. Capital spending is expected to ease back towards 2% of sales as investment in new freehold stores tails off.
Beyond that, Dunelm’s push into Ireland through its Home Focus chain gives it a small international test case, while new smaller London stores are helping the retailer reach new customers.
For a business that combines growth, cash generation and a 4% yield, RBC reckons the balance now tilts back in shareholders’ favour.