Shares in FTSE 250 homeware retailer Dunelm Group PLC (LON:DNLM) surged in late-morning trading Monday after it was upgraded to ‘Buy’ from ‘Hold’ by analysts at City broker Peel Hunt as they cited “clear catalysts” for a recovery following a difficult year for the firm.
In a note to clients, the broker said that while the acquisition and integration of Worldstores in the previous fiscal year had negatively impacted the business, the companies core offering had “visibly sharpened up” since late summer, noting “a sharp step-up in trading performance in [the first quarter] against very tough comparatives”.
In October, the firm reported that in the 13 weeks to September 28, like-for-like (LFL) sales were up 4.2% on the same period a year earlier (when LFL sales were up 9.3% on the same period of 2016).
Analysts also noted an acceleration in Dunelm’s online offering with “strong autumn traffic growth, improved brand traffic and a pick-up in Google Trends data”.
“Only 13.5% of Dunelm’s sales are generated online and there is still no click & collect offer for customers. Playing catch-up, online sales are accelerating as Dunelm drives range, digital marketing spend, brand awareness and focuses on conversion.”
At the start of the fiscal year, Dunelm reported that online LFL revenues were up 33.3% as it remained on track to launch its new web platform in the third quarter.
Peel Hunt also said special dividend payouts were “back on the agenda” for the current year.
“Dunelm has a stated policy of paying out special dividends when average debt/EBITDA falls to 0.25x (sub £40mln), gearing up to 0.75x debt/EBITDA. Assuming no acquisitions or capital projects, then we forecast special dividends to return after the current financial year, potentially doubling the already attractive c5% yield”.
The broker also upped its price target for Dunelm to 750p from 550p, saying the business was built on “strong foundations; a UK market leader with a 5% rent-to-sales ratio, 10%+ EBIT margins, 15% [return on capital employed], 10% [free cash flow] yield and one of the lowest levels of operational gearing in the sector”.
Dunelm suffered a number of setbacks in the previous financial year, including a £3mln hit to its bottom line as it struggled to offload discontinued items in its summer sale which piled pressure on its margins.
Dunelm shares were up 13.5% to 615p, an 18% discount to Peel Hunt's new target price.