Dunelm Group plc (LON:DNLM) shares rose on Tuesday after broker RBC upgraded the homewares retailer on the back of like-for-like (LFL) sales gains.
The FTSE 250-company is expected by the broker to be a “winner” in a polarised UK market, overcoming tough conditions with “strong value for money offer and range advantage” over competitors.
READ: Dunelm hit by September uncertainty despite online sales growth
RBC upgraded Dunelm from “underperform” to “sector perform”, with the price target upped 12% to 850p and estimated 2020 revenue to remain close to previous forecasts, somewhere around £1.1bn.
“We see upside risk to stable gross margin guidance for the full year and expect the profitability gap between stores and online to narrow over time as online becomes more efficient,” the broker said in a note.
“Dunelm's LFLs suggest that online sales are not cannibalising the in-store offer, and if anything the in-store cost base (property, staff costs) should fall as a percentage of sales over time and online will become increasingly efficient.”
According to analysts, Dunelm is well placed to source textiles in an oversupplied market, while it is “somewhat” shielded from foreign exchange moves through its sourcing through full-service vendors.
While the retailer reported weak numbers in September due to exceptionally hot weather, October is expected to pick up, but the second half of the retailer's financial year (January to June) could potentially see it suffering from US dollar headwinds.
“The main downside risk is that sales slow due to worse than expected execution or a tougher than expected competitive environment, which causes operating deleverage in the business,” RBC added.
Shares jumped 3% to 810.5p in the late morning.