Lately I have been thinking about buying some new shares for my portfolio. I drew up a longlist and one of the names on it is Dunelm (LSE: DNLM). With the Dunelm share price currently trading on a price-to-earnings ratio of 11, it looks to me as if it could be good value.
Here is why I have been thinking about buying Dunelm shares.
Long-term business demand
With widespread talk of a recession and growing doubt over the future direction of the housing market, shares in companies that help people kit out their homes have suffered, from white goods specialist AO World to Victorian Plumbing.
Should you invest £1,000 in Diageo right now?
When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Diageo made the list?
But I do not know whether Dunelm will see the same hit to sales in coming years as some competitors focussed on bigger ticket items. Its homepage right now is promoting picnic items from £1 and fans from £20. I do not think belt tightening will necessarily stop lots of people buying low-priced household items like those.
Indeed, if householders do decide to defer or cancel big renovation projects, they may actually have more spare cash to spend on small things that could cheer up their living spaces. With three-quarters of its financial year finished, Dunelm sales are 25% ahead of where they were at the same stage last year.
So although falling consumer spending is a risk for revenues and profits at Dunelm, I actually reckon it might be able to continue growing its turnover in coming years.
Proven operating model
But there are other homewares retailers too, from B&Q owner Kingfisher to B&M. So what is it that attracts me to Dunelm specifically?
I like the company’s simple but proven operating model. Dunelm’s gross profit margin in the first half of the year was an impressive 52.8%. Although its store estate is critical to the business, a third of sales are now made through digital channels. The company’s balance sheet is robust, with the company reporting £48m of net cash at the end of the first half. Admittedly that is £93m less than 12 months previously, but the cash-generative nature of the business combined with its robust finances appeals to me.
Is the Dunelm share price a bargain?
The Dunelm share price has fallen 44% over the past year. That may help explain why directors have bought shares in each of the last three months.
But while the valuation currently looks cheap based on earnings, how sustainable are those earnings? After all, last year’s record earnings per share were 27% higher than they had been just two years beforehand. But cost inflation could eat into profit margins, and with the company’s focus on value for money it may find it hard to pass all such added costs onto customers. I see that as a risk to earnings, although the company says that, “We are confident in our ability to mitigate cost increases and manage retail prices while delivering unbeatable value for money”.
Whether the current share price is a bargain depends on how successfully Dunelm can sustain or grow its earnings in coming years. But whether or not the Dunelm share price is a bargain, I do see it as attractive for what I think is a solid business.
