Homewares retail chain Dunelm (LSE: DNLM) keeps surprising the market – in a good way! And the share price may be set to move higher.
My guess is investors tend to write-off the retailer whenever there’s the slightest ‘smell’ of general economic trouble.
For example, the share price plunged when the pandemic struck in 2020. And it sank again in 2022 when Russia invaded Ukraine.
But through all those troubled periods, the Dunelm business proved to be resilient.
And the five-year financial record shows that revenue has been running with a compound annual growth rate (CAGR) of just over 10%. And both operating and net profits have managed more than 18%, with adjusted earnings delivering a CAGR of around 12%.
Impressive performance
For a supposedly vulnerable and cyclical retailer, those are impressive growth figures given all the general economic and geopolitical upheaval we’ve suffered.
And part of the reason for Dunelm’s strong trading has been its multi-channel approach to selling goods. The firm operates both traditional stores and websites. And when the pandemic struck, the management team bolstered the company’s online presence and capabilities.
When comparing the trading figures to the multi-year share price action, it seems that investor sentiment sometimes gets out of kilter with events on the ground. And the market has been too pessimistic about Dunelm’s prospects at times.
However, strong bounce-backs on the chart show that investors have realised their mistakes and pushed the shares back up again.
And now there’s gathering optimism in the air, with many market watchers anticipating a general, broad-based bull market ahead. Yet Dunelm stock has been consolidating in a narrow trading range since the beginning of the year.
That’s interesting, because a pause in a rising share price provides a good opportunity for investors to reappraise a business.
Strong momentum
In April, the company reported its third-quarter performance. The business had seen “a good winter sale and a strong start from new spring lines”. And total sales increased by 6% compared to a year earlier.
Chief executive Nick Wilkinson said there is “strong momentum” in the business despite a challenging trading backdrop. And City analysts expect earnings to hold broadly flat for this year and next.
But a flat earnings outcome will be quite an achievement given the cost pressures most businesses have been facing. And I’m optimistic that earnings will advance in the years ahead.
One driver may be that cost-of-living pressures begin to recede for consumers, allowing them to have more disposable income to spend with Dunelm. And on top of that, the company will likely work hard to optimise its performance going forward.
However, positive expectations are never certain with any business. And one risk is that competition could swoop in and take some of the company’s market share. Or Dunelm could lose its knack of sourcing and supplying what customers actually want to buy. We saw a similar thing happen with Marks & Spencer over many years, I’d argue.
Nevertheless, with the share price near 1,166p, the forward-looking dividend yield is just over 5% for the trading year to July 2024. I see that yield and the consolidation of the business and stock as attractive features making the opportunity worthy of further research right now.
