Dunelm Defies the Downturn

The Week: Morningstar columnist Rodney Hobson marvels at Dunelm's retail resilience, notes Dixon Carphone's new upbeat message and the muddle at Royal Mail

Rodney Hobson 11 September, 2020 | 9:21AM
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The Week

What is it about Dunelm (DNLM) that it defies the downturn in retailing and makes light of the coronavirus lockdown? I bought into the shares far too late, having refused for months to believe that its success could continue, but I am still well ahead, having paid 853p a share against a current price of 1,340p.

Sales in the 52 weeks to June 27 were down a mere 3.9% despite including the period in which stores were closed. Pre-tax profits for the year were 13.3% lower. Not many retailers did anything like as well as that and Dunelm can thank a doubling of online sales for mitigating the lockdown damage.

When you consider that sales in the eight months to the end of February were 6.8% higher you get an idea of what might have been. Even so, Dunelm had strong cash flow and improved margins in the full year.

Since stores reopened, sales have bounced back with a vengeance, up 59% in July and 24% in August as the summer sale was fed with pent-up demand. Dunelm describes the homewares market as resilient, which must be a bit of a shock for shareholders in Marks & Spencer (MKS).

The company declines to stick its neck out with a forecast for its new financial year but it does intend to restore the dividend at the interim stage, which demonstrates quite enough confidence to keep me happy.

Bizarrely, Dunelm shares tumbled 8% on the figures to stand below the pre-coronavirus level but that opened up a buying opportunity for any investors even more tardy than me in spotting the continuing merits of this company.

Online Boost

Things may also be looking up for Dixons Carphone (DC.), where shareholders including me have been rather more unhappy than at Dunelm. The trading update that graced the AGM was the most optimistic for many a long day, with strong sales reported in all markets and the group boasting that it had moved into a net cash holding, way better than at this time last year. Online sales more than tripled during store closures.

UK and Ireland have recorded like-for-like sales up 12%, despite the continued closure of travel outlets, while the corresponding figure for overseas operations is 16% thanks to gains in market share in Greece and the Nordic states.

Online sales are still running at double last year’s level, which is particularly important given the closure of standalone stores.

The shares collapsed from 152p to 60p in the stock market crash and have recovered to 88p, thanks in part to a gain of 7.4% on the update. There’s a long way to go to get back to 500p, where the shares peaked nearly five years ago, but at long last we have surely got past the bottom.

Snail Mail

One sentence really worries me in the AGM update from Royal Mail (RMG): “In the first five months of the year, we have seen a substantial shift in our business from letters to parcels.”

Hang on a minute. That’s been happening ever since the postal delivery service was privatised and it still seems to be taking the Royal Mail board by surprise. It’s a good job rival delivery services such as Hermes and Yodel have picked up a proportion of the extra parcels. Otherwise Royal Mail would be completely overwhelmed.

GLS, the international parcels side of the business, goes from strength to strength but is being weighed down by continuing and growing losses in the domestic business. With an interim executive chairman and an interim Royal Mail chief executive, it’s hard to see who is going to get a grip on the UK business.

The shares stand at 220p, up nearly 100p from the low point in April, but those who bought in the privatisation and held on can only dream of ever getting their money back. This business model just doesn’t work.

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About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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