Canaccord cuts Dunelm to 'hold' from 'buy'

Canaccord Genuity on Thursday lowered its rating on Dunelm to ‘hold’ from ‘buy’ but raised its target price to 920p from 875p after the homeware retailer reported its full year results.

The broker said there are short-term costs for Dunelm ahead of delivering its long-term objectives for doubling market share. Its long-term goal will require “substantial development of many aspects of the business, including range development, store format and operations, channel penetration, and IT & logistics infrastructure”, Canaccord said.

“Capital expenditure and depreciation have been and remain on a rising trend, and in line with recent years, operating cost growth looks set to exceed top line sales growth for at least another two years.

“Unlike past years, the potential for mitigation from gross margin expansion looks more muted, and with Q1 trading under pressure from hot weather depressing footfall, to cite CEO John Browett's words, Dunelm is facing ‘another tough year’.”

Dunelm reported in the 52 weeks to 2 July pre-tax profit rose to £128.9m from £121.4m in the 52 weeks to 27 June 2015, on revenue of £880.9m, up 7.1% from the year before.

The company recommended a final dividend of 19.1p per share compared to 16p in 2015 and giving a full-year dividend of 25.1p per share, up 16.7% from the prior year. In addition, the company paid a special dividend of 31.5p per share during the year.

Canaccord cut its estimates for 2017 pre-tax profit by 5% and its forecast for 2019 by 9%, reflecting more modest like-for-like gross margin assumptions, the expectations of operating cost growth and the uncertainty surrounding Brexit.

However, the broker said underlying cash generation remains strong and it continues to forecast an annual return of capital to shareholders at £65m per year or 32p per share, which more than doubles the ordinary dividend yield.

“Dunelm remains a quality company with very strong cash generation. Our forecasts still deliver earnings growth against a more uncertain consumer backdrop, albeit at a reduced rate, while its targeted investment programme acts as a drag on operating margin over our forecast horizon.”

Shares rose 0.56% to 897.50p at 1018 BST.