Canaccord leaves Dunelm at 'hold' but raises target price

Canaccord Genuity kept Dunelm at a ‘hold’ rating but raised its target price to 950p from 910p, saying it has “long traded at a significant premium to the wider sector”.

The home furnishing retailer on 7 April reported third quarter revenue growth of 5.9%. Total like-for-like (LFL) growth, combining LFL stores and home delivery, increased by 1.1%.

The company pointed out that, due to the 53rd week included in its last financial year, the period included six days fewer winter sale days year-on-year, reducing like-for-like growth by 4.9% or £1m in the third quarter, though that was partially offset by the earlier Easter contributing 1% towards performance.

Adjusting for the calendar impacts, underlying like-for-like performance was "a very pleasing" 5% for the 13 weeks to 2 April, the broker said.

“The 28% increase in Home Delivery remains an important contributor to total LFL sales growth, but our estimate of underlying 3% Store only LFL sales growth shows that the focus on this specific area, re-initiated by (founder) Will Adderley, continues to bear fruit,” said Canaccord analyst David Jeary.

“The 90 basis points (bps) gross margin improvement in the third quarter was also stronger than we had expected, even though our full-year assumption of a 50bps gross margin improvement is in line with the guidance given by management in the Q3 update.”

Canaccord raised its full year 2016 forecasts by £1.5m (+1.2%) to £128.5m. Jeary said the change to profit estimates broadly reflects a £4m increase in the sales forecast.

“Given its characteristics as an organic growth stock, along with relentlessly strong cash generation and special distributions, Dunelm has long traded at a significant premium to the wider sector,” he said.

“This premium has been as high as 40% over extended periods, but in recent times has more typically been trading around a +/- 20% premium. On the basis of the delivered LFL performance in Q3 and our small upgrades, we have increased the premium we apply to the wider sector from 15% to 25%. This drives a new target price of 950p (from 910p).”

Canaccord retained its hold rating due to the sector de-rating over the past quarter.