RBC Capital downgrades Dunelm, expects margins to moderate

RBC Capital Markets downgraded homeware retailer Dunelm on Monday to ‘sector perform’ from ‘outperform’ and cut the price target to 950p from 1,400p, saying it expects margins to moderate.

"We view Dunelm as a market leading specialist UK homewares retailer, with a strong range advantage and good price architecture," it said. "However, we expect margins to moderate near term given more normalised promotional activity and input cost pressure."

The bank said Dunelm’s margins have likely been temporarily supported over the last two years by a lower level of discounting given higher demand and tighter stock availability. "We expect Dunelm to return to a more normalised sale profile in FY23, with two sales in H2. In total, we forecast circa 130bps of gross margin decline in FY23."

RBC said the outlook for the topline also looks tougher now given a more pressured consumer and likely spend rotation away from homewares and bigger ticket, more discretionary purchases.

It said that although consumer spending in homewares has remained above 2019 levels so far in 2022, it has begun to see declining trends in recent months.

"We believe that this trend will continue, given an ongoing recovery in areas like fashion and travel. Furthermore, mounting pressure on consumer wallets will likely weigh on discretionary income, particularly for big ticket purchases such as furniture, which has been a growing part of Dunelm's mix in recent years (we estimate c.10-15% now)."

As such, the bank reckons it will be more challenging for Dunelm to grow its earnings near term, hence the downgrade.

At 0855 BST, the shares were down 3.7% at 799.50p.