Dunelm slumps on Jefferies downgrade
Jefferies downgraded homewares retailer Dunelm to ‘underperform’ from ‘hold’ and cut the price target to 650p from 700p.
The bank cut the stock to ‘hold’ back in March last year when the macroeconomic outlook started to deteriorate ahead of Brexit and the increased investments in a multi-channel offer and National Living Wage took their toll.
It didn’t downgrade further at the time as Dunelm had an ambitious new management team and a track record for special dividends but the downgrade now is due to Jefferies’ belieft that macro risks could overwhelm the company’s self-help strategy.
The bank said Dunelm's second-quarter Christmas trading performance was a relief following the disappointing first quarter, but with inflation coming, the company's strategy will only go so far to offset real disposable income declines.
“With forecasts around 10% below consensus and a 3-year total share return of of only 6% we think the 15.4x calendar 2017 price-to-earning ratio is at risk.”
Jefferies noted that chief executive officer John Browett has set out a sensible eight-point self-help strategy to drive sales up 50%. With underlying LFL of 1.9% in the second quarter and online sales up 21.7%, the strategy appears to be working, it said.
“However it is early days and management has a lot on with 10 new stores this year, store reformats, a new product strategy, and the integration of Worldstores, Kiddicare, and Achica (inter alia).
In addition, the bank said the decline in the homewares discretionary is unlikely to see any for two to three years.
At 0840 GMT, the shares were down 4.7% to 707.50p.