HSBC initiates Dunelm Group at 'buy'

HSBC said the home furnishings retailer has strong management and an attractive business model with high margins, cash flow and returns.

“It is the leading UK homewares retailer with exposure focused at the low ticket end of home spend but with growing exposure to furniture from a low base,” the bank said.

“Operating margins of around 15% are supported by an efficient cost structure, with Dunelm able to accept lower gross margins than many incumbents while still generating high operating margins.”

The bank said Dunelm is able to generate substantial amounts of cash flow with free cash conversion at more than 80% of net profit with a capital light model, even while growing its store base.

“This and a conservatively geared balance sheet support strong returns to shareholders, with special returns announced in each of the past four years.”

The company has a market share of 8%, which implies a greater degree of fragmentation than other categories such as grocery, clothing, electricals and DIY.

HSBC expects future share gains will be achieved through like-for-like (LFL) outperformance and rollout.

“LFL growth is sensitive to the consumer backdrop but should be supported by a number of strategic initiatives under the new management team led by John Browett. These include further investment in online, category expansion, and increased focus on customer service.”

In the long-term, HSBC sees potential for the business to deliver earnings of more than 78p at 200 stores with online penetration of 20% of sales.

Shares climbed 0.69% to 870.45p at 0908 BST.