RBC Capital upgrades Dunelm, downgrades Next

The bank lifted Dunelm to ‘sector perform’ from ‘underperform’ and increased the price target to 1,100p from 1,000p as it said the company remains "a strong player" in UK retail, with good execution in recent years and a strong track record of market share gains across the last decade.

It noted the shares have fallen around 15% over the last three months and said that at circa 13x CY24e price-to-earnings, Dunelm is trading towards the lower end of its historical valuation range.

"We view this as fair given Dunelm's well-managed, cash generative model, albeit a relatively challenging outlook for home related sales. Hence, we upgrade to sector perform," it said.

RBC also noted that Dunelm has consistently been one of the most price competitive retailers in its UK entry point homewares pricing survey.

"We think it has further strengthened its value positioning this year, by re-investing freight tailwinds into more than 1000 price reductions in Spring 2023. Given a still tough outlook for the UK consumer in 2024, we think consumers will remain focused on value, which should favour the likes of Dunelm," it said.

In a separate note, RBC cut its stance on Next to ‘sector perform’ from ‘outperform’ and reduced the price target to 7,700p from 8,000p as it argued there is less scope for positive surprises.

"We continue to view Next as a blue-chip UK consumer proxy offering longer-term growth potential from its Total Platform," it said.

"However, we see more valuation upside for some other retailers, hence we have downgraded our rating to sector perform."

RBC said Next is more exposed to the lagged impact of higher interest rates, given its relatively high exposure to the 30-50 age group, where average spend on mortgages is highest.

"As such we expect Next's underlying sales performance to be more in line with the market next year, particularly as benefits from less competition in the midmarket are in the base," it said.

RBC pointed out that Next remains predominantly a UK company, generating more than 85% of its sales there.

"We expect a moderating sales trend next year, with employment indicators softening, but also a more benign outlook for costs," it said.