Dunelm dives as profits decline and CFO departs

The departure is likely to be connected to the arrival of new chief executive Nick Wilkinson on 1 February, more than the 1.8 percentage point squeeze in gross margins that resulted in underlying profit before tax falling 8% to £60m and had already been revealed in a trading statement last month.

Sales remain strong, growing 18.4% to £545.4m and with profit margin expected to stabilise in the second half, as the annualisation of the Worldstores acquisition passes through, these increased revenues are expected to result in "good full year profit growth".

This is despite the sales performance of the legacy, lower-margin Worldstores businesses having been weaker than expected, with Worldstores' full-year losses now expected to be £7-8m versus previous guidance of £2-3m. Alongside further investment in infrastructure, will see operating costs grow at a "slightly" faster rate than sales for the full year.

Looking to keep shareholders onside, the FTSE 250 group increased the interim dividend 7.7% to 7p per share. Free cash flow leapt to £27.8m compared to £19m last time, though net debt was up to £134.3m from £103.8m a year ago,

Chairman Andy Harrison said: "The strength of our customer proposition has helped us to deliver a good sales performance in the first half, with like-for-like sales growth of 6.0% and total sales growth of 18.4%, boosted by the Worldstores acquisition.

"We have made good strategic progress, best highlighted by the 36.8% like-for-like growth in our online sales, which now account for 18.5% of our total sales, up from 11.7% last year."

Harrison said CFO Down will step down to take up a role closer to his family home and that the aim was to appoint a replacement before his departure on 15 June.

In the event that the new appointee is unable to start before this time, David Stead, Down's retired predecessor as CFO of Dunelm, has agreed to become Interim CFO during any transition period. David will join the Board during this period.

Dunelm shares fell more than 10% in early trade on Tuesday, falling below 570p for the first time since August.

Broker Canaccord Genuity said the flagging that Worldstores sales have been slower than expected in a difficult furniture market, though homewares is holding up better, will mean the integration of the Worldstores website is likely to take longer than previously expected, as is the Kiddicare in-store proposition.

With Canaccord's full year PBT of £125.5m and earnings per share of 49.5p at the top end of consensus of circa £120m, analysts expect modest pressure of 2-3% on the consensus as a result of the new guidance.

"While the core Dunelm business appears to be performing well, and we are encouraged that the H2 gross margin is still expected to improve, the guidance on Worldstores is disappointing. This was always the area of risk with Dunelm and it may take some time now for the market to rebuild confidence in the growth prospects within the furniture market."

Analyst Neil Wilson at ETX Capital said: "It’s proving to be a very tough market out there –we’ve seen several retailers in the sector fail in recent months and margins are coming under pressure across the board. Consumer spending is softer of course, but the decline in property market activity is key – the less people move home the less they spend on new furnishings."

He acknowledged sales growth is strong, with online doing very well, unlike some notable peers, but margins are the real worry.

"Not only is the Worldstores acquisition dragging down the group average, but it was also due to a higher proportion of end of season and seasonal products. The concern is that Dunelm is heavily discounting to maintain market share, generating good headline LFL sales growth at the expense of profit."