While most people have been enjoying the recent heatwave, the weather has done no favours for the sellers of “big ticket” furniture. Yesterday, both Dunelm, which sells bedding, curtains, furniture and kitchenware, and DFS, its sofa-selling rival, warned about their future profits as Britons favoured picnics and barbecues over trips to the high street.
Falling shopper visits to Dunelm stores and lower demand have left the retailer (perhaps ironically, given all those sofas and chairs) sitting on more stock than it expected and it will have to discount more heavily in its clearance sales. Dunelm, which warned about profits in May, has had to increase its provision for future losses on clearance merchandise by about £3 million.
The latest warning continues a torrid spell for a company, whose share price has plummeted from a high of 701p in January to 485½p a share yesterday.
Dunelm, which began life as a market stall in Leicester in 1979 before listing in 2006, has had to cope with management turbulence, too. John Browett, its chief executive, left abruptly last August after less than two years in the role amid an apparent backlash over his management style. Nick Wharton left similarly suddenly in September 2014. Nick Wilkinson, former boss of Evans Cycles and a former McKinsey management consultant, is the new chief executive, but his thoughts on any future strategy are likely to become clear only in September, when the retailer reports its full-year results.
The question on whether to invest in Dunelm is one that has to be considered within the wider malaise hitting Britain’s retailers. Consumer sentiment and spending is volatile, costs are rising, online rivals continue to steal market share from the bricks-and-mortar brigade and a host of retailers have had to resort to company voluntary arrangements, an insolvency process, to shed stores. In short, Britain’s retail market is not terribly attractive and Dunelm, whose like-for-like store sales fell by 4.6 per cent in the 13 weeks to June 30, is a company where there few signs that it will notably improve.
So, what to do? For holders of the stock who bought in when the shares were riding high, the recent decline has been painful, clearly, but it is best to hang in there and hope for brighter days under its latest boss. The business is still cash-generative with a solid dividend yield and, assuming that there is a bounce back in demand from the autumn, trading could pick up again.
Dunelm did its best to try to put a good spin on its grim update yesterday, highlighting strong sales growth online. It also noted that while its group gross margin was expected to hit 48 per cent, down 90 basis points over the year, this still reflected a “substantial recovery” on the 180 basis-point decline recorded in the first half.
So things may not be as bad as they were. Active customer numbers are growing and losses from its acquisitions of Worldstores and Kiddicare should reduce next year.
Peel Hunt, broker to Dunelm, believes that much of the recent poor trading can be attributed to weaker footfall on the high street during the hot weather. DFS, Dunelm’s biggest rival, also issued an unscheduled profit warning yesterday, similarly blaming lower levels of demand as the hot weather and World Cup fever affected shopping trips. It expects a recovery in the autumn.
Optimists who think that the City’s incredibly bearish view on retail might be overplayed could spy a buying opportunity in Dunelm. It has said, after all, that if its average net debt falls below 0.25 times earnings, it could consider a return to special dividends by late 2019.
ADVICE Hold
WHYFor now best to ride out the retail malaise
Ten Entertainment Group
In theory, the combination of a heatwave and a World Cup should have sent the performance of Ten Entertainment Group rolling into the gutter. In the event, yesterday’s trading update from the tenpin bowling operator, while some way from being a strike, was at least resilient and sufficient to keep the company on track to hit full-year market forecasts.
In the first half of the year, it reported a 7.7 per cent jump in turnover to £37.8 million, with like-for-like sales excluding new centres up 3.1 per cent. As like-for-like sales were up 5.1 per cent in the first quarter, that implies a slowdown to 1 per cent in the second quarter, but, given the hot weather and England’s extended run in Russia, that’s a decent performance, especially as both footfall and spending per head increased.
Alan Hand, chief executive, said that tenpin bowling was benefiting from the increase in demand for experiences and the company, which runs 44 centres under the Tenpin brand, was “in the sweet spot of experiential leisure”. As parents sought to wean their children off screens, so the attractions of an afternoon of bowling, table tennis and soft play were magnified.
As well as driving performance in its existing bowling centres, it continues to expand through the addition of new venues. Unlike Hollywood Bowl, its quoted rival, which expands through new-build developments, Ten generally acquires existing independent centres that are under-invested and under-utilised.
Although its focus on acquisitions rather than developments means that there is less visibility on expansion, Ten has hit the upper end of its target of adding two to four sites a year after the acquisition in April of sites in Leeds and Luton and Mr Hand admitted it was possible it might add a fifth in the second half of the year.
In June, Mr Hand said that he would be stepping down after three years as managing director, then chief executive, overseeing Ten’s flotation at 165p a share in April last year — although he is staying until mid-December while a replacement is sought. The shares rose 2p to 264p.
ADVICE Buy
WHYTen is trading at an unwarranted 25 per cent discount to Hollywood Bowl
