You can see why Dunelm trumpets its growing online sales so loudly, because getting there was a hard slog. To judge by the market plaudits, the protracted and costly integration of the homeware retailer’s loss-making Worldstores deal has been forgiven.
Lockdowns made the timing of that acquisition, sought by management for the target’s more sophisticated online systems, fortuitous. Post-lockdown, the retailer has managed to hang on to the boost given to its website business, which accounted for a third of group sales during its first quarter and pushed the overall figure ahead of analysts’ expectations. The deal has been credited with a smoother launch of click-and-collect.
Stripping out online sales shows that store revenue was 15 per cent higher in the first quarter than in the same period of 2019. There’s likely an element of pent-up spending by people that had built up their savings during the pandemic.
A boom in sales over the past 18 months has helped to almost double the FTSE 250 group’s shares in the past two years. Priced at about 18 times forecast earnings for this year, Dunelm is more highly valued than peers that are still struggling to take proper advantage of the shift by customers to online. But a descent in its market valuation from an earnings multiple that touched 35 in September last year acknowledges that the easy gains made during the pandemic might not last.
Underlying revenue growth is expected to ease — analysts expect a rate of 9.5 per cent this year, falling to between 5 per cent and 6 per cent in 2023 and 2024. Then again, that level of top-line growth trumps what’s expected of Marks & Spencer, DFS or even Kingfisher and is more akin to Next, lauded as one of the few high street names to make “omni-channel retail” look like more than industry jargon.
What Dunelm can boast is an efficient use of its capital and low rent costs that have come with occupying out-of-town retail parks. That has made the business highly cash-generative — last year cash from its operations was equivalent to 143 per cent of after-tax profits. Resisting the urge to splurge on fancy locations and store fitouts means that pre-tax profits are forecast to rise faster annually than revenue over the next three years.
That bodes well for shareholder returns and Dunelm has a habit of paying special dividends. Last year’s payment, including a 65p special return, totalled 100p. Higher capital expenditure means that the special payment is expected to be lower this year, with analysts at Berenberg predicting a total dividend of 74p a share. If that’s right, it would leave the shares offering a potential dividend yield of 5.7 per cent at the present £12.98 share price, while satisfying a reassuring target dividend coverage ratio of between 1.75 and 2.25 times by earnings.
The supply chain problems and cost inflation pressures playing havoc with retail margins are a natural risk, but clogged-up ports and driver shortages haven’t hit the group’s ranges yet. Stocking less seasonal products means delays to deliveries might sting less than for, say, fashion retailers, which operate by season.
What might propel Dunelm’s shares further? Sight of it achieving a 2017 target to boost sales to £2 billion might be one. Evidence that it can raise the proportion of online sales is another.
The market was nonplussed at Dunelm’s forecast-beating first-quarter figures — a high earnings multiple can have that effect — but there’s at least more substance to Dunelm’s business than some of the puffed-up “pandemic winners”.
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Grainger
The unattainability of home ownership means it’s little wonder institutional investors have found the residential rental market a pull. The push has been meagre yields on offer from traditional fixed-income assets. On one hand, that gives Grainger, the build-to-rent developer and landlord, more competition for acquisitions; and on the other, it’s a bullish indicator of the stability of its rental income stream.
Grainger builds and operates a portfolio of about 7,000 private rental properties in Britain. Direct development accounts for only about 15 per cent of activity at any time. Just over a quarter of rental income comes from its portfolio of properties on regulated tenancies, historic leases that enable a tenant to reside for life. These homes are sold as they become vacant.
It wasn’t immune to the pandemic. A high weighting to London — 50 per cent of the portfolio value — meant that the exodus from the capital pulled down the occupancy rate. Rental growth also suffered as rent-free periods were offered in an attempt to entice tenants.
A policy of returning half of net rental income to shareholders means that the rise in the dividend is forecast to be slimmer than usual at a little under 2 per cent to 5.57p. However, set against the dismal performance of other areas of commercial real estate, Grainger’s performance looks more steel-plated.
Occupancy has started to recover — sitting at 94 per cent, up from about 89 per cent at the end of March — and tenant incentives have largely been done away with. While the level of valuation gains recorded during the first half of the year was lower than before, assets, at least, appreciated in value. Compare that with asset markdowns that ran into hundreds of millions of pounds for many of the big office and retail landlords. The shares are broadly in line with forecast net asset value at the end of next September, but solid rental growth and rising asset values make for an undemanding valuation that could lure yield-hungry institutions to Grainger’s door.
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