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Dunelm’s fortunes improve on the home front

Dunelm store, Birchley Industrial Estate, Birchfield Lane, Oldbury B69 1DT
All 173 stores were shuttered after the lockdown was announced but they reopened last month
ALAMY

Baking trays and tableware are flying off the shelves at Dunelm; ditto garden furniture, blackout blinds and stick-on wallpaper (Patrick Hosking writes). With lockdown restricting people’s ability to eat out or to go on holiday, one thing that they can do is spend the money saved on their homes.

Fourth-quarter figures from the homewares retailer yesterday were better than expected, as was the speed at which the company is clawing its way back towards normality. For a while, after March 24, all 173 of its stores were shuttered; since June 22, all have been operating.

The 28.6 per cent fall in sales in the June quarter may look sickly, but the trajectory was reassuring. Sales compared with a year earlier were down by 78 per cent in April, were down 48 per cent in May and were up by 20 per cent in June.

Similarly, the move towards digital has been swift, up by 106 per cent for the full quarter on a year earlier. The purchase of Worldstores in 2016 has not been without bumps, but it gave the group better online capability. About 30 per cent of Dunelm’s revenues are coming from online sales and it is harnessing the strong relationships it has with some of its suppliers by bypassing its own warehouses and having products sent directly to customers.

Dunelm, which was floated in 2006, has come a long way from its roots as a market stall business in Leicester. It has a £2.4 billion valuation and membership of the FTSE 250. One thing hasn’t changed, though: the founding Adderley family still call the shots with a 51 per cent holding.

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In the debit column, there will be a hit from the lockdown because of the trading hiatus, in spite of the £14.5 million the company received in furlough payments. Dunelm now expects its pre-tax profits for the year to June to be between £105 million and £110 million. That’s down from £125.9 million last time.

Nor has the remarkable shift towards digital been seamless. The company admits that there have been reductions in stock availability, lead times and service levels. Customers may forgive this for a while, given the exceptional circumstances, but not for long. Amazon is the comparator against which Dunelm will be judged.

The company also warned yesterday that it would not be able to deliver on some of its planned productivity improvements because of the disruption caused by Covid-19. Investment in technology this year will cost £8 million. Meanwhile, changing systems to meet social distancing rules is said to be costing about £150,000 a week.

The Leicester-based company, which says it has barely been affected by the local lockdown, is tidily managed with an eye on the long term. It’s also conservatively structured, with modest net debt at the year’s end of £35 million. Yet beyond a few own-brand lines and a flair for popular design, it has no great moat to defend its market position and has to keep guard across a wide range of competitors, from John Lewis at the top end down to opportunistic pound shops at the bottom.

Meanwhile, there’s no sign of a dividend. The interim payment was cancelled and Peel Hunt, the company’s broker, thinks a final dividend in September is unlikely, too. The shares, up 29p, or 2.5 per cent, to £11.75 yesterday, now trade on more than 27 times expected 2020 profits. That multiple reduces slowly as profits improve — to 26.1 times in 2021 and 25.6 times in 2022. The shares are expensive and any stumble would be punished. Even that trend for home-baked fairy cakes isn’t going to last forever.
ADVICE Hold
WHY resilient trader successfully making the transition online, but the shares are expensive

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Severn Trent
To fully understand the esteem in which Severn Trent is held by its regulator at the moment, it is worth recalling the murky pools in which the Midlands-based water group was wading in the past (Robert Lea writes).

Less than a decade ago Severn Trent was back up before the beak for dodgy laboratory testing procedures. That had followed several cases of lying to regulators and figure-fiddling, tens of millions of pounds in fines and penalties and, ultimately, a criminal conviction at the Old Bailey after the Serious Fraud Office had got involved. That Severn Trent was making Thames Water look like a paradigm of corporate virtue showed how far things had gone wrong.

Liv Garfield, Severn Trent’s present chief executive, has made it one of her corporate goals to ensure that the company an “awesome place to work”. Under its previous management, the company was just that, but for all the wrong reasons — but that’s all water under Severn’s bridge and last year, during the most challenging quinquennial pricing review in the thirty years of the privatised industry, it was one of three companies fast-tracked by Ofwat to a regulatory settlement. That is an industry gold star. More than that, it freed up management to get started much earlier than their peers on the £500 million of infrastructure upgrades and efficiency gains promised for this year.

In its second trading update since the new five-year regulatory period opened, Severn Trent yesterday eased investors’ concerns about a more stringent regulatory regime: namely, that Covid-19 shutdowns mean that non-household water usage will be down by up to £85 million this year (representing nearly 5 per cent of group revenues) and that it is having to keep an eye on bad debts among household customers. These issues should not cause too much concern, the company said reassuringly.

At £23.96, up 0.5 per cent, or 12p, the shares are at about 21 times this year’s prospective earnings, a strong rating that suggests there might not be much upside, but the promised dividends still put the stock on a yield of more than 4 per cent.
ADVICE Hold
WHY A safe haven with an attractive yield

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