It is not hard to see why investing in Dunelm might be a tough call for most punters. In the past five years, the share price of the homewares retailer has been extremely volatile, falling from just shy of £10 a share in March 2016 to 578½p yesterday.
Dunelm, which began life as a market stall in Leicester in 1979 before listing in 2006, has suffered more than its fair share of management turbulence. John Browett, its chief executive, left abruptly in 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.
Leadership of the company has been entrusted now to Nick Wilkinson, former boss of Evans Cycles and a former McKinsey management consultant, who started his new job this month. Key to his success will be an ability to get along with the founding Adderley family, who hold more than 50 per cent of Dunelm’s shares. Mr Wilkinson will have to find himself a new chief financial officer, too, after Keith Down said yesterday that he was stepping down for personal reasons.
In a retail sector beset with rising costs and inflation, Dunelm, which sells bedding, curtains, furniture and kitchenware, has to cope with a variable housing market and fickle consumer spending. Add in the fact that the group’s acquisition of Worldstores — a lower-margin rival that owns Kiddicare and Achica, two online retailers — is taking longer to integrate than planned and it is clear to see why there may be other retailers that are easier stock picks.
That said, there is more than enough to recommend Dunelm as worthy of holding a position in an investor’s portfolio. It remains a highly cash-generative business, with an eye-catching 4.6 per cent yield, and analysts forecast that it will return to special dividend payments by the end of 2019. In time its acquisition of Worldstores will benefit the company, even though the unit’s losses of £5.6 million in the first half are higher than expected and are hurting the gross margin.
Dunelm’s takeover of Worldstores was designed in part to accelerate its push into online sales and to improve its technological capabilities. Worldstores listed more than 500,000 home and garden products on its site and was considered to have advanced “back-end” online technology. This should help Dunelm, which has been slower than it should have been in seeking a larger share of the ecommerce sector.
The Worldstores acquisition aside, Dunelm’s main business is trading fairly well in a highly challenging market in which bigger rivals, such as Carpetright, are suffering. Interim figures showed that store like-for-like sales were up 3.5 per cent and online sales up by 36.8 per cent. Overall like-for-like sales are up 6 per cent and the group is gaining market share in a homewares market that for most operators is broadly static.
Dunelm has 173 stores that are well spread around the UK and it has maintained a good reputation for value and quality in a market that is deeply sensitive to price. Annual sales are approaching £1 billion and the group is hoping to double that in time, with ecommerce accounting for up to 40 per cent of overall sales. It plans to do this by improving the quality and breadth of its range, making its stores better to shop in and easier to navigate, and cutting costs, while driving online sales.
The share price — rightly — was hit yesterday by the continued Worldstore losses and integration issues in a tough first half, but this could be a buying opportunity as there is medium-term growth ahead.
ADVICE Buy
WHY Once teething problems with its Worldstores acquisition are over, Dunelm could be set for growth. A buying opportunity now
Walmart
There’s a tendency to compare every bricks-and-mortar retailer with Amazon, the big, bad ecommerce wolf that wants to gobble them all up. As such, Walmart’s efforts to upgrade its digital operations are put under the microscope at the end of each quarter.
The owner of Britain’s Asda is unlike Amazon, though. It is the world’s largest private company by revenue, nearly all from offline sales, but with a market valuation of about $311 billion is worth less than half of its fearsome online rival.
Walmart is trying to adapt to the modern market by reducing the number of stores it builds, modernising existing stores, closing some and cutting jobs. It also bought Jet.com, an ecommerce start-up, in 2016 and elevated Marc Lore, its founder, to group ecommerce chief. He is behind several Amazon-style developments. Customers can now order groceries online and pick them up from Walmart stores.
Comparable store sales at Walmart’s American business increased by 2.6 per cent in the three months to January 31 compared with the same period a year before, more than analysts expected and representing the 14th consecutive quarter of growth. American ecommerce sales were 23 per cent higher.
However, the shift from offline to online ate into Walmart’s margins. Companywide profit fell by 42 per cent to $2.2 billion as revenue rose by 4 per cent to $136.3 billion. Revenue was comfortably ahead of analysts’ forecasts, but profit was easily behind, and the stock closed 10.2 per cent lower at $94.11 in New York, its worst percentage fall since 1988.
Ecommerce sales growth was disappointing, given that it had risen by 50 per cent or more in the three preceding quarters. Analysts estimate that it accounts for roughly 4 per cent of revenue, or about $20 billion of the company’s $500 billion annual sales. Walmart was bullish about its online operations, but the company is not betting the house on becoming another Amazon. Its bricks-and-mortar operation is its power centre and continues to grow. Wall Street’s reaction was probably an over-exaggeration from a twitchy market.
ADVICE Hold
WHY Aims are sound and offline sales remain strong
