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Are these FTSE 250 retail stocks irresistible value after today’s updates?

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DFS sofa
Image: DFS: Fair use

Furnishings giant Dunelm Group (LSE: DNLM) has fared pretty badly in Thursday business, the stock dealing 4.2% lower from last night’s close and taking the mantel of ‘biggest FTSE 250 faller.’ The retailer is now at its cheapest since early July.

Dunelm advised that like-for-like sales across its stores fell 5.1% during the 13 weeks to 1 October, to £173.9m, the company citing “unusually warm weather” in reducing physical footfall. Its online division performed better, with underlying sales rising 17.9% in the period. However, this channel creates less than a tenth of group revenues.

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Britain’s robust economy has enabled the furniture giant to report rich earnings growth year after year, a theme that City brokers expect to continue during the medium-term at least — a 2% rise is predicted for the period to June 2017.

Still, this projection creates a P/E ratio of 16 times, nudging above the big-cap average of 15 times. I reckon this is far too heady given the uncertainty over consumer spending patterns — and especially on discretionary, big-ticket items like furniture — over the next year and potentially beyond as the impact of Brexit begins to bite.

A dividend yield of 3.1% for fiscal 2017 also falls short of the blue-chip mean. I reckon the risks are still not fully baked into Dunelm’s share price at present, leaving the stock in danger of a heavy reversal should sales continue to dip.

Homeware warning

Investor appetite for sofa seller DFS Furniture (LSE: DFS) has dipped today, the stock last down 1.3% on Wednesday’s close. But a better trading update stopped the share taking a hefty whack like Dunelm.

DFS — whose share value struck three-and-a-half-month tops this week — advised that revenues soared 7.1% during the 52 weeks to 30 July, the top line hitting a record £756m. This result pushed underlying pre-tax profit to £64.5m from £33.3m a year earlier.

And like Dunelm, DFS is enjoying breakneck sales growth in the white-hot online sub-sector. Transactions here rose 15.6% during the 12 months, although this represented a slowdown from fiscal 2015 when growth of 17.5% was reported.

Commenting on the possible impact of the EU referendum, chief executive Ian Filby noted that “trading in the last 14 weeks has not indicated any weakening of demand to date.”

However, the DFS head cautioned that UK furniture retailers face “an increased risk of a market slowdown with additional cost pressures from foreign exchange movements” in 2017, Filby adding that “it is likely that the retail environment will remain intensely competitive.”

The City expects these pressures to result in a 53% earnings decline in the current year, although it could be argued that a P/E rating of 11.6 times — as well as a 4% dividend yield — still makes the retailer an attractive pick at current prices.

I’m not so sure however, given the patchy nature of recent data from the British high street. I would be happy to sit on the sidelines, rather than plough into DFS or Dunelm, for the time being.

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Royston Wild has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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