This FTSE 250 stock has recovered strongly. Would I keep on buying?

This FTSE 250 stock has managed to stage a strong recovery from its recent lows thanks to high consumer demand. Is it time to bank profits or buy more?

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Dunelm (LSE: DNLM) has made a strong recovery since its recent lows. The FTSE 250 stock has seen its share price rise 85% since the middle of March and is now up 5% on the year. This recovery has been driven by strong demand for housewares, such as baking trays, garden furniture, and wallpaper. But at its current high price of around 1,240p, should investors carry on buying or is it now too expensive?

Recent trading update

Fourth-quarter figures for the retailer were slightly better than expected, with just a 28.6% fall in sales from last year. Although this may sound a lot, in the circumstances it is actually very impressive. Firstly, all 173 of its stores were closed from March 24 until June 22. This meant store sales were down around 50% and were only offset by an online sales increase of 85%.

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The trajectory of sales is also very reassuring. Sales were down 78% in April, down 48% in May, but they were actually up 20% in June. This evidently shows a strong recovery for the retailer. In many ways, this is not surprising. As lockdown has restricted people’s ability to go out or go on holiday, so much of this money has been spent on home improvements instead. I reckon this trend will continue and the FTSE 250 stock could be a main beneficiary.

Shift to online

The retailer has used the lockdown to improve its digital presence. This means that around 30% of Dunelm’s revenues are currently coming from online sales. To improve its efficiency, some of its suppliers are also sending products directly to customers, thus bypassing Dunelm warehouses. This increased digital presence is certainly the way forward, and I believe that this increases the potential growth for the FTSE 250 stock. 

But the digital shift has not been without problems. The company has admitted reductions in stock availability and service levels. Although this is understandable in the current climate, an improvement will have to be made soon to ensure customer loyalty. This is especially true because Amazon is one of Dunelm’s main competitors in this department. Investment in technology has also cost the retailer around £8m. This adds on to the costs of new safety measures, thought to be costing around £150,000 per week. 

Would I buy this FTSE 250 stock?

Dunelm stock certainly has many positives. I’m particularly encouraged by its recent trading update, and positive moves to increase its online presence. But the shares are still not cheap. They currently trade at a price-to-earnings ratio of 27. As a result, there are already high expectations for the FTSE 250 stock, and any slip-up will be punished accordingly.

The interim dividend was also cancelled recently, and there are no signs of its imminent return. For a stock at such a high valuation, I’d prefer a reliable and high-yielding dividend to accompany it. As a result, I’m not buying Dunelm stock at the moment and would at least wait for a dip in its share price.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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