The Dunelm share price is falling. Should I buy this popular retail stock?

The Dunelm share price has endured a roller-coaster few years. Should I consider investing in this popular UK retailer now that it’s dipped?

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FTSE 250 home interior stock Dunelm (LSE:DNLM) saw online sales skyrocket in 2020 and they now account for 40% of its total group sales. Total sales increased by almost 12% in the 13 weeks to 26 December. This was particularly impressive given that most of its stores were forced to close to meet the government lockdown restrictions. Year-to-date the Dunelm share price has fallen almost 6%, so does it present a good long-term investment?

Dunelm share price fluctuations

The five-year chart for the Dunelm share price shows growth of 39%. However, between 2016 and 2019, its share price fell 40%. Since 2019, it’s been enjoying an upward trajectory with some major peaks and troughs. Most UK shares plummeted during the 2020 March market crash, and Dunelm was no exception. By October it had rebounded 55% but since then it’s pulled back 23%. This all amounts to a roller-coaster ride for dedicated shareholders, some of whom will not yet be better off for investing.

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Dunelm’s price-to-earnings ratio is 27 today. It has earnings per share of 43p, and it doesn’t offer a dividend. It was one of the many FTSE companies that opted to cancel their dividends in response to the pandemic. When coronavirus hit, Dunelm’s operating profit fell by almost a tenth to £116m in 2020.

Overpriced vs bargain basement

The rally after March meant investors plunged into those stocks that were likely to survive, while leaving the less likely candidates struggling for air. This means many outstanding stocks ended 2020 overvalued, while their unloved counterparts presented a potential bargain. It makes deciding to buy expensive stocks a little tricky.

Since its share price pull back, a price-to-earnings ratio (P/E) of 27 doesn’t seem too bad for Dunelm. Many other stocks are a lot higher. Traditionally an average P/E for a decent stock would be around 15, but in the past year this has risen above 20.

If the FTSE continues to rise and the economy gets back on track, then there’s not much to worry about. But things are uncertain, and the Covid-19 story is still not very reassuring. Therefore, these pricey stocks could be first in line for a significant correction if things get much worse. For those investors looking to buy for the long-term of five years or more, then this may not be of too much concern.

A rush on renovations

The pandemic led to a massive spike in home renovations and interior decorating, which is partly why Dunelm can now boast that 40% of its total sales come from online purchases. Whether this home improvement trend will continue long term remains to be seen. Dunelm presents a convenient one-stop shop for all interior decorating needs, and prices are fairly competitive. Many consumers are likely to become repeat buyers as long as they’ve had a good customer experience. According to Trustpilot, Dunelm it has 4.3 stars, which means 72% of customer reviews grade it as Excellent. This is a reassuring sign.

I’ve only shopped in Dunelm a couple of times. It has a lot of competitors, including Next and Amazon. With the UK retail environment suffering extensively in the wake of a miserable economy, I’m steering clear of this sector. For now, I’m not tempted to buy shares in Dunelm.

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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. Kirsteen has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended Amazon. The Motley Fool UK owns shares of Next and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 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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