What’s going on with the Dunelm share price?

The Dunelm share price has plummeted recently, but is this an opportunity to buy more shares at a discount? Zaven Boyrazian investigates.

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The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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The Dunelm (LSE:DNLM) share price took quite a tumble last week. Despite publishing seemingly strong figures in its latest earnings report, the stock has since fallen by nearly 10%. So what’s going on? And is this a buying opportunity for my portfolio? Let’s take a look.

A strong earnings update

Despite what the falling Dunelm share price would indicate, the fourth-quarter earnings report looked quite encouraging. At least, I think so. Despite stores being closed for nearly a third of the year, overall revenue achieved double-digit growth of 26.3% compared to 2020 and 21.4% versus pre-pandemic levels.

With many people still working from home, the demand for household decor products remains high. And thanks to the firm’s established digital sales channel, the management team continued tapping this demand, resulting in strong sales, even when its physical stores were closed.

Combining this increase in sales along with a slightly improved gross margin, Dunelm now expects full-year pre-tax profits to come in at £158m. That’s notably higher than the original forecast of £149m-£153m. Needless to say, this is excellent news for shareholders. So why did the Dunelm share price fall?

The Dunelm share has its risks

The Dunelm share price falls with uncertainty

There are undoubtedly several reasons why investors decided to close their positions following this report. However, one of the primary contributing factors is likely the ongoing supply chain issues. While lockdown restrictions may be easing, the pandemic is still disrupting supply chains worldwide. As a result, the management team has said it expects inventory levels to rise for the first half of the next financial year.

This alone doesn’t give much cause for concern providing that the firm can eventually sell these products. But until then, storage costs will be on the rise for an unknown length of time. This will have an impact on profitability. But it’s not the only thing.

The business has just expanded its supply capacity with two new distribution centres. These facilities are expected to become operational later this year. But collectively will add another £20m to the expenses list, £8m of which will be recognised next financial year. Meanwhile, the recent increase in gross margins came from postponing its summer sale event, rather than operational improvements. Therefore, that gain will ultimately reverse when the special offers begin in the first quarter of 2022.

Overall it seems the business’s profitability might be taking a hit in the near future. So, seeing the Dunelm share price fall is understandable.

An opportunity to buy?

While a drop in profitability is not a great sign, the underlying causes seem to stem from one-time or temporary expenses. As such, it’s ultimately a short-term problem, in my opinion. Therefore, to me, this does look like an opportunity to add some shares to my portfolio at a discount.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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