Despite many analysts’ predictions that the stock had exhausted its Covid tailwinds, Dunelm (LSE: DNLM) continues to report strong figures. Having said that, the stock is down 25% year to date (YTD). With fears of a slowing economy and cooling housing market, what’s next for the Dunelm share price? More importantly, could this be an opportunity for me to snatch up Dunelm shares on the cheap?
Sofa, so good
Despite the narrative that Dunelm was a Covid stock and that sales would drop back down once restrictions were lifted, the FTSE 250 company continues to impress. Its most recent earnings report showed a 25% increase in its earnings per share, with total sales up 10.6% year over year.
Dunelm’s gross margins also increased 0.8% as profit margins rose to 10.8%. Additionally, the company’s performance was so strong that it declared a special dividend of £0.37 per share, on top of the standard £0.14 dividend!
The homeware retailer also boasts a stellar balance sheet. It has a 0% debt-to-equity ratio with healthy cash levels. Pair that with a decent price-to-earnings (P/E) ratio of 14, and the Dunelm share price looks intriguing to me.
Dune and dusted?
Nevertheless, it’s worth noting that Dunelm faces substantial economic headwinds. Britain’s most recent GDP numbers were not bright, as the economy only expanded by a minuscule 0.1%. It doesn’t help either when the GfK consumer confidence number is reported to be at 2008 levels. Consumers are really starting to feel the heat of inflation on their wallets.
To make things worse, the increase in interest rates means there has been a decline in mortgage approvals, which would impact the Dunelm’s revenue. Fewer people buying new houses likely means fewer people buying new furniture.
However, all this data may not spell doom and gloom for Dunelm. While country-wide retail sales data for March showed a decline, the fine print showed that household goods stores saw a 2.6% increase in sales. In fact, compared to pre-Covid (February 2020) levels, retail sales were 2.2% higher.
This is backed up by Dunelm’s own figures, as it saw an 8.5% increase in active customer growth. I’d also make the case that Dunelm could stand to profit from a cooling housing market. This is because more people may be tempted to stay put and use their disposable income to improve their current homes instead.
Window of opportunity?
So, is the Dunelm share price trading at a fair level currently? Well, the Dunelm board is confident in its ability to navigate inflationary challenges. The firm expects second-half profits before tax to be in line with recently upgraded analysts expectations of £206m. The homeware firm’s long-term growth plans should see its share price rise, as its market share gains continue to outpace its rivals.
With its expansion into e-commerce and investments in its supply chain, analysts have given the stock an upgrade with an average price target of £15.52. All things considered, Dunelm does look very promising. Even so, I’ll be waiting for next month’s GDP and retail sales numbers before considering buying Dunelm shares for my portfolio.
