This UK growth share has hit a 12-month low. I’d buy

This UK growth share is set for double-digit rises in sales and profits but its share price is tanking. Our writer considers his next move.

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The past year has been tough for quite a few shares. One hit a 12-month low in today’s trading and has lost a third of its value over that period. Yet the company remains in strong growth mode and has an attractive dividend.

Here is why I would happily use the price fall as a buying opportunity for my portfolio.

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Fast-growing retailer

The share in question is Dunelm (LSE: DNLM).

The company is a homewares retailer that has become a familiar name for many shoppers over the past few years. It has focussed on growing sales in physical stores but also digitally. The digital story has been a fast-growing one, and last year such purchases (including tablet-based sales instore) jumped from 27% to 46% of the company’s total sales.

That helped revenue grow 26.3% compared to the prior year, reaching £1.3bn. The company also did a good job of translating those sales into profits. Its gross margin increased to 51.6% and pre-tax profit rose 44.6% to £157.8m.

Falling Dunelm share price

Given such apparent strength, why has the Dunelm share price been falling? Is it because shoppers have abandoned Dunelm now that many of them are spending much less time at home than in the past couple of years?

That does not seem to be the case at all. This month the company said that total sales for the first nine months of its current financial year were 25% higher than in the same period last year. Dunelm expects pre-tax profits for the full year to be in line with expectations. Those expectations are in the range £195m-£215m. So even if Dunelm delivers at the bottom end of the range, that would still be a 24% jump in annual pre-tax profit.

I think the falling price of this UK growth share reflects concerns that high inflation and a worsening economic environment could lead consumers to spend less money on home decoration. That could hurt both sales and profits at Dunelm. Indeed, the company itself noted that “the macro-economic outlook remains highly uncertain and there are significant pressures on UK consumers”.

Attractive dividend

I do think consumer spending could slow down sharply. That may hurt both revenues and profits at Dunelm. But it is a strong operator with a proven business model. Its competitive pricing could mean that belt-tightening by shoppers actually attracts new customers trading down from more expensive retailers.

The potential for a bigger business is not the only thing I like about this UK growth share. It also has a dividend yield of 3.6%. On top of that, it has occasionally paid out special dividends. Last year’s special dividend of 65p per share is equivalent to around 6.7% of the current Dunelm share price. No dividends are ever guaranteed, but I like the proven cash generative nature of the business model.

My move on this UK growth share

I think Dunelm has a compelling growth story, as shown in its recent results.

Although a worsening economy could hurt its business, I think that is already factored in to the reduced share price. I would consider adding this UK growth share to my portfolio today.

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Christopher Ruane 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.

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.

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