An increasingly-murky retail landscape leaves home furnishings hulk Dunelm Group (LSE: DNLM) in danger of a painful retracement, in my opinion.
The stock was already on the defensive following June’s referendum, but last month’s trading statement really put the boot into Dunelm’s share price. The retailer is now dealing at five-year lows, and I reckon another murky release — half-year numbers are slated for Wednesday, February 8 — could prompt a fresh move lower.
The Dunelm Mill owner announced in January that like-for-like sales had slumped 1.6% during the 26 weeks to December 31, to £431m, with revenues at its stores sinking 3% from the corresponding 2015 period.
And the business has struck a cautious tone looking ahead. Dunelm advised that “the homewares market has continued to decline” and that the retail environment remains “challenging and volatile.”
A backdrop of rising inflation is likely to keep demand for discretionary items like furniture on the defensive in 2017 and possibly beyond. And while Dunelm has outperformed the market in recent times, an intensely-competitive marketplace could see the business having to reduce costs to stop sales diving.
City brokers currently suggest that a 7% earnings decline is on the cards for the period to June 2017. A subsequent P/E ratio of 14.3 times is hardly hair-raising, but in my opinion remains far too dear given the threat of prolonged sales weakness.
While I retain a bullish long-term opinion of Reckitt Benckiser Group (LSE: RB), I reckon signs of further sales stress at this month’s full-year update (currently scheduled for Monday, February 13) could see the firm’s stock value sink again.
A worrisome third-quarter statement in October forced investors to steadily march for the door, the stock hitting nine-month lows in December as a result. And while Reckitt Benckiser’s share value has tipped higher since then — helped in no small part by the proposed takeover of baby formula manufacturer Mead Johnson this week — I reckon this fresh strength makes a retracement even more likely.
This is particularly so as, despite City forecasts of a 14% earnings rise in 2017, this still leaves Reckitt dealing on a P/E ratio of 21.2 times, soaring above the FTSE 100 average of 15 times.
The Nurofen and Durex maker advised in October that like-for-like sales rose just 2% during July-September, slowing from the 4% advance enjoyed in the prior quarter and a 5% rise in the first three months of 2016. Reckitt Benckiser cited macroeconomic and operational troubles in key markets in Brazil, Russia and Korea in hampering recent top line performance.
Despite these problems however, and the possibility of fresh share price weakness in the weeks ahead, I believe the strength of its brands — and the huge investment being ploughed into developing these ranges — makee the business a great buy for patient investors.
And I expect the firm’s huge exposure to developing economies to generate fantastic earnings growth as the financial firepower of consumers in these destinations steadily grows.
Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended Reckitt Benckiser. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.