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2 beaten-down FTSE 250 shares with spectacular turnaround potential

The UK’s no.1 homewares retailer Dunelm Group (LSE: DNLM) has endured a somewhat difficult year. Its shares are down by a third over the past 12 months, and the company is on course to post a decline in full year earnings for the first time since it was floated on the London Stock Exchange in 2006. So why do I think the FTSE 250-listed group represents an attractive investment opportunity?

Acquisition boost

In its half-yearly report earlier this month, the Leicester-based retail chain admitted that it was currently operating in a challenging environment, especially in homewares. But despite the weaker market and some short term supply chain disruption, the group actually managed to increase its market share.

Total sales grew by 2.8% during the first six months of the current financial year, benefitting from the opening of five new stores and a 20.1% increase in online sales. The figures were also boosted by the November acquisition of Worldstores, the UK’s largest online retailer of home & garden products, which also included Achica and Kiddicare. Achica is a members-only online store offering furniture, homewares and accessories, with Kiddicare a multichannel retailer selling nursery supplies and merchandise for children and young families.

Dividend hike

But there was also some disappointment, as pre-tax profits (excluding exceptional items) fell 13.6% to £65.2m, impacted by lower like-for-like sales and increased investment in IT and marketing, together with transition costs incurred with the opening of a new distribution centre in Stoke. There was also an exceptional cost of £9.3m associated with the acquisition of Worldstores.

In spite of the anticipated dip in earnings this year, I’m quite optimistic about the outlook for Dunelm. The acquisition of Worldstores should accelerate growth in the online business, and continuing investment should help make the business more efficient in the long run. Management also showed confidence in the further profitable growth of the business by increasing the interim dividend payout by 8.3% to 6.5p per share, bringing the prospective full year payout to 25.52p and the yield to 4.1%.

Double-digit growth

Meanwhile, fellow FTSE 250 constituent Halma (LSE: HLMA) is another company with an excellent track record of growth that’s recently suffered some share price weakness. The Amersham-based technology firm specialises in products for hazard detection and life protection, and has grown into a £3.7bn company with over £800m in annual revenues. Over the last five years Halma’s share price has rocketed from below 374p to all-time highs of 1,126p last October, but then fell foul of a severe retracement for the remainder of 2016.

The share price has started to recover and Halma now trades on a forward P/E of 25, falling to 21 by March 2019. With double-digit earnings growth forecast for the next two years, I feel this is an opportune moment to buy the shares as they reconvene their upward surge.

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK has recommended Halma. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.