I think homewares retailer Dunelm Group (LSE: DNLM) could be shaping up as a great investment opportunity from here. Let me tell you why.
The firm has been weighed down by negative investor sentiment for some time, and with good reason. Earnings per share (EPS) are likely to come in around 12% down for the trading year that ended in June on the back of quarterly like-for-like (LFL) store sales figures that have been slipping since the early part of 2016.
Even the directors have been saying that they think the homewares market is in decline, and the narrative of squeezed consumer spending power, caught between the pincers of inflation and capped incomes, is well known. Bash, bash, bash. Everyone is down on the company, and oh how the shares have fallen from grace. Today’s 632p represents a plunge of around 40% from levels above 1,000p the shares reached during 2013.
A modest valuation and green shoots
One cracking benefit of all this fear and poor sentiment is that Dunelm’s valuation has been compressed. The lofty heights of a price-to-earnings (P/E) ratio running above 20 are long gone and today the shares change hands on a forward P/E rating just over 12. There’s income too. For the year to June 2018, the dividend yield sits at almost 4.3% and City analysts following the firm expect forward earnings to cover the payout almost 1.9 times.
The company updated the market with good news on Friday. The final quarter and full-year trading statement revealed LFL store sales growing 1.3% during the final quarter of the trading year. That’s terrific news because it’s broken the run of quarterly declines we have become used to seeing. I know one sunny day doesn’t make a heatwave, but taken with the other news I’m about to tell you, I think we could be seeing the first green shoots of a turnaround here.
Fast-growing home delivery division
As well as store sales, Dunelm has a fast-growing internet-driven home delivery service and sales grew more than 32% in that division during the final quarter. Home delivery came in at almost 11% of total LFL sales and when that turnover is added to store sales, total LFL sales in the final quarter shot up a healthy-looking 3.8%.
Total revenue for the fourth quarter jumped up 17.7% driven partly by income from the company’s November 2016 acquisition of Worldstores, one of the UK’s largest online retailers of products for the home and garden. Chief executive John Browett seems excited by the potential, saying in the recent update: “The Worldstores acquisition will provide a massive leap forward to our online and store offer that we think our customers will love.”
Looking forward and including Worldstores, around 20% of Dunelm’s sales now originate online – and they’re growing fast. Mr Browett argues that the company has arrived at a point where it is a significant e-commerce player, and I agree. E-sales looks like an emerging growth business cradled within the stable, cash-generating bosom of the old business. And I reckon the firm looks set to grow strong and healthy to potentially serve investors well from here.
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Kevin Godbold has no position in any 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.