Dunelm joins Next and M&S on the retail comeback trail

Are Dunelm shares done falling this year?

High St. highs and lows

Cyclical by nature, challenging UK retail trends can be sticky, and their pressures uneven. Take Dixons Carphone. Among large high-street names, it has borne the brunt of a double whammy from weak wage growth and volatile inflation. Shares of Britain’s largest electronics and electricals vendor have fallen hard since Britain voted to leave the EU, when uncertainty began to cloud domestic industries, compounded by unanchored sterling. With Dixons already down about 55% in 2017 though, this week’s updated CPI and earnings—still elevated and slack respectively—only trimmed the stock a bit. Other retailers at the discretionary end of the high street are more in focus. Earlier in the week, JD Sports showed it’s not impossible to beat the street by carving out a discretionary niche. But the 34% rise of its stock over a year is unusual for a retailer of its size. Dunelm Group is among a clutch of less sure-footed groups with low exposure to necessities—which in theory can underpin revenues. The family-run firm has grown at a fair clip since joining the FTSE 250 seven years ago, and now has a market capitalisation of £1.2bn. That’s more than double that of Debenhams, though a fifth the value of homeware rival Marks & Spencer, and six times smaller than Kingfisher.

Still challenged

Dunelm’s place at the intersection of markets dominated by longer-established names hasn’t always been comfortable. Its shares are 16% lower this year, though they’ve halved a deeper loss on signs that a string of mishaps has passed. The rebound continued on Wednesday with full-year sales coming in on target at £955m, though 23% lower year-on-year. Dunelm still expects “the trading climate to remain challenging”, noting disposable incomes are pressured.

In other words, despite improved recent trading, it’s too early to say it has manoeuvred sustainably out of a tough spot. Dunelm’s goal of doubling sales over the ‘medium term’ may not necessarily apply to its current fiscal year. Dunelm could therefore still close a roughly ten percentage point gap to a rival on the downside—long-term turnaround play Debenhams—before catching up with a rival on the upside—possible near-term comeback story M&S. Either way, uncertainty remains a negative denominator for Dunelm.

Next’s digital revamp

The other pair-off with M&S in focus this week is Next. The UK institution is Next’s closest rival in the mid-priced clothing market. Like Dunelm, Next, which sells more clothes to Britons than any other company, is showing signs of recovery. Again, like Dunelm though, recovery hopes are tentative and may already be in its share price. “I’m marginally less pessimistic than I was three months ago” CEO Simon Wolfson said in August. The patch helping him avoid the blues was probably a startling 11.4% rise in digital sales following a wide-ranging online revamp. Digital sales will be in focus when Next releases first-half results on Thursday. Continued strong online growth will help decide if the stock closes the 2 percentage point gap to M&S over the year-to-date, after a 16% rise since July. Even after that bounce, its shares are down 9% this year. Any signs that new pockets of growth are evaporating could weigh on the stock again, and read poorly across the high street as well.

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