Panmure Liberum upgrades Dunelm after respectable fourth quarter

Panmure Liberum has upgraded Dunelm Group PLC (LSE:DNLM) to 'hold' from 'sell' and nudged its target price up to 820p from 810p, saying the homewares retailer's fourth quarter brought relief that trading did not deteriorate further.

The broker described the outcome as respectable given challenging conditions and adverse weather, though it remains cautious about calling the turn after weaker news flow through the second and third quarters.

Fourth-quarter sales rose 2.9% to £428 million, an improvement on the weaker third-quarter exit rate, when Panmure Liberum estimates sales were declining by around 1% following a broad-based softening in March. Growth was achieved despite two weeks of exceptionally warm weather reducing store footfall. Digital penetration increased by three percentage points to 45%, implying online sales growth of around 10.3%, which suggests store sales declined by roughly 2.4%.

The broker questioned whether tight second-half cost control may have come at some expense to the brand. Second-half operating expenses rose just 1.5%, against 9.2% in the first half, benefiting from lower brand marketing, reduced business rates and productivity initiatives. Full-year guidance implies second-half pre-tax profit of £96 million, up 9.3% year on year and well above the more typical contribution of around £80 million, which the broker said highlights strong cost control.

Panmure Liberum raised its pre-tax profit forecasts by 2% to £209 million, broadly in line with company-compiled consensus.