Dunelm still a 'buy' for UBS as valuation hits seven-year low

Dunelm Group PLC (LSE:DNLM) retained UBS's backing despite earnings downgrades, with the bank highlighting the homewares retailer's lowest valuation since 2019 and scope for expansion. The shares stood at 769p, up 5% in Thursday trading, while the broker maintained its 'buy' rating and cut its target to 1,130p from 1,250p. Behind the downgrades, softer first-quarter trading prompted the analysts to lower their sales growth forecast for the 2027 financial year to 3.5% from 3.9%. Alongside higher store costs, a slightly higher tax rate contributed to a 5% cut in earnings per share for the 2027 financial year. The bank now forecasts £210 million pre-tax profit for 2027, down 4%, and reduced earnings per share estimates by 6% for 2028 and 5% for 2029. Despite those reductions, the note highlighted a valuation around ten times projected earnings for the 2027 financial year, alongside a strong track record of investment returns. On shareholder returns, the analysts see flexibility to support an ordinary dividend yield around 6% despite increased capital expenditure, although future special dividends face some risk. To rebuild momentum, Dunelm plans up to ten annual store openings, over 50 renewals by the 2028 financial year and digital investment focused on personalisation. Dunelm views the 2027 financial year as an investment year, with results improving progressively thereafter, with faster sales growth central to the broker's investment case.