Discount homeware chain Wilko’s summer collapse into administration prompted analysts to upgrade estimates for the listed retailer regarded as the obvious beneficiary, B&M European Value Retail (BME).

The FTSE 100 variety goods value retailer has agreed to acquire up to 51 Wilko stores for up to £13 million in a deal funded from its existing cash reserves and will undoubtedly benefit from Wilko’s disappearance from the high street, as will competing discounters Home Bargains, The Range and Poundland.

Yet judging by the share price weakness of recent weeks, investors seem to be underestimating the potential market share opportunity for Dunelm (DNLM), the UK’s number one homewares leader which sells everything from bedding and curtains to kitchenware seller with a sharp value focus.

Shares sees Dunelm as another name likely to capitalise on the void created by Wilko’s demise, which presents an opportunity for the FTSE 250 retailer to increase market share in areas including affordable home décor.

B&M European Value Retail – key details 

Ticker: BME

Share price: 562p

Market cap: £5.52bn

FTSE subsector: Diversified Retailers

Dunelm – key details 

Ticker: DNLM

Share price: £10.16p

Market cap: £2bn

FTSE subsector: Home Improvement Retailers

TWO STRATEGIES FOR GROWTH

Cut-price groceries-to-general merchandise seller B&M is arguably the ultimate play on the cost-of-living crisis, retailing a range of goods at cheap prices spanning branded groceries and drinks to toiletries and cleaning products, homewares, garden furniture and even toys.

By offering a broad choice at great value, B&M encourages a ‘treasure hunt’ browsing experience for shoppers on a budget which often leads to impulse purchases, helping to drive average transaction values. A key tenet of the strategy is an unwavering focus on a limited assortment, direct sourcing model, which enables B&M to purchase deep volumes at competitive rates and pass the cost savings on to customers through value prices, helping their shopping budgets stretch that bit further.

Continuing to expand into southern areas of the UK, the £5.5 billion cap has three divisions; B&M UK is the core business operating from over 700 stores, while B&M France operates around
114 stores in a country with a similar population to the UK, suggesting it can sustain a strong opening programme over the long term. The third division, Heron Foods, is a convenience store chain with outlets in local neighbourhoods and shopping parades.

The opportunistic Wilko’s store acquisition will only enhance B&M’s geographic and growth potential. Analysts expect these stores will be rebranded under the B&M fascia, accelerate its store rollout and even extend what looks to be a conservative 950 UK stores target.

British homewares champion Dunelm has around 180 UK stores and was founded in 1979, then floated on the stock exchange in 2006.

It has grown to become the UK’s largest home furnishing retailer, built on a customer proposition featuring strong value, range, service and convenience. The founding Adderley family continues to hold a 40%-plus stake in a business whose competitive strengths include an extensive range of some 70,000 products spanning multiple homewares and furniture categories.

Core products are those that make the home cosy, including soft furnishings such as curtains, bedding and cushions, homewares including tableware and kitchenware, and also accessories such as lighting and gifts.

The Leicester-headquartered shopkeeper has successfully expanded out of its Midlands heartland to the rest of the UK and has set a 200 to 250 stores target. The focus over the past few years has been on establishing a multi-channel platform for its core homewares offering, which would also facilitate a bigger push into the furniture market, where the retailer’s share remains very low.

Management of the £2 billion cap company is increasingly confident of driving future growth through the ongoing digitalisation of the business, supporting growth in stores, active customers and market share, and believes profit growth will be driven by selling higher volumes of products rather than through hiking prices. While the company is the market leader, Dunelm still only holds a 7% share of a highly fragmented £24 billion UK homewares and furniture market.

The retailer continues to see a strong payback, under three years, with its new larger and smaller store formats, with depressed lease rates in high-density locations presenting an attractive opportunity to expand the latter format.

HOW DO THEY DIFFER?

Besides the fact B&M has almost four times as many UK stores as Dunelm, key points of difference between the two retail star turns include range. B&M’s relentless focus on prices leaves it better placed to profit from trading down than Dunelm, which does have well-deserved value credentials, but also caters to a more affluent customer through ranges such as the iconic luxury Dorma brand.

Albeit smaller by store number and market cap, Dunelm’s gross margin is higher than B&M’s, 50.1% versus 36% based on results for their last financial years respectively. This indicates Dunelm has superior pricing power and is better able to absorb cost of goods inflation. And whereas Dunelm has one of the strongest online propositions in the UK home-furnishing market, complemented by its well-invested store estate, B&M doesn’t trade online since the economics of selling and delivering low ticket items don’t stack up.

Location is another difference. Dunelm is predominantly an out-of-town retailer, whereas B&M trades from both town centre and out-of-town locations. B&M’s town centre stores are well positioned to benefit from convenience shopping and have a greater emphasis on grocery and fast-moving consumer goods (FMCG) products, whereas the larger out-of-town stores carry the full product offering.

Unlike Dunelm, which has grown its estate organically, B&M has built over one third of its UK store base through acquiring parcels of stores, a key driver of its growth and market share gains. While acquisitions come with greater risk, B&M’s track record gives investors some confidence in the group’s ability to successfully integrate the acquired Wilko sites.

HOW ARE THEY PERFORMING?

Two resilient, cash generative companies offering attractive dividend yields, over 8% in Dunelm’s case as a strong balance sheet allows it to pay generous special dividends, both businesses have momentum with their value-for-money propositions resonating with hard-pressed UK consumers at a time of rising interest rates and inflationary pressures.

Dunelm’s results (20 September) for the year to 1 July 2023 illustrated a well-run business successfully navigating sector headwinds. Although pre-tax profits fell 7.8% to £193 million due to operating cost inflation and Dunelm’s ongoing commitment to investment for the future, sales grew 6% to a record £1.64 billion.

Management remains upbeat about the retailer’s prospects with cost pressures easing and value-for-money products being launched; management said it was ‘pleased’ with trading early in the new year and despite flagging ‘unpredictable’ consumer behaviour, expects to see growth in full year 2024 sales and pre-tax profits driven by volumes.

Berenberg forecasts a rise in Dunelm’s pre-tax profit to £204 million this year ahead of £218 million next. 

Bears will argue Dunelm is exposed to fluctuations in consumer spending and the vagaries of the housing market and that barriers to entry in soft furnishings are low, but a confirmation of positive trading in the first quarter update scheduled for 19 October could be a positive catalyst for Dunelm’s shares, which have been weak since the annual results.

B&M is ‘a rare case of a retailer that has held onto its Covid gains’ according to Liberum Capital. B&M’s total revenue grew 13.5% to over £1.3 billion in the first quarter to 24 June 2023 with UK like-for-like sales up 9.2% amid strong performances in groceries and general merchandise.

At the time (29 June), CEO Alex Russo, who Shore Capital says has ‘seamlessly’ taken up the leader’s mantle from Simon Arora, remarked the retailer’s ‘strong trading momentum’ demonstrated ‘the strength of our unchanged strategy to relentlessly focus on price, product and excellence in retail standards. The business is well positioned as we start to transition to our autumn winter season. We will continue to work hard to help all our customers manage the cost-of-living crisis.’

Off the back of the Wilko deal, Shore Capital sees pre-tax profits building from £472.8 million in the year to March 2024 to the best part of £610 million in the 2026 financial year.

Even when the cost-of-living squeeze abates, B&M should retain many of the customers it has won during these tougher times since their shopping habits will have become ingrained. Investors can expect the details about the acquired Wilko stores and the integration process at the interim results on 9 November.

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