Dunelm 

(DNLM) £11.70

Market cap: £2.4 billion

We have been watching homewares retailer Dunelm (DNLM) for some time now and we think the cycle-low is in for the share price.

In fact, the low occurred in April just after the firm released its third-quarter trading update warning of ‘challenging’ homeware and furniture markets but confirmed full-year earnings would meet the consensus.

We believe the group is set capitalise on a UK economic recovery and a pick-up in consumer spending and expect the share price to reach around £15 within a year.

In July, in its fourth-quarter and full-year update, the firm said it had had ‘a good summer sale period, with customers finding the attractive offers they were looking for as well as buying full-priced lines and responding well to new products’.

Growth was consistent across categories, with the exception of outdoor furniture due to poor weather, and we believe Dunelm’s breadth of product ranges makes it less cyclical than many other non-food retailers.

This is backed up by the consistency of its earnings over the 17 years since it floated, and we would argue the business is actually quite defensive due to the ‘essential’ nature of many of the items it sells.

Over the next couple of years, what were formerly headwinds – supply chain bottlenecks, high freight rates and high interest rates – should reverse and become tailwinds, adding impetus to the firm’s sales.

Meanwhile, the firm’s physical footprint continues to grow with selective new openings and store refurbishments or relocations to make the most of customer demand, while its digital platform – which now accounts for 40% of sales – has been upgraded and the number of products made available to click and collect has been increased.

‘Going into FY25, we have a significant opportunity ahead of us,’ said chief executive Nick Wilkinson last month. ‘We are finding quality sites for new stores and are increasingly confident in our smaller format stores. We are also continuing to invest in both our digital offer and wider operations to support further market share gains. Notwithstanding the continuing uncertainty in our markets, we’re both excited and confident in our plans.’

Assuming earnings per share meet the consensus forecast of 78p next June, the shares just need to re-rate from their current cyclically-adjusted PE (price-to-earnings) ratio of 15 times to 20 times for the price to top £15 with ease.

Additionally, the shares are on a yield of 4.8% for next June with potential for the dividend to rise while two-year gilts are offering just 3.65% currently. 

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