Panmure Liberum has upgraded Dunelm Group PLC (LSE: DNLM) to ‘hold’ from ‘sell’, lifting its target price to 820p from 810p after a steadier fourth quarter.
The broker said the homewares retailer’s fourth-quarter performance brought relief that trading had not deteriorated further amid challenging conditions.
Panmure Liberum described the quarterly outcome as respectable, though it remained cautious about calling a meaningful turn after weaker news flow through the second and third quarters.
Fourth-quarter sales rose 2.9% to £428 million, marking an improvement on the weaker third-quarter exit rate, when the broker estimated sales were declining by around 1%.
That softening in the third quarter had followed a broad-based weakening in March, making the fourth-quarter recovery a modest but welcome development for investors watching the stock.
Growth was achieved despite two weeks of exceptionally warm weather, which reduced store footfall across Dunelm’s retail network during the period.
Digital penetration increased by three percentage points to 45%, implying online sales growth of around 10.3%, while store sales declined by roughly 2.4% in the same period.
The broker questioned whether tight second-half cost control may have come at some expense to the brand, noting second-half operating expenses rose just 1.5% against 9.2% in the first half.
Lower brand marketing spend, reduced business rates, and productivity initiatives all contributed to what Panmure Liberum flagged as unusually strong cost discipline in the back half of the year.
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, underscoring the cost control effort.
Panmure Liberum raised its pre-tax profit forecasts by 2% to £209 million, placing the broker broadly in line with company-compiled consensus for the full year.
Full-year gross margin increased by 10 basis points to 52.5%, with the broker noting cash generation remained strong throughout the period.
With sales growth running at low single digits for three consecutive quarters, Panmure Liberum warned the business remains exposed to any margin shock that could disrupt the current earnings trajectory.
Reaccelerating sales momentum may also prove difficult to achieve after several years of elevated performance that set a high benchmark for the retailer.
The broker noted the shares have de-rated materially, offering some downside protection, while outer-year earnings expectations have also reset to lower levels.
Dunelm shares were changing hands at 878.41p, up 2% on the day, as investors responded positively to both the quarterly numbers and the broker upgrade.
