Broker snap: Dunelm is 'compelling roll-out story'

11th Oct 2010 12:03

It's a case of 'snooze and you lose' at bedding and home furnishings retailer Dunelm, with broker KBC Peel Hunt advising its clientele to wake up to the investment appeal of what is 'stacking up to be the most compelling organic roll-out story in the UK general retail sector.'The broker has initiated coverage on the retailer with a "buy" recommendation and a 520p price target. It thinks the company has plenty of scope for growth in the UK, where it operates from fewer than 100 superstores. The company is targeting an estate of up to 200 stores, the broker notes, and with recent openings paying back their investment within two years, Dunelm is set to "continue to deliver margin growth", Peel Hunt analyst John Stevenson believes.'With Dunelm's still fairly low level of national brand recognition, we believe it is still in the early phase of its growth,' Stevenson added.Leaving aside the scope for expansion, Dunelm currently enjoys a price advantage over its competitors, Stevenson believes, as 'volume-led bought-in margin opportunities offset inflationary pressures.'Further growth could come from online developments, in-store initiatives and range extensions, Stevenson suggests.Dunelm is currently 'top of the league tables' in the broker's retail universe, even outshining glamour stock ASOS, the online clothes seller. 'Dunelm offers the highest ROCE [return on capital employed] of the store-based retailers in our universe and the highest level of fixed charge cover. In our operational gearing test (profit before tax impact of a 5% sales cut), Dunelm is also the sector's best performer, beating all retailers - including ASOS,' Stevenson declared.