Broker snap: Dunelm's valuation justified after Q2 bounce-back, says Numis

7th Jan 2014 09:33

Numis Securities reiterated its 'add' rating and 1,000p target price for homeware retailer Dunelm after the company swung back to like-for-like (LFL) sales growth in the second quarter.LFL sales increased by 2.9% in the second quarter ended December 28th 2013, bouncing back strongly from the substantial 5.3% decline in the first quarter.Numis had expected an increase of just 1.5% during the second quarter and said that this strong result supports its view that the first-quarter disappointment was "entirely weather-related"."The TV advertising campaign appears to have been successful and, while it is difficult to measure accurately, Dunelm believes that each £1 spent on advertising has added £1.50 at the till," the broker said."While this is obviously loss-making (given a 50% gross margin), it is a brand-building, rather than call-to-action, campaign, and the results are better than management had expected. Certainly, with brand recognition running at just 50% even in its heartland (and far lower elsewhere), we are of the view that this is a sensible investment in longer-term growth."Meanwhile, gross margins for the first half are estimated to have risen by 100 basis points year-on-year, ahead of Numis's forecast for a 60 basis-point improvement.Dunelm said it expects to report a profit before tax (PBT) for the first half of around £61.5m, up slightly from the £59.8m recorded the year before.The broker said: "We leave our full-year PBT estimate [£116.8m] unchanged, and believe that the premium valuation (trading at 20.8 times prospective earnings) is justified by the visibility of the growth story, the quality of the customer proposition, and the strong returns metrics."Despite the positive comments, the stock was trading down 3.6% at 943.75p by 10:33 on Tuesday.BC