Dunelm sustains sales momentum and Barratt rides property boom

“Are we at a major turning point for markets? The FTSE 100 is having another bad day, falling sharply at the market open but then quickly narrowing those losses to only trade 0.4% down at 7,098. Yesterday we saw similar erratic behaviour with the index falling and then trying to claw back towards the end of the day,” says AJ Bell Financial Analyst Danni Hewson.

“This suggests that investors are happy to buy on the dips, but it also suggests we’re entering a more fragile state for the market.

“Value stocks trumped defensive names on the FTSE on Wednesday, with energy, banks and miners trying their best to move forward, while pharmaceuticals, tobacco and consumer goods acted as a drag on the index.

“Inflation is front of mind once again, with the latest UK figures considerably higher than expected, and following a similar trend in the US. Inflation is good for commodity producers and stokes the fire for interest rates hike, which benefits banks – hence explaining the top movers on the FTSE.”

Dunelm

“There has been the classic reaction from the market to Dunelm’s latest update. Despite saying profit will be ahead of expectation, the share price has fallen as the company is having to spend extra money to stay competitive.

“Success with online sales has warranted investing in more warehousing and distribution infrastructure. That means a cash outlay now, but the potential to support much higher levels of the business in the future, so a wise investment.

“The market doesn’t always see it that way. Investors are often too short-term in their thinking. Indeed, that seems to be the case with other points in Dunelm’s trading update.

“Delaying its summer sale into the new financial year means the recent fourth quarter period had better margins than expected as it didn’t have the dilution effect of offloading products at lower prices. But that means the 2022 financial year will have three sales instead of the traditional two, thus a hit to margins. This is only a one-off impact and nothing to really worry about.

“Concerns about ongoing disruption to the supply chain means inventories will rise to ensure that it has enough stock to meet demand. That will push up storage costs and no doubt gobble up working capital, but fortunately that can be partially balanced by working capital benefits in the financial year just ended.

“The key takeaway from Dunelm’s latest update is that sales have remained strong beyond the initial reopening spending splurge that we saw as consumers were allowed back into shops, and they had cash ready to spend.

“Dixons gave the same message – for certain companies, the sales boost has momentum and it’s not simply a post-lockdown flutter.

“Dunelm is widely considered to be a top-notch retailer and its proposition of affordable but good quality homeware products has resonated with consumers as much more attention is paid to the state of one’s home.

“Lockdown brought about a big surge in DIY activity in order to make the home a nicer place to be. It’s not all about fixing broken fences and having a splash of new paints on the walls. The home improvement bug also includes the bedding, curtains, blinds and other items sold by Dunelm.

“Fortunately, it had already made a big investment in the digital channel prior to the pandemic so it was able to capitalise on heightened interest in its products as more people went online. Ultimately the trading performance seen over the past year or so would suggest Dunelm falls under the category of ‘the strong are getting even stronger’.”

Barratt Developments

“The muted reaction to housebuilder Barratt Developments’ lifting of full year guidance hints at longer-term concerns among investors over how long the current boom can last.

“Pent-up demand built up during the pandemic, the changing requirements driven by a shift to working from home, mixed with more than a dash of state support has been an extremely powerful cocktail for the housing market.

“And this combination has seen the good times roll for housebuilders like Barratt.

“However, news that Barratt’s profit for the year to the end of June will be above the top end of expectations is behind us now and, after a party time for the sector, there is increasing concern over a possible hangover to come.

“For the time being rising house prices are keeping pace with increases in raw material and other build costs, however the obvious corollary of this is how a downturn or even a relative cooling in the property market will leave Barratt exposed.

“The good news is that, like several of its peers, Barratt is sitting on an enormous pile of cash. This gives Barratt the ability to reward shareholders for the patience should there be a deterioration in trading.

“The exceptionally strong balance sheet at Barratt’s disposal also allows it to make investment decisions for the long term which should leave it well placed through several economic and housing market cycles.

“One potential issue floating in the background is the competition authorities’ investigation into the sale of leasehold properties, with Barratt, unlike its peer Persimmon, yet to reach any accommodation with the regulator.”

These articles are for information purposes only and are not a personal recommendation or advice.