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JPMorgan downgrades Dunelm after profit warning
JPMorgan Cazenove downgraded Dunelm to 'neutral' from 'overweight' and slashed its price target to 620p from 710p following the homeware retailer's profit warning last Friday.
The company said last week that trading conditions had recently become "materially more challenging than expected". As a result of the warning, JPM has cut its FY18 and FY19 forecasts by 5% and 10% respectively, reflecting a combination of softer top line growth and negative operational gearing, as well as higher gross margin risk which it reckons will continue into FY19.
JPM also cut its FY19 group profit before tax forecast by 10% to £115m, driven by both a lower gross margin expectation and higher opex assumptions given that cost growth has been consistently above top-line performance in recent years.
"We believe that the UK consumer environment is uncertain and that big ticket spending in particular remains weak. Dunelm's performance has historically been correlated to housing transaction levels, and, with the group's now higher weighting into big ticket following the acquisition of Worldstores, we see greater risk than historically to a softer market outlook."
In addition, JPM argued that competition in the UK homeware and furniture market is growing, and it questioned whether the extended Dunelm/Worldstores' offer provides enough inspiration and uniqueness in this context.
Dunelm shares crashed last Friday after it said underlying profits for the year were likely to be "moderately below" the £109.3m delivered in 2017 following more challenging trading conditions in the fourth quarter.
At 0950 BST, the shares were up 0.3% to 546.50p.