Dunelm (LSE: DNLM) is up 25% so far in 2021. A trading update Wednesday helped, giving the shares a 5% boost by midday. The Covid-19 crash had sent the stock plunging in March 2020. But since a low that month, the Dunelm share price has more than doubled.
Looking back further, it seems investors have had a love/hate relationship with the home furnishings retailer. Over the past five years, there’s a 60% gain, but that’s been down to the second half of the period. Prior to that, the Dunelm share price had been in a bit of a slide from its previous high-flying growth spurt.
Dunelm does seem to be back in favour now, though. The latest update covers the first seven weeks of the fourth quarter (from 28 March). There’s not much point comparing with the same period last year, because of the devastating effect of the pandemic on the retail sector. Instead, the company said: “Total sales increased by 59% on a 2-year basis against the equivalent period in FY19 (noting that stores were closed in the comparative FY20 period).”
Longer-term trends?
This is a very short period, however, and maybe it’s due to a short-term post-lockdown rush? Still, the update looks promising to me. And judging by the Dunelm share price reaction, the market likes it too. But I’m wary of reading too much into it at this unusual time. I reckon it could take another year or so to see where the longer-term trend might be heading.
This year, at least, should be good. And it will be, partly thanks to growth in the company’s online offerings. Dunelm reckons that “full year profit before tax (PBT) will be significantly ahead of the latest range of analysts’ expectations.” The firm anticipates a figure “in excess of £148m.”
I’ve considered buying Dunelm in the past, but I’d thought the shares had become a bit overvalued. So how’s the valuation looking now, based on the latest prognosis? If EPS beats the 2019 PBT figure by the same proportion, it should come in around 60p. On today’s Dunelm share price, that suggests a P/E multiple of around 25 to 26. I see that as high for a retail stock, with the FTSE 100 long-term average being closer to 14.
Dunelm share price growth factor
The valuation appears to factor in a fair bit of future earnings growth, which I guess is to be expected. And by the standards of some growth shares, the Dunelm P/E could look pedestrian. But will that growth happen? Prior to the latest update, analysts had earnings growth of 23% on the cards for 2022. If that comes good, it would drop the P/E to around 21. I do wonder if that might still be a bit rich.
Overall, Dunelm is on my list of potential growth buys. We should have a further trading update in July, with results due in September. Those should help maintain interest in the Dunelm share price for the next few months. But I can’t help wondering if we could see a bit of a sell-off after that and maybe better buying opportunities to come?