Skip to main content

Running the Rule over Dunelm (DNLM)

"We are confident that we will emerge from this crisis as a stronger business ready to return to sustainable and profitable growth." Nick Wilkinson (CEO, Dunelm, 16th April 2020)

I have spent a lot of time writing about theory since I started writing my blog back in January 2020. My initial intention had been to take readers on a walk through approach and practicalities, spending a lot of time initially on psychology, then methodology. The rapid change in temperature of the Market at the back end of February 2020 caused me to change direction in my writing. I've written a lot recently about how we can respond as investors in times like these. It was always my intention to move on to application sooner rather than later. I'm now going to start applying some of the theory to real life situations.

As my first company in focus, I thought I'd look at Dunelm (DNLM). I hold no position in it and I don't tip (or am qualified to do so)*. I write simply to educate. However I cannot deny that it is a company that has piqued my interest for some time. The drawback has however been price; it's usually been too expensive for me.

Dunlem has however been hit hard by the Market Crash. It was trading at £7 per share on 20th March 2020. It had hit £14 per share on Valentine's day, only 5 weeks before off the back of a very good report to the Market. What had happened? Well, a lot of shares got sold off heavily in the Panic and certain shares (oil producers and retailers) got hit especially hard. They were seen as the riskiest plays as the Market took a downturn and the sell-off was indiscriminate. It didn't matter how great your business was. If you were in the wrong sector demand for your shares, they slumped.

Dunelm came to my attention as it was one of those retailers that was favoured by my wife. My wife is (by her own admission) a savvy shopper and recognises the benefit of both quality and value. For homewares and furnishings Dunelm rapidly became her number one choice at the expense of the older players (the Department Stores) and the new pretenders (Supermarkets etc.) Only John Lewis came close and you can't buy shares in John Lewis. Legendary investor Peter Lynch writes in his classic One Up on Wall Street that advice from his wife's shopping habits led him to discover great companies on more than one occasion. Of course following this approach alone is not recommended, not least as retail is more brutal than ever as a sector, but the truth is that there will always be some great finds out there and it really isn't a bad place to start.

So why did I like Dunelm when I started to look into it?

  1. Balance Sheet- Appreciating amount of cash on balance sheet; growing amount of Work Capital (impressive for a high turnover cash retailer); sensible gearing (levels of net debt). Sensible management of lease liabilities.
  2. Growth- increased revenues year on year, growing levels of earnings per share, improving operating margin. 
  3. Dividends- progressive dividends policy, with reasonable coverage by earnings
  4. Quality- (a key metric for me) a return on capital of over 30%
  5. Good management- evidence of a strong team in charge with clear focus on tight and focused management of the business
  6. Strategy- constantly reporting ways in which they are looking to improve the earnings in the business. A good move to online retailing (key to survival for most retailers).
  7. Consumer demand- potentially quite a recession proof business as they sell everyday items that are needed through good times and bad.
  8. Competition- main competition seemed to be the Supermarkets (who lack focus on this area and often seem to be more focused on price than quality) and Amazon (who lack the obvious deficiency of physical stores and the need for the item "today" with price being less and less of a factor)
  9. Position in FTSE- comfortably in the FTSE250 and therefore picked up by Indices
  10. Decent Healthcheck scores- both Pitroski F-Score and Altman Z2 Scores (Source: Stockopedia)
The main problem for me was the P/E (Profit to Earnings) ratio. It was simply too high. Anything over 20 has (in my very rough estimation) much less wriggle room if things start to go wrong. That's not to say I haven't bought shares on such warm valuations and done well. They usually tend to be very high growth prospects though.

So would I be tempted in now? 

The shares are definitely a lot cheaper than they were, so if you really believe in the story then they are as a prospect arguably less risky than they were.

I really liked the Company's statement to the Market on Thursday 16th April 2020. The top management have taken pay cuts. They have made sensible moves to use Government schemes to protect jobs, they have a strategy to re-open some stores safely, their online business is doing well. They have also protected their working capital really well by drawing their full £175m revolving facility and keeping it unused but ready to deploy. As a result the Company will be able to survive a prolonged lockdown.

Looking at the charts today (18th April) both RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence) look fine. The Share Price is now £8.84, so why Dunlem is not quite the bargain it was on 20th March, it is still only at 62% of its February  2020 high.

On a general level I am nervous about deploying my cash reserves too liberally at present. I can foresee more Market trouble ahead. However there are opportunities to buy quality in times like these and in my humble view Dunelm fits the quality bill at present.

Stay safe and always do your own research.

* This blog is written subject to the usual disclaimer.


Popular posts from this blog

How I pick shares- Part 5 (Management)

Bad directors rarely become good directors  Richard Crowe (aka the Cockney Rebel) I listened to an excellent  podcast  recently on PI World with well known investor Richard Crowe a.k.a. Cockney Rebel. He has developed a specialism in buying shares in turnaround situations. In the course of the podcast he talked about several companies which he has invested in recently and how the common denominator was good management. It is a truism that if a company is well run then the cards are stacked in its favour. Conversely bad management means that any company, however great its ideas, will have an uphill struggle if it wants to succeed. To quote a rather memorable phrase from investor Nigel Wray,  a fish usually rots from the head . So what makes a good manager? Warren Buffett has spoken extensively about this. He wrote about Tom Murphy of Cap Cities- such an example: I mean, no one had either the ability -- no one could top his ability or integrity, in terms of the way he ran Cap Cities for

17 Books to get you started

  Reading brings knowledge and knowledge is power; therefore reading is power  Emma Chase One or two people I've been speaking to recently have asked me for advice on how to get started in the world of share investing. I wrote my story back on  15 February 2020 , giving an overview of how I got into the interesting world of trading and investment in shares*. The key to it (and it is really unavoidable) is reading. The good news is that there are a lot of great books out there to choose from. With the Internet you can supplement your diet with podcasts, blogs (like this) and even YouTube videos however in my view there really is no substitute to learning from some great investors by reading. I've included links below mostly to Blackwells in Oxford (one of my favourite places in the World). You may find the book cheaper on Amazon or eBay who both offer second hand editions. However I am a fan of Blackwells as they offer an excellent range of investment books, many of which you ca

How I pick shares- Part 3 (Hidden Value)

Value investing is at its core the marriage of a contrarian streak and a calculator. - Seth Klarman Thank you for the encouraging comments that I've received in the last couple of blogs*. It's nice to find out what I write is of help to people. Just to recap, in the first part I looked at how  gathering knowledge  is a good thing to start with. In essence the better researched that you are, the better chance you have of success. As Peter Lynch put it memorably, If   you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards. In the second part, I began to look at  value  and how you can start to find those undervalued companies that have a decent chance of growing into their true value.  You actually need to train yourself to think independently of the herd, because if everyone else had thought they were undervalued and had bought the stock, the price would be a lot higher than it is. This is why it