Industry Spotlight

Dunelm, JD Sports and Next share prices: which retail champion to back?

It’s not all doom and gloom on the British high street. Even amid a general slump in consumer retail spending and the impact of online sales on businesses which focus on selling via brick-and-mortar stores, there are businesses which have been able to buck the trend. 

Here are three names in the furniture, sports and fashion segments that have won over shoppers and shareholders alike in the first half of 2019.

 

Dunelm

Furniture and homeware sales are among the most sensitive to shifts in consumer sentiment, and brokers have been less than bullish about the potential for the likes of B&Q owner Kingfisher [KGF] or Carpetright [CPR] to provide returns for investors. 

One retailer that bucks the trend, however, is Dunelm [DNLM]. Last week, the homeware retailer announced an 11.6% year-on-year revenue increase for the 13 weeks to 29 June 2019. Dunelm has been fast to adapt to internet-enabled shopping patterns, shutting underperforming outlets and turning to online instead, to compete with the likes of Wayfair [W]. When looking at the performance of Dunelm.com alone for the same period, revenues were up 37% year-on-year.

With stellar share price growth of 69% to 922.5p year-to-date, as of Monday's close, analysts at Stifel are willing to overlook its expensive forward PE ratio of 19.81 (higher than the sector average of 18.75). Meanwhile, UBS, which holds a 930p target price on the stock, said further acceleration in online sales would convince them to narrow the gap with their fair value assessment of 1,200p.

 

JD Sports

For sports retailers across the globe, “athleisure” is the latest strategy buzzword. JD Sports [JD] has been capitalising on the trend for casual sports apparel both at home and overseas, announcing in a 16 April update that it had opened 39 stores across continental Europe, and five in the US over the year to February 2019.

It also reported a near 50% increase in sales over the period, which hit £4.7bn, with pre-tax profits up by 15.4% to £339.9m. 

There were some blemishes, though. The business has increased its debts significantly, from having net cash of £222.7m to having debt of £85.1m. Meanwhile, its takeover of Footasylum, announced in April, is being probed by UK competition watchdogs. Furthermore, around a third of shareholders in May voted against a £6m bonus for executive chairman Peter Cowgill, prompting a review into pay governance.

Nevertheless, analysts have been enthused by an 80% year-to-date stock gain, and said last week’s closing share price – 613.80p – likely undervalues the brand. “A mid-teens PE for a company that is exporting its skills successfully, building relationships with the key brand and delivering rapid growth is too low,” wrote Peel Hunt.

 

Next

E-commerce upstarts like Farfetch [FTCH], Boohoo [BOO] and Asos [ASOS] are forcing traditional clothing retailers across all price points to adapt or die. Next [NXT] is learning to adapt. For the three months to 17 April, online sales grew 11.8%, while full-price sales in physical stores fell 3.6%. Online sales now exceed those in the brick-and-mortar channel.

Analysts are nonetheless cautious, noting that 2018’s rigid winter season makes for flattering year-on-year comparisons, and warning that continuous investment in online will eat into margins: at £715m, 2019 profits are forecast to be £8m lower than 2018. “It is the same old story with the fashion house, whereby the online division offset the poor high street performance,” wrote CMC Markets’ David Madden.

But Next’s reputation for providing regular shareholder payouts means that traders are more than willing to hang on to shares which, as of Monday's close, have gained 37.4% through 2019. Accounting for a planned £300m share buyback through the year, the current 5,480p share price implies a valuation of 12 times expected full-year EPS.

Analysts at the Share Centre call the stock “no better than a hold for now” due to brick-and-mortar woes. Still, Hargreaves Lansdown likes how business and leases are managed, and the “sensible” capital return policy supports its view “of Next as one of the UK's better-run retailers.”

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