Dunelm positive despite ‘challenging market’

Under promising and over-delivering is a good approach for boards and investor relations departments, but are retailers overdoing ‘post-Brexit tough market conditions’ worries? It’s become almost a reflex, with mention in virtually every company update this year. UK retail sales numbers continue to show resilience yet the companies who earn their crust in this environment keep on stressing how tough it is.

In September Dunelm warned that the trading climate would remain challenging as disposable incomes of the average British shopper come under pressure. Despite this it suggested there had been an encouraging start to the year in the first two months of Q1.

It wasn’t exaggerating, on the second part at least. Total revenue for the first quarter rose by 24.8% to £247.9m, with a like-for-like improvement of 9.3%. Better weather and an easy comparison with last year helped.

Margins have taken a battering thanks to the inclusion of sales from the lower margin Worldstores. In addition, Dunelm notes that a ‘focus on newness in our latest ranges and the planned higher seasonal sales mix’ hit margins by a similar amount. This is not going to last, though, and margins should be in line with last year for Dunelm, but lower for the group due to the addition of Worldstores.

Shares in Dunelm have already fallen due to the soft performance last year that saw profits decline more than 28%, but with a resilient UK retail market, online growth from Worldstores building and easier prior-year comparisons, investors are warming again to the shares. At the open DNLM was up over 6% to 743p.

Slower US sales growth makes Ted Baker look a little less sharp

Further evidence that it's not all doom and gloom in the retail sector came by way of another upbeat trading statement from Ted Baker.

But does Ted Baker really reflect the wider UK retail market? Probably not: this is more and more a global brand rather than a straight British high street retailer. A new store in Kuwait with further openings planned in Qatar, Malaysia, Mexico and its first in India later this year point to the kind of global expansion that means its revenues and profits will become increasingly less reliant on the UK market. This can only be a good thing for Ted Baker, even if UK retail sales are holding up for the moment. Its push overseas is clearly paying off and the growth looks sustainable and manageable. Its controlled approach to distribution and the focus on brand should continue to put it on a strong footing.

Profits rose broadly in line with expectations, with the company reporting a pre-tax profit of £25.3m, or £24.2m accounting for exceptional items. This ought to keep full-year profits on course to exceed £70m in spite of what it calls ‘challenging external market conditions’.

Whilst sales growth has slowed a touch thanks to competition and falling tourist numbers in the US, these figures build on a strong update in June that reflects the momentum in its international expansion and booming wholesale and online sales. Ecommerce sales jumped 44%, while wholesale sales rose 14%.

The UK still accounts for the lion’s share of sales but the fastest growth is seen in Asia (+29.5% versus 15.8% last year), while North America is also strong (+18.8%), albeit this was down from 28.7% growth in the same period of last year. The slowing in North American sales growth does take a shine off otherwise stellar numbers.

Constant currency sales arguably tell us more and these look good, particularly in Asia. Asian sales growth on this basis climbed from 6.5% last year to 19.6% this year. In North America it’s fallen from 18.8% to 7.8%, while in the UK and Europe it has risen from 6.7% to 9.1%. Across group, sales growth has slowed a touch to 14% from 14.4% a year before, or from 10.7% to 9.5% on a constant currency basis.

Shares in Ted Baker remain about 20% below their peak two years ago and despite a 20% rise from the July trough they are still down year-to-date. But with continued international expansion on fixed central costs, it may recover further into the year-end.

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