FTSE 250

Can the Dunelm share price stay ahead of the FTSE 250 index?

Is further index outperformance ahead for the Dunelm share price?

Over the past year, the share price of FTSE 250-listed (INDEXFTSE: MCX) retailer Dunelm (LON: DNLM) has outperformed the index. It has gained 16%, versus a rise of 10% for the FTSE 250, as its financial performance has improved.

Indeed, last week’s trading update highlighted the positive performance from its multi-channel strategy. For example, total sales in the first half of the year increased by 11% compared to the same period of the prior year.

A key part of this performance is the investment made by the firm in its digital sales avenues. Online sales now account for a third of its total sales. Given that its major pivot towards e-commerce was relatively late compared to some of its sector peers, it has done an excellent job, in my view, of capitalising on consumer trends that have been accelerated by the pandemic.

Encouragingly, the firm also reported an upbeat sales performance from its stores. This could mean it is well placed to perform relatively well as a full economic reopening, and greater confidence among shoppers, returns during the course of 2022. It could be in a stronger position than many of its online-only peers.

However, the Dunelm share price may struggle to deliver index outperformance of the size that investors have become used to over recent years. Dunelm’s share price trades on a forward price-earnings ratio of around 19. Given that its bottom line is forecast to rise by around 5% in the next financial year, its valuation appears to be somewhat rich compared to some sector peers.

Moreover, the outlook for retailers could become more challenging. The cost of living is rising at the fastest pace since 2008. Fuel, energy and many other bills are rising rapidly. This could mean that consumer spending is squeezed, which may have a disproportionately negative effect on discretionary items that can be delayed, or traded down to cheaper options, should it be required.

Of course, Dunelm appears to be a solid business with a sound long-term strategy. It is well placed to manage the ongoing transition from in-store to online sales. However, with a more difficult outlook for retailers now that inflation has surged to a 14-year high, its share price prospects could be more limited than they have been in recent months. Therefore, outperformance of the FTSE 250 may be a more challenging task than it has been over the past couple of years.

Not Investment Advice Note: Views expressed are those of the writer. The author does not own any stocks mentioned. The article is information, not advice. Share prices can rise and fall. Past returns are not a guide to the future. Please do your own research.

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