Dunelm shares down 6% on RBC downgrade

Homeware retailer Dunelm (LSE: DNLM) saw a sharp decline in its share price, falling by 6%, following a downgrade by RBC Capital Markets.

The bank downgraded Dunelm’s rating from ‘outperform’ to ‘sector perform’ and lowered the price target from 1,300p to 1,000p. RBC’s downgrade was driven by expectations of moderated margins and potential softness in sales for Dunelm

RBC Capital Markets highlighted the headwinds faced by Dunelm, including cost-of-living pressures that are causing consumers to spend more selectively, potentially leading to softer sales. The firm also mentioned the challenges posed by a softening housing market, rising interest rates, a slowdown in online growth, and a decline in new store openings, which are expected to impact Dunelm’s top-line results.

The bank also noted that Dunelm’s margins had likely been temporarily supported in the past two years by reduced discounting, driven by higher demand and limited stock availability. However, RBC expects the company to return to a more normalised sales profile, forecasting a gross margin decline of approximately 1.3% in FY23.

RBC also expressed concerns about Dunelm’s revenue prospects, citing a more pressured consumer environment and a likely rotation in spending away from homewares and larger, discretionary purchases. The bank believes that consumer wallets under mounting pressure will likely weigh on discretionary income, particularly for big-ticket items such as furniture, which have contributed significantly to Dunelm’s product mix in recent years.

As a result of the downgrade, Dunelm shares experienced a 6.5% decline, trading at 1,047.00p as of 09:00 GMT. If selling pressure persists, this will mark the company’s worst day since March 3, 2022. Prior to this decline, Dunelm’s stock had shown a rise of nearly 18% since the beginning of the year.