Dunelm Group (LON: DNLM) saw its shares plummet over 6% today after the homewares retailer tempered expectations for its full-year 2026 pre-tax profit (PBT).
The company, in its third-quarter trading update, indicated FY26 PBT is now expected to be towards the lower end of consensus expectations, triggering investor concern despite positive sales growth and margin improvements.
The retailer reported a 2.1% increase in total sales for the third quarter, reaching £472 million. Year-to-date sales also showed growth, up 3.1% to £1,398 million. Digital sales continue to be a strong driver, accounting for 43% of total sales in Q3, a 2 percentage point increase year-on-year.
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Gross margin saw a 30 basis point improvement in the quarter. While benefiting from favorable foreign exchange rates seen earlier in the year, the company noted an increase in customers purchasing discounted items, reflecting a value-seeking trend amidst the current economic climate.
The revised profit outlook overshadowed the positive sales and margin figures. The company cited a softening in sales, particularly in March, and an uncertain external environment influenced by global events. The consensus average of analysts’ expectations for FY26 PBT is £213 million, with a range of £210 million to £217 million, indicating the company expects to be closer to the £210 million mark.
Dunelm is actively managing costs, keeping its H2 cost plans on track. The company is also navigating the impact of instability in the Middle East, which is expected to have a small direct cost impact this financial year. Productivity improvements and disciplined investments are helping offset external pressures.
Despite the short-term headwinds, Dunelm remains confident in its long-term growth prospects. The company highlighted the full launch of its mobile app in Q3, which has already garnered over 300,000 downloads. Early data suggests improved conversion rates and increased spend per transaction through the app. Expansion plans are also in motion, with a stronger pipeline of new store openings expected in the next financial year, including a store in Kingston-upon-Thames.
Clo Moriarty, Chief Executive Officer, commented: “We saw further sales growth in Q3, against an uncertain backdrop for both customers and businesses. Although the external environment is not helpful in the short term, we continue to focus on the areas within our control – strengthening our proposition while operating efficiently and effectively.”
Despite the share price reaction, analysts remain cautiously optimistic, pointing to Dunelm’s robust market position and digital growth. However, the near-term profit outlook will likely weigh on the stock until there is more clarity on the consumer environment.
Analyst Summary: Bull and Bear Cases
Bull Case:
- Continued sales growth, with a 2.1% increase in Q3 and 3.1% year-to-date.
- Strong digital performance, now accounting for 43% of total sales.
- Successful mobile app launch with over 300,000 downloads, driving higher conversion and spend.
- Gross margin improvement of 30 basis points in the quarter.
- A strong pipeline for new store openings is planned for the next financial year.
Bear Case:
- Tempered profit outlook for FY26, now expected at the lower end of consensus.
- Softening sales observed in March, indicating potential consumer weakness.
- An uncertain external economic and geopolitical environment is impacting consumer confidence.
- Increased customer preference for discounted items could pressure long-term margins.
- Direct cost impacts from instability in the Middle East, although currently small.
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