Updates from home retailers Dunelm and Topps Tiles painted a contrasting picture of trading conditions in the sector.

Value home furnishings specialist Dunelm surprised analysts with a worse-than-expected first-half update, showing that like-for-likes dropped 4.2% in the second quarter after a 2.1% increase in the first.

Dunelm said the fall reflected a “very strong comparative performance” as well as a “more difficult current trading environment”.

Brokers downgraded forecasts in response. Numis analyst Andy Wade said: “Having been one of our favoured picks in the sector for some time, we move from buy to hold.”

Total sales in the 26 weeks to January 1 rose 8.5% as Dunelm opened more shops and refitted existing superstores.

The retailer was cautious about the consumer environment and expectations for second-half trading. Dunelm said the recent rise in cotton prices is expected to “feed through to increased cost of goods by the middle of the calendar year”.

Dunelm chief executive Will Adderley said: “We are facing a number of external factors in our market, which could affect both consumer demand and bought-in costs for a period of time.

“However, we are very confident that we can use our strong financial position and entrepreneurial flexibility to trade our way through this period and build an even stronger business for the long term.”

Topps Tiles’ update was more upbeat. It reported like-for-likes up 2.2% in the first 13 weeks of the financial year to January 2. Total sales advanced 1.8%.

Topps Tiles chief executive Matt Williams said he was pleased with the performance, particularly in light of the weather disruption, which resulted in one “really

bad week”.

He said Topps Tiles gained share in the period. While Williams is concerned about 2011 trading conditions, he maintained: “I don’t see any reason why we can’t continue to outperform the market.”

The impact of the Vat rise on a tiling project is small, he said. “The world does not seem to have ended after the VAT rise.”

Despite the robust performance Investec analyst David Jeary was cautious: “With household spending set to come under renewed pressure in 2011, our stance reflects broader sector caution on a number of larger ticket retailers of more discretionary products.”

However, Espirito Santo analyst Sanjay Vidyarthi said: “This is a quality business with good longer- term recovery potential.”