Dunelm’s quarterly update this week echoed some of the concerns and challenges the retailer raised at its interims, when it suffered a 26% drop in pre-tax profits.

Boss John Browett said the homewares market has continued to decline in the 12 weeks to April 1, but didn’t appear too bruised. 

Dunelm has “continued to outperform the homewares market”, he thundered, and “enhanced its position as market leader”.

At its half-year mark in February, the homewares specialist said its bottom line was knocked by a temporary softening of the market, which has been timed badly with a significant period of investment.

But the former Dixons and Apple boss is confident that the hard work – and hard cash – will pay dividends in the not too distant future.

“We’re doing a huge amount of infrastructure investment in the company,” Browett told Retail Week earlier this year, “opening and moving depots, building IT systems and investing in head office resources in order to grow the business in the future.

“And it’s all come at once, along with being hit by a slightly softer market, which has mainly been driven by the weather and, to a lesser degree, consumer demand.

“But you have to keep doing the right thing for the business,” Browett insisted, “even if it happens to be inconvenient timing.”

In what Browett termed an “extremely busy” half-year, Dunelm also acquired Worldstores, shelled out start-up costs for new stores and paid for additional marketing.

Above and beyond that, it was landed with one-off costs totalling £3m following teething pains at a new depot.

“If you subtract all the costs that won’t be repeated in the future, we’re actually pretty flat year-on-year,” Browett says.

But will Browett’s strategy pay off for Dunelm in the long-term?

A multichannel future

Part of Browett’s plan is to ensure the business is geared up for shoppers that continue to migrate online and demand more convenience and choice.

“We think the future is multichannel, and all the work we’re doing is positioning Dunelm to win in that multichannel world,” he said.

“That’s why we’re investing in the infrastructure and why we bought Worldstores. It gives us all the components we need to create a really amazing business.”

While Browett said the progress will be incremental, and the work will “always take longer and cost more” than he anticipates, he said service improvements are lined up to land every six months.

“Each new thing will make a difference, such as the imminent arrival of click-and-collect, integrated two-man delivery and our in-store ordering on iPads,” he said.

Dunelm has also overhauled its till systems to integrate the in-store iPads, meaning customers can now shop its full range using just one check out.

Peel Hunt analyst John Stevenson applauded Dunelm’s efforts to ”better drive online participation”. 

He said: “On that front, Dunelm remains one of the few retailers…for which online sales have proved to be incremental rather than substitutional, noting a rise in sales densities – both including and excluding online sales.

“Prior to Worldstores, this was still a transitional year for Dunelm, reflecting investment in distribution capability and infrastructure, the benefits of which we expect to flow through next year.”

He acknowledged a risk of forecasts being “chipped along the way as the Worldstores integration gathers pace,” but says: “We can’t fault the strategy here”.

Next up: store refurbishment

Given that “stores are a hugely important part” of Dunelm’s multichannel offer, Browett said he’ll also continue to invest in its estate.

Dunelm jpg

Dunelm stores

In addition to opening five new shops in its second half – including three within the M25  – the homewares boss has ambitions to roll-out Dunelm’s new store format across the estate over the next five to seven years.

Browett said: “The new format stores are trading well – ahead of what we expected, but we think we can get more out of them still. There’s a few negatives that we’ll correct over the next six months before we go about putting that format into the main estate.”

Even with this task ahead of him, Browett said Dunelm is “lucky” and in a comparatively strong position.

”We don’t have to restructure our real estate or get rid of old stores we don’t want. We have exactly what we want and can focus instead on giving customers what they want for the future.”

Continued confidence

Despite the profit hit and a drop in the share price, analysts appear to have retained confidence in Dunelm.

Canaccord Genuity analyst David Jeary said both core Dunelm and Worldstores performed better than expected, and seemed sure of the retailer’s “lean cost model” and ongoing investment.

But, as Browett himself agreed, the pay-off won’t be immediate.

Stevenson noted that, while Dunelm is “far from broken”, it will be “18 months or so until we start to see the benefits” of its recent initiatives.

Looking ahead, Retail Week Prospect analyst Nick Found said that, having reiterated the short-term and exceptional nature of its interim results, “Dunelm should be in a better place in the second half of the financial year.”

“It’s a really exciting time to work at Dunelm. We’re on a great path,” Browett concluded.

Dunelm investors will hope that path is paved with gold.

Article first published February 9, 2017.