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It's not easy out there retail special: Dunelm, DFS & ASOS

By Chris Bailey | Thursday 12 July 2018


Disclosure: I own shares in one or more of the stocks mentioned. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Lots of updates out there in the troubled retail space. Troubled for all the reasons we see, know and read about...but, of course, not completely uninteresting. So time - in the words of the greatest value investor out there - to ‘get greedy whilst others are fearful’?

I have - erroneously it appears - loved up Dunelm (DNLM) previously. As noted HERE, I am not a frilly curtains and related expert but Dunelm strikes me as a market leader with a propensity to return cash to shareholders - attributes which I like. Today's update has its good and bad parts. Online growth unsurprisingly remains strong but hindered by the weather and consumer caution (more of that later), physical store like-for-likes were down. Gross margins in the second half though did improve as a couple of small acquisitions bedded down and (hopefully) a final set of charges/writedowns associated with these has now occurred.

Put it all through the mixer, profits are a touch down for the full year but at today's price, it is barely trading on x10 earnings, net debt is negligible and cash flow covers the 5%+ dividend and internal capex. With the shares back to levels last seen in 2012 I think there is value here. I am getting greedier on this name.

By contrast, the last time I wrote about DFS (DFS) HERE, I was not as complementary, highlighting a fear that debt/finance liabilities would hinder the company even beyond the inherent challenges of trading. I am still concerned about the former but it is the latter group of concerns that are nobbling the shares today as a combination of warm weather and some supplier disruption in the Far East impacted sales. Certainly such issues can be worked through...but all this does is bring us back to the debt/liability situation again. Longer-term readers may also recall me mentioning in the above linked write-up that 'if England do prevail in Russia over the summer in the football then I will go and order a new sofa at my local DFS emporium'. Well...that's another potential order lost. Maybe I will get my cash to replace my 2001 model at the time of the Euro 2020 championships... In the meantime, avoid the shares.

And finally, from the good and the bad to the intriguing one. I noted a week or so ago that ASOS (ASC) had been very smart in its choice of a new Chairman. Today's update has pushed the shares down 7% mainly because the company has talked about sales growth being at the low end of their hoped-for 25-30% range...but gross margins were higher. Now there undoubtedly can be a little bit of a trade-off between the two and, over the course of my investing life, I have tended to prefer cash flow / pricing power over sales per se. In short - as the old retail adage puts it - 'sales are vanity and profits are sanity' (and cash flow is gospel). I said at the link above that 'I am not going to get all gooey eyed about the shares before I have a look at the next set of numbers' and for a full set of numbers insight, we are going to have to wait for later in the year. However I do trust in Adam Crozier. If you own them, I would not panic about the shares falling sub £60 today.


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