Dunelm wary as hurdles loom in the coming year

HOMEWARES retailer Dunelm said it is wary about the next six months because of the recent VAT sales tax rise, faltering consumer confidence and higher cotton prices.

The group, which has 10 Dunelm Mill stores in Yorkshire, said it had a tough Christmas, driving like-for-like sales down 1.2 per cent in the 26 weeks to January 1.

Dunelm, which sells products ranging from curtains and bedding to rugs and lamps, said challenging conditions during its peak trading months of November and December had an impact, "albeit limited", on sales and earnings.

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"In the short term, we remain cautious about the UK consumer environment and therefore in our expectations for second-half trading," it said.

But Dunelm's chief executive Will Adderley insisted the retailer is well-placed for the long term.

"We have continued to develop our business successfully during the half and we were delighted to celebrate the opening of our 100th superstore at the beginning of December," he said. "The business is in good health operationally and we remain in a very strong financial position."

The group was founded by Leeds couple Bill and Jean Adderley in 1979 as a market stall in Leicester.

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It is the latest retailer to warn about rising cotton prices, after fashion group Next last week warned it would have to raise prices by eight per cent this year.

"Looking ahead 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," said Mr Adderley, who next month moves to executive deputy chairman, to be replaced by Nick Wharton.

"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."

Dunelm operates 110 stores, of which 100 are out-of-town and 10 are on high streets. It has a target of 150 to 200 superstores, and is relocating sm aller stores to new out-of-town locations, plus opening new superstores.

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Its superstores typically have around 30,000 sq ft of selling space.

Total sales grew 8.5 per cent to hit 275.7m during the first half, thanks to the contribution from new space.

Shares in Dunelm shed 5.8 per cent to close at 497p after stockbrokers Numis and Arden Partners cut their ratings on the firm.

Arden Partners said: "After the downgrades the shares are trading on over 17.5 times (Dunelm needed upgrades!) and though a useful premium is clearly justified for Dunelm, given the store opening roll-out potential, that is too rich for us."

Arden cuts its rating on Dunelm to "reduce" from "neutral" and reduced its target price to 480p from 500p. Brokerage Finncap cut its 2011 profits forecast by 4.9 per cent to 82.3m.