Dunelm downgraded to “sector perform” as valuation limits upside, says RBC

Investing.com -- RBC Capital Markets downgraded Dunelm Group (LON:DNLM) to “sector perform” from “outperform,” pointing to valuation constraints and a muted near-term outlook. 

The downgrade follows a rally of more than 20% in the company’s share price over the past three months.

“We view Dunelm as a high quality business. It’s cash generative, has executed well in recent years and expansion potential has stepped up,” analysts at RBC said in the note.

“We now see less upside relative to others in the sector, especially in the context of softer housing market trends,” they added. 

Dunelm shares are trading at around 15 times estimated 2025 earnings, which RBC described as “towards the middle of its historical range.” 

The analysts said the valuation now reflects the company’s strengths and limits scope for further gains. The brokerage maintained its price target at 1,175 pence, slightly below the stock’s latest close of 1,193 pence.

RBC said it prefers peers such as B&M, which trades at roughly nine times estimated 2025 earnings and “should benefit from an inflection in LFL sales trends, with a share buyback likely by year-end.”

The brokerage flagged weaker trading conditions in U.K. homewares in May, following stronger seasonal sales in April due to warmer weather.

The analysts linked this to a potential pull-forward in demand. Additionally, recent changes to U.K. stamp duty rules, which took effect in April, are expected to weigh on housing transactions and home-related retail spending through late 2025 and early 2026.

RBC also noted that gross margin benefits from lower freight costs and a stronger pound will not materialize until the second half of fiscal 2026. 

Dunelm’s hedging and freight contract structures result in delayed impacts. “We model c.40bps of gross margin expansion in H2 FY26,” the brokerage said.

Cost pressures remain a concern, especially from wage inflation. The analysts estimate an annualized headwind of £18 million from increases to the National Living Wage and employer National Insurance contributions, most of which will fall in fiscal 2026.

While Dunelm’s cash generation remains strong, RBC does not expect another special dividend before February. 

The company has returned cash to shareholders in nine of the past 12 years but recently increased capital expenditure with two freehold property purchases.

The acquisition of Ireland-based Home Focus is viewed as a first step toward a broader international strategy, but RBC expects progress to be cautious. 

CEO Nick Wilkinson’s planned retirement also introduces an element of transition, though the brokerage expressed confidence in the handover process.