RBC lifts Dunelm to “outperform,” citing growth and margin momentum

Investing.com -- RBC Capital Markets upgraded Dunelm Group Plc (LON:DNLM), the UK’s largest specialist homewares retailer, to “outperform” from “sector perform,” lifting its price target to 1,300p from 1,200p on expectations of faster growth and margin expansion, in a note dated Monday. 

Shares of the British company were up 4% at 04:31 ET (09:31 GMT).

The analysts said the shares, trading at 13.5x CY26e P/E versus a historical average of about 16x, look “undemanding for a high quality business with a market leading offer, strong operational grip and a cash generative model.”

The note, led by analyst Manjari Dhar, cited stronger market share gains, gross margin momentum and steady cash returns as the main reasons for the upgrade. 

“The shares have lagged the sector despite Dunelm’s improving outlook. Hence, we see an opportunity here and upgrade Dunelm to Outperform,” the brokerage said.

RBC forecasts FY26 adjusted EPS of 81.66p, up 5.9% year over year, and revenue of £1.86 billion, an increase of 5.1%. 

Pre-tax profit is expected to rise to £223 million, up from £211 million in FY25. A 25p/share special dividend is modeled for February 2026, continuing a record of more than £500 million in surplus cash returned to shareholders over the past decade.

Gross margin expansion remains a central driver, with RBC projecting an additional +50-100 basis points uplift in the first nine months of FY26, “mainly from the lagged net effect of the weaker USD vs the GBP.” 

Dunelm sources about 30% of its products directly from Asia, paid in U.S. dollars, and hedges its exposure on a rolling 18-month basis. 

The analysts added that operational initiatives such as “the rollout of self-checkout, should allow Dunelm to offset 3-4% opex inflation this year (primarily coming from labour costs).”

Dunelm’s cash generation and low capital intensity, typically around 2% of sales, are expected to sustain shareholder returns.

While leverage is slightly above the lower end of its 0.2–0.6x net debt/EBITDA target, RBC said this reflects recent strategic investments, including freehold acquisitions and the Home Focus purchase in Ireland. Excluding those, leverage “would fall below the 0.2x level.”

The retailer’s market share goal of 10% in UK homewares and furniture, up from 7.9% in FY25, is supported by a strong product range exceeding 100,000 SKUs, a “good, better, best” pricing architecture and continued space growth. 

RBC models nearly 2% annual sales contribution from new store openings, including larger showroom-style outlets and smaller London formats such as Westfield White City, where 75% of customers are new to the brand.

Digital performance continues to strengthen, with Dunelm generating equal margins online and in-store. 

“60% of dunelm.com customers now see bespoke product ideas,” RBC said, noting that new chief executive Clodagh Moriarty’s omnichannel experience is expected to advance digital growth.

RBC’s DCF analysis values Dunelm at 1,295p/share, implying a 13% upside. The model assumes a 4% 10-year CAGR, 13% terminal EBIT margin, 9% WACC and 1.5% terminal growth rate.

RBC said the upgrade reflects Dunelm’s market leading proposition, improving gross margin, and continued capacity for cash returns, while acknowledging risks from UK retail softness and online competition.