Dunelm Trading, Abrupt Share Price Moves and Volatility

It’s a good job I am not an emotional person. This morning Dunelm (DNLM) issued what I considered a very positive trading statement for the last quarter. The share price promptly dropped 6% after the market opened.

Total group sales were up 5.8%, with like-for-like sales up 6.4%. In addition this is a company that is clearly making a successful transition from being a retail store business to a hybrid on-line/store model. On-line business was up 34.7% while store business was still up 2.9%. On a prospective p/e of less than 15 and a yield of over 4% this is starting to look attractive. The company says year-end expectations remain unchanged as it continues to win market share. The only slight negative was that “September trading was mixed in part reflecting a softer homewares market”. But should a retailer be judged on one month’s trading alone?

This is the third of my holdings to suffer abrupt falls in the last couple of days. The others were 4Imprint (FOUR) and Telecom Plus (TEP), neither for any very obvious reason although there were some large trades put through on the former. But the UK market has been falling driven by the nervousness over resolution of the Brexit situation no doubt. That looks even more problematic at present with it being clear that the EU thinks they can force Brexit to be cancelled by sitting on their hands and dictating another referendum or general election before they will negotiate a withdrawal agreement. Conspiring with Speaker John Bercow is the latest attack on the democratic constitution of the UK by the EU in furtherance of this objective. What’s the motivation for the position of the EU Commission on all of this? I would suggest as usual it’s about money which always drives politics and the actions of individuals. The departure of the UK from the EU will leave a massive hole in the EU budget which they have not even attempted to solve as yet.

These events mean of course that foreign investors, who hold the majority of UK listed companies, are spooked and the risk of a future Labour Government rises as the leavers vote is split between Conservatives and Brexit party supporters. The only positive aspect is that the falling pound, driven by the same emotions, is improving the potential profits of many of my holdings which have large overseas revenues. 4Imprint comes into that category of course so the recent falls are difficult to explain except on the basis of recent past irrational exuberance. Smaller cap stocks are particularly vulnerable because just a few trades can move the share price substantially.

When markets and investors get nervous, volatility does increase and sharp share price falls can happen for no great reason. This is the time to pick up some bargains perhaps?

Postscript: Commentators on the Dunelm results after the share price fell further focused on the threat to margins from a falling pound, but the company announcement indicated that they expect gross margin for the full year to be consistent with last year despite currency headwinds towards the end of the year.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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2 thoughts on “Dunelm Trading, Abrupt Share Price Moves and Volatility”

  1. Instead of asserting the the UK’s departure from the EU will leave a massive hole in the EU’s budget, I do wish you would stick to facts. As I understand it, the net contribution is around £9billion (source: Full Fact); certainly a large figure but hardly massive in the context of UK GDP. Less hyperbole please.

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