RBC predicts consensus downgrade in Dunelm's future, reiterates 'top pick' rating on ASOS

After home furnishings retailer Dunelm turned in a softer-than-expected set of fourth-quarter results on Thursday, analysts at RBC Capital Markets decided to take a fresh look at their numbers on the firm.

With Dunelm reporting broadly flat like-for-like sales across the group and a 50 basis point drop to gross margins, which follows an unexpected profits warning in May, RBC said it was continuing to see a consensus earnings downgrade on the horizon.

Dunelm was left with a higher-than-expected volume of clearance merchandise at quarter end, due to disappointing footfall seen in the quarter and its pre-tax profit guidance for the full year has now been revised to £102m, short of market consensus for a £106m profit - implying a 4% consensus downgrade.

Like-for-like sales were in line with lowered expectation at 0.1%, something RBC felt reflected a soft homewares market and challenging retail trading environment.

Online trading continued to perform well, delivering growth of 41.8% in the quarter.

"We think the outlook for the UK homewares market remains tough - a combination of challenging consumer environment and housing market will continue to pressurise discretionary spending on homewares" the broker said.

"While there are opportunities going forward, we think in the short term, Dunelm needs to rebalance its promotional offers that are currently driving its LFL sales and its gross margins," added RBC's analysts.

RBC also noted that, in the medium term, it thought Dunelm's £2bn sales and market share targets looked "ambitious".

The Scottish broker left Dunelm's 500p price target and 'underperform' rating unchanged.

RBC also took another look at ASOS, highlighting the retailer as a "best-in-class" operator.

With ASOS continually delivering sustainably high levels of growth owing to a large market opportunity and a competitive, ever-improving proposition, nothing in the firm's Thursday morning trading update undermined the broker's view on the group as it reiterated its 'top pick' rating.

RBC called ASOS a "compelling buying opportunity".

"We believe that the share price pull-back today, on the back of softer P3 sales growth (+21% cFX vs. +25% expected) creates an attractive opportunity to buy into a fast-growing, structurally and competitively well-positioned fashion retailer," the analysts noted.

RBC dropped its target price on ASOS to 7,700p from its previous 7,800p mark.