This FTSE 250 stock is falling today, despite great results. What’s going on?

Full length shot of a happy senior couple drinking coffee and spending time together at home

The fact that we’ve spent a lot of our time indoors/working from home over the last year or so has been a huge tailwind for any retailer operating in the space. Just ask FTSE 250 growth stock Dunelm (LSE: DNLM).

“Exceptionally strong” sales

Today, the homewares seller announced that total sales rose 26.3% year-on-year to £1.34bn. As one might expect, given the temporary closure of its shops, almost half (46%) of these came from the firm’s digital offering.  

The last quarter was particularly successful. Over the 13 weeks to 26 June, sales more than doubled compared to over the same period in 2020. Clearly, there was a lot of pent-up demand for new curtains, cushions and decorations! Indeed, sales since the re-opening of retail stores in mid-April were described as “exceptionally strong.”

Of course, it might argued that last year was a one-off and a comparison with the firm’s numbers from two years ago is a better gauge of how it is progressing.

Fortunately, Dunelm provided the figures from 2019 as well. From this perspective, total sales were still up almost 44% over Q4 and 21.4% for the full year. So, however it’s viewed, it’s hard to deny the FTSE 250 constituent is doing very well. 

Having “delivered sales growth materially ahead of the market” in Q4, Dunelm now expects pre-tax profit for the full year will be around £158. Positively, this would be “slightly ahead” of what the market was predicting, according to the company.

So are the shares a buy? 

Well, prior to today’s update, Dunelm’s shares were trading at 22 times forecast earnings. This looks like a pretty reasonable valuation to me, especially taking into account the firm’s history of generating high returns on the money it invests. The company also had higher-than-anticipated net cash of £129m at the end of the reporting period. 

Having said this, there are a few things worth bearing in mind. First, Dunelm said today that its supply chain continued to be impacted by the pandemic. It now expects inventory levels to rise in the first half of the year. This means higher storage costs. For how long this continues, we simply don’t know. 

On top of this, Dunelm’s commitment to growth means higher investment. Although spending cash on improving systems and stores is inevitable, investors tend to grumble when companies announce such a strategy. This may go some way to explaining why the share price is down over 3% this morning. 

Like fellow lockdown beneficiaries Kingfisher and Howden Joinery, there’s also the possibility that the (almost) full lifting of restrictions could spell the end of the purple patch. The fact that Dunelm expects a “continued appetite for consumers to improve and refresh their homes” doesn’t mean it’ll be as high as before, of course. Will this take priority over a family holiday or two? I’m not so sure. 

Rounding things off, there’s the opportunity cost to consider. Are there even better growth stocks to be found elsewhere on the market? I think so, even if investors might be required to pay an even higher price for them.

On my watchlist

Dunelm presents as a well-run company and today’s update is undoubtedly encouraging. Even so, I’m not sure I’d rush to buy the shares today. Accordingly, this FTSE 250 growth stock stays on my watchlist for now.

The post This FTSE 250 stock is falling today, despite great results. What’s going on? appeared first on The Motley Fool UK.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.