Why these FTSE 350 retailers have the right business models to deliver growth

Robert Stephens, CFA, discusses the prospects for two non-essential retailers as the economy reopens.

The pandemic has caused major disruption for non-essential retailers. Store closures have led to lost sales and lower profitability in many cases.

However, retailers such as JD Sports Fashion (LON:JD) and Dunelm (LON:DNLM) have successfully adapted to change. Their online operations have picked up a large proportion of lost in-store sales. They may now be in even stronger positions relative to sector peers who lack an extensive digital presence.

With non-essential retailers now open, both companies could experience improving financial and share price performance.

JD

JD’s latest annual results highlighted its resilience over the past year. The sports, fashion and outdoor products retailer’s sales were marginally higher than the previous year, while adjusted earnings per share declined by only 6%. Meanwhile, net cash increased from £430 million to £795 million.

A multichannel offering was key to its strong performance. Its digital offering could mean it is well-placed to capitalise on the long-term retail trend towards online sales that may persist post-coronavirus. Indeed, 35% of all UK retail sales are now conducted online, versus 8% a decade ago.

JD also stands to benefit from the reopening of stores. They allow greater differentiation versus sector peers and aid the company in building a deeper connection with its customer base.

The firm’s future growth may be driven by international expansion. It has made acquisitions in the US over the past 12 months, while continuing to convert previously acquired Finish Line stores. It also opened a net 31 new stores in Europe (excluding UK) in the past year. International expansion provides diversification, in addition to growth opportunities.

JD trades on a forward price-earnings ratio of 26. Although this is significantly higher than many of its retail peers, it is forecast to generate double-digit earnings growth in the next financial year. Alongside its multichannel business model and resilient financial performance, this suggests it could offer long-term investment appeal.

Dunelm

Homewares retailer Dunelm delivered strong results in its latest quarter. Total sales declined by around 17%, despite its stores being closed for the vast majority of the period. 

Digital sales partially offset a slump in physical sales, with home delivery and click & collect services covering 83% of the prior year’s sales. 

The firm’s online proposition may enable it to take advantage of long-term retail trends that were well-established prior to the pandemic. They look set to persist over the coming years.

Meanwhile, it could benefit from a release of pent-up demand among UK consumers. Even though the homewares market has performed strongly during the pandemic, savings rates have nevertheless reached record highs under lockdown restrictions. As the economy reopens, a potential unwinding of recent savings habits could stimulate demand for a range of consumables, including homeware products.

Dunelm’s shares trade on a forward price-earnings ratio of 29. However, the company is forecast to generate double-digit earnings growth in the next financial year. This suggests that it could offer capital growth potential, with its business model appearing to place it in a strong position to capitalise on future changes in the retail sector.