J.P. Morgan has upgraded Dunelm Group Plc (LON:DNLM) from a neutral rating to overweight, arguing that the balance of risk now leans upward after the retailer implemented early operational changes under incoming chief executive Clo Moriarty and market expectations were reset.
At the same time, the brokerage lowered its price target for June 2027 to 1,225p from 1,240p, citing model changes triggered by weaker-than-anticipated sales in the second quarter. The reduction in the target sits alongside other adjustments to near-term forecasts rather than a reversal of the more positive risk assessment.
J.P. Morgan described Dunelm's start to 2026 as "rocky," pointing to disappointing Q2 sales and a shifting pattern of profit phasing that contributed to the stock's decline of around 15% year to date. The shares, the bank notes, now trade at about 12 times calendar-year 2026 earnings - a valuation aligned with the longer-run sector average and lower than the double-digit premium the company historically held.
Despite the recent investor disappointment, the brokerage highlighted Dunelm's strong cash generation, estimating free-cash-flow yield of roughly 11% - among the highest across the stocks J.P. Morgan covers. That metric underpins the bank's view that downside risk has moderated as market forecasts are recalibrated.
J.P. Morgan said current trading has improved and flagged a series of targeted operational changes already being applied under Moriarty's leadership. Those measures include ensuring best-selling ranges appear across the entire store estate rather than being present in only about 70% of locations previously, clearer differentiation between sub-brands, and the retirement of sub-brands judged to add complexity to the offer.
Other adjustments cited include packaging changes for smaller items that have reduced complaints associated with one-man deliveries by about 20%. The bank views these actions as tangible early indicators that management is simplifying the business and addressing customer experience frictions - developments that support its upgraded stance.
On cost phasing, J.P. Morgan detailed Dunelm's guidance that approximately 53% of full-year 2026 profit is expected to fall in the first half of the year, down from roughly 58% a year earlier. Management attributes the shift to lower inflation, a slower pace of investment growth, improved productivity - in part from rolling out more self-checkout - and timing effects such as business-rates and brand-marketing phasing, which should help the second half of the year.
The bank now models operating expenses in the second half rising about 1% year on year, compared with a 9% increase in the first half. Following the weaker January sales update, J.P. Morgan trimmed its full-year 2026 pretax profit forecast by 3% to 213 million. That projection is broadly in line with consensus of 214 million. Beyond 2026, the brokerage's outer-year estimates remain largely unchanged, with mid-single-digit annual pretax profit growth assumed.
J.P. Morgan also lowered its special-dividend expectations after Dunelm declared a 25p special payout for the first half, down from 35p the prior year. The downgrade to the special-dividend forecast was factored in alongside the profit revisions.
In sum, the brokerage's view combines a cautious near-term adjustment to profit and cash returns with a more constructive stance on the company's risk profile because of operational fixes that appear to be taking hold. The upgrade to overweight reflects that the bank now sees more upside than downside from current levels, even as it trims short-term earnings and special-dividend estimates.
Sector and market implications
- UK retail and home furnishings names could be re-evaluated as investors price in Dunelm's tighter operational execution and revised valuation.
- Investor focus may shift toward cash generation metrics and cost-phasing dynamics across consumer discretionary stocks as companies reset guidance.