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Homing in

The recovery in spending on home improvements has been far faster than expected due to a shift in spending following the protracted period at home. There will have been some pent-up demand post the lockdown period and the market’s assumption is that the improvement will be temporary as the furlough period ends and consumers’ caution increases. This increasingly feels too negative and most of our forecasts have material upside potential. The numbers from Dunelm# yesterday demonstrate this theme. This note looks at our coverage across the space and identifies the companies with the greatest upside.

Household goods

The floorcovering sector had been exhibiting slow growth at best in the years leading up to the Covid-19 period, held back by largely static house prices, low levels of housing transactions and greater consumer focus on other areas of spend (holiday, leisure, technology etc).

Furniture/upholstery sector

The shape of the sector has been well-established for a while, with the quoted players showing much better trading form short term, but more fundamentally, better balance sheet strength. This latter point has come home to roost through the Covid-19 crisis, and one of DFS# and SCS’ key competitors, Harveys, has gone into administration. Its stores are currently in “fire sale” mode, but it is unlikely the group will be saved at the last minute. Some of the stores will be taken on by other retailers, but essentially much of this space will leave the industry. Oak Furniture Land has had a brush with the administrator as well and about a quarter of its stores have closed. A number of other smaller players have failed to survive.

Building materials & merchants

The UK building sector largely shut down at the end of March and remained closed for April and part of May. Certain merchant branches and materials companies remained open as they were needed for essential services and products. Irish activity stopped from 28 March until 18 May, while many Continental European construction markets were not shut at all as governments deemed the sector “essential”.