Down 21%, this underappreciated FTSE gem looks a major long‑term value opportunity

Dunelm’s (LSE: DNLM) share price does not reflect the firm’s position as one of the FTSE’s most consistently strong retailers, in my view.

Its vertically-integrated model gives it pricing power and margins that rivals struggle to match, reinforcing a genuine competitive advantage.

Trading has stayed resilient, supported by loyal customers and a value‑quality proposition that continues to outperform the wider homewares market.

So, with the shares looking modestly priced against this operational strength, where ‘should’ they be trading?

Growth momentum intact after H1 results?

Dunelm’s recent H1 fiscal-year 2026 results showed earnings dipping year on year, with profit before tax down 7.5% to £114m. This reflected softer trading over the period, in line with still-major cost-of-living pressures across the UK.  

Even so, the business continued to grow ahead of the wider homewares market. This was supported by rising sales (up 3.6% year on year to £926.3m), increased gross margin (up 2.1% to 40.5%), and broadly stable pricing.

Free cash flow remained exceptionally strong at £171m (up £2.9m), underlining the resilience of the model even against a tougher consumer backdrop.

Management now expects annual pre-tax profit to be at the higher end of market expectations — £214m (compared to £211m in 2025).

A risk remains that cost-of-living pressures will continue to weigh on the firm. However, I think the foundations are in place for earnings to recover as cost pressures ease and digital momentum continues. Analysts’ consensus forecasts reflect the same view, expecting Dunelm’s earnings to grow at an average 5.8% a year to end-2028.

Where ‘should’ the shares be priced?

A discounted cash flow (DCF) approach gives a clear, standalone picture of Dunelm’s underlying value, unaffected by over- or undervaluations across the sector as a whole.

It identifies a company’s ‘fair value’ by projecting its future cash flows and then discounting them back to today. Dunelm converts a very high proportion of earnings into free cash flow. And its steady mid‑single-digit growth outlook provides a solid foundation for such long-term modelling.

Analysts’ DCF modelling varies — some more cautious than mine — depending on the variables used. However, based on my DCF assumptions — including a 9% discount rate — Dunelm shares are 19% undervalued at their current £9.80 price.

This implies a fair value of £12.10.

The gap between the company’s current share price and its fair value is very important for long-term investors. This is because asset prices (including shares) tend to trade to their fair value over time.

My investment view

Overall, for long-term investors, I believe Dunelm offers a rare combination of quality, resilience and value.

The business continues to generate strong cash flows, even in a tougher consumer environment. And its disciplined approach to pricing and promotions supports both margins and customer loyalty.

With the shares trading around 19% below my estimate of fair value, I think the market has failed to properly price these factors in. But I think this will change, as Dunelm continues to demonstrate consistently robust earnings growth.

The dividend outlook adds an extra layer of appeal, with analysts expecting a yield of around 5% by 2028. This is unusually high for a retailer with this level of operational strength.

Taken together, I see Dunelm as a compelling opportunity to consider for investors seeking dependable long-term returns at a sensible price.

The post Down 21%, this underappreciated FTSE gem looks a major long‑term value opportunity appeared first on The Motley Fool UK.

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Simon Watkins 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.

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