Investment View: Dunelm Mill is worth backing despite family share sell-off
Businesses which retain a strong family connection have a mixed reputation on the stock market. Sometimes external shareholders have good reason for complaint: when businesses run by a family (or even a strong-minded entrepreneur) raise money from them, it can sometimes seem they are treated like second-class citizens. That the message is something like: "Yes, yes, please give us your money. And then go away quickly."
On the other hand, businesses with strong family shareholdings can also take a longer-term view than more conventional companies that operate in similar markets. This means that they are able to ignore City fads: such as loading the balance sheet up with debt, for example, or entering into sale and lease-back arrangements with property that might look good in the short term but can leave the business saddled with onerous rents that are hard to keep up with in a difficult economy (like lots of retailers).
One family business that has been attracting more than its fair share of the wrong sort of headlines in recent weeks is Dunelm Mill, the fast-growing home furnishings chain. This is because last week Will Adderley, who holds the position of deputy executive chairman (the sort of title one rarely sees in more conventional companies) of Dunelm, and his wife, Nadine, sold 7.5 million of their shares, netting them a combined £36m. That attracted quite a bit of negative comment. And if a family member is selling up, it should serve as a clear signal to steer clear, right? Well, not necessarily.
If you want family-owned businesses to behave like public companies are supposed to behave, treating all shareholders with equal respect, you can hardly complain if the main family shareholder exercises their right to cash in like any normal investor. And, with the Adderleys still holding more than 50 per cent of the shares, increasing the number in "free float" like this might not be such a bad thing. More shares are available for private investors.
The Adderleys have pledged not to sell any more for six months – which doesn't mean much – but they have also said that they plan to retain a substantial stake in the business.
There are some good arguments for the Adderleys selling (they intend to use the cash to diversify their investments). Dunelm is not at all cheap for a retailer, at about 15 times forecast full-year earnings with a prospective yield of just 2.5 per cent. But it has been growing extremely quickly and now boasts 114 stores with more on the way.
The company aims to open 10 new superstores a year with a target of 200. It is rapidly becoming a national chain, and that bodes well for sales at its existing stores, because as it grows, Dunelm's national recognition will improve. The new stores could, in this way, help to grow like-for-like sales at the chain's existing outlets.
There are other reasons for liking the shares too. Dunelm says it is getting lots of John Lewis customers through its doors as a result of its "value proposition". That is an awful, corporate way of saying that your goods are keenly priced. A reputation for keen pricing is no bad thing right now.
I think that the sector premium Dunelm enjoys is justified and that it's worth taking the fall in the shares sparked by the Adderley sale as an opportunity, as one or two of Mr Adderley's boardroom colleagues have done. Risky, but Dunelm is a buy.
Another retailer with strong family connections is J Sainsbury. In the early part of 2007 the sometime fractious Sainsbury family united to use their 18 per cent stake in the grocer bearing their name to block an attempted takeover by a consortium of private equity interests. Among the bidders' plans was a sell-off of Sainsbury's property portfolio (which would then have leased back the stores).
The family's stance meant that instant profits for a whole host of City types (and not a few small shareholders) evaporated. They took a lot of flak for this, but it is worth noting that the furious bankers who cooked up the deal and were hoping that it would generate lucrative success fees (and bonuses) didn't need to structure the bid in a way that would have allowed the Sainsbury family a blocking minority.
J Sainsbury has never recovered the value it had back in 2007, but the business left as a result of debt-driven private equity mechanics might not have looked very pretty. The whole supermarket sector might ultimately have lost a competitor, and that wouldn't have been good for anyone.
I suggested holding Sainsbury at the end of January with the shares just below 300p. They're still bouncing around that level. However, with a 5.4 per cent yield and some signs of economic "green shoots", I'd actually be inclined to buy right now.
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