By Uday Sampath Kumar
(Reuters) - British homewares retailer Dunelm Group Plc <DNLM.L> warned on Thursday that a weakening pound would weigh on its profit margins later in the year as raw material costs rise, driving its shares down more than 5%.
Dunelm maintained its cautious outlook for full year sales even as it reported a 6.4% rise in like-for-like first quarter sales on an increase in online orders and as the company spruced up its advertising campaign and delivery options to counter a slowdown on Britain's high streets.
Concern that Britain could crash out of the European Union without a deal on Oct. 31 is crimping consumer demand and like the rest of the country's retail industry, Dunelm is feeling the pressure.
British retailers endured their worst September since at least the mid-1990s, according to recent surveys that painted a gloomy picture of household demand ahead of Brexit.
Dunelm, founded as a market stall 40 years ago and has grown into one of Britain's largest homeware retailers with more than 170 stores countrywide, said trading last month was mixed because of a softer homewares market.
"We expect gross margin to be consistent with last year, with improvements in the first half likely to be offset by FX headwinds towards the end of the financial year," Dunelm said in its quarterly sales statement.
A company spokesman declined to elaborate but the company is vulnerable to a depreciating pound as it drives up the cost of raw material imports. The pound has fallen about 17% since the 2016 Brexit referendum, touching a three-year low in September.
Dunelm shares fell 5.4% and were the biggest loser on the FTSE mid-cap index <.FTMC>.
Traders and analysts said the lack of an upgrade in expectations from the company and its warning that a weakening pound would pressure profit margins later in the year was hitting investor confidence.
"The outlook for the UK homewares market remains tough - a combination of a challenging consumer environment and soft housing market," RBC Capital Markets analyst Richard Chamberlain said in a client note.
"Dunelm's medium-term target of 2 billion pound sales and market share target look ambitious, and we have reservations of it being able to achieve this without sacrificing margin," he wrote.
To combat the high street slowdown, Dunelm has spruced up its advertising campaign with new TV ads run during popular programmes such as ITV's "This Morning" and has expanded its social media presence.
As more customers shop online, Dunelm has also increased spending to develop a new website, offering an expanded range of products and new delivery options.
The company said it expects to transfer its online traffic to the new website before Christmas.
Total revenue rose 7.5% to 262.6 million pounds ($320.95 million) in the first quarter ended Sept. 28, boosted by a 34.7% jump in online revenue.
(Reporting by Uday Sampath in Bengaluru; Editing by Bernard Orr and Emelia Sithole-Matarise)