UK shares: could this home furnishings stock be a great recovery buy?

I believe there are plenty of UK shares trading at discount levels currently. My investment strategy is to buy and hold for the long term. With that in mind, I’m willing to bear some short-term pain. One stock that could be a good addition to my holdings is Dunelm (LSE:DNLM).

Home furnishings

Dunelm is a home furnishing retailer with an online presence, as well as 80 locations throughout the UK. Its stores are primarily larger out-of-town sites located in retail parks. It is best known for its textile products such as custom-made curtains, bed linens, cushions, and more. It also sells other furniture such as wardrobes, cupboards, tables, and so on.

So what’s the current state of play with Dunelm shares? At present, they’re trading for 770p. At this time last year, the stock was trading for 1,232p. This is a decline of 37.5% over a 12-month period.

UK shares have risks

Due to recent volatility, as well as the tragic events in Ukraine, Dunelm shares have come under pressure. Some of the headwinds include soaring inflation, the rising cost of raw materials, as well a global supply chain crisis.

All of these aspects threaten Dunelm’s shorter-term investment viability. Rising costs could put pressure on profit margins, as well as levels of return. The supply chain crisis may see its ability to offer certain products dwindle, in turn, negatively impacting sales and performance.

These headwinds have also created a cost-of-living crisis in the UK. With that in mind, Dunelm may suffer shorter-term performance issues, as consumers may have less money to spend on furnishings, and be more inclined to spend their hard-earned cash on staples such as food and energy bills.

The positives and my verdict

So to the bull case of Dunelm shares. Firstly, I noticed that Dunelm has a good track record of past performance. In the past four fiscal years, it has grown revenue and profit for three of these years. The exception was 2020, when its physical stores were shut for a long period due to restrictions linked to the pandemic. What pleases me in particular is the fact that 2022 performance has surpassed pre-pandemic performance by some margin.

As Dunelm has been performing well, it has been able to reward shareholders in the form of dividends. With the share price falling, its dividend yield has inflated somewhat, and currently stands at close to 9%. I am conscious that dividends are never guaranteed, and can be cancelled in times of volatility to conserve cash.

Finally, Dunelm is one of a number of UK shares trading at bargain levels. As I write, the shares are trading on a price-to-earnings ratio of just nine.

To summarise, I believe Dunelm could suffer a little bit in the short term, but, in the longer term continue its impressive growth trajectory, and performance levels too. This should provide consistent returns, and boost the share price upwards, in my opinion.

The fact that the shares are trading cheaply currently is a bonus and what caught my eye originally. I will place Dunelm shares on my buy list for when I next have some funds to invest.

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