Dunelm Group plc Final Results (5672Q)

Share Name	Share Symbol	Market	Type	Share ISIN	Share Description
Dunelm Group Plc	LSE:DNLM	London	Ordinary Share	GB00B1CKQ739	ORD 1P

	Price Change	% Change	Share Price	Bid Price	Offer Price	High Price	Low Price	Open Price	Shares Traded	Last Trade
	9.50	0.97%	992.50	992.00	994.50	1,000.00	967.00	967.00	29,543	14:17:36

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Furniture Stores	1.64B	151.9M	0.7530	13.17	2B

Dunelm (LSE:DNLM)
Historical Stock Chart

From Apr 2019 to Apr 2024

TIDMDNLM

RNS Number : 5672Q

Dunelm Group plc

13 September 2017

Dunelm Group plc ("Dunelm")

Preliminary Results for the 52 weeks to 1 July 2017

Continuing growth, Worldstores online investment on track

Dunelm Group plc, the UK's leading homewares retailer, today announces its preliminary results for the 52 weeks to 1 July 2017.

 
                            Year                         Year        Year         Year         Year 
                            ended           Year         ended       ended       on year      on year 
                            1 July          ended        1 July      2 July       change       change 
                             2017          1 July         2017        2016 
                                            2017                                Underlying    Reported 
 
                          Underlying                    Reported    Reported 
                                         Exceptional 
                                            items 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Total revenues            GBP955.6m               -   GBP955.6m   GBP880.9m         +8.5%       +8.5% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Like-for-like 
  growth                       -0.5%               -       -0.5%       +2.5%             -           - 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Gross margin                  48.9%               -       48.9%       49.8%        -90bps      -90bps 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 EBITDA                    GBP142.2m       -GBP14.0m   GBP128.2m   GBP154.3m         -7.8%      -16.9% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Operating 
  profit                   GBP111.7m       -GBP16.9m    GBP94.8m   GBP129.3m        -13.6%      -26.7% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Profit before 
  tax                     GBP109.3m*       -GBP16.9m    GBP92.4m   GBP128.9m        -15.2%      -28.3% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Free cash 
  flow                             -               -    GBP14.2m   GBP110.4m             -      -87.1% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Net Debt                          -               -   GBP122.1m    GBP79.3m             -      -54.0% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 
 Basic EPS                     43.1p               -       36.3p       50.5p        -14.7%      -28.1% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Fully diluted 
  EPS                          42.8p               -       36.1p       50.3p        -14.9%      -28.2% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Ordinary 
  dividends                        -               -       26.0p       25.1p             -       +3.6% 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Special distribution              -               -           -       31.5p             -           - 
----------------------  ------------  --------------  ----------  ----------  ------------  ---------- 
 Total distribution                -               -       26.0p       56.6p             -           - 
----------------------  ------------  --------------  ----------  ----------  ------------  ----------

*includes Worldstores losses of GBP10.7m for the thirty-one-week period post acquisition, from 28 November 2016 to 1 July 2017

Highlights

-- Sales growth of 8.5% (2.3% excluding Worldstores) in challenging and subdued Homewares and Furniture markets

   --      Share of Homewares market increased to 7.9% (2016: 7.8%)

-- Acquisition of Worldstores in November 2016 creates a springboard for online growth and range development; business plan for accelerated growth established and integration is well under way

-- EBITDA of GBP142.2m (pre-exceptional items), down 7.8% year on year reflecting investment for growth and consolidation of Worldstores trading losses

-- Earnings per share reduced to 36.1 pence (fully diluted), reflecting primarily the costs of the Worldstores acquisition, both expected trading losses and exceptional costs

   --       3.6% increase in full year dividend to 26.0 pence per share 
   --       Encouraging start to FY18 with good LFL sales growth in the first two months

Andy Harrison, Chairman, commented:

"Dunelm has made good strategic progress over the year, most notably with the acquisition of Worldstores, which moves us closer to our goal of being the biggest and best multichannel homewares retailer in the UK. Over the medium-term we are aiming to double our sales to GBP2bn, with 30%-40% from our increasingly important online channel.

"The Worldstores acquisition provides a step change in our online scale, product range and capability. Our reported profit for the year reflects an investment of nearly GBP28m in the acquisition. The integration is going well and we remain confident in the benefits that it will generate.

"We expect the trading climate to remain challenging with the disposable income of UK consumers under pressure. Nevertheless, we have a full programme of management actions underway to further improve the Dunelm customer proposition, both online and in-store, increase our business efficiency and support our colleagues.

"Sales in the first two months of the new financial year have started positively, with good LFL sales boosted by favourable weather comparatives. We expect to open a total of 8 new stores in the first half of the year of which 4 are already open. An encouraging start."

There will be a presentation for analysts at 9.30am this morning at UBS, 5 Broadgate, London EC2M 2QS. If you have not already registered for attendance then please contact Peter Lambie at MHP Communications on peter.lambie@mhpc.com.

Dunelm will hold a Capital Markets Day for analysts and investors in Stoke on the afternoon of 11 October 2017. This will cover, inter alia, the benefits of our Worldstores acquisition and progress on our other strategic actions. A full agenda will be provided in due course and those who wish to attend are requested to contact Peter Lambie at MHP. A copy of the presentation will be made available on the Dunelm website after the event.

Dunelm will also issue a Q1 Trading Update on the same day.

For further information please contact:

 
 Dunelm Group plc                       0116 2644439 
 Keith Down, Chief Financial Officer 
 Andy Harrison, Chairman 
 MHP Communications                     020 3128 8100 
 Tim Rowntree / Simon Hockridge /       dunelm@mhpc.com 
  Gina Bell

For photography, please contact MHP Communications

Notes to Editors

Dunelm is market leader in the GBP12.4bn UK homewares market. As at 1 July 2017, it operated 164 stores, of which 160 are out-of-town superstores and four are located on high streets, and an online store, to be found at www.dunelm.com.

The company acquired the assets of Worldstores, including Achica and Kiddicare, on the 28 November 2016. Worldstores is one of the UK's largest online retailers of products for the home and garden, with over 300,000 products on the site. Achica is a members-only online store offering furniture, homewares and accessories, often at significant discounts to RRPs for limited periods through flash sales. Kiddicare is a multichannel retailer, selling nursery supplies and merchandise for children and young families.

Dunelm's "Simply Value for Money" customer proposition offers industry-leading choice of quality products at keen prices, with high levels of availability and supported by friendly service. Core ranges include many exclusive designs and premium brands such as Dorma and Fogarty, and are supported by a frequently changing series of special buys. The superstore format provides an average of 30,000 sq. ft. of selling space with over 35,000 products across a broad spectrum of categories, extending from the Group's home textiles heritage (bedding, curtains, cushions, quilts and pillows) to a complete homewares offer including kitchenware and dining, lighting, wall art, furniture and rugs. Dunelm is one of the few national retailers to offer an authoritative selection of curtain fabrics on the roll, and owns a specialist UK facility dedicated to producing Made to Measure curtains.

Dunelm was founded in 1979 as a market stall business, selling ready-made curtains. The first shop was opened in Leicester in 1984 and over the following years the business developed into a successful chain of high street shops before expanding into broader homewares categories following the opening of the first Dunelm superstore in 1991.

Dunelm has been listed on the London Stock Exchange since October 2006 (DNLM.L) and has a current market capitalisation of approximately GBP1.2bn.

CHAIRMAN'S STATEMENT

Introduction

At Dunelm, we aim to be the number one choice for homewares and furniture in the UK. We will achieve this by building on the strengths which have underpinned our success to date; our extensive choice of good quality, great value products, backed up by friendly and knowledgeable service, in our nationwide network of over 160 stores.

In addition, we are extending our online offering. The acquisition of Worldstores represents a big leap forward in our online scale and capability, together with a substantial expansion of our online product offering, especially in Furniture. There is still much to do to integrate fully this acquisition and to deliver its benefits to our customers, colleagues and shareholders, but the progress so far is very encouraging.

Over the medium-term we are aiming to double our sales to GBP2bn, with 30%-40% from the increasingly important Online channel. It has been a busy year and I would like to thank our wider leadership team and all our colleagues for their hard work and commitment, which is at the core of our success.

Performance

Over the last financial year we grew our total sales by 8.5% to GBP955.6m, with the benefit of GBP54.5m of sales from the Worldstores acquisition. We have continued to win share in a challenging and subdued market environment. Our like-for-like sales were 0.5% lower but our Online sales were up 23.5% (excluding Worldstores), demonstrating the changing pattern of customer shopping habits. We still see more opportunity to grow our national store network and we opened seven new superstores in the year, taking our network to 160 superstores.

Underlying profit before tax, before exceptional items, fell by 15.2% to GBP109.3m, the main reasons being the expected losses from the newly acquired Worldstores business, increased investment and the small reduction in our like for like store sales. We stepped up capital investment in the business to GBP60.5m from GBP42.5m last year to support the delivery of our strategic goals and longer term growth, with key investments in our IT systems, supply chain, website and stores. Profits after tax and exceptional items fell to GBP73.1m (FY16: GBP102.3m).

Dividends

The Board has recommended a 2.1% increase in the final dividend to 19.5 pence per share, bringing the total dividend for the full year to 26.0 pence per share, an increase of 3.6% on the previous year. This dividend increase will reduce our dividend cover below our policy but it reflects both the large one off costs associated with the Worldstores acquisition and our confidence in Dunelm's future growth prospects. We retain our strong balance sheet and our strong underlying cashflow. Principally as a result of the Worldstores acquisition and an increase in our inventories, which we do not expect to be repeated, our net debt at year end increased to GBP122.1m (FY16: GBP79.3m).

Board Changes

Our Chief Executive, John Browett, stepped down in August and I would like to thank John for the progress made during his tenure. We have started a search to find his replacement. In the meanwhile, we have a strong executive team and I shall provide temporary leadership, ably supported by our Deputy Chairman, Will Adderley and our CFO, Keith Down.

Let me also thank Simon Emeny, our Senior Independent Director, for his admirable 10 years service on our Board. Simon will step down at our AGM and the appointment of his successor is well advanced.

Outlook

We have clear and ambitious plans to deliver significant profitable growth over the medium term and we are making good progress delivering the benefits of the Worldstores acquisition. We expect the trading climate to remain challenging with the disposable income of UK consumers under pressure. Nevertheless, we have a full programme of management actions to further improve the Dunelm customer proposition, both online and in-store, to enhance our business efficiency and to support our colleagues.

Sales in the first two months of the new financial year have started positively, with good LFL sales boosted by favourable weather comparatives. We expect to open 8 new stores in the first half of the year of which 4 are already open. An encouraging start.

Andy Harrison

Chairman

13 September 2017

BUSINESS REVIEW

Dunelm is a great business which has grown rapidly over its 38-year history by offering great value for money for customers. Over time we have developed an unrivalled range of homewares products and a low cost operating model, supported by a strong balance sheet and robust cash generation, which allows us to continue to invest for growth.

Our vision is to be the customer's number one choice for Homewares and Furniture. We want to be famous for style, value, quality and ease of shopping. We are aiming to be twice as big as today, in both sales and profit, and twice as good as we are today for our customers.

Over the last 12 months we have made considerable progress in preparing Dunelm for future growth, while continuing to react to changing market conditions and customer needs. We have grown sales in our core business, and have benefited from further top-line growth from the acquisition of the Worldstores Group in November 2016. This is against the backdrop of a challenging Homewares market in FY17 and warm weather, in the early part of FY17, which reduced footfall.

While we have continued to grow faster than the market, our share of 7.9% is still relatively low for a market leader and the GBP12bn Homewares market remains fragmented. In furniture, where the UK market size is GBP11bn, our share is even lower, at around 1%. Our position in both markets illustrates the scale of the opportunity still available to Dunelm.

Online growth is impacting all retailers, and is now part of customers' everyday shopping experience. Competition from online pure-play operators and from the discounters is increasing in the Homewares and Furniture markets. However, our combined store and online business enables us to offer a leading customer proposition which neither the discounters nor the pure-play operators can match.

Our customers' needs are clear to us. Inspiration and convenience across channels are essential. Being able to look, touch and feel products remains important in the Homewares and Furniture categories where rendering colour and texture online remains challenging. This gives us confidence in continuing our roll-out of physical stores which remain a highly profitable part of our business. Continued growth in design and style-led purchases also provides us with opportunity to increase footfall and visit frequency.

Offering a convenient home delivery service is key and next-day, nominated day/ time and other services such as furniture recycling are in high demand. In this area, we are really excited by the opportunities on the horizon, as we leverage our Dunelm Home Delivery network.

We are delighted to have completed the Worldstores acquisition and are excited about the opportunity it provides us to accelerate and develop our multichannel capability. It provides a massive leap forward for our online and store offer which our customers will love including:

   --     Broader product ranges, with improved sourcing agility and a focus on Furniture 
   --     An improved Home Delivery service for 2-man deliveries

-- Improved technological capabilities including better websites for customers, and stronger delivery management

   --     New reasons to shop with Dunelm in the Nursery category via Kiddicare

We anticipate the total investment for the acquisition and integration will be approximately GBP25-30m, broadly the amount we would have invested ourselves to develop the same capability, but over a longer period. The acquisition means we have been able to accelerate our progress and increase our online presence. We expect to reach near break-even in the Worldstores businesses in FY18 after integration benefits, and anticipate approximately GBP10m further PBT improvement in FY19.

We have four succinct and enduring business goals which help us shape and prioritise our activities to support growth. These sit above our eight business objectives which we continue to use to co-ordinate actions and monitor progress internally.

   1.     Creating new reasons for customers to shop with Dunelm

We must never cease to innovate and adapt to offer more categories and services to our customers. We are pleased with the progress we have made in the last 12 months and excited about the ideas we have planned.

We grew our seasonal product offerings across key Christmas and Summer trading periods by 48% and 76%, respectively, and increased the online prominence and marketing of them. We doubled the seasonal space available by refitting the front of store areas with a new till configuration in 89 stores. We believe there is much more potential here and are taking ambitious steps to drive more growth next year.

During the year, we acquired the Kiddicare and Achica brands as part of the Worldstores acquisition. Alongside the Worldstores benefits mentioned above, we are particularly excited by the opportunities Kiddicare provides as a new Nursery category for Dunelm. We have begun work to rebrand our own kids ranges to Kiddicare, and are well progressed with plans to trial opening a number of Kiddicare departments in existing Dunelm stores as part of our refit programme. The largest of these will be 10,000 square foot, a substantial space investment. Kiddicare offers a fantastic range proposition and has the potential to bring new customer groups to our stores and websites, just at the point where they become more interested in our Homewares and Furniture ranges.

With the acquisition of Worldstores, we also now have access to around 300,000 new Homewares and Furniture products which are available to shop on the Worldstores websites. This is a significant extension to our range and provides a massive leap forward which our customers will love.

Instore, we have changed more products this year and focused heavily on our promotional ranges. We want our customers to see new products each time they visit our stores and websites. We are constantly working to bring a wide variety of styles to our customers. We anticipate that, over time, this will improve our footfall and conversion. Whilst this has had a short-term impact on the level of end of season stock we're carrying, it has also created more opportunities for our customers to find a bargain.

In the next year, we are really excited about the planned re-launch of our Made to Measure curtains and blinds offer online. Also, we will make progress on our Furniture offer, improving range, service and economics. We believe we have significant growth ahead of us in these categories.

   2.     Easy and inspiring for customers to shop (both instore and online)

Our stores provide a fantastic opportunity for us to showcase product ranges and inspire customers as they browse and shop Homewares. Our websites provide the same opportunity for customers at home or on the go. We are working hard to create a seamless proposition across all channels, making life easier for our customers wherever and whenever they shop with us.

This year we trialled new formats in stores and have since used the learnings to inform the design of 11 major store refits. The customer response has been encouraging and we see this essential maintenance capital expenditure as a real opportunity to make our store environments more inspiring and easier to shop, so as to support sales growth. Our customers have also appreciated our new in-line till layouts which we've continued to roll out this year.

We launched tablet-based selling in store, providing customers with the opportunity to access the full Dunelm range from a store. We supported colleagues with training on the new tablets and we have also trialled our brand-new tablet-based mobile point of sale system which has integrated chip and pin capability. We plan to launch this across the store estate this year. This will allow our colleagues to sell customers our full product range (including Worldstores products), seamlessly for Home Delivery and, in the future, Click & Collect.

Developing a market leading 2-man Home Delivery capability is a key priority for Dunelm to unlock the potential opportunity for Furniture growth. The fleet network acquired from Worldstores operates from a series of hubs throughout the UK. This enables us to sell items we don't hold in stock, limiting working capital investment. We have developed and begun implementing plans to improve further the last delivery mile, and provide amazing service for our customers. In April, we began offering Dunelm products via this service and we are well on the way to re-branding and re-working the operation to become the Dunelm Home Delivery Network.

This year we have restructured our Made to Measure business. We have brought our consultants back into store (from previously being out on the road) to enable them to showcase the product range displays to customers more effectively and to reduce appointment waiting times. We have introduced a new seven-day express service, initially in two of our areas. We have also increased the offer of our fitting service from around 100 to 150 stores. This has supported the growth of blinds and shutter sales, up by 25% in the year.

   3.     A simple and low cost operating model

Our low cost operating model and dedication to keeping things simple has created a straightforward business platform for future growth. As a key business principle, it is essential we continue to keep our business simple and free from unnecessary complexity so we can continue to deliver great value for money.

Last year we consolidated the 1-man Home Delivery warehousing operation into our main warehouse facilities in Stoke. This has allowed us to maintain one stock file, improve our product availability for customers, and reduce the cost of transporting product between sites. We have also completed the transfer of the Kiddicare and Achica operations from their previous site in Peterborough to Stoke.

We launched a 'paperless' project last year and have been successful in reducing the amount of paper (and printing) used across the business by 33%. We have broadened the use of technology and introduced more applications for a variety of business activities from colleague scheduling to communications. We will continue to focus on technology as an enabler for improved working practices.

Our focus on activities which have a benefit on the environment continued. During the year, we reduced CO(2) emissions by 5.3%, supported by the completion of 37 LED refits in the year, taking the total number of stores with LED lighting up to 125. Our focus on recycling and landfill diversion has enabled us to reduce our General Waste tonnage by 6.5% year on year, generate significant revenues from recycling, and improve our landfill diversion by three percentage points to 92%.

In our stores, we focused on re-organising and streamlining activities to create more customer facing time. We diverted approximately 400,000 hours from operational tasks to customer service and developed improved stock management routines creating more accurate stock files and better availability for customers when browsing our stores. Stock file accuracy will become even more critical as we develop our Click & Collect service to ensure we don't add additional cost into our operation.

   4.     A great place to work for our colleagues

Making Dunelm a great place to work has been a long-standing goal as we know that highly engaged colleagues provide better service to our customers.

We are encouraged with the progress made this year in creating better, more rewarding jobs for colleagues in stores and in support functions, and the fact that we're promoting more and more internal colleagues to Assistant Manager and Manager level roles demonstrates improvements we're making to identify and develop talent.

Great leadership makes a huge difference and we have invested more in management and leadership development training and will continue to do this. We've also made big improvements to our internal communications and made changes to numerous people processes including appraisals and recruitment to promote better colleague support and well-being.

We have recently re-launched, company-wide, our business principles which we're really proud of. We want to ensure all colleagues can live these every day.

Summary

The progress made last year, combined with the Worldstores acquisition, provides a massive leap forward for our customers. We have made several changes which help us create a seamless multichannel offer and will support the trading performance of the business going forward.

The improved technology, range and fleet capabilities, provided by the Worldstores acquisition, have accelerated our progression and we are excited by the opportunities which Kiddicare will bring in terms of new and existing customer footfall, trading density improvements and brand recognition.

The Homewares market remains uncertain and favourable weather (cooler and wetter) is never guaranteed. However, we have a clear plan and are well positioned for considerable growth and success in a multichannel world. We already have a leading customer offer which we're making even stronger. We have a low cost operating model which we will protect. It is now up to us to capture the clear opportunity for profitable growth.

Andy Harrison / Keith Down

13 September 2017

CHIEF FINANCIAL OFFICER'S REVIEW

Revenue

Group revenue for FY17 was GBP955.6m (FY16: GBP880.9m), an increase of 8.5% for the full financial year, including GBP54.5m of revenues generated by the Worldstores businesses over the last seven months of the year post acquisition.

 
                       52 weeks to 1(st) 
                        July 2017 
--------------------  ---------------------------------- 
                        Sales    YoY Growth   YoY Growth 
                        (GBPm)     (GBPm)         (%) 
--------------------  --------  -----------  ----------- 
 LFL stores             758.4      -18.7        -2.4% 
--------------------  --------  -----------  ----------- 
 Online                 76.5       +14.5        +23.5% 
--------------------  --------  -----------  ----------- 
 Total LFL              834.8       -4.1        -0.5% 
--------------------  --------  -----------  ----------- 
 Non-LFL stores         66.3       +24.4          - 
--------------------  --------  -----------  ----------- 
 Total Dunelm 
  excl. Worldstores     901.1      +20.3        +2.3% 
--------------------  --------  -----------  ----------- 
 Worldstores            54.5       +54.5          - 
--------------------  --------  -----------  ----------- 
 Total Dunelm 
  Group                 955.6      +74.7        +8.5% 
--------------------  --------  -----------  -----------

On an underlying basis, excluding Worldstores, Dunelm grew by 2.3% to GBP901.1m in FY17. Like-for-like ('LFL') sales declined by 0.5% as a result of lower footfall in our stores, where LFL sales decreased by 2.4%. This was partially offset by a continued strong performance online with Online growing by +23.5%. Over the financial year as a whole, Online sales represented 8.5% of the underlying Dunelm business (FY16: 7.0%).

Including Worldstores' contribution for the last seven months of the year, 13.5% of sales were Online in FY17, and since acquisition, approximately 20% of our total sales order value now originates online.

LFL performance in the year reflected:

   --      Unusually warm weather which had a dampening effect on footfall in Q1;

-- Availability being lower than the prior year for most of the first half as a result of disruption following the addition of the new warehouse in Stoke;

   --      The negative impact of Easter falling later in the calendar year;

-- The benefit of investment in seasonal ranges and space which supported sales in the final quarter

Our store expansion programme continued with seven new openings in the year, increasing our store portfolio to 160 superstores and four stores in high street locations. We also completed 11 major store refits to create an easier and more inspirational shopping experience for customers.

Gross Margin

Gross margin decreased by 90 basis points to 48.9% (FY16: 49.8%), impacted by the consolidation of lower Worldstores gross profit margins of c.34%.

On an underlying basis, the Dunelm business was broadly flat year on year. FY17 Q4 gross margin was adversely impacted by a combination of increased newness, generating higher end of season markdown, and increased seasonal sales at lower margin.

As expected, retail price increases offset cost pressures from the USD exchange rate.

Operating Costs before Exceptional Items

Operating costs before exceptional items in FY17 grew by 15.1% compared with the prior year, an increase of GBP46.7m. Of this increase, GBP29.6m relates to the operating costs of the acquired Worldstores business for the last seven months of the year. The remaining GBP17.1m reflects a 5.6% increase in underlying Dunelm operating costs, driven by:

   --      Store portfolio growth - seven new superstore openings, increasing selling space by 4.9%;

-- Online - the value of business through this channel rose by 23.5% compared with the previous year;

-- Logistics spend increased by GBP6.0m year on year, including the permanent increase in cost base due to the opening of a second warehouse (partially offset by savings from exiting external storage), but also unanticipated one-off transition costs associated with the opening of a new DC and also the movement of our one-man delivery network (GBP3m-GBP4m);

-- IT capability - we continue to invest in IT as a key enabler for the future growth of our business. We have continued to increase the scale and capability of our internal IT function as well as incurring further depreciation and amortisation relating to completed projects; and

-- Marketing - increased spend on digital marketing and investment in new brand and seasonal campaigns to drive customer awareness.

Looking ahead, a number of volume-based cost increases will apply as we continue to grow. We intend to open approximately 12 new stores next year, of which 2 are relocations, and refit a further 10 stores into our new format. We anticipate the transitional expenditure on logistics incurred this year to be a one-off and expect to achieve integration cost benefits of approximately GBP5m in the next financial year particularly in relation to digital marketing effectiveness and logistics consolidation efficiencies.

Exceptional Items

During the year, exceptional cost items of GBP16.9m were incurred in relation to the acquisition and subsequent integration of the Worldstores businesses as follows:

 
                                      GBPm 
-----------------------------------  ----- 
 Acquisition costs - administrator 
  fees                                0.9 
-----------------------------------  ----- 
 Acquisition costs - other 
  professional fees                   0.4 
-----------------------------------  ----- 
 Welcome payments for continuation 
  of supply                           7.3 
-----------------------------------  ----- 
 Fair value adjustments in 
  respect of acquired inventory       0.5 
-----------------------------------  ----- 
 Key management retention 
  bonuses                             2.7 
-----------------------------------  ----- 
 Asset write-offs, impairments 
  and accelerated depreciation        2.9 
-----------------------------------  ----- 
 Other integration costs              2.2 
-----------------------------------  ----- 
 Total                                16.9 
-----------------------------------  -----

Welcome payments of GBP7.3m were made to suppliers to ensure continuation of supply and were part of the expected initial working capital outflow.

Fair value adjustments in respect of acquired inventory have unwound as the inventory has been sold.

Key management retention bonuses are potentially payable over a three-year period, and have both retention and performance conditions attached.

As a result of the acquisition, a review of the websites and other intangible IT assets of both the existing Dunelm business and the acquired business has been undertaken. Decisions have been made to integrate the available assets and, as a result, certain assets have been written off and others' useful economic lives have been reduced resulting in accelerated depreciation. Such cost items have been judged as exceptional and one-off in nature and not part of the underlying trading performance of the Group.

Other integration costs include professional advisory support, and costs associated with the exit of the Peterborough site and transfer into Stoke of the Kiddicare and Achica logistics operations.

Of the above exceptional cost items, GBP11.3m are cash outflows in the period. Exceptional cost items of approximately GBP7m are anticipated in the next financial year of which approximately GBP4m will be cash outflows.

Operating Profit

Group operating profit before exceptional items for the financial year was GBP111.7m (FY16: GBP129.3m). This includes operating losses of GBP10.7m in respect of Worldstores for the seven months post acquisition.

On an underlying Dunelm basis, operating profit before exceptional items and Worldstores losses was GBP122.4m, (-GBP6.9m or -5.3% year on year) and operating profit margin was 13.6% (FY16: 14.7%) reflecting the more challenging sales environment, the impact of one-off logistics transition costs, and continued investment to enhance key infrastructure and internal capabilities to deliver future growth.

EBITDA

Earnings before interest, tax, depreciation and amortisation before exceptional items were GBP142.2m, and on an underlying basis excluding Worldstores were GBP152.9m (FY16: GBP154.3m). This represents a small underlying decrease of -0.9% on the previous financial year. The underlying EBITDA margin achieved was 17.0% of Dunelm sales excluding Worldstores (FY16: 17.5%).

After exceptional items and Worldstores losses, EBITDA was GBP128.2m.

Financial Items

The Group incurred a net financial expense of GBP2.4m in FY17 (FY16: GBP0.4m). Interest and amortisation of costs arising from the Group's revolving credit facility amounted to GBP1.8m (FY16: GBP1.5m) and net foreign exchange differences on the translation of dollar denominated assets and liabilities amounted to a further GBP0.6m expense (FY16: gain of GBP1.1m). These costs were partially offset by interest earned on cash deposits of GBP0.2m (FY16: GBP0.1m).

As at 1 July 2017, the Group held $140.0m (FY16: $93.0m), in US dollar forward contracts, of which $107.6m mature in the next 12 months (FY16: $81.5m), representing approximately 69% of the anticipated US dollar spend over the next financial year. Surplus US dollar cash deposits amounted to $0.3m (FY16: $1.6m).

Hedging

Due to the Brexit vote that took place close to the Group's period end in the prior year, the hedging balance was material at 2 July 2016, and additional disclosures were included in the notes to the financial statements. Since this point, the impact of the decline in the USD exchange rate has largely unwound and as a result, the hedging balance has returned to more a more "normal" level.

Profit before Tax

After accounting for interest and foreign exchange impacts, PBT before exceptional items for the financial year amounted to GBP109.3m (FY16: GBP128.9m), a decrease of 15.2%. On a comparable underlying basis, excluding Worldstores, Dunelm PBT before exceptional items was GBP120.0m representing a decrease of 6.9% compared to FY16. Excluding the non-cash net foreign exchange movement year on year of GBP1.7m, PBT would have decreased by 5.5%.

Improvement in PBT in respect of Worldstores in FY18 is expected to be approximately GBP12m on an annualised basis (annualised losses for Worldstores were approximately GBP15m-20m in FY17) as the Worldstores businesses approach break-even profitability in the year. A further GBP10m of PBT benefit is anticipated the following year.

Taxation

The tax charge for the year was 20.9% of profit before tax, compared with 20.6% in the prior year. This reflects the reduction in the headline rate of corporation tax from 20.0% in FY16 to 19.75% this year; however, it was impacted year on year by a number of ineligible items including acquisition costs and freehold property purchase costs. Without these one-off impacts, the tax charge is expected to trend approximately 75-100 bps above the headline rate of corporation tax going forward, principally due to depreciation charged on non-qualifying capital expenditure.

PAT and EPS

Profit after tax was GBP73.1m (FY16: GBP102.3m).

Basic earnings per share (EPS) for the year ended 1 July 2017 decreased to 36.3p, or 43.1p before exceptional items (FY16: 50.5p). Fully diluted EPS decreased to 36.1p, or 42.8p before exceptional items (FY16: 50.3p).

Operating Cash Flow

Dunelm continues to deliver strong cash returns from operations providing the opportunity to make investment decisions to deliver long term growth. In FY17 the Group generated GBP79.5m (FY16: GBP148.2m) of net cash from operating activities. Whilst this is down GBP68.7m year on year, it includes the impact of the lower underlying Dunelm EBITDA (GBP1.4m), the trading losses incurred by the Worldstores business since acquisition (GBP10.7m), and the cash elements of exceptional cost items (GBP11.3m). Additionally, net working capital increased by GBP26.2m compared to a reduction of GBP18.3m last year.

The investment in working capital, which we do not expect to recur, reflects cost price increases, new store inventories and decisions made to increase the level of product refresh to introduce more new ranges for customers (resulting in higher end of season inventories at year end), and to bring forward the intake of seasonal lines in preparation for earlier launch year on year. At the end of the year the Group had GBP48.7m higher inventories than the prior year including the acquired inventories relating to Worldstores. Trade and Other Payables due within one year increased by GBP37.7m with growth in capital creditors comprising GBP2.5m within this.

Capital Expenditure

Gross capital expenditure in the financial year was GBP60.5m compared with GBP42.5m in FY16. During the year, we acquired three freehold sites in Shoreham, St Albans and Darlington (GBP13.1m), and we invested in new stores (GBP11.7m), IT projects (GBP12.7m) and distribution capability (GBP3.3m). Additional maintenance capital investment of GBP19.7m was made in refitting stores.

We expect a similar level of capital expenditure in the next financial year, at around GBP55m to GBP60m, as we continue to invest to support our long-term growth strategy. We plan to open 12 new stores next year, of which 2 are relocations (requiring an average investment of GBP1.3m per store), and are aiming to complete 10 major store refits (approximately GBP20m in total) as well as a number of smaller store based projects (approximately GBP5m). We will continue to invest in IT systems and web development (estimated at GBP15m) and supply chain improvements. We will consider freehold store acquisitions on an opportunistic basis.

Free cashflow after capital expenditure was GBP14.2m in the year (FY16: 110.4m) reflecting the lower profitability year on year, the investment in inventories, higher capital expenditure and acquisition of Worldstores.

Banking Agreements and Net Debt

The Group has in place a GBP150m syndicated Revolving Credit Facility ('RCF'), with an optional GBP75m accordion facility which matures in 2020. The terms of the RCF are consistent with normal practice and include covenants in respect of leverage (net debt to be no greater than 2.5x EBITDA) and fixed charge cover (EBITDA to be no less than 1.75x fixed charges), both of which were met comfortably as at 1 July 2017. In addition, the Group maintains GBP20m of uncommitted overdraft facilities with two syndicate partner banks.

Net debt at 1 July 2017 was GBP122.1m (0.86x historical EBITDA before exceptional items) compared with GBP79.3m in FY16 (0.51x historical EBITDA). Daily average net debt in FY17 was approximately GBP92.2m (FY16: GBP50.7m).

Capital and dividend policy

During FY15, the Board adopted a new policy on capital structure, targeting an average net debt level (excluding lease obligations and short-term fluctuations in working capital) of between 0.25x and 0.75x historical EBITDA. This policy provides the flexibility to continue to invest in the Group's growth strategy and to take advantage of investment opportunities as and when they arise, for example freehold property acquisitions.

The Board's policy on dividends is that ordinary dividend cover (by which we mean the Group's earnings per share divided by the total amount paid to shareholders by way of ordinary dividend) should be between 1.75 and 2.25x in the full year in respect of which the dividend is paid.

The Board will consider further special distributions in the future if average net debt over a period consistently falls below the minimum target of 0.25x EBITDA, subject to known and anticipated investment plans at the time.

The Group's full capital and dividend policy is available on our website at www.dunelm.com.

Dividends paid and proposed

Reflecting the capital and dividend policy, an interim dividend of 6.5p per share was paid in March 2017 (FY16: 6.0p). It is proposed to pay a final dividend of 19.5p per share (FY16: 19.1p), subject to shareholder approval. The total dividend of 26.0p represents an increase of 3.6% over the previous year, giving a dividend cover of 1.6x, excluding exceptional items (FY16: 2.0x). This cover level is outside of policy, as described above; however, the Board wishes to signify confidence in the Worldstores integration and believes that dividend progression should be maintained during this investment year. The final dividend will be paid on 24 November 2017 to shareholders on the register at the close of business on 3 November 2017.

During the prior year, the Group returned excess capital of GBP63.8m (31.5p per share) to shareholders in the form of a special dividend with a total return of GBP108.4m to shareholders by way of dividend in the year, the equivalent of 53.5p per share.

Retained earnings

During the previous financial year, the Group undertook a capital restructuring exercise which facilitated the payment of dividends from subsidiary undertakings to Dunelm Group plc of GBP359m. Consequently, the parent company had retained earnings of GBP242.8m as at 2 July 2016. The retained earnings of the parent company as at 1 July 2017 were GBP189.1m.

Share Buy-back

During the year, the Group invested GBP4.2m to buy 500,000 shares to hold in treasury in line with its policy to purchase shares in the market to satisfy the future exercise of options granted under incentive plans and other share schemes. At the year-end, 1,150,642 shares were held in treasury, equivalent to approximately 48% of options outstanding. Over time, we expect to increase our holding in treasury to be equivalent to approximately 60% of outstanding options.

Tax policy

The Group maintains its straightforward and transparent tax policy. The aim is to comply with all relevant tax legislation and pay all taxes due, in full and on time as well as actively managing tax affairs and only to engage in tax planning where this is aligned with commercial and economic activity and does not lead to an abusive result. We would normally expect our corporation tax charge to be higher than the statutory tax rate, as noted above. HMRC has recently reconfirmed the Group's low-risk tax status. Further details of the Group's tax policy are available on our website, www.dunelm.com.

During the year, total tax contributions paid to HMRC in the form of corporation tax, property taxes, PAYE and NIC's and VAT were GBP132.6m (FY16: GBP140.8m).

Treasury Management

The Group Board has established an overall Treasury Policy, day-to-day management of which is delegated to me as Chief Financial Officer. The policy aims to ensure the following:

   --    Effective management of all clearing bank operations; 
   --    Access to appropriate levels of funding and liquidity; 
   --    Effective monitoring and management of all banking covenants; 
   --    Optimal investment of surplus cash within an approved risk/return profile; 
   --    Appropriate management of foreign exchange exposures and cash flows.

Key Performance Indicators

In addition to the traditional financial measures of sales and profits, the Directors review business performance each month using a range of other KPIs. These include measures shown below:

 
 Sales growth 
 2017                                                    8.5% 
-------------------------------------------------  ---------- 
 2016                                                    7.1% 
 2015*                                                  12.7% 
-------------------------------------------------  ---------- 
 
 Like for like store sales growth 
 2017                                                   -2.4% 
-------------------------------------------------  ---------- 
 2016                                                    1.0% 
 2015*                                                   3.4% 
-------------------------------------------------  ---------- 
 
 Online sales growth (including Worldstores) 
 2017                                                  108.1% 
-------------------------------------------------  ---------- 
 2016                                                   23.2% 
 2015*                                                  55.0% 
-------------------------------------------------  ---------- 
 
 Gross margin change 
 2017                                                  -90bps 
-------------------------------------------------  ---------- 
 2016                                                   60bps 
 2015*                                                 -30bps 
-------------------------------------------------  ---------- 
 
 Operating margin before exceptional items 
 2017                                                   11.7% 
-------------------------------------------------  ---------- 
 2016                                                   14.7% 
 2015*                                                  14.7% 
-------------------------------------------------  ---------- 
 
 Earnings per share (diluted) before exceptional 
  items 
 2017                                                   42.8p 
-------------------------------------------------  ---------- 
 2016                                                   50.3p 
 2015*                                                  46.8p 
-------------------------------------------------  ---------- 
 
 Dividend per share 
 2017                                                   26.0p 
-------------------------------------------------  ---------- 
 2016                                                   25.1p 
 2015*                                                  21.5p 
-------------------------------------------------  ---------- 
 
 Total distributions per share 
 2017                                                   26.0p 
-------------------------------------------------  ---------- 
 2016                                                   56.6p 
 2015*                                                  91.5p 
-------------------------------------------------  ---------- 
 
 EBITDA before exceptional items 
 2017                                               GBP142.2m

-------------------------------------------------  ---------- 
 2016                                               GBP154.3m 
 2015*                                              GBP142.6m 
-------------------------------------------------  ---------- 
 
 New store openings 
 2017                                                       7 
-------------------------------------------------  ---------- 
 2016                                                       6 
 2015*                                                     12 
-------------------------------------------------  ---------- 
 * 2015 is treated as a 52-week period for 
  these measures, rather than 53 weeks

Keith Down

Chief Financial Officer

13 September 2017

CONSOLIDATED INCOME STATEMENT