Dunelm Group plc Final Results (4785A)

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
	7.50	0.78%	974.50	973.00	976.00	981.00	959.00	959.00	156,003	15:26:33

Industry Sector	Turnover	Profit	EPS - Basic	PE Ratio	Market Cap
Furniture Stores	1.64B	151.9M	0.7530	12.87	1.95B

Dunelm (LSE:DNLM)
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From Apr 2019 to Apr 2024

TIDMDNLM

RNS Number : 4785A

Dunelm Group plc

12 September 2018

Dunelm Group plc

("Dunelm")

Preliminary Results for the 52 weeks to 30 June 2018

Seizing opportunities in a digital world

Dunelm Group plc, the UK's leading homewares retailer, today announces its preliminary results for the 52 weeks to 30 June 2018.

 
              Year ended    Year ended    Year ended    Year ended   Year ended      Year 
                30 June       30 June       30 June       1 July       1 July        ended       Year on      Year on 
                  2018         2018           2018         2017         2017        1 July         year         year 
                                                                                     2017         change       change 
               Underlying   Exceptional     Reported    Underlying   Exceptional 
                               items                                    items      Reported     Underlying    Reported 
 Total 
  revenue     GBP1,050.1m             -   GBP1,050.1m    GBP955.6m             -   GBP955.6m         +9.9%       +9.9% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 Gross 
  margin            48.0%             -         48.0%        48.9%             -       48.9%        -90bps      -90bps 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 Profit 
  before 
  tax          GBP102.0m*      -GBP8.9m      GBP93.1m   GBP109.3m*     -GBP16.9m    GBP92.4m         -6.7%       +0.8% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 
 EBITDA         GBP139.6m      -GBP4.9m     GBP134.7m    GBP142.2m     -GBP14.0m   GBP128.2m         -1.8%       +5.1% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 Free cash 
  flow                  -             -      GBP52.9m            -             -    GBP14.2m             -     +272.5% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 Net debt               -             -     GBP124.0m            -             -   GBP122.1m             -       -1.6% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 
 Basic EPS          40.1p             -         36.3p        43.1p             -       36.3p         -7.0%        0.0% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 Fully 
  diluted 
  EPS               40.0p             -         36.2p        42.8p             -       36.1p         -6.5%       +0.3% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ---------- 
 Ordinary 
  dividends             -             -         26.5p            -             -       26.0p             -       +1.9% 
             ------------  ------------  ------------  -----------  ------------  ----------  ------------  ----------

*Includes net negative impact of Worldstores estimated at GBP8.4m for the 52-week period in FY18, and GBP10.7m for the period post-acquisition in FY17 (from 28 November 2016 to 1 July 2017).

Highlights

   --      Group revenue of GBP1,050.1m (FY17: GBP955.6m), an increase of +9.9%. LFL sales were +4.2% 
   --      Growth in unique customer numbers both online (+18%), and in-store (+5%)(1) 
   --      Strong growth in LFL online, with home delivery sales up 37.9%

-- Continued development of multichannel proposition with total Dunelm.com sales (including Reserve and Collect) now representing 13.5% of total Dunelm sales in FY18 (FY17:11.2%)

-- Opening of ten new superstores in the year (including one relocation) adding 6.1% new space, and completion of six refits

-- Clear plan to leverage the technology acquired with Worldstores; profitable Worldstores products transferred to Dunelm.com

-- Underlying PBT of GBP102.0m (pre-exceptional items), down 6.7% year on year, inclusive of an estimated GBP8.4m of net profit dilution from Worldstores (FY17: GBP109.3m underlying PBT including GBP10.7m negative impact from Worldstores)

-- PBT of GBP93.1m (FY17: GBP92.4m) including GBP8.9m (FY17: GBP16.9m) of exceptional costs relating to the acquisition, integration and/ or disposal of the Worldstores businesses

   --      Improved free cash flow year-on-year to GBP52.9m (FY17: GBP14.2m)

-- 1.9% increase in full year dividend to 26.5 pence per share, reflecting strong cash generation and robust balance sheet

(1) Unique customer numbers reflects internal analysis based on unique payment card transactions within the financial period

Nick Wilkinson, Chief Executive Officer, commented:

"Following healthy sales growth over the past year, we are now taking steps to simplify the business under the core Dunelm brand, with one web platform and an integrated supply chain. This will allow us to respond more quickly to the changing consumer environment and drive future profitable growth.

"Dunelm's purpose is to help everyone create a home they love. Our committed colleagues, our great products, and our increasingly integrated in-store and online offer, mean we are well placed for success as a leading multichannel specialist.

"The Worldstores acquisition has given us the key ingredients for a step change in our digital capabilities. We are preparing to launch Dunelm.com on our new proprietary technology to give us much greater agility in improving our customer proposition. This is a new and exciting chapter for Dunelm as we fully embrace digital retailing.

"The UK retail environment remains challenging, but against this difficult background we have traded in line with expectations during the current financial year to date."

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 issue a trading update for the first quarter of its new financial year on 11 October 2018.

For further information please contact:

 
 Dunelm Group plc                                 0116 2644439 
 Nick Wilkinson, Chief Executive Officer 
  David Stead, Interim Chief Financial Officer 
 
 MHP Communications                               020 3128 8570 
 Tim Rowntree / Simon Hockridge / Alistair De     dunelm@mhpc.com 
  Kare Silver / Pete Lambie

For photography, please contact MHP Communications

Notes to Editors

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, following the opening of the first Dunelm superstore in 1991, into broader homewares categories. Dunelm is now a multi-channel retailer, with Dunelm.com being launched in 2005 and the acquisition of the Worldstores Group in 2016 accelerating this further.

Dunelm is market leader in the GBP13bn UK homewares market and active in the GBP11bn UK furniture market. It currently operates 172 stores, of which 169 are out-of-town superstores and 3 are located on high streets, and online stores, the largest of which can be found at www.dunelm.com. Dunelm employs approximately 10,000 colleagues and sells around 30,000 product lines in store, increasing to around 55,000 online.

Dunelm, "The Home of Homes", offers a customer proposition of style, value, quality and ease of shopping. From its textiles heritage, in areas such as bedding, curtains, cushions, quilts and pillows, Dunelm has rapidly broadened its product offering to a complete homewares offer including the likes of kitchenware, dining, lighting, seasonal, wall art 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.

The product range includes many exclusive, own brand designs and premium brands such as Dorma and Fogarty. This is augmented by a range of other well-known brands and license agreements.

Dunelm has been listed on the London Stock Exchange since October 2006 (DNLM.L) and has a current market capitalisation of approximately GBP1.0bn.

CHAIRMAN'S STATEMENT

Introduction

Dunelm has grown to become the market leader in homewares in the UK. It has a network of 169 superstores selling a broad product range (with most lines being unique to Dunelm) offering outstanding value and choice. Our strategy in recent years has been to build on these strengths by growing our online participation, evolving towards a truly multichannel business. This strategy has necessitated large investments in our systems and in our supply chain logistics, and the acquisition of Worldstores in November 2016 accelerated this transition.

The year under review was complicated by a combination of management changes, the integration of Worldstores and a fragile economic environment. However, the appointment of our new CEO, Nick Wilkinson, in February brought cohesion and impetus to our strategic thinking and as a Board we are pleased with the immediate progress he has achieved. The Worldstores integration is virtually complete and the acquired unit will in future no longer be reported separately, as all the continuing sales are transferred to the Dunelm.com site, which will incorporate key elements of the Worldstores systems. As a result, our fast-growing online business will become better established and will be our primary focus for future growth.

Dunelm has made significant strategic progress in the last few years and I am confident that under Nick's leadership we will turn our strategic plans into substantial value creation.

We are proud of Dunelm's strong culture and amazing colleagues. I would like to thank them all for their hard work and commitment. Although our business is becoming more digital, the human touch from all our colleagues is as important to our success as always.

Performance

Against the backdrop of challenging and volatile market conditions, over the last financial year we grew our total sales by 9.9% to GBP1,050.1m, with positive like-for-like sales performance of 4.2%. We have continued to win homewares market share and strengthen our leadership position. Our store like-for-like sales increased by 1.0%, while like-for-like online sales were up 37.9%, reflecting our increasing focus on this channel as customer shopping behaviour continues to shift. We opened ten new superstores in the year (including one relocation) taking our network to 169 superstores, and we still see opportunity to grow our national store network in a measured way.

Profit before tax and exceptional items fell by 6.7% to GBP102.0m, reflecting a full year of trading losses reported in respect of Worldstores, a small reduction in our core business gross margin, and increased operating costs due in part to the higher mix of online sales. As a result of new store openings, refits and investment in our digital technology infrastructure, we maintained a relatively high level of capital investment of GBP44.0m (FY17: GBP60.5m). Profits after tax and exceptional items were in line year-on-year at GBP73.3m (2017: GBP73.1m).

Our balance sheet remains strong with limited leverage (net debt:EBITDA before exceptional items of 0.89x at year-end) and cash generation remains a key feature of our business model with free cash flow of GBP52.9m in the year (FY17: GBP14.2m).

Dividends

The Board has recommended maintaining the final dividend at 19.5 pence per share, bringing the total dividend for the full year to 26.5 pence per share, an increase of 1.9% on the previous year. While dividend cover before exceptional items of 1.5x remains below our target range, it reflects both the non-recurring costs associated with the Worldstores acquisition and integration, and our confidence in Dunelm's future growth prospects.

Board changes

Nick Wilkinson has made a strong start as CEO and is already bringing fresh energy to our wider leadership team.

Laura Carr will join as CFO on 29 November and will bring valuable retail and commercial experience having been CFO of Indigo in Canada and most recently Group Financial Controller of Compass Group plc. In the meantime, we have been fortunate to have David Stead return as Interim CFO following the departure of Keith Down in May. David was previously our CFO from 2003 to 2016 and I would like to thank him for returning to smooth the CFO transition.

As previously advised, Simon Emeny, our Senior Independent Director, stepped down at our AGM in November 2017 after ten years' service. Liz Doherty, who chairs our Audit & Risk Committee, has succeeded Simon as Senior Independent Director.

In March, we appointed Rachel Osborne as a Non-Executive Director to gain the benefit of her experience as CFO in a variety of consumer facing businesses. Unfortunately, Rachel subsequently changed her executive role which created a competitive conflict and she stood down from the Board in August. We have initiated a search for Rachel's replacement and will update on progress in due course.

The future

Our mission at Dunelm is to help everyone create a home they love. Notwithstanding a difficult retail environment, after a challenging period of change and investment we are now well placed for future profitable growth in a multichannel world. Our strategy will bring continuous improvement in our proposition both online and in stores, based around our broad range of great value and stylish products, our well invested infrastructure, our right-sized estate, and the committed colleagues who live and breathe our business principles every day.

I look forward to working with Nick and the rest of the Board to capitalise on the exciting opportunities ahead.

Andy Harrison

Chairman

12 September 2018

CHIEF EXECUTIVE OFFICER'S REVIEW

First impressions

Dunelm is a great business which has grown sales in each year of its 39-year history by offering great choice and value for money. Over time we have developed deep knowledge and an unrivalled range of homewares products, supported by committed suppliers. The business is prudently financed, and highly cash generative. Investment in appropriate systems and infrastructure provides a solid platform for growth, and the superstore portfolio combines good locations and attractive rent levels. Our long-established business principles and committed colleagues help ensure a high level of customer satisfaction, which is still growing.

However, we need to continue to change if we are to continue to win. The market is changing, with the increasing penetration of online retail. At the same time, while some of our traditional competitors are retrenching, discounters continue to expand their physical store portfolios. Our rate of market share gain has slowed. We have made some inroads into the furniture market, but our proposition is not yet well developed. The acquisition of Worldstores in FY17 has accelerated the development of our multichannel capabilities, but the process of integrating Worldstores into Dunelm has been substantial and has reduced our focus on some of our operating disciplines.

My conclusion is that I have joined an excellent business which is experiencing some new challenges, both near term and medium term. I am really excited about helping Dunelm to navigate these challenges as we aim to fulfil our purpose of helping everyone create a home they love. We will differentiate ourselves by being famous for product style, value and quality in all market segments, and we are working hard to become the best multichannel retailer for homewares in terms of convenience and customer experience.

Worldstores

The acquisition of Worldstores was a major event in Dunelm's development and trading and integrating the acquired businesses has been a massive focus for the management team.

Although Worldstores was acquired from administration for a nominal sum, our estimate of the total cash outlay we will incur, including goodwill payments to suppliers, integration costs and trading losses amounts to approximately GBP30m (net of tax relief).

The business model of Worldstores itself was not sustainable and at the time of acquisition it was incurring losses of over GBP20m per year. We have transferred significant numbers of profitable lines (approximately 15,000 to date) from Worldstores and Kiddicare to our own website, strengthening the Dunelm.com offer and contributing to growth. Having transferred the worthwhile sales, we decided to cease trading the Worldstores websites as separate entities and they were fully withdrawn by early September 2018. We also sold the Achica brand which did not fit with Dunelm's business model and, having tested the Kiddicare brand, we concluded that we can more profitably extend our presence in the children's market using the Dunelm brand. We therefore closed the Kiddicare business in July 2018.

The main benefit from the acquisition is the access to technology and digital development capabilities, which are an important ingredient to the infrastructure that is essential to our success in a multichannel world. Importantly, we see the technology platform acquired with Worldstores as a real asset. We are well advanced in a major programme to move the Dunelm.com website onto this platform which will allow us to launch Click & Collect and subsequent developments (such as improved delivery options) with much greater agility than has been possible whilst working with a third-party technology partner. We are on track to introduce the new platform during Q3 of our financial year. Linked to the above, we now have not only better technology assets but also a much more advanced capability within the organisation, with a significant increase in the number of digital developers and a digital development centre in London.

With the integration behind us, it is clear that Worldstores has created a new level of energy and focus in the business around digital growth. This will play a key role in driving Dunelm's growth for the foreseeable future.

Immediate challenges and opportunities

We have seen profits fall in our last two financial years and we have identified a number of issues and opportunities to improve performance of the core Dunelm business.

We need to evolve to a market-leading multichannel offer. The actions described above to capitalise on the assets acquired with Worldstores are the critical next phase on this journey.

We also have a clear opportunity to improve our customer offer via renewed focus on our value for money credentials. We will reinvigorate our programme of special buys in the coming months and ensure these are prominently displayed in stores and online.

We have grown our furniture business over recent years such that furniture (excluding Worldstores) now represents approximately 5% of Dunelm sales, but the proposition is still at an early stage of development. I am excited by the opportunity to develop our furniture offer further across all channels.

Partly as a result of management change and partly due to the distraction of the Worldstores acquisition and integration activity, some of our basic retail disciplines have slipped, for example in the areas of margin management and stock loss. I am determined that we will regain our grip in these areas.

We have invested heavily in our store portfolio over recent years. With a small number of exceptions, the performance of new stores has been positive and continues to give good payback on investment. Refit investments have shown a mixed return. I continue to believe in the opportunity for rolling out new stores, and for targeted refits, although I will ensure that we are highly selective with these investments going forward. I anticipate that the rate of new store openings will be lower, approximately three to five per year, as we move towards our target of 200 stores for full national coverage; and that our investment in refits will settle at GBP5-10m per year over the medium term.

Evolution of strategy

The core of Dunelm's business strategy is sound, but needs to adapt to reflect fully the issues described above and the challenges of a multichannel environment.

Our customer purpose is to help everyone create a home they love. We intend to reflect this in the way we think about the business, the way we organise, and the way we express our strategy.

Customer first - The leading multichannel specialist

We are now organising ourselves in line with a clear "Customer First" mind-set. In this retail environment, we must be agile and able to work at pace in an ever-evolving competitive landscape. Our combined store and online business enables us to offer a leading multichannel customer proposition which neither the discounters nor the pure-play operators can match.

By listening to our customers and serving them better we have a significant opportunity to sell more. Shopping frequency and average basket size have considerable headroom for growth as we develop our customer proposition. We under-participate in certain key homewares customer segments, such as "confident nest builders" and "necessity buyers", and have the potential to grow substantially within these groups. Furthermore, awareness of the Dunelm brand is approximately 80%, which remains low for a market leader.

In the coming years our customer proposition will evolve significantly. Product choice will be extended considerably, in both current and adjacent categories, as we help our customers by sourcing great products. Our stores will become more service and experience orientated, supported by market-leading services which offer inspiration and advice to help customers create a home they love. At the same time, we will work hard to improve the value we offer customers, and to make it even easier for them to shop with us.

In addition to our four existing business goals which help us shape and prioritise our activities to support growth, we have now added a fifth, reflecting the opportunity to grow customer awareness and improve our capabilities with regards to customer acquisition.

1. Reaching new customers with our brand

We have increased the number of unique customers shopping in our stores by 5% and online by 18% during the last year. Continuing to grow our customer base is now a key focus.

Historically customers have "found" Dunelm as we have opened new stores near their homes. In recent years, with the growth of online performance marketing, we have also attracted new customers directly to our website, which in turn supports our store sales.

In the current financial year, we are launching a new integrated brand building campaign which will begin in September 2018, comprising TV sponsorship and advertising, supported by PR, social media activity, email communications and instore activities. We will test and learn from this approach, and will endeavour to have an "always on" flow of customer communications to ensure the Dunelm brand is "front of mind" amongst our target customer segments. Our investment in this campaign over the coming financial year will be partly funded by redirecting existing brand spend. We will measure success in terms of customer acquisition and visit numbers.

We plan to accelerate investment in online performance marketing on Dunelm.com in line with our growth expectation for this channel.

We will also continue to develop the use of our own content via our own website, emails to customers, and on social media channels where we are targeting increased followers and likes. We are learning how best to leverage the capabilities of our new CRM system, and generating interaction through #mydunelm and user-generated content and imagery. We will further step up our product PR activity and influencer programmes to gain critical mass.

We are excited about the potential for medium term growth across all our channels which will come from this heightened focus on customer acquisition.

2. Creating new reasons for customers to shop with Dunelm

We must continually improve our proposition by offering the best product choice, quality, value and style to our customers. We must broaden our product appeal to suit all customer tastes, and reinforce our product advantage compared to our competitors. Driving broader category awareness will help us drive visit frequency and basket size.

During the last year we have had some notable successes in improving our product ranges in areas such as lighting and rugs where sales grew significantly both online and in stores.

We have recently launched online a new Made to Measure blinds offer, which will be followed in due course by Made to Measure curtains, which we expect to appeal to customers seeking convenience. In furniture, we are building differentiation into our offer to improve the ranges available for customers and drive consideration in areas such as mattresses with new Dorma and Fogarty branded products.

We want our customers to see new products each time they visit our stores and website. We will achieve this by reinvigorating our approach to special buys and trading to bring a wide variety of styles and great value products to our customers.

In the last year, we have continued to grow our sales of seasonal products across key winter and summer trading periods (on top of strong growth in FY17). We believe there is more potential for growth here and are planning further improvements in seasonal ranging over the next year.

3. Easy and inspiring multichannel shopping for our customers

Our customers tell us that shopping convenience is high on their priority list. In addition, customers seek help, advice and inspiration to help create a home they love.

Our 169 superstores provide a fantastic opportunity for us to showcase our product ranges and inspire customers as they browse. As we expand our store estate to around 200 stores, we will bring this opportunity within reach of even more customers, enabling them to access our great ranges and 'take home today' convenience.

Our website provides a different type of convenience for customers shopping at home or on the go. We are working hard to create a seamless multichannel proposition, and are aiming to be the leading multichannel brand in homewares for customer experience. In reality, we are still in catch-up mode for online capability, and we know our customers will appreciate the Click & Collect service which we will introduce in tandem with our new web platform early in 2019, as well as improved payment and delivery options.

We know that our stores are an integral part of our future success in a multichannel world, and delivering an inspirational and easy to shop store remains important. We have rolled out tablet-based selling in-store during the last 12 months, providing customers with the opportunity to access the full Dunelm range from every store. We have introduced customer hosts in our stores who will support customers' shopping needs, offering friendly advice and expertise, and helping them navigate the wide variety of ranges available to them.

Last year we continued to evolve our format in stores by completing six major refits, as well as a number of smaller modular refits around furniture, lighting and Made to Measure. We will continue to trial and develop new concepts in stores and currently plan to complete a small number of further major refits in the next financial year.

4. Simple and low cost - good housekeepers

Our low-cost operating model and dedication to keeping things simple has historically been a source of significant cost advantage. However, cost growth has exceeded sales growth for a number of years now as we have addressed the changing retail market and transitioned to our multichannel model.

Our approach going forward is to drive efficiency by leaving behind the Worldstores and Kiddicare brands, and leveraging a single brand, web platform and integrated supply chain. As our channel mix shifts, we will attack costs and work to keep all our channel operations low cost and efficient. We calculate that the marginal contribution from 1-man home delivery sales is currently around 15% below in-store sales.

Over the last year we have made conscious decisions to invest in areas such as digital marketing and technology, and these investments will continue. We have partially offset these investments through productivity initiatives, both in stores and in our supply chain operations, including elimination of some of the Worldstores operating costs. However, we have also suffered increased operating costs due to weaker grip on basics such as stock loss, sourcing and procurement. We are now refocused on improving controls in these areas.

5. A great place to work for colleagues

Making Dunelm an even better place to work for all our colleagues is a continual focus for our leadership team and something that we are passionate about. We know that highly engaged colleagues provide better service to our customers.

Our business principles are really important to us, and as we embrace a digital future, we are working hard to retain the culture which has enabled us to get to where we are.

We are encouraged by the progress made this year in creating better, more rewarding jobs for colleagues in stores and in support functions. We have again promoted more colleagues to management level roles, and we continue our efforts to identify and develop talent to enable individuals to reach their full potential.

We continually listen to our customers and colleagues using our "always-on" feedback and engagement tools. Significant actions taken in response to feedback from our colleagues include restructuring our Technology teams to become more agile and product focused, and combining our Buying and Merchandising functions into an integrated team.

Colleagues value our commitment to activities which have a benefit for the environment. During the year, we reduced CO(2) emissions by 7.4%, supported by the completion of 25 LED refits in the year, taking the total number of our sites with LED lighting up to 164 out of 184. Our focus on recycling and landfill diversion has enabled us to reduce our costs of waste management year-on-year, generate significant revenues from recycling, and improve our landfill diversion by three percentage points to 95%.

Summary

In the near term, we have a number of self-help opportunities to improve profitability and cash generation after a difficult and disappointing FY18. I am determined that we grasp these opportunities quickly so as to return to profit growth.

Over the medium term I see plenty of opportunity for us to drive growth as the leading multichannel specialist, helping more customers to create a home they love. This is a new and exciting chapter for Dunelm as we fully embrace digital retailing.

The UK retail environment remains challenging, but against this difficult background we have traded in line with expectations during the current financial year to date.

Nick Wilkinson

Chief Executive Officer

12 September 2018

CHIEF FINANCIAL OFFICER'S REVIEW

Overview

The table below is provided in order to aid understanding of the impact of Worldstores on the performance of the group as a whole. The analysis includes a number of assumptions and judgements, particularly in relation to the allocation of costs between core Dunelm and Worldstores.

 
                                                      Dunelm                  Worldstores   Total Group 
                                                                                   (GBPm)        (GBPm) 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
                                      Existing   Worldstores   Total (GBPm) 
                                        (GBPm)      transfer 
                                                      (GBPm) 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Revenue                                 971.7          12.4          984.1          66.0       1,050.1 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Cost of sales                         (495.7)         (7.4)        (503.1)        (43.4)       (546.5) 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Gross profit                            476.0           5.0          481.0          22.6         503.6 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Operating costs                       (362.9)         (2.4)        (365.3)        (33.6)       (398.9) 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Operating profit                        113.1           2.6          115.7        (11.0)         104.7 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Financial income and expense                                                                     (2.7) 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Profit before tax and exceptional 
  items                                                                                           102.0 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Exceptional items                                                                                (8.9) 
-----------------------------------  ---------  ------------  -------------  ------------  ------------ 
 Profit before tax                                                                                 93.1 
-----------------------------------  ---------  ------------  -------------  ------------  ------------

The commentary which follows explains the performance of Dunelm and Worldstores separately as far as possible.

Revenue

 
                                                    52 weeks to 30 June 
                                                            2018 
                                             Revenue   YoY Growth   YoY Growth 
                                              (GBPm)       (GBPm)          (%) 
------------------------------------------  --------  -----------  ----------- 
 LFL stores                                    805.0         +8.2        +1.0% 
------------------------------------------  --------  -----------  ----------- 
 LFL online (Dunelm.com) (including lines 
  transferred from Worldstores)                105.4        +28.9       +37.9% 
------------------------------------------  --------  -----------  ----------- 
 Total LFL                                     910.4        +37.1        +4.2% 
------------------------------------------  --------  -----------  ----------- 
 Non-LFL stores                                 73.7        +43.6            - 
------------------------------------------  --------  -----------  ----------- 
 Total Dunelm                                  984.1        +80.7        +8.9% 
------------------------------------------  --------  -----------  ----------- 
 Worldstores businesses                         66.0        +13.7            - 
------------------------------------------  --------  -----------  ----------- 
 Total Group                                 1,050.1        +94.5        +9.9% 
------------------------------------------  --------  -----------  -----------

Group revenue for FY18 was GBP1,050.1m (FY17: GBP955.6m), an increase of 9.9%. Within this, Dunelm revenue grew by 8.9% to GBP984.1m.

Despite volatile trading conditions throughout the year, like-for-like ('LFL') revenue grew by 4.2%. This was primarily driven by continued strong performance online, where revenue grew by 37.9%; over the year as a whole, Dunelm.com accounted for 10.7% of total Dunelm business (13.5% including reserve & collect orders picked up in stores).

After a decline in the previous financial year, revenue in LFL stores also increased, with growth of 1.0% reflecting:

-- Better availability throughout the financial year, with no repeat of the supply chain disruption seen in FY17

   --      Improvements in product ranges with more new lines and a stronger seasonal offering 
   --      Benefits from investment in existing stores, including six major refits 
   --      Favourable weather conditions through the first half, and especially the first quarter 
   --      Adverse weather conditions in the second half

Non-LFL revenue reflected the impact of our ongoing store expansion programme, with ten new openings in the year (of which one was a relocation). We ended the year with a portfolio of 169 superstores and three stores in high street locations. We anticipate a smaller number of new openings in FY19, with two new superstores committed (both relocations) as at the date of this report.

The Worldstores businesses, comprising Worldstores.co.uk, Achica.com and Kiddicare.com, were acquired midway through FY17. During FY18 we divested Achica.com and made the decision to transfer continuing lines from the Worldstores and Kiddicare ranges to Dunelm.com, prior to winding down the Worldstores.co.uk and Kiddicare.com sites in the first quarter of FY19. As a consequence, sales attributed to Worldstores businesses will be minimal in FY19.

Gross Margin

Gross margin decreased by 90 basis points to 48.0% (FY17: 48.9%). Excluding the dilutive impact of lower margins earned by the Worldstores businesses, core Dunelm gross margin was 48.9% in FY18 and 49.8% in FY17.

Key factors causing the year-on-year decline in gross margin were adverse foreign exchange impacts and a higher level of clearance of discontinued lines (including a year-end adjustment to increase our obsolete stock provision by GBP2.6m).

Setting aside the year-end adjustment described above, core Dunelm gross margin showed year-on-year growth of 40bps during the final quarter of the year. This gave positive momentum going into FY19, when we also expect to benefit from improved foreign exchange rates. We anticipate that these benefits will more than offset the margin dilution from transfers of further Worldstores lines to Dunelm.com.

Operating Costs before Exceptional Items

Operating costs before exceptional items in FY18 were GBP398.9m, an increase of GBP43.0m or 12.1% compared with the prior year. The total included GBP33.6m of costs relating to Worldstores businesses (FY17: GBP29.2m).

The main drivers of the GBP38.6m increase in core Dunelm operating costs include:

-- Store portfolio growth - nine new superstore openings (net of one relocation), increasing selling space by 6.1%

   --      Online - digital marketing and fulfilment costs grew broadly in line with Dunelm.com sales

-- National Living Wage - upward cost pressure in excess of inflation, partially mitigated by productivity initiatives

We will redouble our focus on productivity and overhead cost control going forward.

Exceptional Items

We have treated as exceptional those non-recurring costs which relate to the acquisition, integration and/or disposal of the Worldstores businesses. During the year, these exceptional items totalled GBP8.9m, comprising the following:

 
                                                    FY18 (GBPm)   FY17 (GBPm) 
-------------------------------------------------  ------------  ------------ 
 Fair value adjustments in respect of acquired 
  inventory                                                   -           0.5 
-------------------------------------------------  ------------  ------------ 
 Acquisition costs                                            -           1.3 
-------------------------------------------------  ------------  ------------ 
 Welcome payments for continuation of supply                  -           7.3 
-------------------------------------------------  ------------  ------------ 
 Retention and redundancy payments                          1.2           2.7 
-------------------------------------------------  ------------  ------------ 
 Loss on disposal, asset write-offs, impairments 
  and accelerated amortisation                              5.8           2.9 
-------------------------------------------------  ------------  ------------ 
 Other integration costs                                    1.9           2.2 
-------------------------------------------------  ------------  ------------ 
 Total                                                      8.9          16.9 
-------------------------------------------------  ------------  ------------

Management retention and redundancy payments were made in the year in accordance with contractual agreements. There are no further payments due to be made.

We have reviewed the websites and other intangible IT assets of both the existing Dunelm business and the acquired Worldstores businesses. Having determined our technology plans going forward, we have written off certain technology assets and useful economic lives of others have been reduced resulting in accelerated depreciation.

During the year we took the decision to develop the Kids and Nursery category under the Dunelm brand, rather than the Kiddicare standalone brand. As a result, the Kiddicare brand acquired as part of the Worldstores acquisition was deemed to be fully impaired. As well as this, aged Kiddicare stock and various other intangible assets relating to the development of a new Kiddicare website were also written off.

As a result of the sale of the Achica business, certain costs relating to the sale and subsequent restructure of the business have been classified as exceptional. These costs include the write-off of assets relating to Achica and onerous contracts. The proceeds from the sale of the Achica business were GBP0.6m.

Other integration costs include professional advisory support and costs associated with the transfer of the London head office to a new location.

Of the above exceptional items, GBP1.6m were net cash outflows in the period. We do not expect to report exceptional items in FY19.

Operating Profit before Exceptional Items

Group operating profit before exceptional items for the financial year was GBP104.7m (FY17: GBP111.7m), equating to 10.0% of sales (FY17: 11.7%). Included within this is a net negative impact from the Worldstores businesses, which we estimate at GBP8.4m. This impact will reduce significantly in FY19 as Worldstores trading is absorbed fully into the core Dunelm business.

Operating profit after exceptional items was GBP95.8m (FY17: GBP94.8m) reflecting the lower level of exceptional costs in the current year.

EBITDA

Before exceptional items, earnings before interest, tax, depreciation and amortisation were GBP139.6m (FY17: GBP142.2m). This represents a 1.8% reduction on the previous financial year. The EBITDA margin achieved was 13.3% (FY17: 14.9%).

After exceptional items EBITDA was GBP134.7m (FY17: GBP128.2m).

Financial Items

The Group incurred a net financial expense of GBP2.7m in FY18 (FY17: GBP2.4m). Interest and amortisation of costs arising from the Group's revolving credit facility amounted to GBP2.2m (FY17: GBP2.0m) and net foreign exchange differences on the translation of dollar denominated assets and liabilities amounted to a further GBP0.5m expense (FY17: expense of GBP0.6m). Interest earned on cash deposits was GBPnil (FY17: GBP0.2m).

As at 30 June 2018, the Group held $164.0m (FY17: $140.0m) in US dollar forward contracts, of which $121.5m were due to mature in the next 12 months (FY17: $107.6m), representing 76% of the anticipated US dollar spend over the next financial year. US dollar cash deposits amounted to $7.3m (FY17: $0.3m).

PBT

After accounting for interest and foreign exchange impacts, profit before tax (excluding exceptional items) for the financial year amounted to GBP102.0m (FY17: GBP109.3m), a decrease of 6.7%.

Profit before tax and after exceptional items was GBP93.1m (FY17: GBP92.4m).

Taxation

The tax charge for the year was 21.3% of profit before tax, a premium of 230bps compared with the statutory rate of 19.0%. This included an unusually high level of disallowable asset write-offs largely relating to the acquired Worldstores brands.

In future, we expect the tax charge to trend approximately 100 bps above the headline rate of corporation tax, principally due to depreciation charged on non-qualifying capital expenditure.

PAT and EPS

Profit after tax was GBP73.3m (FY17: GBP73.1m).

Basic earnings per share (EPS) for the year ended 30 June 2018 was 36.3p and in line with last year, or 40.1p before exceptional items (FY17: 43.1p). Fully diluted EPS increased slightly to 36.2p (FY17: 36.1p). Before exceptional items this measure decreased to 40.0p (FY17: 42.8p).

Operating Cash Flow

In FY18 the Group generated GBP98.5m (FY17: GBP79.5m) of net cash from operating activities, an increase of 24%. Cash elements of exceptional costs were GBP1.6m (FY17: GBP11.3m).

Net working capital increased by GBP20.3m over the year (FY17: GBP26.2m increase). Despite the expansion of our store estate, we reduced year-end inventory by GBP8.6m through a combination of delayed inflow of Christmas merchandise and lower cover levels on continuing lines. However, payables reduced by GBP31.4m due to a combination of factors including the later timing of Christmas stock flows and the lower level of capital investment in progress at year-end.

Capital Expenditure

Gross capital expenditure in the financial year was GBP44.0m compared with GBP60.5m in FY17. During the year, we opened ten new stores (GBP13.8m), and invested GBP10.6m in refits. We continued to invest in technology infrastructure to improve our website and open up new sales channels (GBP14.3m). We relocated our London Support Centre and invested in a new bespoke curtains manufacturing site, as well as acquiring one freehold property.

We expect capital expenditure in the next financial year to be lower. We anticipate fewer new store openings. We intend to complete a small number of major store refits as well as other specific upgrades across the estate to introduce concepts which have a proven return (estimated GBP5-10m in total). We will continue to invest in technology and web development as we move the Dunelm.com website to the Worldstores technology platform and introduce Click & Collect (estimated at GBP15m). In total, we are planning capital investment, assuming no freehold acquisitions, of GBP30-35m in FY19.

Free Cash Flow (FCF)

We measure FCF as net cash from operating activities less net cash used in investing activities. FCF was GBP52.9m in the year (FY17: GBP14.2m), reflecting the improved operating cash flow and lower capital expenditure year-on-year.

Banking Agreements and Net Debt

During the year the Group amended and extended its syndicated Revolving Credit Facility ('RCF'). The RCF was increased to GBP165m and extended until March 2023. The terms of the RCF are unchanged and are consistent with normal practice. They include covenants in respect of leverage (net debt to be no greater than 2.5× EBITDA) and fixed charge cover (EBITDA to be no less than 1.75× fixed charges), both of which were met comfortably as at 30 June 2018. In addition, the Group maintains GBP20m of uncommitted overdraft facilities with two syndicate partner banks.

Net debt at 30 June 2018 was GBP124.0m (0.89× historical EBITDA before exceptional items) compared with GBP122.1m in FY17 (0.86× historical EBITDA). Daily average net debt in FY18 was GBP112.4m (FY17: GBP92.2m).

Capital and Dividend Policy

The Board targets an average net debt (excluding lease obligations and short-term fluctuations in working capital) of between 0.25× and 0.75× historical EBITDA. This policy provides the flexibility to continue investing 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 targets ordinary dividend cover (by which we mean the Group's earnings per share in a given financial year divided by the total ordinary dividends declared in respect of that year) of between 1.75× and 2.25×.

The Board will consider special distributions if average net debt over a period consistently falls below the lower limit of the target range (0.25× 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 https://corporate.dunelm.com.

Dividends Paid and Proposed

An interim dividend of 7.0p per share was paid in March 2018 (FY17: 6.5p). It is proposed to pay a final dividend of 19.5p per share (FY17: 19.5p), subject to shareholder approval. The total dividend of 26.5p represents an increase of 1.9% over the previous year, giving a dividend cover of 1.5× before exceptional items (FY17: 1.6×). This cover level is outside our policy, as described above; however, the Board has confidence in the strategic plans of the business and believes that ordinary dividend cover will revert to the policy range in the medium term. The final dividend will be paid on 7 December 2018 to shareholders on the register at the close of business on 16 November 2018.

Share Buy-backs

The Group's policy is to purchase shares in the market from time to time to satisfy the future exercise of options granted under incentive plans and other share schemes. During FY18 no shares were purchased (FY17: 500,000). At the year-end, 914,635 shares were held in treasury (FY17: 1,150,642), equivalent to approximately 37% of options outstanding.

Tax Policy

The Group maintains a 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. While actively managing its tax affairs, the Group will only 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, https://corporate.dunelm.com.

During the year, total tax contributions paid to HMRC in the form of corporation tax, property taxes, PAYE and NIC and VAT were GBP142.3m (FY17: GBP132.6m).

Treasury Management

The Group Board has established an overall Treasury Policy, day-to-day management of which is delegated to the 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 
 2018                                                          9.9% 
-------------------------------------------------------  ---------- 
 2017                                                          8.5% 
 2016                                                          7.1% 
-------------------------------------------------------  ---------- 
 
 Like for like store sales growth 
 2018                                                          1.0% 
-------------------------------------------------------  ---------- 
 2017                                                         -2.4% 
 2016                                                          1.0% 
-------------------------------------------------------  ---------- 
 
 Online sales growth (including Worldstores) 
 2018                                                         33.1% 
-------------------------------------------------------  ---------- 
 2017                                                        108.1% 
 2016                                                         23.2% 
-------------------------------------------------------  ---------- 
 
 Gross margin change 
 2018                                                        -90bps 
-------------------------------------------------------  ---------- 
 2017                                                        -90bps 
 2016                                                         60bps 
-------------------------------------------------------  ---------- 
 
 Operating margin before exceptional items 
 2018                                                         10.0% 
-------------------------------------------------------  ---------- 
 2017                                                         11.7% 
 2016                                                         14.7% 
-------------------------------------------------------  ---------- 
 
 Earnings per share (diluted) before exceptional items 
 2018                                                         40.0p 
-------------------------------------------------------  ---------- 
 2017                                                         42.8p 
 2016                                                         50.3p 
-------------------------------------------------------  ---------- 
 
 Dividend per share 
 2018                                                         26.5p 
-------------------------------------------------------  ---------- 
 2017                                                         26.0p 
 2016                                                         25.1p 
-------------------------------------------------------  ---------- 
 
 Total distributions per share 
 2018                                                         26.5p 
-------------------------------------------------------  ---------- 
 2017                                                         26.0p 
 2016                                                         56.6p 
-------------------------------------------------------  ---------- 
 
 EBITDA before exceptional items 
 2018                                                     GBP139.6m 
-------------------------------------------------------  ---------- 
 2017                                                     GBP142.2m 
 2016                                                     GBP154.3m 
-------------------------------------------------------  ---------- 
 
 New store openings 
 2018                                                            10 
-------------------------------------------------------  ---------- 
 2017                                                             7 
 2016                                                             6 
-------------------------------------------------------  ----------

David Stead

Interim Chief Financial Officer

12 September 2018

Consolidated Income Statement