(DNLM) Dunelm Group

8 February 2012

Dunelm Group plc

Interim Results Announcement

Dunelm Group plc, the leading out-of-town specialist homewares retailer, announces its Interim Results for the 26 weeks to 31 December 2011.

Financial Highlights

·     Revenues up 8.8% to £299.9m (Prior year: £275.7m)

·     Like-for-like (LFL) sales up by 1.1% (Prior year: 1.2% decline)

·     Gross margin up 10 basis points to 49.2% (Prior year: 49.1%)

·     Operating profit growth of 7.1% to £51.8m (Prior year: £48.4m)

·     Profit before taxation up by 7.8% to £52.2m (Prior year: £48.5m)

·     Earnings per share (fully diluted) up 8.8% to 18.6p (Prior year: 17.1p)

·     Cash flows from operating activities before interest and tax up 15.1% to £73.1m (Prior year: £63.5m)

·     Interim dividend increased by 14% to 4.0p per share (Prior year: 3.5p)

·     Net cash of £49.9m at period end (Prior year: £34.3m)

Business Highlights

·     Continuing market share gain on LFL basis

·     11 new superstores opened in the period (including one relocation)

·     4 further sites committed for launch this financial year (including one relocation); strong pipeline for launches next financial year - 4 locations already committed

·     50% of superstores new or refitted within last 3 years

·     Continuing strong growth in multi-channel sales, driven by launch of Reserve & Collect proposition

·     Move to new head office successfully completed

Nick Wharton, Chief Executive, said:

"Dunelm has achieved robust trading results in a very demanding retail environment, and has continued to gain market share on a like for like basis. We have also made significant progress on our longer term development plan, not only delivering a very ambitious store opening programme over the last quarter, but also making significant improvements to our on-line offer which have been well received by customers. I would like to thank all Dunelm colleagues for their hard work and commitment in the half year.

"Whilst we remain cautious about the impact of the UK consumer environment on our trading in the near term, we will continue to focus on the disciplined execution of our strategy and will maintain tight operational management. With eight further store openings already committed, good momentum in multi-channel and with our "Simply Value for Money" proposition resonating with a wide range of customers, we remain confident in the future growth prospects for the business."

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Notes to Editors

Dunelm is the UK's leading specialist out of town homewares retailer, operating in the £11bn homewares market. The Group currently operates 123 stores, branded Dunelm Mill, of which 114 are out-of-town superstores and 9 are located on high streets, and an on-line store, to be found at www.dunelm-mill.com.

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 are supported by a frequently changing series of special buys. The superstore format provides an average of c.30,000 sq ft of selling space with over 20,000 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 employs c.6,500 full and part time staff, the vast majority of whom work in the stores and was listed on the London Stock Exchange in October 2006 (DNLM.L). The Group has a current market capitalisation of approximately £900m.

 Chairman's Statement

The Group has continued to make strong progress on several fronts during the 26 weeks to 31 December 2011.

In a market which has remained challenging for most retailers, Dunelm has recorded some notable achievements:

-      Positive like for like sales growth over the period

-      Continued space expansion, with 11 new superstores (including one relocation)

-      Significantly improved multi-channel offering

-      Expanded head office capacity

-      Strong growth in profit before tax and earnings per share

The Group continues to generate internally the funds required to invest in all aspects of its growth programme, and net cash at the end of the period was £49.9 million. The Board's confidence in the continuing cash generation of the business has led us to declare a 14% increase in the interim dividend to 4.0p (2011 - 3.5p). The Board keeps under review the requirement for cash resources to support the Group's continued development, and is committed to returning excess cash to shareholders where appropriate.

We have today announced a further appointment to the Board. I am pleased to welcome Matt Davies as a new independent Non-Executive Director. Matt has a professional finance background and has been Chief Executive of Pets At Home, a privately owned retail business, since 2004, overseeing a period of significant growth in that business.  He was clearly the best candidate from a strong shortlist, and his experience and skills will be of great benefit to the Board.  Matt will also chair the Audit Committee.

Looking ahead, the homewares market is expected to remain subdued for some time. However, we continue to see opportunities to grow and improve the Dunelm business and we remain confident that our 'Simply Value for Money' proposition will continue to be attractive to customers.

Geoff Cooper

Chairman

8 February 2012

Business Review

Overview

In the context of a consumer environment that remains extremely challenging we are satisfied with the progress made by the Group over the first half of the financial year. We continue to develop the business through a clear focus on our four strategic priorities, through which we continue to strengthen our customer offer and improve our infrastructure while increasing scale through new stores and multi-channel expansion.

During the period, the opening of 10 new stores, plus the relocation of an existing unit, contributed to overall revenue growth of 8.8%, with like-for-like ("LFL") revenue growth of 1.1% leading to further gains in market share. While we continue to invest in the infrastructure of the business to support future growth, revenue growth combined with ongoing cost discipline led to profit before tax increasing by 7.8% year on year to £52.2m (FY11: £48.5m).

Financial performance

During the period total revenues were £299.9m (FY11: £275.7m). The LFL revenue increase (calculated by comparing stores which have traded throughout the last two financial years) of 1.1% was concentrated in the second quarter of the financial year, which benefitted from stronger marketing activity during the key December trading period and comparison with the poor weather which impacted footfall in the equivalent period in 2010.

In line with our expectations for the full year, the gross margin percent in the period was broadly flat year on year, increasing by 10 basis points. A slight reduction in gross margin percent in the second quarter reflects the anniversary of a particularly strong performance in the prior year. We continue to see the benefits of increased buying scale and better lifecycle management, which have been sufficient to offset the impact of recent cost inflation.

Operating costs increased by 10.1% (£8.8m) in aggregate, with the majority of the increase driven by the cost of opening 11 new stores and the resultant 8.7% year on year increase in average selling space, together with costs associated with the new head office and the expansion of our central warehouse capacity to support future growth. Costs in LFL stores (including costs relating to the further development of Dunelm Direct) were broadly flat year on year, reflecting the benefits from the centralisation of some tasks previously performed by individual stores and from the better planning of colleague rotas to match customer footfall.

As a consequence of the above and net finance income of £0.4m (FY11: £0.1m), profit before tax grew by 7.8% to £52.2m (FY11: £48.5m).

Profit after tax of £37.9m (FY11: £34.8m) reflects the projected full year effective tax rate of 27.4% (FY11: 28.2%).  The effective rate has reduced compared with last year, due to the lowering of the headline rate of corporation tax.

Fully diluted earnings per share were 18.6p (FY11: 17.1p), an increase of 8.8%.

The Group continues to be strongly cash generative even after ongoing investment in the growth and capabilities of the business. Capital investment of £29.4m over the period (FY11: £23.1m), reflects fit-out costs for new stores and store refits, and includes the acquisition of two new freehold units within a total freehold investment of £12.0m. This brings our freehold portfolio to 20 stores (including two units yet to open) and our head office facilities.

Cash generated from operations, after interest and tax, was £60.2m (FY11: £52.1m) and represents 116% of operating profit (FY11: 108%). The year on year increase in inventory primarily reflects investment in new stores.

Dividend

An interim dividend of 4.0p per ordinary share, an increase of 14% on the prior year interim dividend of 3.5p, will be paid on 13 April 2012 to shareholders on the register at 23 March 2012.

The Group's financial position remains robust with closing positive net cash of £49.9m (FY10: £34.3m) and average daily cleared funds over the period of £47.6m. With our commitment to maintaining a progressive dividend policy and to continued investment in the growth of the business, the Board retains a preference for capital flexibility. However, the strength of cash generation within the business is such that cash surpluses should build over time. It remains the Board's intention periodically to return such excess capital to shareholders.

Strategy development

We continue to make good progress against each of the four elements of our stated business strategy:

1. Develop our specialist position

We continue to invest in the Group's "Simply Value For Money" proposition. This proposition combines our core differentiator of market leading choice with great prices, reliable quality and strong product availability. We also look to augment our long established product strength with further differentiation based upon friendly, knowledgeable customer service.

To expand further our presence in the £11bn homewares market we continue to develop our ranges. We refresh our ranges across all departments twice each year to ensure that they remain contemporary. On average around 25% of ranged lines are less than 12 months old at any given time. Specifically during the period we have expanded our occasional furniture offer, and have introduced an extensive range of colour co-ordinated kitchen electrical products under our own Spectrum brand   We continue to use our Miss it Miss Out ("MIMO") promotions and special buys to emphasise Dunelm's value proposition, and to provide a seasonally relevant feel to the store.

Ongoing investment in systems and processes to reduce the level of non-customer facing tasks undertaken in store will provide additional scope for our colleagues to interact with our customers without increasing overall labour costs.  Most significantly we continue to increase the proportion of inventory ordering that is automated, having successfully completed a series of trials in the previous financial year.

While the opportunity to enhance revenues through a "service based selling" approach is clear, we are equally determined to preserve our core service credentials of friendliness and trustworthiness. We have commenced a programme of training to provide our colleagues with the knowledge and confidence to engage positively with customers. We will use an extensive Mystery Shopper programme to monitor our progress.

We continue to migrate our marketing presence from local, store‑based advertising to the more consistent use of national and digital media. Through a combination of brand‑led and tactical advertisements that drive footfall we believe this strategy is beginning to build awareness of both our brand and our value proposition.

Our relaunched trial of Dunelm At Home, through which customers can select bespoke, made to measure window treatments via a free home consultation, tests the opportunity to differentiate the overall Dunelm proposition through the addition of services. Having delivered our targeted level of customer satisfaction in three initial stores we will extend the trial to 10 stores during 2012.

2. Develop the store portfolio

The Group's store portfolio is centred on our preferred edge of town superstore format, averaging 30,000 sq ft. This size of unit allows us to showcase the full depth and breadth of our market leading range. We remain committed to our target of achieving full national coverage, estimated at 150-200 superstores, and during the period we opened 11 new superstores, including the relocation of one store to a much improved location. The Group ended the period with 113 superstores, providing 3.3m sq ft of retail space, as well as nine high street shops.

Our recent openings continue to trade well and deliver strong returns on invested capital, with paybacks averaging 29 months for stores opened over the last three financial years. We remain committed to financial discipline, targeting a maximum 36 month payback period for new stores; the strength of our current performance allows us to acquire new space with confidence and provides capacity to absorb potential cannibalisation of revenue in future openings without damaging returns.

Despite the record number of store openings during the period our forward property pipeline remains healthy, with eight stores legally committed, of which we anticipate four will open in the current financial year.

We continue to invest in a programme of store refits to improve the shopping environment in our existing stores. These refits increase sales by introducing new ranges, such as our expanded kitchen or art and craft departments, and enhance the overall shopping experience through improved departmental adjacencies and, where appropriate, the introduction of our award winning Pausa coffee shop. In the period we completed eight refits, of which two were major refits, as a result of which almost 50% of the current superstore chain is either new or has benefitted from a major refit over the past three years.

3. Grow multi-channel

Enhancing our on-line offer and extending our multi-channel presence allows our customers to shop at Dunelm how and when they wish, extends our geographic reach and creates our biggest shop window, allowing our ranges to be viewed and researched by new and existing customers. Expanding our multi-channel operation is therefore an investment priority.

Sales from our multi-channel business - accessible through www.dunelm-mill.com and www.dorma.co.uk - have continued to grow strongly during the period and represented approximately 2% of revenues over the period.  Site traffic is equivalent to footfall in over 30 superstores and we are encouraged by the improvement in conversion which we have seen, particularly since the launch of Reserve & Collect in October, detailed below.

As well as the increased use of digital advertising within our advertising mix and the launch of a social media presence to deepen customer engagement, two significant developments were launched during the period which, when complete, will materially improve the convenience of our multi-channel proposition.

Our Reserve and Collect ("R&C") system links individual store stock files to the web, allowing customers to check availability and reserve any of 15,000 products before visiting the store to collect their purchase on the same day or beyond. It has performed ahead of our expectations with customers attracted by the confidence in product availability and the convenience it provides.  As well as eliminating online logistics costs, R&C also provides the opportunity to generate incremental sales through adding additional products to the customer's basket once in store.

We have also further developed our logistics infrastructure dedicated to Home Delivery. This ongoing programme will increase on-line availability and enable further premium delivery options, while lowering operating costs by reducing the extent of expensive store based picking activity. While we are confident of the medium and long term improvements that these changes will deliver, we did have to deal with a number of implementation issues in the second quarter.  We partially addressed these in the period through limiting the online service - both in terms of range and delivery options - to maintain customer service levels.

Our next phase of multi-channel development saw the launch of a dedicated mobile‑friendly website in January.

4. Infrastructure

We continue to invest in our infrastructure in order to strengthen the current business and provide a sound foundation for our future growth. This has included recruitment to two key new senior management positions (Chief Operating Officer and Director of Multi-Channel) and further strengthening our Buying and Merchandising teams. The most notable development in physical infrastructure during the period was the occupation of our new head office during September. With 55,000 sq ft of office accommodation compared with just 25,000 sq ft at our previous location, which we continue to use for ancillary purposes, the building provides significant headroom for future growth.

Risks and uncertainties

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause actual results to differ materially from expected and historical results.  The Board does not consider that the principal risks and uncertainties have changed since the publication of the annual report for the year ended 2 July 2011.  These comprise:

·     Increased competition

·     Economic uncertainty

·     Input cost pressures

·     Access to sites for store chain expansion

·     Disruption to key IT systems, major facilities or suppliers

·     Loss of key personnel

·     Reputational damage through product and service quality

·     Failure to comply with legislative or regulatory requirements

A detailed explanation of these key risks can be found on pages 20 and 21 of the 2011 Annual Report which is available at www.dunelm-mill.com.

Outlook

Whilst we remain cautious about the impact of the UK consumer environment on our trading in the near term, we will continue to focus on the disciplined execution of our growth strategy and on tight operational management. With eight further store openings already committed, momentum in multi-channel and with our "Simply Value for Money" proposition resonating with a wide range of customers, we remain confident in the future growth prospects for the business.

Our next update on trading will be the release of an Interim Management Statement on 11 April 2012.

Nick Wharton

Chief Executive

8 February 2012

Consolidated statement of comprehensive income (unaudited)

For the 26 weeks ended 31 December 2011

All activities relate to continuing operations

Consolidated balance sheet (unaudited)

As at 31 December 2011

Consolidated cash flow statement (unaudited)

For the 26 weeks ended 31 December 2011

Statement of changes in equity (unaudited)

For the 26 weeks ended 31 December 2011

1 Basis of preparation

The condensed financial statements have been prepared using accounting policies consistent with International Financial

Reporting Standards and in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting.

The presentation of the condensed financialstatements requires the Directors to make judgements, estimates and assumptions that affect the application of policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experiences and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates.

2 Accounting policies

The condensed financial statements are prepared under the historical cost convention, except for financial instruments and share based payments which have been stated at their fair value.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 2 July 2011, as described in those financial statements.

3 Segmental reporting

The Group has only one class of business, retail, and operates entirely in the UK market.

4 Taxation

The taxation charge for the interim period has been calculated on the basis of the estimated effective tax rate for the full year of 27.4% (26 weeks ended 1 January 2011: 28.2%)

5 Earnings per share

Basic earnings per share is calculated by dividing the profit for the period attributable to equity shareholders by the weighted average number of ordinary shares in issue during the period.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the period.

Weighted average numbers of shares:

6 Dividends

The directors are proposing an interim dividend of 4.0p per ordinary share for the period ended 31 December 2011 which equates to £8.1m.  The dividend will be paid on 13 April 2012 to shareholders on the register at the close of business on 23 March 2012.

7 Announcement

The interim report was approved by the Board on 8 February 2012 and copies are available from the registered office at Watermead Business Park, Syston, Leicester, LE7 1AD or from the website at www.dunelm-mill.co.uk.