Dunelm Regulatory News (DNLM)

4 September 2019

Dunelm Group plc

 ("Dunelm")

Preliminary Results for the 52 weeks to 29 June 2019

Customer focus drives strong growth and shareholder returns

Dunelm Group plc, the UK's leading homewares retailer, today announces its preliminary results for the 52 weeks to 29 June 2019.

Highlights

·; Total like-for-like ("LFL") sales increased by 10.7% with strong growth both in stores (7.7%) and dunelm.com (35.1%)

·; Focus on core Dunelm, with improved customer proposition offering more choice, style and value

·; Continuing growth in brand awareness and consideration helped drive an 8.5% increase in unique active customers4

·; Ongoing development of digital capabilities with further plans in progress to enhance the multichannel customer experience

·; Increased homewares market share5 by 0.6ppts

·; Profit before tax of £125.9m up 23.4% (vs FY18 underlying profit before tax), reflecting higher sales, improved gross margins (+160bps) and better operational grip

·; Excellent cash flow generation: Free cash flow of £154.4m (+£101.5m vs FY18) and a significant reduction in net debt to £25.3m (FY18: £124.0m)

·; Final dividend of 20.5p brings the full year ordinary dividend to 28.0p, growth of 5.7%

·; Special dividend of 32.0p, bringing total shareholder dividend for the year to 60.0p

Nick Wilkinson, Chief Executive Officer, commented:

"As Dunelm celebrates its 40th anniversary, we are pleased to have delivered a strong performance during the year, with an improvement across all our customer, operating and financial metrics. In particular, the strong like-for-like revenue growth, both in stores and online, demonstrates the progress we are making with our multichannel proposition whilst maintaining the breadth and depth of our specialist customer offer in homewares.

"These results reflect our focus on the core Dunelm business and we see further opportunities to develop our Customer 1st plans, through extending product choice and value, improving our customer experience enabled by technology, and bringing more people to the brand.

"Recent trading performance has continued to be strong, reflecting both weak comparatives in the prior year and continued market share growth. However, we remain cautious about the full year outlook due to increased Brexit uncertainty and specifically the impact it may have on consumer spending as we enter our peak period.

"Looking to the future, I am excited about the opportunity to grow our business as we enhance and extend our specialist and multichannel offer, build on our market leading position and fulfil our purpose of helping everyone create a home they love."

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 Ailsa Prestige at MHP Communications on ailsa.prestige@mhpc.com. The next scheduled event is the first quarter trading update on 10 October 2019.

For further information please contact:

Quarterly sales and margin analysis (totals include Worldstores):

1. FY18 Underlying numbers exclude exceptional items associated with the acquisition, integration and subsequent disposal / closure of the Worldstores businesses.

2. Free cash flow is defined as net cash generated from operating activities less net cash used in investing activities.

3. Net debt is defined as cash and cash equivalents less total borrowing.

4. Unique active customers who have shopped in the last 12 months, based on management estimates using Barclays data.

5. As per Global Data September 2019 report - Dunelm homewares market share at 8.7% (September 2018: 8.1%).

6. LFL sales in Q2 (and therefore H1) have been restated due to a sales reclassification between LFL stores and non-LFL stores

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 £13.5bn UK homewares market and active in the £11bn UK furniture market. It currently operates 170 stores, and also trades online through 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 broadened its product range 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 and blinds.

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

Dunelm has been listed on the London Stock Exchange since October 2006 (DNLM.L) and has a current market capitalisation of approximately £1.8bn.

CHAIRMAN'S STATEMENT

An anniversary to celebrate. Putting our customers first

Dunelm was founded on a market stall in Leicester by Bill and Jean Adderley in 1979 and grew into a national network of superstores under the leadership of their son, Will Adderley. We are delighted to celebrate our 40th anniversary with a strong performance. This success has been built on a renewed focus on Dunelm's well-established Customer 1st values, offering great products and excellent value for money, combined with friendly and knowledgeable service from colleagues throughout our 172 stores. In addition, we are building powerful new digital capabilities which are driving sales both online and in stores.

We have continued to invest in raising customer awareness of Dunelm's outstanding offer, which has driven higher customer numbers. Tighter operational management has also allowed us to convert strong sales into healthy profit growth and substantially improved cash flow. Of equal note, our customer satisfaction and colleague satisfaction scores improved significantly during the year.

To defy the challenges in UK retail with double digit growth in like-for-like sales and a 23% growth in our pre-tax profit (vs FY18 underlying) is very pleasing. I would like to thank all of our Dunelm colleagues for their hard work and commitment, which is central to our success. We are proud of Dunelm's strong culture and the commitment of all our team to delivering a great experience for our customers.

Dividends

The Board has recommended an increased final dividend of 20.5 pence per share, bringing the total ordinary dividend for the full year to [28.0] pence per share, an increase of 5.7% on the previous year. As a result of our strong cash flow generation this year, which substantially reduced our net debt position, and in line with our policy, the Board has also declared a special dividend of 32.0 pence, to be paid in October 2019, reflecting our commitment to return surplus cash to our shareholders.

Board changes

Nick Wilkinson has completed his first full year as Chief Executive and has been central in leading our improved performance, re-energising our core skills, building new digital capabilities and focusing on the Dunelm brand.

We welcomed Laura Carr to Dunelm as CFO on 29 November 2018 and we are already seeing the benefits of her financial discipline and commercial insight.

Liz Doherty has decided to retire from the Board and will therefore not be seeking re-election at the Annual General Meeting in November. On behalf of my Board colleagues and the entire Dunelm team, I would like to thank Liz for her significant contribution over the last six years. We have benefitted substantially from Liz's wisdom and the strength of her retail and international business experience, especially in her role as chair of our audit and risk committee.

In July 2019, we appointed Ian Bull as a Non-Executive Director. Ian's broad experience as a CFO in a range of consumer businesses is an excellent addition to our board. Ian brings a wealth of experience and I am very pleased to have him as part of our team. When Liz retires from the Board in November, Ian will take on the role of chair of the audit and risk committee. Ian is also the senior independent director (SID) and audit committee chair at St Modwen Properties plc and audit committee chair at Domino's Pizza Group plc.

Today we announce that we have appointed Paula Vennells as a Non-Executive Director (NED). Paula has a strong track record, having led the Post Office for seven years which is a large, complex consumer business. Paula is also a NED at WM Morrison Supermarkets PLC, Chair of the Imperial College NHS Healthcare Trust and a NED of the Cabinet Office.

While the year ahead will be a challenging one, with lots of economic uncertainty and tougher comparatives, I am excited by the significant opportunities ahead for Dunelm and I am confident that it is well placed to maintain its position as the leading specialist multichannel homewares retailer in the UK and to continue to deliver sustainable growth.

Andy HarrisonChairman4 September 2019

CHIEF EXECUTIVE OFFICER'S REVIEW

The performance of the business and the strategic progress we have made in this, our 40th year, is very pleasing, as we continue to strive to offer our customers great choice and value for money. Our purpose is to help everyone create a home they love. With a focus on learning and continuous improvement, my colleagues and I are committed to this purpose and are excited about the next phase of growth.

Performance in FY19

We achieved strong revenue growth with total like-for-like (LFL) revenue up 10.7% on the year, and continuing Dunelm revenue growth of 11.5% including the effect of new store openings. Our internal analysis shows that we are continuing to win homewares market share. Our multichannel progress is encouraging, with dunelm.com revenue growth of 35.1% and growth in our LFL stores of 7.7%, supported by new tablet-based selling tools which allow colleagues to offer customers home delivery orders across an extended product range. Overall multichannel revenue, including online home delivery revenue, reserve and collect revenue and tablet-based revenue, now represents 17.4% of the total for the year, up from 13.5% last year.

Gross margin improved by 160bps, reflecting improved sourcing, FX gains, the elimination of Worldstores product lines with lower margins, and better end of season stock management.

As a result, profit before tax of £125.9m was up from £102.0m (before exceptional items) last year, generating free cash flow of £154.4m, an increase of £101.5m on last year.

What we have done

Focus on Dunelm and operational grip: We have significantly simplified our business model by focusing on the core Dunelm business. We closed both the Kiddicare and Worldstores websites during the first quarter and transferred those product lines we wished to retain to the dunelm.com website. This enabled us to invest all of our energy back into the Dunelm brand, concentrating on one supply chain and one website. In so doing, we significantly tightened our operational and commercial grip on the business.

As part of this renewed focus, we improved the customer offer in our stores. Our product selection and sourcing has been focused on offering more style and better value to customers and we reinvigorated our special buy product programme, both in store and online, with more frequently changing offers, helping to provide greater inspiration and newness to our customers. We have also extended our furniture and seasonal ranges to increase choice. The management of end of season product clearance was more rigorous, and our stores benefitted from a new calendar of clearance activity and less discounted product in stock, which, in turn, generated more full-priced revenue. All of this has resulted in improved trading intensities across our portfolio.

Discipline around cost control and cash generation was also a key area of focus. For example, we reduced stock loss in our stores and supply chain and made savings in store wages through a restructuring of management teams. These efficiencies mitigated inflationary pressures and enabled investment for the longer-term benefit of the business.

We continued to listen to our customers and colleagues to learn how to improve both satisfaction and engagement scores, and joined the Top 50 UK Companies, as ranked on Glassdoor, the workforce review website.

Introduced Home of Homes campaign: One of the key opportunities we set out to pursue this year was to build greater brand awareness and reach new customers. In the first quarter we launched our 'Home of Homes' marketing campaign across multiple media channels including TV, radio and social media. We supported this campaign with an ad-funded TV programme on ITV called "Back to Mine", with the first series airing during the Autumn and re-runs screened in April. We also commenced a year-long sponsorship of ITV's flagship daytime show, 'This Morning', in March 2019. The show's audience aligns well with our target customer and feedback suggests there is a clear brand fit and we have improved key perception metrics.

We also made a step change in our digital marketing by redirecting spend previously incurred for the Worldstores sites to dunelm.com. Our brand awareness measure has increased by 3ppts as at June 2019. We have also seen an increase in our unique active store and online customers year on year (+7.3% and +28.4% respectively). The acceleration of growth in our customer base is particularly encouraging given we only opened one net new store at the end of the financial year.

Seized more digital opportunities: In last year's review I commented that we were playing catch up as a multichannel retailer, having grown up as a store-based business. We have continued to address this at pace by seizing digital opportunities which will improve our offer. During the second half, we increased our focus on online ranging and trading across our product categories. We increased the number of customer hosts we have in our stores to 1,200 and provided training and support to enable them to help customers shop our extended ranges in store via tablets. We also improved the speed of our website whilst continuing to develop our new digital platform. We will complete the roll out to customers in the new financial year.

We continue to invest in our store portfolio. We opened three new stores, which included two relocations, towards the end of the year and we undertook ten store refits to maintain the integrity of the estate.

Looking forward

Market outlook: The total homewares market has been in modest growth for the last two years, aided by the positive trends of real wage growth and high employment. However, we remain cautious about the outlook for consumer confidence as a result of continued political uncertainty surrounding Brexit. In the run-up to the 2016 referendum, we observed a softening in the market ahead of the vote. The latest proposed date for Brexit is 31 October 2019, which falls in the run-up to our peak Winter season. For this reason, we maintain a cautious outlook for the FY20 year.

Notwithstanding these macro economic factors, our broad range of products and price points, coupled with a low average item value, means that our offer appeals to customers whether they are moving house or choosing to stay in their current home and refresh their homewares.

A changing homewares consumer:  We are observing new behaviours in the homewares market as shoppers become more focused on digital content, more resourceful online, and more eager to find new ways to be 'a smart and savvy' shopper. These behaviours are not strongly correlated to age or wealth segments. Indeed, technology is increasingly being adopted by older consumers, often influenced in their homewares shopping by their children. Social media is fuelling these habits, with value being placed on how your home looks, and how well you are managing it.

In the last three years we have seen a noticeable reduction in the attitudinal customer segment which we label as 'classic and content' towards a much more digitally-focused consumer segment, aged from 18 to 60, which we refer to as 'savvy home lovers'. More consumers are able and willing to seek out new sources for homewares products and are using a broader portfolio of retailers to fulfil their needs.

We believe that Dunelm is benefitting from these trends. We are becoming part of the portfolio of more homewares consumers, across more categories. Put simply, where once we may have been the place where a customer bought their quilts or curtains, we are now being considered for a wider range of products.

One implication of this is that we need to meet a wider range of customer expectations: from buying 'everyday necessities' (stuff that just needs to get done, like a replacement school lunchbox), to more 'rewarding essentials' (where comfort and quality matter more, like towels or bedding), to decorative enhancements, to items for room refresh projects (like rugs, curtains and occasional furniture) and onto bigger-ticket 'permanent' purchases (like made to measure curtains or a mattress).

Some of our traditional competitors are retrenching, and new ones are emerging, as different retailers react at different speeds to changing consumer behaviour. Ultimately, understanding and reacting to these trends is the key to sustainable and profitable growth over the long term.

Evolution of strategy: Since Dunelm was founded in 1979, we have enjoyed two distinct phases of growth. In the first, the business grew from a market stall into a chain of high street stores, selling a range of own brand products. In the second phase the business opened out of town superstores, grew its range to 20,000 mainly own brand products, and developed a committed supplier base. Looking forward, we are moving into in a new phase of growth; one in which we will grow as a brand and a 'total retail' system, with a comprehensive digital offer which augments a strong physical store experience. In this next stage of our journey there is much that will be different, but the purpose and the DNA of the business will not change.

A year ago I described our Customer 1st plans for this next phase of growth. 12 months on, our purpose remains unchanged: to help everyone create a home they love. In order to extend this customer focus deeper into all parts of our business we have articulated three customer promises to better define the offer that we will provide to our customers. These promises will shape everything we do for our customers:

1) Great choice and value: fantastic quality, own-label product at a price that can't be beaten;

2) Easy and inspiring to shop: an experience that gives our customers ideas, and provides help when they want it, across all the different shopping missions in homewares;

3) Convenient to buy and return: accessible to all, whether delivered to your home or picked up in store.

The growth we have enjoyed this year has been delivered by having an effective plan to attract more customers to the brand, to increase shopping frequency by one visit a year, and to encourage customers to put one more item in their basket. These are medium term goals and based on the success of adding more active customers to the brand after just one year, we have increased our goal here to add 2 million more. This simple formula will drive significant growth, both in stores and online.

Underpinning our growth and delivering on our customer promises, we will continue to strengthen the foundations of our business model. Some are well developed, such as a low-cost store portfolio, and committed colleagues and suppliers. However, some of the essential foundations for a modern digital business require further investment and development, such as customer insight and the new digital platform.

Our business principles define our culture. In a challenging retail world, we have to be brave and do things our own way. We like to see ourselves as the underdog and believe that keeping things as simple as we can is the key to driving profitable growth.

In summary, we have solid fundamentals and increasingly understand the new skills and capabilities we need to prosper in a new phase of growth. Our track record of 40 years of growth gives us confidence to continue to evolve and succeed.

What we will do next

In the next 12 months we are focused on delivering material progress in four specific areas of our 'Customer 1st' plans, whilst maintaining the core operational disciplines which helped drive performance improvement in FY19.

Extend product choice and value: We will continue to improve the quality, style and value of our product range across all our core categories to reinforce our specialist position. We see significant scope for continuous improvement across all price bands and taste types. We are rebalancing the proportion of lines at opening 'good' price points (for example, in our dinnerware and glassware ranges). We are also targeting a material increase in our online-only ranges with plans underway to add a net 6,000 products to our online-only ranges in FY20, many of which will be own label products. Some of these online-only products will be displayed in store and will be available to order for home delivery. Our furniture product offer is also set to strengthen as we grow own-brand options and extend colour choice on some of our best-selling products (e.g. printed fabrics for our occasional chairs and painted versions of our living room cabinetry collections). Promotional product and special buy programmes are set up to continue to introduce unique products with limited runs, bringing newness and great value for our customers. These initiatives rely on a strong network of committed suppliers and we will continue to focus on developing our relationships with both our existing and new suppliers.

Launch the new digital platform and step up our digital experience: We will launch our new digital commercial platform in FY20. Whilst we are already live on some of the new technologies, this is a major milestone following two years in which we have transformed our technology capability, bringing in more engineering talent and developing new ways of working, to create a scalable suite of retail services founded on the latest cloud-native technology. The transition to the new platform brings sales risks, but our tests to date give us confidence that users will experience material improvements to site speed, search effectiveness and checkout functionality (e.g. the ability to transact a mixed basket of items with different fulfilment options, and the ability to pay for store-stocked items for collection). Our development roadmap post go-live will be ambitious: to complete the 'catch up' needed on convenience and to drive tangible customer enhancements that improve conversion, frequency and basket size. We view digital development as driving store sales as much as our online sales and will continue to invest in developing our offer across all channels.

Broaden and deepen our customer base: We will continue our sponsorship of ITV's This Morning until March, building on the increased awareness from exposing a core audience to the Dunelm brand. We will extend our Home of Homes brand campaign with new family stories from the Autumn, and we are also sponsoring a second series of Back to Mine, which is scheduled for the Winter. The development of our brand campaign in conjunction with more and better targeted performance marketing via PPC and social channels will continue. Furthermore, we are collecting insight into the drivers of shopping frequency and will test whether there are enhancements to our proposition that could directly drive increased frequency for different customer groups. At the same time, we continue to extend our geographic reach by opening new stores, and expect to open 3-5 new stores (including relocations) each year.

Build capabilities for the next phase of growth: As we progress with our Customer 1st strategy in a fast-moving digital world, there are new skills we are acquiring and need to develop further. In particular, we will build on the transformations made in our Technology and Product teams in FY19 and are developing deeper capabilities in Data and Insight, to provide benefits across the business. As we look to build further capabilities across our workforce, our focus on making Dunelm a great place to work will accelerate, with a significant commitment to raising awareness of mental health issues. We are talking about topics that many feel are still taboo, and are learning how to best offer support and advice. All line managers will be trained in mental health awareness by the end of FY20.

Summary and outlook

We are pleased to have delivered a strong performance during the year, with an improvement across all our customer, operating and financial metrics. In particular, the strong like-for-like revenue growth, both in stores and online, demonstrates the progress we are making with our multichannel proposition whilst maintaining the breadth and depth of our specialist customer offer in homewares.

These results reflect our focus on the core Dunelm business and we see further opportunities to develop our Customer 1st plans, not least through extending our product choice and value, improving our digital experience and bringing more people to the brand.

Whilst recent trading performance has continued to be strong, we remain cautious about the full year outlook due to ongoing Brexit uncertainty and specifically the impact it may have on consumer spending as we enter our peak period.

Looking to the future, I am excited about the potential to grow the business as we enhance and extend our specialist and multichannel offer, build on our market leading position and fulfil our purpose to help everyone create a home they love.

Nick WilkinsonChief Executive Officer4 September 2019

CHIEF FINANCIAL OFFICER'S REVIEW

Revenue

1. LFL Stores - stores trading for at least one full financial year prior to 1 July 2018 without any significant change of space. LFL stores revenues include Reserve & Collect sales, and home delivery sales in respect of orders placed via in-store tablets

2. LFL Online - dunelm.com (excludes Reserve & Collect sales, and home delivery sales in respect of orders placed via in-store tablets)

3. Non-LFL Stores - new stores (including relocations) opened in the current or previous financial year, and existing stores with significant change of space in the current or previous financial year

4. Non-LFL Online - Worldstores.co.uk, Kiddicare.com and Achica.com (these websites are now closed)

Group revenue for FY19 was £1,100.4m (FY18: £1,050.1m), an increase of 4.8%. Total like for like (LFL) revenue growth was 10.7%, reflecting strong growth in both LFL stores (7.7%) and dunelm.com (35.1%). Growth was driven by higher footfall in stores and traffic in online, and reflected the following:

• improvements across all categories with Furniture and Seasonal demonstrating significant increases

• transfer of profitable products from the Worldstores business to dunelm.com

• benefit from tablet-based selling in stores, including more web-exclusive ranges (c. 2%pts contribution to store sales growth)

• investment in raising brand awareness though an integrated marketing campaign

• favourable weather in the second half of the year, particularly in the fourth quarter

Non-LFL revenue reflected continued growth in the store portfolio, with three new openings in the year (of which two were relocations). We ended the year with 170 superstores and two stores in high street locations. We anticipate between 3-5 new openings in FY20, with one new superstore opened (a relocation) with one other legally committed at the date of this report.

As expected, sales attributable to the Worldstores businesses were minimal as the remaining websites were closed in the first quarter of FY19.

Gross margin

Gross margin increased by 160 basis points to 49.6% (FY18: 48.0%). Core Dunelm gross margin improved by 100bps as a result of better sourcing decisions and improved cost price negotiations, including the benefit of FX. More focused product lifecycle management resulted in lower end of season clearance during the year.

Furthermore, as a result of the closure of the Worldstores businesses in the first quarter, the full year margin rate benefited by approximately 60bps from the removal of these margin dilutive sales.

Operating costs

Operating costs in FY19 of £418.7m increased in line with sales, representing an operating cost to sales ratio of 38.0% (FY18: 38.0% before exceptional costs). Some of the savings from the closure of the Worldstores businesses, such as digital marketing costs, were reinvested in the growth of dunelm.com. Focus on operational grip and productivity initiatives such as reducing stock loss and streamlining store management structures have offset inflationary pressures, such as National Living Wage. Increased investment in brand marketing and technology have been made to drive long-term sustainable growth.

Total operating costs increased by £19.8m compared to the prior year (before exceptional costs). This increase included the write-off of the Fogarty brand (£3.8m) when the licensee went into administration, approximately £10m of higher colleague and management incentive costs and c. £6m higher technology costs which included increased amortisation and depreciation.

Operating profit

Group operating profit for the financial year was £126.9m (FY18: £104.7m before exceptional costs), equating to 11.5% of sales (FY18: 10.0%).

EBITDA

Earnings before interest, tax, depreciation and amortisation were £166.3m (FY18: £139.6m before exceptional items). This represents a 19.1% increase on the previous financial year. The EBITDA margin achieved was 15.1% (FY18: 13.3%).

Financial items

The Group incurred a net financial expense of £1.0m in FY19 (FY18: £2.7m). Interest and amortisation of costs arising from the Group's revolving credit facility amounted to £1.9m (FY18: £2.2m). Interest earned on cash deposits was £0.3m (FY18: £nil) and net foreign exchange differences on the translation of dollar denominated assets and liabilities amounted to a further £0.6m income (FY18: expense of £0.5m).

As at 29 June 2019, the Group held $190.5m (FY18: $164.0m) in US dollar forward contracts, of which $126.5m were due to mature within the next 12 months (FY18: $121.5m), representing 70% of the anticipated US dollar spend over the next financial year. US dollar cash deposits amounted to $6.1m (FY18: $7.3m).

Profit before tax

After accounting for interest and foreign exchange impacts, profit before tax for the financial year amounted to £125.9m (FY18: £102.0m before exceptional items), an increase of 23.4%. Profit before tax in FY18 after exceptional items was £93.1m.

Taxation

The tax charge for the year was 19.5% of profit before tax compared to 21.3% in the prior year. The reduction in the effective rate of tax reflects both a prior year adjustment in relation to R&D incentives claimed and the unusually high level of disallowable asset write-offs, largely relating to the acquired Worldstores brands, in FY18.

Going forward, the effective tax rate is expected to trend approximately 100 bps above the headline rate of corporation tax, principally due to depreciation charged on non-qualifying capital expenditure.

Profit after tax and earnings per share

Profit after tax was £101.3m (FY18: £73.3m).

Basic earnings per share (EPS) for the year ended 29 June 2019 was 50.2p (FY18: 36.3p). Diluted EPS increased to 49.9p (FY18: 36.2p) reflecting growth of 37.8%.

Operating cash flow

In FY19 the Group generated £174.0m (FY18: £98.5m) of net cash from operating activities, an increase of 77%.

Net working capital reduced by £26.5m compared to the prior year-end (FY18: £20.3m increase). Small increases in stock and receivables were more than offset by a £31.2m increase in payables. The increase reflects higher levels of stock intake, a larger VAT creditor due to the strong sales performance in the final quarter and higher incentive accruals due to the improved overall financial performance. We expect approximately £10-15m of this working capital inflow to reverse in FY20 as we pay the higher year-end trade and VAT creditors and reduce our accruals for incentives.

Capital expenditure

Gross capital expenditure in the financial year was £25.5m compared with £44.0m in FY18, mainly reflecting the lower number of new store openings during the year. We opened three new stores (£3.9m) and invested £7.8m in refits. The work to build our technology eco-system and infrastructure continues with £12.0m being spend on IT programmes including the new website platform as well as major upgrades to our store till system and network.

We expect to open between 3-5 new stores in FY20 (including relocations). Our refit programme will continue as we maintain the integrity of the store estate. Following the launch of the new digital platform in FY20, the digital development teams will be focussed on continuously improving the customer experience and therefore it will be more difficult to attribute these costs to identifiable future economic benefits. Therefore, we anticipate a higher level of these digital costs will be expensed through the P&L rather than capitalised. The capital spend on technology programmes is therefore likely to be lower by around £5-7m in FY20, while the total cash spend remains similar. In total, we anticipate capital investment, including one potential freehold acquisition, of approximately £30m in FY20.

Free cash flow (FCF)

We measure FCF as net cash from operating activities less net cash used in investing activities. FCF was £154.4m in the year (FY18: £52.9m), reflecting the improved operating cash flow and lower capital expenditure year-on-year.

Banking agreements and net debt

The Group has in place a £165m syndicated Revolving Credit Facility ('RCF'), with an optional £75m accordion facility which matures in March 2023. The terms of the RCF are consistent with normal practice. They include covenants in respect of leverage (net debt to be no greater than 2.5× EBITDA before exceptional items) and fixed charge cover (EBITDA before exceptional items to be no less than 1.75× fixed charges), both of which were met comfortably as at 29 June 2019 and are forecast to be met going forward. In addition, the Group maintains £20m of uncommitted overdraft facilities with two syndicate partner banks.

Net debt at 29 June 2019 was £25.3m (0.15× historical EBITDA) compared with £124.0m in FY18 (0.89× historical EBITDA before exceptional items). Weekly average net debt in FY19 was £50.8m (FY18: £112.4m).

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 7.5p per share was paid in April 2019 (FY18: 7.0p). It is proposed to pay a final dividend of 20.5p per share (FY18: 19.5p). The total ordinary dividend of 28.0p represents an increase of 5.7% over the previous year, giving a dividend cover of 1.8×. (FY18: 1.5× before exceptional items). This cover level is within our policy as described above. In line with our policy, and as a result of the strong cash flow and low net debt position at the end of the year, the Board has declared a special dividend of 32.0p. The final ordinary dividend will be paid, subject to shareholder approval, on 22 November 2019 to shareholders on the register at the close of business on 1 November 2019. The special dividend will be paid on 11 October 2019 to shareholders on the register at the close of business on 20 September 2019.

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 FY19 no shares were purchased (FY18: nil). At the year-end, 867,642 shares were held in treasury (FY18: 914,635), equivalent to approximately 26% 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 £157.4m (FY18: £142.3m).

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

Brexit

Over the past 18 months, Dunelm has been working to identify and mitigate any operational or financial risks arising from the expected exit from the EU, which is now anticipated on 31 October 2019. A Working Group, reporting to the Board, was set up to identify and address these risks and monitor the latest political developments.

The business imports less than 1% of its goods from EU countries; however, we identified some risk arising from potential disruption at 'deep-sea' ports in the period following an exit, especially in the scenario of a "no deal". During the year, we took some actions to mitigate these risks, such as purchasing incremental stock of some best-selling lines and securing additional supply chain capacity. However, the latest anticipated date for Brexit is just ahead of our peak trading season and therefore, whilst we see no need for stockpiling product, we have chosen to accelerate some of our seasonal product flows to ensure they have been received ahead of the proposed exit date.

Approximately 3% of our employees are EU nationals and we are ensuring that they are kept up to date with the latest information from the UK government. They will also be receiving our support to obtain 'settled status' if and when needed.

Like other retailers, we remain exposed to any impact Brexit may have on currency and more importantly consumer confidence and the markets we operate in. We are hedged against a sudden decline in the value of Sterling against the US dollar. The impact of significant macro-economic disruption to demand in the homewares market is difficult to predict and therefore we remain cautious.

New accounting standards

The Group will adopt IFRS16 for the first time in its financial statements for the period ending on 27 June 2020. Dunelm has chosen to adopt IFRS16 on a modified retrospective basis and will first report under IFRS16 in its interim results in February 2020. The implementation of IFRS16 has no impact on cash flows generated and will not impact management's decisions on how the business is run. It does, however, have an impact on the assets, liabilities and income statement of the Group. The presentation of the Cash Flow Statement will also change, with an increase in net cash flows generated from operating activities being offset by an increase in net cash flows used in financing activities.

This significant change in accounting is expected to reduce Group profit before tax by approximately £3m and increase EBITDA by approximately £50m. Furthermore, as EBITDA will increase due to an accounting change with no cash impact, going forward our target net debt to historical EBITDA range will be between 0.2x and 0.6x. In order to familiarise readers of the accounts with the likely impact of transitioning to IFRS16 on the Group financial statements, a pro-forma unaudited reconciliation for FY19 is shown in note 13 to the Financial Statements.

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:

Laura CarrChief Financial Officer

4 September 2019

Consolidated Income Statement

For the 52 weeks ended 29 June 2019

Consolidated Statement of Comprehensive Income

For the 52 weeks ended 29 June 2019

Consolidated Statement of Financial Position

As at 29 June 2019

Consolidated Statement of Cash Flows

For the 52 weeks ended 29 June 2019

Consolidated Statement of Changes in Equity

For the 52 weeks ended 29 June 2019

Accounting Policies

For the 52 weeks ended 29 June 2019

1 Basis of preparation

The annual report and financial statements for the period ended 29 June 2019 were approved by the Board of Directors on 4 September 2019 along with this preliminary announcement, but have not yet been delivered to the Registrar of Companies.

The financial information contained in this preliminary announcement does not constitute the Group's statutory accounts within the meaning of Section 434 of the Companies Act 2006.

The auditor's report on the statutory accounts for the period ended 29 June 2019 was unqualified and did not contain a statement under section 498 of the Companies Act 2006.

The statutory accounts of Dunelm Group plc for the period ended 30 June 2018 have been delivered to the Registrar of Companies. The auditor's report on the statutory accounts for the period ended 30 June 2018 was unqualified and did not contain a statement under section 498 of the Companies Act 2006.

2 Segmental reporting

The Group has one reportable segment, in accordance with IFRS 8,'Operating Segments', which is the retail of homewares in the UK.

Customers access the Group's offer across multiple channels and often their journey involves more than one channel. Therefore, internal reporting focuses on the Group as a whole and does not identify individual segments.

The Chief Operating Decision-Maker is the Executive Board of Directors of Dunelm Group plc. Internal management reports are reviewed by them on a monthly basis. Performance of the segment is assessed based on a number of financial and non-financial KPIs as well as on profit before taxation.

Management believe that these measures are the most relevant in evaluating the performance of the segment and for making resource allocation decisions.

All material operations of the reportable segment are carried out in the UK. The Group's revenue is driven by the consolidation of individual small value transactions and as a result, Group revenue is not reliant on a major customer or group of customers.

3 Acquisitions and disposals

In the prior year, the trade and assets of Achica, a subsidiary undertaking, were sold to BrandAlley UK Limited, a London-based flash sales business for a total consideration of £0.6m. The transaction included the sale of trademarks and customer lists and resulted in an overall loss on disposal of £0.3m.

4 Exceptional items

We have treated as exceptional those non-recurring items which relate to the acquisition, integration and/or disposal of the Worldstores businesses.

5 Operating costs before exceptional items

6 Operating profit

Operating profit is stated after charging the following items:

7 Financial income and expenses

8 Taxation

The tax charge is reconciled with the standard rate of UK corporation tax as follows:

The taxation charge for the period as a percentage of profit before tax is 19.5% (2018: 21.3%).

The UK Government substantively enacted reductions in future tax rates by 2% from 19% to 17% from 1 April 2020. The deferred tax asset is therefore measured at 17%.

9 Dividends

The dividends set out in the table below relate to the 1 pence Ordinary Shares.

The Directors are proposing a final dividend of 20.5 pence per Ordinary Share for the period ended 29 June 2019 which equates to £41.4m. The dividend will be paid, subject to shareholder approval, on 22 November 2019 to shareholders on the register at the close of business on 1 November 2019. The Directors have declared a special dividend of 32.0 pence per Ordinary Share for the period ended 29 June 2019 which equates to £64.6m. The dividend will be paid on 11 October 2019 to shareholders on the register at close of business on 20 September 2019.

10 Earnings per Ordinary Share

Basic earnings per share is calculated by dividing the profit for the period attributable to equity holders of the Company by the weighted average number of Ordinary Shares in issue during the period, excluding Ordinary Shares purchased by the Company and held as treasury shares.

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:

11 Intangible assets

All amortisation is included within operating costs in the income statement.

Within software development and licences, £2.3m (2018: £3.9m) of additions relates to internally generated assets.

Within rights to brands and customer lists the impairment of £3.8m (2018: nil) relates to the Fogarty Brand.

12 Property, plant and equipment

All depreciation and impairment charges have been included within operating costs in the income statement.

13 IFRS 16 "Leases"

The first results that will be published on an IFRS16 basis will be in FY20, where we expect IFRS16 to reduce Group profit before tax by c.£3m. On transition, a lease liability of c.£330m will be recognised on the balance sheet. A right of use asset of c.£290m will also be recognised, being equal to the value of the lease liability less the value of accrued rent incentives at the transition date. As a result, there will be no impact on net assets.

In order to familiarise readers of the accounts with the likely impact of transitioning to IFRS16 on the Group financial statements, we show a proforma unaudited reconciliation for FY19 for illustrative purposes.