Dunelm Regulatory News (DNLM)

15 September 2011

Dunelm Group plc

Preliminary Results for the 52 weeks to 2 July 2011

Dunelm Group plc, the leading specialist out-of-town homewares retailer, today announces its preliminary results for the 52 weeks to 2 July 2011.

Financial summary

Financial highlights

·; Revenues up 9.3% to £538.5m; like-for-like decline of -0.6% (2010: like-for-like growth +8.0%)

·; Gross margin up 120 basis points to 48.0% (2010: 46.8%)

·; Operating profit up 10% to £83.3m (2010: £75.5m)

·; Profit before taxation up 9% to £83.6m (2010: £76.8m)

·; Basic EPS up 10% to 29.7p (2010:27.1p); fully diluted EPS up 9% to 29.3p (2010: 26.9p)

·; Recommended final dividend of 8.0p per share (2010: 5.0p); full year dividend up 44% at 11.5p

(2010: 8.0p)

·; Year-end net cash of £35.1m (2010: £15.4m)

Contd./ 2

Business highlights

·; Continuing market share gains on a like-for-like basis

·; Ten new superstores opened in the year, one further unit opened since year-end (now 104 superstores in

 total)

·; Contractually committed to 13 more units of which nine are currently scheduled to open before Christmas

·; Continued investment in store refits; almost 50% of superstores either new or have benefitted from refit in past 3 years

·; Strong growth of multi-channel - www.dunelm-mill.co.uknow number one store by revenue, with further significant developments planned

·; Important infrastructure improvements completed:

·; Expanded central warehouse

·; New logistics partner with dedicated distribution centre

·; New head office

Nick Wharton, Chief Executive, commented:

"Dunelm has continued to perform well, despite the challenging consumer backdrop and an exceptional period of commodity inflation. This has been achieved through a strong focus on retailing excellence, as a result of which we have made significant improvements to our overall model. I would like to thank all my colleagues for their hard work and commitment in achieving this.

"Our development programme remains strong. The near-term store opening programme is exciting, as are the enhancements we are about to implement to our on-line proposition. These will build on changes already made in the past year which have proved popular with our customers leading to accelerated revenue growth in this channel.

"Our financial position remains strong, enabling us to propose a significant increase in the dividend whilst maintaining cover at 2.5x, still within our target range. The Board's confidence in the future development of the Group is reflected in its intention to grow future dividends, from this higher base, in line with earnings.

"Looking ahead, despite there being no obvious short term catalyst for significant growth in the homewares market, we are confident in the ability of our 'Simply Value for Money' proposition to deliver further growth for Dunelm."

An interim management statement in respect of first quarter trading will be provided on 5 October 2011.

For further information please contact:

For photography, please contact MHP Communications.

Notes to Editors

Dunelm is the UK's leading specialist out of town homewares retailer, operating in the £12bn homewares market. The Group currently operates 113 stores, branded Dunelm Mill, of which 104 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 £800m.

CHAIRMAN'S STATEMENT

The most recent financial year has been a challenging period for most non-food retailers. In the context of subdued customer demand for homewares, it was a satisfactory achievement for Dunelm to deliver like for like (LFL) sales growth in two of the four quarters, with only a small decline in LFL sales over the year as a whole. With continuing progress on gross margin and good contribution from stores opened in the last 24 months, the Group was able to deliver a highly creditable 9.0% increase in profit before tax.

We have continued to generate very strong operating cash flows. This enabled the Group to fund out of current cash flow a record year of capital investment in the business, including new stores, a larger refit programme and also key infrastructure investments comprising a doubling of space at the central warehouse in Stoke and the creation of a new head office facility.

The Board's confidence in the continuing cash generation of the business is reflected in our proposal to reduce dividend cover to the bottom of our target range at 2.5x, leading to a recommended 60% increase in the final dividend to 8.0p (2010 - 5.0p). This would bring full year dividends to 11.5p (2010 - 8.0p), an increase of 43.8%.

It is the Board's intention to grow future dividends in line with earnings. In addition, the Board will continue to review the capital structure of the Group, returning excess capital if appropriate.

Since taking over as Chief Executive from Will Adderley in the course of the year, Nick Wharton has assumed full responsibility for running Dunelm. Will continues to provide support to Nick on key trading issues such as managing the effects of cotton price increases, and will be able to allocate his time increasingly to development activities.

Looking ahead, we have a range of exciting development initiatives and attractive network expansion opportunities. Despite seeing no catalyst for significant short term growth in the homewares market, we are confident in our 'Simply Value for Money' offer and look forward to further growth in profits and returns.

Geoff Cooper

Chairman

CHIEF EXECUTIVE'S REVIEW

Introduction

Having assumed the role of Chief Executive during the year, I want to start by paying tribute to the significant contribution made by my predecessor Will Adderley, over the 15 years in which he led Dunelm. Will is a first class retailer and has built on the foundations laid by his father to make Dunelm an outstanding business. As the first externally-appointed Chief Executive of the Group I am delighted to have the opportunity to grow and further develop the Group with the close support of Will in his new role as Executive Deputy Chairman, pursuing our clear strategy that has served Dunelm so well to date.

Trading

In the context of a consumer environment which has continued to be challenging, we are satisfied with our trading performance over the last financial year. Reflecting the opening of 10 new superstores which increased overall retail space by over 300,000 sq ft, our total revenue increased by 9.3% over the financial year. Like-for-like sales (calculated by comparing stores which have traded throughout the last two financial years) were marginally lower by 0.6%, but measurably better than the decline of 1.9% for the home textiles market as a whole, as measured by the British Retail Consortium.

The environment across the year was characterised by new levels of uncertainty, both in consumer behaviour and in the rate of commodity price inflation, which in cotton and other man-made alternatives was at a level not experienced for a generation.

Against this backdrop we have focussed on managing the controllable elements of our business model, with a particular emphasis on operating costs. The growth achieved in gross margins and the progress made in the second half year in cost management were particularly pleasing and have led to a 20 basis points expansion in operating margins year on year, after absorbing the costs associated with the expansion of retail space.

Strategy development

We continue to develop the business through a strong focus on our four strategic priorities. These priorities reflect our intention progressively to expand and strengthen our customer offer, while at the same time increasing scale through store and multi-channel expansion.

Priority 1 - developing our specialist proposition

We continue to invest in the development of the Group's 'Simply Value for Money' proposition within the £11bn UK homewares market. This proposition combines great prices, reliable quality, strong product availability and friendly and knowledgeable service, with our core differentiator of offering industry-leading choice.

Choice is at the heart of our proposition and allows us to attract a broad cross section of customers. Under the single Dunelm brand we successfully sell entry-level products that compete with those sold by grocery or discount multiples, through mid-range product to premium ranges, that compete directly with offers within department stores or higher end independent retailers. These premium ranges include bedding and bathroom merchandise under our owned Dorma brand.

Our range of choice has been particularly valuable during the past financial year. We have seen customer behaviour changing, with more affluent customers looking for greater value and more value-led customers seeking to trade up within our ranges to provide a low cost, indulgent treat.

We continue to use our Miss it Miss Out ("MIMO") promotions and special buys to reinforce Dunelm's value credentials and provide a seasonally relevant feel to the store.

We have developed a new advertising approach during the financial year which is focused on brand development and on emphasising the Dunelm value proposition. This is part of a migration towards a more consistent presence in the national media.

Friendly, knowledgeable customer service is an increasingly important point of differentiation for Dunelm. In order to make more colleague time available for customer service without increasing overall labour cost, we continue to invest in a number of systems and process enhancements that reduce the level of non-customer facing tasks that are performed within store. For example, the migration from a labour intensive manual process to an automated system for inventory ordering is key. Trials completed during the year have confirmed its potential to reduce activity while maintaining availability and we intend to have ordering of over 50% of our inventory automated by the end of the calendar year.

We are also continuing to invest in training to provide our colleagues with the knowledge and confidence to engage with customers and are using tailored incentives to reward good customer service.

We also see an opportunity to further enhance the Dunelm proposition through the addition of new services. Dunelm At Home is a relatively new service offering a free home consultation which allows customers to choose bespoke, made to measure window treatments in their own homes. Recognising that the initial execution of this proposition was insufficiently scalable without endangering quality of service, we have redesigned our processes to ensure high quality delivery and a second pilot of this service has been launched in three stores since the year-end.

Priority 2 - developing the store portfolio

The Group operates from two formats. The vast majority of stores operate as out-of-town superstores averaging 30,000 sq ft, where Dunelm's market leading range, breadth and depth stands out in a sector that is still characterised by small independent retailers and is best delivered to our customers. We also trade from a limited number of smaller high street locations where there are no suitable out of town alternatives.

We opened ten new superstores in the year (one being a relocation), adding over 300,000 sq ft of selling space. As at the year-end, our superstore chain comprised 103 stores providing 3.1m sq ft of selling space. The high street chain totalled nine, after we closed one shop during the year upon lease expiry.

Our recent openings continue to trade well and deliver strong returns on invested capital. We estimate that, on a discounted cash flow basis, the average payback period for stores opened in the last three financial years will be approximately 30 months. This performance enables us to acquire further space with confidence that we will continue to deliver our targeted payback period for new stores of 36 months, even allowing for potential cannibalisation of revenue and potentially higher costs associated with operating in the south east.

Despite the lack of fresh retail development across the UK, we have opened a further store since the year-end in Dartford and are contractually committed to 13 more units, two of which are relocations of existing superstores to significantly enhanced trading locations. We also continue to use our strong balance sheet to acquire interests in freeholds where, for example, we wish to secure long term tenure or avoid onerous lease clauses.

Our committed pipeline of stores, which we aim to add to, will provide further growth over the next 12 to 18 months as we expand towards our target for national coverage in the UK of between 150 and 200 superstores.

We continue to invest in a programme of store refits to improve the shopping environment in our existing stores. These refits enhance revenue by introducing new ranges, for example kitchen concept or arts and crafts and improve the overall shopping experience, for example through better department adjacencies or through the introduction of a Pausa coffee shop.

Through new and refitted stores, we now have Dorma sub-shops in 53 stores; our arts and crafts offer is present in 79 stores; and our extended kitchen offer, now divided between cooking, dining and utility sub-shops, is in 50 stores.

Our Pausa Coffee Shop, now present in 58 stores, provides both an additional reason to visit for new customers and increases dwell time. Our confidence that Pausa fits with our 'Simply Value for Money' proposition was reinforced during the year when it won the coveted Coffee Shop Sandwich Retailer of the Year at the British Sandwich Association awards.

During the year we developed a lower cost refit alternative, more suitable to newer or smaller footprint stores and have reviewed the costs associated with all refit activities to ensure that capital is focused on those areas which deliver greatest financial returns. This review has reduced the average cost of a major refit by approximately 25% to around £0.6m, whilst a medium refit requires substantially lower investment (c£0.1m).

We completed eight major refits in the last financial year (2010 - nine) as well as a significant number of 'medium' refits.

Through this ongoing refit programme, 49 stores (almost 50% of the superstore chain) are either new or have benefitted from a major refit in the last three financial years.

Priority 3 - growing multi-channel

It is clear from the general increase in multi-channel revenues across UK retail and from our own customer research that enthusiasm for the convenience and value that multi-channel shopping provides continues to grow. Enhancing our on-line offer and extending our multi-channel presence is therefore an investment priority.

This level of enthusiasm is illustrated by the number of visitors to our websites and their average spend which, at over £50, is approximately twice the level achieved through store transactions. Dunelm-mill.com is our biggest shop window allowing the full range to be viewed and researched by existing customers and providing the opportunity to extend our reach and establish brand awareness with new customers.

During the year our investment included a major refresh of our web-site to provide a more contemporary, functional and user friendly shopping experience. Responding to customer feedback, this included significant improvements to the key home and landing pages and the streamlining of the checkout process.

Sales from our on-line businesses (www.dunelm-mill.comand www.dorma.co.uk ) have continued to grow strongly over the last financial year. As a result of the investment made, the direct channel is now ranked as our number one store in sales terms.

During the year we invested in a dedicated warehouse facility for our top 4,000 selling lines on the web for home delivery. This investment increased on-line availability, particularly for premium delivery options, while eliminating the requirement for expensive store picking activity previously used to service these sales.

Significant development is under way to deliver a further step-change improvement in the convenience of our multi-channel proposition. Such improvements will not only improve customer experience but will reduce operating costs.

In the first half of the forthcoming financial year, we intend to offer increased convenience through a true 'Reserve and Collect' model as well as launching a mobile-friendly website. Through linking individual store stock files to the web, customers will be able to check availability and reserve each of over 20,000 products prior to visiting the store to collect their purchase at a time of their convenience on the same day or beyond.

Through reducing customer waiting time and eliminating logistics costs, this development will represent a major improvement compared with our existing proposition, where customers currently reserve centrally held stock for delivery to their local store for collection.

The web will also play an increasing part in our overall marketing strategy with digital advertising planned to form a much more significant part of our overall advertising and customer engagement plan. As shown by the 13,000 customer recommendations on our site, of which two-thirds achieve the highest 5 Star rating, our customers are highly engaged with the Dunelm brand and products. Our recent launches on Facebook where 5,000 customers now follow us after only five weeks, and on Twitter, are part of a broader social media strategy which will further deepen this relationship.

Priority 4 - developing and exploiting our infrastructure

We continue to invest in our physical and systems infrastructure and in our people, in order to strengthen the current business and provide a sound foundation for our future growth. Specifically, we continue to extract further benefits from our IT systems, enabling us to improve stock control and make in-store processes more efficient.

The year saw two key developments that have strengthened our logistics infrastructure. We have doubled the space available at our Stoke warehouse, to 500,000 square feet and successfully transitioned to a new third party carrier to operate the delivery of merchandise from UK-based suppliers to our stores. These developments will enable us to accommodate future growth either in new stores or in the proportion of product that we source directly from overseas suppliers.

Development of our new head office near to our existing base in Syston, Leicestershire was completed shortly after the year-end and the new building was officially opened by Bill Adderley (founder and honorary Life President) together with his wife Jean on 8 September 2011. We will retain our existing head office for a number of operational uses, such as the central stockholding of fabric and a photo studio to enhance product imagery on our websites.

We also continue to enhance our organisational capacity and capability through recruitment into a number of key management roles. The existing Operating Board was strengthened during the year through the addition of a Buying and Merchandise Director, and the first half of the current financial year will see the further addition of a Chief Operating Officer and a dedicated Director of Multi-Channel.

Summary & Outlook

While we anticipate that the consumer environment will remain challenging through the current financial year, we have demonstrated, through disciplined execution of our strategy and close operational management, that our business can make good progress in these conditions.

Our focus on constantly improving our customer offer has allowed us to gain market share while expanding gross margins; at the same time our future growth prospects have been enhanced through strengthening the pipeline of new stores and the continuing development of our multi-channel footprint.

The Group's financial position remains strong and the trading business strongly cash generative, readily financing the investment required for our envisaged growth. While retaining a preference for capital flexibility, our reduction in dividend cover to 2.5x and our intention to grow future dividends in line with earnings reflect the Board's confidence in the future development of the Group.

We will provide an update on sales and gross margin figures for the first quarter of the financial year on 5 October 2011.

Nick Wharton

Chief Executive

FINANCE DIRECTOR'S REVIEW

Operating result

Group revenue for the 52 weeks to 2 July 2011 was £538.5m (2010: £492.8m) an increase of 9.3%.

Like-for-like sales declined slightly by 0.6% over the period, however non-comparable space contributed +9.9%. The like-for-like sales performance strengthened in H2 at +0.1% with H1 having recorded -1.2% against a particularly strong comparative performance in the equivalent period last year (+15.4%).

The Group continued to improve gross margin which, over the year, increased by 120 basis points to 48.0% (2010: 46.8%). Improved life-cycle management and sell through of sale stock (summer 2010 & winter 2011) in particular boosted this result. The market experienced some price inflation over the year as a result of higher commodity prices and an increase in VAT rates but these challenges were met while maintaining our 'Simply Value for Money' price positioning.

Operating costs grew by 12.8% compared with last year, with the increase primarily due to investment in the store portfolio and supporting central infrastructure. Operating costs in like-for-like stores increased by just 2.1% despite increased investment in multi-channel operations and refits. Non-store costs grew in line with the overall growth of the business, including increased marketing investment and enhanced warehousing and distribution capacity.

Operating profit for the financial year was £83.3m (2010: £75.5m) an increase of £7.8m.

EBITDA

Earnings before interest, tax, depreciation and amortisation were £97.4m. This has been calculated as operating profit (£83.3m) plus depreciation and amortisation (£14.1m) and represents a 12.1% increase on the previousyear. The EBITDA margin achieved was 18.1% of sales (2010: 17.6%).

Financial items and PBT

The Group generated £0.4m net financial income for the year ended 2 July 2011 (2010: £1.3m).Financial items include foreign exchange losses of £0.1m (2010: gain of £0.8m) arising in respect of US dollar holdings; as at 2 July 2011 the Group held $1.8m in US dollar cash deposits and had forward contracts covering approximately 35% of the anticipated US dollar spend over the next 12 months. The balance of net financial income, £0.5m (2010: £0.5m), represents interest on surplus cash deposits.

After accounting for interest and foreign exchange impacts, profit before tax for the year amounted to £83.6m (2010: £76.8m), an increase of 9.0%.

Tax, PAT and EPS

The tax charge for the year was 28.5% of PBT compared with 29.2% in the prior year. The year on year reduction reflects both the lower headline rate of corporation tax and an increase in the level of assets qualifying for capital allowances following a review completed during the year.

Profit after tax was £59.8m (2010: 54.4m) an increase of 9.9%.

Basic EPS for the year ended 2 July 2011 was 29.7p (2010: 27.1p), an increase of 9.6%. Fully diluted EPS increased by 8.9% to 29.3p (2010: 26.9p).

Capital expenditure

Gross capital expenditure in the financial year was £37.2m compared with £24.6m last year. The major investments in the year were in stores, including fit-out costs for 10 new stores and 8 major refits in the period as well as acquisition of two freehold sites. In addition, central infrastructure was bolstered by the completion of the fit-out of our 250,000ft2 extension to our central warehouse as well as a £5.8m investment in the build of our new head office.

Working capital

Investment in working capital increased by £4.1m over the financial year, primarily due to expansion of the store chain.

Cash position

The Group generated £74.0m (2010: £72.0m) net cash from operating activities in the last financial year, an increase of 2.8%. At the end of the year net cash resources were £35.1m (2010: £15.4m). The Group cancelled its committed bank facility under a revolving loan agreement with Lloyds Banking Group plc of £40m. In light of the Group's financial strength, the Board concluded that access to external funding would not be required in the near term.

During the next financial year to 1 July 2012 Dunelm will continue to invest in the expansion of the business. This will include opening new superstores (estimated capital cost £1.2m per site), major and medium store refits and development of multi-channel operations. In addition the investment in final fit-out of the new Head Office will be completed. Further freehold acquisitions will be considered as opportunities arise.

Dividend

An interim dividend of 3.5p was paid in April 2011 (2010: 3.0p). It is proposed to pay a final dividend of 8.0p per share (2010: 5.0p). The total dividend of 11.5p represents a 43.8% increase over last year reflecting the Group's strong financial performance and leaves dividend cover of 2.5x, within our target range of 2.5x-3.0x.

Key Performance Indicators

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

Key performance indicators FY11

Sales growth†

Operating margin

Dividend (per share)

Like-for-like sales growth†

EBITDA £m

New store openings

Gross margin change (basis points)

Earnings per share (diluted)

Major refits

† 2009 is treated as a 52 week period for these measures (53 weeks for the rest).

David Stead

Finance Director

RESPONSIBILITY STATEMENT

We confirm that to the best of our knowledge:

(a) The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Group; and

(b) The management report includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties it faces

Nick Wharton David Stead

Chief Executive Finance Director

Consolidated income statement

For the 52 weeks ended 2 July 2011

All activities relate to continuing operations.

Consolidated statement of comprehensive income

For the 52 weeks ended 2 July 2011

Consolidated statement of financial position

As at 2 July 2011

Consolidated statement of cash flows

For the 52 weeks ended 2 July 2011

Consolidated statement of changes in equity

For the 52 weeks ended 2 July 2011

Notes to the annual financial statements

For the 52 weeks ended 2 July 2011

1 Segmental reporting

The Group has one reportable segment, retail of homewares.

The Chief Operating Decision Maker is the Group's Operating Board. Internal management reports are reviewed by them on a monthly basis. Performance of the segment is assessed based on profit before taxation.

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.

Management believe that this approach is the most appropriate in evaluating the performance of the segment and for making resource allocation decisions.

2 Operating profit

Operating profit is stated after charging the following items:

The analysis of auditors' remuneration is as follows:

3 Operating costs

4 Employee numbers and costs

The average number of people employed by the Group (including Directors) was:

The aggregate remuneration of all employees including Directors comprises:

5 Financial income and expense

6 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 28.5% (2010: 29.2%).

7 Dividends

All dividends relate to the 1p Ordinary Shares.

The Directors are proposing a final dividend of 8.0p per Ordinary Share for the period ended 2 July 2011 which equates to £16.1m. The dividend will be paid on 16 December 2011 to shareholders on the register at the close of business on 25 November 2011.

8 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: