Dunelm Regulatory News (DNLM)

12 February 2013

Dunelm Group plc

Interim Results Announcement

Dunelm Group plc, the UK's leading homewares retailer, announces its Interim Results for the 26 weeks to 29 December 2012.

Financial Highlights

·; Revenues up 13.4% to £340.1m (Prior year: £299.9m)

·; Like-for-like (LFL) sales up by 2.2% (Prior year: 1.1%)

·; Gross margin up 30 basis points to 49.5% (Prior year: 49.2%)

·; Operating profit growth of 14.5% to £59.3m (Prior year: £51.8m)

·; Profit before taxation up by 14.6% to £59.8m (Prior year: £52.2m)

·; Earnings per share (fully diluted) up 18.8% to 22.1p (Prior year: 18.6p)

·; Cash flows from operating activities before interest and tax up 3.7% to £75.8m (Prior year: £73.1m)

·; Interim dividend increased by 12.5% to 4.5p per share (Prior year: 4.0p)

·; Net cash of £27.4m at period end (Prior year: £49.9m) following return of excess capital of £65.8m to shareholders

Business Highlights

·; Continuing market share gain on LFL basis and investment in leading proposition

·; 10 new superstores opened in the period (including one relocation and one reopening)

·; Six further sites committed

·; Continued growth in multi-channel sales (now 4% of revenues), with enhanced on-line offer

Nick Wharton, Chief Executive, said:

"With a specialist proposition which continues to appeal to a broad spread of customers, Dunelm has continued to outperform the overall homewares market.

"We have made good strategic progress during the period, particularly supported by our work to improve customer service, the continued expansion of our store portfolio across the UK and the progress made in our on-line offering.

"The final quarter of our financial year presents some challenging like for like sales comparatives, but with a significant new store growth opportunity and an exciting multi-channel agenda in place, the Board remains confident in the overall growth prospects for the business."

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Notes to Editors

Dunelm is market leader in the £11bn UK homewares market. The Group currently operates 133 stores, branded Dunelm Mill, of which 124 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 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 has been listed on the London Stock Exchange since October 2006 (DNLM.L) and has a current market capitalisation of approximately £1.6bn.

Chairman's Statement

The Group has continued to make strong progress during the 26 weeks to 29 December 2012.

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

- Positive like for like sales growth over the period

- Continued space expansion

- Strong growth in multi-channel trading

- Continued gross margin gains

- Further growth in profit before tax and earnings per share

The Group continues to generate healthy levels of free cash flow. This allowed us to complete a return of capital to shareholders in November of £65.8m, following a similar return of £43.2m in March 2010. In addition we have declared a 12.5% increase in the interim dividend to 4.5p (2012 - 4.0p).

Looking ahead, Dunelm is well placed to make further progress. In the next reporting period, the homewares market is expected to remain subdued and we will be reporting against a very strong comparative period in the final quarter of the current financial year. However, we continue to see opportunities to improve and grow the Dunelm business and we remain confident that our proposition will continue to be attractive to a broad spectrum of customers.

Geoff Cooper

Chairman

12 February 2013

Business Review

Overview

Dunelm has made good trading and strategic progress over the first half of the financial year, despite a challenging consumer environment. The development of the business remains clearly focused on our four strategic priorities: continually strengthening our customer offer and improving our infrastructure while increasing scale through new stores and multi-channel expansion.

During the period, the opening of 10 new stores, including the relocation of an existing unit at Telford and the re-opening of our Coventry store following a serious fire in 2011, contributed to overall revenue growth of 13.4%. Within this like-for-like ("LFL") revenue growth of 2.2% reflected further gains in market share. Whilst we continued to invest to support growth of the business, our disciplined management of costs and the operational gearing effect of fixed overheads led to profit before tax increasing by 14.6% year on year to £59.8m (FY12: £52.2m).

The Dunelm business model continues to be highly cash generative, allowing us to fund our continuing organic growth from internal resources. Our strategy remains to return excess capital to shareholders periodically, while retaining cash flexibility. During the period we made a return of capital of 32.5p per share, totalling £65.8m, in addition to our ordinary dividend payment.

Financial performance

During the period total revenues were £340.1m (FY12: £299.9m).

The gross margin percentage increased by 30 basis points year on year. Gross margin continues to benefit from our direct sourcing activities, lower commodity costs and our increased buying scale. In line with our intention to continue investing to strengthen our customer proposition, an element of margin gain was used under our "New Lower Prices" umbrella to make permanent price reductions across several departments, reinforcing our value credentials.

Operating costs increased by 13.6% (£13.0m) in aggregate, with the majority of the increase driven by new space. With the exception of investments related to development of multi-channel, costs in LFL stores were broadly flat year on year. Non-store costs rose marginally, driven by increased advertising investment, primarily relating to our first catalogue.

As a consequence of the above and net finance income of £0.5m (FY12: £0.4m), profit before tax grew by 14.6% to £59.8m (FY12: £52.2m).

Profit after tax of £45.0m (FY12: £37.9m) reflects the projected full year effective tax rate of 24.8% (FY12: 27.4%). The effective rate has reduced substantially compared with last year due to the lowering of the headline rate of corporation tax and our recovery of historical capital allowances claims.

Fully diluted earnings per share were 22.1p (FY12: 18.6p), an increase of 18.8%.

The Group continues to be strongly cash generative even after ongoing investment in the growth and capabilities of the business. Capital investment of £14.9m over the period (FY12: £29.4m), mainly represents fit-out costs for new stores and store refits. Cash generated from operations, after interest and tax, was £63.4m (FY12: £60.2m) and represents 107% of operating profit (FY12: 116%).

Dividend

An interim dividend of 4.5p per ordinary share, an increase of 12.5% on the prior year interim dividend of 4.0p, will be paid on 12 April 2013 to shareholders on the register at 22 March 2013.

The Group's financial position remains robust with closing net cash of £27.4m (FY12: £49.9m) despite cash returns to shareholders in the period totalling £86.1m.

Strategy development

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

1. Develop our specialist position

We continue to invest in our market leading proposition, built on our core differentiators of choice and value. Our unique broad range of prices is applied to each of our core categories and has helped us retain existing customers and attract new customers during the period. At one end, our entry price position competes with grocers and discount multiples but at higher quality whilst at the other, our ranges of premium products compete with department stores and higher end independent retailers but at keener prices. We are also being increasingly successful in adding to our long established product strength with further differentiation based upon friendly, knowledgeable customer service.

We continually develop our ranges to ensure our offer remains contemporary and fresh, further expanding our presence in the £11bn homewares market. On average around 25% of ranged lines are less than 12 months old at any given time and we continue to use our Miss it Miss Out ("MIMO") promotions and special buys to emphasise Dunelm's value proposition and provide a seasonally relevant feel to our stores.

Further differentiation will be provided by our continuing drive to re-assign colleague time from non-customer facing tasks to providing customers with friendly, knowledgeable service. We are confident that this will help to build loyalty and customer referrals. We intend to continue to release colleague time in stores through our ongoing systems investments, providing additional scope for colleagues to interact with customers without increasing overall costs in existing stores. During the period, hours released have been invested in specific departments, such as curtains, where customer service requirements are high: this has led to a pleasing improvement in service as measured by our Mystery Shopper programme. The next phase of our customer service initiative, planned for Spring 2013, will be a programme of training to provide our colleagues with the knowledge and confidence to engage more positively with customers.

Increasing customer awareness and recognition of the quality of our proposition is a clear priority. We continue to grow our advertising spend to give a more consistent presence in national press, increase our social media activity and invest in other marketing activities - of which the most significant within the period was the launch of our first ever major homewares catalogue. This 200 page catalogue was highly effective in illustrating the breadth, quality and value of our offer and was well received by customers. We intend to follow with a spring catalogue in February 2013.

Independent recognition of our offer continues to grow and during the period we were delighted to be voted as the "Homewares Retailer of the Year" for the second year in succession by the readers of House Beautiful magazine. Furthermore, the Excellence in Housewares Award we received from the Cookware and Houseware Association serves to highlight our growing reputation for the quality of our Kitchen and Dining offer.

Our relaunched Dunelm At Home service, through which customers can select bespoke, made to measure curtains, blinds and accessories via a free home consultation, deepens the customer relationship with Dunelm and seeks to differentiate the overall Dunelm proposition through the addition of services. Having extended the pilot to make the service available from 12 stores in 2012, we plan to increase this to 25 stores from April 2013.

2. Develop the store portfolio

The Group's store portfolio mainly comprises 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 200 superstores, and during the period we opened 10 superstores, including the relocation of one store and the re-opening of another. The Group ended the period with 123 superstores, providing 3.7m sq ft of retail space, as well as nine high street shops.

As at the period end, our forward property pipeline comprised six legally committed stores, of which we anticipate four will open in the current financial year (including one relocation) giving an anticipated full year store opening programme totalling 14 stores.

Our recent openings continue to trade well and deliver strong returns on invested capital, with paybacks averaging approximately 30 months for stores opened during the last three financial years. We remain committed to our long-standing financial hurdles, targeting a maximum 36 month payback period for new stores in larger catchments (which we expect to represent the majority of future opportunities) and a maximum 48 month period for the rest. 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 while delivering our targeted returns.

We continue to invest in a programme of store refits to improve the shopping environment in our existing stores and create a full and consistent customer experience under the Dunelm brand. Refits increase sales by introducing new ranges 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 45% 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. Customer preference for this shopping experience is clear with over 16 million visits to our websites during the period representing over one-third of our overall customer visits. Expanding our multi-channel operation is therefore an investment priority.

Sales from our multi-channel business - accessible through www.dunelm.com, www.dunelm-mill.com and www.dorma.co.uk - have continued to grow strongly during the period and now represent approximately 4% of revenues. This includes a number of web exclusive ranges, particularly furniture, where sales continue to be pleasing. Since launching the mobile-optimised version of our website in early 2012 we have seen traffic from smartphones grow so that it now accounts for 15% of our on-line visits.

Whilst a proportion of multi-channel revenues are realised as reserve & collect orders in stores, the majority of transactions are fulfilled via home delivery. During the Christmas quarter we saw a significant improvement in the level of deliveries fulfilled within promise date, compared with the equivalent quarter in the prior year. Nevertheless we recognise that there remains an opportunity to improve our offering through more convenient delivery options, as well as a requirement to increase the capacity of our fulfilment operation as our on-line business grows. Both of these points will be addressed through a review of our fulfilment arrangements, with a revised operation scheduled to be in place by the summer.

4. Infrastructure

The Group's continued success is reliant upon a resilient, functionally rich and flexible business infrastructure encompassing capability across physical, systems and people resources. We continue to invest in our infrastructure in order to strengthen the current business and provide a sound foundation for our future growth. For example, in recent years we have significantly increased the size of our back office and distribution facilities.

A key focus during the next 18 months will be the completion of upgrades to each of our core systems platforms: our in-store POS system; our enterprise system; and our e-commerce platform.

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 30 June 2012. 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 14 and 15 of the 2012 Annual Report which is available at www.dunelm-mill.com.

Outlook

With a specialist proposition which continues to appeal to a broad spread of customers, Dunelm has continued to outperform the overall homewares market. We have made good strategic progress during the period, particularly supported by our work to improve customer service, the continued expansion of our store portfolio across the UK and the progress made in our on-line offering. The final quarter of our financial year presents some challenging like for like sales comparatives, but with a significant new store growth opportunity and an exciting multi-channel agenda in place, the Board remains confident in the overall growth prospects for the business.

Our next update on trading will be the release of an Interim Management Statement on 10 April 2013.

Nick Wharton

Chief Executive

12 February 2013

Consolidated statement of comprehensive income (unaudited)

For the 26 weeks ended 29 December 2012

All activities relate to continuing operations

Consolidated balance sheet (unaudited)

As at 29 December 2012

Consolidated cash flow statement (unaudited)

For the 26 weeks ended 29 December 2012

Statement of changes in equity (unaudited)

For the 26 weeks ended 29 December 2012

Notes to the interim results

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 have been prepared under the historical cost convention, except for share based payments which are stated at their fair value.

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 June 2012, 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 24.8% (26 weeks ended 31 December 2011: 27.4%)

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 4.5p per ordinary share for the period ended 29 December 2012 which equates to £9.1m. The dividend will be paid on 12 April 2013 to shareholders on the register at the close of business on 22 March 2013.

7 Announcement

The interim report was approved by the Board on 12 February 2013 and is available from the website at www.dunelm-mill.com.

Responsibility statement of the directors in respect of the half-yearly financial report

We confirm that to the best of our knowledge:

·; the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU

·; the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7Rof the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8Rof the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

By order of the board

Nick Wharton David Stead

Chief Executive Finance Director

12 February 2013 12 February 2013