Dunelm Regulatory News (DNLM)

13 February 2019

Dunelm Group plc ("Dunelm")

Interim Results for the 26 weeks to 29 December 2018

Focus on core business delivers good growth in revenue, profits and cash

Highlights

· Strong like for like (LFL) revenue growth of 6.9%, with increases in both stores (3.8%) and online (35.8%)

· Growth in unique customer numbers, both instore (+4.3%) and online (+18.7%), combined with improved brand awareness

· Multichannel proposition continues to develop and represents 15.7% of total revenues, up 3.9ppts on last year

· Gross margin improvement of 170bps due to improved sourcing, FX benefits and removal of less profitable Worldstores lines

· PBT of £70.0m, up 16.7% year on year (FY18: £60.0m before exceptional costs)

· Strong cash conversion with free cash flow of £91.2m (FY18: £27.8m)

· Interim dividend increased by 7.1% to 7.5 pence per share (FY18: 7.0p)

Nick Wilkinson, Chief Executive Officer, commented:

"It's been a good first six months with our strong performance reflecting the focus we have placed back on the core Dunelm business. The like-for-like revenue growth, both in stores and online, demonstrates the progress we are making in improving our multichannel proposition whilst maintaining the breadth and depth of our specialist customer offer in homewares. On top of this, good operational discipline and keeping things simple, is driving a better financial performance."

"We traded well through our key Winter Sale period and remain pleased with our performance to date. As previously highlighted, we are cautious about the outlook for the remainder of the financial year due to the continuing political uncertainty in the UK. We are confident in delivering market expectations5 for the full year assuming no material change in the macro-economic environment."

"Looking to the future, we will continue to grow the business as we become a truly multichannel homewares destination, making Dunelm the first choice for even more customers, and further strengthening our market leading position."

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

2 Growth in the continuing Dunelm business was +8.7%.

3 EBITDA is defined as the operating cash flows before exceptional operating costs and movement in working capital as presented in the Consolidated Statement of Cash Flows.

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

5 Management understand that updated FY19 PBT analyst estimates are in the range of £114m - £118m.

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 Pete Lambie at MHP Communications on peter.lambie@mhpc.com. A copy of this presentation will be available to download from our corporate website shortly after the briefing.

For further information please contact:

For photography, please contact MHP Communications

Notes to Editors

Dunelm was founded in 1979 as a market stall business, selling ready-made curtains. The first shop was opened in Leicester in 1984 and over the following years the business developed into a successful chain of high street shops before expanding, following the opening of the first Dunelm superstore in 1991, into broader homewares categories. Dunelm is now a multi-channel retailer, with dunelm.com being launched in 2005 and the acquisition of the Worldstores Group in 2016 accelerating this further.

Dunelm is market leader in the £13bn UK homewares market and active in the £11bn UK furniture market. It currently operates 171 stores, of which 169 are out-of-town superstores and two are located on high streets, and trades online through dunelm.com. Dunelm employs approximately 10,000 colleagues and sells around 30,000 product lines in store, increasing to around 60,000 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 £1.4bn. 

CHAIRMAN'S STATEMENT

We delivered good progress during the first six months of the year in a challenging environment. Nick Wilkinson, who became our CEO just over a year ago, has brought a renewed focus on the core Dunelm business, resulting in improved customer scores, higher colleague engagement and a stronger product offering. This focus underpinned our 6.9% growth in LFL revenue and increased market share. Nick and his team have also brought tighter operational grip, and as a result our underlying pre-tax profits for the half year rose by almost 17% to £70m.

The additional costs and integration challenges that came with the Worldstores acquisition are now behind us and the benefits can be seen in the continuing strong growth in our online revenue (+35.8%) and further strengthening of our multichannel credentials.

Our Dunelm colleagues have once again done a fantastic job and I would like to thank them for their hard work and dedication. I would also like to thank our trading partners for their support.

Free cash flow has increased to £91.2m (H1 FY18: £27.8m) and the Board has declared a 0.5 pence increase in the Interim dividend to 7.5 pence per share.

We were delighted to welcome Laura Carr who joined as our new Chief Financial Officer in November 2018. Rachel Osborne stepped down as a non-Executive Director in August 2018, following her appointment as CFO of a competing business. A search for her successor is underway.

Looking ahead, the retail trading climate is likely to remain difficult during this period of exceptional political uncertainty. This is a world where only the best companies will prosper and I am confident that Dunelm will be one of those companies.

Andy Harrison

Chairman

13 February 2019

BUSINESS REVIEW

I am pleased with the performance of our business in the first half of FY19 and the strategic progress that we have made. We are committed to helping our customers create homes they love and have taken steps forward in our product and service proposition.

Performance

We achieved good revenue growth in the first half with total like for like (LFL) revenue up 6.9% on the year, and continuing Dunelm revenue growth of 8.7%. Our internal analysis shows that we are continuing to win homewares market share. Our multichannel progress is encouraging, with dunelm.com revenue growth of 35.8% and growth in our LFL stores of 3.8% supported by new tablet-based selling tools which facilitate home delivery orders across extended product ranges. Overall multichannel revenue, including online home delivery revenue, reserve and collect revenue and tablet-based revenue, now represents 15.7% of the total, up from 11.8% last year.

Gross margin improved by 170bps, reflecting improved sourcing, FX gains, the elimination of Worldstores product lines with lower margins, and better end of season stock management.

Profit before tax of £70.0m, after a £3.8m impairment of an intangible asset, is up from £60.0m (before exceptional items) last year.

What we have done

Focus on Dunelm and operational grip: During the first half we have 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 to the dunelm.com website those lines that we wished to retain. This has enabled us to invest all our energy back into the Dunelm brand, with one supply chain and one web platform; in so doing, we have significantly tightened our operational and commercial grip on the business.

We have improved trading intensities in our stores. Our product selection and sourcing has been focused on offering more style and better value to customers. We have reinvigorated promotional activities in our stores and online with more frequently changing offers, helping provide more inspiration and newness to our customers. Our management of end of season product clearance has been more rigorous, and our stores are benefitting from less discounted product in stock which, in turn, is generating more full-priced revenue.

Discipline around cost control and cash generation has also been a key focus. For example, we have reduced stock loss in our stores and supply chain, enabling us to continue investing for the longer-term benefit of the business.

We have listened to our customers and colleagues carefully to learn how to improve both satisfaction and engagement scores, and recently 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 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. We also made a significant change in our digital marketing by redirecting spend previously incurred on the Worldstores sites to dunelm.com.

It is early days in assessing the benefits of these marketing activities, but the initial results are encouraging. We have seen a further increase in unique store and online customers year on year (+4.3% and +18.7% respectively), and our brand awareness measure at December 2018 was 3ppts higher than the previous year.

Seized more digital opportunities: We are fully aware that we are still playing catch up as a multichannel retailer, having grown up as a store-based retailer. However, we continue to address this at pace by seizing digital opportunities which will improve our offer. During the 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 1200 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 for customers.

What we will do next

We have a clear business purpose to help our customers create a home that they love and ambitious growth plans to build on our market leading position. We see significant opportunity to grow our customer base, shopping frequency and basket size. Our customer proposition will evolve significantly in order for us to meet our growth aspirations, underpinned by further developing our multichannel capabilities. In line with our five business goals, our short-term focus areas are outlined below.

Reaching more customers with our brand: Over the next 18-24 months we will continue to invest to raise brand awareness. Our fourth Home of Homes TV advertisement will run in February. We are also excited by our new agreement with ITV to sponsor This Morning from March 2019, reaching two million viewers each day and 50% of UK adults over the course of a year. Importantly, the viewing audience is very aligned with our target customer. We will continue to develop more unique Dunelm digital content, using our new photo studio facility, to share through our own channels and through various influencers.

Create more reasons to shop with Dunelm: Great homewares product is the lifeblood of our business and our unique, curated ranges offer style and value across a wide range of price points. The recently launched Spring/Summer collections continue our focus on delivering value and quality to our customers across all budgets and tastes. Furniture revenues have been encouraging in the last six months, with extended ranges from the lines transferred from Worldstores, significantly improved own ranges, and in-store selling capabilities led by our customer hosts. We see plenty of opportunity for further furniture growth as we develop our product and supply chain capabilities.

Easy and inspiring multichannel customer experience: We will continue to develop our multichannel customer experience by introducing a new set of technologies on which to run our digital operations. These technologies will be more flexible, scalable and will offer enhanced functionality from launch, such as Click & Collect. We are focused on introducing the new platform in a way which avoids disruption to the strong growth we are already seeing through the existing dunelm.com platform. We therefore intend to phase the implementation via a beta site which is likely to be introduced to a small proportion of customers this summer. The pace of roll out will be contingent on the results from this initial launch. In the meantime, our existing platform is trading well, and we continue to see opportunities for further growth before we switchover.

Our stores remain fundamental to our multichannel capabilities. Over the medium term, we expect to open 3-5 stores per year, aiming for full coverage in the UK (around 200 stores). We currently have one new store (a relocation) committed for the second half and discussions are under way on a number of sites for FY20 and beyond. We will also complete one more major refit before year-end (and a number of smaller ones) and will continue to test and learn with regard to the layout and service proposition offered in our stores.

Simple and low cost and good housekeepers: We started the journey of simplifying the business in the first half and reintroduced some core retail disciplines which have improved our financial performance. This is an ongoing focus area for the whole business and we continue to seek improvement opportunities across many areas, and specifically within stock loss, product lifecycle management, supply chain and capital investment discipline.

Great place to work: The Dunelm culture, rooted in our original business principles, remains critical to us as we enter our fortieth year as a retailer. Our people make Dunelm a special place to work and shop and make us proud of the service we give to our customers each day. We will continue to support all our colleagues in developing their capabilities and their careers, including our recently restructured Technology and Commercial teams.

Summary and Outlook

It's been a good first six months with our strong performance reflecting the focus we have placed back on the core Dunelm business. The like-for-like revenue growth, both in stores and online, demonstrates the progress we are making in improving our multichannel proposition whilst maintaining the breadth and depth of our specialist customer offer in homewares. On top of this, good operational discipline and keeping things simple, is driving a better financial performance.

We traded well through our key Winter Sale period and remain pleased with our performance to date. As previously highlighted, we are cautious about the outlook for the remainder of the financial year due to the continuing political uncertainty in the UK. We are confident in delivering market expectations1 for the full year assuming no material change in the macro-economic environment.

Looking to the future, we will continue to grow the business as we become a truly multichannel homewares destination, making Dunelm the first choice for even more customers, and further strengthening our market leading position.

Nick Wilkinson

Chief Executive Officer

13 February 2019

FINANCIAL REVIEW

Revenue

Total revenue for the 26 weeks to 29 December 2018 grew by 1.2% to £551.8m (FY18 H1: £545.4m). Total LFL growth was 6.9% with LFL Store revenue growing by 3.8% and dunelm.com revenue growing by 35.8%.

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 revenue, and home delivery revenue in respect of orders placed via in-store tablets

2. LFL Online - dunelm.com (excludes Reserve & Collect revenue, and home delivery revenue 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)

Gross margin

Group gross margin of 50.3% was +170bps higher than the same period last year. Included in the overall margin increase was 90bps of improvement relating to the removal of lower margin lines from closing the Worldstores businesses. We expect the improvement in gross margin to continue during the second half of the year, albeit that the absolute margin rate will be lower due to the timing of the Winter and Summer sales during this period.

Operating costs

Operating costs for the period were £206.6m, an increase (before exceptional items last year) of £2.9m (+1.4%) year on year. The closure of the Worldstores businesses has led to improved operating efficiencies within supply chain and performance marketing. However, these efficiencies were offset by costs driven by revenue growth in the core Dunelm business and some additional areas including:

· Impairment charges of £3.8m relating to the Fogarty brand following the licensee going into administration

· Additional costs of £2.3m reflecting our planned investment in brand marketing

· Increased Technology costs of £1.6m as we upgrade the operating systems supporting our digital proposition.

Operating costs as a percentage of revenue were 37% (flat compared to the same period last year). The increased marketing spend will continue and year on year we anticipate a higher cost of colleague and management incentives. For the full year, we anticipate the operating costs to revenue ratio will remain similar to the prior year, before taking into account the £3.8m impairment charge.

Profit and Earnings per Share

Operating profit for the period was £70.7m (FY18 H1: £61.3m before exceptional costs), an increase of £9.4m (+15.3%) reflecting the improved gross margin delivery.

Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by 17.3% to £92.8m (FY18 H1: £79.1m before exceptional cash items). The EBITDA margin achieved was 16.8% (FY18 H1: 14.5% before exceptional items).

There was a net cost of £0.7m (FY18 H1: £1.3m) in respect of financial items in the period. These included interest payable and amortisation of arrangement fees relating to the Group's revolving credit facility amounting to £1.2m (FY18 H1: £1.1m), £0.1m of interest received (FY18 H1: nil) and gains of £0.4m (FY18 H1: £0.2m loss) resulting from foreign exchange differences on the translation of dollar denominated assets and liabilities.

Profit before tax was £70.0m (FY18 H1: £60.0m before exceptional costs), an increase of 16.7% year-on-year. Profit after tax of £55.8m (FY18 H1: £45.0m) reflects the projected full year effective tax rate of 20.3% (FY18: 20.1%).

Diluted earnings per share were 27.5 pence (FY18 H1: 23.8 pence before exceptional costs), an increase of 15.5%.

Cash generation

Dunelm remains a highly cash generative business which has the ability to make investment decisions for the long term to support growth whilst also having the potential to periodically return surplus cash to shareholders. In the period, the Group generated £106.9m (FY18 H1: £59.8m) of net cash from operating activities, an increase of 78.8%.

Working capital reduced by £21.4m during the period (FY18 H1: £11.3m increase). The improvement was driven by an increase in payables (£23.5m) primarily due to the phasing of trade compared to Q4 last financial year, resulting in higher VAT and supplier payables. Total payables are broadly in line with the same time last year.

The cash outflow on capital investment was £15.7m in the first half (FY18 H1: £32.0m). Spend included investment in IT infrastructure (£8.8m), one new store opening (£1.5m) and store refit expenditure in existing stores (£4.0m).

Free cash flow, defined as net cash generated from operating activities less net cash used in investing activities, was £91.2m (FY18 H1: £27.8m) an increase of £63.4m.

Capital Policy

The Board policy on capital structure targets an average net debt level (excluding lease obligations and short-term fluctuations in working capital) of between 0.25 x and 0.75 x of the last twelve months' EBITDA. Furthermore, the policy targets ordinary dividend cover of between 1.75x and 2.25x during the financial year to which the dividend relates.

We will pay an interim ordinary dividend of 7.5p per share (totaling £15.1m), a 7.1% increase year-on-year, to shareholders on the register at 15 March 2019. The payment is expected to be made on 12 April 2019.

The Board will consider returning surplus cash to shareholders if average net debt over a period consistently falls below the minimum target of 0.25 x 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 www.corporate.dunelm.com.

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

Banking Agreements and Net Debt

The Group has in place a £165m syndicated Revolving Credit Facility (RCF) which matures in 2023. The terms of the RCF are consistent with normal practice and include covenants in respect of leverage (net debt to be no greater than 2.5× EBITDA) and fixed charge cover (EBITDA to be no less than 1.5 x fixed charges), both of which were met comfortably as at 29 December 2018.

In addition, the Group maintains £20m of uncommitted overdraft facilities with two syndicate partner banks and has an accordian option with a maximum facility of £75m.

Net debt at 29 December 2018 was £72.9m (FY18 H1: £134.3m) compared with net debt of £124.0m at 30 June 2018. Daily average net debt (facilities drawn plus cash at bank) was £80.9m (FY18 H1: £117.0m). Net debt at the period end was equivalent to 0.48x historical EBITDA.

Principal 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 beyond, and could cause actual results to differ materially from expected and historical results. The Board considers that the majority of significant risks and uncertainties remain as published in the Annual Report for the year ended 30 June 2018. These comprise:

· Loss of market share through failing to maintain a competitive offer in the homewares market

· Damage to brand reputation through product and service quality

· Failure to deliver maximum value from our online business

· Reduced portfolio expansion through the inability to secure or develop the required retail trading space

· Impact on the business should it fail to attract, retain and motivate high calibre colleagues

· Prosecution and other regulatory action as a result of failure to comply with legislative or regulatory requirements

· Disruption to key IT systems from a major incident, including a cyber-attack

· Impact on trade, or reduced efficiencies, from supply chain disruption

· Inability to compete and grow the business in line with the strategy through failure to operate the business in an efficient manner

· Unforeseen financing requirements or treasury exposures

· Failure to anticipate and manage the potential impact of Britain leaving the European Union (see update below)

A detailed explanation of these risks can be found on pages 8 to 43 of the 2018 Annual Report which is available at www.corporate.dunelm.com.

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 on 29 March 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 have identified some risks arising from potential disruption at 'deep-sea' ports in the period following exit. Actions have been taken within the business and throughout our supply chain to mitigate these risks, such as purchasing incremental stock of some best-selling lines and securing additional supply chain capacity.

Approximately 2.5% 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 consumer confidence. 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.

Laura Carr

Chief Financial Officer

13 February 2019

STATEMENT OF DIRECTORS' RESPONSIBILITIES

The Directors confirm that these condensed interim financial statements have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

· an indication of important events that have occurred during the first six months 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 financial year; and

· material related-party transactions in the first six months and any material changes in the related-party transactions described in the last annual report.

The Directors are responsible for the maintenance and integrity of the Company's website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.

By order of the Board

Nick Wilkinson Laura Carr

Chief Executive Officer Chief Financial Officer

13 February 2019 13 February 2019

INDEPENDENT REVIEW REPORT TO DUNELM GROUP PLC

Report on the interim financial statements

Our conclusion

We have reviewed Dunelm Group plc's interim financial statements (the "interim financial statements") in the interim results of Dunelm Group plc for the 26 week period ended 29 December 2018. Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

What we have reviewed

The interim financial statements comprise:

· the consolidated statement of financial position as at 29 December 2018;

· the consolidated income statement and consolidated statement of comprehensive income for the period then ended;

· the consolidated statement of cash flows for the period then ended;

· the consolidated statement of changes in equity for the period then ended; and

· the explanatory notes to the interim financial statements.

The interim financial statements included in the interim results have been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting', as adopted by the European Union and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2 to the interim financial statements, the financial reporting framework that has been applied in the preparation of the full annual financial statements of the Group is applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union.

Responsibilities for the interim financial statements and the review

Our responsibilities and those of the directors

The interim results, including the interim financial statements, is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim results in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.

Our responsibility is to express a conclusion on the interim financial statements in the interim results based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.

What a review of interim financial statements involves

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.

A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

We have read the other information contained in the interim results and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.

PricewaterhouseCoopers LLP

Chartered Accountants

Birmingham

13 February 2019

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

For the 26 weeks ended 29 December 2018

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

For the 26 weeks ended 29 December 2018

CONSOLIDATED STATEMENT OF FINANCIAL POSITION 

(UNAUDITED)

As at 29 December 2018

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

For the 26 weeks ended 29 December 2018

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

For the 26 weeks ended 29 December 2018

NOTES TO THE INTERIM FINANCIAL STATEMENTS

For the 26 weeks ended 29 December 2018 (UNAUDITED)

1 General information

Dunelm Group plc and its subsidiaries ('the Group') are incorporated and domiciled in the UK. Dunelm Group plc is a listed public company, limited by shares and the company registration number is 04708277. The registered office is Watermead Business Park, Syston Leicestershire, LE7 1AD.

The primary business activity of the Group is the sale of homewares through a network of UK stores and websites.

The Group's financial results and cashflows are subject to seasonal trends between the first and second half of the financial periods. Traditionally, revenue and profit are higher in the first half of the financial period due to the performance of seasonal lines and inclusion of the first week of the winter sale.

2 Basis of preparation

These condensed interim financial statements for the 26 weeks ended 29 December 2018 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority (previously the Financial Services Authority) and with IAS 34, 'Interim financial reporting', as adopted by the European Union.

The condensed interim financial statements should be read in conjunction with the annual financial statements for the year ended 30 June 2018, which have been prepared in accordance with IFRSs as adopted by the European Union.

The presentation of the condensed financial statements 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.

The financial information in this document is unaudited, but has been reviewed by the auditors in accordance with the Auditing Practices Board guidance on Review of Interim Financial Information.

These condensed interim financial statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006 and are not audited. Statutory accounts for the year ended 30 June 2018 were approved by the Board of Directors on 12 September 2018 and delivered to the Registrar of Companies. The report of the auditors on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.

3 Going concern basis

The Group has considerable financial resources together with long standing relationships with a number of key suppliers and an established reputation in the retail sector across the UK. In their consideration of going concern, the Directors have reviewed the Group's future cash forecasts and profit projections, which are based on market data and past experience. The Directors are of the opinion that the Group's forecasts and projections, which take into account reasonably possible changes in trading performance, show that the Group is able to operate within its current facilities and comply with its banking covenants for the foreseeable future.

Consequently, the Directors believe that the Group is well placed to manage its business risks successfully. Having reassessed the principal risks, the Directors consider it appropriate to adopt the going concern basis of accounting in preparing the financial information.

Further information regarding the Group's business activities, together with the factors likely to affect its future development, performance and position is set out in the Strategic Report on pages 8 to 43 in the 2018 Annual Report available from the website at www.corporate.dunelm.com. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Financial Review on pages 7 to 9.

4 Accounting policies

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

The accounting policies adopted, as well as significant judgements and key estimates applied, are consistent with those of the annual financial statements for the year ended 30 June 2018, as described in those financial statements, except as described below:

· Taxes on income in the interim periods are accrued using the tax rate that would be applicable to expected total annual profit or loss.

As well as this, IFRS 15 and IFRS 9 detailed below, have been adopted for the first time.

IFRS 15 'Revenue from contracts with customers'

The Group has adopted IFRS 15 'Revenue from contracts with customers' for the first time in the current financial year. The standard applies a five-step approach to the timing of revenue recognition.

The Group's revenues are mainly from individual products which are sold directly to customers via our stores or website. The standard establishes a principle-based approach for revenue recognition that we recognise revenue to reflect the transfer of control of goods and services, measured as the amount to which the Group expects to be entitled in exchange for those goods or services.

The standard has been applied using the modified retrospective approach without adjusting prior periods. The Group has considered the following in assessing the impact of the new standard:

(a) Principal versus agent consideration

The Group has two types of products which are stocked and non-stocked products. Management has established that the Group acts as a principal for both types of products and thus should recognise revenue in the gross amount of consideration to which it expects to be entitled. The Group already recognised revenue on a gross basis including delivery charges therefore the Group's revenue recognition is unchanged in this regard.

(b) Gift cards

The Group issues gift cards and credit notes to customers. IFRS 15 requires an entity to recognise gift cards and credit notes (non-refundable prepayments) as a liability. However, customers may choose not to redeem their gift cards and credit notes therefore not exercising all their contractual rights. Management has estimated the value of gift cards which it expects not to be redeemed based on prior history of gift card redemption and has recognised this amount in the financial statements at the date of transition. This adjustment does not have a material impact on the financial statements and therefore a reconciliation of the relevant values has not been provided.

(c) Sales return provision

The Group holds a sales return provision in the Consolidated Statement of Financial Position to provide for expected levels of returns. Under IFRS 15 the expected value of revenue relating to returns will continue to be recognised within sales provisions. However, the expected value of cost of sales relating to the returned items will be included within inventories instead of sales provision. This adjustment does not have a material impact on the financial statements and therefore a reconciliation of the relevant values has not been provided.

(d) Disclosure of disaggregated revenue

IFRS 15 requires the disaggregation of revenue from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Management has considered how information about the entity's revenue has been presented for other purposes such as internal management accounts and investor presentations. For the purposes of these, revenue is disaggregated between Stores and Online (please refer to the Financial Review on page 7). However, for the purposes of the financial statements management has concluded that since customers access the Group's products across multiple channels and often their journey involves more than one channel, disaggregation of revenue would not be appropriate.

IFRS 9 'Financial instruments'

The Group has adopted IFRS 9 'Financial Instruments' for the first time in the current financial year.  IFRS 9 replaces IAS 39 which relates to the recognition, classification, measurement and impairment of financial assets and liabilities and hedge accounting.

Impact of adoption

The adoption of IFRS 9 had no material impact on the Group's retained earnings at 1 July 2018 or the interim consolidated financial information at 29 December 2018.

Classification of financial assets and liabilities

IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, Fair Value Through Other Comprehensive Income (FVOCI) and Fair Value Through Profit and Loss (FVTPL). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. IFRS 9 eliminates the previous IAS 39 categories of held to maturity, loans and receivables and available for sale. Under IFRS 9, investments in equity instruments that do not have a quoted price in an active market for an identical instrument are now measured at fair value rather than at cost.

On 1 July the Group assessed the financial assets and liabilities of the business and has classified its financial instruments into the appropriate IFRS 9 categories.

Forward contracts used for hedging - FVOCI - hedging instrument

Trade and other receivables - Amortised cost

Cash and cash equivalents - Amortised cost

Borrowings - FVOCI - Other financial liabilities

Trade and other payables - FVOCI - Other financial liabilities

Hedge accounting

IFRS 9 requires the Group to ensure that hedge accounting relationships are aligned with risk management objectives and strategy and to apply a forward looking approach to assessing hedge effectiveness.

The effective portion of changes in the fair value of derivatives that are designated and qualify as cash flow hedges is recognised in the cash flow hedge reserve within equity. The gain or loss relating to the ineffective portion is recognised immediately in profit or loss, within operating costs.

When option contracts are used to hedge forecast transactions, the group designates only the intrinsic value of the options as the hedging instrument. Until 30 June 2018, the group classified foreign currency options as held-for-trading derivatives and accounted for them at FVTPL.

Gains or losses relating to the effective portion of the change in intrinsic value of the options are recognised in the cash flow hedge reserve within equity.

When forward contracts are used to hedge forecast transactions, the group designates the full change in fair value of the forward contract (including forward points) as the hedging instrument. The gains or losses relating to the effective portion of the change in fair value of the entire forward contract are recognised in the cash flow hedge reserve within equity.

Amounts accumulated in equity are reclassified in the periods when the hedged item affects profit or loss. Where the hedged item subsequently results in the recognition of a non-financial asset (such as inventory), both the deferred hedging gains and losses and the deferred time value of the option contracts or deferred forward points, if any, are included within the initial cost of the asset. The deferred amounts are ultimately recognised in profit or loss as the hedged item affects profit or loss (for example through cost of sales).

When a hedging instrument expires, or is sold or terminated, or when a hedge no longer meets the criteria for hedge accounting, any cumulative deferred gain or loss and deferred costs of hedging in equity at that time remains in equity until the forecast transaction occurs, resulting in the recognition of a non-financial asset such as inventory. When the forecast transaction is no longer expected to occur, the cumulative gain or loss and deferred costs of hedging that were reported in equity are immediately reclassified to profit or loss.

New accounting standards not yet adopted

At the balance sheet date, there are a number of new standards and amendments to existing standards in issue but not yet effective. None of these are expected to have a significant effect on the financial statements of the Group, except IFRS 16 detailed below.

IFRS 16, 'Leases', will be effective from the period ending June 2020 onwards.

The changes required under IFRS 16 will lead to the creation of a right-of-use asset and a lease liability on the balance sheet that did not previously exist. The right-of-use asset will be subject to depreciation on a straight-line basis over the term of the lease. An interest charge will be recognised on the lease liability that will be higher in the earlier years of the lease term. The total expense recognised in the Income Statement over the life of the lease will be unaffected by the new standard. However, IFRS 16 will result in the timing of lease expense recognition being front-loaded for leases which would be currently accounted for as operating leases.

The presentation of the Cash Flow Statement will change significantly, 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 will have no net impact on cash flows over the life of the lease but there will be a timing impact on tax payments due to the phasing of the depreciation and interest to the income statement.

The Group has established a Steering Committee to review the impact of IFRS 16, which regularly reports to the Audit and Risk Committee. To date, progress has been made on a number of areas including the collection and verification of all necessary property and non-property lease data. The Group has drafted its accounting policy which is in the process of being approved. This includes its calculation of incremental borrowing rates.

The Group intends to apply the retrospective modified approach on transition and will not restate the comparative information. Under this approach, at the date of transition the right- of -use asset will equal the lease liability for all leases (IFRS 16 para C8b(ii)). As a result, there will be no impact on retained earnings. Furthermore, the Group has begun working through the recently published technical amendments to the tax legislation following the introduction of IFRS 16.

Given the complexities of IFRS 16 and the material sensitivity to key assumptions, such as discount rates, it is not yet practicable to fully quantify the effect of IFRS 16 on the financial statements of the Group.

5 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 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.

6 Exceptional items

Exceptional items are those items which, due to their materiality, nature or infrequency, could distort an assessment of underlying business performance.

Exceptional items have occurred in prior years as a result of the acquisition of the Worldstores Group on 28 November 2016. There have been no exceptional items recorded for the period ending 29 December 2018.

7 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 20.3% (26 weeks ended 30 December 2017: 20.1%).

8 Dividends

The Directors have declared an interim dividend of 7.5 pence per Ordinary Share for the financial year ended 29 June 2019. This equates to an interim dividend of £15.1m. The dividends will be paid on 12 April 2019 to shareholders on the register at the close of business on 15 March 2019.

The interim dividend has not been recognised as a liability in these interim financial statements, it will be recognised in the statement of changes in equity in the period ended 29 June 2019.

9 Earnings per 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:

10 Intangible assets and property, plant and equipment

The Fogarty brand has been impaired, resulting in an impairment charge of £3.8m.

11 Trade and other payables

Current accruals and deferred income include lease incentives of £5.4m (FY18 H1: £4.6m, FY18: £5.6m) and capital accruals of £2.3m (FY18 H1: £3.9m, FY18: £2.7m).

The maturity analysis of non-current deferred income, all of which relate to lease incentives, is as follows:

12 Financial risk management and financial instruments

Financial risk factors

The Group's activities expose it to a variety of financial risks including foreign currency risk, fair value interest rate risk, credit risk and liquidity risk. The condensed interim financial statements do not include all financial risk management information and disclosures required in the annual financial statements; they should be read in conjunction with the Group's annual financial statements as at 30 June 2018. There have been no changes in any risk management policies since the year end.

Fair values

The fair value of the Group's financial assets and liabilities are equal to their carrying value. The fair value of foreign currency contracts are amounts required by the counterparties to cancel the contracts at the end of the period.

Fair value hierarchy

Financial instruments carried at fair value are required to be measured by reference to the following levels:

• Level 1: quoted prices in active markets for identical assets or liabilities;

• Level 2: inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

• Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs).

All derivative financial instruments carried at fair value have been measured by a Level 2 valuation method, based on forward exchange rates that are quoted in an active market. The effects of discounting are generally insignificant for Level 2 derivatives.

13 Bank loans

The Company has medium term bank facilities of £165m (FY18 H1: £150m; FY18: £165m) committed until 5 March 2023. £95m of this facility was drawn down at 29 December 2018 (FY18 H1: £150m; FY18: £140m). The carrying amount of bank borrowings is materially equal to fair value. The Group also has an accordian option with a maximum facility of £75m, as well as an overdraft facility of £20m.

14 Capital Commitments

As at 29 December 2018 the Company had entered into capital contracts amounting to £4.9m (FY18 H1: £3.7m).

15 Announcement

The interim report was approved by the Board on 13 February 2019. Copies are available from www.corporate.dunelm.com.