Dunelm Regulatory News (DNLM)

7 Mar 2007 07:33

Dunelm Group plc07 March 2007 7 March 2007 Dunelm Group plc Interim Results Announcement Dunelm Group plc, the leading out-of-town specialist homewares retailer,announces its maiden Interim Results for the 26 weeks to 30 December 2006. Financial Highlights • Sales up 13.2% to £178.4m (2005: £157.6m) • Like-for-like sales increase of 5.0% • Underlying operating profit up 9.2% to £23.7m* (2005: £21.7m) • Operating profit of £19.7m (2005: £21.7m) • Underlying profit before taxation of £21.9m* (2005: £22.1m) • Profit before taxation of £17.9m (2005: £22.1m) • Underlying EPS of 7.7p* (2005: 7.6p) • EPS of 5.9p (2005: 7.6p) • 0.8p interim dividend per share** Business Highlights • Successful IPO completed in October 2006 • Strong performance in a subdued market, with consistent like-for-like sales growth from August 2006 • Continued focus on 'Simply Value For Money' proposition • Two new superstores opened in Stevenage and Colchester • On track for total of six new stores in the current financial year, strong pipeline for next • Investment in new central warehouse in Stoke and roll-out of new IT systems (SAP) • Good sales momentum since half year (LFL + 4.1% in last nine weeks) * excludes non-recurring costs of transfer to new warehouse (£1.0m) and IPO (£3.0m) ** reflects the period post IPO - 2 - Commenting, Will Adderley, Chief Executive of Dunelm, said: "Following our successful flotation in October, we are pleased to report arobust set of maiden interim results. "In the first half, we achieved total sales growth of 13.2%, and like-for-likesales growth of 5.0%. At the same time, we have made significant strategicprogress, continuing to expand our presence through new store openings, furtherimproving our specialist homewares offering and developing our infrastructure. "Trading in the second half has started well, with sales for the 9 weeks to 3March up 10.0%, and up 4.1% on a like-for-like basis, and we are confident ofbeing able to meet our expectations for the year as a whole. Clearly, however,this confidence needs to be tempered by the risk of demand being impacted bymacroeconomic factors. "We continue to have a very clear focus on our customer and our offer. Puttingthis with our strong management team and a determination to grow, we continue towork towards our long-term target of 150 superstores across the UK." For further information please contact: +---------------------------------------------------------+--------------------+|Dunelm Group plc | 0116 2644 356|+---------------------------------------------------------+--------------------+|Will Adderley, Chief Executive | |+---------------------------------------------------------+--------------------+|David Stead, Finance Director | |+---------------------------------------------------------+--------------------+| | |+---------------------------------------------------------+--------------------+| | |+---------------------------------------------------------+--------------------+|Hogarth Partnership | 020 7357 9477|+---------------------------------------------------------+--------------------+|John Olsen/James Longfield/ Fiona Noblet | |+---------------------------------------------------------+--------------------+ Notes to Editors Dunelm is amongst the top 10 retailers operating in the £12bn UK homewaresmarket. The Group has 83 stores, branded Dunelm Mill, of which 66 areout-of-town superstores and 17 are high street shops. The majority of the storesare located in the Midlands or north-west of England. Dunelm employs over 5,000full and part time staff, the vast majority of whom work in the stores. Dunelm was founded in 1979 as a market stall business, selling ready madecurtains. The first shop was opened in Leicester in 1984 and over the followingyears the business developed into a successful chain of high street shops in theMidlands specialising in soft furnishings. The first Dunelm superstore wasopened in 1991, leading to the Company's move into the broader homewares market. The superstores provide an average of 28,000 sq ft of selling space and offer anextensive range of up to 18,000 products across a broad spectrum of categories,including bedding, curtains, gifts and seasonal items, cushions, bathroomproducts, kitchenware, quilts, pillows and rugs. Dunelm also specialises inoffering a wide range of fabrics, made to measure curtains and a frequentlychanging series of special buys. The directors are passionate about ensuringthat all ranges live up to Dunelm's philosophy of offering customers "SimplyValue for Money". Last year Dunelm also introduced an on-line store, to be found atwww.dunelm-mill.com. Currently over 5,000 products are available through thewebsite. Dunelm listed on the London Stock Exchange in October 2006 (DNLM.L) and has acurrent market capitalisation of over £400 million. - 3 - CHAIRMAN'S STATEMENT As we report our first set of interim results as a listed company I would liketo welcome all our new shareholders to Dunelm. We successfully floated the Company in October last year and we have been verypleased by the reception from investors both at the time of the IPO and in themonths since. The purpose of the IPO was and is to support the business indelivering its long-term growth objectives. That we are able to report a robust set of maiden interim results, andsignificant strategic progress during the period, is a particular credit to themanagement team who have remained fully focused on the business despite theincrease in workload created by the IPO process. In the first half, we achieved total sales growth of 13.2%, and like-for-likesales growth of 5.0%. This represents a good performance given the relativelysubdued prevailing market conditions. At the same time, we have continued tomake progress with our plans to expand Dunelm's presence beyond our traditionalterritory of the Midlands and the North West, have further developed ourspecialist homewares offering, and have taken important steps forward with ourphysical and IT infrastructure. The Directors have approved an interim dividend of 0.8p per share, whichreflects the period since our October flotation. This will be payable on 25April to shareholders on the register at the close of business on 10 April. Asindicated at the time of the IPO, the Company intends to operate a progressivedividend policy, with dividend cover in the range 2.5 to 3.0 times. We have achieved a great deal during the period and, as well as the management,I would like to thank all Dunelm employees for their significant contribution toour continued success. Following the IPO we have introduced an Employee ShareOption Scheme, allowing our staff to share in the benefits of Dunelm's continuedgrowth and aligning their interests with those of our shareholders. The period under review has been an exciting one for Dunelm. We are in a strongposition to drive the next stage of growth for the benefit of the business andits shareholders, and we look to the future with considerable confidence. - 4 - CHIEF EXECUTIVE'S REVIEW Dunelm's trading strategy is to offer customers everyday good value andunrivalled choice across a wide range of homewares, with knowledgeable andfriendly staff and in convenient locations. Our philosophy is summed up in ourcustomer promise to offer 'Simply Value For Money'. The homewares market remained relatively subdued in 2006. For Dunelm, tradingbegan to pick up from August and our like-for-like sales growth was consistentlystrong from that point onwards. Financials During the period, sales grew by 13.2% to £178.4m (2005: £157.6m), with alike-for-like increase of 5.0%. Product gross margins continued to increase in the period and were up by 0.4percentage points, one of the contributory factors being the continuing strengthof sterling against the US dollar. Underlying operating profit rose by 9.2% to £23.7m (2005: £21.7m). Underlyingoperating profit comprises reported operating profit, adjusted by adding backnon-recurring costs in respect of the IPO (£3.0m) and the transition to our newcentral warehouse (£1.0m). We have previously indicated that operating costs would increase as a result ofchanges in the business - specifically, occupancy of the new warehouse hasincurred rental costs from July 2006 and we have been incurring amortisationcharges from our new IT investments since April 2006. These new operating costsamounted to £1.5m in the first half and are charged in full within underlyingoperating profit. Trading performance in our business tends to be weighted in favour of the firsthalf of the financial year. This is because sales in like-for-like stores tendto be a little higher in the first half (52% of the total in the last financialyear), with costs evenly spread; and buying margin tends to be lower in thesecond half, as this includes the majority of our winter and summer saleactivity. One of the core strengths of Dunelm is our low cost operating model. This isreflected in our underlying operating margin of 13.3% in the first half, whichwe believe is in the top tier of UK retailers. Reported profit before tax was £17.9m, compared to £22.1m in the equivalentperiod last year. This reduction was anticipated at the time of the IPO. Inaddition to the non-recurring costs relating to the IPO and warehouse transition(£4.0m) referred to above, it reflects: • non-comparable financing costs in the period arising from the Group's new capital structure (£0.8m) • foreign exchange loss arising mainly from forward contracts and dollar cash balances which became devalued as the dollar fell further against sterling (£1.0m) We have recently reviewed our policy towards foreign currency management. Sinceonly a relatively small proportion of our purchases are made directly indollars, we have decided that we will not pursue an active hedging strategy forthe time being. Therefore, we do not intend to take out forward currencycontracts beyond those currently outstanding, all of which will expire by June2007. Profit after tax reflects the projected full year effective tax rate of 34.2%,driven by disallowable IPO costs. Disregarding IPO costs, the projectedeffective rate is 31.8%. Underlying earnings per share (ie before non-recurring costs) were 7.7p. - 5 - Dunelm is a highly cash generative business. Cash generated from operations was£16.5m. This includes not only funding the non-recurring costs, but alsoincreased stock levels to ensure continuity of supply during the period oftransitioning to the new central warehouse, as detailed further below. Net debt at the period end was £42.5m. In January 2007 we repaid, ahead ofschedule, £10m of the Group's £50m revolving loan facility. In our IPO prospectus, we included a three year financial record under IFRSaccounting principles and policies. This interim statement has been prepared onthe same basis. We are also required to provide an analysis of the impacts ofthe transition to IFRS. Such analysis is shown below. Strategy At the time of IPO, we laid out our strategy for growth under four key headings.We have made encouraging progress in all of these: New Store openings During the period we opened new stores in Stevenage (freehold) and Colchester(leasehold) and relocated our Swansea store to a new (and larger) freehold unit.We therefore ended the period with 83 stores, of which 66 are out of townsuperstores. Customer response has been very positive at all three locations andthe stores have traded in line with expectations. The availability of good sites, and our ability to secure these, remains key toour growth, and we have recently strengthened and expanded our property team. Weanticipate achieving four further superstore openings in this financial yearincluding Bradford and Perth. We have a strong pipeline for next financial year, with two new superstorelocations already committed and several others in advanced negotiations. Specialist Offer Our 'Simply Value For Money' proposition remains at the heart of all we do, andwe are constantly striving to improve the offer for customers. Recently, for example, we have reached an agreement with Dorma, a long-standingsupplier, for them to provide exclusive designs of Dorma-branded bed linen. Wehave also continued to increase our depth of range, for example introducing moreproducts into our kitchen offer and even adding to our plain dye bed linenrange. In response to specific customer demand we have extended our range ofstorage products. Equally, we are prepared to act quickly if a part of our offer is not performingsatisfactorily. We have identified that the dynamics of the bed market aresignificantly different from furnishings and accessories; accordingly, we haverecently withdrawn from selling beds in our stores. Another key part of our specialist proposition is value added service. Wecontinue to offer customers a variety of options to have curtains and blindsmade to their specifications; and we have introduced a home measuring service inseveral parts of the country to assist further with complex purchases. Infrastructure From the beginning of July, our new warehouse facility at Stoke becameoperational. This is a leasehold unit with 250,000 sq ft of floor space. TheStoke facility will shortly become our sole central warehouse, although for atemporary period we have been continuing to use our previous warehouse at Burtonas an additional bulk storage location. - 6 - We will close the Burton warehouse in the current trading period and seek torealise value from the freehold. Whilst developing our Stoke operation, our over-riding priority has been toensure continuity of supply to our shops. In achieving this we took the decisionto invest substantially in extra central stock levels. This is a temporarysituation and stocks will be managed down over the coming months, but it hasensured that the transfer has been completed smoothly and stock availability hasremained good throughout. In addition, we have continued to invest in our IT infrastructure, following thesuccessful initial implementation of core SAP modules in early 2006. During theperiod we rolled out more elements of SAP stock management functionality acrossthe business. This process is expected to be largely completed by the end of thecurrent financial year. The combination of the new warehouse and upgraded IT systems gives us aninfrastructure capable of supporting the business through the next phase of itsgrowth. The availability of improved management information should also help usto manage stock levels more tightly going forward. Longer Term Opportunities Whilst the current business model will remain the main growth driver of thebusiness, we continue to explore other avenues for growth. In particular, wehave continued to expand our online store following the launch of ourtransactional website in January 2006. The range of products available onlinehas been increased to over 5,000. We saw a substantial increase in sales throughthe site in the run-up to Christmas, but our online business remains a verysmall part of the total at this stage. We will continue to invest prudently inthis new channel. Outlook Trading in the second half has started well, with sales for the 9 weeks to 3March up 10.0%, and up 4.1% on a like-for-like basis (albeit against softcomparatives). Comparatives continue to be reasonably soft for the remainder ofthe current financial year. Given current performance and market conditions, we remain confident of beingable to meet our expectations for the year as a whole. Clearly, however,confidence needs to be tempered by the risk of demand being impacted bymacro-economic factors. We continue to have a very clear focus on our customer and our offer. Puttingthis with our strong management team and a determination to grow, we continue towork towards our long-term target of 150 superstores across the UK. - 7 - Consolidated Income Statement For the 26 weeks ended 30 December 2006 Note 26 weeks ended 26 weeks ended 52 weeks ended 30 December 31 December 1 July 2006 2006 2005 £000 £000 £000 Revenue 2 178,434 157,551 315,187 Cost of sales (147,424) (129,954) (264,599)---------------- ------ ------------ ------------ ---------- Gross profit 31,010 27,597 50,588 Administrativeexpenses ongoing (7,317) (5,894) (12,438) Administrative expensesnonrecurring (re IPO andwarehousetransition) (4,015) - ----------------- ------ ------------ ------------ ----------Total administrativeexpenses (11,332) (5,894) (12,438) Other operatingincome 28 16 - ---------------- ------ ------------ ------------ ---------- EBITDA* (before nonrecurringcosts) 28,661 25,387 46,475 Non recurring costs (4,015) - - Depreciation andamortisation (4,940) (3,668) (8,325) ---------------- ------ ------------ ------------ ---------- Operating profit 19,706 21,719 38,150 Financial income 103 510 808 Financial expenses (1,947) (133) (919) ---------------- ------ ------------ ------------ ---------- Profit beforetaxation 17,862 22,096 38,039 Taxation 3 (6,108) (6,871) (11,839) ---------------- ------ ------------ ------------ ---------- Profit for theperiod 11,754 15,225 26,200---------------- ------ ------------ ------------ ---------- ---------------- ------ ------------ ------------ ---------- Earnings per ordinaryshare -basic 5 5.9 p 7.6 p 13.1 p---------------- ------ ------------ ------------ ---------- Earnings per ordinaryshare -diluted 5 5.8 p 7.6p 13.0 p---------------- ------ ------------ ------------ ---------- Dividend proposed perordinaryshare 6 0.8 p - ----------------- ------ ------------ ------------ ---------- Dividend paid perordinaryshare 6 25.0 p - 3.7p---------------- ------ ------------ ------------ ---------- All activities relate to continuing operations. All profit is attributable toequity shareholders. * Earnings before interest, tax, depreciation and amortisation. - 8 - Consolidated Balance Sheet As at 30 December 2006 30 December 31 December 1 July 2006 2005 2006 £000 £000 £000Non current assetsIntangible assets 3,893 2,130 3,665Property, plant and equipment 67,392 60,787 61,490Deferred tax asset 3,037 2,522 2,815------------------- ----------- ----------- -----------Total non current assets 74,322 65,439 67,970------------------- ----------- ----------- ----------- Current assetsInventories 66,471 50,194 56,345Trade and other receivables 11,336 8,817 10,024Cash and cash equivalents 7,551 19,769 2,964Assets held for sale 5,998 - 5,998------------------- ----------- ----------- -----------Total current assets 91,356 78,780 75,331------------------- ----------- ----------- ----------- ------------------- ----------- ----------- -----------Total assets 165,678 144,219 143,301------------------- ----------- ----------- ----------- Current liabilitiesInterest-bearing loans and borrowings (67) (309) (150)Trade and other payables (63,641) (57,748) (53,484)Provisions (36) (112) (58)------------------- ----------- ----------- -----------Total current liabilities (63,744) (58,169) (53,692)------------------- ----------- ----------- ----------- Non current liabilitiesInterest-bearing loans and borrowings (50,000) - -Deferred tax liabilities (806) (575) (543)------------------- ----------- ----------- -----------Total non current liabilities (50,806) (575) (543)------------------- ----------- ----------- ----------- ------------------- ----------- ----------- -----------Total liabilities (114,550) (58,744) (54,235)------------------- ----------- ----------- ----------- Net assets 51,128 85,475 89,066------------------- ----------- ----------- ----------- EquityIssued capital 2,006 2,000 2,000Share premium 267 - -Retained earnings 48,855 83,475 87,066------------------- ----------- ----------- -----------Total equity attributable to equityholders of the parent 51,128 85,475 89,066------------------- ----------- ----------- ----------- - 9 - Consolidated Cash Flow Statement For the 26 weeks ended 30 December 2006 26 weeks ended 26 weeks ended 52 weeks ended 30 December 31 December 1 July 2006 2005 2006 £000 £000 £000 Cash flows from operating activitiesProfit beforetaxation 17,862 22,096 38,039Adjusted for:Finance income (103) (510) (808)Finance costs 1,947 133 919Depreciationandamortisation 4,940 3,668 8,325Share basedpaymentexpense 35 15 31Loss / (profit) on disposal of property,plant andequipment (6) 17 3------------------- ----------- ----------- -----------Operating cash flows beforemovement inworkingcapital 24,675 25,419 46,509 (Increase) instocks (10,126) (5,072) (11,224)(Increase) indebtors (1,312) (1,288) (2,636)Increase increditors 8,771 5,505 2,523(Decrease) inprovisions (22) (32) (54)------------------- ----------- ----------- -----------Cash generatedfromoperations 21,986 24,532 35,118 Interest paid (141) (3) (57)Interestreceived 113 437 983Tax paid (5,497) (4,444) (11,910)------------------- ----------- ----------- -----------Net cash generated from operatingactivities 16,461 20,522 24,134------------------- ----------- ----------- ----------- Cash flows from investing activitiesProceeds on disposal of property, plantand equipment 6 6 1Acquisition of property plant andequipment (10,750) (10,759) (21,256)Acquisition ofintangibleassets (317) (1,799) (4,176)------------------- ----------- ----------- -----------Net cash utilised in investingactivities (11,061) (12,552) (25,431)------------------- ----------- ----------- ----------- Cash flows from financing activitiesProceeds fromthe issue ofshare capital 273 - -Proceeds fromnew bank loan 50,000 - -Repayment offinance leaseliabilities (83) (256) (392)(Loss)/ gainon foreignexchange (1,003) 2 -Dividends paid (50,000) - (7,400)------------------- ----------- ----------- -----------Net cash utilised in financingactivities (813) (254) (7,792)------------------- ----------- ----------- ----------- Net increase/(decrease) in cashand cashequivalents 4,587 7,716 (9,089)Cash and cash equivalents at thebeginning ofthe period 2,964 12,053 12,053------------------- ----------- ----------- -----------Cash and cash equivalents at theend of theperiod 7,551 19,769 2,964------------------- ----------- ----------- ----------- - 10 - Notes to the interim results 1 Basis of preparation Dunelm Group plc ('the Company') and its subsidiary companies ('the Group') havepreviously prepared consolidated financial statements in accordance with UKGenerally Accepted Accounting Practice ('UK GAAP'). Following admission to theLondon Stock Exchange, in common with all companies listed within the EuropeanUnion ('EU'), the Group is now required to prepare its financial statements inaccordance with International Financial Reporting Standards as adopted by the EU('Adopted IFRS'). The Group will therefore prepare consolidated financial statements for the 52weeks ending 30 June 2007 under Adopted IFRS. The interim statement for the 26weeks ended 30 December 2006 has been prepared in accordance with therecognition and measurement principles of Adopted IFRS. The Group's date oftransition to IFRS is 3 July 2005, being the start of the period which has beenpresented as comparative information. The Adopted IFRSs that will be effective in the annual financial statements forthe 52 weeks ending 30 June 2007 are still subject to change and to additionalinterpretations and therefore cannot be determined with certainty. Accordingly,the accounting policies for that period will be determined finally only when thefinancial statements are prepared for the 52 weeks ending 30 June 2007. The comparative figures for the 52 weeks ended 1 July 2006 do not constitutestatutory accounts for the purposes of section 240 of the Companies Act 1985. Acopy of the statutory accounts for the 52 weeks ended 1 July 2006, preparedunder UK GAAP, has been delivered to the Registrar of Companies and contained anunqualified auditors' report which made no statement under sections 237(2) or(3) of the Companies Act 1985. The Group has adopted IFRS 1 from 3 July 2005. IFRS 1 'First Time adoption ofIFRS' establishes the transitional requirements for the preparation of financialinformation in accordance with IFRS for the first time. The general principle isto establish accounting policies under IFRS then to apply these retrospectivelyat the date of transition to determine the opening balance sheet. IFRS 1 permitsa number of first time adoption exemptions, none of which are relevant to theGroup. An explanation of how the transition to Adopted IFRS has affected the reportedfinancial position and results is provided below, including reconciliations ofthe Group's balance sheet and consolidated income statement for the interimperiod to 31 December 2005, the 52 weeks ended 1 July 2006 and the transitionbalance sheet as at 3 July 2005. The implementation of Adopted IFRS represents an accounting change only and doesnot affect the operations or cash flows of the Group. The interim statements are prepared under the historical cost convention exceptfor share based payments and derivative financial instruments which are statedat their fair value. In addition assets classified as held for sale are valuedat the lower of net book value and fair value less costs to sell. The accounting policies that have been used in the preparation of the InterimResults are detailed below. The presentation of the interim statements requires the Directors to makejudgements, estimates and assumptions that affect the application of policiesand reported amounts of assets and liabilities, income and expenses. Theestimates and associated assumptions are based on historical experiences andvarious other factors that are believed to be reasonable under thecircumstances. Actual results may differ from these estimates. 2 Segmental reporting The Group has only one class of business, retail, and operates entirely in theUK market. - 11 - Notes to the interim results continued 3 Taxation The taxation charge for the interim period has been calculated on the basis ofthe estimated effective tax rate for the full year of 34.2%, or 31.8% excludingnon-deductible one off IPO costs of £3 million (26 weeks ended 31 December 2005:31.1% based on full year actual effective rate). The estimated underlyingeffective rate excluding IPO costs is higher than the actual rate for financialyear 2006 due to increased ineligible depreciation and a reduction in nontaxable tenant to tenant lease incentives. 4 Share Capital On 2 October 2006 the Company's share capital was sub divided from 2,000,000 £1ordinary shares in issue to 200,000,000 1p ordinary shares. Outstanding shareoptions were adjusted correspondingly. For the purpose of the interim financial statements, all calculations ofearnings per share and all dividends are expressed as if the new sharedenomination had always been in place. 5 Earnings per share Basic earnings per share is calculated by dividing the profit for the periodattributable to equity shareholders by the weighted average number of ordinaryshares in issue during the period. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all dilutive potential ordinaryshares. These represent share options granted to employees where the exerciseprice is less than the average market price of the Company's ordinary sharesduring the period. Weighted average numbers of shares: 26 weeks ended 26 weeks 52 weeks 30 December 2006 ended 31 ended 1 July December 2005 2006 000 000 000 Weighted average number ofshares in issue during theperiod 200,108 200,000 200,000 Impact of share options 2,285 1,508 1,508------------------------------ -------- -------- --------Number of shares fordiluted earnings per share 202,393 201,508 201,508 ------------------------------ -------- -------- -------- In addition to standard earnings per share, an adjusted earnings per sharecalculation is provided below which excludes non recurring costs (net of tax).The earnings used for the standard and adjusted calculations, together with theresultant basic earnings per share are shown below: - 12 - Notes to the interim results continued 26 weeks ended 26 weeks 52 weeks 30 December 2006 ended 31 ended 1 July December 2005 2006 £000 £000 £000 Profit for the period 11,754 15,225 26,200 Non recurring costs (net oftax) 3,700 - ----------------------------- -------- -------- -------- Profit for the periodexcluding one off costs 15,454 15,225 26,200---------------------------- -------- -------- -------- Basic earnings per share -standard 5.9 p 7.6p 13.1 p Basic earnings per ordinaryshare - adjusted 7.7 p 7.6p 13.1p---------------------------- -------- -------- -------- 6 Dividends On the 2 October 2006 the Group declared an interim dividend of 25p per share.This was paid on the 5 October 2006. The directors have approved a second interim dividend of 0.8p per ordinary sharewhich equates to £1.6 million. The dividend will be paid on 25 April 2007 toshareholders on the share register at the close of business on 10 April 2007. No dividend was paid during the 26 week period ended 31 December 2005. 7 Analysis of movement in reserves Share Share Retained Total capital premium earnings Equity £'000 £'000 £'000 £'000 As at 2 July 2005 2,000 - 68,235 70,235Profit for the period - - 15,225 15,225Employee share option scheme - - 15 15Dividends paid - - - - ------------------------ --------- --------- --------- ---------As at 31 December 2005 2,000 - 83,475 85,475Profit for the period - - 10,975 10,975Employee share option scheme - - 16 16Dividends paid - - (7,400) (7,400) ------------------------ --------- --------- --------- ---------As at 1 July 2006 2,000 - 87,066 89,066Profit for the period - 11,754 11,754Shares issued 6 267 - 273Employee share option scheme - - 35 35Dividends paid - - (50,000) (50,000) ------------------------ --------- --------- --------- --------- As at 30 December 2006 2,006 267 48,855 51,128------------------------ --------- --------- --------- --------- 8 Announcement The interim report was approved by the Board on 7 March 2007 and copies areavailable from the registered office at Fosse Way, Syston, Leicester, LE7 1NF orfrom the website at www.dunelm-mill.co.uk - 13 - Independent review report by KPMG Audit Plc to Dunelm Group plc Introduction We have been engaged by the company to review the financial information set outon pages 7 to 12 and we have read the other information contained in the interimreport and considered whether it contains any apparent misstatements or materialinconsistencies with the financial information. This report is made solely to the company in accordance with the terms of ourengagement to assist the company in meeting the requirements of the ListingRules of the Financial Services Authority. Our review has been undertaken sothat we might state to the company those matters we are required to state to itin this report and for no other purpose. To the fullest extent permitted by law,we do not accept or assume responsibility to anyone other than the company forour review work, for this report, or for the conclusions we have reached. Directors' responsibilities The interim report, including the financial information contained therein, isthe responsibility of and has been approved by the directors. The directors areresponsible for preparing the interim report in accordance with the ListingRules which require that the accounting policies and presentation applied to theinterim figures should be consistent with those applied in preparing thepreceding annual financial statements except where any changes, and the reasonsfor them, are disclosed. As disclosed in note 1 to the financial information, the next annual financialstatements of the Group will be prepared in accordance with IFRSs as adopted bythe European Union. The accounting policies that have been adopted in preparingthe financial information are consistent with those that the directors currentlyintend to use in the next annual financial statements. There is, however, apossibility that the directors may determine that some changes to these policiesare necessary when preparing the full annual financial statements for the firsttime in accordance with those IFRSs as adopted by the European Union. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4Review of interim financial information issued by the Auditing Practices Boardfor use in the United Kingdom. A review consists principally of making enquiriesof Group management and applying analytical procedures to the financialinformation and underlying financial data and, based thereon, assessing whetherthe accounting policies and presentation have been consistently applied unlessotherwise disclosed. A review is substantially less in scope than an auditperformed in accordance with International Standards on Auditing (UK andIreland) and therefore provides a lower level of assurance than an audit.Accordingly, we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications thatshould be made to the financial information as presented for the 26 weeks ended30 December 2006. KPMG Audit Plc Chartered Accountants 1 Waterloo Way Leicester LE1 6LP 7 March 2007 - 14 - Transition to International Financial reporting Standards Introduction The interim results have been prepared in accordance with the accountingpolicies below. Following is an explanation of the differences between UK GAAP and IFRS for theGroup and contain reconciliations of the Group's balance sheet and consolidatedincome statement for the 26 week period ended 31 December 2005, the financialstatements for the 52 week period ended 2 July 2006 and opening balance sheet at3 July 2005 (the Group's date of transition). Explanations of Significant Differences between UK GAAP and IFRS Which Affectthe Group The most significant changes in the Group's accounting policies and presentationas a result of the adoption of IFRS are set out below: 1 Leases (IAS 17) Under UK GAAP, operating lease incentives (principally premiums received andrent free periods) were recognised in the profit and loss account over theperiod to the first rent review. In accordance with IAS 17, lease incentiveswill now be recognised in the income statement over the shorter of the full termof the lease and the first break clause that is controlled by the company. As aresult there will be a reduction in reported profits and an increase inliabilities (deferred income). Where leases for land and buildings provide for fixed rent review dates andamounts, the Group accounts for such reviews by recognising, on a straight linebasis, the total implicit minimum lease payments over the non cancellable periodof the lease term. 2 Share based payments (IFRS 2) Under IFRS 2, the charge recognised in the income statement for share options,long term incentive plans and other share based payments will be based on the'fair value' of the awards, calculated using an option pricing model. Thiscontrasts to UK GAAP, where the charge recognised was based on the 'intrinsicvalue' of awards, being the difference between the market value of the shares atthe date of the award and the option exercise price. Since this was typicallynil the UK GAAP charge was nil. The Group has applied the fair value model to all grants of equity instrumentsthat had not vested as at 3 July 2005. For equity-settled share based payments, the fair value determined at the dateof grant is expensed through the income statement on a straight line basis overthe vesting period, based on the Group's estimate of the number of shares thatwill eventually vest. Fair value is measured by use of a binomial model. 3 Cash flow statements (IAS 7) Under Adopted IFRS, cash flows are classified by three types of activity;operating, investing and financing. Cash includes cash equivalents but this hasnot had an impact on the Group's reported results. These headings are differentto those used under UK GAAP and there are therefore reclassifications within thecash flow statement. 4 Financial instruments, recognition and measurement (IAS 39) Under Adopted IFRS foreign exchange forward contracts are recognised at theirinitial fair value and subsequently re-measured to fair value at future balancesheet dates. Changes in fair value are taken to the income statement in theperiod in which they arise. This differs to UK GAAP where no values wereattributed to the contracts. Therefore under Adopted IFRS where an asset isrecognised, profit will be increased and where a liability is recognised profitwill be reduced. - 15 - 5 Income tax (IAS 12) IAS 12 takes a balance sheet approach to deferred tax whereby deferred tax isrecognised in the balance sheet by applying the appropriate tax rate to thetemporary differences arising between the carrying value of assets andliabilities and their tax base. This contrasts to UK GAAP (FRS 19), whichconsiders timing differences arising in the profit and loss account. Adjustmentsmade to the financial statements on the transition to Adopted IFRS typicallyresult in related adjustments to deferred tax, particularly with regard to leaseincentives. 6 Foreign exchange disclosures Presentation adjustments have been made for foreign exchange gains and losseswhich were previously recognised in cost of sales under UK GAAP but which may beclassified as financial income / expenses under Adopted IFRS. - 16 - IFRS Accounting Policies The following notes detail the accounting policies that the Group has applied toits interim financial results for the period ended 30 December 2006. The Accounting Standards adopted by the European Union (EU) that will beeffective in the annual financial statements for the year ending 30 June 2007are still subject to change and additional interpretation and therefore cannotbe determined with certainty. Accordingly, the accounting policies for thisaccounting period will be determined finally only when the annual financialstatements are prepared for the year ending 30 June 2007. Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when theCompany has the power, directly or indirectly, to govern the financial andoperating policies of an entity so as to obtain benefits from its activities. Inassessing control, potential voting rights that presently are exercisable orconvertible are taken into account. The financial statements of subsidiaries areincluded in the consolidated financial statements from the date that controlcommences until the date that control ceases. Transactions eliminated on consolidation Intragroup balances, and any unrealised gains and losses or income and expensesarising from intragroup transactions, are eliminated in preparing theconsolidated financial statements. Revenue Revenue represents the proceeds from sales of goods and related services. Itexcludes sales between Group companies and is after deducting returns, discountsgiven and VAT. For the majority of sales, revenue is recognised at the point ofsale with the exception of custom made products, where revenue is recognised atthe point that the goods are collected, and gift vouchers, where revenue isrecognised when the vouchers are redeemed. Foreign currencies Transactions in foreign currencies are recorded at the prevailing rate at thedate of the transaction. Monetary assets and liabilities denominated in foreigncurrency are translated at the rates ruling at the balance sheet date. Resultingexchange gains or losses are recognised in the income statement for the period. Derivative financial instruments Derivative financial instruments comprise forward contracts for foreigncurrencies. They are recognised at fair value. The gain or loss onre-measurement to fair value is recognised immediately in the income statement. Where a derivative financial instrument is used to hedge economically theforeign exchange exposure of a recognised monetary asset or liability, no hedgeaccounting is applied. Intangible assets These comprise software development and implementation costs, and are writtenoff over three years from date of implementation. - 17 - IFRS Accounting Policies continued Property, plant and equipment Owned assets Items of property, plant and equipment are stated at cost less accumulateddepreciation (see below) and impairment losses. Where parts of an item of property, plant and equipment have different usefullives, they are accounted for as separate items of property, plant andequipment. Leased assets Leases in which the Group assumes substantially all the risks and rewards ofownership of the leased asset are classified as finance leases. Lease paymentsare accounted for as described below. Depreciation Depreciation is charged to the income statement on a straight-line basis overthe estimated useful lives of each part of an item of property, plant andequipment. Land is not depreciated. The estimated useful lives are as follows: • computer equipment 3 years • freehold buildings 50 years • fixtures and fittings 4 years • motor vehicles 4 years • office equipment 5 years • plant and machinery 5 years • leasehold improvements over the period of the lease The residual value, if significant, is reassessed annually. Current assets Trade and other receivables Trade and other receivables are stated net of impairment provisions. Inventories Inventories are stated at the lower of cost and net realisable value. Cost isbased on the first-in first-out principle and includes expenditure incurred inacquiring the inventories and bringing them into the business. Net realisablevalue is the estimated selling price in the ordinary course of business. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bankoverdrafts that are repayable on demand and form an integral part of the Group'scash management are included as a component of cash and cash equivalents for thepurpose of the statement of cash flows. - 18 - IFRS Accounting Policies continued Assets classified as held for sale A non-current asset is classified as held for sale if its carrying amount willbe recovered principally through sale rather than through continuing use, it isavailable for immediate sale and sale is highly probable within one year. Assets held for sale are valued at the lower of net book value and fair valuenet of costs to sell. Borrowings and borrowing costs All loans and borrowings are recognised at fair value. Borrowings are classed as current liabilities unless the Group has anunconditional right to defer settlement of the liability for at least twelvemonths from the balance sheet date. Impairment The carrying amounts of the Group's assets, other than inventories and deferredtax assets, are reviewed at each balance sheet date to determine whether thereis any indication of impairment. If any such indication exists, the asset'srecoverable amount is estimated. The recoverable amount is the greater of net selling price and value in use.In assessing value in use, the estimated future cash flows are discounted totheir present value using a pre-tax discount rate that reflects current marketassessments of the time value of money and the risks specific to the asset. Foran asset that does not generate largely independent cash inflows, therecoverable amount is determined for the cash-generating unit to which the assetbelongs. An impairment loss is recognised whenever the carrying amount of an asset or itscash-generating unit exceeds its recoverable amount. Impairment losses arerecognised in the income statement. Provisions A provision is recognised in the balance sheet when the Group has a presentlegal or constructive obligation as a result of a past event, and it is probablethat an outflow of economic benefits will be required to settle the obligation.A provision for onerous contracts is recognised when the expected benefit to bederived by the Group from a contract is lower than the unavoidable costs ofmeeting its obligations under the contract. Expenses Property leases Lease incentives received are recognised in the income statement evenly over theshorter of the full term of the lease and the first break clause that iscontrolled by the Group. Where leases for land and buildings provide for fixed rent review dates andamounts, the Group accounts for such reviews by recognising, on a straight linebasis, the total implicit minimum lease payments over the non-cancellable periodof the lease term. Finance leases Minimum lease payments are apportioned between the finance charge and thereduction of the outstanding liability. The finance charge is allocated to eachperiod during the lease term so as to produce a constant periodic rate ofinterest on the remaining balance of the liability. Financing income/ expense Financing income/expense comprises interest payable on borrowings calculatedusing the effective interest rate method, interest receivable on funds invested,foreign exchange gains and losses and gains and losses on forward exchangecontracts. - 19 - IFRS Accounting Policies continued Retirement benefits The Group operates a defined contribution pension plan using a third partyprovider. Obligations for the contributions to this plan are recognised as anexpense in the income statement as incurred. Share-based payment transactions The Group operates an employee share save scheme open to all employees with over6 months service, enabling them to save money which may be used after threeyears to acquire shares in the company at a predetermined price. The Group also operates two other share option schemes enabling certainemployees to acquire shares of the Company. The fair value of options granted is recognised as an employee expense with acorresponding increase in equity. Fair value is measured at grant date andspread over the period during which the employees become unconditionallyentitled to the options. Fair value has been measured using the binomial model,taking into account the terms and conditions upon which the options weregranted. Dividends Dividends are recognised as a liability in the period in which they areapproved. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Taxis recognised in the income statement except to the extent that it relates toitems recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year,using tax rates enacted or substantively enacted at the balance sheet date, andany adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing fortemporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that it is probable thatfuture taxable profits will be available against which the asset can beutilised. Deferred tax assets are reduced to the extent that it is no longerprobable that the related tax benefit will be realised. - 20 - Restatement of financial information to IFRS Consolidated income statement For the 52 weeks ended 1 July 2006 As previously Fixed rent Property lease Forward Share based Foreign IFRS reported under reviews incentives exchange payments Exchange UK GAAP contracts £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 315,187 - - - - 315,187Cost of sales (263,543) (170) (694) - - (192) (264,599)----------- --------- ------ ------- ------- ------- ------- --------Gross profit 51,644 (170) (694) - - (192) 50,588 Administrative (12,407) - - - (31) - (12,438)expensesOther operating - - - - - - -income --------- ------ ------- ------- ------- ------- ------------------- Operating 39,237 (170) (694) - (31) (192) 38,150profitFinancial 790 - - (174) - 192 808incomeFinancial (57) - - (862) - - (919)expenses --------- ------ ------- ------- ------- ------- -------------------Profit before 39,970 (170) (694) (1,036) (31) - 38,039taxTaxation (12,411) 51 209 312 - - (11,839)----------- --------- ------ ------- ------- ------- ------- --------Profit for the 27,559 (119) (485) (724) (31) - 26,200period --------- ------ ------- ------- ------- ------- ------------------- - 21 - Consolidated balance sheet As at 1 July 2006 As previously Fixed rent Property lease Forward Share based Other IFRS reported under reviews incentives exchange payments UK GAAP contracts £'000 £'000 £'000 £'000 £'000 £'000 £'000Non currentassetsIntangible 3,665 - - - - - 3,665assetsProperty, plantandequipment 61,490 - - - - - 61,490Deferred tax - 199 2,378 259 - (21) 2,815-------------- -------- ------ -------- -------- -------- ------ -------Total noncurrent 65,155 199 2,378 259 - (21) 67,970assets -------- ------ -------- -------- -------- ------ --------------------- Current assetsInventories 56,345 - - - - - 56,345Trade and otherreceivables 10,024 - - - - - 10,024Cash and cashequivalents 2,964 - - - - - 2,964Assets held for 5,998 - - - - - 5,998sale -------- ------ -------- -------- -------- ------ ---------------------Total current 75,331 - - - - - 75,331assets -------- ------ -------- -------- -------- ------ --------------------- -------------- -------- ------ -------- -------- -------- ------ -------Total assets 140,486 199 2,378 259 - (21) 143,301-------------- -------- ------ -------- -------- -------- ------ ------- CurrentliabilitiesInterestbearing loansandborrowings (150) - - - - - (150)Trade and otherpayables (44,035) (662) (7,925) (862) - - (53,484)Provisions (58) - - - - - (58)-------------- -------- ------ -------- -------- -------- ------ -------Total currentliabilities (44,243) (662) (7,925) (862) - - (53,692)-------------- -------- ------ -------- -------- -------- ------ ------- Non currentliabilitiesInterestbearing loansandborrowings - - - - - - -Deferred taxliabilities (543) - - - - - (543)-------------- -------- ------ -------- -------- -------- ------ -------Total noncurrent (543) - - - - - (543)liabilities -------- ------ -------- -------- -------- ------ --------------------- -------------- -------- ------ -------- -------- -------- ------ -------Total (44,786) (662) (7,925) (862) - - (54,235)liabilities -------- ------ -------- -------- -------- ------ --------------------- -------------- -------- ------ -------- -------- -------- ------ -------Net assets 95,700 (463) (5,547) (603) - (21) 89,066-------------- -------- ------ -------- -------- -------- ------ ------- EquityIssued capital 2,000 - - - - - 2,000Retained 93,700 (463) (5,547) (603) - (21) 87,066earnings -------- ------ -------- -------- -------- ------ ---------------------Total equityattributableto equityholders of theparent 95,700 (463) (5,547) (603) - (21) 89,066-------------- -------- ------ -------- -------- -------- ------ ------- - 22 - Consolidated income statement For the 26 week period ended 31 December 2005 UK GAAP Fixed rent Property Forward Share based Foreign IFRS reviews lease exchange payments Exchange incentives contracts £'000 £'000 £'000 £'000 £'000 £'000 £'000 Revenue 157,551 - - - - - 157,551 Cost of sales (129,534) (95) (396) - - 71 (129,954) ------------ ------- ------ ------- ------- ------- ------- --------Gross profit 28,017 (95) (396) - - 71 27,597 Administrativeexpenses (5,792) - - - (15) (87) (5,894) Otheroperatingincome - - - - - 16 16 ------------ ------- ------ ------- ------- ------- ------- -------- Operating 22,225 (95) (396) - (15) - 21,719profit Financial 436 - - 74 - - 510income Financial (26) - - (107) - - (133)expenses ------- ------ ------- ------- ------- ------- -------------------- Profit before 22,635 (95) (396) (33) (15) - 22,096tax Taxation (7,028) 28 119 10 - - (6,871) ------------ ------- ------ ------- ------- ------- ------- -------- Profit for the 15,607 (67) (277) (23) (15) - 15,225period ------- ------ ------- ------- ------- ------- -------------------- - 23 - Consolidated balance sheet As at 31 December 2005 UK GAAP Fixed rent Property lease Forward Share based Other IFRS reviews incentives exchange payments contracts £'000 £'000 £'000 £'000 £'000 £'000 £'000Non currentassetsIntangible 2,130 - - - - - 2,130assetsProperty, plantandequipment 60,787 - - - - - 60,787Deferred tax - 176 2,289 (42) - 99 2,522--------------- ------- ------- -------- -------- -------- ------ -------Total noncurrent 62,917 176 2,289 (42) - 99 65,439assets ------- ------- -------- -------- -------- ------ ---------------------- Current assetsInventories 50,194 - - - - - 50,194Trade and otherreceivables 8,676 - - 141 - - 8,817Cash and cashequivalents 19,769 - - - - - 19,769Assets held for - - - - - - -sale ------- ------- -------- -------- -------- ------ ----------------------Total current 78,639 - - 141 - - 78,780assets ------- ------- -------- -------- -------- ------ ---------------------- --------------- ------- ------- -------- -------- -------- ------ -------Total assets 141,556 176 2,289 99 - 99 144,219--------------- ------- ------- -------- -------- -------- ------ ------- CurrentliabilitiesInterest bearingloans andborrowings (309) - - - - - (309)Trade and otherpayables (49,529) (587) (7,632) - - - (57,748)Provisions (112) - - - - - (112)--------------- ------- ------- -------- -------- -------- ------ -------Total currentliabilities (49,950) (587) (7,632) - - - (58,169)--------------- ------- ------- -------- -------- -------- ------ ------- Non currentliabilitiesInterest bearingloans andborrowings - - - - - - -Deferred taxliabilities (455) - - - - (120) (575)--------------- ------- ------- -------- -------- -------- ------ -------Total noncurrent (455) - - - - (120) (575)liabilities ------- ------- -------- -------- -------- ------ ---------------------- --------------- ------- ------- -------- -------- -------- ------ -------Total (50,405) (587) (7,632) - - (120) (58,744)liabilities ------- ------- -------- -------- -------- ------ ---------------------- Net assets 91,151 (411) (5,343) 99 - (21) 85,475--------------- ------- ------- -------- -------- -------- ------ ------- EquityIssued capital 2,000 - - - - - 2,000Retained 89,151 (411) (5,343) 99 - (21) 83,475earnings ------- ------- -------- -------- -------- ------ ----------------------Total equityattributable toequity holdersof theparent 91,151 (411) (5,343) 99 - (21) 85,475--------------- ------- ------- -------- -------- -------- ------ ------- - 24 - Consolidated balance sheet As at 3 July 2005 As previously Fixed rent Property lease Forward Share based Other IFRS reported under reviews incentives exchange payments UK GAAP contracts £'000 £'000 £'000 £'000 £'000 £'000 £'000Non currentassetsIntangible - - - - - - -assetsProperty, plantandequipment 54,050 - - - - - 54,050Deferred tax - 148 2,171 (53) - - 2,266-------------- --------- -------- -------- -------- -------- ------ -------Total noncurrent assets 54,050 148 2,171 (53) - - 56,316 -------------- --------- -------- -------- -------- -------- ------ ------- Current assetsInventories 45,121 - - - - - 45,121Trade and otherreceivables 7,388 - - 175 - - 7,563Cash and cashequivalents 12,053 - - - - - 12,053Assets held for - - - - - - -sale --------- -------- -------- -------- -------- ------ ---------------------Total currentassets 64,562 - - 175 - - 64,737-------------- --------- -------- -------- -------- -------- ------ ------- -------------- --------- -------- -------- -------- -------- ------ -------Total assets 118,612 148 2,171 122 - - 121,053-------------- --------- -------- -------- -------- -------- ------ ------- CurrentliabilitiesInterestbearing loansandborrowings (469) - - - - - (469)Trade andother payables (42,019) (492) (7,234) - - - (49,745)Provisions (144) - - - - - (144)-------------- --------- -------- -------- -------- -------- ------ -------Total currentliabilities (42,632) (492) (7,234) - - - (50,358)-------------- --------- -------- -------- -------- -------- ------ ------- Non currentliabilitiesInterestbearing loansandborrowings (73) - - - - - (73)Deferred taxliabilities (366) - - - - (21) (387)-------------- --------- -------- -------- -------- -------- ------ -------Total noncurrentliabilities (439) - - - - (21) (460)-------------- --------- -------- -------- -------- -------- ------ ------- Totalliabilities (43,071) (492) (7,234) - - (21) (50,818) -------------- --------- -------- -------- -------- -------- ------ -------Net assets 75,541 (344) (5,063) 122 - (21) 70,235-------------- --------- -------- -------- -------- -------- ------ ------- EquityIssued capital 2,000 - - - - 2,000Retainedearnings 73,541 (344) (5,063) 122 - (21) 68,235-------------- --------- -------- -------- -------- -------- ------ -------Total equityattributableto equityholders of theparent 75,541 (344) (5,063) 122 - (21) 70,235-------------- --------- -------- -------- -------- -------- ------ ------- - 25 - Group statement of recognised income and expense 52 weeks ended 26 weeks ended 1 July 2006 31 December 2005 £'000 £'000 Share based payments 31 15 --------------------- ------------------- ----------------Net income recognised directly inreserves 31 15 Profit for the financial period 26,200 15,225 --------------------- ------------------- ----------------Total recognised income and expensefor the period 26,231 15,240--------------------- ------------------- ---------------- Analysis of movement in reserves Share capital Retained Total equity earnings £'000 £'000 £'000As at 3 July 2005 (UK GAAP) 2,000 73,541 75,541Rent reviews - (492) (492) Lease incentives - (7,234) (7,234) Forward contracts - 175 175 Share based payments - - - Tax - 2,245 2,245 ------------------- ------------ ------------- --------------As at 3 July 2005 restated(IFRS) 2,000 68,235 70,235 Profit for the period - 15,225 15,225 Employee benefits - 15 15 Equity dividend - - - ------------------- ------------ ------------- --------------As at 31 December 2005 2,000 83,475 85,475 Profit for the period - 10,975 10,975 Employee benefits - 16 16 Equity dividend - (7,400) (7,400) ------------------- ------------ ------------- --------------As at 1 July 2006 2,000 87,066 89,066------------------- ------------ ------------- -------------- This information is provided by RNS The company news service from the London Stock Exchange