We are now well placed for future profitable growth in a multichannel world. Our strategy will bring continuous improvement online and in stores

Introduction

Dunelm has grown to become the market leader in homewares in the UK. It has a network of 169 superstores selling a broad product range (with most lines being unique to Dunelm) offering outstanding value and choice. Our strategy in recent years has been to build on these strengths by growing our online participation, evolving towards a truly multichannel business. This strategy has necessitated large investments in our systems and in our supply chain logistics, and the acquisition of Worldstores in November 2016 accelerated this transition.

The year under review was complicated by a combination of management changes, the integration of Worldstores and a fragile economic environment. However, the appointment of our new CEO, Nick Wilkinson, in February brought cohesion and impetus to our strategic thinking and as a Board we are pleased with the immediate progress he has achieved. The Worldstores integration is virtually complete and the acquired unit will in future no longer be reported separately, as all the continuing sales are transferred to the Dunelm.com site, which will incorporate key elements of the Worldstores systems. As a result, our fast-growing online business will become better established and will be our primary focus for future growth.

Dunelm has made significant strategic progress in the last few years and I am confident that under Nick's leadership we will turn our strategic plans into substantial value creation.

We are proud of Dunelm's strong culture and amazing colleagues. I would like to thank them all for their hard work and commitment. Although our business is becoming more digital, the human touch from all our colleagues is as important to our success as always.

Performance

Against the backdrop of challenging and volatile market conditions, over the last financial year we grew our total sales by 9.9% to £1,050.1m, with positive like-for-like sales performance of 4.2%. We have continued to win homewares market share and strengthen our leadership position. Our store like-for-like sales increased by 1.0%, while like-for-like online sales were up 37.9%, reflecting our increasing focus on this channel as customer shopping behaviour continues to shift. We opened ten new superstores in the year (including one relocation) taking our network to 169 superstores, and we still see opportunity to grow our national store network in a measured way.

Profit before tax and exceptional items fell by 6.7% to £102.0m, reflecting a full year of trading losses reported in respect of Worldstores, a small reduction in our core business gross margin, and increased operating costs due in part to the higher mix of online sales. As a result of new store openings, refits and investment in our digital technology infrastructure, we maintained a relatively high level of capital investment of £44.0m (FY17: £60.5m). Profits after tax and exceptional items were in line year-on-year at £73.3m (2017: £73.1m).

Our balance sheet remains strong with limited leverage (net debt:EBITDA before exceptional items of 0.89x at year-end) and cash generation remains a key feature of our business model with free cash flow of £52.9m in the year (FY17: £14.2m).

Dividends

The Board has recommended maintaining the final dividend at 19.5 pence per share, bringing the total dividend for the full year to 26.5 pence per share, an increase of 1.9% on the previous year. While dividend cover before exceptional items of 1.5x remains below our target range, it reflects both the non-recurring costs associated with the Worldstores acquisition and integration, and our confidence in Dunelm's future growth prospects.

Board changes

Nick Wilkinson has made a strong start as CEO and is already bringing fresh energy to our wider leadership team.

Laura Carr will join as CFO on 29 November and will bring valuable retail and commercial experience having been CFO of Indigo in Canada and most recently Group Financial Controller of Compass Group plc. In the meantime, we have been fortunate to have David Stead return as Interim CFO following the departure of Keith Down in May. David was previously our CFO from 2003 to 2016 and I would like to thank him for returning to smooth the CFO transition.

As previously advised, Simon Emeny, our Senior Independent Director, stepped down at our AGM in November 2017 after ten years' service. Liz Doherty, who chairs our Audit & Risk Committee, has succeeded Simon as Senior Independent Director.

In March, we appointed Rachel Osborne as a Non-Executive Director to gain the benefit of her experience as CFO in a variety of consumer facing businesses. Unfortunately, Rachel subsequently changed her executive role which created a competitive conflict and she stood down from the Board in August. We have initiated a search for Rachel's replacement and will update on progress in due course.

The future

Our mission at Dunelm is to help everyone create a home they love. Notwithstanding a difficult retail environment, after a challenging period of change and investment we are now well placed for future profitable growth in a multichannel world. Our strategy will bring continuous improvement in our proposition both online and in stores, based around our broad range of great value and stylish products, our well invested infrastructure, our right-sized estate, and the committed colleagues who live and breathe our business principles every day.

I look forward to working with Nick and the rest of the Board to capitalise on the exciting opportunities ahead.

Andy Harrison Chairman

12 September 2018