Company Announcements

 

12 February 2020

Dunelm Group plc

 

Interim Results for the 26 weeks ended 28 December 2019

 

Delivering further growth and strategic progress with new digital capabilities

 

Dunelm Group plc ("Dunelm"), the UK's leading homewares retailer, today announces its interim results for the 26 weeks to 28 December 2019.

 

	FY20 H1 Pre IFRS 16	Impact of IFRS 16	FY20 H1     Reported	FY19 H11     Reported	Year on year change   Reported
Revenue	£585.0m	-	£585.0m	£551.8m	+6.0%
Gross margin2	51.5%	-	51.5%	50.3%	+120bps
Profit before taxation	£84.9m	(£1.3m)	£83.6m	£70.0m	+19.4%
Free cash flow3	£64.4m	-	£64.4m	£91.2m	(29.4%)
Net debt (excl. IFRS 16 lease liabilities)4	(£67.7m)	-	(£67.7m)	(£72.9m)	+7.1%
Basic EPS	34.0p	(0.5p)	33.5p	27.6p	+21.4%
Diluted EPS	33.7p	(0.5p)	33.2p	27.5p	+20.7%
Interim dividend	8.0p	-	8.0p	7.5p	+6.7%

Highlights

 

·      Total like for like (LFL) revenue growth of 5.6%, against a strong comparative period (FY19 H1: 7.8%)

·      Successful launch of the new digital platform enabling a new phase of growth for Dunelm

·      Store sales continue to grow across most product categories, driven by positive footfall, tablet-based selling and Click & Collect

·      Growth in total unique active customers⁵ of 8.8% underpinned by improved brand awareness and consideration

·      Gross margin improvement of 120bps mainly due to sourcing gains and fewer markdowns

·      Profit before taxation (PBT)⁶ of £83.6m, up 19.4% year on year or 21.3% on a pre-IFRS 16 basis (FY19: £70.0m)

·      Strong free cash flow of £64.4m, despite paying £20m additional corporation tax (mainly due to regulatory timing changes)

·      Net debt (excluding IFRS 16 lease liabilities) of £67.7m (FY19: £72.9m) after paying a special dividend of £64.6m in October 2019

·      Interim dividend increased by 6.7% to 8.0 pence per share (FY19: 7.5p)

  ¹  FY19 financials prepared on an IAS 17 basis

  ² Gross margin is calculated as gross profit divided by revenue

  ³ Free cash flow is defined as net cash generated from operating activities less net cash used in investing activities and repayment of, and interest on, lease liabilities

  ⁴ Net debt (excluding IFRS 16 lease liabilities) is defined as cash and cash equivalents less total borrowings net of unamortised issue costs. For consistency, and because the underlying liabilities of the business have not changed, IFRS 16 lease liabilities are not included

  ⁵ Unique active customers who have shopped in the last 12 months, based on management estimates using Barclays data

  ⁶ FY20 PBT is shown on an IFRS 16 basis, which has been adopted for the first time this year

 

Nick Wilkinson, Chief Executive Officer, commented:

 

"We have made good progress over the first half, following a strong performance last year, which is reflected in the significant growth delivered in both sales and profits.

 

"We continue to build strong foundations for future growth. The successful launch of our digital platform accelerates our ability to innovate our customer proposition and we remain focused on operational improvements across all areas of the business.

 

"We also continue to broaden our customer base and following the successful sponsorship of ITV's This Morning, which concludes in March, we are excited about our new sponsorship deal with Channel 4's First Dates programme, starting later this week, which will enable us to reach more customers with the Dunelm brand.  

 

"The third quarter has started well, with a successful Winter Sale across the total retail system. As a result, we expect full year FY20 profit before tax to be slightly ahead of the top of the latest range of analyst expectations⁷. We are monitoring the Coronavirus outbreak carefully.  To date we have not assumed any material disruption to our supply chain or any financial impact in the year.

 

"We have plenty to look forward to over the remainder of the year as we strengthen the Dunelm offer and help more customers to create the home they love."

 

⁷ Management understand that updated FY20 PBT analyst estimates are in the range of £135.0m to £137.3m (adjusted for IFRS 16 where appropriate)

 

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 Ailsa Prestige at MHP Communications on ailsa.prestige@mhpc.com. The next scheduled event is the third quarter trading update on 8 April 2020.

 

For further information please contact:

 

Dunelm Group plc	0116 264 4439
Nick Wilkinson, Chief Executive Officer Laura Carr, Chief Financial Officer
MHP Communications (including photography requests)	020 3128 8789
Simon Hockridge / Rachel Mann / Pete Lambie	dunelm@mhpc.com

 

Notes

 

1.     Quarterly sales and margin analysis (Q1 FY19 included Worldstores businesses in the total Group):

 

	52 weeks to 27 June 2020
	Q1	Q2	H1	Q3	Q4	H2	FY
Total sales	£262.6m	£322.4m	£585.0m
LFL Stores growth	2.9%	1.2%	2.0%
LFL Online growth	34.7%	32.1%	33.2%
Total LFL growth	6.4%	5.0%	5.6%
Total Dunelm growth	7.5%	6.1%	6.7%
Total Group growth	5.8%	6.2%	6.0%
Gross margin growth	+130bps	+110bps	+120bps

 

	52 weeks to 29 June 2019
	Q1	Q2	H1	Q3	Q4	H2	FY
Total sales	£248.2m	£303.6m	£551.8m	£284.5m	£264.1m	£548.6m	£1,100.4m
LFL Stores growth	1.3%	7.8%	4.8%	9.8%	12.1%	10.9%	7.7%
LFL Online growth	33.3%	37.7%	35.8%	32.1%	37.0%	34.6%	35.1%
Total LFL growth	4.2%	10.8%	7.8%	12.5%	15.4%	13.9%	10.7%
Total Dunelm growth	7.5%	9.6%	8.7%	12.4%	16.6%	14.4%	11.5%
Total Group growth	0.1%	2.0%	1.2%	6.1%	11.6%	8.7%	4.8%
Gross margin growth	+130bps	+190bps	+160bps	+90bps	+240bps	+160bps	+160bps

 

 

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.

 

Dunelm is market leader in the £13bn UK homewares market and active in the £11bn UK furniture market. It currently operates 171 superstores, of which the majority are out of town and trades online through dunelm.com. Dunelm employs approximately 10,000 colleagues and sells around 30,000 product lines in store, increasing to around 55,000 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 £2.4bn.

 

CHAIRMAN'S STATEMENT

 

Dunelm has performed well in the first half, growing sales and winning market share in a soft homewares market, impacted by political and economic uncertainty. Our strong customer offer, improved operational execution and successful investments in both our brand and digital platform have all helped to drive sales and support margins.

 

In the first half we grew sales by 6.0%, increased gross margins, grew pre-tax profits by 19.4% and delivered strong operating cash flows, whilst continuing to invest in the business.

 

This strong performance reflects the hard work and commitment of all of our Dunelm colleagues, and I would like to thank them for their dedication to the company.  We shall continue to invest in our people, which has helped to increase colleague engagement and support our commitment to make Dunelm a great place to work.

 

The Board has declared an interim dividend of 8.0 pence per share, an increase of 0.5 pence (6.7%) on the previous year.

 

We are excited by the significant opportunities ahead for Dunelm. We remain determined to create significant value for all our stakeholders and to play a positive role in the communities within which we live and work.

 

Andy Harrison
Chairman
12 February 2020

 

CHIEF EXECUTIVE OFFICER'S REVIEW

 

I am pleased with our progress in the first half of FY20 where we have reported strong sales and profit growth on top of significant growth last year. The launch of the new digital platform represents a key milestone in Dunelm's journey towards being a more digital business, enhancing our ability to help everyone create a home they love.

 

Performance

 

We achieved good revenue growth in the first half with total like for like (LFL) sales of 5.6% (FY19 H1: 7.8%).  Total growth was 6.0% (FY19 H1: 1.2%) representing the benefit of new stores in the current year and reflecting the closure of the Worldstores businesses in FY19. Growth was seen across most product categories, including furniture sales which increased by 42%.

 

Our customers continue to embrace digital retailing. Total multichannel revenues, including online home delivery, Reserve & Collect, Click & Collect and tablet-based sales made in store, now represents 19.2% of the total, up from 15.7% last year.

 

Our internal analysis, based on external data, shows that we are continuing to win both homewares and furniture market share.  Following 18 months of growth, the homewares market⁸ declined by 1.4% in the first half of the year. Dunelm's growth in the period was +2.3%, suggesting an outperformance of the market by around 3.7% points.

 

Gross margin improved by 120bps mainly due to our sourcing efforts to mitigate currency headwinds and other cost price inflation.  We made fewer product markdowns this half compared to the prior year and we did not participate in Black Friday or other additional pre-Christmas discounting.

 

Profit before taxation (PBT) was £83.6m after taking into account the new accounting standard IFRS 16 'Leases'.  The impact of adopting the new standard was to reduce PBT by £1.3m in this period.  PBT was up 19.4% compared to the prior year (FY19 H1: £70.0m on an IAS 17 basis).

 

What we have done

 

Launched our new digital platform 

We transferred 100% of our customers to our new proprietary digital platform in October 2019 and were delighted with the lack of disruption during the critical switchover phase.  As our digital customer proposition improved, we delivered 33.2% online sales growth in the first half of the year (FY19 H1: 35.8%).

 

Since launch, our customers have benefited from increased speed (notably the mobile experience is twice as fast), enhanced search capabilities, and an improved checkout experience including a named/nominated delivery date and the ability to checkout a 'mixed' basket (home delivery and a Click & Collect order).  We hosted more customers on the site over the peak Christmas period than capacity on the previous system would have permitted.  At one point we had more than 70% more concurrent users than during last year's peak.

 

Our customers can now 'Click & Collect' (C&C) their store purchases through the website.  This has replaced our previous option of 'Reserve & Collect' (R&C).  Whilst it is early days to comment on the differing trends between R&C and C&C, we are very pleased with how our customers and store colleagues have embraced the change. Store conversion has improved post C&C launch, with collecting customers often choosing to purchase additional items. C&C also drives store efficiency, as a significant proportion of goods that were previously reserved under R&C, were not actually picked up by customers.

 

Beyond the immediate improvements to the customer experience from the new platform, we are even more excited by the digital opportunities ahead of us. We have built a modern, flexible and cloud-native platform which will allow us to step change our retail innovation capabilities going forward.  The proprietary new platform was built by our internal engineering team, which we have been building and developing since the acquisition of Worldstores in November 2016.

 

We have transformed both our digital team capabilities and our technology architecture.  We implemented a new organisational model to introduce agile ways of working.  We expanded our internal digital engineering team and invested in people to transform our culture. Our technology architecture has also been transformed by using single page applications, language-independent microservices, channel agnostic shared services and serverless architecture (based on Amazon Web Services).

 

⁸ Homewares market calculated using GFK data and management estimates

 

Extended product choice and value

We have continued to grow our capability and confidence in product development and sourcing. As a result, we are improving quality, style and value across all of our core categories. Our regular ranges offer choice at good, better and best price points, and we have continued to re-balance our ranges to offer more choice at lower price points. For example, in bathroom textiles the proportion of sales at 'good' price points increased significantly vs last year.

 

Meanwhile, in living, dining and bedroom furniture, choice is growing. Our ten best-selling furniture collections now have an average of 16 items per collection and are all exclusive to Dunelm; nine out of ten of those collections have been introduced in the last three years. We have continued to supplement our regular ranges with a promotional buy programme and seasonal campaigns. Our Christmas seasonal campaign this year was our best ever, with more exclusive products, more sustainable choices for customers, and more designed in house.

 

Broadened and deepened our customer base

Unique active customers have grown by 8.8% over the last 12 months, showing that our integrated marketing campaigns across media, digital and social are continuing to have an impact.  

 

Our year-long sponsorship of ITV's This Morning ends in March. We estimate that in a year, individual viewers will have had the opportunity to see our adverts more than 120 times. Our research suggests that this partnership has both supported and improved our brand image metrics and has reinforced the perception that Dunelm is modern, inspirational and good value. Brand metrics for quality, style, value and trust have all improved.

 

Our Home of Homes campaign continued with three more real customer families inviting us into their homes to talk about what they love about Dunelm. Brand awareness increased, and at 85.2%, is at an all-time high.  Consideration scores have also improved and are up 240bps on this time last year. Our social followers have also increased with significant growth on Instagram during the first half, whilst maintaining the same level of engagement from our followers.

 

What we will do next

 

As customer needs evolve, and technology opens up new ways of serving customers, the characteristics of what it is to be 'a good retailer' are constantly changing. We are in a new phase for Dunelm, where our well-established physical store experience is being enhanced and extended by modern digital capabilities. Our Customer 1^st strategy ensures the business is fully focused on maximising this opportunity, and while the strategy is unchanged, our effort to continuously improve and build new capabilities is accelerating.

 

Further extend our product choice

We will continue to improve the quality, style and value of our product range across all of our core categories to reinforce our specialist position. The scope for continuous innovation across all price bands and taste types is infinite. Spring/Summer 20 introductions include collections which are designed to help everyone create a beautiful and tranquil home and begin to meet the growing demand for products made from sustainable sources, such as our double duvet cover from sustainably sourced cotton and recycled polyester for £12.

 

Online-only products will grow as a proportion of our range, and we will add 6,000 lines this year. We are also working to develop the group of committed suppliers who are our key sourcing partners. Many of our existing suppliers have grown with us for the last 30 years, since we started buying our core product ranges. We are excited by the ongoing potential of these partners, and have begun the process of introducing a small number of new suppliers to this group.

 

Enhance our customer experience 

We continue to innovate and modernise our customer experience across the total retail system.  Having gone live with the new platform in October 2019, and ensuring the systems could support the requirements of Winter Sale, the digital teams are now ready to improve and enhance the digital proposition further.

 

Our immediate priority is to improve basic site functionality and to optimise site performance (e.g. tools for up-selling and cross-selling and better product sequencing).  We are also at an early stage in the evolution of our Click & Collect offer, the next stage will be to enable goods which are not available in store, but which are in our central warehouse, to be available for collection in store. 

 

Colleagues selling to customers via tablets in store has been a great success over the past 18 months and we believe it continues to be a growth driver - especially as we continue to build our furniture offer, where customers like to view products in store and then order them for home delivery.  We will deploy improved tablet-based selling tools to support the customer and colleague experience.

 

In the second half of the year we will refit 3 stores, as we are pleased with the improved returns we are seeing from the programme, in part due to lower costs.  In addition, we will also revamp the furniture departments in a further c.20 stores to provide customers with improved choice and a better experience.

 

Continue to broaden and deepen our customer base 

We have recently announced an exciting new sponsorship arrangement with Channel 4's First Dates which runs from mid-February until the end of December. The sponsorship covers First Dates, First Dates Hotel, Valentines and Christmas specials and video on demand.  This is a great opportunity to reach more customers and we think that First Dates is a good brand fit - very real, emotional, optimistic, kind and non-judgmental. Meanwhile our successful Home of Homes campaign continues, and we will feature our 4^th Dunelm family of FY20 in the Spring.  We will also continue to support key social influencers who are big fans of Dunelm.

 

Opening new stores also continues to be a way of reaching more customers. We expect to open two to three new superstores in the second half, of which one, Durham, is a new catchment to improve our reach. In addition, we have been encouraged by the performance of superstores we have recently opened in high street locations and will shortly trial a much smaller (5,000 sq. ft) high street store in a new catchment. This store opening is a low cost test to understand how our customers react to a smaller, edited range in a location chosen to increase our reach.

 

Build our capabilities and infrastructure  

We will continue to invest in our people and ways of working. Following the successful transformation of the digital technology team, we are introducing more agile ways of working across the business. New technical product owner roles will enable a greater focus on leveraging our technology capabilities to enhance and extend our customer offer and improve productivity across the business.

 

We will accelerate our sustainability capabilities. We've long been focused on having the highest standards of ethical sourcing, reducing waste and saving energy (it's in our DNA) but we are now also learning the science of carbon reduction and sustainable materials, and how to offer these choices affordably to our customers.

 

Building on the new technology stack created for the digital platform, we are developing our data, insight and analytics capabilities.  We are currently working on data fundamentals such as quality, management, security and infrastructure which will enable us to build more comprehensive data capabilities. At the same time, we are migrating data away from traditional reporting systems and will build a single view of the customer platform to drive meaningful customer insight and intelligence.

 

As a result of our growth aspirations, we are reviewing the capacity requirements of our supply chain, which must remain flexible and efficient. We are developing our understanding of fulfilment economics to optimise and leverage our existing supply chain assets and during the second half of the calendar year, will make some investments in additional capacity, specifically in our 1-man e-commerce operations, to keep pace with anticipated demand.  We will also reconfigure our direct to store cross docking operation in order to increase product flow through our existing facilities and provide efficiencies by moving part of the operation closer to our UK suppliers. 

 

Summary and outlook

 

We have made good progress over the first half, following a strong performance last year, which is reflected in the significant growth delivered in both sales and profits.

 

We continue to build strong foundations for future growth. The successful launch of our digital platform accelerates our ability to innovate our customer proposition and we remain focused on operational improvements across all areas of the business.

 

The third quarter has started well, with a successful Winter Sale across the total retail system. As a result, we expect full year FY20 profit before tax to be slightly ahead of the top of the latest range of analyst expectations9. We are monitoring the Coronavirus outbreak carefully.  To date we have not assumed any material disruption to our supply chain or any financial impact in the year.

 

More broadly, the outlook for consumer spending remains uncertain, however, due to our extensive product range, broad price architecture and relatively low average transaction value, we feel well positioned in the market.  In addition, we feel that our ongoing investments in our customer proposition should deliver attractive returns.

 

We have plenty to look forward to over the remainder of the year as we further strengthen the Dunelm offer and help more customers to create the home they love.

 

Nick Wilkinson
Chief Executive Officer
12 February 2020

 

⁹ Management understand that updated FY20 PBT analyst estimates are in the range of £135.0m to £137.3m (adjusted for IFRS 16 where appropriate)

 

CHIEF FINANCIAL OFFICER'S REVIEW

 

Revenue

 

Total revenue for the 26 weeks to 28 December 2019 grew by 6.0% to £585.0m (FY19 H1: £551.8m). Total LFL growth was 5.6% with total Dunelm growth of 6.7% including the benefit of new stores.

	26 weeks to 28 December 2019
	Revenue (£m)	YoY Growth (£m)	YoY Growth  (%)
LFL Stores1	485.2	+9.4	+2.0%
Online - dunelm.com	83.4	+20.8	+33.2%
Total LFL2	568.6	+30.2	+5.6%
Non-LFL Stores3	16.4	+6.6	-
Total Dunelm	585.0	+36.8	+6.7%
Closed businesses4	-	(3.6)	-
Total Group	585.0	+33.2	+6.0%

1 LFL stores:  stores trading for at least one full financial year prior to 30 June 2019 without any significant change of space. LFL store revenues include Reserve & Collect/Click & Collect sales and home delivery sales in respect of orders placed via in-store tablets

2 Total LFL:  LFL stores and dunelm.com. The process for obtaining a refund for online purchases in store has been changed to minimise the risk of fraudulent returns. This process change has increased the attribution of refunds to the online channel. Total LFL is unaffected and therefore, as the business becomes more multichannel, is a more meaningful measure of overall performance

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 Closed businesses: sales from Worldstores.co.uk and Kiddicare.com. These websites were closed in Q1 FY19

 

Gross margin

 

Group gross margin of 51.5% was +120bps higher than the same period last year. Margin improvements were seen across all key product categories mainly due to sourcing gains and lower product markdowns during the period. We anticipate that during the second half of the year, traditionally a lower margin period due to the timing of the two clearance sales, gross margin will move forward, but at a lower year on year rate of improvement than seen in the first half.

 

Operating costs

 

Operating costs for the period were £213.5m, an increase of £6.9m or 3.3% year on year.  This year on year increase was driven partly by managing higher sales volumes in the supply chain and stores. Increased investments in brand marketing and technology were made to drive long term sustainable sales growth and the business also continues to focus on initiatives to improve efficiency and productivity to offset inflationary pressures such as National Living Wage. These cost increases were partially offset by the £1.3m benefit to operating costs from implementing IFRS 16¹⁰. Despite the increased costs, operating costs as a percentage of revenue were lower year on year at 36.5%.

 

As previously announced, following the successful launch of the new digital platform, we will now expense all of the digital development costs through the Income Statement, rather than capitalise these costs. As previously guided, this change in approach will lead to an increased Income Statement charge for technology costs of around £5m in the second half of FY20.  For the full year, we anticipate the operating costs to revenue ratio will remain broadly similar to last year.

 

Profit and Earnings per Share

 

Operating profit for the period was £87.6m (FY19 H1: £70.7m), an increase of £16.9m (+23.9%) reflecting higher sales and improved gross margin delivery and the £1.3m benefit from the adoption of IFRS 16. 

 

Earnings before interest, tax, depreciation and amortisation (EBITDA¹¹) increased by 36.3% to £126.5m (FY19 H1: £92.8m). EBITDA in FY20 benefits from the add back of the IFRS 16 interest and depreciation charges. On a comparable basis, EBITDA would have been, after removing the add back relating to IFRS 16, £102.6m, an increase of 10.6%.

 

¹⁰ The impact of the IFRS16 has been to increase operating profit by £1.3m, increase financial expenses by £2.6m and therefore reduce PBT by £1.3m in the first half

¹¹ EBITDA is calculated as operating profit plus depreciation, amortisation and impairments, depreciation on right-of-use assets and loss on disposal of non-current assets

 

There was a net cost of £4.0m (FY19 H1: £0.7m) in respect of financial items in the period. This included interest on IFRS 16 lease liabilities of £2.6m, interest payable and amortisation of arrangement fees relating to the Group's revolving credit facility amounting to £0.6m (FY19 H1: £1.2m) and losses of £0.8m (FY19 H1: £0.4m gain) resulting from foreign exchange differences on the translation of dollar denominated assets and liabilities. There was no interest received (FY19 H1: £0.1m).

 

Profit before tax was £83.6m (FY19 H1: £70.0m), an increase of 19.4% year-on-year.  The impact of IFRS 16 on H1 FY20 is to reduce profit before tax by £1.3m.  Profit after tax of £67.6m (FY19 H1: £55.8m) reflects the projected full year effective tax rate of 19.1% (FY19 H1: 20.3%).

 

Diluted earnings per share were 33.2 pence (FY19 H1: 27.5 pence), an increase of 20.7%.

 

Cash generation

 

In the period, the Group generated £108.1m (FY19 H1: £106.9m) of net cash from operating activities, an increase of 1.1%.  Working capital improved by £8.7m during the period (FY19 H1: £21.4m). The improvement was driven by an increase in payables (£5.7m) which reflects a higher VAT creditor as a result of sales in the pre-Christmas period. This was partially offset by lower accruals for bonus schemes as incentives for performance in FY19 have been paid to colleagues.

 

The cash outflow on capital investment was £17.1m in the first half (FY19 H1: £15.7m). This included the investment in a freehold store (£5.6m), two new store openings (£3.6m), technology and digital infrastructure (£4.2m), and store refit expenditure in existing stores (£3.3m). We expect capital expenditure for the full year to be between £26m and £28m.

 

The definition of Free Cash Flow is impacted by the disclosure requirements of IFRS 16, therefore, to ensure comparability we have redefined this measure as 'net cash generated from operating activities less net cash used in investing activities and repayments of, and interest on, lease liabilities'.  Free Cash Flow was £64.4m (FY19 H1: £91.2m) a reduction of £26.8m. This mainly reflects the new rules on the timing of corporation tax payments which resulted in two additional payments on account being made within the period.

 

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 (both calculated on a pre-IFRS 16 basis) in respect of leverage (net debt to be no greater than 2.5x EBITDA) and fixed charge cover (EBITDA to be no less than 1.75x fixed charges), both of which were met comfortably as at 28 December 2019.

 

In addition, the Group maintains £20m of uncommitted overdraft facilities with two syndicate partner banks and has an accordion option (requiring lender's acceptance) with a maximum facility of £75m.

 

Net debt excluding IFRS 16 lease liabilities at 28 December 2019 was £67.7m (FY19 H1: £72.9m) compared with net debt of £25.3m at 29 June 2019. Weekly average net debt (facilities drawn plus cash at bank) was £24.2m (FY19 H1: £80.9m).

 

Capital and Dividend 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 0.2x and 0.6x of the last twelve months' EBITDA (on a post IFRS 16 basis). Net debt at the period end was equivalent to 0.31x historical 12-month EBITDA¹². 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 8.0p per share, a 6.7% increase year-on-year, to shareholders on the register at 20 March 2020. The payment is expected to be made on 14 April 2020.

 

The Board will consider returning surplus cash to shareholders if average net debt over a period consistently falls below the minimum target of 0.2x 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.

 

¹² Historical 12-month EBITDA is adjusted to include management's estimate of the depreciation and interest relating to IFRS 16 which would have been included in FY19 H2 EDITDA

 

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

 

Principal Risks and Uncertainties

 

Over the remaining six months of this period, as we gain better understanding of how the new political landscape develops, we remain cautious on the number of potential risks and uncertainties which could have a material impact on the Group's performance. The Board considers that the majority of significant risks and uncertainties remain as published in the Annual Report for the year ended 29 June 2019. These comprise:

 

·      Loss of market share through failure to respond to changing customer needs and failure to maintain a competitive offer in the homewares market

·      Damage to brand reputation through product and service quality

·      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

·      Failure to anticipate and address the strategic, regulatory and reputational impact of climate change and governmental action in response to it

·      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 24 to 32 of the 2019 Annual Report which is available at www.corporate.dunelm.com.

Brexit

 

Over the past two years, Dunelm has been working to identify and mitigate any operational or financial risks arising from the expected exit of the UK from the EU.  A working group, reporting to the Board, was set up to identify and address these risks and monitor political developments. This group deemed that the greatest risk of Brexit to our business would be a downturn in consumer demand. The business imports less than 1% of its goods from EU countries and approximately 3% of our employees are EU nationals.

 

The UK left the EU on 31 January 2020 and has now entered an 11-month transition period. There still remains some uncertainty around what will happen next. We will continue to monitor developments and assess any potential impact to our business.  

 

New accounting standards

 

The Group is reporting its FY20 interim results on an IFRS 16 basis while the prior results are prepared on an IAS 17 basis.  The implementation of IFRS 16 has no impact on cash flows generated and will not impact management's decisions on how the business is run. It does, however, have an impact on the assets, liabilities and income statement of the Group. The presentation of the Cash Flow Statement has also changed, 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 significant change in accounting has reduced FY20 H1 Group profit before tax by £1.3m and increased EBITDA by £23.9m. We expect the full year impact on Group profit before tax to be in the region of £2.7m. Furthermore, as EBITDA has increased due to an accounting change with no cash impact, going forward our target net debt to historical EBITDA range will be between 0.2x and 0.6x. In order to familiarise readers of the accounts with the impact of IFRS 16, where appropriate, we have shown FY20 H1 interims on an IAS 17 and IFRS 16 basis.

 

Future presentation of financials

 

With the launch of our new digital platform and the shift in focus to a 'total retail' system, we plan to change our sales disclosures from the start of FY21.  We will only present 'Total like for like sales' going forwards.  As the customer proposition becomes increasingly digital, such as extended Click & Collect where customers will be able to purchase products online that are not sold in store for in-store collection, we believe that Total LFL is a more meaningful measure of sales growth than the previous channel split.  Sales disclosures for Q3, Q4 and FY20, will be presented on a consistent basis, with the above change coming into effect from Q1 FY21.

 

Laura Carr
Chief Financial Officer

12 February 2020

 

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 maintenance and integrity of the Company's website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that might have occurred to the interim financial statements since they were initially presented on the website.

The directors of Company are listed in the Company's annual report for 29 June 2019, with the exception of the following changes in the period: Paula Vennells was appointed on 4 September 2019. A list of current directors is maintained on the Company's website: www.corporate.dunelm.com.

 

By order of the board

 

Nick Wilkinson                                                                                     Laura Carr

Chief Executive Officer                                                                       Chief Financial Officer

12 February 2020                                                                                12 February 2020

 

 

 

INDEPENDENT REVIEW REPORT TO DUNELM GROUP PLC

 

Report on the condensed interim financial statements

 

Our conclusion

We have reviewed Dunelm Group plc's condensed interim financial statements (the "interim financial statements") in the Interim Results of Dunelm Group plc for the 26 week period ended 28 December 2019. 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 28 December 2019;

·      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

12 February 2020

 

CONSOLIDATED INCOME STATEMENT

(UNAUDITED)

For the 26 weeks ended 28 December 2019

 

	Note	26 weeks ended 28 December 2019 (unaudited)*	26 weeks ended 29 December 2018 (unaudited)	52 weeks ended 29 June 2019 (audited)
		Reported	Reported	Reported
		£'m	£'m	£'m
Revenue	5	585.0	551.8	1,100.4
Cost of sales		(283.9)	(274.5)	(554.8)
Gross profit		301.1	277.3	545.6
Operating costs		(213.5)	(206.6)	(418.7)
Operating profit		87.6	70.7	126.9
Financial income		-	0.1	0.9
Financial expenses		(4.0)	(0.8)	(1.9)
Profit before taxation		83.6	70.0	125.9
Taxation	6	(16.0)	(14.2)	(24.6)
Profit for the period		67.6	55.8	101.3
Earnings per Ordinary Share - basic (pence)	8	33.5	27.6	50.2
Earnings per Ordinary Share - diluted (pence)	8	33.2	27.5	49.9

 

 

*The Group has initially applied IFRS 16 with effect from 30 June 2019, using the modified retrospective approach. Under this approach, comparative information is not restated (see note 4).

 

 

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

(UNAUDITED)

For the 26 weeks ended 28 December 2019

 

 

		26 weeks ended 28 December 2019 (unaudited)	26 weeks ended 29 December 2018 (unaudited)	52 weeks ended 29 June 2019 (audited)
		£'m	£'m	£'m
Profit for the period		67.6	55.8	101.3
Other comprehensive (expense)/income:
Items that may be subsequently reclassified to profit or loss:
Movement in fair value of cash flow hedges		(3.1)	5.7	6.6
Transfers of cash flow hedges to inventory		(4.0)	(1.9)	(3.9)
Deferred tax on hedging movements		1.2	(0.6)	(0.5)
Other comprehensive (expense)/income for the period, net of tax		(5.9)	3.2	2.2
Total comprehensive income for the period		61.7	59.0	103.5

 

CONSOLIDATED STATEMENT OF FINANCIAL POSITION 

(UNAUDITED)

As at 28 December 2019

				Note	28 December 2019 (unaudited)*	29 December 2018 (unaudited)	29 June 2019 (audited)
					£'m	£'m	£'m
Non-current assets
Intangible assets				9	26.6	27.2	27.3
Property, plant and equipment				9	181.0	193.2	180.6
Right-of-use assets				4	281.7	-	-
Deferred tax assets					4.5	-	0.8
Derivative financial instruments					-	1.7	1.0
Total non-current assets					493.8	222.1	209.7
Current assets
Inventories					157.4	156.3	157.7
Trade and other receivables					11.6	24.4	25.6
Derivative financial instruments					1.3	5.5	5.1
Cash and cash equivalents				12	-	21.2	19.0
Total current assets					170.3	207.4	207.4
Total assets					664.1	429.5	417.1
Current liabilities
Trade and other payables				10	(134.4)	(126.4)	(136.3)
Current borrowings				12	(26.3)	-	-
Lease liabilities				4	(42.4)	-	-
Liability for current tax					(2.6)	(14.5)	(13.5)
Derivative financial instruments					(1.3)	-	-
Total current liabilities					(207.0)	(140.9)	(149.8)
Non-current liabilities
Bank loans				12	(41.4)	(94.1)	(44.3)
Lease liabilities				4	(268.6)	-	-
Trade and other payables				10	-	(36.9)	(35.5)
Deferred tax liabilities					-	(1.2)	-
Provisions					(1.7)	(1.7)	(1.7)
Derivative financial instruments					(1.1)	-	-
Total non-current liabilities					(312.8)	(133.9)	(81.5)
Total liabilities					(519.8)	(274.8)	(231.3)
Net assets					144.3	154.7	185.8
Equity
Issued share capital					2.0	2.0	2.0
Share premium account					1.6	1.6	1.6
Capital redemption reserve					43.2	43.2	43.2
Hedging reserve					(0.9)	6.0	5.0
Retained earnings					98.4	101.9	134.0
Total equity					144.3	154.7	185.8

*The Group has initially applied IFRS 16 with effect from 30 June 2019, using the modified retrospective approach. Under this approach, comparative information is not restated (see note 4).

 

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

For the 26 weeks ended 28 December 2019

 

		26 weeks ended 28 December 2019 (unaudited)	26 weeks ended 29 December 2018 (unaudited)	52 weeks ended 29 June 2019 (audited)
	Note	£'m	£'m	£'m
Profit before taxation		83.6	70.0	125.9
Adjustment for net financing costs		4.0	0.7	1.0
Operating profit		87.6	70.7	126.9
Depreciation, amortisation and impairments		16.2	20.8	32.7
Depreciation on right-of-use assets		22.6	-	-
Loss on disposal of non-current assets	9	0.1	1.3	6.7
Operating cash flow before movements in working capital		126.5	92.8	166.3
Decrease/(increase) in inventories		0.3	(1.6)	(3.0)
Decrease/(increase) in receivables		2.7	(0.5)	(1.7)
Increase in payables		5.7	23.5	31.2
Net movement in working capital		8.7	21.4	26.5
Share-based payments expense		0.9	0.5	1.4
Interest received		-	0.1	0.3
Tax paid		(28.0)	(7.9)	(20.5)
Net cash generated from operating activities		108.1	106.9	174.0
Cash flows from investing activities
Acquisition of intangible assets		(4.0)	(8.0)	(13.0)
Proceeds on disposal of property, plant and equipment		-	-	5.4
Acquisition of property, plant and equipment		(13.1)	(7.7)	(12.0)
Net cash used in investing activities		(17.1)	(15.7)	(19.6)
Cash flows from financing activities
Proceeds from exercise of share options		0.6	-	0.2
Drawdowns on revolving credit facility		47.0	25.0	25.0
Repayments of revolving credit facility		(50.0)	(70.0)	(120.0)
Repayment of lease liabilities		(24.0)	-	-
Interest paid		(0.5)	(1.0)	(1.6)
Interest on lease liabilities		(2.6)	-	-
Ordinary dividends paid	7	(106.0)	(39.4)	(54.6)
Net cash flows used in financing activities		(135.5)	(85.4)	(151.0)
Net (decrease)/increase in cash and cash equivalents		(44.5)	5.8	3.4
Foreign exchange revaluations		(0.8)	0.4	0.6
Cash and cash equivalents at the beginning of the period		19.0	15.0	15.0
Cash and cash equivalents at the end of the period		(26.3)	21.2	19.0

 

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

(UNAUDITED)

For the 26 weeks ended 28 December 2019

 

	Note	Issued share capital	Share premium account	Capital redemption reserve	Hedging reserve	Retained earnings	Total equity
		£'m	£'m	£'m	£'m	£'m	£'m
As at 29 June 2019		2.0	1.6	43.2	5.0	134.0	185.8
Profit for the period		-	-	-	-	67.6	67.6
Fair value losses on cash flow hedges		-	-	-	(3.1)	-	(3.1)
Gains on cash flow hedges transferred to inventory		-	-	-	(4.0)	-	(4.0)
Deferred tax on hedging movements		-	-	-	1.2	-	1.2
Total comprehensive income for the period		-	-	-	(5.9)	67.6	61.7
Proceeds from issue of treasury shares		-	-	-	-	0.6	0.6
Share based payments		-	-	-	-	0.9	0.9
Deferred tax on share based payments		-	-	-	-	1.3	1.3
Ordinary dividends paid	7	-	-	-	-	(106.0)	(106.0)
Total transactions with owners, recorded directly in equity		-	-	-	-	(103.2)	(103.2)
As at 28 December 2019		2.0	1.6	43.2	(0.9)	98.4	144.3
As at 30 June 2018		2.0	1.6	43.2	2.8	85.1	134.7
Profit for the period		-	-	-	-	55.8	55.8
Fair value gains on cash flow hedges		-	-	-	5.7	-	5.7
Losses on cash flow hedges transferred to inventory		-	-	-	(1.9)	-	(1.9)
Deferred tax on hedging movements		-	-	-	(0.6)	-	(0.6)
Total comprehensive income for the period		-	-	-	3.2	55.8	59.0
Share based payments		-	-	-	-	0.5	0.5
Deferred tax on share-based payments		-	-	-	-	(0.1)	(0.1)
Ordinary dividends paid	7	-	-	-	-	(39.4)	(39.4)
Total transactions with owners, recorded directly in equity		-	-	-	-	(39.0)	(39.0)
As at 29 December 2018		2.0	1.6	43.2	6.0	101.9	154.7
As at 30 June 2018		2.0	1.6	43.2	2.8	85.1	134.7
Profit for the period		-	-	-	-	101.3	101.3
Fair value gains on cash flow hedges		-	-	-	6.6	-	6.6
Losses on cash flow hedges transferred to inventory		-	-	-	(3.9)	-	(3.9)
Deferred tax on hedging movements		-	-	-	(0.5)	-	(0.5)
Total comprehensive income for the period		-	-	-	2.2	101.3	103.5
Proceeds from issue of treasury shares		-	-	-	-	0.2	0.2
Share-based payments		-	-	-	-	1.4	1.4
Deferred tax on share-based payments		-	-	-	-	0.7	0.7
Current tax on share options exercised		-	-	-	-	(0.1)	(0.1)
Ordinary dividends paid	7	-	-	-	-	(54.6)	(54.6)
Total transactions with owners, recorded directly in equity		-	-	-	-	(52.4)	(52.4)
As at 29 June 2019		2.0	1.6	43.2	5.0	134.0	185.8

 

 

NOTES TO THE INTERIM FINANCIAL STATEMENTS

For the 26 weeks ended 28 December 2019 (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 the website.

 

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 28 December 2019 have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct 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 29 June 2019, 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 29 June 2019 were approved by the Board of Directors on 4 September 2019 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 6 to 45 in the 2019 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 10. 

 

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 29 June 2019, 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.

 

Additionally, IFRS 16, detailed below, has been adopted for the first time.

 

IFRS 16, 'Leases'

IFRS 16 requires the creation of a right-of-use asset and a lease liability in the Statement of Financial Position. The right-of-use asset is subject to depreciation on a straight-line basis over the term of the lease. An interest charge is recognised on the lease liability which 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 accelerated for leases which would previously have been accounted for as operating leases.

The presentation of the cash flow statement has changed 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. However, there is no net impact on cash flows.

The Group has initially applied IFRS 16 with effect from 30 June 2019 (the opening balance sheet date). The Group's leases comprise property, vehicles and equipment. As a lessee, the Group has recognised a right-of-use asset representing the Group's right to use the identified assets as well as lease liabilities representing the obligation to make lease payments. The Group's activities as a lessor are not significant therefore the Group has not made any changes to lessor accounting as a result of the application of IFRS 16.

4.1          Changes to accounting policies

Lease liabilities

Lease liabilities comprise the net present value of the following payments:

·      Fixed payments (contractual payments including where rental payments are variable but set out within the lease agreement)

·      Lease incentives to be received subsequent to the commencement of the lease

·      Amounts expected to be paid under residual value guarantees

·      The exercise price of purchase options if these are reasonably certain to be exercised

·      Payments of penalties for terminating the lease

 

Lease liabilities have been calculated by discounting the future lease payments. Lease payments have been discounted using the incremental borrowing rate (IBR). This rate has been calculated based on the Revolving Credit Facility rate adjusted for factors including the lease term. The weighted average rate was 1.7%.

At lease commencement date the Group determines the term of the lease to be the full term, assuming that the Group will not exercise any options to extend or terminate the lease.

Right-of-use assets

Right-of-use assets comprise the following:

·      The amount of the initial measurement of the lease liability

·      Any lease payments made at or before the commencement date, less any lease incentives received. This includes the first pro-rated lease payment made on day one of the lease

·      Any initial direct costs incurred defined as incremental costs that would not have been incurred if the lease had not been obtained

 

The Group has applied the modified retrospective approach on transition and has not restated the comparative information. On transition, the Group has applied the following practical expedients/options:

 

·      Application of the standard only to leases previously identified under IAS 17, therefore contracts were not reassessed under the IFRS 16 definition of a lease

·      No recognition of leases where the lease term is less than 12 months - the Group has chosen to apply this expedient to non-property leases only. Leases meeting these criteria have been recognised on a straight line basis as an expense in operating costs

·      No recognition of low value leases - the Group has chosen to apply this expedient to non-property leases where the total lease cost is under £5,000. This expedient has not been applied to cars. Leases meeting these criteria have been recognised on a straight line basis as an expense in operating costs

·      Application of a single discount rate to all leases with similar characteristics

·      On transition, no recognition of initial direct costs incurred in entering the lease within the value of the right-of-use asset

·      Reliance has been placed on the assessment made under IAS 37 to identify onerous leases, rather than performing an impairment test on right-of-use assets on transition

4.2          Impact

Application of this approach has therefore had the following impact on the financial statements:

 

Right-of-use asset

 

Under this approach, the right-of-use asset equals the lease liability for all leases, adjusted by any lease prepayments and deferred income relating to landlord incentives at the date of transition (IFRS 16 para C8b(ii)). The right-of-use assets recognised on transition are set out below:

	£'m
Lease liabilities	326.5
Rent prepayments	11.4
Lease incentives	(42.2)
Right of use assets	295.7

 

As a result of the above, the Group's trade and other receivables have reduced by £11.4m and trade and other payables have reduced by £42.2m.

 

The Group presents its right-of-use assets separately from other assets in the Consolidated Statement of Financial Position. The carrying amount of right-of-use assets is set out below:

 

 

	Property	Vehicles and equipment	Total
	£'m	£'m	£'m
As at 30 June 2019	288.2	7.5	295.7
As at 28 December 2019	275.4	6.3	281.7

 

Lease liabilities

The Group presents its lease liabilities separately from other liabilities in the consolidated statement of financial position. The carrying amount of the lease liabilities on the date of transition equalled £326.5m. The carrying amount of the lease liabilities as at 28 December 2019 is set out below:

	£'m
Current liabilities	42.4
Non-current liabilities	268.6

 

A reconciliation of the operating lease commitments presented in the 2019 Annual Report and the lease liabilities on transition is set out below:

	£'m
Minimum lease payments under operating leases at 29 June 2019	369.2
Leases outside the scope of IFRS 16	(3.1)
Gross lease liabilities with effect from 30 June 2019	366.1
Effect of discounting using the incremental borrowing rate at 30 June 2019	(28.2)
Prepayments included within operating lease commitments	(11.4)
Lease liabilities with effect from 30 June 2019	326.5

 

Reserves

The Group has applied the modified retrospective approach on transition in which asset equals liability. Therefore, there is no impact on reserves at the date of transition.

 

Cashflow statement

The Group's cash generated from operating activities has increased by £26.6m as a result of the implementation of IFRS 16. This is offset by an increase of £26.6m in cash used in financing activities.

Income statement

The impact on the Group's Consolidated Income Statement for the period to 28 December 2019 is as follows:

	26 weeks ended  28 December 2019 (unaudited)			26 weeks ended 29 December 2018 (unaudited)
	Pre - IFRS 16	Impact of IFRS 16	Reported	Reported
	£'m	£'m	£'m	£'m
Revenue	585.0	-	585.0	551.8
Cost of sales	(283.9)	-	(283.9)	(274.5)
Gross profit	301.1	-	301.1	277.3
Operating costs	(214.8)	1.3	(213.5)	(206.6)
Operating profit	86.3	1.3	87.6	70.7
Financial income	-	-	-	0.1
Financial expenses	(1.4)	(2.6)	(4.0)	(0.8)
Profit before taxation	84.9	(1.3)	83.6	70.0
Taxation	(16.2)	0.2	(16.0)	(14.2)
Profit for the period	68.7	(1.1)	67.6	55.8
Earnings per Ordinary Share - basic (pence)	34.0	(0.5)	33.5	27.6
Earnings per Ordinary Share - diluted (pence)	33.7	(0.5)	33.2	27.5

 

The impact on operating profit is an increase of £1.3m, being the effect of replacing operating lease expenses of £23.9m with straight line depreciation of the right-of-use assets of £22.6m.

The impact on net finance costs is an increase of £2.6m, being the interest charge on the lease liabilities.

The overall impact is to reduce profit before tax by £1.3m. This is due to the timing difference between the recognition of costs under IFRS 16 and IAS 17 as described above.

We do not expect the application of IFRS 16 to have a material impact on the Group's effective tax rate.

 

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              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 19.1% (26 weeks ended 29 December 2018: 20.3%).

 

7              Dividends

 

		26 weeks ended 28 December 2019	26 weeks ended 29 December 2018	52 weeks ended 29 June 2019
		£'m	£'m	£'m
Final for the period ended 30 June 2018	- paid 19.5 pence	-	39.4	39.4
Interim for the period ended 29 June 2019	- paid 7.5 pence	-	-	15.2
Special dividend for the period ended 29 June 2019	- paid 32.0 pence	64.6	-	-
Final for the period ended 29 June 2019	- paid 20.5 pence	41.4	-	-
		106.0	39.4	54.6

 

The Directors have declared an interim dividend of 8.0 pence per Ordinary Share for the financial year ending 27 June 2020. This equates to an interim dividend of £16.2m. The dividends will be paid on 14 April 2020 to shareholders on the register at the close of business on 20 March 2020. 

 

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 ending 27 June 2020.

 

8              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:

 

		26 weeks ended 28 December 2019	26 weeks ended 29 December 2018	52 weeks ended 29 June 2019
		'm	'm	'm
Weighted average number of shares in issue during the period		202.0	201.9	202.0
Impact of share options		1.7	0.8	1.0
Number of shares for diluted earnings per share		203.7	202.7	203.0
		26 weeks ended 28 December 2019	26 weeks ended 29 December 2018	52 weeks ended 29 June 2019
Profit for the period (£'m)		67.6	55.8	101.3
Earnings per Ordinary Share - basic (pence)		33.5	27.6	50.2
Earnings per Ordinary Share - diluted (pence)		33.2	27.5	49.9

 

9              Intangible assets and property, plant and equipment

 

		Intangible assets	Property, plant and equipment	Total
		£'m	£'m	£'m
Cost
At 29 June 2019		60.8	376.2	437.0
Additions		2.8	13.2	16.0
Disposals		-	(0.8)	(0.8)
At 28 December 2019		63.6	388.6	452.2
Accumulated amortisation / depreciation
At 29 June 2019		33.5	195.6	229.1
Charge for the financial period		3.5	12.7	16.2
Disposals		-	(0.7)	(0.7)
At 28 December 2019		37.0	207.6	244.6
Net book value
At 29 June 2019		27.3	180.6	207.9
At 28 December 2019		26.6	181.0	207.6

 

All amortisation and depreciation charges have been included within operating costs in the income statement.

 

Within software development and licences, £0.8m (FY19 H1: £1.3m, FY19: £2.3m) of additions relates to internally generated assets.

 

10           Trade and other payables

		28 December 2019	29 December 2018	29 June 2019
		£'m	£'m	£'m
Current
Trade payables		60.3	60.7	62.6
Accruals and deferred income		45.3	41.0	56.0
Other taxation and social security		28.2	24.4	17.3
Other payables		0.6	0.3	0.4
Total current trade and other payables		134.4	126.4	136.3
Non-current
Deferred income		-	36.9	35.5
Total non-current trade and other payables		-	36.9	35.5
Total trade and other payables		134.4	163.3	171.8

 

Current accruals and deferred income include lease incentives of £nil due to adoption of IFRS 16 (FY19 H1: £5.4m, FY19: £6.5m), capital accruals of £2.1m (FY19 H1: £2.3m, FY19: £3.2m) and a returns provision of £3.1m (FY19 H1: £2.8m, FY19: £2.2m). Contract liabilities of £3.2m (FY19 H1: £3.6m, FY19: £2.2m) for gift cards and credit notes are included within accruals and deferred income.

 

Non current deferred income includes lease incentives of £nil due to the adoption of IFRS 16 (FY19 H1: £36.9m, FY19: £35.5m). The maturity analysis of non-current deferred income is as follows

		28 December 2019	29 December 2018	29 June 2019
		£'m	£'m	£'m
One to two years		-	5.9	6.1
Two to five years		-	15.1	15.4
After five years		-	15.9	14.0
		-	36.9	35.5

 

11           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 29 June 2019. 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)

·      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.

 

12           Bank loans

 

		28 December 2019	29 December 2018	29 June 2019
		£'m	£'m	£'m
Total borrowings		42.0	95.0	45.0
Less: unamortised debt issue costs		(0.6)	(0.9)	(0.7)
Bank borrowings		41.4	94.1	44.3
Current borrowings		26.3	-	-
Cash and cash equivalents		-	(21.2)	(19.0)
Net debt excluding lease liabilities		67.7	72.9	25.3

 

The Company has medium term bank facilities of £165m (FY19 H1: £165m; FY19: £165m) committed until 5 March 2023, with an associated accordion facility of £75m. As at 28 December 2019 £42m of this facility was drawn down (FY19 H1: £95m; FY19: £45m). The carrying amount of bank borrowings is materially equal to fair value. The Group also has an overdraft facility of £20m. Current borrowings include £55.2m of payments which had not cleared the bank on 28 December 2019, and are included within cash and cash equivalents in the Consolidated Statement of Cash Flows.

 

13              Capital Commitments

As at 28 December 2019 the Company had entered into capital contracts amounting to £5.9m (FY19 H1: £4.9m; FY19: £7.8m).

 

14              Announcement

The interim report was approved by the Board on 12 February 2020. Copies are available from www.corporate.dunelm.com.