Dunelm Group plc Year-end Trading Update

Dunelm Group plc (LON:DNLM), the UK’s leading homewares retailer, reports the following trading update for the 13-week period, and financial year, ended 30 June 2018.

Revenue

Total like-for-like (LFL) revenues in the quarter were broadly flat year on year (0.1% increase). This includes a continuing strong performance in our on-line channel (Dunelm.com) which achieved growth of 41.8%. As previously indicated in our announcement on 25 May 2018, footfall in physical shops was weak in the quarter, leading to a 4.6% decline in sales in LFL stores.

Overall revenue for the quarter showed a 1.4% decline year on year. Whilst we benefited from the strong store opening programme earlier in the financial year, this was offset by decisions to rationalise the offer in our acquired businesses of Worldstores.co.uk and Kiddicare.com – having divested Achica.com during the previous quarter.

For the year as a whole, the Group delivered LFL revenue growth of 4.2% and overall growth of 9.9%.

1. LFL Stores – stores trading for at least one full financial year prior to 2 July 2017 without any significant change of space

2. LFL Online – Dunelm.com

3. Non-LFL Stores – new stores opened within the current financial year or prior financial year

4. Non-LFL Online – Worldstores.co.uk, Kiddicare.com and Achica.com. (Note, the Group acquired these businesses in November 2016; it disposed of the Achica business in February 2018)

Gross Margin

Underlying gross margin for the quarter was 40bps higher year on year. However, due to the disappointing footfall experienced during the quarter (including during the key weeks of Summer Sale when we look to clear through discontinued lines), the volume of clearance merchandise remaining at year-end was greater than normal. As a result, we will be increasing our level of provision for future losses on clearance merchandise by approximately £3m. After allowing for this provision increase, reported gross margin for the quarter will show a year on year decrease of approximately 50bps.

For the full year, after allowing for the provision increase described above, Group gross margin is expected to be 48.0%. This would represent a decline of 90bps over the year, a substantial recovery from the 180bps decline recorded in the first half.

Customers and Market

Our customer reach continues to grow. As at the year-end, the number of active customers for Dunelm.com was up by 18% over the previous year. Despite the footfall challenge of the final quarter, the total number of visits to physical stores in the year (including the benefit of new openings) increased by 5% over the prior year. Pleasingly, we have seen strong performance in satisfaction scores across all channels.

Our data shows that we have continued to outperform the homewares market over the quarter.

Business Development

We continue to refine our plans for the Worldstores businesses acquired in FY17. Specifically:

a) We are completing development of the Worldstores technology platform prior to migrating the Dunelm.com website onto this platform in the course of FY19. This will enable rapid improvements in our on-line proposition (such as the implementation of click & collect functionality) and we will retain the ability for continuous development of the website.

b) We have used the Kiddicare brand to grow our participation in the baby and kids market, which we expect to remain a core category for us going forward. Having tested Kiddicare as both an in-store and on-line brand, we have concluded that the best way for us to develop this category profitably is under the Dunelm brand. Accordingly, we plan to retire the Kiddicare website in the first quarter of FY19.

c) We continue to transfer Worldstores and Kiddicare lines to Dunelm.com and expect to complete this process in the coming weeks with around 5,000 further lines transferring (making 20,000 transferred in total, and bringing our total on-line assortment to over 60,000 lines).

There were no new store openings in the latest quarter, leaving our superstore footprint at 169 stores. We will open two new stores (one of which is a relocation) early in the new financial year.

Overall Financial Performance

We expect full year PBT, before exceptional items, to be approximately £102m (FY17: £109.3m). Included within this are trading losses related to the Worldstores businesses, which we estimate at £8.5m (FY17: £10.7m); these losses will reduce significantly (and will no longer be reported separately) in FY19 as Worldstores trading is absorbed fully into the core Dunelm business.

Separately, FY18 exceptional charges (defined as non-recurring costs related to the acquisition, integration and closure or divestment of Worldstores businesses) amounted to £8.9m.

The group remains strongly cash generative. After dividend payments totalling £53.5m in the last year and capital expenditure approaching £50m, our net debt is expected to be at a similar level to FY17 (£122.1m).

Comment from Nick Wilkinson, Dunelm’s Chief Executive:

“I am delighted to have joined Dunelm as it gathers pace on the journey to becoming a truly multi-channel business. I firmly believe that our homewares authority, combined with our increasing ability to adapt to evolving consumer trends, means that there is very significant potential for growth of the Dunelm brand. We have expanded our customer reach and digital capabilities significantly over the last twelve months and will continue to do so as we exploit the technology assets which we acquired with Worldstores.

I am excited about the opportunity at Dunelm and look forward to expanding on my plans for the future of this great brand when we announce our full year results in September.”