Dunelm Group plc

Good morning, everyone. Welcome to the Dan Elm interim results presentation. My name is Nick Wilkinson, and also on this audio broadcast this morning is Laura Carr, our CFO. We would love to be with you in person, but that's not possible. So wherever you are, I hope you are safe and well, and thank you for your continued interest in our company. I'll make some introductory comments before asking Laura to share our financials and outlook. And then I want to talk about looking forward. Obviously looking forward to the vaccine rollout and the lockdown ending, but more profoundly looking forward to what we can achieve in a changed world because of the progress we are making. And one final comment before getting into the presentation, and that's to acknowledge the complexity in analyzing companies right now. So we'll spend some time in this presentation connecting recent developments to the fundamentals of our investment case. And we're also giving more disclosure than normal around weekly trends to help you align COVID waves with our reporting cycles. So onwards and into the highlights in the first half, and I'm pleased to say we have seen a strong performance with improvement across all of our key financial metrics, sales, profit, and cash growth, despite navigating further enforced store closures during the second quarter. Total sales grew at 23%, digital sales grew at over 100%, and you can deduce that store sales were strongly positive in like-for-like terms across the half in total, and obviously higher still if you exclude the periods when they were closed. Gross margin was excellent. That resulted in PBT of £112.4 million up a third year on year. And that's after the repayment of £14.5 million job retention scheme monies claimed in the prior financial year. The balance sheet is looking strong and we've seen more good free cash flow conversion. And we're pleased to be reintroducing a dividend, reflecting a strong performance in the half and our confidence in the business overall. Stronger Together has been the guiding value of the year. I want to start by expressing my sincere thanks to the whole Dunelm team and our committed suppliers. Together, they've shown amazing adaptability and commitment and supported each other brilliantly. Throughout the crisis, including right now with the current restrictions in place, we have been focused on doing the right thing. The health and wellbeing of our colleagues and customers remains our top priority, and we've worked hard to monitor and enhance our best-in-class safety procedures. We ask every customer to rate their perception of safety when they visit a store, and this has been consistently high. And that NPS score of 77% is actually better than it was pre-COVID. We really believe in our stores. They are one half of a physical and digital system. They make us local, social, and convenient, and they differentiate us from businesses without good stores. As you can see from the slide our role within our communities has expanded, for example store colleagues organized the campaign in December to deliver joy in the form of personalized Christmas gifts for the most vulnerable in their communities. The campaign spread organically across social media channels with three quarters of a million shares and reached an audience of over 84 million people. As well as repaying JRS, we've also decided not to claim any further support. And during the current lockdown, we have introduced a company funded furlough equivalent scheme for those still colleagues without meaningful work to do, which will include those who are clinically extremely vulnerable and others who are unable to work due to needing to care for others. It's been a busy half operationally. We've made plenty of progress. We're fortunate that the pandemic reaffirmed our existing areas of focus. So we've pushed harder rather than had to change direction. And as a result, I think we've achieved a lot. Looking back at the last six months, I'd highlight in particular progress in our digital capabilities, and on product and brand. Digital-wise, we've completed the re-engineering of all the foundational microservices we operate. The last technology rewrites were checkout, product information management, and our delivery promise. As one of AWS's largest serverless cloud customers in Europe, we can scale immediately to respond to peak volumes. We've also doubled home delivery capacity at peak run rates and worked hard to improve our post-sale customer journey and performance analytics. There's loads more we can do, but all of this has led to a doubling in online traffic and improved conversion. Product-wise, we've developed more lines made from recycled materials, and we've also enhanced affordability with some significant price drop campaigns, such as on our winter teddy range of throws. In terms of brand, we've changed the tone of our advertising with our Home We Get It autumn campaign, and our brand score for value perception increased significantly year on year. The waves of the COVID pandemic do not neatly align with our reporting period. So on this slide, sales are played through week by week. The blue line is Dunelm sales growth. The black line, our estimate of the homewares market using GFK data and excluding Dunelm sales. In Q2, when there were tiered lockdowns, we've shown the percentage of stores closed from our state, which was about 85% of them for most of November. The early weeks of the half benefited from the delayed timing of our summer sale as customers came back strongly following the first lockdown period, and the latter part of the half was impacted by those store closures. In the right-hand table, you'll see the homewares market grew by just under 10% in the first half of our financial year, and that for comparable categories, Dunham's growth for the period was 21%. During the weeks when our stores were open, we significantly outperformed the market. but we performed below the market in weeks impacted by store closures because many other retailers selling homewares were classified as essential and remained open. And just to finish off this slide, in the boxes above the line, you can see how digital participation has grown in the half. I'm going to ask Laura now to pick up the story from here and take you through the half one financials.

Thanks, Nick. And good morning, everyone. I hope you're safe and well out there. And I'm really sorry that we can't see each other face to face. I'm now going to take you through the financial results for the week for the 26 weeks ended the 26th of December 2020. As Nick has already said, we are really pleased with the strong performance in the first half. Very strong top line growth accompanied by continued gross margin improvement and strong cost control delivered profit before tax of £112.4 million, which is an increase of 34.4% versus the same period last year. This profit translated into cash, with free cash flow of £98 million, up £34.1 million on last year. And we ended the period with a very strong balance sheet, net cash of £140.9 million and undrawn approved financing facilities of £175 million. Earnings per share were £44.1 per share, an increase of 32.8%. As just highlighted by Nick in the line graph, we saw excellent sales growth throughout the half, even though the second quarter was impacted by further store closures. Total sales was 719.4 million pounds, an increase of 23% compared to the same period last year. The penetration of digital sales has increased significantly year over year to 35% of the total. This penetration includes home delivery, click and collect, and tablet-based selling in stores. We've been really pleased to see that the digital sales growth has maintained over 100% throughout the half, even when the stores were open and performing really well. We've included the standard charts here for quarterly sales growth and HomeWare's market share performance based on GFK data. Nick has already covered our market outperformance in the first half, but I think it's also worth noting that we were consistently outperforming the market before COVID hit. Gross margin for the period was 52%, an improvement of 50 basis points compared to the same period last year. Margin was up 100 basis points in the first quarter as the higher sales led to less end of season product after our summer sale finished and we also continued to experience sourcing gains negotiated in the prior period. Those sourcing gains continued in the second quarter but were mainly offset by provisions made for the reduced end of season clearance in December as stores were closed ahead of the launch of our winter sale. And whilst it's very difficult to predict the margin outlook for the second half without any clarity of when we will be able to reopen our stores and what stock levels we will need to trade through, we expect the second half margin to be broadly flat to slightly positive compared to the same period last year. Operating costs increased to £256 million, mainly driven by higher sales volumes. The operating cost to sales ratio improved by 100 basis points due to the benefit of fixed cost leverage from the higher sales. Additionally, we saw approximately £5 million of additional investments in the P&L related to technology, data and supply chain capacity. although it is worth noting that £3 million of the tech spend had been classified as CAPEX rather than OPEX in the prior year. We changed our capitalisation policy to expense all our digital development costs after the launch of the new digital platform in October 2019. Social distancing requirements and health and safety protocols added approximately £5 million to the P&L during the half. This includes the cost of additional meet-a-greeter roles in all of our stores to monitor customer capacities and safety in store, PPE and safety equipment, and also the impact from lower productivities in our supply chain operations from implementing social distancing. We previously announced that we would repay the job retention scheme monies claimed in Q4 FY20, and this half contains the £14.5 million repayment. The P&L impact of the repayment is broadly offset by the business rates relief afforded to all UK retailers, which was £14.4 million in the period. Looking to the second half, we expect to see the continuation of additional investments as highlighted at the prelims in September, mainly relating to technology, data and supply chain capacity and capability. We had very strong cashflow generation in the period with free cashflow of 98 million pounds compared to 63.9 million for the same period last year. Working capital was broadly flat during the half, but we do expect the exceptional working capital inflow from FY20 of around 80 million pounds to reverse in the second half of FY21 as we rebuild our stock levels and repay the deferred element of VAT from last year. Tax paid was £19.4 million, reflecting two quarterly corporation tax payments on account. You'll remember that this time last year, the same period contained four payments on account as the government had accelerated the collection of timing of corporation tax. CapEx this half was £6.4 million, significantly lower than the £17.1 million in the first half last year. This is mainly because last year included the purchase of the freehold of our Bristol Cribs Causeway store, and also we were capitalising on development costs for the new digital platform. The repayment of lease liabilities was higher this year compared to the same period last year, as at the June quarter day we were paying our rents on a monthly basis. From September onwards, we've reverted to paying quarterly in advance. We ended the period with £140.9 million of cash compared to a net debt position of £67.7 million this time last year. Despite the short-term uncertainty, the Board has decided to resume dividends, recognising that no dividends were paid to shareholders in respect of FY20. Reflecting our strong performance in the first half of the financial year and our confidence in the medium-term outlook, the Board has declared an interim dividend of 12 pence per share, which will be paid in April. The final dividend will be decided in due course, taking into consideration the external environment at that time, together with an assessment of our balance sheet position. And whilst we are maintaining a prudent balance sheet under the current circumstances, we do remain committed to returning to our published capital and dividend policies over time, which include returning surplus cash to shareholders. The outlook for FY21 is obviously very uncertain given that all but one of our stores are currently closed to customers. It's therefore really difficult to give any meaningful guidance for the four year outlook. We are still permitted to provide click and collect services for our customers in all but five of our stores in Northern Ireland. Home delivery is permitted across the UK and continues to see high demand. Over recent weeks, we have seen that the combination of click and collect and home delivery is covering approximately 70% of the prior year total sales, demonstrating the strength of the digital offering and how much it has grown over the past year. However, with the stores closed, and as we are not taking any support from the job retention scheme, we are modestly loss-making on a weekly basis. Therefore, the biggest determinant of the full year outlook is the date at which we can reopen our stores. We are confident that once we can reopen, we will return to strong growth. From a costs perspective, we continue to invest for the future, and the second half will see a continuation of the investments in technology, data, and supply chain that we highlighted at the prelims in September. We also note some year over year timing impacts in the fourth quarter of around 22 million pounds relating to business rates being reintroduced. And we'll also be cycling over the 14.5 million pounds of JRS claims that we received in FY20. From a cash perspective, we expect CapEx in the second half to be around 15 million pounds and a working capital outflow reflecting the unwind of the 18 million pound exceptional inflow from FY20. So that concludes my summary of the first half results. And I'm now going to hand back to Nick so that you can talk about our plans going forward. Over to you, Nick.

Thanks, Laura. And what I want to pick up now is how COVID, rather than create new trends in homeware shopping, has actually accelerated prior trends. So most of you will be familiar with our overarching customer first growth plan shown here on the right-hand side, unchanged from prelims and essentially the same strategy that has been driving our performance in the years prior to the pandemic. What the pandemic has done is to permanently accelerate some of the changing habits that were already shaping our landscape. So we now see more customers wanting to make their home special, people that we call home lovers, and they now have new needs because the home is playing an ever more important role in their lives, fulfilling more functions. Additionally, we see the impact of social distancing restrictions has turbocharged the adoption of digital sales and fulfilment channels for both existing and new customers. Another continuing trend is the relative appeal of out-of-town retail parks when compared to the high street. Most of our stores and all of our in-store cafes are out of town and sufficiently spacious to enable us to provide a safe shopping environment for our colleagues and customers. We're also seeing increased engagement with good digital content and a growth in our community connections and support for local activities. And I've been talking about both of these now for several years. Finally, in terms of consumer trends, sustainability is also now growing in importance for more and more of our customers. It's not yet in the everyday mindset for the majority, but it will become so. Combine these trends with our own focus and investment activities and the businesses experiencing an intense period of innovation, capability building and learning. This is why we feel such a sense of progress right now. So let me try and fit this progress into the fundamentals of our competitive advantage and our investment case. On the left side of this slide from our presentation in September, our ambitions for long-term sustainable and profitable growth, for our brand to be the number one home waste destination, and our renewed commitment to being a good company as stakeholder expectations develop in profound ways. On the right, the fundamentals of our competitive advantage. Many of these have been in place since the IPO 16 years ago, but some are more recently developed and I'll run through them briefly. We're a brand that appeals to a wide range of customers, a market leader in a large fragmented market with the mentality of a challenger brand seeking to grow our market share. We have a distinctive and specialist product portfolio offering quality, value and style that is largely in brand and responsibly sourced from long-term committed suppliers in which we are adept at continually improving. We now have a total retail system that combines the advantages of digital and local physical shopping. We believe that we best serve customers through the integration of our digital offer with the connection and service afforded by our friendly, conveniently located stores. The fact that we are highly cash generative provides us with the agility to invest, and we have the discipline to invest and maximize long-term returns. And indeed, long-term thinking is one of our shared values, and these are guiding us on the journey we are now on to do the right thing for all of our stakeholders. Additionally, and critically, as our data and understanding of customers has grown over recent years, we now see a clear runway ahead for attracting more customers and growing their frequency. And we haven't said this before, so let me try and bring it to life for you. We've been sharing growth in active customers for a while and we've shown consistent growth over the several years in terms of the number of active customers shopping with us at least once in a 12 month period. We currently have over 12 million active customers, a number which has grown by 2 million since the first half of FY18. Total active customer growth in the 12 months up until the last first half to December 2020 was 4.4%, which includes the impact of two lockdown periods on store customer growth. Stores have historically been the channel where we acquired most of our new customers. But the growth in the number of our online active customers has accelerated over recent periods and is up by over 450% since H1 FY18. And in the 12 months of December 2020, growth was 200%. And here the two lockdown periods will be skewing the numbers with fewer new store customers due to the closures and more new online customers. It doesn't matter to our model whether a new customer starts online or in-store. We showed you in September that the growth in online customers during our fourth quarter, so that's April to June 2020, was driven in broadly equal parts by new to Dunelm customers, store customers shopping online for the first time, and increased frequency of existing online-only customers. As promised then, we've monitored the behaviour of the cohort of new customers acquired in that fourth quarter period, and they are following a similar pattern to previous cohorts in terms of repeat purchase rates and repeat purchase values within their first six months of shopping at Dunelm, as shown on the right-hand side. This gives us confidence that the customers we acquired in this skewed to online cohort are at least as valuable as previous customers. And if we turn to frequency and look now at 24 months, so two year cycles, we know that our highest value customers make up around 40% of our sales from around 12% of our customer base. Critically, the key differentiating behavior of our higher value customers is frequency, not average order value, and is further characterized by cross category and cross channel shopping. We estimate that these customers shop on average four and a half times as often in 24 months as our baseline, which is the average of the other 88% of customers. They shop across more categories, 2.7 times as many as the baseline, and they're eight times more likely to be multi-channel shoppers, but their average order value per shop is the same as the baseline. So growing customer frequency across our channels and categories is a major value driver. We think about it as a growth runway because we'll be able to acquire new customers and grow their frequency with good measurement of the return on investment of our efforts to do this. From data-driven marketing to where we invest to improve our home delivery services to where we focus our proposition development to super serve these customers. This runway will take us all the way to achieving the ambitions I set out earlier. So as we look forward to the second half of the financial year, you'll see us develop our customer proposition fastest in the areas where digital meets local and friendly in-store. We're now beginning to use our new customer data platform, and there's an example on the left, to scale customer relationship marketing activity, engaging with customers through both behavioral and lifecycle campaigns. The other example on this page I want to pull out is the introduction or the planned introduction of my account features on the website for our more frequent customers. And we're clearly at the very early stages of this, but there's a path that's well-traveled by most other online retailers. So we're very excited about what we can do here in short order. In terms of product, I think we've managed the supply-side complexity of the COVID waves well, and we have good levels of product availability and appeal in half two to support a strong reopening of stores and online trading. We're also having fun launching collections in some adjacent categories, but what I'd emphasise is the work we're doing to help customers continue to live well at home, whether that's to meet their practical needs, such as having space to work from home, or their emotional needs, such as our retreat and mindful home collections. All of our customers will continue to have unmet needs and desires for their homes, and our job is to make shopping for them fun and affordable. As we look forward to a resumption of more normal trading in the coming months, we'll be welcoming customers back, including to our Poser coffee shops, which have been closed since October. And we'll be reintroducing our customer hosts with better technology to support in-store selling of products available for home delivery. There are scores of things you can see here that are in flight. Store investments continue. There are two new ones opening in the second half and more refit activity. Home delivery innovation is accelerating and our pilots of store to door are genuinely exciting. And we've got an increased ability to run site experimentation as we work to make dynamo.com the very best homewares online experience in the UK. I'll take this final slide of our plans a bit slower as there are some important and new things for us to say here. I'm delighted to publish our scope one and scope two carbon reduction targets today and announce that we're proud supporters of the BRC's roadmap to achieve net zero by 2040. We've worked with the Carbon Trust to evaluate our Scope 1 and Scope 2 carbon footprint and have set greenhouse gas reduction targets aligned to a 1.5 degree pathway. That means for Scope 1 to reduce by 50% by 2030, using 2019 as our base, and for Scope 2, we're committed to purchase renewable energy from now onwards. We've also developed and will adopt a more stringent, most responsibly sourced cotton standard based on industry best practice and communicated by our own logo. and we're aiming for half of our autumn winter 2021 bedding collection to meet this most responsible resource standard. This is an example of a programme and we have others in timber, sheepskin, feathers and palm oil, with a target of these programmes being 100% of our supply by 2025. Other initiatives are listed here and we're learning by doing on all of them. Our goal is to make sustainability accessible for everyone and we are extremely motivated to do this. It's time to draw things to a conclusion in terms of the presentation. Our first half performance was very strong across the total retail system with growth significantly ahead of the market, despite our non-essential retailer status. We performed well across all key metrics, including sales, profit, free cash flow, customer growth and customer satisfaction. Our pace of transition to a more digital, more customer-focused business has accelerated, partly due to the consumer changes happening around us, partly due to our own focus and investment in the right areas over recent years. The result is that our fundamentals in terms of competitive advantage have been strengthened, and we feel well-placed to win in a large and still fragmented marketplace. short term we need to navigate the closure period and there's uncertainty on when we'll reopen but longer term we've never been more ambitious or more confident i'm really fortunate to be part of a great business with an awesome team and i'm grateful to all of my colleagues and all of our other stakeholders for their support over this period i trust you found this a useful presentation and i i really hope we've been able to convey our our sense of excitement in the plans we have You know, the pandemic is awful, but it will end. And when it does, our customer and competitor landscape will have shifted significantly. We've been adapting to these changes for several years now. And I think in the last 12 months, probably more successfully than ever before. And that is why we're so confident in the future. So looking forward to updating you on the progress we make in the second half. Looking forward to prelims in September and trust you'll stay safe and well. And thank you for your attention this morning. All the best from both of us.