Dunelm Group plc

Good. So welcome to Dunelm's interim results. I know I've met many of you before, but for those that haven't, I'm Chloe Moriarty, and I joined us four months ago, having spent 15 years with Sainsbury's and almost a decade with Bain before that. Now, over the last four months, it has been tremendous to validate for myself all the things that I believe to be true about this business. And I've been able to do that through a deep onboarding. Now, having visited almost 60 of our shops, many of our logistics sites engage with our dedicated partners and, of course, spend time with our teams in the centre. And look, this really is a beautiful business, right? We are product-centric with something for everyone, carefully crafted with our long-standing suppliers across that end-to-end supply chain. This is a business that really understands the role of the physical store, but how it can be complemented with the role of digital. And it also has something that is really difficult to build from scratch. We have colleagues who really care. And all of that is in service of our customers. Now, over the course of this morning, between Karen and I, we're going to walk through our H1 results, many of which have already been well-trailed. Thank you for all of your questions and some provocations post our trading statement. What we've endeavoured to do is actually weave the answers to those questions through our presentation to keep us all in check, but we have plenty of time in Q&A if there's anything that we don't cover. And then uniquely on this occasion, given that it has been a number of months, I'd love to share my initial reflections on where I and we see the opportunities for now and for all the years to come. Word of warning, this is not a capital markets day undercover, right? This is a data share of those insights for us to be able to bring it to life. So let's start with the half that was. We demonstrated a very solid H1 start to this financial year with 3.6% growth year on year. It very much was a half of two quarters with strong growth of 6.2% in the first quarter and softer growth of 1.6% in the second quarter from which we're now rebounding. But our strong focus on our gross margin demonstrated further margin enhancement of 60 bps, now up to 53.4%. And we have consolidated our market share position, again, up a further 0.2 percentage points, now at 7.9% market share. Now, we have endeavoured through this transition to ensure that we've kept all of our measures and metrics really consistent to enable you to best follow our business. But today we are introducing one additional measure for the purpose of this session, and that's all around the customer, CSAT, customer satisfaction. And from a really strong base, and I wouldn't expect to see this level of increase year on year given the base, we have demonstrated a 2.6 percentage point increase, which really reflects the focus that this team and this business is putting on our customers and noting that our customers are noticing. As well trailed in our trading statement, Karen will go into a lot more detail, I promise, on our £114 million outturn and particularly around the phasing of our costs. But we've also had very strong cash flow. So free cash flow of £171 million, which is relatively stable year on year. Now, in this business, we have a very clear capital allocations policy and one that I really buy into. And it is as a result of that that we're able to share our interim dividend and also announce our special dividend for this financial year. So let's get into a bit more detail on the growth from the half. So we demonstrated 3.6% year-on-year growth over the half in what was a relatively subdued market. But worthy of note is actually the shape of our business. So as I look across our total year-on-year sales from year to year, that's broadly consistent. But we do see variances between the quarters. And that's driven by seasonality, it's driven by discounting, and it's driven by eventing. And we do typically see a lower Q2. Some of that is external. Some of that is a choice as to how we run our business. But we do want to spend a little bit more time on Q2 this time around because it still was softer than we anticipated. We know that consumer confidence has remained very subdued and has done so now for a number of quarters. So every single penny or pound that a customer spends is hard-earned. Equally, through this period of time, we saw much deeper levels of discounting and the discounting lasting for longer. This is an area that we chose to not further engage in and that did impact our participation. And lastly, as again trailed in our trading statement, whereas furniture has been providing tailwinds for us over the last number of quarters, it didn't fare well in this environment. And part of that was driven by a miss on our side from an availability standpoint. We introduced a new system and it didn't forecast for the demand that we saw later in the year. Now, I'm going to go pains to labour that when we introduced F&R, so our forecasting and replan tool, and we rolled it out across the different categories, it is performing exceptionally well for us. It is driving up availability and it's driving down stockholding, exactly what we wanted to do. It didn't work as effectively in furniture. Lessons learnt, we've embedded those learnings and we've moved on. And in the spirit of moving on, we are confident for the half to come. So we've started the year with a strong sale, and it was great to see our customers buy into that event, buy into Dunelm, and buy into our products. And for the record, the highest selling item, yet again, was Dorma Full Forever Pillows. So if you haven't got one, this is basically the UK market telling you that you should. We equally took a good bit of time focusing on newness, right, those full price sales. And we could see our customers engage in those products. So we are bang on expectations when we look at all of those new season lines. And lastly, though there was a bit of a soft launch pre-Christmas, There were 130,000 customers who managed to find our app and download it organically and have continued to do so. But at the end of this month, we will have our official customer launch of the Dunelm app. And whilst we're relatively late, we'll acknowledge that, to the digital space, we are seeing really high levels of engagement with these early adopters, and in particular around the basket building and the basket size. So more on that later, but before we go into that detail, I'm going to hand over to Karen to take us through the numbers for the half. Karen. Thank you. We'll do a seamless change here.

A seamless change here, yep. So... Really nice to see everyone today. Nice full room here. Thank you for taking the time to join us. As usual, I'm going to start with a summary of the half-year financial results and then take you through our financial performance in more detail, as Chloe said. We grew the business over the six months and continued to take market share despite some periods of softer sales in Q2. Our gross margin was strong at 53.4%, up 60 basis points year on year. Our net operating costs were higher this half, as previously flagged, driven by the relative balance of investment, productivities and inflation, with some phasing of costs into H1 rather than H2. We expect the year on year increase in costs to moderate significantly in H2. Profit before tax of £114 million was £9 million lower than last year, primarily due to operating cost dynamics, which I will explain in more detail. Our cash generation remains strong. We're reporting a headline fee cash flow of £171 million and a half-year net cash position of £13 million. Similar to this time last year, these figures included a temporary favourable timing variance on payables of £93 million, which cleared very shortly after the end of the reporting period. With healthy cash generation and confidence in our business prospects, the Board has declared an interim ordinary dividend of 17p per share, up 3% year-on-year, and we're also announcing another special dividend of 25p per share. We had a solid overall first half of trading, with sales up by 3.6% to £926 million. Year on year, our digital participation increased by 2 percentage points to 41%. Quarter 1 sales were strong and grew at more than 6%, but we were disappointed with the Q2 performance of 1.6% growth, with external data pointing to the end of the quarter being particularly challenging for UK retail. Sales growth was driven by core categories, from heritage areas like soft textiles to newer areas of specialism such as lighting. However, as Chloe explained, in furniture, as well as macro pressures, and while several subcategories performed well, we had availability issues of some key product lines. This was caused by challenges in how we managed forecasting and ordering, where we had a lot of newness. The issue has now been resolved and availability has significantly improved. Across the half, we saw growth in average item values driven by product and category mix, whilst volumes were broadly flat. We expanded gross margin percentage by 60 basis points year-on-year to 53.4% with the upside mainly driven by favourable foreign exchange rates. We kept retail prices broadly stable, we were disciplined on promotional activity and we managed input costs closely. We expect foreign exchange tailwind to continue over the remainder of the year. It is important for me to explain how the profile of our operating costs will work across the year. In H1, net operating costs of £375 million were £32 million higher year on year. In the first half of this year, our operating cost base increased through a combination of volume-driven cost growth, inflation and investment, partly offset with productivity gains. Volume-related growth of £11 million related to the variable costs associated with digital sales, so that's logistics and performance marketing costs. The pressure on costs in the retail environment is well documented. Sales, marketing and distribution costs are the most impacted by the hourly wage rate inflation, the national living wage and national insurance contribution increases. Aside from this, we're tightly managing inflation in our non-labour cost base to limit the overall impact to £11 million versus this time last year, or just over 3% on the total operating cost base. we're reporting an incremental £9 million of investment in the business in H1. This was driven by the full impact of costs associated with the new stores opened in H2 of the prior year, and that's including the cost of our store openings in Ireland. As you can see, we offset some of the cost growth in the half with productivity benefits amounting to £6 million. These came from further optimisation of performance marketing and from work on store and other labour costs, and a latter included some of the early benefits from the rollout of self-serve checkouts. Our other items, totalling £7 million, contributed to the H1 year-on-year increase in costs. So we'll always have some other year-on-year cost ups and downs in any time period, and in H1, the biggest of these were year-on-year cost increases relating to share-based payments, including the CEO buyout cost, and a pull forward of brand marketing from H2 into H1. We continue to balance inflationary pressures alongside our investment plans, all the while ensuring that we continue to deliver productivity gains. And now here you can see how we expect costs to moderate significantly in the second half of the year by looking at the relative year-on-year movements in the blocks of spend that I've described for the first half of the year. So we still expect to see volume growth in costs in line with sales channel mix. And inflation will continue to be driven by labour costs. But we expect this to have peaked in H1, and we expect a lower national living wage increase in April 2026, which will impact our Q4 costs. Whilst we continue to invest, investment spend growth will be lower in H2, largely because we started to encounter new store-related costs in H2 last year, and therefore they've annualised. Our productivity gains will accelerate in H2, primarily as we deliver more benefits from work on our operating models, including further gains from the rollout of self-serve checkouts, and also as we continue to deliver our efficiency gains and performance marketing. And in H2, we expect a reduction in other items year on year, and that's including the relative benefit from the phasing of the brand advertising pulled forward into the first half and a small benefit in business rates. Reflecting the softer trading in Q2 and the timing of certain costs, PBT of £114 million declined by £9 million year on year. Higher gross profit was more than offset by the cost profile that I've just explained and this results in a reduction in EPS from 45 pence to 41.7 pence. Our effective tax rate of 25.6% was stable and within our guidance of 50 to 100 basis points above the headline rate of tax. We're confident that our plans for the second half, including those on costs, will result in a PBT for the full year in line with consensus expectations. Cash generation remains strong in the half, with a 65% conversion ratio. As I explained up front, we're reporting a headline free cash flow of £171.4 million. However, the same as last year, this includes a timing difference on working capital, which created a very temporary inflow of £93 million due to supplier payments in transit at the end of the period, which cleared on the second day of H2. Again, there was nothing unusual about the payments. There were normal course of business payments to suppliers and for services and the impact is neutral over the full year. Inventory was well controlled and we ended the half with inventory levels consistent with the prior year. Total capex in H1 of £23.2 million was materially lower than the prior year, which included a freehold store purchase. This year's first half CAPEX spend primarily relates to store estate spend, including our regular programme of refits, small works and decarbonisation activity. CAPEX also includes spend associated with self-checkout rollout and capitalised tech spend, including the app. We were pleased to reopen our Yeovil store, which had been closed since the end of August 24 due to fire damage. And we also opened our second inner London store in Wandsworth, and it's trading well. Store openings have been slow this year, and two stores will likely now open early in FY27. But our pipeline for FY27 is stronger, and we see plenty of opportunity for future store openings to drive growth, and CLO will give more colour on this. We ended the period with a headline net cash position of £13 million, equating to an underlying net debt position of about £80 million after adjusting for the payments which cleared just after the period end. We have a capital allocation methodology that states that after prioritising investment in the business for growth, we'll return surplus cash to shareholders. And in this half, we're continuing our strong track record of shareholder returns. With confidence in the prospects of the business, the board has declared an interim ordinary dividend of 17 pence per share, up 3% year on year. Although the underlying net debt to EBITDA position at the end of the period was within policy range at 0.3 times, the ratio was outside of the range at the end of most months in the period and the Board has therefore declared a special dividend of 25 pence per share. And this morning we also announced one of our periodic intentions to buy back up to 1.6 million shares to satisfy the requirements of employee share option schemes. So I'll finish by summarising the outlook and guidance for FY26. We've been encouraged with trading in the early part of Q3. Customers responded well to our winter sale and sales growth to date has been similar to the overall growth for H1. We're working hard on mitigating inflationary pressures, especially wage inflation, with value creating initiatives. We're therefore confident in our plans to deliver full-year PBT in line with market consensus. We expect our effective tax rate to be 50 to 100 basis points above the headline rate of corporation tax. And from a cash perspective, we expect a broadly neutral working capital position at the end of the year. And we're reducing our capex guidance to around £40 million this year, down from our previous view of about £50 million, and that reflects the timing of new store openings. So thank you for your attention, and I will now pass back to Chloe. Thank you.

Okay, so this really is a brilliant business, right? And over the last period of time, as I've been meeting with some of you and others, that's what also you've been telling me, right? There is lots to like about Dunelm. And I agree. So what we're going to do over the next 10 minutes is talk through six of the data-driven insights that we as a team are now using to build the strategic evolution over the coming weeks, months and years. And as we should, let's start with customers. So we have universal appeal. And we're not going to shy away from that. So as I look at our customer base, our customer base broadly reflects the UK population. Here at Dunelm, we have something for everyone. And we have really high levels of awareness. So the UK customer knows who we are. But when I look at the consideration to buy, that drops off. Now, there's nothing massive here, right? That's totally in line with benchmarks. It's absolutely in line with averages. But as the market leader, I and we do expect more. And then secondly, when I think about where we stand out for customers, and we do, there are equally opportunities for us to grow. So what you're looking at on the right-hand side, across the top, are a subset of our categories and our sub-cats. And from top to bottom, we're looking at the key buying factors. So these are the factors that customers consider when they're picking where to buy and what to buy. And they're ranked in order of importance. And as you can see, Dunelm is number one across many of them, but not across all. So we can see a real opportunity for us to match the perception with the true reality of what we offer. And this week we announced externally that we're bringing in some new capability into Dunelm to be able to supercharge this. So I'm thrilled that Laura Harrocks will be joining us as our Chief Customer Officer. And when she joins us in a couple of weeks at the beginning of March, her two key priorities are going to be around our brand positioning and moving the dial on that perception. We also have deeply loyal customers, right? And those loyal customers are on a growing customer base. But critically, we understand those customers better and hence we're able to respond to their needs. So now recognising that a third of our customers make up two thirds of our sales. But even for those most loyal customers, we still only capture 15% of their homewares wallet. So there is so much more headroom for us. And as we think about how we do that, it is about the connection, it is about the contact, and it is about the personalisation. So over the last quarter, we have been trialling these omnichannel communications and incentives. And we've trialled them in store and online. And we're seeing across the board high levels of incrementality, with an opportunity given we've got relatively low redemption rates. But whether it is in-store or online, we are seeing a mix of basket build or frequency. So over the coming trading periods, we're going to take those learnings and make them even more personalised. And we all know this, but our products up to now are just brilliant. And in any given year, we've got over 100,000 items live for our customers. One of the things that we're really proud of is our product brand as Dunelm. So we've now got about 70% of our products going out the door under the Dunelm brand. But there's more that we can do to help our customers understand our good, better and best. Because when I look at the packaging across some of those ranges, sometimes it's hard to distinguish. So we're going to create greater clarity so our customers can always opt in to whichever tier works for them. We'll also be thoughtful of our owned brands and national brands and where they have a role to play. But where they create cost for us as a business or where they create complexity or confusion for a customer, we're going to remove them. And we've already started doing that. We've already retired now at the start of this financial year elements and edited life to name two. And then this last chart on the right-hand side really caused us reflection, right, because we are a specialist. And what you should expect for us and will expect for us going forward is that we will continue to have great ranges. We will continue to bring newness to the market. But we're equally going to ensure that each and every one of those SKUs works really hard for us and really hard for customers. And right now, half our SKUs contribute most of our sales. So we've got some work to do. But again, we're going to use that insight across our good, better and best to help inform our ranges even more. And I guess case in point, our starter for 10 is ensuring that all of our best selling lines are in each and every one of our stores. And we're moving fast, but in our lower, our smaller stores, We only have 70% of our top-selling SKUs, so we're changing that now and we'll have that embedded before the end of the financial year. This is a digital world. We all know that. But even in that digital world, and particularly in homewares, the role of the physical really matters. To be able to touch, feel and see product really matters. So we are going to double down our focus on our existing estate because, candidly, they're not growing fast enough. But at the same time, in spite of us having access to customers, so 15% of the UK population can reach us within 15-minute drive. That's high, but it's not high enough. So we're going to go again at our store expansions. We've reappraised the market, so looked at where the demand is, our presence, our competitors' presence, and ultimately the different formats that we're able to bring to bear. And we can see an even bigger opportunity than we've showcased before. And lastly, again, as I alluded to earlier, we have come late to digital, but now at 41% participation, we are holding our own. But interestingly for us, we benchmark really highly on many digital journeys, and in particular, search engine optimisation. but there are still countless opportunities for us to go after, whether that is in the social commerce space or generative engine optimisation or the app that we just referred to. When we launch the app at the end of this year, at the end of this year, at the end of this month, we will be able to bring shop the look, shop the range. We'll be able to bring find your local store, find the products within the store, find the stock within the store. And critically, will be able to release products fresh to that market, well ahead of any other customer. So again, my call to action is if you haven't downloaded the app, I strongly recommend you download it now. This is a business that has strong customer satisfaction. Of course, there is always room for improvement. But in addition to the strong customer satisfaction, When we notice something, when we see something, this is a business that can move at pace. So let's take an example of home delivery. We have nationwide reach in home delivery. It is a large and growing part of our estate, so one we need to pay attention to. But when I look at CSAT, so our customer satisfaction, customers who rate us five out of five on their experience, you can see a meaningful difference between our home delivery two-person, large items, and our home delivery one-person, smaller items. When we interrogated that further, you could see that a big driver of that CSAT was damages. And of course, everyone here will know the costs associated with damages, not only the lost sales, and the fact that that customer may not return. But equally, we've high costs associated with the contact centre, return of the product, replacement of the product, refund of the product, re-delivery of the product and potentially goodwill. So we address that and before Christmas, we've changed our packaging. And now we've already reduced our complaints across the board in one person home delivery by 20%. So for a little bit of extra cost in our packaging, we have delivered significant value across the value chain and we'll expand from there. So my key takeaway for you on this slide is we are going to be obsessed with our customers and what our customers tell us. But we are going to, as system owners and as system thinkers, follow the value across the value chain and as such return value. And last but definitely not least, we've great colleagues, 12,500 amazing colleagues with great capabilities. And we have been investing, as have others, across the front end and back end for a number of years. But you'd expect me to say this, the job's not done. The job in this space will never be done. What we are looking to do is as we make those choices on tech, We're being really thoughtful about moving from best in breed to best in suite. So working with fewer, bigger partners, which will make our integrations more seamless and less costly. It'll ensure we have access to the biggest and best thinking and us be present on their roadmaps. And it'll also provide more context in our business so that for every penny we're spending, we're ensuring we're getting more impact for that investment. So building capabilities for the future is a big part of the route ahead across people, processes and systems. So if you ask me, do I think there are strengths and assets in this business? Absolutely. Do I think there are significant opportunities on the back of those existing strengths and opportunities? Absolutely. With universal appeal, but we're going to maximise that appeal through a clearer brand proposition. We already have really loyal customers, but we're going to engage and delight those customers at each and every opportunity to drive share of their wallet. We know we've got outstanding product choice. We have a big opportunity to be able to use that master brand and ensure we make our amazing ranges more shoppable. We've got physical and digital reach. but we're going to double down on the existing and ensure that we maximize each and every ounce of that white space. We've got great colleagues and platforms. And as a result, we're going to stand on the shoulders of giants and ensure that we are a future fit across all. And we have strong customer satisfaction. but ensuring that we unleash the best of what Dunelm has from end-to-end experience, I believe that we're going to be able to drive repeat business, repeat purchases, again and again and again. So we are the market leader. We only have 7.9% market share in a highly fragmented market. There is so much more to go for. As we've discussed, we have lots of assets across customer, across brand, across products, across channels. But each and every one of those assets presents a large and growing opportunity for us. And we have a proven track record of discipline and strong cash generation. And we're not going to move away from that, but we're going to build on it with additional efficiency and productivity opportunities. You know, you might have gathered I'm out and about a lot and I'm talking to customers all the time. But one reflection really stuck with me from a customer. And when I said, Danelm, what do you think? And they said, Danelm, it's actually very good. And I agree. We are actually very good. And the job of work for us is to remove that actually sentiment Because I do believe the UK core opportunity remains compelling. And we are best placed as the market leader to be the home of homes. Thanks a million. What we'll do now is hand over to some Q&A in case you have one or two questions that you'd like to ask. And we'll ensure we cover them all. I'll follow you up. Good morning. Apologies, I missed a point of ceremony. Do you mind mentioning for the webcast your name and where you come from?