www.dunelm-mill.com l D u n e m G r o u p p l c A n n u a l r e p o r t 2 0 1 0 Dunelm Group plc Annual report 2010 Dunelm Group plc Fosse Way Syston Leicester Leicestershire LE7 1NF Tel: 0116 264 4356 Email: investorrelations@dunelm-mill.co.uk Advisers Corporate Brokers and Financial Advisers Legal Advisers Auditors Principal Bankers Registrars Financial Public Relations UBS Investment Bank 1 Finsbury Avenue London EC2M 2PP Tel: 020 7567 8000 Oriel Securities Limited 125 Wood Street London EC2V 7AN Tel: 020 7710 7600 Allen & Overy LLP One Bishops Square London E1 6AO Tel: 020 3088 0000 KPMG Audit Plc 1 Waterloo Way Leicester LE1 6LP Tel: 0116 256 6000 Barclays Bank plc Midlands Corporate Banking PO Box 333 15 Colmore Row Birmingham B3 2WN Tel: 0845 755 5555 Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Tel: 0871 384 2030 Hogarth Partnership Limited No. 1 London Bridge London SE1 9BG Tel: 020 7357 9477 Dunelm is a fast growing specialist out-of-town homewares retailer providing a comprehensive range of products to a wide customer base, under the brand name Dunelm Mill Contents Business review 01 Highlights 04 Chairman’s statement 06 Chief Executive’s review 10 Finance Director’s review 15 Directors Governance 16 Letter from the Chairman 17 Corporate governance report 21 Letter from the Chairman of the Remuneration Committee 23 Remuneration report 27 Directors’ report and business review 31 Corporate social responsibility 35 Statement of Directors’ responsibilities Financial statements 36 Independent Auditor’s report 37 Consolidated income statement 38 Consolidated statement of comprehensive income 39 Consolidated statement of financial position 40 41 42 Accounting policies 47 59 Parent Company financial statements Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the annual financial statements Dunelm Group plc Annual report and accounts 2010 1 Operational highlights Financial highlights FY10 94 superstores at 3 July 2010 10 new superstores opened in the year Average superstore selling area of 29,000 square feet Around 20,000 lines in a superstore – broad and deep ranges Revenue increase 16.3% (vs 53 weeks in FY09) Operating margin 15.3% Operating cash flow £72.0m after interest and tax Revenue† Operating profit*† 2010 £492.8m 2008 £391.8m 2009 £423.8m 2007 £354.7m 2006 £315.2m 2010 £75.5m 2008 £49.4m 2009 £52.6m 2006 £38.2m 2007 £40.8m Profit before tax*† Net cash from operations† 2010 £76.8m 2009 £67.4m 2010 £72.0m 2008 £49.1m 2009 £53.5m 2006 £38.0m 2007 £37.8m 2008 £45.0m 2007 £34.7m 2006 £24.1m * The 2007 figures for operating profit and profit before tax included non-recurring items in respect of IPO and warehouse relocation as well as a non-recurring gain on a property disposal. The combined effect of these was to reduce operating profit by £3.2m and profit before tax by £3.0m. † The 2009 figures reflect a 53 week trading period, compared with 52 weeks in all other years. 2009 £52.6m £51.6m1 2008 £49.4m 2005 £36.2m 2006 £38.2m 2007 £40.8m 2009 £423.8m £417.1m1 2008 £391.8m 2007 £354.7m 2006 £315.2m 2005 £282.5m 2 Dunelm Group plc Annual report and accounts 2010 Business review Business strategy: These are our key priorities Dunelm Group plc Annual report and accounts 2010 3 Priority Priority Priority Priority1 Open more superstores We will continue to drive Dunelm’s growth by rolling out the successful superstore format. We see the potential to increase from 94 superstores last year-end to 150–200 superstores across the UK. 2 Further develop our specialist position We will continue to focus on homewares and our ‘Simply Value for Money’ proposition – deep ranges of quality products at keen prices, with high availability and supported by friendly service. We intend to keep strengthening each element of the offer. 3 Grow Dunelm Direct We see significant opportunity to grow our overall business by further developing direct channels to complement our expanding store base. 4 Develop and exploit our infrastructure We will continue to upgrade our infrastructure where necessary to support our ambitious growth plans. 4 Dunelm Group plc Annual report and accounts 2010 Business review Chairman’s statement Geoff Cooper Chairman Our key strengths • UK’s largest specialist homewares retailer • • Portfolio of established out-of-town superstores, average sales area 29,000 sq.ft. ‘Simply Value for Money’ proposition: – Good quality products – Great prices – Industry leading choice – Deep availability – Friendly service • On-line store featuring 14,000 products • Owner of ‘Dorma’ brand • Robust, scalable infrastructure • Experienced management team, entrepreneurial culture • Highly cash generative • Strong balance sheet In my interim report to shareholders, I commented on the excellent performance delivered by Dunelm over the 26 weeks to 2 January 2010. I am delighted to say that the business has remained very strong in the second half and we have delivered not only impressive sales growth for the full financial year, but also an outstanding 43.5% increase in profit before tax. The business has continued to generate very strong cash flows. As a result, we were able to return £43.2m of surplus capital to shareholders in the course of the year – in addition to our normal dividends whilst continuing to invest in the business to support our future growth. The proposed final dividend of 5.0p (2009: 4.0p) brings the full year dividend to 8.0p (2009: 6.0p) – an increase of 33%. Looking ahead, we remain cautious about the outlook for UK consumer spending and in turn the impact on the homewares market. However, we are very confident that Dunelm will continue to grow its share and become an even more significant player over the coming period. I am excited about forthcoming changes in Board composition. After almost 15 years as Dunelm’s Chief Executive, Will Adderley has decided to relinquish that role from February 2011, when he will assume the new role of Executive Deputy Chairman, a full-time Board position. In this new role, he will be able to focus on specific aspects of the Group where he has unique expertise and experience, under the direction of the newly appointed Chief Executive. Nick Wharton will assume the role of Chief Executive Designate with effect from 1 December 2010, and will take over as Chief Executive after the announcement of the Group’s interim results in February 2011. Nick has been a Non-Executive Director of Dunelm since August 2009. This change is a reflection of the Board’s desire to enhance and expand the executive management of the Group as it embarks on the next important phase of its development. The change represents the culmination of a detailed review by the Board, over many months, of the executive management resources required to maintain the pace of development through the next phase of our exciting growth plan. This review was instigated at Will’s request and has involved a thorough and formal recruitment process, including benchmarking of external candidates by an executive search firm. In his new role as Executive Deputy Chairman, he will be able to dedicate all his time and energy to aspects of the business which he is passionate about and where he has a unique level of insight and experience. At the same time, we are bringing increased strength in depth to the executive management team through the appointment of a new Chief Executive. Nick will be a worthy successor to Will. As well as being a hugely experienced retailer he already has a good understanding of Dunelm’s business and, most importantly, of our business philosophy and values. He will maintain the drive and sense of purpose which Dunelm has been used to under Will’s leadership. Through his time as a Non-Executive Director, he has built strong relationships with both Will and David Stead, our Finance Director, and we are absolutely confident that the new team will combine to take Dunelm forward to further success. The whole process typifies the foresight and objectivity shown both by Will, and by Bill and Jean Adderley before him, in considering the long-term interests of Dunelm and all its shareholders. Geoff Cooper Chairman 16 September 2010 Dunelm Group plc Annual report and accounts 2010 5 Priority 1 Open more superstores Superstores as at 4 July 2009 Superstores opened since 4 July 2009 New superstores Since 4 July 2009 we have opened 12 new superstores adding almost 400,000 square feet of selling space 6 Dunelm Group plc Annual report and accounts 2010 Business review Chief Executive’s review Business highlights • 8.0% increase in like-for- like sales • Exciting developments in our customer offer • 10 new superstore openings in FY10 • 9 major refits of existing stores in FY10 • Strong growth in Dunelm Direct • Continuing investment in infrastructure Trading I am delighted to report further outstanding growth during the last financial year. Our overall sales increased by 18.2% compared with the equivalent 52 week period in the prior year. Like-for- like sales were extremely strong in the first half and the momentum carried through to a full year increase of +8.0% (again on a 52 week basis) – significantly beating the overall homewares market. We have delivered these results by retaining a sharp focus on the four priorities which continue to form our growth strategy. Priority 1 – open more superstores We opened 10 new superstores in the year, adding over 300,000 square feet of selling space. As at the year-end, our superstore chain comprised 94 stores (including two stores previously treated as high street shops) with 2.8m square feet of selling space. We have opened two further stores since the year-end in Milton Keynes and Torquay and we are contractually committed to nine more units which are due to open in the current financial year, one being a relocation of an existing under- spaced superstore. Our recent openings have all traded well. Our target is for new stores to pay back their ingoing investment within 36 months on a discounted cash flow basis, but we have consistently beaten this. The actual payback period for the last 30 openings is expected to be around 26 months on average. Taking confidence from the performance of both new stores and the existing chain, we have increased our target for national coverage in the UK from 150 to 200 superstores. Priority 2 – further develop our specialist position We know that it is essential for us to keep evolving our retail proposition. We remain as passionate as ever about giving ‘Simply Value for Money’ to all our customers – a combination of good quality products at great prices, industry-leading choice, deep availability and friendly service. • Recent developments in our offer include the following: . We continue to roll out Dorma • dedicated Dorma centres which are now represented in 32 stores. We have extended the range of products sold under the Dorma brand to include bathroom, gift and tableware lines. . Window treatments/Dunelm At Home We developed some time ago a more integrated and space-efficient way of merchandising products relating to windows (curtains, blinds, tracks and poles, fabrics, nets and voiles). This execution of the offer is now present in 26 stores. In addition, we now supplement our in-store offer with a free home consultation service, branded Dunelm At Home, which allows customers to select from our range of window treatments with the help of an advisor in their own homes. This service is currently provided from 30 stores. Furniture full review of our furniture ranges, and created an extended furniture department in several of our larger stores. Kitchen different version of our traditional kitchen department. The new concept divides the offer between cooking, dining and utility and offers much deeper ranges in each of these areas, supported by new display methods and greater space allocation. This concept has been introduced to 15 stores to date. . We have created a radically . We have completed a • • Dunelm Group plc Annual report and accounts 2010 7 Priority 2 Further develop our specialist position • Dorma centres in store • Roll-out of window treatment departments • Development of Dunelm At Home • Extended furniture department in larger stores • Extended kitchen ranges “Miss It Miss Out” promotions These special deals further add to the variety and interest in our stores. 8 Dunelm Group plc Annual report and accounts 2010 Business review Chief Executive’s statement continued • . We have evolved our Miss It Miss Out use of “Miss It Miss Out” campaigns to signpost great customer deals, and we are increasingly using this mechanism to clear discontinued lines outside of our traditional sale periods. This further adds to the variety and interest of our in-store offer. We have continued investing to improve the shopping environment in our older stores. We completed nine major refits in the last financial year (2009 – six). The total cost of a refit including the impact of sales disruption is typically around £0.8m per store; this includes any expenditure necessary to maintain the fabric of the building. Sales uplifts in refitted stores have run approximately 10% ahead of trend. Going forward we plan to continue investing judiciously in major refits whilst also taking opportunities to refresh stores through smaller interventions. Priority 3 – grow Dunelm Direct During the last financial year we successfully implemented a new software platform for our on-line business (www. dunelm-mill.com and www.dorma.co.uk ). This has enabled us to offer a much improved experience for on-line visitors as well as giving customers the option of collecting on-line purchases in store. At launch of the new platform we were able to offer approximately 7,000 lines for sale; this number has now doubled. We continue to invest in this channel, with regular enhancements to functionality and further expansion and strengthening of the Dunelm Direct team. As a result of this focus, we continue to see strong growth in on-line sales. Dunelm Direct is now consistently ranked amongst our top 10 stores in sales terms and we are confident that further growth will be achieved. Priority 4 – develop and exploit our infrastructure We continue to extract further benefits from our IT systems, enabling us to improve stock control and make in-store processes more efficient. We have doubled the space available to us at our Stoke warehouse, to 500,000 square feet. Assuming that the proportion of merchandise distributed via Stoke remains constant, this will give us the capacity to support growth in our store estate for the foreseeable future. To support our continuing growth, we have acquired a plot of freehold land for a new head office near to our existing base in Syston, Leicester. Construction of a new building is under way and we expect to relocate in mid-2011. energy to become our next Chief Executive. He is a great addition to the Dunelm team and I very much look forward to working with him. I have been privileged to run Dunelm over the last 15 years and I feel invigorated by my forthcoming new role which will allow me to spend much more time on the areas where I believe that I can add the most value. As the Group’s largest shareholders, my family remain totally committed, both emotionally and financially, to Dunelm for the long-term and we are as excited as ever about the next phase of its development which will take place under Nick’s leadership. We are convinced that these changes will underpin the long-term development and success of the Group. Current trading We are clearly operating in challenging economic conditions, and we expect to see continuing pressure on consumer spending. Will Adderley Chief Executive 16 September 2010 Despite this backdrop, we are confident that Dunelm will demonstrate resilience, benefiting from our focus on continuing to deliver ‘Simply Value for Money’ and our low average transaction values, and that the business will continue to grow and to strengthen its position in the UK homewares market. Performance in the early weeks of our new financial year has been pleasing, given strong performance in the comparative period last year. Board change As our Chairman explains in his statement, I will shortly be handing over my responsibilities as Chief Executive to Nick Wharton, allowing me to take on the new role of Executive Deputy Chairman. I am delighted that we have been able to attract somebody with Nick’s talent and Dunelm Group plc Annual report and accounts 2010 9 Priority 3 Grow Dunelm Direct • New technology platform launched September 2009 • 14,000 products available • Collect in-store service • Rapid growth • Continuing enhancements 10 Dunelm Group plc Annual report and accounts 2010 Business review Finance Director’s review Financial highlights • Revenue increased by 16.3% (18.2% on a 52 week basis) • • Operating profit increased by £22.9m (£23.9m on a 52 week basis) Fully diluted EPS increased by 44.6% (47.0% on a 52 week basis) • 33% increase in dividend • £43.2m return of capital delivered Operating result The year ended 3 July 2010 was a 52 week accounting period but the comparative year ended 4 July 2009 was a 53 week accounting period. The additional 53rd week last year represented £6.7m of revenue and approximately £1.0m of operating profit. Unless otherwise stated, reference to 2009 or the comparative year relate to this 53 week period. Group revenue for the 52 weeks to 3 July 2010 was £492.8m (2009: £423.8m) an increase of 16.3% (18.2% on a 52 week basis). Like-for-like sales (comparing stores which have traded throughout the last two financial years) increased by 8.0% on a 52 week basis and new space contributed a further 10.2%. The like-for-like sales growth was strongest in H1 at +15.4% with H2 recording +0.8%, however the shift in our accounting calendar due to the 53rd week last year meant that more of our winter sale fell in the first half than in previous years. Adjusting for this the like-for-like performance would have been approximately 2.0% lower in H1 and 2.0% higher in H2. Gross margin has continued to increase year on year, due primarily in the most recent period to successful product life cycle management. As a result, gross margin ended the year at 46.8% (2009: 44.9%) a 190 bps improvement. Gross margin is now calculated after taking into account all charges for inventory write- downs, which were previously included in operating costs; the comparative figures for the 53 weeks to 4 July 2009 have been restated onto this new basis. Operating costs increased 12.8% compared with last year, with the increase primarily due to investment in the portfolio and supporting central infrastructure. Operating costs in like-for-like stores increased only 0.2% held down by improvements in labour cost ratios, a reduction in energy costs and lower than expected rent and rates settlements. Non-store costs grew by £3.4m (11.0%) to support the growth of the business. Operating profit for the financial year was £75.5m (2009: £52.6) an increase of £22.9m (£23.9m on a 52 week basis). EBITDA Earnings before interest, tax, depreciation and amortisation were £86.9m. This has been calculated as operating profit (£75.5m) plus depreciation and amortisation (£11.4m) and represents a 37.3% increase on the previous year. The EBITDA margin achieved was 17.6% of sales (2009: 14.9%). Financial items and PBT The Group generated £1.3m net financial income for the year ended 3 July 2010 (2009: £0.9m). Financial items includes foreign exchange gains of £0.8m (2009: £1.0m) arising in respect of US dollar holdings; the Group held $1.8m in US dollar cash deposits and had forward contracts covering approximately 35% of the anticipated US dollar spend over the next 12 months. The balance of net financial income, £0.5m (2009: –£0.1 expense), represents interest on surplus cash deposits. After accounting for interest and foreign exchange impacts, profit before tax for the year amounted to £76.8m (2009: £53.5m), an increase of 43.5%. Tax, PAT and EPS The tax charge for the year was 29.2% of PBT (2009: 29.7%). Ineligible depreciation was at a similar absolute level to last year and this combined with a very significant increase in PBT at 28% has resulted in a lower effective rate. Basic EPS for the year ended 3 July 2010 was 27.1p (2009: 18.8p), an increase of 44.1%. Fully diluted EPS increased by 44.6% to 26.9p (2009: 18.6p or 18.3p on a 52 week basis). Dunelm Group plc Annual report and accounts 2010 11 Priority 4 Develop and exploit our infrastructure • Improved stock control • Distribution centre capacity doubled • Relocation to new head office in mid 2011 12 Dunelm Group plc Annual report and accounts 2010 Business review Finance Director’s review continued Capital expenditure Gross capital expenditure in the financial year was £24.6m compared with £26.0m last year, although the 2009 spend was boosted by the £5.1m acquisition of the Dorma brand. The major investments in the year were in stores, including fit-out costs for 10 new stores and nine major refits in the period as well as acquisition of the freehold interest in one existing leasehold store. In addition, important investment programmes were begun with the acquisition of land for a new head office building (expected to be completed during 2011) and the commencement of fit-out work on our expanded central warehouse facility. Working capital The Group reduced working capital in the year by £1.7m (2009: £14.8m). Investment in inventories was £62.6m, an increase of £4.7m compared with last year but with the growth in the portfolio this represents a reduction of 8.0% in like-for-like stores. Trade and other payables generated a positive cash movement of £6.1m, largely as a result of an increase in accruals and deferred income. Cash position The Group generated £72.0m (2009: £67.4m) net cash from operating activities in the last financial year, an increase of 6.8%. In the second half, the Group returned excess capital to shareholders amounting to £43.2m. As a result, net cash resources at the end of the year were £15.4m (2009: £24.0m). A committed undrawn revolving loan facility of £40.0m remains in place until September 2011. It is anticipated that the financial year to July 2011 will see an increase in the level of cash reinvested in the business. Continuing expansion of the store portfolio will require a typical investment cost of £1.2m per store, whilst the refit programme brings a typical investment of £0.8m per store. This year will also include completion of the fit-out of the central warehouse extension (approximately £1.0m) as well as development of the new head office facility, expected to cost a further £10.0m capital over the years to July 2011 and July 2012. In addition, freehold store acquisition opportunities have been identified with potential investment of up to £8.0m. Dividend An interim dividend of 3.0p was paid in April 2010 (2009: 2.0p). It is proposed to pay a final dividend of 5.0p per share (2009: 4.0p). The total dividend of 8.0p represents a 33% increase over last year and leaves dividend cover a little over the top end of our target range of 2.5x–3.0x. This reflects the fact that a high level of capital expenditure is anticipated in the next financial year, to support ongoing growth of the business. Key performance indicators In addition to the traditional accounting measures of sales and profits, the Directors review business performance each month using a range of other KPIs. These include those on the table opposite. Key risks The Directors also consider key risks to the business in the areas of strategic, operational and financial risks. Strategic risks Increased competition in the homewares market could materially impact returns and limit opportunities for growth. We will continue to monitor major competitor threats and activity and seek to modify our proposition if necessary. Changes in political and economic conditions will continue to put pressure on consumer expenditure and a continued downturn could result, impacting the retail sector as a whole. We mitigate this risk by reacting quickly to changes in customer demand and adjusting our offer in response. Continued focus on a low cost base also enables us to maintain our ‘Simply Value for Money’ proposition. Dunelm Group plc Annual report and accounts 2010 13 Key performance indicators FY10 Sales growth† Like-for-like sales growth† Gross margin change (basis points) 2010 2009 2008 +18.2% +6.4% +10.5% 2010 2009 2008 +8.0% +0.5% +2.5% 2010 2009 2008 +190bps +120bps +60bps Operating margin EBITDA £m Earnings per share (diluted) 2010 2009 2008 15.3% 12.4% 12.6% 2010 2009 2008 £86.9m £63.2m £58.9m 2010 2009 2008 26.9p 18.6p 16.6p Dividend (per share) New store openings Major refits 2010 2009 2008 8.0p 6.0p 5.5p 2010 2009 2008 10 6 8 2010 9 2009 2008 6 1 † 2009 is treated as a 52 week period for these measures (53 weeks for the rest). 14 Dunelm Group plc Annual report and accounts 2010 Business review Finance Director’s review continued Dunelm has a number of staff members in specialist positions whose expertise is important to operations and who could not easily be replaced. We have mitigated this risk by incentivising loyalty through deferred share awards as well as continuing to build strength in depth within the operating management team over recent years. Financial risks Dunelm has a committed bank facility under a revolving loan agreement with Lloyds Banking Group plc of £40m. This facility expires in September 2011. The Group also has existing cash resources which together with banking facilities are considered to provide sufficient funding for the Group’s operations. We do not consider our direct exposure to interest rate fluctuations to generate any significant downside risk and we are well placed to take advantage of any interest rate increases. The Group invests surplus funds in overnight deposit accounts, fixed term facilities and in structured deposits. Counter parties are approved by the Board and risk associated with these counterparties is continually monitored. A credit rating of at least an ‘A’ is required. David Stead Finance Director 16 September 2010 Dunelm, like many other retailers could experience upward pressure on input costs particularly in areas such as foreign currencies, freight rates and raw material costs. These could impact margins. We have protected our business from fluctuating currencies through hedging a greater proportion of our foreign spend. In addition our increased scale and rate of growth provide further protection. Our growth plans rely heavily on our being able to gain access to additional trading locations. If for any reason the supply of vacant retail warehouse space declines significantly, we will be forced to accept a lower pace of expansion. However, with increasing pressures on retailers and landlords we anticipate continuing availability of space over the next few years. Operational risks Information systems and technology operate at the heart of our business. A major incident or interruption to key systems could constitute a significant threat to the business, at least in the short- term. A disaster planning committee oversees the disaster recovery plan designed to ensure business continuity in such an event. In addition, certain key systems are either hosted offsite with full disaster recovery and the remainder are backed up in separate locations. The business could suffer disruption in the event of a major incident within the supply chain, e.g. loss of our central warehouse or a major supplier. However, our use of a wide supply base, active management of key supplier relationships, high stock service levels and a high proportion of direct-to-store deliveries mitigate this risk. Dunelm Group plc Annual report and accounts 2010 15 Directors 1. 2. 3. 4. 5. 6. 1. Will Adderley Chief Executive 2. David Stead Finance Director Will Adderley, joined the business in 1992. He has worked in and is familiar with all major areas of the business and took over the day-to-day running of the Group from his father in 1996. David Stead, joined the Group in 2003. Previously he spent 14 years at Boots where he was Finance Director of Boots The Chemists and Finance Director of Boots Healthcare International. During the coming year, Will is to take on the new role of Executive Deputy Chairman. 3. Geoff Cooper Non-Executive Chairman Geoff Cooper, joined the Board in November 2004. Member of the Remuneration and Nominations Committees. He is currently Chief Executive of Travis Perkins plc, and is a former Director of Gateway (now Somerfield plc) and has also been Finance Director and then Deputy Chief Executive of Alliance UniChem plc. 4. Marion Sears Senior Independent Non-Executive Director Marion Sears, joined the Board in July 2004. Chairman of the Remuneration and Nominations Committees and Member of the Audit Committee. She is also a Non-Executive Director of Zetar Plc. Bill Adderley Founder and Life President Bill Adderley founded Dunelm in 1979. He led the development of the business successfully for many years, then took a non-executive role before retiring in February 2008. He and his wife Jean remain passionate Dunelm supporters and major shareholders. 5. Simon Emeny Independent Non-Executive Director 6. Nick Wharton Independent Non-Executive Director Simon Emeny, joined the Board in June 2007. Member of the Audit, Remuneration and Nominations Committees. Simon has recently been appointed Group Managing Director of Fuller Smith and Turner P.L.C. where he was previously responsible for the Fuller’s Inns division. Nick Wharton, joined the Board in August 2009. Chairman of the Audit Committee, member of the Remuneration and Nominations Committees. Nick is Finance Director of Halfords Group plc. Nick will become Chief Executive of the Group in the coming year. 16 Dunelm Group plc Annual report and accounts 2010 Governance Letter from the Chairman Dear Shareholder, In an effort to improve communication and increase understanding of Dunelm, I thought it would be helpful to introduce the Corporate Governance section in our annual report. In addition, as remuneration is such an important subject, I have asked Marion Sears to write to you separately outlining our approach to executive pay and you will find this on page 21. It is my experience that whilst shareholders rightly expect the Board to take collective responsibility for all published information, they also appreciate a sharp sense of accountability where individual directors take the lead on a particular issue. We are very clear at Dunelm that the Board should have an involved and active role in supporting the Executive Directors and the senior management team. We aim, as a minimum, to incorporate best practice and to comply with the UK Corporate Governance Code in all respects but we have also formed some guidelines of our own that we feel improve the role of the Board and are in keeping with our positive and energetic culture. We have worked hard to compose a Board with diversity of thought. This includes appointing non-executive directors (‘NEDs’) with diverse backgrounds including executive positions in other companies. Our NEDs have experience and diverse perspectives of issues of direct interest to Dunelm, including a range of business models, challenges involved in consumer markets, City and investor experience and retail knowledge. With the help of the finance and Company secretarial departments we manage and administer corporate governance ourselves internally and the NEDs are actively involved in this. There is a strong collegiate and respectful relationship between the Executive and NEDs. All the NEDs aim to visit a store once a month, often with a member of the senior management team. This is helpful in fostering our understanding of business issues as well as communicating internally from head office to store teams and vice versa. In addition, Board meetings are often held in store or at other Company locations and include presentations from managers within the business. Shareholder feedback is regularly monitored, with NEDs joining management in a selection of shareholder meetings following our results announcements. We will continue to attend a sample of meetings, however, if any shareholder wishes to meet with any of the NEDs without management present to discuss Dunelm then this can be arranged through our advisers. We have announced a key development for Dunelm with the appointment of Will Adderley as Executive Deputy Chairman and of Nick Wharton as Chief Executive. These changes have been made following a thorough review by the Board of the needs of the business to support its future development. This review included benchmarking of external candidates for the Chief Executive role through an executive search company. Yours faithfully, Geoff Cooper Chairman 16 September 2010 Dunelm Group plc Annual report and accounts 2010 17 Corporate governance report The Board is committed to high standards of corporate governance. This report explains how the Group has applied the principles of good governance and code of best practice set out in the 2008 version of the Combined Code on Corporate Governance (the ‘Combined Code’) during the financial year. The Board considers that the Group’s governance complied with the Combined Code. The Board has reviewed the new UK Corporate Governance Code (the ‘Corporate Governance Code’) published in June 2010 and has agreed actions during the 2010/11 financial year to bring its governance arrangements into line with this new code. The Board The Board has overall responsibility for controlling the Group, making decisions relating to the Group’s strategic direction and measuring progress towards strategic goals. The Board has 10 scheduled meetings per annum, including one strategy meeting. There was full attendance at all Board meetings during the year except that Simon Emeny was absent from one Board meeting. The Board has reviewed the schedule of matters reserved to the Board for decision or approval, which is available on the Group’s website or from the Company Secretary. Examples of such matters include Group strategy and budget, Group capital structure, approval of financial results and report and accounts, significant capital or contractual commitments, maintaining internal control and risk management, and approval of Group-wide policies. At each meeting, the Chief Executive reports on operational performance (including health and safety) and the Finance Director reports on financial performance. Other matters are discussed by the Board as required, supported by a briefing paper where a decision is to be made by the Board. Minutes of all Board and Committee meetings are taken by the Company Secretary and committee secretaries respectively and circulated for approval. Any unresolved concerns raised by a Director are recorded in the minutes. The Chairman and the other Non-Executive Directors meet from time to time without Executive Directors being present, and regularly have individual meetings with other senior managers in the business. In addition the Non-Executive Directors have the opportunity to meet at least once a year without the Chairman present as part of the Board effectiveness review process. Directors The Non-Executive Chairman is Geoff Cooper and the Chief Executive is Will Adderley. The Board has adopted a written statement setting out their respective responsibilities. In general terms, the Chairman is responsible for running the Board and the Chief Executive is responsible for running the Group’s business. The other Non-Executive Directors during the year were Marion Sears, Simon Emeny and Nick Wharton (appointed on 14 August 2009). David Stead is an Executive Director. The Senior Independent Director is Marion Sears. Subsequent to the year-end, it has been announced that Will Adderley will take on the new role of Executive Deputy Chairman. He will be replaced as Chief Executive, after a handover period, in February 2011 by Nick Wharton. The Board considers that Geoff Cooper was independent on appointment, and that Marion Sears and Simon Emeny are independent. The Board further considers that Nick Wharton was independent during the year ended 3 July 2010. Following the announcement of his appointment as Chief Executive he ceases to be so. It is the Board’s intention to recruit an appropriately skilled new Non-Executive Director in due course. Directors are required to retire from the Board by rotation and offer themselves for re-election at least every three years. Board committees The Audit Committee was chaired during the year by Nick Wharton, the other members being Marion Sears and Simon Emeny. The Board considers that Nick has recent and relevant financial experience by virtue of his professional qualification and his executive role as Finance Director of Halfords Group plc. The committee has adopted terms of reference which are available on the Group’s website or from the Company Secretary. The committee is scheduled to meet at least three times a year, to coincide with key dates in the Group’s financial reporting and audit cycle. During the period under review it met in September, February and May with full attendance. The Group Chairman and the Finance Director usually attend meetings by invitation, along with a representative from the external auditors. The principal responsibilities of the committee are to: • • monitor the integrity of the Group’s financial statements and public announcements relating to financial performance; oversee the external audit process, including the appointment of the auditors, their objectiveness and independence and the scope and effectiveness of the audit; 18 Dunelm Group plc Annual report and accounts 2010 Governance Corporate governance report continued • • monitor the effectiveness of internal controls and consider annually the need for an internal audit function; and review the process for identifying and managing risk throughout the Group. During the year the committee: • • approved the full year results issued in September 2009 and the interim results issued in February 2010; decided that an internal audit function was not required in view of the adequacy of financial controls in place and low level of complexity in the business; confirmed the Group’s policy for use of the auditors for non-audit advice; and verified the independence of the auditors, and approved the scope of the audit plan and the audit fee. • • The committee met privately with the auditors in the course of each meeting during the period. The committee has approved a policy that the auditors should only be used for non-audit work if they offer demonstrably better capability than alternative providers and there is no potential conflict with the independence of the audit. The committee has approved a policy which allows employees to raise legitimate concerns in confidence without fear of discrimination. The Nominations Committee is chaired by Marion Sears, the other members are Geoff Cooper and Simon Emeny. Nick Wharton was a member of the committee during the year but was not involved in meetings considering the selection of a new Chief Executive. The committee has adopted terms of reference which are available on the Group’s website or from the Company Secretary. The committee’s responsibilities include: • • • reviewing the composition and balance of the Board; Board succession planning; and making recommendations on appointments to the Board (including reappointments at Annual General Meeting). The committee met in July 2009 with full attendance to approve the appointment of Nick Wharton as Non-Executive Director. In making this appointment, the committee chose to rely on its own research into potential candidates rather than engaging an external search consultancy, in the belief that committee members themselves would be better placed to identify individuals likely to fit well with Dunelm’s unique culture. The committee recognised in particular that Nick would bring a combination of retail business experience (from Halfords Group plc and Boots Group plc) and relevant finance experience to allow him to take over chairmanship of the Audit Committee. The committee met on numerous occasions during 2010 to consider the appointment of a Chief Executive in succession to Will Adderley. An executive search consultancy was engaged to assist in this process. It was recognised that the qualities leading to Nick Wharton’s appointment as a Non-Executive Director also made him a strong candidate for the Chief Executive role. From that point, Nick Wharton did not participate in meetings concerning the Chief Executive succession. The committee keeps under constant review the balance between Executive and Non-Executive Directors, as well as the mix of skill-sets and experience possessed by the Board as a whole. The committee remained satisfied that the Board contained an appropriate mix of individuals during the year. The Remuneration Committee is chaired by Marion Sears, the other members are Geoff Cooper and Simon Emeny. Nick Wharton was a member of the committee during the year. The Chief Executive normally attends by invitation. The committee has adopted terms of reference which are available on the Group’s website or from the Company Secretary. The committee’s responsibilities include: • recommending to the Board the specific pay and benefits packages for the Executive Directors, including pensions and any compensation payments; recommending and monitoring the level and structure of pay and benefits for senior management; and implementing any awards made under share incentive schemes. • • During the year the committee met four times with full attendance and: • • • determined the pay reviews and incentive arrangements for Executive Directors; determined the annual bonus payable to Executive Directors in respect of the year ending 3 July 2010; and approved conditional share awards to be made to Executive Directors under the Group’s Long-Term Incentive Plan and other share incentives to be offered to senior management and other employees. Dunelm Group plc Annual report and accounts 2010 19 Following the year end the committee met, without Nick Wharton, to determine the remuneration package of the new Chief Executive. Further details of the committee’s activities are set out in the Remuneration Report on page 23. Appointment and removal of Directors The Articles of Association of the Company provide that a Director may be appointed by ordinary resolution of the Company’s shareholders in general meeting, or by the Board so long as the Director stands down and offers himself for election at the next Annual General Meeting of the Company. The Articles also provide that each Director must stand down and offer him or herself for re-election by shareholders at the Annual General Meeting at least every three years. Directors may be removed by a special resolution of shareholders, or by an ordinary resolution of which special notice has been given in accordance with the Companies Act 2006. The Articles also provide that the office of a Director shall be vacated if he is prohibited by law from being a director, or is bankrupt; and that the Board may resolve that his office be vacated if he is of unsound mind or is absent from Board meetings without consent for six months or more. A Director may also resign from the Board. The Nominations Committee makes recommendations to the Board on the appointment and removal of Directors. Powers of Directors In accordance with the Companies Act 2006 and the Articles of Association, the business of the Company is managed by the Board, which may exercise all of the powers of the Company, subject to the requirements of the Companies Acts, the Memorandum and Articles of Association of the Company, and any special resolution of the Company. As stated above, the Board has adopted internal delegations of authority in accordance with the Code, and these set out matters which are reserved to the Board or Committees and the powers and duties of the Chairman and Chief Executive respectively. At the Annual General Meetings of the Company in 2007, 2008 and 2009 the Board sought and was given authority to issue shares and to buy back and reissue shares, subject to the limits imposed by law and those set out in the text of the resolution. Similar resolutions are being tabled at the 2010 Annual General Meeting, together with a waiver of any obligation of Will Adderley under the City Code on Takeovers and Mergers to make an offer for all of the shares of the Company if the authority to buy back shares is used. For further details see pages 27 and 28 of the Directors’ Report and Business Review, and the Notice of Annual General Meeting which is sent separately with this report. Advice and insurance All Directors have access to the advice and services of the Company Secretary. In addition Directors may seek legal advice at the Group’s cost if they consider it necessary in connection with their duties. The Group purchases Directors’ and Officers’ Liability insurance cover for its Directors. Training Upon joining the Board, any new Director is offered a comprehensive induction programme with visits to key sites and meetings with senior managers and other staff members. As part of each Director’s annual review any additional training or development needs are addressed. Throughout the year all Directors have maintained a regular series of visits to stores and meetings with members of the senior management team. The Board has also received presentations from independent advisers on financial policy and on retail sector trends. Evaluation The Chairman appraises the performance of the Chief Executive with regard to personal objectives agreed at the start of each financial year. The Chief Executive similarly appraises the performance of the Finance Director. There is a well established process for evaluating the performance of the Chairman, the other Non-Executive Directors, the Board Committees and the Board as a whole. This takes the form of a Board meeting convened solely for the purpose of such review. During the course of this meeting there is the opportunity for the Chairman or other individual Directors to be asked to leave the discussion whilst their performance is assessed. Conflicts of interest The Companies Act 2006 allows the Board of public companies to authorise conflicts and potential conflicts of interest of individual directors where the Articles of Association contain a provision to that effect. At the 2008 Annual General Meeting, new Articles of Association were adopted which give the Board this authority subject to the following safeguards: • Directors who have an interest in matters under discussion at a Board meeting must declare that interest and abstain from voting. 20 Dunelm Group plc Annual report and accounts 2010 Governance Corporate governance report continued • • Only directors who have no interest in the matter being considered are able to approve a conflict of interest and, in taking that decision and the Directors must act in a way they consider, in good faith, would be most likely to promote the success of the Company. The Directors are able to impose limits or conditions when giving authorisation if they feel this is appropriate. Following the adoption of the Articles of Association, all Directors were requested to disclose any actual or potential conflicts to the Board and the following matters were considered and approved: • Will Adderley is a major shareholder and connected to other major shareholders. Authorised on the basis that Will Adderley continues to abide by the terms of the Relationship Agreement entered into between himself, other major shareholders Geoff Cooper is a director of Travis Perkins plc; and Nick Wharton is a director of Halfords Group plc, each of which potentially competes with the Company for retail property. Authorised on the basis that Geoff Cooper is not involved in day to day decisions in relation to the property portfolio in either company; and Nick Wharton to absent himself from any meeting of the Company in which property matters are to be discussed and a conflict of interest might arise. • There were no other matters disclosed that were considered by the Board to give rise to a conflict of interest. Any conflicts considered by the Board and any authorisations given are recorded in the Board minutes and reviewed annually by the Board. The Board considers that its procedures to approve conflicts of interest and potential conflicts of interest are operating effectively. Significant shareholders The Group’s significant shareholders are listed in the Directors’ report on page 29 and voting rights are stated on page 27. Articles of Association The Company’s Articles of Association may only be amended by a special resolution of shareholders. Risk management and internal control Throughout the year and up to the date of approval of this Annual Report there has been in place an established, ongoing process for identifying, evaluating and managing the significant risks faced by the Group. The process has been reviewed by the Audit Committee and the Board and is in accordance with the Turnbull Guidance on Internal Control for Directors. This will be reviewed in the light of the revised Turnbull Guidance which is due to be issued later in 2010. A register of major strategic and operational risks is maintained and reviewed regularly by the Board, which also monitors the status of agreed actions to mitigate key risks. The Board is ultimately responsible for the Group’s system of internal control and for reviewing its effectiveness. However such a system is designed to manage rather than eliminate the risk of failure to achieve business objectives and can provide only reasonable, and not absolute, assurance against material loss and misstatement. The Group maintains a well established control framework comprising clear structures and accountabilities, well understood policies and procedures and budgeting and review processes. Each store manager has clear responsibilities and operates within defined policies and procedures covering such areas as financial targets, human resources management, customer service, health and safety etc. The Executive Directors monitor compliance with these policies and procedures in the course of regular reviews. The Audit Committee considers annually whether an internal audit function is required. It does not consider that this is necessary in view of the adequacy of internal and risk management controls and reporting in place, and the low level of complexity of the business. Investor relations There is a formal investor relations programme based around results presentations and trading statements. In addition analyst/shareholder visits are arranged. All of the Non-Executive Directors are available to attend meetings at shareholder request. The Chairman and Executive Directors feed back any investor comments to the Board. All Directors will be available at the Annual General Meeting to meet with shareholders and answer their questions. Dunelm Group plc Annual report and accounts 2010 21 Letter from the Chairman of the Remuneration Committee Dear Shareholder, I am writing to set out for you our approach to executive reward at Dunelm. I hope you find this adds to your understanding of our culture and our way of doing business. In preparation for our flotation on the main market in 2006, with the benefit of a clean sheet of paper, we designed the simplest, most transparent remuneration structure for Executive Directors that we could whilst following best practice, the Combined Code (as it then was) and the Association of British Insurers’ guidelines. Our aims were to pay fairly for the role and responsibilities of each director and to incentivise strongly for value creation, with an emphasis on the long-term. In keeping with Dunelm’s family background our overriding principle was to design a structure where directors become strongly aligned with business goals by virtue of share ownership. We believe strong alignment of ownership by Executive Directors is the single most important factor in an effective remuneration structure. From flotation we adopted the traditional three-pronged remuneration structure comprising basic salary (including benefits), an annual cash bonus and a three-year share-based Long-Term Incentive Plan (‘LTIP’). Basic salary was initially set just below median levels for comparator companies at that time. However, a consequence of our growth, store roll-out programme and new business initiatives over the last few years has been to increase the operational scale of the executives’ roles and make them more complex. It is important to recognise this appropriately and for 2010/11 we have increased David Stead’s salary ahead of inflation and ahead of the Company-wide increase, to reflect both his performance and his increased responsibilities. Will Adderley has indicated that, as a large shareholder, he does not need or wish to take an increase in salary above the general Company level. We initially set the maximum annual cash bonus opportunity at 60% of basic salary. From 2010/11 we have increased this to 100%, which we see as a more typical level in peer companies. We set the maximum LTIP award at 120% of basic salary. This level will be maintained for the October 2010 conditional LTIP award, although we now recognise that 120% is lower than some competitor companies and we will review this against market practice prior to next year’s award. We feel that the balance between short-term bonus and longer-term reward is important in order to maintain the focus on the long-term as well as helping to build up a director’s alignment. To encourage alignment, we require Executive Directors to build a shareholding equivalent to at least 2x their basic salary. This is a high multiple relative to the market norm. For both the annual bonus and LTIP we chose to use fully diluted earnings per share (‘EPS’) as the only financial performance measure. We did this after careful consideration on the basis that EPS is audited, easy to understand and simple to measure. It is also a main driver of share price and is a reasonable proxy for value, provided capital investment is monitored. We recognise that, with EPS as the only measure, it is essential that the Board controls both capital investment and leverage to ensure the business is driven to increase shareholder value, and these are part of our regular Board processes. Our approach has always been to do things properly whilst doing what is appropriate for Dunelm’s particular circumstances. Therefore we set a very high EPS hurdle requiring EPS compound annual growth to reach the increase in the retail price index (‘RPI’) plus 20% for maximum LTIP vesting. This was at the very top end of the benchmark spectrum for LTIPs but felt right for a growing company. However, in 2008 and 2009 we reduced this to RPI+12% given the worsening economic outlook. We remain committed to reviewing the hurdles carefully every year. The remuneration of below-Board executive committee members is handled by the Chief Executive with guidance from the Remuneration Committee. This tier of management is incentivised by a discretionary annual bonus scheme with matching nil cost share options, deferred for three years. We are also considering a shareholding requirement for the executive committee and other senior managers. In early 2010, following the first LTIP vesting, we conducted a full Remuneration Review with the whole Board where we looked at how our original policies have suited us and how the Directors involved have been rewarded. We concluded that we should leave the basic structure unchanged for as long as possible whilst looking carefully at the base salaries and performance conditions each year. As with all such decisions in Dunelm, the Remuneration Committee’s stance is to try and take decisions which are fair for the individuals and best for the business long-term. I hope therefore, that shareholders will feel that our approach to executive pay is aligned with their interests. 22 Dunelm Group plc Annual report and accounts 2010 Governance Letter from the Chairman of the Remuneration Committee continued Following the year-end, we have set the remuneration terms for Nick Wharton when he becomes a full-time Executive Director – from 1 December 2010 as Chief Executive Designate, and from February 2011 as Chief Executive. Nick’s remuneration will follow Dunelm’s established policy. He will receive a basic salary of £400,000 per annum plus benefits including car allowance, medical and life insurance and a pension contribution equivalent to 10% of salary. He will participate in the annual bonus and the LTIP scheme, both of which will be adjusted pro-rata to length of employment in respect of FY2011. On joining, Nick will receive a one-off cash payment of £150,000 in lieu of his annual bonus foregone. Subject to shareholder approval, he will also receive a one-off grant of nil cost share options to a value of £1,000,000 at date of joining in compensation for long-term incentive payment foregone. This will vest, subject only to continuing employment, after five years. The Remuneration Committee believes this is an important incentive to ensure alignment of his interests with those of shareholders in the context of long-term commitment to the business. To reinforce this alignment, Nick will be required to build a shareholding of at least two times basic salary over time. Yours faithfully, Marion Sears Chairman of the Remuneration Committee 16 September 2010 Dunelm Group plc Annual report and accounts 2010 23 Remuneration report The Directors present their Remuneration report for the period ended 3 July 2010. Introduction The Remuneration Committee has prepared this report in accordance with the requirements of Section 420 Companies Act 2006 and the Listing Rules. The report and the Group’s remuneration policy comply with the UK Corporate Governance Code. An ordinary resolution to approve the report through a shareholder vote will be proposed at the Annual General Meeting. The disclosures that the Group’s auditors are required to audit within the Remuneration report are contained in the section headed ‘Audited Information’. The auditors’ opinion is included in their report on page 36. Non-audited information Remuneration committee and advisers During the year ended 3 July 2010, the Remuneration Committee was made up of four members, Marion Sears, Simon Emeny, Nick Wharton and Geoff Cooper. Marion Sears, who is the Senior Independent Non-Executive Director, chairs the committee and also acts as Secretary. The committee determines the Executive Directors’ annual remuneration packages and provides guidance on the remuneration packages of members of senior management. No Director determines their own pay. Changes in policy during the year There have been no changes to remuneration policy during the year. Executive remuneration policy The Remuneration Committee’s policy is to provide an executive remuneration structure that will attract, motivate and retain the high quality individuals who are essential for the successful development of the business over the long-term. Executive remuneration aims to ensure that the Executive Directors are fairly rewarded for their success measured by the Group’s performance and are incentivised to enhance value for shareholders on a continuing and long-term basis. There are three main elements of the remuneration package for Executive Directors: • • • base annual salary including benefits; annual bonus; and Long-Term Incentive Plan. Two of these main elements are performance based, which means that there is significant emphasis in the Group’s executive remuneration policy on its performance. The Remuneration Committee oversees the two performance-based plans: an annual bonus plan and a Long-Term Incentive Plan (‘LTIP’). In accordance with governance guidelines and the requirements of the Combined Code, the Remuneration Committee implemented these two performance based plans to ensure alignment of interests between shareholders and Executive Directors. The annual bonus plan is short-term and provides cash rewards. The LTIP is long-term and rewards are in the form of shares. Base salary and benefits Prior to the beginning of each financial year the Remuneration Committee sets the base salaries of Executive Directors. The committee examines the salaries of Directors in a comparator group of public companies and considers the operational scale and complexity of the role each Director performs. It also reviews published research and surveys, and considers the wage increases across the Group as a whole. The committee aims to set salaries at around the median level provided by similar companies. In addition to base salary, the Executive Directors are entitled to benefits comprising a car allowance, a contribution to a personal pension, private medical insurance and life insurance. Annual bonus The Group operates a discretionary annual cash bonus scheme. Any bonus amounts determined to be payable are paid after the year-end results are finalised. The Remuneration Committee has established bonus objectives that are principally financial but also include personal objectives for the year relevant to each Director. The bonus payment for on target EPS is 24% of salary, subject to personal performance, and the maximum bonus payable for the year ended 3 July 2010 was 60% of salary. 24 Dunelm Group plc Annual report and accounts 2010 Governance Remuneration report continued For the year ended 3 July 2010, EPS exceeded target. After due consideration of job performance, the committee awarded an annual bonus to Will Adderley of £195,840 and to David Stead of £134,640. Long-Term Incentive Plan Under the LTIP, Executive Directors are awarded nominal cost share options annually. These awards will vest three years after date of grant, to the extent that the applicable performance target is met. The Remuneration Committee has chosen growth in fully diluted EPS over each three-year performance period as the performance target for the awards under the LTIP. The committee believes that this measure is closely aligned to the drivers of growth of the business, and that in the long-term, EPS performance will be reflected in shareholder value. The committee is satisfied that capital expenditure controls exercised by the Board are sufficiently rigorous to avoid EPS accretion by means of ineffective investment of capital, and in any event reserves the right to adjust the target in the event of a major capital transaction. The LTIP is structured as follows (awards vest on a straight line basis between the threshold and maximum points): Periods ending Threshold Maximum Compound annual growth in EPS 2009, 2010 RPI + 5% RPI + 20% 2011, 2012 Vesting percentage RPI + 3% RPI + 12% 25% 100% The committee decided to reduce the performance hurdle in respect of the schemes maturing in 2011 and 2012, recognising the challenging market conditions expected to result from global recession. The committee meets after the results for each three-year performance period are available to determine the extent to which performance conditions have been satisfied. There is no retesting. Awards cannot be granted under discretionary schemes, including the LTIP, over Ordinary Shares in excess of 5% of the issued Ordinary Share capital in any rolling 10 year period. Awards of Ordinary Shares worth 120% of base salary were made to Will Adderley and David Stead in March and September 2007, in September 2008 and in September 2009. The March 2007 award was in respect of the three-year performance period to 4 July 2009, over which the compound annual growth in EPS was 14.8% (12.4% above RPI). Accordingly, 62% of the conditional shares awarded in March 2007 vested in March 2010 and the entitlements were exercised by both Will Adderley (93,809 shares) and David Stead (61,461 shares) on 23 March 2010. The Remuneration Committee has reviewed the Company’s EPS record over the three year performance period which ended on 3 July 2010. Reported EPS, grew at a compound annual rate of 30.1%. This is 27.3% above RPI over the same period. Accordingly, 100% of the September 2007 LTIP award will vest in September 2010, representing 190,130 shares in favour of Will Adderley and 127,792 shares in favour of David Stead. Other share options The Group operates an all-employee SAYE scheme in which Executive Directors are also entitled to participate. Non-executive remuneration policy Non-Executive Directors’ remuneration is determined by the Executive Directors. The Non-Executive Directors do not receive bonuses or participate in any incentive plans. They are paid annual fees which reflect additional responsibilities taken when chairing a committee of the Board. All Non-Executives have letters of appointment, detailed in the table on page 25. Dunelm Group plc Annual report and accounts 2010 25 Service contracts In accordance with the Group’s policy, the service contracts of the Executive Directors have no fixed term, the notice period for termination is 12 months from either party and payments on termination are restricted to a maximum of the value of salary for the notice period. The Non-Executive Directors have letters of appointment for an initial period of three years with a provision for termination of one month’s notice from either party, or three months’ notice from either party in the case of Geoff Cooper, the Chairman. Will Adderley David Stead Geoff Cooper Marion Sears Simon Emeny Nick Wharton Date of Initial contract 28.09.06 15.09.03 08.10.04 22.07.04 25.06.07 10.08.09 Unexpired remaining term n/a n/a 1 month 34 months 33 months 23 months Notice period 12 months 12 months 3 months 1 month 1 month 1 month Retirement plans The Remuneration Committee has decided not to use final salary pension plans as a way of remunerating its Executive Directors. Instead the Group contributes to the Executive Directors’ personal pension plans. The Remuneration Committee believes this is an efficient way to assist Executives to prepare for retirement. When determining the mixture of fixed and performance based pay, the Remuneration Committee takes account of contributions to pension plans. Performance graph The graph below shows the Group’s performance since flotation, measured by total shareholder return, compared with the FTSE General Retail Index and the FTSE 250. The Remuneration Committee has chosen these indices for comparison because they provide a range of comparator companies which have similar market capitalisation, which are in the same sector and which face similar market and economic challenges in the long-term. The shares traded in the range 202.5p to 438.4p during the year, and stood at 325.3p at 3 July 2010. 350 300 250 200 150 100 50 0 18.10.06 18.02.07 18.06.07 18.10.07 18.02.08 18.06.08 18.10.08 18.02.09 18.06.09 18.10.09 18.02.10 18.06.10 Dunelm FTSE All Share General Retailers FTSE 250 26 Dunelm Group plc Annual report and accounts 2010 Governance Remuneration report continued Audited information Details of Directors’ remuneration Details of individual Directors’ remuneration in respect of the year ended 3 July 2010 are as follows: Base salary or fees £’000 Vehicle allowance £’000 Contribution to personal pension £’000 Taxable benefits £’000 Executive Directors Will Adderley David Stead Non-Executive Directors Geoff Cooper Marion Sears Simon Emeny Nick Wharton Total 326 224 86 32 27 24 719 1 10 10 waived waived 20 – – – – 20 – – – – 1 – – – – Annual bonus £’000 196 135 – – – – 2010 Total £’000 533 389 86 32 27 24 – 2009 Total £’000 481 348 84 32 26 20 331 1,091 971 Will Adderley waived pension contributions totalling £20,000 and David Stead waived other taxable benefits totalling approximately £1,000. Directors’ interests in share options The Directors’ beneficial interests in options granted under the Long-Term Incentive Plan, all of which will vest only if EPS performance conditions are met, are as follows: Director Will Adderley David Stead Date of award Share options at 3 July 2010 performance End of Market Price of shares at period date of award Sept 2007 190,130 Sept 2008 259,459 Sept 2009 123,949 Sept 2007 127,792 Sept 2008 178,378 85,215 Sept 2009 June 2010 June 2011 June 2012 June 2010 June 2011 June 2012 193p 148p 316p 193p 148p 316p The Directors’ beneficial interests in options granted under other schemes are as follows: Shares under option at 5 July 2009 7,710 7,710 Shares under option at 3 July 2010 7,710 7,710 Type of option SAYE SAYE Granted during period Exercised during period – – – – Lapsed during period – – Exercise price per share 124p 124p Market price of shares at date of exercise Vesting date Expiry date – – Jan 2012 Jan 2012 Jun 2012 Jun 2012 Director Will Adderley David Stead Approval This report was approved by the Board of Directors on 16 September 2010 and signed on its behalf by: Marion Sears Chairman of Remuneration Committee 16 September 2010 Dunelm Group plc Annual report and accounts 2010 27 Directors’ report and business review The Directors present their report together with the audited financial statements for the year ended 3 July 2010. Together with certain information in the reports from the Chief Executive and the Finance Director on pages 6 to 14 which are incorporated into this report by reference, this report satisfies the requirements of the Companies Act 2006 to produce a Business Review. The purpose of this Business Review is to provide to shareholders a review of the Group’s business over the period, and to describe the principal risks and uncertainties facing the Group. Principal activity The principal activity of the Group is that of a specialist UK homewares retailer selling to customers through stores and over the internet. Review of business and future developments A review of the business and future developments of the Group is given in the Chief Executive’s Review on pages 6 to 8. Shareholder and voting rights All members who hold Ordinary Shares are entitled to attend and vote at the Annual General Meeting. On a show of hands at a general meeting every member present in person shall have one vote and on a poll, every member present in person or by proxy shall have one vote for every Ordinary Share held. On 2 October 2006, Jean Adderley, Bill Adderley and Will Adderley (all shareholders) entered into a Relationship Agreement with the Company, pursuant to which each of Jean Adderley, Bill Adderley and Will Adderley undertook to the Company that, for so long as, individually or together, they are entitled to exercise, or to control the exercise of, 30% or more of the rights to vote at general meetings of the Company or they are able to control the appointment of directors who are able to exercise a majority of votes at Board meetings of the Company, they will: (a) conduct all transactions and relationships with any member of the Group on arms length terms and on a normal commercial basis; (b) not take any action which precludes or inhibits any member of the Group from carrying on its business independently of Jean and Bill Adderley and their associates (as defined in the Listing Rules); (c) not exercise any of their voting rights or other powers to procure any amendment to the Articles of Association of the Company which would be inconsistent with or undermine any of the provisions of the Relationship Agreement; (d) abstain from voting on any resolution to which LR11.7.R(4) of the Listing Rules applies involving Jean Adderley, Bill Adderley or Will Adderley or any of their associates as the related party; (e) not carry on (other than through their holding of securities of the Company) or have any financial interest (other than a financial interest in securities which are held for investment purposes only) in any person who carries on a business as a homewares retailer, to the extent that it would be inconsistent with or undermine any provisions of the Relationship Agreement; and (f) only enter into, amend or terminate any transaction, agreement or relationship between themselves or any of their associates and any member of the Group with the approval of a majority of the independent Non-Executive Directors. There are no restrictions on the transfer of Ordinary Shares in the Company other than certain restrictions imposed by laws and regulations (such as insider trading and marketing requirements relating to close periods) and requirements of the Listing Rules whereby Directors and certain employees of the Company require Board approval to deal in the Company’s securities. Change of control The Company is not party to any significant agreements which take effect, alter or terminate solely on a change of control of the Company following a takeover bid. There are no agreements between the Company and its Directors or employees providing for additional compensation for loss of office or employment (whether through resignation, redundancy or otherwise) that occurs because of a takeover bid. Results and dividends The consolidated profit for the year after taxation was £54.4m (2009: £37.6m). The results are discussed in greater detail in the Finance Director’s review on pages 10 to 14. A final dividend of 5.0p per share (2009: 4.0p) is proposed in respect of the year ended 3 July 2010 to add to an interim dividend of 3.0p per share paid on 1 April 2010 (2009: 2.0p per share). The final dividend will be paid on 10 December 2010 to shareholders on the register at 26 November 2010. 28 Dunelm Group plc Annual report and accounts 2010 Financial statements Directors’ report and business review continued Directors Details of the Directors in office at the year end are set out on page 15. Directors serving at the year end and their interests in the shares of the Company were: WL Adderley D Stead G Cooper M Sears S Emeny N Wharton At 3 July 2010 1p ordinary shares At 4 July 2009 1p ordinary shares 69,953,809 50,000,000 430,085 181,611 100,000 19,000 466,546 181,611 100,000 24,000 12,500 – Will Adderley’s beneficial shareholding has increased during the period as a result of receipt of a gift of 20,000,000 ordinary shares from Bill Adderley on 14 December 2010, and the exercise of nil cost options over 93,809 shares under the Long Term Incentive Plan on 23 March 2010. The total shown above includes 2,093,809 Ordinary Shares held by Will Adderley’s wife Nadine Adderley, which were transferred to her by way of a gift during the period. On 2 March 2010 Will Adderley transferred 140,000 Ordinary Shares to The Leicester Foundation, a charitable trust of which he is a trustee. He is deemed to retain a legal interest in these shares which are not included in the above total. On 14 July 2010, The Leicester Foundation sold 48,200 shares to a family trust of which Will Adderley is a trustee but not a beneficiary. Following this transaction, The Leicester Foundation holds 91,800 Ordinary Shares and the family trust holds 48,200 Ordinary Shares. Will Adderley is deemed to retain a legal interest in these shares which are not included in the total in the table above. David Stead exercised nil cost options over 61,641 shares under the Long-Term Incentive Plan on 23 March 2010. On the same day he sold 25,000 Ordinary Shares to cover his tax and national insurance liability. Nick Wharton purchased 12,500 Ordinary Shares on 25 February 2010 and Simon Emeny purchased 5,000 Ordinary Shares on 26 February 2010. There were no changes in the Directors’ shareholdings between the year end and 16 September 2010. Details of share options held by Directors at the year end are given in the Remuneration report. Simon Emeny and Will Adderley will be retiring by rotation at the 2010 Annual General Meeting and will be offering themselves for re-election. Biographical details of these Directors are set out on page 15 and details of their service contracts are in the Remuneration report on page 23. Share capital and treasury shares The Company has only one class of shares, Ordinary Shares of 1p each. During the year the Company effected a return of capital to shareholders amounting to £43.2m (21.5p per share). This was achieved through the issue of redeemable B shares. By year end all B shares had been redeemed and cancelled. The issued share capital of the Company has increased by 248,748 during the period due to the exercise of share options by Directors and some senior managers pursuant to bonus schemes, and by other employees in connection with the Group’s Savings Related Share Option Plan. At 3 July 2010 the Company held 99,628 shares in treasury. During the period 737,507 Ordinary Shares were transferred out of treasury to employees on the exercise of share options. Details of option exercises by directors are set out in the Remuneration report on page 23. The remaining shares in treasury are held by the Company for the purpose of delivery to employees under employee share schemes. There have been no movements of shares into or out of treasury since the period end. Dunelm Group plc Annual report and accounts 2010 29 Significant shareholders At 16 September 2010 the following had notified the Company of a disclosable interest in 3% or more of the nominal value of the Company’s Ordinary Shares: WL Adderley W Adderley Standard Life Investments Ltd Ordinary shares Percentage of share capital 69,953,809 48,070,000 8,457,936 34.8 24.0 4.2 WL Adderley is also deemed to hold a legal interest in 91,800 Ordinary Shares held by The Leicester Foundation and 48,200 Ordinary Shares held by a private family trust, by virtue of the fact that he is a trustee of those trusts. Powers of Directors Specific powers of Directors in relation to shares and the Company’s Articles of Association are referred to in the Corporate Governance Report on page 19. Charitable donations The Group’s charity of the year in the last financial year was Children’s Hospices UK. Collections are made in stores for the nominated charity throughout the financial year, specific fund-raising events are organised and the Group makes its own donations, from time to time the Group also makes adhoc donations to local charities. The total value of donations made by the Group in the year ended 3 July 2010 was £60,000 (2009: £49,000). The Group made no donations to political parties in either financial year. Treasury and risk management The Group’s approach to treasury and financial risk management is explained in the Finance Director’s Review on page 14. Going concern The Directors have made appropriate enquiries and formed a judgement at the time of approving the financial statements that there is a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. For this reason the Directors continue to adopt a going concern basis in preparing the financial statements. Disclosure of information to auditors The Directors who held office at the date of approval of this Directors’ report confirm that, so far as they are each aware, there is no relevant audit information of which the Group’s auditors are unaware; and each Director has taken all the steps that they ought to have taken as a Director to make themselves aware of any relevant audit information and to establish that the Group’s auditors are aware of that information. Disclaimer This Directors’ Report and Business Review and the Financial Statements contain certain forward-looking statements with respect to the financial condition, results, operations and business of Dunelm Group plc. These statements and forecasts involve risk and uncertainty because they relate to events, and depend upon circumstances, that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts. Nothing in this Directors’ Report and Business Review or in these Financial Statements should be construed as a profit forecast. 30 Dunelm Group plc Annual report and accounts 2010 Financial statements Directors’ report and business review continued Annual General Meeting The Annual General Meeting will be held at 10.30am on Tuesday 16 November 2010 at the Dunelm Group Distribution Centre, Birmingham Road, Stoke-on-Trent, ST4 4DG. Special business at the Annual General Meeting will be: • Requesting authority pursuant to section 551 of the Companies Act 2006, to issue shares to the value of one third of the issued Ordinary Share capital of the Company. The nominal amount of shares covered by this authority is £669,826 (66,982,602 Ordinary Shares), 33.3% of the issued share capital at 16 September 2010. At that date the Company also held 99,628 Ordinary Shares in treasury, which represents approximately 0.05% of the total Ordinary Share capital. This authority will lapse at the 2011 Annual General Meeting or, if earlier, on 31 December 2011. The Directors have no present intention to exercise this authority except to issue shares pursuant to the Group’s employee share schemes. Requesting authority pursuant to section 561 of the Companies Act 2006 to distribute Ordinary Shares to the value of £100,474 (10,047,390 Ordinary Shares), which constitutes 5% of the Company’s issued share capital (excluding treasury shares) at 16 September 2010, without offering them to existing shareholders. This authority will lapse at the 2011 Annual General Meeting or, if earlier, on 31 December 2011. The Directors do not intend to issue more than 7.5% of the issued share capital of the Company for cash on a non pre-emptive basis in any rolling three year period without prior consultation with the Investment Committees of the Association of British Insurers and the National Association of Pension Funds. Requesting that the Directors be authorised pursuant to section 701 of the Companies Act 2006 to buy up to 5,000,000 Ordinary Shares, approximately 2.5% of issued Ordinary Share capital (excluding treasury shares) in the Company. The Directors will only exercise this authority if it enhances earnings per share and is in the interests of shareholders generally. Shares purchased may be cancelled or held in treasury. If held in treasury and used to satisfy share options, the NAPF’s (National Association of Pension Funds) guidelines would be complied with. Requesting a waiver of any obligation that could arise on WL Adderley to make a general offer for the entire issued capital of the Company as a result of: purchases by the Company of Ordinary Shares; and/or the grant to and exercise by WL Adderley of options granted to him under the Company’s Long-Term Incentive Plan. Voting on these resolutions will take place on a poll; WL Adderley and persons connected with him will not be eligible to vote. Authorising the Board to convene a general meeting other than an Annual General Meeting on at least 14 days’ notice. The Companies (Shareholders’ Rights) Regulations require that all meetings other than an Annual General Meeting must be held on at least 21 days’ notice unless shareholders agree to a shorter period. Under the Companies Act 2006 and the Company’s Articles of Association, the Company can call meetings other than an Annual General Meeting on 14 days’ notice. This resolution will allow the Company to continue to do so, and will be effective until the next Annual General Meeting when it is intended that a similar resolution will be proposed. The Company will also need to meet the requirements for electronic voting under the Regulations before it can call a meeting on 14 days’ notice. Requesting a waiver of the rules of the Dunelm Group Long-Term Incentive Plan to allow the following conditional awards to be made to Nick Wharton: (i) over Ordinary Shares with a market value at the date of the award equivalent to £280,000, being 120% of his basic salary for the period between 1 December 2010 to 2 July 2011; and (ii) over Ordinary Shares with a market value at the date of the award equivalent to £1,000,000. It is proposed that the awards be made on the commencement of his employment as a full time Executive Director of the Company. • • • • • The Notice of Annual General Meeting is set out in the separate booklet enclosed with this report. Auditors KPMG Audit Plc offer themselves for reappointment as auditors in accordance with section 489 of the Companies Act 2006. Dunelm Group plc Annual report and accounts 2010 31 Corporate social responsibility The Group recognises that it has a duty on behalf of all stakeholders to minimize its business related social, ethical and environmental impacts. As part of this commitment the Dunelm’s Corporate Social Responsibility programme has focused on reducing key impacts in many significant areas such as waste management, energy reduction and carbon emissions. The Board places particular emphasis on maintaining good relationships with its customers, employees and suppliers; on ethical sourcing; on environmental issues; and on charitable contributions. The Chief Executive reports regularly to the Board on all of these issues. Customers The Group is committed to delivering consistently high standards of customer service and satisfaction. We constantly strive to provide high quality, safe products at a fair price supported by our ‘Simply Value for Money’ ethos. The Group aims to ensure that it complies fully with relevant legislation in all areas affecting its customers including marketing, product quality, the environment and customer data. The Group has a dedicated Customer Service team that deals with customer contact whether it is by letter, e-mail, fax or phone and supports the store teams in delivering a strong customer experience. Weekly communications are sent to all stores highlighting areas of good customer service and also opportunities for improvement. Employees Dunelm employs over 6,000 staff engaged throughout the Group’s stores, distribution and head office locations and in a range of disciplines including Buying, Marketing, Warehousing, IT, Finance, HR as well as many customer facing roles. The Group is a growing business and offers competitive benefits as well as personal and career enhancement opportunities. We have recently launched our ‘Dunelm Directions’ programme to support the development of talented staff and management. We also offer further support for employees to obtain relevant professional skills and qualifications. The Group is an equal opportunities employer. We are committed to recruit, develop, promote and retain skilled and motivated people regardless of disability, race, religion, gender, colour, nationality, sex, sexual orientation, marital status or age. The Group places considerable value on the involvement of its employees and continues its practice of consulting with employees on matters likely to affect their interests, through its partners’ council. Information on matters of concern to employees is also given through bulletins, reports and an in-house newsletter. The Group recognises its obligations towards disabled people and endeavours to provide employment where possible having regard to the physical demands of the Group’s operations and the abilities of the disabled persons. In the event of employees becoming disabled, every effort is made to retrain them in order that their employment with the Group may continue. It is the policy of the Group that training, career development and promotion opportunities should be available to all employees and this is reflected in its Equal Opportunities Policy. Health and safety Dunelm is responsible for the health and safety of our employees, contractors, customers and any other visitors to our premises. A dedicated Health & Safety manager ensures that key operational risks are fully understood and that all mitigating action has been taken to ensure a safe environment for everyone. A programme of risk assessments and independent audits helps us to identify areas of concern whether in workplace transport, safety during store development or a safe shopping environment. Training programmes are key to ensuring a safe and clean environment and we adopt a number of methods for keeping these live ranging from documented SSOW (‘safe systems of work’) to web based ‘e-learning’ and testing modules. During the past year the number of reportable accidents was 46 (2009: 56). The Group undertakes a full programme of self-audit through site management, health & safety representatives and the operational audit team designed to identify issues with compliance or training. Results of these audits are escalated appropriately and communicated back to the executive committee at least monthly. 32 Dunelm Group plc Annual report and accounts 2010 Financial statements Corporate social responsibility continued Suppliers Dunelm sources the products it sells from many countries around the world. We work with suppliers to stress the importance of ethical trading and we encourage contractors and suppliers to manage the environmental impact of their activities and to support the Group’s environmental policy. The Group has a firm policy on ethical sourcing which all suppliers are required to sign up to. This policy seeks to ensure that products are produced in clean and safe environments, that workers are treated with respect and earn a reasonable wage and that suppliers work within the relevant laws and legislation. Independent audits of suppliers’ facilities, particularly in the Far East are carried out on a regular basis. Payment policy and average payment period Dunelm trades with all stock suppliers on an electronic basis providing an efficient payment process. This process ensures that all suppliers are treated on the same basis and operate to standard terms and conditions. All new suppliers are made aware of the basis of trade with Dunelm and in particular our standard payment terms in advance of commencing trade. The number of days’ purchases outstanding for payment at 3 July 2010 was 36 days (2009: 33 days). Contractual or other arrangements The Directors consider that there are no contractual or other arrangements, with major suppliers, which are likely to influence, directly or indirectly, their performance of the business and its value. Environment Dunelm recognises that the business has an impact on the environment both directly, through its store portfolio, head office and distribution infrastructure but also indirectly through partnerships with suppliers and through customers when it comes to buying products for their home. Dunelm continues to be committed to achieving high standards of environmental performance in all aspects of its business activities. The Group has in place an Environmental Committee tasked with understanding our environmental impact and to continually improve in the key areas of energy usage, waste and carbon emissions. We have launched a ‘Turning Dunelm Greener’ campaign designed to place environmental impact at the heart of what we do. Specific objectives for the forthcoming year are outlined below: 1. Increasing the proportion of waste which is recycled Dunelm is aiming to maximise the volume of waste which is recycled and in so doing reduce the volume going to landfill. Over the past year we have worked to deliver more effective waste management procedures. We have doubled the number of sites with balers to 43 (2009: 21) and commenced the recycling of plastic, in addition to cardboard, in all locations. We intend to double this again in the coming year. We have also introduced ‘Dry Mixed Recycling’ into 12 sites (2009: nil) which has enabled us to recycle all plastics, paper and tin/aluminium cans. This initiative will be rolled out to many more sites in the forthcoming year. Annual waste to landfill (like-for-like stores) – 1000m3 80 70 60 50 40 30 20 10 0 We have engaged with a waste management company to identify further opportunities for recycling and aim to either reuse or recycle all of our waste fabric and soft furnishings going forward. These initiatives, together with enhanced reporting of site by site performance has enabled Dunelm to reduce the proportion of waste to landfill in like-for-like stores by 25.8%. 2008 – 09 2009 –10 Target 2010 –11 Our target for the forthcoming year is to reduce the cube volume of waste sent to landfill by a further 25%. Dunelm Group plc Annual report and accounts 2010 33 2. Reducing the level of product packaging Dunelm continues to work with suppliers to reduce the level of packaging in our products. We have completed a trial to introduce reusable delivery totes into our supply chain and we expect to launch this with a number of key suppliers in the second half of the financial year ending 2 July 2011. This will reduce product packaging for those suppliers by up to 50%. In the year we have audited many of our waste streams to divert materials from landfill where possible. Most recently we have identified a particular specification of clear plastic or wrap that should be used by suppliers – Low Density Polyethylene. This product has a much greater recyclable content and will be standard for all suppliers going forward. Eco-bags are offered in all stores to promote reusable customer packaging and plastic bags are no longer being encouraged with each transaction. The number of plastic carrier bags used during the year ended 3 July 2010 declined by 6.8%, despite the increase in business. Our target for the forthcoming year is to reduce the number of carrier bags used per store by a further 10%. 3. Reducing energy consumption across all locations Dunelm has completed the roll out of new electricity meters to all stores. We are also halfway through implementation of a similar technology for our sites with gas meters. We expect this to be completed by the end of December 2010 . These meters have allowed us to monitor energy consumption on a half-hourly basis and to provide a range of site by site exception reports targeted at reducing the level of consumption and eliminating waste. Energy usage has also been added to monthly bonus targets for all stores which is encouraging store management to challenge performance. Electricity usage (like-for-like stores) – GWh 25 20 15 10 5 0 The Group has also commenced a trial of Building Management Systems (‘BMS’) in 11 stores. These systems are designed to optimise energy usage across the store and cut out unnecessary wastage. This investment will be reviewed over the next few months and, if successful, we intend to roll these out in all new stores, refits and progressively to other stores in the chain. 2008 – 09 2009 –10 Target 2010 –11 As a result of these actions we have reduced electricity usage by 2.4% in like-for-like stores. Our target for the forthcoming year is to reduce electricity and gas usage by 10% on a like-for-like basis. 34 Dunelm Group plc Annual report and accounts 2010 Financial statements Corporate social responsibility continued 4. Carbon Reduction (CO2) Dunelm’s energy carbon footprint for the period ended 3 July 2010 was 23,371 tonnes of CO2. This is a reduction year on year of 2.6% of CO2, despite a growth of 12% in the number of superstores trading. Over the year ended 3 July 2010, 80% of the power used by Dunelm was on a renewable combined heat and power (‘GQCHP’) tariff, where CO2 emissions are 30% lower than the national average. The remaining supplies will be transferred to these ‘green tariffs’ as from October 2010. As a result of the work being undertaken, apart from those supplies picked up through our continued expansion, which take several months to transfer, all power used by Dunelm will be on either a renewable or green tariff by the end of June 2011. Investment has also been made at our Stoke distribution centre where we have fitted the new 250,000 square feet extension with energy efficient lighting and taken the opportunity to retrofit the existing 250,000 square feet facility. Company car fuel efficiency has also been targeted and we have reduced the maximum CO2 emissions to 155g/km for all new cars. We will reduce this further in the coming year. In the coming year we will focus on investments in stores to reduce energy consumption. The most significant investment is likely to be in building management systems but we will further roll out energy efficient lighting, motion detectors and climatic sensors to moderate the use of heating and cooling systems. Over the past year Dunelm has worked with an external consultancy to drive reductions in our carbon emissions. We have registered for the Carbon Trust Standard as part of the new Carbon Reduction Commitment legislation. A full application will be made by the end of October 2010. Our target for the forthcoming year is to reduce absolute CO2 levels year on year. By order of the Board David Stead Company Secretary 16 September 2010 Dunelm Group plc Annual report and accounts 2010 35 Statement of Directors’ responsibilities in respect of the Annual Report and the financial statements The Directors are responsible for preparing the Annual Report and the Group and Parent Company financial statements in accordance with applicable law and regulations. Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare the Group financial statements in accordance with IFRSs as adopted by the European Union (‘EU’) and applicable law and have elected to prepare the Parent Company financial statements on the same basis. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • • • • select suitable accounting policies and then apply them consistently; make judgements and estimates that are reasonable and prudent; state whether they have been prepared in accordance with IFRSs as adopted by the EU; and prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business. The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transaction and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations. The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. Responsibility Statement We confirm that to the best of our knowledge: (a) The financial statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and (b) the management report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. By order of the Board Geoff Cooper Chairman 16 September 2010 Will Adderley Chief Executive 36 Dunelm Group plc Annual report and accounts 2010 Financial statements Independent Auditor’s report to the members of Dunelm Group plc We have audited the financial statements of Dunelm Group plc for the financial year ended 3 July 2010 set out on pages 37 to 41. The financial reporting framework that has been applied in their preparation is applicable law and International Financial Reporting Standards (‘IFRSs’) as adopted by the EU and, as regards the Parent Company financial statements, as applied in accordance with the provisions of the Companies Act 2006. This report is made solely to the Company’s members, as a body, in accordance with chapter 3 of part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company’s members those matters we are required to state to them in an auditors’ report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company’s members, as a body, for our audit work, for this report, or for the opinions we have formed. Respective responsibilities of Directors and auditors As explained more fully in the Directors’ Responsibilities Statement set out on page 35, the Directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our responsibility is to audit the financial statements in accordance with applicable law and International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices Board’s (‘APB’s’) Ethical Standards for Auditors. Scope of the audit of the financial statements A description of the scope of an audit of financial statements is provided on the APB’s website at www.frc.org.uk/apb/scope/UKP. Opinion on financial statements In our opinion: • the financial statements give a true and fair view of the state of the Group’s and of the Parent Company’s affairs as at 3 July 2010 and of the Group’s profit for the year then ended; the Group financial statements have been properly prepared in accordance with IFRSs as adopted by the EU; the Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. • • • Opinion on other matters prescribed by the Companies Act 2006 In our opinion: • the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the financial statements; and the information given in the corporate governance statement with respect to internal control and risk management systems in relation to financial reporting processes and about share capital structures is consistent with the financial statements. • • Matters on which we are required to report by exception We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or certain disclosures of Directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit; or a Corporate Governance Statement has not been prepared by the company. • • • • Under the Listing Rules we are required to review: • • the Directors’ statement, set out on page 35, in relation to going concern; and the part of the Corporate Governance Statement relating to the Company’s compliance with the nine provisions of the June 2008 Combined Code specified for our review. Wayne Cox (Senior Statutory Auditor) for and on behalf of KPMG Audit Plc, Statutory Auditor Chartered Accountants Leicester 16 September 2010 Consolidated income statement For the 52 weeks ended 3 July 2010 Revenue Cost of sales Gross profit Operating costs Operating profit Financial income Financial expenses Profit before taxation Taxation Profit for the period attributable to equity shareholders of the parent Earnings per Ordinary Share – basic Earnings per Ordinary Share – diluted Dividend proposed per Ordinary Share Dividend paid per Ordinary Share All activities relate to continuing operations. Dunelm Group plc Annual report and accounts 2010 37 52 weeks 2010 £’000 53 weeks 2009 £’000 Note 1 492,839 423,783 (262,253) (233,628) 230,586 190,155 3 (155,126) (137,560) 2 5 5 75,460 52,595 1,361 (65) 1,563 (667) 76,756 53,491 6 (22,406) (15,870) 54,350 37,621 8 8 7 7 27.1p 26.9p 18.8p 18.6p 5.0p 3.0p 4.0p 2.0p 38 Dunelm Group plc Annual report and accounts 2010 Financial statements Consolidated statement of comprehensive income For the 52 weeks ended 3 July 2010 Profit for the period Effective portion of movement in fair value of cash flow hedges Deferred tax on hedging movements Total comprehensive income for the period 52 weeks 2010 £’000 Restated 53 weeks 2009 £’000 54,350 37,621 (545) – 153 – 53,958 37,621 Dunelm Group plc Annual report and accounts 2010 39 Consolidated statement of financial position As at 3 July 2010 Non-current assets Intangible assets Property, plant and equipment Total non-current assets Current assets Inventories Trade and other receivables Cash and cash equivalents Total current assets Total assets Current liabilities Trade and other payables Liability for current tax Financial instruments Interest-bearing loans and borrowings Total current liabilities Non-current liabilities Deferred tax liability Total non-current liabilities Total liabilities Net assets Equity Issued capital Share premium Capital redemption reserve Hedging reserve Retained earnings Total equity attributable to equity holders of the Parent 3 July 2010 £’000 4 July 2009 £’000 Note 9 5,202 10 102,599 5,843 88,771 107,801 94,614 12 13 14 62,583 10,470 15,369 57,895 10,739 24,016 88,422 92,650 196,223 187,264 15 17 16 11 (71,638) (11,200) (65,550) (8,797) (545) – – (18) (83,383) (74,365) (152) (152) (127) (127) (83,535) (74,492) 112,688 112,772 18 2,010 580 43,155 – (392) – 2,008 345 67,335 110,419 112,688 112,772 The financial statements on pages 37 to 58 were approved by the Board of Directors on 16 September 2010 and were signed on its behalf by: Will Adderley Chief Executive 40 Dunelm Group plc Annual report and accounts 2010 Financial statements Consolidated statement of cash flows For the 52 weeks ended 3 July 2010 Profit before taxation Adjustment for net financing costs Operating profit Depreciation and amortisation Loss on disposal of property, plant and equipment Operating cash flows before movements in working capital (Increase)/decrease in inventories Decrease in receivables Increase in payables Net movement in working capital Share-based payments expense Foreign exchange losses Interest paid Interest received Tax paid Net cash generated from operating activities Cash flows from investing activities Proceeds on disposal of property, plant and equipment Acquisition of property, plant and equipment Acquisition of intangible assets Net cash utilised in investing activities Cash flows from financing activities Proceeds from issue of share capital Purchase of treasury shares Proceeds from issue of treasury shares Repayment of bank loan Proceeds from bank loan Return of capital to shareholders Dividends paid Net cash flows utilised in financing activities Net (decrease)/increase in cash and cash equivalents Foreign exchange revaluations Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period Note 52 weeks 2010 £’000 76,756 (1,296) 75,460 11,370 13 86,843 (4,688) 269 6,094 1,675 1,330 516 53 weeks 2009 £’000 53,491 (896) 52,595 10,555 26 63,176 2,815 897 11,132 14,844 599 323 90,364 (71) 557 (18,899) 78,942 (821) 523 (11,200) 71,951 67,444 7 1 (23,344) (1,233) (19,647) (6,295) (24,570) (25,941) 244 – – 642 (10,000) 10,000 – (43,155) – (14,029) (186) 124 (10,000) (10,993) (56,298) (21,055) (8,917) 288 23,998 20,448 717 2,833 14 15,369 23,998 Dunelm Group plc Annual report and accounts 2010 41 Consolidated statement of changes in equity For the 52 weeks ended 3 July 2010 Issued share capital £’000 Share premium £’000 Capital redemption reserve £’000 Hedging reserve £’000 Retained earnings £’000 Total equity £’000 As at 28 June 2008 2,008 345 Profit and total comprehensive income for the financial year Purchase of treasury shares Treasury shares reissued in respect of share option schemes Share-based payments Deferred tax on share-based payments Current corporation tax on share options exercised Dividends Total transactions with owners, recorded directly in equity – – – – – – – – – – – – – – – – As at 4 July 2009 2,008 345 Profit for the financial year Movement in fair value of cash flow hedges Deferred tax on hedging movements Total comprehensive income for the financial year – – – – – – – – – – – – – – – – – – – – – – Issue of share capital Issue of B shares Redemption of B shares Treasury shares reissued in respect of share option schemes Share-based payments Deferred tax on share-based payments Current corporation tax on share options exercised Dividends Total transactions with owners, recorded directly in equity 2 43,155 (43,155) 235 – – – – 43,155 – – – – – 2 – – – – – – – – – – 235 43,155 – – – – – – – – – 83,036 85,389 37,621 37,621 (186) 123 599 139 80 (10,993) (186) 123 599 139 80 (10,993) (10,238) (10,238) – 110,419 112,772 – 54,350 54,350 (545) 153 – – (545) 153 (392) 54,350 53,958 – – – – – – – – – – (43,155) (43,155) 237 – (43,155) 649 649 1,330 320 1,330 320 606 (14,029) 606 (14,029) (97,434) (54,042) As at 3 July 2010 2,010 580 43,155 (392) 67,335 112,688 2009 financial year was 53 weeks. 42 Dunelm Group plc Annual report and accounts 2010 Financial statements Accounting policies Basis of preparation The Group financial statements consolidate those of the Company and its subsidiaries (together referred to as the ‘Group’). The Parent Company financial statements present information about the Company as a separate entity and not about its Group. The Group financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’) and in accordance with the provisions of the Companies Act 2006 and these are presented on pages 37 to 58. The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Group financial statements. The annual financial statements are prepared under the historical cost convention except where financial instruments have been stated at fair value. The financial statements are prepared in pounds sterling, rounded to the nearest thousand. Going concern 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 different geographic areas. As a consequence, the Directors believe that the Group is well placed to manage its business risks successfully despite the current economic outlook. The Directors have a reasonable expectation that the Company and the Group have adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the Annual Report and financial statements. 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 Directors’ Report and Business Review on pages 27 to 30. The financial position of the Group, its cash flows, liquidity position and borrowing facilities are described in the Finance Director’s review on pages 10 to 14. In addition note 17 to the financial statements includes the Group’s objectives, policies and processes for managing its capital; its financial risk management objectives; and its exposures to credit risk and liquidity risk. Use of estimates and judgements The presentation of the annual 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 experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The key estimates and judgements used in the financial statements are as follows: Inventory provisions The Group provides against the carrying value of inventories held, based upon average losses incurred to clear old and discounted lines. Dilapidations The Group provides for the full estimated costs of any dilapidations on stores where required. Taxation There are transactions whose ultimate tax treatment is uncertain. The Group makes provision for anticipated tax issues based on the likelihood of whether additional taxes may arise. The Group recognises deferred tax assets and liabilities based on estimates of future taxable income and recoverability. If these estimates do not materialise or change, or there are changes in tax rates or to the period over which losses might be recognised, then the value of the deferred tax assets or liability will need to be revised in a future period. Dunelm Group plc Annual report and accounts 2010 43 Equity-settled share-based payments Certain employees and Directors of the Group receive equity-settled remuneration in the form of equity-settled share-based payment transactions, whereby employees render services in exchange for shares or rights over shares. The cost equity- settled transactions with employees is measured by reference to the fair value, determined using an appropriate pricing model, at the date at which they are granted. The cost of equity-settled transactions is recognised, together with a corresponding increase in equity, over the period in which the non-market vesting conditions are expected to be fulfilled, ending on the relevant vesting date. The cumulative expense recognised for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period and is adjusted to reflect the Directors’ best available estimate of the number of equity instruments that will ultimately vest based upon non-market conditions. Basis of consolidation Subsidiaries Subsidiaries are entities controlled by the Company. Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity so as to obtain benefits from its activities. In assessing control, potential voting rights that presently are exercisable or convertible are taken into account. The financial statements of subsidiaries are included in the consolidated financial statements from the date that control commences until the date that control ceases. Transactions eliminated on consolidation Intragroup balances, and any unrealised gains and losses or income and expenses arising from intragroup transactions, are eliminated in preparing the consolidated financial statements. Revenue Revenue represents the proceeds from sales of goods and related services. It excludes sales between Group companies and is after deducting returns, discounts given and VAT. For the majority of sales, revenue is recognised at the point of sale with the exception of make-up charges for custom made products, where revenue is recognised at the point that the goods are collected, and gift vouchers, where revenue is recognised when the vouchers are redeemed. Foreign currencies Transactions in foreign currencies are recorded at the prevailing rate at the date of the transaction. Monetary assets and liabilities denominated in foreign currency are translated at the rates ruling at the balance sheet date. Resulting exchange gains or losses are recognised in the income statement for the period. Intangible assets These comprise software development and implementation costs and trademarks and are stated at cost less amortisation (see below). Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful life of the asset. These are as follows: • • software development trademarks 3 years 5 years Property, plant and equipment Owned assets Items of property, plant and equipment are stated at cost less accumulated depreciation (see below) and impairment losses. Where parts of an item of property, plant and equipment have different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of each part of an item of property, plant and equipment. Land is not depreciated. The estimated useful lives are as follows: • • • • • • • 3 years 50 years 4 years 4 years 5 years 4 years over the period of the lease computer equipment freehold buildings fixtures and fittings motor vehicles office equipment plant and machinery leasehold improvements The residual value of an asset, if significant, is reassessed annually. 44 Dunelm Group plc Annual report and accounts 2010 Financial statements Accounting policies continued Current assets Trade and other receivables Trade and other receivables are initially recognised at fair value and then carried at amortised cost net of impairment provisions. Inventories Inventories are stated at the lower of cost and net realisable value. Cost is derived using the average cost method and includes costs incurred in bringing the inventories to their present location and condition. Net realisable value is the estimated selling price less cost to sell in the ordinary course of business. Cash and cash equivalents Cash and cash equivalents comprise cash balances and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Bank borrowings and borrowing costs Interest-bearing bank loans and overdrafts are recorded at the proceeds received. Borrowing costs are recognised as an expense in the financial period in which they are incurred. Borrowings are classed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months from the balance sheet date. Derivative financial instruments Derivative financial instruments used are forward exchange contracts and are measured at fair value. The fair values are determined by reference to the market prices available from the market on which the instruments involved are traded. Certain derivative financial instruments are designated as hedges in line with the Group’s treasury policy. Cash flow hedges that hedge exposure to variability in cash flows that is either attributable to a particular risk associated with a recognised asset or a liability or a highly probable forecasted transaction. For cash flow hedges that proportion of the gain or loss on the hedging instrument that is determined to be an effective hedge, as defined by IAS 39 ‘Financial Instruments: Recognition and Measurement’, is recognised in equity, directly in the hedge reserve with any ineffective portion recognised in the income statement. Such hedges are tested, both at inception to ensure they are expected to be effective and periodically throughout their duration to assess continuing effectiveness. When the forecast transaction results in the recognition of a non-financial asset or liability, the associated gains or losses previously recognised in equity are included in the initial measurement of the asset or liability. For all other cash flow hedges, the gains or losses that are recognised in equity are transferred to the income statement in the same period in which the hedge cash flows affect the income statement. Any gains or losses arising from changes in fair value derivative financial instruments not designated as hedges are recognised in the income statement. Impairment The carrying amounts of the Group’s assets, other than inventories and deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the asset’s recoverable amount is estimated. The recoverable amount is the greater of net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time-value of money and the risks specific to the asset. For an asset that does not generate largely independent cash inflows, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds the recoverable amount. Impairment losses are recognised in the income statement. Share capital Where the Company purchases its own equity share capital (treasury shares) the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received net of any directly attributable incremental transactions costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. Dunelm Group plc Annual report and accounts 2010 45 Provisions A provision is recognised in the balance sheet when the Group has a current legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. A provision for onerous contracts is recognised when the expected benefit to be derived by the Group from a contract is lower than the unavoidable costs of meeting its obligations under the contract. Expenses Property leases Lease incentives received are recognised in the income statement evenly over the full term of the lease. Where leases for land and buildings provide for fixed rent review dates and amounts, the Group accounts for such reviews by recognising, on a straight-line basis, the total implicit minimum lease payments over the non-cancellable period of the lease term. Financing income/expense Financing income/expense comprises interest payable on borrowings calculated using the effective interest rate method, interest receivable on funds invested and foreign exchange gains and losses. Retirement benefits The Group operates a defined contribution pension plan using a third-party provider. Obligations for the contributions to this plan are recognised as an expense in the income statement as incurred. Share-based payment transactions The Group operates an employee share save scheme open to all employees with over six months’ service, enabling them to save money which may be used after three years to acquire shares in the Company at a predetermined price. The Group also operates other share option schemes enabling certain employees to acquire shares of the Company. The fair value of options granted is recognised as an employee expense with a corresponding increase in equity. Fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. Fair value is measured using the binomial model, taking into account the terms and conditions applicable to the options. At each balance sheet date the Group revises its estimates of the number of share incentives that are expected to vest and amends the charge accordingly. Dividends Dividends are recognised as a liability in the period in which they are approved such that the Company is obligated to pay the dividend. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax represents the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, together with any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be recognised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be recognised. 46 Dunelm Group plc Annual report and accounts 2010 Financial statements Accounting policies continued Adopted IFRS and IFRIC not yet applied IFRS 8 IAS 27 (revised) Consolidated and Separate Financial Statements Operating segments The effect of the revision of IAS 27 is disclosed on page 41. At the date of approval of these financial statements, the following standards, amendments and interpretations were in place but not yet effective: IFRS 1 IFRS 7 IFRS 9 IAS 1 IAS 27 IAS 34 IFRIC 13 – First time adoption of IFRSs – Financial Instruments – Financial Instruments – Presentation of Financial Statements – Consolidated and Separate Financial Statements – Interim Financial Reporting – Customer Loyalty Programmes Revised IFRS 1 Revised IFRS 7 Revised IFRS 9 Revised IAS 1 Revised IAS 27 Revised IAS 34 Revised IFRIC 13 The above will be adopted in the Group and Company’s financial statements when they become effective. When adopted none of the above standards or amendments are expected to have any significant impact on the financial statements of the Group or Company. Revised IFRS 7 requires additional disclosure to better enable users to evaluate an entity’s exposure to risks arising from financial instruments. Revised IAS 1 requires a reconciliation of each component of equity to be presented in the statement of changes in equity showing separately changes arising from items recognised in profit or loss, in other comprehensive income, and from transactions with owners acting in their capacity as owners. Dunelm Group plc Annual report and accounts 2010 47 Notes to the annual financial statements For the 52 weeks ended 3 July 2010 1 Segmental reporting The Group has one reportable segment, retail of homewares. Management believe that these measures are the most relevant in evaluating the performance of the segment and for making resource allocation decisions. The Chief Operating Decision Maker is the Group’s Executive Committee. Internal management reports are reviewed by them on a monthly basis. Performance of the segment is assessed based on profit before interest and taxation. 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. 2 Operating profit Operating profit is stated after charging the following items: Inventories Cost of inventories included in cost of sales Write down of inventories Amortisation of intangible assets Depreciation of property, plant and equipment Owned Operating lease rentals Land and buildings Plant and machinery Loss on disposal of property, plant and equipment and intangible assets The analysis of auditors’ remuneration is as follows: Fees payable to the Company’s auditors for the audit of the Parent and consolidated annual accounts Fees payable to the Company’s auditors and their associates for other services to the Group – audit of the Company’s subsidiaries pursuant to legislation – tax compliance – other tax services – all other services 3 Operating costs 2010 £’000 2009 £’000 262,253 229,701 2,758 2,550 1,120 1,876 9,494 8,005 22,544 1,351 13 21,683 1,151 26 2009 £’000 15 52 29 2010 £’000 15 52 30 88 8 17 – 2010 £’000 Restated 2009 £’000 130,606 117,933 19,601 26 24,507 13 155,126 137,560 Selling and Distribution Administrative Loss on disposal of property, plant and equipment and intangible assets 4 Employee numbers and costs The average number of people employed by the Group (including Directors) was: Selling Distribution Administration 2010 2010 Number Full time of heads equivalents 2009 Number of heads 2009 Full time equivalents 5,608 285 198 6,091 3,493 274 194 3,961 5,003 250 161 5,414 3,302 240 158 3,700 48 Dunelm Group plc Annual report and accounts 2010 Financial statements Notes to the annual financial statements continued For the 52 weeks ended 3 July 2010 4 Employee numbers and costs continued The aggregate remuneration of all employees including Directors comprises: Wages and salaries including bonuses and termination benefits Social security costs Share-based payment expense (note 20) Defined contribution pension costs 2010 £’000 61,994 4,324 1,330 196 2009 £’000 52,696 3,429 599 206 67,844 56,930 Details of Directors’ remuneration, share options, long-term incentive schemes and pension entitlements are disclosed in the Remuneration Report on pages 23 to 26. 5 Financial income and expense Finance income Interest on bank deposits Foreign exchange gains Finance expenses Interest on bank borrowings and overdraft Net finance income 6 Taxation Current taxation UK corporation tax charge for the period Adjustments in respect of prior periods Deferred taxation Origination of temporary differences Adjustment in respect of prior periods Total taxation expense in the income statement The tax charge is reconciled with the standard rate of UK corporation tax as follows: Profit before tax UK corporation tax at standard rate of 28.0% (2009: 28.0%) Factors affecting the charge in the period: Non-deductible expenses Ineligible depreciation Lease incentive deductions Adjustments to tax charge in respect of prior years Profit on disposal in excess of capital gain The taxation charge for the period as a percentage of profit before tax is 29.2% (2009: 29.7%). 2010 £’000 2009 £’000 557 804 1,361 523 1,040 1,563 (65) 1,296 (667) 896 2010 £’000 2009 £’000 22,146 (238) 16,143 94 21,908 16,237 324 174 498 (332) (35) (367) 22,406 15,870 2010 £’000 2009 £’000 76,756 53,491 21,492 14,977 128 7 972 (122) (64) – 5 947 (125) 59 22,406 15,870 7 Dividends All dividends relate to the 1p Ordinary Shares. Final for the period ended 28 June 2008 – paid 3.5p Interim for the period ended 4 July 2009 – paid 2.0p Final for the period ended 4 July 2009 – paid 4.0p Interim for the period ended 3 July 2010 – paid 3.0p Dunelm Group plc Annual report and accounts 2010 49 2010 £’000 – – 2009 £’000 (6,994) (3,999) (8,008) – (6,021) – (14,029) (10,993) The Directors are proposing a final dividend of 5.0p per Ordinary Share for the period ended 3 July 2010 which equates to £10.0m. The dividend will be paid on 10 December 2010 to shareholders on the register at the close of business on 26 November 2010. 8 Earnings per share Basic earnings per share is calculated by dividing the profit for the period attributable to equity shareholders by the weighted average number of Ordinary Shares in issue during the period. 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: Weighted average number of shares in issue during the period Impact of share options Number of shares for diluted earnings per share 9 Intangible assets Cost At 28 June 2008 Additions Disposals Transfers from property, plant and equipment At 4 July 2009 Additions Disposals Transfers from property, plant and equipment At 3 July 2010 Amortisation At 28 June 2008 Charge for the financial period Disposals At 4 July 2009 Charge for the financial period Disposals At 3 July 2010 Net book value At 28 June 2008 At 4 July 2009 At 3 July 2010 52 weeks ended 3 July 2010 ’000 53 weeks ended 4 July 2009 ‘000 200,264 199,874 2,559 2,047 202,311 202,433 Software development and licences £’000 Rights to Dorma brand £’000 6,613 1,237 (153) 41 7,738 1,233 (5,444) 2 – 5,036 – – 5,036 – – – Total £’000 6,613 6,273 (153) 41 12,774 1,233 (5,444) 2 3,529 5,036 8,565 4,516 1,627 (135) 6,008 869 (5,444) 1,433 2,097 1,730 2,096 – 923 – 923 1,007 – 1,930 – 4,113 3,106 4,516 2,550 (135) 6,931 1,876 (5,444) 3,363 2,097 5,843 5,202 All additions were acquired and do not include any internal development costs. Transfers relate to assets which were classified initially as fixtures and fittings and leasehold improvements. 50 Dunelm Group plc Annual report and accounts 2010 Financial statements Notes to the annual financial statements continued For the 52 weeks ended 3 July 2010 10 Property, plant and equipment Cost At 28 June 2008 Additions Transfers to intangible assets Disposals At 4 July 2009 Additions Transfers to intangible assets Disposals At 3 July 2010 Depreciation At 28 June 2008 Charge for financial period On disposals At 4 July 2009 Charge for financial period On disposals At 3 July 2010 Net book value At 28 June 2008 At 4 July 2009 At 3 July 2010 Land and Plant and Leasehold buildings improvements machinery £’000 £’000 £’000 41,769 6,969 – – 48,738 4,144 – – 40,246 7,179 (10) (7) 47,408 10,049 66 (319) 52,882 57,204 2,054 661 – 2,715 802 – 9,871 3,405 (4) 13,272 3,996 (314) 102 93 – – 195 281 – – 476 52 44 – 96 43 – Motor vehicles £’000 Fixtures and fittings £’000 Total £’000 99 – – (13) 86 – – (33) 29,092 111,308 19,669 (41) (171) 5,428 (31) (151) 34,338 130,765 23,344 (2) (13,558) 8,870 (68) (13,206) 53 29,934 140,549 99 – (13) 86 – (33) 22,075 3,895 (145) 34,151 8,005 (162) 25,825 4,653 (13,191) 41,994 9,494 (13,538) 3,517 16,954 139 53 17,287 37,950 39,715 46,023 30,375 34,136 49,365 40,250 50 99 337 – – – 7,017 8,513 77,157 88,771 12,647 102,599 11 Deferred tax Deferred tax is provided in full on temporary differences under the liability method using a taxation rate of 28% (2009: 28%). Deferred taxation assets and liabilities are attributable to the following: Property, plant and equipment Other temporary differences Share-based payments The movement in the net deferred tax balance is as follows: Property, plant and equipment Employee benefits Short-term temporary differences Assets Liabilities Net 2010 £’000 – 153 1,051 1,204 2009 £’000 – – 558 558 2010 £’000 (1,187) (169) – (1,356) 2009 £’000 (634) (51) – (685) 2010 £’000 (1,187) (16) 1,051 (152) 2009 £’000 (634) (51) 558 (127) Balance at Recognised Recognised in equity in income £’000 £’000 28 June 2008 £’000 Balance at 4 July 2009 £’000 (813) 182 (3) (634) 179 236 (48) 367 – 140 – 140 (634) 558 (51) (127) 11 Deferred tax continued Property, plant and equipment Employee benefits Short-term temporary differences 12 Inventories Goods for resale 13 Trade and other receivables Trade receivables Other receivables Prepayments and accrued income Dunelm Group plc Annual report and accounts 2010 51 Balance at Recognised Recognised in equity in income 5 July 2009 £’000 £’000 £’000 Balance at 3 July 2010 £’000 (634) 558 (51) (127) (553) 173 (118) (498) – 320 153 473 (1,187) 1,051 (16) (152) 2010 £’000 2009 £’000 62,583 57,895 2010 £’000 122 628 9,720 2009 £’000 463 1,113 9,163 10,470 10,739 All amounts fall due within one year. All trade receivables are current. No interest is charged on trade receivables, whilst these remain current. 14 Cash and cash equivalents Cash at bank and in hand Cash and cash equivalents include the following for the purpose of the cash flow statement: Cash at bank and in hand Bank overdraft 15 Trade and other payables Trade payables Accruals and deferred income Other taxation and social security Other creditors 16 Interest bearing loans and borrowings Bank overdraft 2010 £’000 2009 £’000 15,369 23,998 15,369 – 24,016 (18) 15,369 23,998 2010 £’000 32,451 35,509 3,283 395 2009 £’000 28,850 31,462 3,971 1,267 71,638 65,550 2010 £’000 – – 2009 £’000 18 18 On 26 September 2006 the Group entered into a £50m revolving credit facility, repayable in full on 26 September 2011 and sub-divided into two elements: a £40m facility and a £10m facility. The £10m facility was cancelled on 26 May 2009. The £40m facility remains available but was not utilised at the balance sheet date. Interest is payable on funds utilised under the £40m facility at the rate of LIBOR plus 0.35%. LIBOR is fixed for a given loan at the date of draw down. The facility is guaranteed by the Parent Company and its subsidiaries. 52 Dunelm Group plc Annual report and accounts 2010 Financial statements Notes to the annual financial statements continued For the 52 weeks ended 3 July 2010 16 Interest bearing loans and borrowings continued Interest rate risk profile of financial assets and liabilities The interest rate profile of the Group’s financial liabilities as at the period end was: 2010 2010 Total Floating rate £’000 £’000 2010 Effective Fixed rate interest rate % £’000 2009 2009 Total Floating rate £’000 £’000 2009 Fixed rate £’000 Effective interest rate % Overdraft – – – – – – – – 18 18 18 18 – – 2.00 2.00 All liabilities are denominated in sterling. The floating rate on the overdraft is linked to Barclays Bank Base Rate and the Group believes that an increase in the rate of 1% would not have had a material impact on profit before tax for the period. Financial assets at 3 July 2010 consisted of £122,000 (2009: £463,000) trade receivables and £15,369,000 (2009: £24,016,000) cash at bank and on deposit; interest earned is at normal commercial rates. 17 Financial risk management The Board of Directors has overall responsibility for the oversight of the Group’s risk management framework. A formal process for reviewing and managing risk in the business has been developed. A register of strategic and operational risks is maintained and reviewed quarterly by the Board, who also monitor the status of agreed actions to mitigate key risks. Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations and arises principally from the Group’s receivables from customers. The Group only deals with creditworthy counterparties, and uses publicly available financial information to rate its customers. As the principal business of the Group is retail related, trade receivables consist of a relatively small number of customers, which tend to be charity or local authority based. The carrying amount of financial assets recorded in the financial statements represents the Group’s maximum exposure to credit risk. Liquidity risk Liquidity risk is the risk that the Group will not be able to meet its financial obligations as they fall due. The Group’s approach to managing liquidity risk is to ensure, as far as possible, that it will always have sufficient liquidity to meet its liabilities when due, under both normal and extreme circumstances. The Group manages this risk by continuously monitoring cash flow forecasts. The Group’s available facilities can be found in note 16. Group policy is that surplus funds are placed on deposit with counterparties approved by the Board, with a minimum of ‘A’ credit rating. Credit limits with approved counterparties are limited to £20m for any individual party. Market risk Market risk is the risk that changes in market prices, such as foreign exchange rates and interest rates will affect the Group’s income. Interest rate risk The Group’s bank borrowings incur variable interest rate charges linked to LIBOR and Barclays Bank Base Rate. The Directors do not consider that future changes in interest rates are likely to cause a material direct impact on profitability. The Group’s exposure to interest rates on financial assets and liabilities are detailed in note 16. Foreign currency risk The Group is exposed to foreign currency risk on purchases denominated in US dollars. These amounted to approximately 11% of the total purchases in the year ended 3 July 2010. The outstanding US dollar liabilities at the year end were $139,000 (2009: $400,000). During the year the Group entered into exchange rate swaps for $18.8m to sell sterling and buy US dollars. These swaps are accounted for as cash flow hedges. During the year the mark to market loss on foreign currency hedging instruments taken to equity was £0.5m (2009: nil). At the balance sheet date the Group had eight swap contracts outstanding with a maximum value of $30.0m. Dunelm Group plc Annual report and accounts 2010 53 17 Financial risk management continued All of the Group’s revenues are in sterling. Purchases of promotional goods are generally in US dollars. Purchase of regular range goods are generally in sterling, although some lines are now being imported directly and paid for in dollars. We will cover exchange rate exposure on expected promotional product purchases up to a maximum of 100% of forecast purchases over a four month horizon. We will cover exchange rate exposure on expected regular range purchases up to a maximum of 50% of forecast purchases over a 12 month horizon. We will use various means to cover the above currency exposures; hold excess funds in US dollars, take out forward contracts for the purchase of US dollars, enter into forward rate options. In the event of a significant adverse movement in the US dollar exchange rate, the Group would seek to minimise the impact on profitability by changing the selling price of goods. Sensitivity analysis The Group’s principal foreign currency exposure is to the US dollar. The Directors believe that an increase or decrease of 10% in the US dollar/sterling exchange rates would not have a material effect on the Statement of comprehensive income. The US dollar year end exchange rate applied in the above analysis is 1.5186 (2009: 1.5870). Strengthening and weakening of sterling may not produce symmetrical results depending on the proportion and nature of foreign exchange derivatives which do not qualify for hedge accounting. Fair values The fair value of the Group’s financial assets and liabilities is not materially different from their carrying value. The fair value of foreign currency contracts are sums required by the counterparties to cancel the contracts at the end of the year. 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); and Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). • All financial instruments carried at fair value have been measured by a Level 2 valuation method. Capital management The Board’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. From time to time the Group purchases its own shares on the market; the timing of these purchases depends on market prices. The shares are intended to be used for issuing shares under the Group’s share option programmes. Buy and sell decisions are made on a specific transaction basis by the Board. The Group does not have a defined share buy-back plan. The following table is a comparison by category of the carrying amounts and fair values of the Group’s financial assets and liabilities at 3 July 2010 and 4 July 2009. Cash and cash equivalents Trade receivables Total financial assets Trade payables Forward exchange contracts Total financial liabilities Net financial liabilities 2010 Carrying value £’000 2010 2009 Fair value Carrying value £’000 £’000 15,369 122 15,369 122 23,998 463 2009 Fair value £’000 23,998 463 15,491 15,491 24,461 24,461 (32,451) (32,451) (545) (545) (28,850) – (28,850) – (32,996) (32,996) (28,850) (28,850) (17,505) (17,505) (4,389) (4,389) The fair value on trade receivables and trade payables are approximate to the carrying value. 54 Dunelm Group plc Annual report and accounts 2010 Financial statements Notes to the annual financial statements continued For the 52 weeks ended 3 July 2010 17 Financial risk management continued The currency profile of the Group’s cash and cash equivalents is as follows: Sterling US dollar Euro 2010 £’000 2009 £’000 14,057 1,209 22,669 1,329 103 – 15,369 23,998 As at 3 July 2010, the analysis of trade receivables that were past due but not impaired is as follows: 3 July 2010 4 July 2009 18 Share capital In issue at the start of the period B shares issued via a bonus issue B shares redeemed in the year Issued during the period in respect of share option schemes In issue at the end of the period Neither past due nor impaired £’000 Total £’000 122 463 26 43 Less than 30 days £’000 49 407 31–60 days £’000 1 7 61–90 days £’000 10 4 More than 90 days £’000 36 2 Number of ordinary shares of 1p each 2010 200,791,400 – – 248,748 201,040,148 Number of B shares of 21.5p each 2010 – 200,723,131 (200,723,131) – Number of ordinary shares of 1p each 2009 200,791,400 – – – 200,791,400 Proceeds received in relation to shares issued during the period were £238,000 (2009: £nil). Ordinary shares of 1p each: Authorised Allotted, called up and fully paid 2010 number of shares 2010 £’000 2009 number of shares 500,000,000 5,000 500,000,000 201,040,148 2,010 200,791,400 2009 £’000 5,000 2,008 During the year the authorised share capital of the Group was increased by £43,155,000 from £5,000,000 to £48,155,000 by the creation of 200,723,131 21.5p non cumulative redeemable preference shares (‘B shares’). £43,155,000 was capitalised standing to the credit of the Group’s merger reserve to pay up in full the B shares. The B shares were allotted and issued to Shareholders on the basis of one B share for each Ordinary Share held on 22 February 2010. All of the B shares were redeemed and cancelled by the end of the financial year. The holders of the B shares were not entitled, in their capacity as holders of such shares, to receive notice of any general meeting of the Group nor to attend, speak or vote at any such general meeting. 19 Treasury shares Outstanding at beginning of year Purchased during year Reissued during the period in respect of share option schemes Outstanding at end of year 2010 number of shares 837,135 – (737,507) 99,628 2010 £’000 1,301 – (1,173) 128 2009 number of shares 951,500 127,000 (241,365) 837,135 2009 £’000 1,522 186 (407) 1,301 In the past the Company has acquired its own shares (‘treasury shares’) for the purpose of delivery to employees under employee share schemes. No such purchases were made during the financial year. The Company reissued 737,507 (2009: 241,365) treasury shares for a total consideration of £641,843 (2009: £124,453). The Company has the right to reissue the remaining treasury shares at a later date. Dunelm Group plc Annual report and accounts 2010 55 20 Share-based payments As at 3 July 2010, the Group operated three share award plans: a) Dunelm Group Share Option Plan (‘GSOP’) b) Dunelm Group Savings Related Share Option Plan (‘Sharesave’) c) Long-Term Incentive Plan (‘LTIP’) There were 6,241 exercisable options in total under these schemes as at 3 July 2010. a) Dunelm Group Share Option Plan The GSOP was established in December 2003. Options have a vesting period of three years from date of grant and a maximum life of 10 years. All options granted prior to October 2006 have an exercise price equal to the market value as agreed with HMRC at date of grant; all subsequent grants have had an exercise price equal to market price at date of grant. There are no performance conditions but there is a requirement that the Group’s shares be traded on a public exchange at date of exercise, and the awards are also subject to continued employment with the Group. The fair value of services received in return for share options granted is measured by reference to the fair value of the options, assessed using a binomial model. The fair value per option granted and the assumptions used in the calculations are as follows: Fair value at measurement date Exercise price Expected volatility (weighted average volatility used in modelling – based on historical volatility of comparable quoted companies) Option life (weighted average life used in modelling) Expected dividends Risk-free interest rate January 2010 grant June 2008 grant August 2006 grant September 2005 grant December 2004 grant September 2004 grant 133.5p 405.0p 65.6p 137.0p 7.0p 62.1p 6.3p 57.0p 6.0p 46.0p 6.2p 46.0p 35% 3 years 2.5% 2.8% 35% 3 years 8.7% 4.8% 35% 3 years 8.7% 4.8% 35% 3 years 8.7% 4.8% 35% 3 years 8.7% 4.8% 35% 3 years 8.7% 4.8% The number and weighted average exercise price of options under the GSOP is as follows: Outstanding at beginning of year Granted during year Retrospective adjustment to prior year Exercised during year Outstanding at end of year Weighted average exercise Number of shares price under option 2010 2010 405.0p – 60.5p 427,331 12,345 – 54.9p (390,836) 48,840 203.8p Weighted average exercise Number of shares price under option 2009 2009 52.4p 610,500 36,496 137.0p 46.0p 21,700 56.1p (241,365) 60.5p 427,331 b) Dunelm Group Savings Related Share Option Plan The Sharesave scheme was established in 2006 and is open to all staff with eligible length of service. One grant was made under the scheme during the year, in October 2009. Options may be exercised under the scheme on completion of the three year savings contract and must be exercised within six months from that date. There is provision for early exercise in certain circumstances such as death, disability, redundancy and retirement. 56 Dunelm Group plc Annual report and accounts 2010 Financial statements Notes to the annual financial statements continued For the 52 weeks ended 3 July 2010 20 Share-based payments continued The fair value per option granted and the assumptions used in the calculations are as follows: Fair value at measurement date Share price Exercise price Expected volatility (weighted average volatility used in modelling – based on historical volatility of comparable quoted companies) Option life (weighted average life used in modelling) Expected dividends Risk-free interest rate Forfeiture rate October 2009 180.4p 376.3p 253.0p October 2008 47.0p 125.0p 124.5p October 2007 November 2006 70.0p 212.0p 157.0p 69.0p 202.0p 153.0p 30% 57% 58% 30% 3.5 years 3.5 years 3.5 years 3.5 years 2.5% 4.8% 0% 2.5% 3.0% 29% 2.5% 4.8% 10% 2.5% 2.8% 48% The number and weighted average exercise price of options outstanding under the Sharesave at 3 July 2010 is as follows: Outstanding at beginning of year Granted during year Exercised during the year Forfeited during year Outstanding at end of year Weighted average exercise Number of shares price under option 2010 2010 Weighted average exercise Number of shares price under option 2009 2009 154.0p 1,001,273 142.9p 867,972 124.5p 362,125 253.0p 347,376 153.0p (440,150) – 161.5p (103,426) 151.4p (495,426) 142.9p 867,972 190.4p 671,772 – c) Long-Term Incentive Plan The LTIP was approved by the Board in 2006 enabling the Group to award shares to particular individuals, normally in the form of nominal cost options. The LTIP is administered by the Remuneration Committee. Two grants were made in the year, to the Executive Directors and senior management. The Executive Directors’ grant in September 2009 is exercisable in September 2012 and the senior management grant in September 2009 is exercisable in July 2011. The grant to the Executive Directors is dependent on the level of growth in Group EPS relative to RPI, as well as continuing employment. The grant to senior management is dependent on continuing employment within the Group. The maximum life of options under the LTIP is 10 years from the date of grant. Full details of this plan are included in the Remuneration Report on pages 23 to 26. The fair value of services received in return for share options granted is measured by reference to the fair value of the options. This has been calculated as follows: Share price at date of grant Discount factor, based on dividend yield of 3.0% to vesting date Fair value of option September 2009 September 2008 September 2007 316.0p 0.913 288.5p 148.0p 0.889 132.5p 193.0p 0.913 178.9p March 2007 229.0p 0.913 209.0p The number and weighted average exercise price of options under the LTIP at 3 July 2010 is as follows: Outstanding at beginning of year Granted during year Exercised during year Forfeited during year Outstanding at end of year – – – – – 1,263,571 384,164 (155,270) (165,997) 1,326,468 – 568,356 – 713,554 – – (18,339) – – 1,263,571 Weighted average exercise price 2010 Number of shares under option 2010 Weighted average exercise Number of shares price under option 2009 2009 Dunelm Group plc Annual report and accounts 2010 57 20 Share-based payments continued The total expense recognised in the income statement arising from share-based payments is as follows: GSOP Sharesave LTIP 2010 £’000 2 6 93 1,235 1,330 2009 £’000 128 465 599 21 Commitments As at 3 July 2010 the Group had entered into capital contracts amounting to £15.4m. The equivalent figure as at 4 July 2009 was £2.0m. The future minimum lease payments under non-cancellable operating leases were as follows: Within one year In the second to fifth year inclusive After five years 2010 Motor vehicles £’000 2010 2010 Land and Plant and buildings machinery £’000 £’000 2009 Motor vehicles £’000 2009 2009 Land and Plant and buildings machinery £’000 £’000 428 374 23,723 86,794 – 115,241 802 225,758 292 535 – 827 368 398 20,852 76,915 – 103,199 766 200,966 280 578 – 858 The Group has 91 operating leases in respect of properties. These leases run for periods of up to 20 years, with an option to renew leases on expiry. Lease payments are typically reviewed every five years. The Group also leases a number of vehicles, shop fittings and items of computer hardware under operating leases. These vary in length. 22 Contingent liabilities The Group had no contingent liabilities at either period end date. 23 Related parties Identity of related parties The Group has related party relationships with its subsidiaries and with its Directors. Transactions between the Company and its subsidiaries, which are related parties, have been eliminated on consolidation for the Group. Key management personnel The key management personnel of the Group comprise members of the Board of Directors and the executive team. Directors of the Company and their immediate relatives control 59.1% of the voting shares of the Company. Disclosures relating to remuneration of Directors are set out in the Remuneration Report on pages 23 to 26. The remuneration of the key management personnel (Executive Committee excluding Directors) of the Group is set out below: Salaries and other short-term benefits Post-employment benefits Share-based payments 2010 £’000 1,269 22 4 1,295 2009 £’000 637 13 45 695 58 Dunelm Group plc Annual report and accounts 2010 Financial statements Notes to the annual financial statements continued For the 52 weeks ended 3 July 2010 23 Related parties continued From time to time the Group makes purchases on behalf of a major shareholder, Bill Adderley, and sells fully depreciated vehicles to him that the Group no longer requires. These amounts are billed based on normal market rates for such supplies and payable under normal payment terms. No balances remained unsettled at either period end. The aggregate value of these transactions in the year ended 3 July 2010 was £766 (2009: £1,000). From time to time Directors of the Group, or their related entities, may purchase goods from the Group. These purchases are on the same terms and conditions as those entered into by other Group employees or customers and values involved are trivial. 24 Ultimate controlling party The Directors consider that the Adderley family is the ultimate controlling party of Dunelm Group plc by virtue of their combined shareholding. 25 Subsequent events There are no material post-balance sheet events. Parent Company financial statements Parent Company statement of financial position As at 3 July 2010 Dunelm Group plc Annual report and accounts 2010 59 Non-current assets Investment in subsidiaries Deferred tax asset Total non-current assets Current assets Trade and other receivables Total current assets Total assets Current liabilities Trade and other payables Liability for current tax Interest bearing loans and borrowings Total current liabilities Non-current liabilities Interest bearing loans and borrowings Total non-current liabilities Total liabilities Net assets Capital and reserves Issued capital Share premium Non-distributable reserves Capital Redemption Reserve Retained earnings Equity shareholders’ funds Note 2010 £’000 Restated 2009 £’000 Restated 2008 £’000 4 5 46,134 630 45,771 202 45,438 43 46,764 45,973 45,481 6 47,910 64,107 64,413 47,910 64,107 64,413 94,674 110,080 109,894 7 8 (855) (102) – (957) (591) (278) (18) (887) (879) 89 (20) (810) – – (10,000) (957) (887) (10,810) 93,717 109,193 99,084 10 2,010 580 979 43,155 46,993 2,008 346 616 43,155 63,068 2,008 346 283 43,155 53,292 93,717 109,193 99,084 The financial statements on pages 59 to 68 were approved by the Board of Directors on 16 September 2010 and were signed on its behalf by: David Stead Director 16 September 2010 Company number 4708277 60 Dunelm Group plc Annual report and accounts 2010 Parent Company financial statements Parent Company statement of cash flows For the 52 weeks ended 3 July 2010 Profit before tax Adjusted for: Net financing costs Operating profit Operating cash flows before movements in working capital Decrease in receivables Increase/(Decrease) in payables Net movement in working capital Investment income Share-based payments expense Cash flows from operating activities Dividends received Interest paid Interest received Net cash generated from operating activities Cash flows from financing activities Proceeds from issue of share capital Purchase of treasury shares Proceeds from issue of treasury shares Proceeds from bank loan Repayment of bank loan Return of capital Dividends paid Net cash flows utilised in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period 52 weeks 2010 £’000 53 weeks 2009 £’000 38,922 20,773 (2,390) (2,550) 36,532 18,223 16,200 266 16,466 306 (134) 172 (40,000) 935 (20,000) 266 13,933 (1,339) 40,000 (71) 2,454 20,000 (870) 3,266 56,316 21,057 244 – – 642 10,000 – (10,000) (43,155) – (14,029) (186) 124 (10,000) (10,993) (56,298) (21,055) 18 2 (18) – (20) (18) Dunelm Group plc Annual report and accounts 2010 61 Parent Company statement of changes in equity For the 52 weeks ended 3 July 2010 As at 28 June 2008 Prior year adjustment Restated as at 28 June 2008 Profit for the financial year Total comprehensive income for the financial year Purchase of treasury shares Treasury shares reissued in respect of share option schemes Share-based payments Deferred tax on share-based payments Dividends Total transactions with owners, recorded directly in equity Issued share capital £’000 Share premium £’000 2,008 – 2,008 – 346 – 346 – Merger reserve £’000 – 43,155 43,155 – – – – – – – – – – – – – – – – – – – – – – Restated as at 4 July 2009 2,008 346 43,155 Profit for the financial year Total comprehensive income for the financial year Issue of share capital Treasury shares reissued in respect of share option schemes Issue of B shares as bonus issue Redemption of B shares for cash Creation of capital redemption reserve Share-based payments Deferred tax on share-based payments Current corporation tax on share options exercised Dividends Total transactions with owners, recorded directly in equity – – 2 – 43,155 (43,155) – – – – – 2 – – 234 – – – – – – – – – – – – (43,155) – – – – – – – 43,155 – – Capital redemption Non- reserve distributable £’000 £’000 – – – – – – – – – – – – – – – Retained earnings £’000 53,292 – 53,292 20,545 Total £’000 55,929 43,155 99,084 20,545 283 – 283 – – – 20,545 20,545 (186) (186) – 333 – – 123 266 21 (10,993) 123 599 21 (10,993) 333 (10,769) (10,436) 616 63,068 109,193 – 39,205 39,205 – 39,205 39,205 – – – – – 363 – – 236 649 – – (43,155) 935 284 649 – (43,155) – 1,298 284 – – – – – – 36 (14,029) 36 (14,029) 234 (43,155) 43,155 363 (55,280) (54,681) As at 3 July 2010 2,010 580 – 43,155 979 46,993 93,717 The non-distributable reserve’s purpose is to reflect movements in share-based payments in respect of awards given by the Parent Company to employees of subsidiaries. The 2009 financial year was 53 weeks. 62 Dunelm Group plc Annual report and accounts 2010 Parent Company financial statements Accounting policies Basis of preparation The Company financial statements have been prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’) and as applied in accordance with the provisions of the Companies Act 2006. The accounts of the Company are prepared under the historical cost convention, in accordance with the Companies Act 2006, applicable accounting standards and specifically in accordance with the accounting policies set out below. After making enquiries, the Directors have a reasonable expectation that the Company has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. The revision of IAS 27 became applicable and in line with its provisions, the Group elected to restate the share for share acquisition which occurred in 2003. No further acquisitions have occurred since this date. The impact of this adjustment is to increase the cost of the investment in Dunelm (Soft Furnishings) Limited to the value of the net assets at the date of the acquisition. This increases the investment by £43,155,000 and creates a merger reserve of the same amount within shareholders’ funds. Investments Investments in subsidiary undertakings are stated at the adjusted cost of the investment, IFRIC 8 ‘Scope of IFRS 2 share-based payments’ requires the Parent Company to recognise an increase in the cost of its investment in a subsidiary which has issued share options in the Parent Company’s shares to its employees. Bank borrowings and borrowing costs Interest bearing bank loans and overdrafts are recorded at the proceeds received. Borrowing costs are recognised as an expense in the financial period in which they are incurred. Borrowings are classed as current liabilities unless the Group has an unconditional right to defer settlement of the liability for at least 12 months from the balance sheet date. Bank overdrafts that are repayable on demand and form an integral part of the Group’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Where a Group Company enters into financial guarantee contracts to guarantee the indebtedness of other Group Companies within the Group, the Company considers these to be insurance arrangements for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable the Company will be required to make a payment under the guarantee. Share capital Where the Company purchases its own equity share capital (treasury shares) the consideration paid, including any directly attributable incremental costs is deducted from equity attributable to the Company’s equity holders until the shares are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received net of any directly attributable incremental transactions costs and the related income tax effects, is included in equity attributable to the Company’s equity holders. Share-based payments The Company operates two share options schemes details of which are set out in note 12. The fair value of options granted is realised as an employee expense with a corresponding increase in equity. Fair value is measured at grant date and spread over the period during which the employees become unconditionally entitled to the options. Fair value is measured using the binomial model, taking into account the terms and conditions applicable to the options. At each balance sheet date the Company revises its estimates of the number of share incentives expected to vest. Any impact of this revision is recognised as an adjustment to equity with a corresponding adjustment to investments. Dunelm Group plc Annual report and accounts 2010 63 Dividends Dividends are recognised as a liability in the period in which they are approved such that the Company is obligated to pay the dividend. Taxation Tax on the profit or loss for the year comprises current and deferred tax. Tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax represents the expected tax payable on the taxable income for the year, using tax rates enacted or substantively enacted at the balance sheet date, together with any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be recognised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be recognised. Adopted IFRS and IFRIC not yet applied IFRS 8 IAS 27 (revised) Consolidated and Separate Financial Statements Operating segments The effect of the revision of IAS 27 is disclosed on page 61. At the date of approval of these financial statements, the following standards, amendments and interpretations were in place but not yet effective: IFRS 1 IFRS 7 IFRS 9 IAS 1 IAS 27 IAS 34 IFRIC 13 – First time adoption of IFRSs – Financial Instruments – Financial Instruments – Presentation of Financial Statements – Consolidated and Separate Financial Statements – Interim Financial Reporting – Customer Loyalty Programmes Revised IFRS 1 Revised IFRS 7 Revised IFRS 9 Revised IAS 1 Revised IAS 27 Revised IAS 34 Revised IFRIC 13 The above will be adopted in the Group and Company’s financial statements when they become effective. When adopted none of the above standards or amendments are expected to have any significant impact on the financial statements of the Group or Company. Revised IFRS 7 requires additional disclosure to better enable users to evaluate an entity’s exposure to risks arising from financial instruments. Revised IAS 1 requires a reconciliation of each component of equity to be presented in the statement of changes in equity showing separately changes arising from items recognised in profit or loss, in other comprehensive income, and from transactions with owners acting in their capacity as owners. 64 Dunelm Group plc Annual report and accounts 2010 Parent Company financial statements Notes to the Parent Company financial statements For the 52 weeks ended 3 July 2010 Income statement 1 The Company made a profit after tax of £39,206,000 (2009: £20,544,000). The Directors have taken advantage of the exemption available under section 408 Companies Act 2006 and have not presented an income statement for the Company alone. The Company is not required to give details of the fees paid to its auditors in accordance with the Companies (Disclosure of Auditor Remuneration) Regulations 2005. 2 Employee costs The Company has no employees other than the two Executive Directors. Full details of the Directors’ remuneration and interest are set out in the Remuneration Report on pages 23 to 26, and share-based payments details in note 12 on pages 67 to 68. 3 Dividends All dividends relate to the 1p Ordinary Shares. Final for the period ended 28 June 2008 – paid 3.5p Interim for the period ended 4 July 2009 – paid 2.0p Final for the period ended 4 July 2009 – paid 4.0p Interim for the period ended 3 July 2010 – paid 5.0p 2010 £’000 – – 2009 £’000 (6,994) (3,999) (8,008) – (6,021) – (14,029) (10,993) The Directors are proposing a final dividend of 5.0p per Ordinary Share for the period ended 3 July 2010 which equates to £10m. The dividend will be paid on 10 December 2010 to shareholders on the register at the close of business on 26 November 2010. Investments 4 Shares in subsidiary undertakings. As at 28 June 2008 Share-based payments As at 4 July 2009 Share-based payments As at 3 July 2010 Principal subsidiaries The following are the principal subsidiaries as at the end of the year: Subsidiary Dunelm (Soft Furnishings) Limited Dunelm Estates Limited Restated £’000 45,438 333 45,771 363 46,134 Nature of business Proportion of ordinary shares held 100% 100% Retailer of soft furnishings Property holding company Both of the above subsidiaries and the Parent Company are registered and operate in England and Wales. Dunelm Group plc Annual report and accounts 2010 65 5 Deferred tax assets Share-based payments The movement in deferred tax assets is as follows: Employee benefits Employee benefits Assets 2010 £’000 630 2009 £’000 202 Balance at Recognised Recognised in equity in income £’000 £’000 28 June 2008 £’000 Balance at 4 July 2009 £’000 43 138 21 202 Balance at Recognised Recognised in equity in income 5 July 2009 £’000 £’000 £’000 Balance at 3 July 2010 £’000 202 144 284 630 Deferred tax assets are recognised for other temporary differences to the extent that the realisation of the related tax benefit through future taxable profits is probable. 6 Trade and other receivables Amounts owed by subsidiary undertakings Prepayments and accrued income Other taxation and social security 2010 £’000 47,870 29 11 6 2009 £’000 64,071 30 47,910 64,107 Amounts owed by subsidiary undertakings are immediately repayable. Interest is charged monthly on all intercompany balances at an annual rate of 5.25%. 7 Trade and other payables Trade payables Accruals and deferred income Other creditors 8 Interest bearing loans and borrowings Bank overdraft 2010 £’000 15 820 20 855 2010 £’000 – – 2009 £’000 14 557 20 591 2009 £’000 18 18 On 26 September 2006 the Company entered into a £50m revolving credit facility which is repayable in full on 26 September 2011. The facility is sub-divided into two elements: a £40m facility and a £10m facility. The £10m facility was cancelled on 26 May 2009. The £40m facility was not utilised at the balance sheet date. Interest is payable on the £40m facility at the rate of LIBOR plus 0.35%. The facility is guaranteed by the Company and its subsidiaries. 66 Dunelm Group plc Annual report and accounts 2010 Parent Company financial statements Notes to the Parent Company financial statements For the 52 weeks ended 3 July 2010 9 Financial risk management Capital management The following table is a comparison by category of the carrying amounts and fair values of the Company’s financial assets and liabilities at 3 July 2010 and 4 July 2009. 2010 Carrying value £’000 2010 2009 Fair value Carrying value £’000 £’000 2009 Fair value £’000 Subsidiary loans Total financial assets Short-term borrowings Trade payables Total financial liabilities Net financial liabilities 47,870 47,870 64,071 64,071 47,870 47,870 64,071 64,071 – (15) (15) – (15) (15) (18) (14) (32) (18) (14) (32) 47,855 47,855 64,039 64,039 The fair value on subsidiary loans and trade payables are approximate to the carrying value. The currency profile of the Company’s net debt is as follows: Sterling 10 Share capital In issue at the start of the period B shares issued via a bonus issue B shares redeemed in the year Issued during the period in respect of share option schemes In issue at the end of the period 2010 £m – – 2009 £m (18) (18) Number of ordinary shares of 1p each 2010 200,791,400 – – 248,748 201,040,148 Number of B shares of 21.5p each 2010 – 200,723,131 (200,723,131) – Number of ordinary shares of 1p each 2009 200,791,400 – – – – 200,791,400 Proceeds received in relation to shares issued during the period were £238,000 (2009: £nil). Ordinary Shares of 1p each Authorised Allotted, called up and fully paid 2010 number of shares 2010 £’000 2009 number of shares 2009 £’000 500,000,000 201,040,148 5,000 2,010 500,000,000 200,791,400 5,000 2,008 The holders of the Ordinary Shares are entitled to receive dividends as declared and are entitled to one vote per share. 11 Treasury shares Outstanding at beginning of year Purchased during year Reissued during the period in respect of share option schemes Outstanding at end of year 2010 Number of shares 2010 £’000 2009 Number of shares 837,135 – (737,507) 1,301 951,500 – 127,000 (1,173) (241,365) 99,628 128 837,135 2009 £’000 1,522 186 (407) 1,301 In the past the Company has acquired its own shares (‘treasury shares’) for the purpose of delivery to employee share schemes. No such purchase was made during the year. The Company reissued 737,507 (2009: 241,365) treasury shares for a total consideration of £641,843 (2009: £124,453). The Company has the right to reissue the remaining treasury shares at a later date. Dunelm Group plc Annual report and accounts 2010 67 12 Share-based payments As at 3 July 2010, the Company operated two share award plans: a) Dunelm Group Share Option Plan (‘GSOP’) b) Long-Term Incentive Plan (‘LTIP’) There were no exercisable options as at 3 July 2010. a) Dunelm Group Share Option Plan The GSOP was established in December 2003. Options have a vesting period of three years from date of grant and a maximum life of 10 years. All options granted prior to IPO have an exercise price equal to the market value as agreed with HMRC at date of grant; there have been no further grants since IPO. There are no performance conditions but there is a requirement that the Group’s shares be traded on a public exchange at date of exercise, and the awards are also subject to continued employment with the Group. The fair value of services received in return for share options granted is measured by reference to the fair value of the options, assessed using a binomial model. The fair value per option granted and the assumptions used in the calculations are as follows: Fair value at measurement date Exercise price Expected volatility (weighted average volatility used in modelling – based on historical volatility of comparable quoted companies) Option life (weighted average life used in modelling) Expected dividends Risk-free interest rate August 2006 grant September 2005 grant December 2004 grant September 2004 grant 7.0p 62.1p 6.3p 57.0p 6.0p 46.0p 6.2p 46.0p 35% 3 years 2.5% 2.8% 35% 3 years 8.7% 4.8% 35% 3 years 8.7% 4.8% 35% 3 years 8.7% 4.8% The number and weighted average exercise price of options under the GSOP is as follows: Outstanding at beginning of year Exercised during year Outstanding at end of year Weighted average exercise Number of shares price under option 2010 2010 Weighted average exercise Number of shares price under option 2009 2009 – – – – – – – – – – – – b) Long-Term Incentive Plan The LTIP was approved by the Board prior to IPO enabling the Company to award shares to particular individuals, normally in the form of nominal cost options. The LTIP is administered by the Remuneration Committee. One grant has been made in the year, to the Executive Directors only, and is exercisable in September 2010 depending on the level of growth in Group EPS relative to RPI. The maximum life of options under LTIP is 10 years from the date of grant. Full details of this plan are included in the Remuneration Report on pages 23 to 26. The fair value of services received in return for share options granted is measured by reference to the fair value of the options. This has been calculated as follows: Share price at date of grant Discount factor, based on dividend yield of 3.0% to vesting date Fair value of option September 2009 September 2008 September 2007 316.0p 0.913 288.5p 149.0p 0.889 132.5p 196.0p 0.913 178.9p March 2007 229.0p 0.913 209.0p 68 Dunelm Group plc Annual report and accounts 2010 Parent Company financial statements Notes to the Parent Company financial statements continued 12 Share-based payments continued The number and weighted average exercise price of options under the LTIP at 3 July 2010 is: Weighted average exercise price 2010 Number of shares under option 2010 Weighted average exercise Number of shares price under option 2009 2009 Outstanding at beginning of year Granted during year Exercised during year Lapsed during year Outstanding at end of year – – – – – 1,006,193 209,164 (155,270) (95,164) 964,923 – 568,356 – 437,837 – – – – – 1,006,193 The total expense recognised in the income statement arising from share-based payments is as follows: LTIP 2010 £’000 935 935 2009 £’000 266 266 13 Contingent liability The Company and certain subsidiaries have given joint and several guarantees in connection with all bank facilities provided by the Group’s principal bankers. The Group’s banking facilities are subject to a netting facility whereby credit balances may be offset against indebtedness of other Group companies. 14 Related party disclosure The amount due to the Company from subsidiary undertakings is set out in note 6. Transactions between the Company and its subsidiaries were as follows: Cash paid to Group undertakings Cash received from Group undertakings Dividends received Net interest receivable 2010 £’000 2009 £’000 (69,653) 10,997 40,000 2,454 (56,759) 33,199 20,000 3,266 Advisers Corporate Brokers and Financial Advisers Legal Advisers Auditors Principal Bankers Registrars Financial Public Relations UBS Investment Bank 1 Finsbury Avenue London EC2M 2PP Tel: 020 7567 8000 Oriel Securities Limited 125 Wood Street London EC2V 7AN Tel: 020 7710 7600 Allen & Overy LLP One Bishops Square London E1 6AO Tel: 020 3088 0000 KPMG Audit Plc 1 Waterloo Way Leicester LE1 6LP Tel: 0116 256 6000 Barclays Bank plc Midlands Corporate Banking PO Box 333 15 Colmore Row Birmingham B3 2WN Tel: 0845 755 5555 Equiniti Aspect House Spencer Road Lancing West Sussex BN99 6DA Tel: 0871 384 2030 Hogarth Partnership Limited No. 1 London Bridge London SE1 9BG Tel: 020 7357 9477 Dunelm is a fast growing specialist out-of-town homewares retailer providing a comprehensive range of products to a wide customer base, under the brand name Dunelm Mill Contents Business review 01 Highlights 04 Chairman’s statement 06 Chief Executive’s review 10 Finance Director’s review 15 Directors Governance 16 Letter from the Chairman 17 Corporate governance report 21 Letter from the Chairman of the Remuneration Committee 23 Remuneration report 27 Directors’ report and business review 31 Corporate social responsibility 35 Statement of Directors’ responsibilities Financial statements 36 Independent Auditor’s report 37 Consolidated income statement 38 Consolidated statement of comprehensive income 39 Consolidated statement of financial position 40 41 42 Accounting policies 47 59 Parent Company financial statements Consolidated statement of cash flows Consolidated statement of changes in equity Notes to the annual financial statements www.dunelm-mill.com l D u n e m G r o u p p l c A n n u a l r e p o r t 2 0 1 0 Dunelm Group plc Annual report 2010 Dunelm Group plc Fosse Way Syston Leicester Leicestershire LE7 1NF Tel: 0116 264 4356 Email: investorrelations@dunelm-mill.co.uk