CFO’s review GROSS MARGIN Operating costs Gross margin of 51.6% was 130bps higher than the £m prior year. Gross margin benefited from a lower 14 level of discounting throughout the year, including 10 during our Winter Sale when Covid-19 restrictions 12 8 meant that stores were closed for most of the 16 69 (22) 523 planned event. Furthermore, the delayed store re-openings in April 2021 led us to postpone the Summer Sale into FY22. We continue to focus on driving sourcing gains by 416 working closely with our suppliers. In FY21 and in the short- to medium-term outlook, we are seeing notable cost price inflation arising from commodity price increases and global pressures on freight costs. Where appropriate, we are increasing some retail prices to offset cost price pressures, however we remain committed to offering our customers great value products at each price point. We will also augment our standard ranges with increased The business benefited from business rates relief special buys and review price architecture to which continued throughout FY21. The lack of maintain competitiveness. rates charges resulted in a year-on-year benefit of £22m, which partially offset the loss of business We expect gross margin in FY22 to decrease by during the various restricted trading periods c.50-75bps as the trading calendar normalises. during the year. We expect to mostly mitigate the impacts of raw material and freight inflationary pressures through Our investments in digital, data, insights and better sourcing and increasing prices where supply chain capacity increased by £12m year appropriate. over year (including £3m of digital costs that would previously have been classed as capital Over the medium term we aim to maintain expenditure rather than operating costs). These gross margin of c.50%, leveraging our strong investments supported the business growth and committed supplier relationships, with a relentless customer proposition development. focus on sourcing and a disciplined approach to promotional activity and markdowns, whilst Due to the strong business performance this year, continuing to invest in great value and quality for operating costs were impacted by £10m of higher our customers. managementand colleague incentive costs, given that the majority of FY20 incentive schemes did not OPERATING COSTS pay out as aresult of the unexpected impacts of Total operating costs were £522.5m FY20:( Covid-19 in Q4 FY20. £416.4m), representing an operating cost ratio of 39.1% (FY20: 39.4%). This growth in costs was We anticipate that, over time, our operating largely driven by the higher sales volume. Both cost to sales ratio will remain around 38%, with FY21 and FY20 were impacted by Covid-19. increased scale offsetting ongoing investments in the proposition. Additionally, we will continue Costs in FY21 were adversely impacted by the to focus on driving productivity and efficiency non-recurrence of benefits in FY20 that arose from improvements to offset cost pressures and labour the closure of the stores in the first lockdown. This inflation. In FY22 we will invest in supply chain included £14.5m relating to the Job Retention capacity, expand our teams in digital and Scheme which we claimed in Q4 FY20 at the data engineering and build new capabilities, start of the pandemic. The Board subsequently for example in product management, insight decided to repay these monies and the repayment & analytics and sustainability. cost impacted FY21. We also experienced £8m higher costs to serve in FY21 relating to Covid-19 PROFIT AND EARNINGS PER SHARE restrictions. These costs mainly related to the Despite making losses in the third quarter when additional roles required in stores to maintain stores were closed, operating profit for the year social distancing and capacity requirements, increased significantly to £166.4m (FY20: £116.0m). which ensured a safe environment for our This partially reflects the leverage of our home colleagues and customers. delivery fixed cost base due to strong demand, as well as the higher gross margin. Costs were +130bps tightly controlled throughout the year despite the significant disruption caused by the periods of increase in gross margin % year on year lockdown and thespecific cost increases required to operate safely under Covid-19 restrictions. 100 pence There was a net cost of £8.6m (FY20: £6.9m) in respect of financial items in the period. This included interest on IFRS 16 lease liabilities total dividends in FY21 of £5.3m (FY20: £5.5m), interest payable and 36 DUNELM GROUP PLC ANNUAL REPORT & ACCOUNTS 2021 FY20VolumeoFnYe2 o0IfnfsvestmentsHighetro c soesrtveIncentivesrepayJmRSentRhaotleidsayFY21