Shareprice

The Board confirms that it has carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity. The Board’s assessment of the principal risks and uncertainties facing the Group and the mitigation in place is set out below.

Changes to the principal risks in the year

In June 2019, the Audit and Risk Committee and the Board carried out an in depth review of the principal risks, and made the following changes:

  • In view of the increasingly multichannel nature of the Group’s business, and the fact that the mitigating factors are broadly the same, the risk of ‘Failure to deliver maximum value from our online business’ has been combined with the ‘Competition, market and customers’ risk;
  • The ‘Portfolio expansion’ risk has been moved to the Operational Risk register, reflecting the fact that opening new stores is no longer the principal source of the Group’s future growth;
  • ‘Climate change’ has been added as a new and emerging risk, reflecting the increased urgency and focus on this by government, international bodies, investors, customers, colleagues and the media;
  • The ‘Brand damage’ risk has been expanded to include a greater focus on sustainable sourcing for the same reasons; and
  • The ‘Brand damage’ risk also now includes a greater focus on management of allergens in our Pausa cafes, following heightened government and public concern. 

Competition, market and customers

Link to Customer
1st strategy:

Our customer promises

Performance Indicator:

Market share

View Key

Executive responsibility:

Customer and Digital Director

Reports to:

Chief Executive Officer

Impact compared to 2017/18:

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Description

Failure to respond to changing consumer needs, particularly the shift towards online sales, and to maintain a competitive offer on multiple fronts (range, quality, value and ease of shopping) could impact profitability and limit opportunities for growth.

A downturn in consumer spending could impact sales and productivity.

How we mitigate

  • Focus on Customer 1st rather than channel to align strategy and operational focus to customer demand
  • Customer insight research gauges relative customer perception and experience
  • Focus on new product development, particularly own brand, in both existing and new categories, to strengthen our offer
  • Comparative performance within the homewares market tracked monthly across all main product categories
  • Investment in brand marketing, development of our website and store design to raise awareness of Dunelm and communicate our credentials on product, range, value and ease of shopping

Board oversight:

Reviewed annually in depth by the Board at its Strategy Day and through subsequent presentations.

Progress in 2018/19

  • Dunelm continues to lead the UK homewares market with an increased estimated share of 8.7% in 2019 (8.1% in 2018)
  • Continued development of our Customer 1st plan
  • Increased brand awareness through step up in investment in brand marketing, including sponsorship of “Back To Mine” and “This Morning”
  • Continued product innovation in existing categories and strengthened seasonal campaigns and promo buys to increase ‘newness’ and promote our value
  • Revised product strategy agreed; to significantly increase our range and focus on exclusive brands
  • Improved online product range, introduced customer hosts and tablet-based sales rolled out in store
  • Improved our website and focused our digital marketing activity

Brand damage

Link to Customer
1st strategy:

Our customer promises

Committed supplier partners

Performance Indicator:

Product recalls

Percentage of audits completed within policy 

View Key

Executive responsibility:

Product Director

Reports to:

Chief Executive Officer

Impact compared to 2017/18:

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Description

Our customers expect us to deliver products that are safe, compliant with legal and regulatory requirements, and fit for purpose. Increasingly, customers also want to know that products have been sustainably sourced and that their environmental impact is minimised.

We must also ensure that our suppliers share and uphold our approach to business ethics, human rights (including safety and modern slavery) and the environment.

Failure to do so could result in harm to individuals with the potential for customers, colleagues and other stakeholders to lose confidence in the Dunelm brand.

How we mitigate

  • We have a range of policies specifying the quality of own brand products and production processes which suppliers must adhere to
  • Factory profile questionnaire introduced, to obtain a more holistic assessment
  • We operate a full test schedule for all new own label products and on a sample basis for ongoing lines, overseen by our Specialist Product Technology team
  • Food hygiene and allergen awareness is maintained through the adoption of clear operating guidelines and compulsory colleague training. Compliance audits are performed regularly
  • All stock and food suppliers and the majority of our other suppliers are required to sign up to our Anti-Bribery and Ethical Code of Conduct which is in line with international guidelines, and also covers modern slavery
  • We conduct periodic audits on all suppliers of own brand products against our Code of Conduct

Board oversight:

Ethical trading/modern slavery/sustainable sourcing reviewed annually in depth by the Board.

Progress in 2018/19

  • Specialist partner appointed to review and grade ethical audits and follow up on corrective actions. Supplier audits extended to UK warehouse facilities used by suppliers and Pausa suppliers
  • Food safety and allergen compliance strengthened following a thorough review conducted with the support of a specialist food technologist
  • Packaging specialist recruited to help develop our plan to minimise unnecessary packaging and phase out single-use plastics where feasible
  • Appointed third party to verify compliance with legality of timber sourcing through our branded product supply chain
  • Sustainable cotton sourcing plan developed
  • Modern slavery awareness programme continued

For further information please see the Sustainability Report.

People and culture

Link to Customer
1st strategy:

Committed colleagues

Performance Indicator:

Colleague engagement

View Key

Executive responsibility:

People and Stores Director 

Reports to:

Chief Executive Officer

Impact compared to 2017/18:

Description

The success of the business could be impacted if it fails to attract, retain and motivate high calibre colleagues.

Maintaining the culture of our business embodied in our ‘business principles’ is essential to deliver our strategy and ensure the long term sustainability of our business.

How we mitigate

  • The composition of the Executive team is regularly reviewed by the Board to ensure that it is appropriate to deliver the growth plans of the business
  • Succession plans and annual appraisals are in place across the Group
  • High calibre individuals are retained and developed through sponsored talent management and development
  • Business principles in place to describe our values and business culture
  • The Group’s remuneration policy is designed to ensure that high calibre executives are attracted and retained. Lock-in of senior management is supported by awards under the Long Term Incentive Plan

Board oversight:

People plan and culture reviewed at least annually by the Board.

Progress in 2018/19

  • Purpose and customer promises embedded throughout the business through the Customer 1st plan
  • Organisational design work completed to align resource to growth areas and promote productive ways of working
  • Enhanced Group Board engagement with colleagues through NED attendance at National Voice Forum in November and April, and Board presentation in November
  • Mental health awareness initiative launched, and started programme to train mental health first aiders

Climate change and environment

Link to Customer
1st strategy:

Our customer promises

Lean and efficient supply chain

Performance Indicator:

Prosecution and other regulatory action

View Key

Executive responsibility:

Company Secretary

Reports to:

Chief Financial Officer

Impact compared to 2017/18:

New/emerging principal risk

Description

Failure to anticipate and address the strategic, regulatory and reputational impact of climate change and governmental action in response to it.

How we mitigate

  • Sustainability Committee, chaired by the Company Secretary, oversees our approach to sustainability issues, including climate change
  • Sustainability Manager accountable for ensuring that the Group complies with environmental legislation and reporting and monitoring new legislation and best practice
  • Targets in place to reduce emissions, energy usage and waste to landfill, and increase recycling
  • Energy brokers advise on energy saving strategy
  • Waste management contractor KPIs to deliver waste minimisation and recycling targets

Progress in 2018/19

  • Sustainability Committee relaunched – remit and membership widened
  • Environmental and sustainability targets set – including waste, energy, HGV fleet emissions
  • Decision taken to source 100% green energy
  • New colleague engagement programme rolled out
  • Targets being developed to reduce packaging and packaging waste
  • Strategic climate change risk assessment being developed

Regulatory and compliance

Link to Customer
1st strategy:

Our customer promises
Committed colleagues

Performance Indicator:

Prosecution and other regulatory action

View Key

Executive responsibility:

Company Secretary

Reports to:

Chief Executive Officer

Impact compared to 2017/18:

Left and right arrow

Description

Fines, damages claims and reputational damage could be incurred if we fail to comply with legislative or regulatory requirements including consumer law, health and safety, employment law, GDPR and data protection, Bribery Act, competition law.

How we mitigate

  • Policies and training in place in respect of key compliance areas. These are regularly reviewed and updated
  • Operational management are responsible for liaising with the Company Secretary and external advisers to ensure that new legislation is identified and relevant action taken
  • Dedicated Group health and safety function to oversee this aspect of compliance
  • Training on the requirements of the Bribery Act and Competition Law is in place for all relevant colleagues and policies are communicated to all suppliers
  • We have a whistleblowing procedure and independently administered helpline which enables colleagues to raise concerns in confidence

Board oversight:

Monthly Board report on health and safety.

Health and safety reviewed in depth by the Board at least annually.

GDPR and Bribery Act are standing Audit and Risk Committee agenda items.

Non-compliances reported by the Company Secretary by exception.

Progress in 2018/19

  • Installed security locks on single bladed knives and reinforced colleague awareness and ‘Think 25’ training, including repeat training for all store colleagues, to prevent sale to customers who are aged below 18, and instigated a third party programme of test audits
  • Video training and pocket guidelines rolled out in stores to help colleagues deal with violent customers and conflict situations
  • Reduced accident rates in our home delivery fleet by 39%
  • Strengthened health and safety governance through the creation of functional steering groups to drive health and safety actions
  • Developed policy on use of independent contractors in advance of the April 2020 deadline, which will impose an obligation on Dunelm to assess whether workers are genuine contractors or employees, and to pay any tax/NI due
  • Continued to embed new policies and processes implemented to comply with the General Data Protection Regulation

Brexit

Link to Customer
1st strategy:

Our customer promises
Lean and efficient supply chain

Performance Indicator:

Sales and profit

View Key

Executive responsibility:

Chief Financial Officer

Impact compared to 2017/18:

Description

Brexit could impact sales and margin due to a downturn in consumer demand, increase costs due to the fall in the value of sterling against the US dollar, or cause supply chain issues, supplier failure and labour shortages.

How we mitigate

  • Brexit risk assessment completed to identify potential areas of risk, and a number of mitigating actions identified
  • Steering group meets monthly to review developments, standing monthly agenda item for the Executive Board
  • Continue to reduce use of agency labour in the Dunelm Home Delivery Network and in Dunelm DCs, and logistics partners encouraged to do likewise

Board oversight:

Twice yearly review of principal risks.

Monthly updates through CFO report.

Progress in 2018/19

  • Increased the percentage of anticipated FY19 and FY20 dollar purchases which have foreign currency hedging in place
  • Limited stock build in place prior to 31 October 2019
  • Assessed number of colleagues who are EU nationals. Agreed to assist in registration for obtaining ‘settled status’
  • HDN driver pay increased in line with market
  • Reviewed supplier capability to maintain data flows from EU in respect of key IT systems
  • Prepared operational plan to manage fall in value of sterling

IT systems, data and cyber security

Link to Customer
1st strategy:

Our customer promises
Customer data and insight
Agile and scalable digital platform
Lean and efficient supply chain

Performance Indicator:

Number of major incidents

View Key

Executive responsibility:

Chief Information Officer 

Reports to:

Chief Executive Officer 

Impact compared to 2017/18:

Description

Operations impacted by failure to develop technology to support the strategy, lack of availability due to cyber attack or other failure, and reputational damage/fines due to loss of personal data.

How we mitigate

  • Information security steering group in place to oversee the Group’s approach to IT security and data protection
  • IT security function in place, reporting to the ISSG
  • Formal IT governance processes in place to cover all aspects of IT management
  • Changes to IT services are managed through a combination of formal programmes for large and complex programmes, or bespoke iterative development methodologies for smaller scale changes
  • A detailed IT development and security roadmap is in place, aligned to strategy
  • We have a disaster recovery strategy designed to ensure continuity of trade
  • Comprehensive third party support in place for relevant technologies
  • Authorisation controls and access to sensitive transactions are kept under review

Board oversight:

Cyber security is a standard agenda item for the Audit and Risk Committee.

Major security incidents reported by the Company Secretary.

Progress in 2018/19

  • Increased investment in IT security resource agreed
  • Continue to implement the GDPR risk treatment plan
  • New structure and ways of working leading to improved colleague engagement and retention, improved systems knowledge and ownership, and more rapid and agile development of systems
  • Network re-architecture project implemented to allow better control, visibility and security
  • Continuity plans in place for all major systems and with regular testing programme

Supply chain disruption

Link to Customer
1st strategy:

Our customer promises
Lean and efficient supply chain

Performance Indicator:

Service levels in respect of store fulfilment

View Key

Executive responsibility:

Chief Executive Officer

Reports to:

Chief Executive Officer

Impact compared to 2017/18:

Left and right arrow

Description

Sales/profitability and customer satisfaction could be impacted by supply chain disruption or loss of access to key support locations. 

How we mitigate

  • Supply chain strategy in place to ensure capacity is in line with long term financial plan
  • Business continuity plans in place for Dunelm non-store facilities
  • Contracts in place with third party logistics partners
  • We seek to limit dependency on individual suppliers by actively managing key supplier relationships

Board oversight:

Business continuity is a standard Audit and Risk Committee agenda item.

Progress in 2018/19

  • New five-year logistics capacity plan being developed
  • Business continuity plans reviewed
  • Continue to strengthen relationships with key suppliers

Business efficiency

Link to Customer
1st strategy:

Our customer promises
Lean and efficient supply chain

Performance Indicator:

Operating cost %

View Key

Executive responsibility:

Chief Financial Officer

Reports to:

Chief Executive Officer

Impact compared to 2017/18:

Description

Profitability could be impacted by failure to operate the business efficiently or to manage cost price volatility.

How we mitigate

  • Costs are managed by the Board and Executive Board through the budget and forecasting process and monthly management accounts reviews
  • Dunelm’s scale, growth and increased buying power allows it to secure supply of key services and raw materials at competitive prices. Commodity price tracking covers all key materials
  • Major non-stock purchase contracts regularly tendered

Board oversight:

Board receives monthly management accounts.

Long term plans and budget reviewed by the Board at least annually.

Progress in 2018/19

  • Renewed focus on cost discipline through monthly Executive Board performance review
  • Refit programme refocused to deliver better return on capital
  • Working groups in place to manage product lifecycle, stock and returns
  • New investment and contract approval process implemented
  • Store management teams restructured to reduce costs

Finance and treasury

Link to Customer
1st strategy:

Our customer promises
Lean and efficient supply chain

Performance Indicator:

Operating cash conversion
Banking covenant compliance

View Key

Executive responsibility:

Chief Financial Officer

Reports to:

Chief Executive Officer

Impact compared to 2017/18:

Description

Growth constrained by lack of access to capital/financial resource.

How we mitigate

  • The Group has a £165m, five-year Revolving Credit Facility in place until March 2023
  • Further, uncommitted borrowing facilities have been agreed for possible short term working capital requirements
  • Dunelm works with a syndicate of long term, committed partner banks
  • A Group treasury policy is in place to govern levels of debt, cash management strategies and to control foreign exchange exposures
  • Hedging is in place for foreign exchange, and freight and energy prices are agreed in advance, to help mitigate volatility and aid margin management

Board oversight:

Board receives monthly treasury report.

Progress in 2018/19

  • Significant improvement in year end net debt position of £25.3m (0.15× EBITDA) (FY18: £124.0m) due to increased profitability and focus on cost and cash management
  • Foreign currency hedges are in place covering approximately 75% of expected purchases in FY20