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.

In February 2017, the Board decided that “Failure to integrate the Worldstores business successfully” was an additional principal risk which should be added to the register. As the integration is now largely complete this has been revised to cover “Failure to deliver maximum value from our online business”.

We have also included this year a separate section on “Brexit” to highlight the risks and mitigating actions. Last year we included these in the “competition, markets and customers” section, the “business efficiency” section, and the “finance and treasury” sections.

Competition, market and customers

Link to business goals:

1 2 3 4

Performance Indicator:

Market share

View Key

Executive responsibility:

Customer Director

Reports to:

Chief Executive Officer

Impact compared to 2016/17:

Arrow left and right

Description

Failure to respond to changing consumer needs, particularly the shift towards online sales, and to maintain a competitive offer in the Homewares market on multiple fronts (price, range, quality and service) could materially impact profitability and limit opportunities for growth.

A downturn in consumer spending will impact sales and productivity.

How we mitigate

  • Focus on “customer” 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 in existing and new Homewares categories, to strengthen our offer
  • Comparative performance within the Homewares market tracked monthly across all main product categories
  • Investment in development of our website and store design and marketing designed to communicate our credentials on product, range, choice and value

Board oversight:

  • Reviewed annually in depth by the Board at its Strategy Day and through subsequent presentations.
  • Business plan review once per annum.

Progress in 2017/18

  • Dunelm continues to lead the UK Homewares market with an increased estimated share of 8.1% in 2018 (8.0% in 2017)
  • Continued product innovation in existing categories and strengthened seasonal campaigns
  • More customer-centric vision, strategy and KPIs developed and communicated throughout the business
  • Optimal Store Format template(s) finalised. Refocused refit programme to make fewer changes to more stores
  • Customer Host concept trialled and rolled out
  • M2M production time decreased and work started on new manufacturing facility. M2M Blinds online launched
  • Marketing to emphasise the value that we offer across all price points
  • Launched Dunelm Extra with wider furniture catalogue and enhanced customer delivery proposition on dunelm.com launched next day and named day delivery service

Failure to deliver maximum value from our online business

Link to business goals:

1 2 3 4

5

Performance Indicator:

Web traffic growth

View Key

Executive responsibility:

Chief Executive Officer

Impact compared to 2016/17:

Left and right arrow

Description

Failure to deliver maximum value from our online business will adversely impact Dunelm’s profitability and investment KPIs.

How we mitigate

  • All activity under the Dunelm brand from Autumn 2018, and Digital Growth plan in place to focus on driving sales across the combined business
  • Formal projects in place to deliver remaining IT integration programme, monitored monthly by the Executive Board

Board oversight:

  • Chief Executive Officer provides a monthly progress update.

Progress in 2017/18

  • Integration plan completed and cost savings delivered
  • London office reduced in size and new cheaper premises secured
  • Achica business divested and Kiddicare business redirected to Dunelm baby and kids offer
  • Single digital P&L created; online offer to be integrated under Dunelm.com in FY19

Brand damage

Link to business goals:

1 2 3

Performance Indicator:

Product recalls
Percentage of audits completed within policy

View Key

Executive responsibility:

Product Director

Reports to:

Chief Executive Officer

Impact compared to 2016/17:

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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.

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
  • 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 is maintained through the adoption of clear operating guidelines contained in our food safety manual. Colleague certification is compulsory and risk assessments, equipment inspections and compliance audits are performed regularly to ensure standards are maintained
  • 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 specifically covers modern slavery
  • We conduct periodic audits on all suppliers of own brand products against our Code of Conduct
  • Selected non-stock suppliers are assessed against our modern slavery audit

Board oversight:

  • Ethical trading/modern slavery reviewed annually ‘in depth’ by the Board.

Progress in 2017/18

  • Committed suppliers and overseas agents continue to work directly with factories to deliver more ‘green’ ratings against our Ethical Code of Conduct
  • Factory profile questionnaire introduced, to obtain a more holistic assessment
  • Modern Slavery awareness programme continued
  • Preferred materials and animal welfare policies updated
  • Plan to seek alternatives to plastic packaging developed

Portfolio expansion

Link to business goals:

2 3 4

Performance Indicator:

Number of new store openings and pipeline

View Key

Executive responsibility:

Property Director

Reports to:

Chief Executive Officer

Impact compared to 2016/17:

Left and right arrow

Description

Availability of vacant or new retail space in the right location is essential to deliver our strategy to expand our national coverage through growth in our store portfolio. Inability to secure or develop the required retail trading space will limit our pace of expansion or force us to compromise our offer.

How we mitigate

  • Our property team actively monitors availability of retail space with the support of professional advisers
  • Financial modelling helps us assess the viability of potential sites
  • The Group’s strong cash generation and funding headroom provide an attractive covenant to landlords and the ability to acquire freehold units if appropriate

Board oversight:

  • Property strategy reviewed annually by the Board.

Progress in 2017/18

  • We have opened ten new stores in the year
  • We are currently planning to open two stores (both relocations) in 2018/19
  • The roll out of tablet based selling and our “Customer Host” initiative will give customers easier access to the whole of our online range – enhancing their multichannel experience, exploiting our advantage over pure play online retailers, and underpinning our digital growth

People and culture

Link to business goals:

5

Performance Indicator:

Colleague engagement

View Key

Executive responsibility:

People Director

Reports to:

Chief Executive Officer

Impact compared to 2016/17:

Left and right arrow

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 2017/18

  • New Chief Executive Officer and Chief Financial Officer appointed
  • Purpose and Business goals relaunched across the business
  • New “housewarming” induction adopted for non-store colleagues and store management
  • “Always on” colleague feedback mechanism implemented
  • Board discussion of culture and culture KPIs formally reviewed
  • Over 71% of store managers now recruited internally

Regulatory, environment and compliance

Link to business goals:

1 2 3 4

Performance Indicator:

Prosecution and other regulatory action

View Key

Executive responsibility:

Company Secretary

Reports to:

Chief Financial Officer

Impact compared to 2016/17:

Left and right arrow

Description

Fines, damages claims and reputational damage could arise 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 and the environment.

How we mitigate

  • Policies and training in 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 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 whistle blowing procedure and 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.
  • Non-compliances reported by the Company Secretary by exception.

Progress in 2017/18

  • New policies and processes implemented to comply with the General Data Protection Regulation, including training for all colleagues
  • Health and safety focus on contractor management, safety during store refits and store fixtures and fittings
  • Review of safety of our third party logistics partners and improved safety in the Dunelm Home Delivery Network
  • Policies and standard conditions amended to address the corporate offence of failure to prevent tax evasion
  • Independent third party whistleblowing hotline introduced

Brexit

Link to business goals:

3 4 5

Performance Indicator:

Sales and profit

View Key

Executive responsibility:

Chief Executive Officer

Impact compared to 2016/17:

Arrow up icon

Description

Britain’s exit from the European Union could lead to the following:

  • Fall in the value of sterling against the US$, resulting in an increase in the cost of goods purchased for resale.
  • Disruption or congestion at ports causes delays in product supply chain.
  • Labour shortages affecting drivers / warehouse labour of Dunelm or third party logistics providers.
  • Supplier failure / fall in service as a result of the above.

How we mitigate

  • High level Brexit risk assessment completed to identify potential areas of risk
  • Desktop review completed to understand the operational risks from a supply chain perspective, and a number of mitigating actions identified
  • 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.
  • More frequent reviews in FY19 as appropriate.

Progress in 2017/18

  • Political situation to be monitored during FY19 to assess the likely impact, and the need to take mitigating actions
  • A number of further actions planned to assess likely impact on supply chain
  • Increased the percentage of anticipated FY19 purchases which have foreign currency hedging in place

IT systems, data and cyber security

Link to business goals:

1 2 3 4

Performance Indicator:

Number of major incidents

View Key

Executive responsibility:

Chief Information Officer

Reports to:

Chief Executive Officer

Impact compared to 2015/16

Left and right arrow

Description

Dunelm is dependent on the continued availability, integrity and capability of key information systems and technology. A major incident (including a cyber-attack), sustained performance problems or failure to keep technology up to date could constitute a significant threat to the business, at least in the short term.

The risk of loss of data including customer data could have a significant adverse reputational impact.

How we mitigate

  • Business critical systems are based on established, industry leading package solutions, or are established systems which have been developed in-house with full support in place
  • 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
  • Authorisation controls and access to sensitive transactions are kept under constant review
  • Information Security Steering Group in place to oversee the Group’s approach to IT security and data protection

Board oversight:

  • Cyber security is a standard agenda item for the Audit and Risk Committee.
  • IT strategy reviewed annually by the Board.
  • Major security incidents reported by the Company Secretary.

Progress in 2017/18

  • Continued investment is being made in the capability of our IT function and in maintaining and upgrading business critical systems
  • We have adopted the Government’s ‘10 steps to cyber security’ as a template to assess our position; progress has been made against all measures during the year
  • Data security and integrity assessed and a number of improvements made as part of the plan to implement the General Data Protection Regulation, and further planned

Supply chain disruption

Link to business goals:

1 2 3 4

Performance Indicator:

Service levels in respect of store fulfilment

View Key

Business Plan link:

Supply chain

Executive responsibility:

Supply Chain Director

Reports to:

Chief Executive Officer

Impact compared to 2016/17

Left and right arrow

Description

Supply chain disruption could disrupt stock flows from DCs to stores and customers’ homes, leading to an impact on trading or cost / efficiency implications.

Loss of the store support centre, the manufacturing centres, or our contact centre could impact our ability to trade and divert focus from long term strategy and planning.

How we mitigate

  • Supply chain strategy in place to ensure capacity is in line with five year plan
  • Disaster recovery plans in place for Dunelm non-store facilities
  • We seek to limit dependency on individual suppliers by actively managing key supplier relationships

Board oversight:

  • Disaster recovery is a standard Audit and Risk Committee agenda item.

Progress in 2017/18

  • Stock management programme initiated to review process and compliance across the whole UK supply chain
  • Warehousing activity consolidated at Stoke DC 1 and 2 to improve efficiency and customer experience and reduce cost
  • Agreements with two man delivery partner extended to secure service continuity and provide flexibility / fallback
  • More focus on partnerships with committed suppliers
  • Consolidation of former Worldstores supply base to improve customer experience

Business efficiency

Link to business goals:

1 2 3 4

Performance Indicator:

EBITDA %

View Key

Executive responsibility:

Chief Financial Officer

Reports to:

Chief Executive Officer

Impact compared to 2016/17

Arrow up icon

Description

Failure to operate the business in an efficient manner leads to additional cost and operating margin pressure, and could constrain our profitability and our ability to compete and grow the business in line with our strategy.

Failure to anticipate or manage cost price volatility in key areas such as freight, raw materials, energy and exchange rates may lead to increased cost, margin pressure and lower profitability.

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.
  • Five year plan and Budget reviewed by the Board at least annually.

Progress in 2017/18

  • Non-stock procurement team upskilled and targeted to deliver significant cost reductions
  • Further work to improve store productivity by automation and removal of unnecessary task, and improved stock management
  • Standard new store format adopted to reduce cost
  • Efficiency savings delivered through completion of the Worldstores integration plan

Finance and treasury

Link to business goals:

4

Performance Indicator:

Operating cash conversion, Banking covenant compliance

View Key

Executive responsibility:

Chief Financial Officer

Reports to:

Chief Executive Officer

Impact compared to 2016/17

Left and right arrow

Description

Lack of access to appropriate levels of cash resources or exposure to significant variations in interest rates or exchange rates could have an impact on the Group’s operations and growth plans.

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 2017/18

  • Revolving credit facility extended from 2020 to 2023 and increased by £15m
  • Net Debt at the end of the year was £124m (0.89× EBITDA before exceptional items) (FY17: £122.1m). Since our debt is higher than in recent years we are managing our cash more closely
  • Foreign currency hedges are in place covering approximately 76% of expected purchases in FY19