Dunelm Group plc (DNLM) Earnings Call Transcript & Summary

Good morning. Thank you all so much for battling the rain and making it here. We really appreciate you being here. For those of you who I haven't met, my name is Clodagh Moriarty, and I'm our CEO here at Dunelm. Now I joined this business almost a year ago, and I knew from the outside in, there were opportunities. But it's been really encouraging over the last 12 months to really see that not only do those opportunities exist, but actually, there's so much more. So we're really excited actually to bring that to life. And I'll do that for the first 30 minutes or so before I hand over to Karen Witts, who I know you all know as our CFO. We then have a number of breakouts. So we brought along a number of members of our exec to bring the plan to life. So we'll have Faye Atkins. So Faye is our Chief Commercial Officer. And she's been in our business for 17 years, always in product, always in commercial, so no better person to be able to bring that to life. Then we have Laura Harricks. Laura Harricks joined us in February of this year as our Chief Customer Officer, having held that role in a number of other U.K. retailers for the last number of years. And then we have John Gahagan, who is our CTIO. And John joined actually our exec -- straight into the exec 5 years ago, having played a role across a number of global retailers. So we're collectively really looking forward to sharing the plan. But let's get going. Because Dunelm is a special business with a tremendous growth story. It has been, it is and it will continue to be because we are the market leader in a GBP 25 billion U.K. homewares fragmented market. And in spite of that position, we still only capture a fraction of the spend and a fraction of our total customer share of wallet for our most loyal customers. So we're really ambitious about seizing that opportunity by sharpening our specialist proposition, by improving our omnichannel experience and by simplifying our business. And by doing that, we can see a line of sight to mid- to high single-digit sustainable growth. We can see how we can take out GBP 100 million of our least productive cost and reinvest that into capability, into simplification and into automation and doing that while continuing to generate strong cash. Now it is a bounded but self-funded investment. And it is all in service of making this business materially larger, materially more productive and more valuable for its customers, its colleagues, its suppliers and of course, its shareholders. Now we're going to go through grow in existing stores. We're going to grow in new stores, and we're going to grow in digital, both in and out of our ecosystem. We're going to grow through our amazing product, the design and the quality, and we're going to grow through technology advancements. And as a result, we believe we can be bigger, bolder and better. Now in -- let me jump here. In February, when we last caught up, I talked about the key strengths in our business. And the opportunity was clear. We have universal appeal. We have loyal customers. We have outstanding products. We've got physical and digital reach, great colleagues and platforms and strong customer satisfaction. But all of those strengths demonstrate even further opportunities because still 85% of the U.K. population doesn't shop with us frequently yet. We hold 20% share of our most loyal customers' wallet, which means we still have 80% to go for. And yet, we have amazing products, but our in-depth analysis tells us that we do have a tail. And by unlocking that tail, we can create an additional up to 25% more space in some of our stores. There is white space for us. We have identified 100 locations where we know Dunelm can thrive without cannibalization. And whilst we have made really strong inroads in the e-commerce space, we have yet to unlock the full opportunity associated with digital experiences. And this business is ripe for simplification and much more process orientation. And as a result, we can take GBP 100 million of unproductive cost out and reinvest that for the growth. And we can do all of this while remaining customer obsessed. But the time to move is now, right? Our growth rate over the last number of years has slowed. We recognize that. Competition continues to be intense and the macroeconomic challenges continue. At the same time, customer behavior continues to change and it ever will. But the role of digital is ever more important with inspiration, with conversion, with understanding the role of curation. AI tools and data tools are critically important now for customers and very much will be in the future. And we know that getting the value equation right for our customers so that when they're spending their hard earned money, they're spending it well is key. But in all of that context, we also need to remember that Dunelm is a brilliant business. It's a resilient business with a strong balance sheet and even stronger proposition. And as a result, we believe we are better placed than many of the others to stand up to these type of pressures. And therein lies the opportunity. In addition, our customer insights have never been sharper, right? Put simply, we know our customers better now. We can target them more effectively, and we can move faster. And that's why we're choosing to invest now. This isn't a question about whether Dunelm can continue to perform. Of course, it can. This is a question about how much of the ambition we are willing to capture because we believe if we don't move now, we leave the door a jar for others to potentially enter that space. And we know we are better placed to serve our customers. So the fundamental idea behind this plan is winning the hearts and homes of our customers. And mathematically, knowing how to grow the business is one thing, but really understanding the emotional connection with customers, understanding their hopes, their dreams, their passions, their designs, that's how we become their specialist. And by winning their hearts and winning the privilege of playing a greater role in their homes, that's how we, as a business win. And this is all about layering to deliver this big ambition. It is about more reach, digitally and physically. It is about more spend through our amazing product catalog and enhanced experiences. It's about more missions. We already have breadth and depth in categories. The job of work now is to connect that across journeys. And we're going to have more loyal customers. We already have millions of customers in our ecosystem. We simply want to make them more loyal to us. And we're going to do that by being more productive so we can move faster and be more efficient. And as we do this, we believe we can increase our customer loyalty and spend through repeat visits and share of wallet. We believe we can return to mid- to high single-digit growth, and that's through like-for-like store-enabled growth and through digital acceleration. And we can see how we can deliver strong returns and cash generation with an adjusted PBT margin of circa 11% and a very strong ROCE of 30%. But if the idea behind this plan is all about customers, let's just spend a little bit of time understanding our customers because we really do and we continue to learn. So what we're looking at here on the right-hand side is our total customer base and the share of customers by segment. The next bar shows our share of sales equally by segment. And I'm going to start from bottom up, all right, because our biggest customer group are our once and done. Now this group of customers, they care about relevance and accessibility, and we can do that. So when they spearfish, they hook us. They really care about events and campaigns, and we have 12 really strong campaigns every year to be able to address this group. We then have our Now and thens. Now our Now and thens shop with us about three times a year, they totally get who we are, right? But whilst they dabble in categories like cook and dine, what they really cross the threshold for, what they really click through online for is bedding. And as a business, we know how to do bedding. We then have our Big debuts. Our Big debuts are ripe for conversion and the next best message because this is a group that has typically shopped with us for the first time over the last year, but they've shopped big and they've shopped cross category. So the customer relationship management involved here will continue to attract and convert this group. And that's going to start to get really interesting because we've got 20% of our customers that make up 60% of our sales. And we start with our Little and oftens. Our Little and often shop with us nine times a year. They shop with us in store, they shop with us online, they shop cross category. They eat and drink in Pausa. They know how to shop Dunelm. The interesting fact about this cohort is their typical average basket is the item in the basket is lower than the average customer. But they are very comfortable building baskets and shopping with us frequently. So they are the two metrics that we can address through our walkway, through our flow and through our inspiration. We then have our Big dippers. Now they don't shop with us that often, about three times a year. But when they shop, they shop big. They shop quilts, they shop pillows, they shop rugs, they shop furniture, they shop curtains. They really understand the breadth of the opportunity. So the job of work here is to ensure that we are really clear in our product descriptions, in our inspiration, in our curation because that matters to this group of customers. And last but definitely not least, we have our Dunelm devotes, 3% of our customer base, 20% of our sales, right? This group of customers shop with us all the time. They shop across category. They love us, we love them, and we are going to make sure that we recognize and reward this cohort to keep them coming back time and time again. Now if you were to cut this data across all the regions in the U.K., you'd actually get a broadly similar picture. And that makes sense, right, because we have universal appeal. But when you look at the different behaviors across these segments, that's when you start to understand where you can create the value because we've used this to be able to understand the role of the categories, the role that channels can play and how our data can delight these customers and create value for us. And that's how we get to our three growth drivers: becoming the homeware specialist with something for everyone, delivering seamless omnichannel experiences that our customers love and of course, transforming our capabilities so we can sustain this growth. So if we start with becoming the homeware specialist with something for everyone. What we are going to do is ensure that we really focus on us as a specialist. We're going to simplify our range. We're going to make it more inspiring. We're going to make it more productive. Our customers already trust us across our product categories. We need to ensure that we build that trust across the entire mission. And we're going to do that in three ways: ranging to win, building trust on affordability and maximizing our product brands. So ranging to win is not about more for the sake of more. It is about the right products at the right prices through the right channels to enable our customers to complete their overall mission. When we started to look at the analysis behind the use of our space and our SKU paretos, I don't know if any of you have spent a lot of time walking around our make and mend department. Anyone? Anyone? But if you do walk around our make and mend department, you'll see that it's really high density when it comes to our SKUs, and they are really unproductive, right? Or equally, if you walk one of our sub cats, take cushions, for example, it's a phenomenal range, but the complexity in a very small space within our shops does oftentimes make it more difficult to shop, more difficult to create those coordinated solutions or to generate the depth of fill. Now you can see that when you walk our shops. You can see it when you shop online, but you can also see it in all of the in-depth analysis. And as a result, we will do this carefully, but we can see a route in a number of our stores of freeing up to 25% of space, still ensuring you have the endless aisle experience online, supported by home delivery and click and collect, but using that space for more productive categories, more destination categories and to showcase more of our home spaces that you can kind of see here in the room. We believe we have a very strong value equation. We don't always get recognized for such, and that's where we're building trust on affordability. Because this plan doesn't involve a huge investment across the board in price points. Instead, it is about ensuring we've got the best, good, better and best architecture. The appropriate packaging, the right pricing and affordability tools and critically ensuring that we always have our products available, whether it's in-store or online. No homeware specialist can sell fresh air, and we're not going to try starting that, all right? Now we have got going on this. So you can see the pans towards the back of the room or here on the screen. But when we looked at that category, we looked at the total range and what products should be in that range. We looked at the price points. We changed the packaging and we changed the flow. And as a result, over the course of the year, we have seen a 9 percentage point outperformance in that category versus our other categories. We take another example, take plain dye bedding in our St. Albans refit. We changed the flow and merchandising associated with our good, better, best and colorways. And as a result, we're seeing double-digit outperformance in that category. So we're using all of these examples to understand what is it that we need to change in our proposition and what we can scale. And Faye, when she stands on the stage a little bit later on, is definitely going to bring this and more of these examples to life. Now before I move off this slide, I just want to draw your attention to our more focused trading calendar. Our biannual sales have worked really effectively for us for a number of years, but our customers no longer consistently shop in that way. So we are going to adapt our trading calendar slightly to ensure we are showing up and eventing with relevance and full-price products when our customers are expecting it. As you would expect, we will manage our margin over the course of the year, so we don't see dilution here. And lastly, we have maximizing our brand. And while this says product brands, we see a real route to maximizing our retail brand as Dunelm, which Laura can touch on, and maximizing our product brand. Currently, 75% of our products are sold through our own brands. We can see a route to driving that to 90% to simplify the offer to improve our credentials and to really establish ourselves as that homewares specialist. So as you connect all of these things together, it is a sales and margin play, right? But in the spirit of our more and more, this is more spend, more missions delivered more productively. Okay. So number two is delivering seamless omnichannel experiences. Our customers already shop with us in-store and online, right? And our known devotes, you know that most loyal group, they have the highest propensity to be an omnichannel shopper. And that's great because our omnichannel shoppers have our highest retention rate at 72%. That is 15 percentage points higher than a store-only customer and circa 30 percentage points higher than a web customer. So the opportunity here is to connect those omnichannel experiences, so we design as one. And we'll do it by extending our reach physically and digitally. We will do it by optimizing our existing estate, that's our stores and our platforms and obviously creating those connected experiences. The design principle though, behind this is designed first for omnichannel and then for individual channels thereafter. So let's start with extending our reach. We have identified those 100 locations where we know Dunelm can thrive. And we can see a route to opening up to 10 of those each year over the course of the plan. Now each of those stores when they're running contribute to about 0.2 percentage points of our growth. Clearly, that is subject to the location, the maturity, the format. But broadly, that's what we're looking at. As we open stores, we will continue to maintain our discipline. But if you look here, this is our Kingston store, which we opened early in the summer. Now that was at the height of one of the heat waves, one of the many heat waves that we had. So it was greater than 30-degree heat in the morning, and we still had a long line outside that shop. And that shop is already our top-performing transaction shop across the estate. So we know how to pick these locations. And at the same time as getting the physical locations right, we are really focused on the next channel for growth through digital for generative engine optimization. We, as a business, have performed very well in the SEO space because of our strong data quality. But the need for data in a GEO world is immense. And that is why we are investing in product information. It is why we're investing in our digital assets, in our order management system and our overall customer relationship management because this is a space that we do expect will grow. Now Laura is going to talk a lot more about that in her breakout. So do feel to ask her all of the very, very technical questions, she'd be delighted to answer. But she'll also touch on our advent into the social space because we are not active enough in social as a business. So whether that is TikTok or whether that is YouTube, we are truly committed to showing up where our customers are. But we've also got to optimize our existing estate. Now for those of you who know me, you know that I like to be out and about, right? I love to be in our shops, in our operation, connecting the data that we see centrally with the reality of what customers and colleagues experience. So I've been to well over 150 of our shops, some 80% of our estate. And candidly, some of our stores simply aren't good enough. But 25% of our stores are more tired than they should be. And as a result, there is value leakage when we should be generating strong sales. We have a program to be able to conduct these renewals. So we are adapting it and accelerating it. And in FY '27, we expect to renew 30 of our stores and to complete the program the following 12 months with a further 20 stores. At the same time, we will continue to conduct a number of full refit, just like our St. Albans store, where we bring some of the latest concepts and thinking to accelerate our journey. And St. Albans, in particular, is already seeing in spite of only opening in the summer, high single-digit growth. At the same time of investing in our physical, it's the same logic. We will invest in our digital, ensuring that we have the right inspiration, the right basket build, correct bundles and using the best of all of the data-led and AI technology. And again, Laura can bring this to life in about an hour's time. Finally, on this, we are creating connected customer experiences. Those Dunelm devotees that I talk about, they understand how to complete missions. They already get it. And as a result, they spend 6x more with us versus an average customer. But we need to work harder to be able to create these home spaces. So a customer when they come into our physical environment, knows how to complete their mission. So moving from a single item pick to completing a full journey and a full mission. We also believe that it is our role as a specialist to help our customers along this way and here in enters our app. It is a little known fact, but we were one of the first retailers in the U.K. to embed AI search within our digital ecosystem. We were also, earlier this summer, one of the first retailers in Europe, again, working with Google to embed conversational commerce inside our ecosystem, specifically in the app. And the app is working really well for us. So on average, a customer who shops with the app spends 40% more with us on checkout versus a non-app customer. They are more frequent and they have higher conversion. So the value equation in this space is really clear. More visits and eyeballs, stronger conversion, bigger basket build and more repeat customers or in the spirit of our more, more, more, you have more physical and digital reach, you have more spend, you have more missions, and we've got more loyal customers as a result. And our third driver is all about transforming our capabilities because we need to be nimble, we need to be faster in order to be able to capture this opportunity. And as a result, we have to rightsize our organization. We need to ensure we've got the right people, process, systems and data to be able to fuel our future growth. So we have looked at our organizational structure. We've launched a new process and productivity initiative, and we are advancing our tech and ensuring that we eat every ounce of value out of that technology. So over the summer, we announced some restructuring. Now that resulted in a net 8% out of central salaried headcount. And while cost was definitely a factor here, the main focus was on the productivity and efficiency of our most critical resource, our people. But we also took this opportunity to invest in transformation and change, to drive the pace, to invest in a new division for data and analytics to ensure we move away from data review to data decisioning and critically automated data decisioning, and to consolidate our customer function, bringing together our journeys, our digital, our brand and, of course, our marketing because, again, if we are going to be customer first, we have to show up in a customer-first way. This, together with optimizing our process and productivity does contribute significantly to our GBP 100 million of unproductive cost out. And Karen, when she steps on to the stage momentarily, is going to go into a lot more detail. But while cost is a really important element of this, there are other facets of value. So again, when I've done this before, you look at taking a revamped store operating model. You then combine it with the best of tech, which in our business is our self-checkout, our rescheduling, our camera technology and RFID. And not only do you take cost out of the business as a result, you improve the customer experience and you improve the colleague experience. Or in the example here where we have our made to measure, we relooked at the overall process of how we deliver made to measure. And then we layered in the Salesforce technology, which resulted in a 30% reduction in lead times, which, of course, translates to an availability opportunity, which translates to a sales opportunity and repeat customers. So again, for those of you who know me well, you will know I feel really passionately about combining the power of people and tech and how if you combine them in the right way, you can generate significant value. And John is going to bring a lot more of that to life in the breakout. But in a nutshell, we see some investment required in some of our tech foundations. Of course, we are going to leverage the best of AI. We will go to fewer and bigger suppliers to make ourselves more efficient and to ensure we're benefiting the most. And as our systems and as our platforms reach end of life, we will gracefully transition to fewer, more connected platforms. And that's where we see the value. Let's be very honest. We aren't always at the forefront of tech. Now I know my predecessor used to mention that the Church of England got to contactless before we did, true. And we're not massively proud that it took us until February 2026 to have a fully functioning app for the market. But the benefit is you are then operating on the latest tech. You are then operating on modern platforms, which makes it fundamentally easier to develop some. And that means that we can spend more of our time on looking at how we reimagine the ERP, how we unlock automated fulfillment and what we need to do in our customer architecture and our merchandising and ranging. It's never tech for the sake of tech. It is always tech to drive better decisions, faster decisions, more cost-effective execution and more personalized journeys. So there's a lot going on, right? We recognize that. We also recognize that in strategy, it's so important to be focused. So the way we are thinking about focus is the sequencing of this plan, right? So in FY '27, I'll bring that to life, we are looking at what are the areas we will have laid the foundations and groundwork for, where will we have piloted, tested and learned, and where will we have delivered in-year value. So for this year, we'll have made significant progress on understanding our end state personalization and loyalty journey. We will have landed and completed the discovery for a number of our key tech enablers, specifically across the towers of customer, commercial and digital, alongside the next generation of our app when we think about how you connect customers and colleagues. We'll have completed all of our discovery work on the distribution automation opportunities required for all of the growth that is to come in the future. And of course, we'll have invested in our team's capabilities to ensure that we collectively are future fit. In terms of test and learn, we will have tested in rigor our home spaces proposition, starting the bedroom and then moving through across all channels. We'll have tested our new store formats, whether that is our smaller stores or our larger stores to identify which of the elements we should be rolling back and what we should be scaling forward. We'll have tested our affordability and tracking tools. And of course, we will have rigorous testing in social commerce, in conversational commerce and GEO-led customer acquisition. And in terms of delivery, we will have delivered our customer targeting for our -- key segments. We'll have landed up to 10 new stores and 30 renewals, moving from value leakage to value creation. We'll have improved our supply chain resilience. So over the next number of years, we are really set to be able to deliver all of that volume. And critically, we have made huge inroads into our productivity and process improvements so that we can take that unproductive cost out and we can refuel it in the growth of our business. So the fundamentals of this plan are centered all around our strengths, right? Our market leadership position, our highly cash-generative business, our disciplined returns and our clear capital allocation model. We have a self-funded plan. It is deliberately bounded and it is deliberately concentrated in 2 years, linked to specific initiatives and outcomes. And over the course of this period, we feel we'll be well on our way to winning the hearts and homes of our customers and starting to see increased customer loyalty and spend, a return to mid- to high single-digit growth, and we will be delivering strong returns and cash generation. This is not about us changing the fundamentals of Dunelm. It's us strengthening them and ensuring that we can accelerate this growth even further. This is not about us changing the discipline in our business. It is, though, about us moving our ambition. So when I shared in February that our customers said to me, "Oh, Dunelm, it's actually very good." We now believe that we have a plan, which over time for our customers, our colleagues, our suppliers and our shareholders, we will be really confident saying, "Dunelm, it's always very good," because we will be bigger, we will be better and we will be bolder. And I promise you, we're already going. So thank you for listening. I'm going to hand over to Karen now, who's going to take us through the financial rigor of the plan. Karen, over to you.

Well, good morning, everyone. I'm Karen, and I've been CFO at Dunelm for more than 4 years now. Now that you've heard the strategic detail of our plan, I'd like to take you through what this means from a financial perspective. Clo has set out the reasons for acting now. We are a financially robust company. We are highly profitable. We have a consistent track record of growth and returns and a great set of assets to leverage. However, we also recognize that our growth is slowing. Our sales are still growing in a challenging market, but the growth has recently been less than mid-single digit and with less growth coming from market share gains than we are happy with. Operating in a cost inflationary environment is now the norm. Labor cost inflation has been a particular headwind with total employee costs increasing by about GBP 85 million between FY '22 and FY '26. That's a CAGR of around 8%. Whilst wage inflation may be moderating and whilst we consistently deliver efficiency improvements and productivity gains, the combination of inflation and net investment after those productivity gains has meant that operating leverage has been used as an offset, leading to limited profit growth. Now we have plans in place to address this to take advantage of the significant opportunity that Clo has described to reach and engage more customers and to create sustainable operating leverage from a new phase of higher top line growth. So the financial fundamentals of our business are good. A very strong return on capital employed is one of our relatively uncelebrated assets. Our ROCE of more than 30% sits high for our sector, where we believe the average is more like 10%. And whilst not always linear in its progress, it has remained consistently strong through investment cycles. For example, when we've increased distribution capacity and when we've invested in freehold stores. This resilience has been helped by our disciplined approach to cost and investment management. Our PBT margin is similarly strong. Much of our investment runs through our P&L, and we use our operating leverage to help to cover it. We are still relatively CapEx light and a highly cash-generative business model, which allows us to invest in attractive opportunities to grow our business. We have a strong and efficient balance sheet and a track record of returning cash to shareholders, and we've returned GBP 1.7 billion over the last 20 years. We have now built a 3-year plan to accelerate growth. We're executing on a plan that capitalizes on our strong fundamentals and the great assets that we already have in our business. Over the next 3 years and with further to come beyond, we will deliver a self-funded growth plan to build a bigger, better and bolder Dunelm. The investment required to deliver this plan will be a combination of recurring spend, non-recurring spend, which we will show as adjusting items and incremental CapEx, all funded from cash flow generation and a save to invest plan. So that means in terms of sales, moving from lower than mid-single-digit sales growth to mid- to high single-digit sales growth. We will grow like-for-like store-enabled sales, and we'll continue to grow digital sales by reaching more customers who will spend more with us through more shopping missions and who will become and remain more loyal customers. We intend to open up to 10 new stores per year, and we can see about 100 attractive locations, which would fill white space with limited cannibalization risk. In terms of profit, to support our plan, we will save to invest. By FY '29, we will have removed about GBP 100 million of our least productive costs from our current base, and we will have reinvested a similar amount over that same time frame. Reinvestment will be in our store estate, in capability, in technology and in simplification and automation to improve effectiveness at a lower cost to serve with better customer satisfaction. We also expect to fund some activity that will not be recurring. In particular, we need to invest in some foundational systems to provide better platforms for future growth, and John will talk about this in more detail. We expect this nonrecurring spend to total around GBP 30 million to GBP 40 million invested over the next 2 years. Over the next 3 years, as we take cost out and the returns on our reinvestment start to build, we will still deliver an attractive adjusted operating margin of around 11% with expansion after that. In terms of capital allocation, over the next 3 years, we will use our existing policy to prioritize investment for growth. Funded through free cash flow, we will generate the means to invest an incremental GBP 125 million of CapEx, means above our historic run rate in new stores, in refreshing tired stores and in continued investment in technology to modernize, simplify and to automate. Whilst our approach to capital allocation will focus on investment for growth, we will continue to pay a growing ordinary dividend. We will maintain our target net debt-to-EBITDA ratio at 0.2 to 0.6x, operating with low levels of debt and any surplus remaining cash will be distributed to shareholders. And finally, in terms of returns, we will grow EPS over the planned period. We will maintain an efficient balance sheet, and we will approach investments with discipline, applying a rigorous approach to returns, which will keep our ROCE high at around 30% through this investment phase. We intend to return to mid- to high single-digit sales growth by FY '29. Increased sales over the next 3 years will come from an improved omnichannel experience and from optimizing our homeware specialist credentials, and Faye and Laura will help to bring our plans to life. In FY '26, we were disappointed by our low number of store openings. So over the next 3 years, we will focus on opening up to 10 new stores per annum in attractive white space locations. Our store-enabled like-for-like sales will be revitalized to a sustainable position of growth. Store-enabled sales include store fulfilled click and collect and store-assisted tablet-based sales. These grew modestly in FY '26, but sales through store checkouts alone declined. So we have plans to invest in renewing underperforming stores that don't currently provide the environment or the experience that our customers deserve. And by removing our least efficient SKUs, we can create more space in store for our most popular lines and far more inspiration. And we will continue to deliver our historic high levels of digital growth, the definition of which is unchanged and includes home delivery sales, click & collect and in-store tablet sales. We will continue to get to know our customers more deeply, and we will use technology to make shopping with us easier, more relevant and more repeatable. As we engage more customers online and on app and attract a higher share of wallet from customers, we will retain our customary gross margin discipline. Capturing this growth opportunity does require investment. This investment will be funded by the cash generated from our operations and from structural cost savings. The top left arrow in the diagram shows that by the end of FY '29, we will have invested around GBP 100 million in capability, process and automation, fully funded by GBP 100 million Save to Invest program that's shown in the arrow below. We will also invest around GBP 30 million to GBP 40 million in total over the next 2 years in nonrecurring areas, including foundational infrastructure, and we will refer to this spend as adjusting items. Our CapEx will step up over the next 3 years when we expect to invest an incremental GBP 125 million, primarily in stores and distribution. The nonrecurring investment and the incremental CapEx will be funded through our ongoing cash-generative model, focusing capital allocation on investing in the business for growth. Our Save to Invest plan is a productivity and simplification program designed to make Dunelm more efficient, more scalable and therefore, better positioned for future growth. So let's first look at how we will take cost out. We will remove about GBP 100 million of our least productive costs from the business over the next 3 years so that we can reinvest a similar amount in capability and process improvements to make us more effective. We're approaching this work through four interconnected and phased streams of work. So moving from the top down, our areas of focus are, organizational design and cost removal, end-to-end process reengineering, operating model optimization and range efficiency and rationalization. Together, these initiatives will help us remove structural cost. We will then reinvest in the areas that will create a more effective organization and deliver most to our customers. So starting with the green block, we've already started to simplify elements of our organization and reduce costs across the business. We recently announced plans, which removed about 8% of our gross salaried headcount with, of course, an associated cost, which we're including as an adjusted item. Changes to our organizational design and other targeted third-party cost removal will deliver annualized savings of around GBP 40 million by FY '29. We will also remove costs by reviewing processes end-to-end and designing them to be more effective. Traditionally, in a functionally designed organization, we've solved for functional problems and made functional improvements. And now we're redesigning how workflows across the entire business. We're establishing a common end-to-end process architecture for Dunelm, covering product life cycle management, inventory management, stock flow, merchandising, trade operations, fulfillment and returns. We see opportunities to remove manual activity to reduce process complexity, improve data quality, simplify and speed up decision-making and increase automation. And we expect this work to deliver annualized benefits of around GBP 35 million by FY '29. The blue blocks are focused on where we already have a strong track record of continuous improvement, particularly across our stores and supply chain. We will build on this, and we will deploy targeted technology to unlock efficiency. This will include the deployment of RFID, which is currently in early rollout to streamline store and logistics processes and improve stock accuracy and availability. We will also introduce better workforce management tools to improve labor deployment and scheduling. These initiatives are expected to deliver about GBP 15 million of annualized operating model benefits by the end of FY '29. And moving on to the bottom layer, customers expect choice from Dunelm, but complexity comes at a cost. And as you'll hear from Faye, our focus is not on reducing that feeling of choice. It's on ensuring that every product earns its place in the range and that so-called complexity exists only where it creates genuine customer value. By rationalizing SKU count in stores and removing a long tail of our least productive SKUs, we will free up to 25% of space, which we will then devote to more productive SKUs and to create more in-store inspiration. When we combine this with the opportunity to improve our stock disciplines, including processes around churn and clearance, we believe that we can deliver around GBP 10 million from these initiatives. Our goal is straightforward: eliminate waste, improve productivity and create a better experience both for customers and colleagues. The results will be a simpler, faster and more productive organization capable of supporting future growth without a proportional increase in cost. These plans will allow us to reinvest, to create a sustainable capability, growth and efficiency over the next 3 years. Over the years, we've always found productivity initiatives to help fund our investments. But this plan is bolder, and we will save more, and we will fully reinvest the savings over the next 3 years to support profitable and sustainable growth. As I said, we are a highly cash-generative business, and we can fund the investment we need for our step-up in growth through a combination of these Save to Invest plans and through prioritizing investment for growth through capital allocation. Over the period of the plan and as we've always done, we will invest in incremental activity that will be recurring in nature. As John will describe in more detail, we will invest in deploying more strategic relationships across the business with fewer partners. As Laura will describe, we will reach more customers with a bigger, better stores estate, and we will invest in developing and improving organizational capability, for instance, in data and analytics. We would expect the incremental P&L cost of this to be in the region of GBP 100 million over the next 3 years. That is higher than our recent per annum run rate, which has been closer to GBP 20 million per annum, but funded by an equivalent amount from our cost-out program. And over the next 2 years, deliberately focused within a bounded time frame, we will also reinvest a total of GBP 30 million to GBP 40 million on nonrecurring items. Because of the nonrecurring characteristics, we will refer to these as adjusting items and we'll highlight their impact by excluding them from the adjusted performance of the business. We've developed clear guidelines and governance on how to identify costs of this nature. Adjusting items will include the restructuring costs associated with optimizing our operating model, the temporary cost of delivering a clearly defined change program and investment in foundational technology to ensure we have a good platform from which to deliver our growth plans. Our CapEx has varied over recent years depending on opportunities to invest. Our historic average investment has been just over GBP 40 million per annum. An incremental CapEx over the 3-year plan period is expected to be around GBP 125 million. We will invest in store expansion plans to reach more customers, still with a disciplined approach to payback. And over the next 2 years, we have a plan to renew around 50 stores in our portfolio that are underperforming and that we do not think provide our customers with the right retail experience nor do justice to our brand. And we're also working on plans to improve our supply chain infrastructure as we recognize that we will need more automation to improve operational efficiency and to deliver a better customer experience. So this picture shows how we expect the shape and nature of CapEx deployed over the period to evolve. You can see our planned investment in new stores alongside a focus on renewals and continued investment in technology. And in FY '28 and '29, we would expect to invest in our supply chain infrastructure. We don't have detailed plans for the supply chain investment at this stage as we're still in discovery, but we are assuming investment after FY '27. We will always be disciplined in our approach to investment, recognizing that capital needs to be allocated to initiatives with different return characteristics. So for instance, we have strong new stores payback of around 4 years. We expect our renewals program to reverse the decline of the targeted stores, and we currently estimate a payback of around 3 years on these stores. So just to revert to a reminder of the returns picture, we're investing for long-term value whilst maintaining attractive returns. We're building a sustainably leaner, more effective business. Our investments are aimed at driving growth in returns, albeit with a slight moderation during a period of transition. In both PBT margin and ROCE, our returns compare very favorably in our sector. We expect an adjusted PBT margin of around 11% over the plan period with improved operating leverage, increasing PBT after year 1. ROCE will remain strong over our investment phase at about 30%. These returns are expected to improve beyond the plan period. I've spoken about capital allocation, and I've set out our approach and priorities in more detail here. First, we will invest in the business for growth to capture the opportunity that Clo has described. Our investment plans are disciplined and developed with a focus both on operational outcomes and financial returns. We remain committed to distributing a growing ordinary annual dividend given our strong cash flow generation and our confidence in our business and its prospects. Our target net debt-to-EBITDA range will remain consistent at 0.2 to 0.6x, and we will return any surplus cash to shareholders. We've looked out over the next 3 years. But I'd now like to provide some near-term guidance for FY '27. Firstly, to note, FY '27 will be a 53-week year. The last one was in FY '22. We expect that we will continue to operate in an inflationary environment, and we're assuming inflation of about 3% on our operating cost base. We're guiding to GBP 25 million to GBP 30 million of cost removal in the year, contributing to our GBP 100 million 3-year target. And this cost removal will fund a similar amount of reinvestment for growth. We expect GBP 30 million to GBP 40 million of adjusting P&L items across the next 2 years. These are primarily cash investments that support our growth plan and are nonrecurring after that 2-year period. The investments in FY '27 relate mainly to restructuring costs, the cost of running a change program and foundational systems investment. So we expect adjusted PBT to be broadly in line with FY '26. As usual, we expect our effective tax rate to be 50 to 100 basis points above the headline rate of corporation tax, and we expect working capital to be broadly neutral. We're guiding to CapEx in FY '27 of GBP 60 million to GBP 70 million, reflecting the plans we've set out for investment, primarily in our store estate. We have significant store activity planned for FY '27, up to 10 new store openings, and we will deliver up to 30 store renewals focused on underperforming stores. We will also continue with our regular program of maintenance and refits. And we expect our net debt-to-EBITDA ratio to be within our target range of 0.2 to 0.6x. So before I hand over, I will recap on the key elements of our financial plan. This is a plan to grow our top line at a rate of mid- to high single digits by FY '29. Our profitability will remain at attractive levels even through this period of investment. We expect an adjusted PBT margin of around 11%. We will prioritize investment for growth and our plan will be funded through savings initiatives and through cash generated by the business. We will retain our target leverage of 0.2 to 0.6x net debt to EBITDA. Our ROCE will be around 30% over the plan period, and we are very confident that this is the right plan for Dunelm.

Thank you for storing up all of your questions for this kind of final session. In the background, we are going to leave kind of the key summary of what I hope you've really got to understand over the last couple of hours, which is about our ambition to return to mid- to high level growth across our business, to deliver that adjusted PBT margin of around kind of 11%, stay within our range for our capital allocation, where we have a very clear policy. And to deliver those returns, we do believe that a 30% ROCE in retail is a very strong set of returns. But we are passionate about winning hearts and homes, the three growth engines. And of course, we really hope it has come through, but our desire to be customer first and to lead with customer obsession is how we think we're going to be able to unlock this. So with that in mind, we are very happy to take your questions. And we have roaming mics.

John Stevenson at Peel Hunt. I'll go with two to kick it off. So you've given sort of a few hints of the numbers around thinking about the refit. You talked about the uplift for 40% of the CapEx, I think, in terms of renewal versus a refit. Can you kind of finish that off for us? So what does a renewal CapEx look like versus kind of a full refit? And in your experience to date, I appreciate it's really early, but what sort of uplift have you seen on St. Albans? And how does that compare to the two or three renewals you've done already? I appreciate we're not going to extrapolate this, but just to get a sense of the detail behind it. And then second question, just on the store sort of space allocations. Are we -- I think there's about 30,000 SKUs in a store now. Is that coming down? Are you creating more space? What does the store look like in terms of its stock density? And how do you think about what the store is going to look like?

All right. Thanks a million, John. So why don't I start with just the renewals and refits, and I'll hand over then to Karen before maybe, Faye, you can pick up the in-store range changes that we're anticipating. So firstly, there are two parts when we're looking at our existing estate. The first are refits. There's a handful of refits that we'll continue to have over the course of the plan. And that's an example like St. Albans. And what we're seeing in St. Albans is that high single-digit growth. And that's as a result of the flow, the navigation, the change in what the offering experience is. The wider group of stores are what we're calling renewals. And there are 30 of those renewals in FY '27 and then a further 20 in FY '28. Those are the stores where we believe there's value leakage. And you're talking about a couple of hundred thousand of investment in those stores to ensure they move from what we would say is brand diminishing to brand enhancing. That is all about fabric, flow, fittings, any other words you can add in there. But that's what we're doing in those stores. So we'll get quite different returns where one is looking to enhance an already strongly performing store, and the other is to bring a value leakage store to a level that we feel really proud of.

I think you've actually answered the numbers question as well. I mean the refits come in many shapes and sizes from something which is more akin to a bit of maintenance right up to something much, much fuller like a St. Albans. And those ones can actually be quite expensive in terms of CapEx, but confident in a quick return. I think what's keeping the cost down relatively on the renewals is as Clo and Laura said earlier, we're not trying to move space. We're not taking something from a downstairs up to an upstairs. We're focused on the fittings, the flow and the fabric of the walls.

Yes. So regarding the SKU question, we are expecting to reduce some level of SKUs within some of our stores, but we are testing that over the course of the first year of the plan because we want to make sure that we -- what we see on the spreadsheets and then what happens in real life as a result of that. The other thing to say is, obviously, it links a lot with our sort of end-to-end stock flow and our store operating model as well because actually what we want is the stock flow and turn to be faster. And then also links to the sort of digital experience. So we might be taking SKUs out, but we'll be then enhancing how does the customer see our digital touch points and understand our home delivery proposition, our click and collect propositions as part of that. And then regarding stock density, we're always trying to optimize inventory, and that is part of the plan.

Richard Taylor from Barclays. Two questions, please. Firstly, on the CapEx slide, there's the green bar, which is a pretty big one. And I know you say it's sort of discovery, I believe, in relation to automation. But then can you outline some of your thoughts on potential efficiencies there, please? And I appreciate this is a 3-year plan, but if we were to put this on 1 year forward, will that investment in supply chain fall out? Or do you think it will sort of continue beyond this 3-year plan? And then secondly, just a question on the distribution to shareholders. You're very clear that you want to stay in the capital allocation range of 0.2 to 0.6x. But in recent years, you have been towards the lower end of that range. So how do you think about potentially rewarding shareholders through the investment phase? Would you be willing to move more to the middle end of that range during investment? Or will that depend on how the revenue performance was delivering over that period?

Thanks, Richard. Karen?

Yes. Sure. So in terms of the CapEx, I do think we have spoken previously about the fact that we are not very automated at all in our distribution centers. A few of you will actually have walked around them, and we are still using some very manual processes. And partly, that's a function of the kind of shape of the products that we are sending through the distribution centers. We're not sending out nice neat little boxes. But more and more, we see that there are automation solutions, and we feel ready to invest in that automation, not least of all because we're going to be a bigger business, we'll have much more throughput. And we also know that as you automate, you get efficiency improvements and the efficiency improvements are not just good for our P&L, but they're really good for the end-to-end customer experience. So that is kind of the rationale for the network automation. We've done a lot of research into it. We know what others have done. We know what probably will suit us best, but we are in discovery phase because this would be a significant amount of CapEx. It will be bounded though, because once the automation is in place, of course, there will be ongoing running costs of the new machinery that we've got in place, but automation can take out some labor costs. So I would expect that green bar, if not to disappear completely, but to be very significantly reduced after the end of FY '29. And if I just also pick up on the net debt to EBITDA range, the 0.2 to 0.6x. We've ended FY '26 at 0.3x. So absolutely, to your point, close to the bottom of that range. But the fact that we've got a range gives us optionality. It does mean that where we see good opportunities for investment, then we can invest. It does mean that we can be thoughtful about distributions to shareholders. Now we believe that we have put all the investment that we need into the plans that we have presented today over the next 3 years. And we've also set out that we are still thinking about shareholders' ongoing requirements, and that's why we're very committed to an attractive ongoing annual ordinary dividend.

David Hughes from Shore Capital. A couple of questions from me, please. First of all, on the kind of space in store, you talk about reducing the space by about 25% or freeing that up. What would be the plans to use that? Is that a case of merchandising and insets like you see at the Kingston store to kind of bring to life? Or are there any other plans for use of the excess space? And then secondly, in terms of the targets of mid- to high single-digit growth and a profit margin of around 11% in a world where you're seeing kind of the tougher consumer environment or things aren't going as well as perhaps we all hope, what's the tension between those two and that GBP 100 million sales? Is there a world where some of that goes to support the margin at the expense of growth? Or is the growth the most important thing and you'd be more willing to take a hit on the margin side?

Great. Thanks, David. So if we start with the use of space in store. I think Faye, I will come to you in a moment. But what we're thinking about is ensuring that our space has become much more shoppable. So if you spend time in our Kingston store or if you spend time in our St. Albans store, you will see that it is much easier to see the breadth and depth of our products and much easier to shop by mission. So much more of these home spaces curated in this way, which are working exceptionally well for us. So that is one of the priority elements. The other element, though, it comes back to the role of categories and understanding what are those destination categories, where we need to extend those and where are those high-value categories. So Faye, anything else you wanted to pick up on the specific role of category within stores?

Yes. I think that point is really important. So yes, whilst the inspiration will be a key element of it, it's not only going to be used for that. There are some categories where we feel like we've got opportunity to increase the range more in some categories into the stores as well. So what we've learned from our digital sales, for example, how we can then apply that differently and where we really want to deliver destination status in authority categories, we know that the store experience as part of that is really important.

And then I guess specifically coming back to your mid- to high single digits and probably Karen and I will team and Laura, feel free to jump in with the customer lens. What we are sharing today are some of the early evidence points of how you can get that mid- to high single-digit growth by changing either the flow in store, like our example, plain dye in bedding or by changing the good, better, best architecture per the pans example. So on both of those, you're seeing mid- to high in the pounds and already double digit in the plain dye. And then when you couple that with increasingly more and more customers shopping using our app and the 40% uplift that we see in that space, we've already got almost 0.75 million of our customers on the app, and we expect that to continue to grow. So it's clear from those data points that the demand and the appetite is there. Our job of work is to scale that quickly so we can capture maximum demand.

I don't actually see that there necessarily has to be attention between those two things, David, because this is a customer-first plan. And we've tried to demonstrate just how much of that customer we're leaving on the table at the moment. That's 80% of the wallet that they're not spending with us. So by executing on the plans that we've laid out, we feel confident that we will get the growth and efficiency is also good for the customers. So some of the things that we have talked about, actually, they take out the friction points in our processes. We are really focusing on end-to-end processes because that's where you see those friction points. So if we get better customer service, that's a bit that self-reinforcing, which also is kind of looping back into the top line. And I also think it is important to say that we do think that we have put into this plan with the assumption that we will deliver around about 11% PBT margin over the plan period. That does include the stuff that we need to spend and what we need to save.

Before we move on, is there anything else, Laura, that you'd want to add from the fact that we're a specialist with universal appeal and hence, operating across all the tiers?

Yes. I think the thing that gives me encouragement on this one is the fact that we're such a fragmented market. And when I look at the customer base, nearly half -- just under half of our customers only come in once a year. It's not beyond the wit of man to say, actually by improving our customer proposition, how it shows up that you can actually do that better. So I think I look at it and I think that there's bits of value growth across the full chain.

It's Georgina Johanan from JPMorgan. Just a few questions -- well, two questions and then two very quick ones, if that's all right, please. The first one was just with regards to the renewals. Obviously, it's a meaningful, I think, 15% of the store portfolio this year and also what you're going to be doing around the freeing up of the 25% space, just in terms of any disruption to sales that we should be building into our models sort of near term for that, please? And then sort of thinking about the sales uplift that you're hoping to drive more broadly, if you have any multiyear examples that you could share so we can have confidence that it's not just like a 1-year step-up and done kind of thing. And then just the two quick ones was at the end of the plan, assuming all goes well and the consumer environment is benign, let's say, fingers crossed, where would you see the fiscal '30 CapEx level? And where would you expect the fiscal '30 PBT margin to land in round numbers, please?

Thanks, Georgina. Right. So let me take the renewals question and Karen, then we'll tag team on both what we've seen from an experience point of view and then equally a longer-term outlook. On those renewals, we've already got three under our belt. And we've now got a very tried and tested route of being able to get in and out very effectively, whether that is whilst the store is closed, early doors are overnight or making some key changes during the day. And we are not seeing any levels of disruption where there is maybe over the course of the week, it rebounds very, very fast. So very comfortable when you're looking at 15% of our state or overall kind of the 25% that we can do this effectively whilst engaging our customers, sharing it's going to be a better end state without disrupting their trading patterns. Karen?

Yes. And any disruption that we might assume is already built into our appraisals. So we've got that included in our payback model. And just in terms of the CapEx, I think it's the same answer to Richard's question, which is we do expect after FY '29 that we will have completed the network automation program. So the green block will largely go away. What happens to the blocks associated with tech, new stores and refits? I think we will continue with a regular drumbeat of those, and we will look for opportunities. I mean I think if we saw some great opportunities to spend a bit more and we're confident in the return on investment, then I think that would be viewed as a good idea. On the page after the CapEx graph, we've actually shown a schematic. This is not a forecast. It's just a schematic of what could happen at the end of the plan period in terms of the PBT margin. You might have noticed that threaded through our presentations, we are talking about sustainability and leverage. And when we get to a consistent level of mid- to high single-digit top line growth, that provides a lot of operating leverage. If you put that in the context of some of our investment is likely to moderate, then you can see how that picture could emerge.

Ben Hunt from Panmure Liberum. Over the years, you've grown Internet, your penetration up to quite a high level in the 40s. Some would say that's quite high generally. You're asking for or you're expecting more online growth and you're also expecting more store growth. But I wonder in those building blocks to get to that sort of mid- to high single digit, how much contingency you've actually built in for the potential for store cannibalization?

Okay. Well, let's maybe talk about the full benefit of both in-store and physical with Laura. But in terms of cannibalization, when we looked at those physical sites, and we see kind of 100 of those sites that we can go after. We've also looked -- I mean there would have been -- that list would have been significantly longer, Ben, if we weren't accounting for cannibalization. So that list is a post-cannibalization review. So that's -- I think we've considered that as we think about our target areas to go after. And in the spirit of, is there more growth to be had, I guess, following from your breakout?

Yes. I mean I hope it was clear in the breakout that we consider that there's both growth through the store and also connecting them. I think it's really interesting, the interdependency that they play. So if you think about a click and collect order, we take -- it's taken online, but fulfilled in store. So the more that you can actually drive your store network, you grow your click and collect business. The opposite is also true, which is our MPOS, which is our colleagues in store who are selling some of those higher ticket item products on the tablet. So as we build those destination status, they're taking those orders in store and then they're being filled by a home delivery network. So is there such synchronicity between having this omnichannel experience that actually gives us confidence that the sum of the parts is greater than the whole. And I think the really interesting thing from some of our new store openings is we're not seeing cannibalization. Actually, we are seeing that there's a halo in online sales because actually, you're getting more of that awareness in that catchment area. You're getting the physical mental availability in someone's head, it's on their radar, and that's leading to a bit more of a digital halo across them.

[indiscernible] renewals. I think you actually said that there was a difference of 8% in the from the top to the bottom of like-for-like performance over a number of years. Is there any way you can maybe frame it in terms of what's the actual difference in sales densities between the top-performing stores and those 50 renewals or just some form of qualitative view of it?

We haven't really disclosed any of that before. But I think that 8 percentage point range is really what we are focused on actually moving the bottom up to the top. The step one of that though is to actually make sure that we don't have what everyone is referring to as the value leakage to stop the value leakage and then move up the scale.

It's Anne Critchlow from Berenberg. I've got two questions, please. The first one is on the white space. And I think historically, Dunelm had an idea that 220 superstores might be capacity in the U.K. And I think you've got about 190 locations now. So I'm just wondering where the incremental 70 come from and whether some of them might be small urban concept stores? And if not, where do you see the small urban concept stores fitting into your strategy now? And then the second question is really just on the GBP 100 million of cost out. I'm just wondering how much of that might have happened anyway, for example, with self-checkout.

Okay. Well, let me take the first one, and then I'll pass to Karen for the other. So in terms of where do we see it coming from, we've researched where our customers are telling us they need a demand and equally where we see unmet demand. And as a result of that, there are three main parts of the U.K. that we can see we're underpenetrated on, and that is Northern Ireland, Scotland and London and the Southeast. But you're absolutely spot on. This is not a game of rolling out 10 new -- up to 10 new superstores every year. We will look at some of the London infills. We will have more of those local stores, which are close to the 15,000 to 20,000 square foot as well as peering it with the larger superstores. And the way we're really comfortable with that now is because we're connecting more of the physical and the digital. So if you take our Kingston store or the St. Albans store, both of those, one is slightly above 10% in the store-enabled sales, one is slightly below 10%. That's a very high proportion where our store is acting as another shop window for digital sales. So that's how we're balancing it, changing the format, understanding where we're underpenetrated and then maintaining our discipline.

Yes. So just in terms of the GBP 100 million of cost out and if we would have done it anyway, I think we would have done some of this undoubtedly because we've always been looking for productivities to help to offset inflation and our investment requirements. But I think what is really neat about this plan that we've got is how interconnected it is and how it has moved from being functionally driven to being end-to-end. So we've been successful being a very functionally organized organization. But now as we're looking even more deeply into our cost base and how we show up for customers and where the pain points are, we see that we have to actually look end to end. And so I don't think -- I think there are some opportunities that we wouldn't have picked up in the same way as we're picking up now. And I was just sort of thinking about, okay, so... So I think we would have picked up self-serve checkouts. Would we then have linked the self-serve checkouts with, oh, hang on a minute. Actually, maybe we could do with a labor scheduling tool. And a labor scheduling tool, which helps to take advantage of the labor we're releasing from actually, we could put that into our supply chain and logistics operations as well. We might not have thought about that. And as we're taking hours out of our activities, then we need to be thinking about how those hours flow through from the operation, for instance, in our distribution centers to the way that deliveries turn up at a store. So that's been granular and detailed. But by thinking about end-to-end, I think that we wouldn't have got to all of this without thinking.

[indiscernible] You're really seeing it in the tech space, moving away from the kind of the point solutions to the connected.

Yes, that's really what I -- do I need a microphone? That's really what sits behind the move we've made into more of a platform-based architecture. So some of the examples Karen has provided, we can scale solutions across more than one function. And secondly, by bringing in a platform, you cover more of the process. So we're actually thinking end-to-end process and not just about that individual opportunity.