Good morning, and welcome to the Dunelm Interim Presentation, covering the first half of our financial year up until the thirtieth of December. My name is Nick Wilkinson. Alison Brittain, Karen Witts, and I are really delighted to welcome you to the offices of Peel Hunt. Thank you for joining us and giving us your time this morning. Whether you're here in person or joining virtually, I hope you're well and feel connected to the continuing story of Dunelm. Those of you who came to our recent investors event in November know that we're at heart, a product company. Our product company is also busy innovating in the ways that it connects its products to an ever-growing number of customers. So with images from our spring, summer 2024 collections, we'll use this presentation to bring to life how we're developing the business and the results we are achieving.
It's our normal running order, a short overview me. Then Karen will go through the half one results and guidance, and I'll be back to update on our plans before we take your questions. So with our spring and Easter products demonstrating that everyone needs a bit of Dunelm in their lives, and with a spring in our step, let's get started. So H1 highlights. In a complex environment, we've continued to perform strongly. Consumers remain under pressure. We're in growth, but our markets are not. And I'm pleased with the shape of our financial performance in the half. Our H1 profits are up by 4.8% on the prior year, in balance with our sales growth up by a similar level, achieved through good discipline on gross margins in particular, and on costs.
We've announced this progression of our interim dividend and a special dividend of GBP 0.35 per share, maintaining our track record in terms of cash generation and distribution. Active customer growth and market share growth are also strong, and Karen will explore these and our financials in more detail shortly. A particular thank you to all my colleagues listening, and all of our supplier partners for everything you do every day to grow and adapt, and to deliver for our customers and our other stakeholders. Retailing is always about today's sales, but it's important to achieve today's sales through actions to deliver long-term, sustainable, compounding growth. In the half, we traded well. We feel we've struck the right balance so far this year, and the evidence is in the combination of volume and margin growth.
With some strong comparables in our prior year, and with hard-pressed consumers focused on really seeking out value, as well as some seasonal joy and fun, it was an environment which saw considerable volatility in our market from week to week. Growth in both volume and sales was driven by market share gains. We were extremely focused on offering customers outstanding value, and we did this by leveraging the breadth of our price architecture from our good, our opening price points to our better and best tiers, and a few thousand carefully selected reductions to our regular prices. In a market which was more promotional, we were disciplined, focused on a genuine winter sale and our established rolling program of special buy lines. We adapted to volatility in the market, achieving our sales growth with good grip on input costs and inventory.
Indeed, our cash gross profit increased by 8% year-on-year. We've ended the half with the right stock and good sell-through of our Christmas ranges. With a long-term lens, I'm pleased that our sales were driven more by volume than by price. Customer growth and frequency are also effectively volume measures of our business, and here, the breadth of our growth was excellent. We saw more customers shop with us in all regions of the country, in all age groups, and in all income groups, up to GBP 100,000 per annum. The breadth of this result is the function of investing through the current economic cycle in our offer in our total retail system. We'll come onto our plan shortly, but first, we'll take you through the half, and I'll hand over to Karen.
Thank you, Nick. Well, good morning, everyone, and, thanks for making the time to spend with us, today. I'll start with a summary of our financial results. As Nick said, we're pleased to be reporting another strong half-year performance. I'm going to go through the various elements in more detail, but as a headline level, we delivered GBP 872.5 million of sales in the first half of FY 2024, and that's 4.5% higher than the same period last year. As Nick has described, our growth was volume driven as we offered our customers relevance, choice, and outstanding value at every price point. Our gross margin was also strong at 52.7%, that's 160 basis points higher than the previous year.
While this expansion was primarily driven by the reduction in freight rates, we also managed our input costs well and were disciplined with pricing and promotion. We speak about operational grip, and this has been important in a period of uncertain consumer demand. We've managed costs with a focus on both managing inflationary pressures and on how we choose to invest in the business for the future. Profit before tax of GBP 123 million grew by 4.8%, slightly ahead of our sales growth, with EPS of GBP 0.446, 2.6% down year-over-year. That's mainly reflecting last year's increase in the rate of corporation tax. Our cash generation was strong at GBP 91 million, and we ended the half with GBP 6 million of net cash on the balance sheet.
The board has declared an interim ordinary dividend of GBP 0.16. That's up 6.7% year-on-year, and we're also announcing a special dividend of GBP 0.35 per share. This next slide explains how we grew sales well in a complex environment. We saw sales progression both in stores and online, with digital sales making up 36% of our total, 2 percentage points higher than the same period last year. As I said in my introduction, and consistent with our guidance in September, our sales growth was driven by volume, which we believe is important for long-term, sustainable, and profitable growth. And we grew both market share and customer numbers. As we continue to develop product mastery and category strength, we saw good performance in areas such as cook and dine and furniture.
We know that our customers like plenty of choice within a curated range, so we carefully expanded online SKU availability. Nick will give color on how our ongoing investment in digitalization is improving the customer experience of our site and is further helping to drive sales. We saw good growth in our active customer numbers, which increased by 4.2%. As Nick described in his introduction, our growth was broad-based by category and by customer type. We saw growth in all regions, all age groups, and all income levels, except our highest income level group, which was flat. We were pleased to see strong growth in our younger age groups and in London. Shopping frequency also continued to grow and was up by 1.1%. As you know, we use global data reporting over a last 12-month period to track our market share.
This tells us that the combined market for homewares and furniture over 2023 was broadly flat, and with our growth of 5% over the same period, we gained 50 basis points of market share. We saw an increase in both the homewares and furniture markets. We're focused strategically on gaining share across the combined market, and increasingly, we think of furniture as several categories, as we showed in our November investor event, and we've reminded you of that in the appendix to this presentation. So we're going to move to a single disclosure of the combined market, which we'll continue to update on twice a year, and we'll show you our long-term progress over key categories as appropriate. I said I'd return to the drivers of gross margin.
As I highlighted, the year-on-year growth of 160 basis points came primarily from a net benefit from freight costs. That's lower freight rates with a slight headwind from foreign exchange. As you may remember, the margin in the second half of our year is always lower than the first half, as it contains our two main sale events. The foreign exchange headwind in H2 will be a bit stronger than in the first half, and we're managing the current Red Sea issues, where the longer shipping routes are adding 2-3 weeks to shipping times, and we are incurring surcharges because of this. Operationally, availability is still strong, and new season stock is arriving in stores and online as we speak.
We expect the overall profile of H1 versus H2 to be similar to prior years, and we're comfortable maintaining our full year guidance of 100 basis points of gross margin rate growth year-on-year. Moving on, we worked hard on the combination of tight operational grip and thoughtful investment. Year-on-year operating costs grew by GBP 8 million to support our volume growth. We experienced a GBP 10 million inflationary headwind in H1, largely driven by wage costs. We partly offset this through efficiency savings from areas like marketing optimization and tight management of external storage costs. In September, at our prelims, we explained that we wanted to continue to invest in the digitalization of the business and also to take a step up in brand marketing as we evolved our ecosystem, in this case, by developing our Home of Homes brand platform.
We also expanded our store estate and continued with our rolling program of store refits, and these initiatives added around GBP 16 million to year-on-year costs. Looking forward, the forthcoming rise in the National Living Wage rates means that upward inflationary pressure will continue in H2, and we are maintaining our guidance of a cost-to-sales ratio of about 39%. So let's look at the bottom part of the P&L, and you can see that our profit before tax has grown by 4.8%. Net financing costs of GBP 3.9 million include interest on IFRS 16 lease liabilities of GBP 3 million. We feel fortunate that we're not having to finance significant amounts of debt in these times. Our effective tax rate increased from 20.8% in H1 FY 2023 to 26.3% in this half.
The majority of this increase related to the increase in the rate of corporation tax, and the remainder of the increase above the headline rate of tax related to more disallowable property-related expenses and a deferred tax adjustment, which is non-repeating. The increase in the tax rate was reflected in our EPS of GBP 0.446, which is 2.6% lower than it was last year. Just for noting, without the change in corporation tax rate, EPS would have increased by 3%. Now, moving on to cash flow. You can see how we generated and spent our free cash flow of GBP 91 million. Cash conversion of 72% included the impact of increased CapEx and higher tax payments, with a modest working capital outflow and stock levels and quality are good. CapEx of GBP 20 million was in line with our anticipated accelerated store activity.
We opened four new stores in the half, two super stores and two smaller formats, compared with three in the prior year, and we also refitted 12 stores. Dividend payments of GBP 54.5 million were slightly higher year-on-year, as we ended the half in a small net cash positive position of GBP 6 million. Our capital allocations methodology supports attractive shareholder distributions. This is a reminder of our continued strong shareholder returns record. With profit growth, a strong balance sheet position, and confidence in our future prospects, the board has declared an ordinary dividend of GBP 0.16, which is a 7% increase year-on-year, and a special dividend of GBP 0.35, both to be paid in April. Net debt after dividend commitments is 0.3x and therefore in line with our target range
So just before handing back to Nick, I'd like to close with the following guidance. Despite operating in an uncertain environment, we're confident that we will see full year growth margin around 100 basis points higher than in FY 2023. We're maintaining our guidance on operating costs at around 39% of sales. With four stores opened in the first half of the year, we're well on track to deliver 5-10 new stores in the full year, and we expect our full year tax rate to be consistent with the half. Finally, we expect our full year profit before tax to be in line with the market expectations. So thank you for your attention, and now let's go back to Nick.
Thanks, Karen. Building the Home of Homes and building Dunelm into a bigger market leader. How are we getting on? But first, let's talk about the world in which we are operating. In a changing world, it's never been more important to be focused on customers. Multichannel shopping is now established in homewares as the overwhelming preference for most consumers. Very few say that they are an online-only or a store-only customer in our categories. But channels aside, consumer attitudes are evolving at pace, and consumers are diverging in terms of what they're looking for, in terms of their attitudes to home, what they expect from the products that they buy, and how they want to shop. Responding to this, we feel advantaged as a specialist. We have breadth and depth.
Breadth of categories, price, quality tiers, and styles, and depth of knowledge in product design and supply chains and services that allows us to adapt and innovate, able to grasp and control more levers and be super relevant for consumers. We've also significantly increased our consumer insight capability in recent years, from listening directly to our customers, to more rigorous testing of new initiatives, and to leveraging the data which now flows into us from our digital and physical channels. This allows us to focus our efforts on the most meaningful changes to most customers. It's incredibly exciting to be working at a time when technology and data capabilities allow us to serve up the right products through the right channels and content to appeal to different customer needs effectively and efficiently.
If you attended our investor event in November, you'd have seen some examples of this as we build out our offer and identity. Let's get a bit more specific, and I'll bring to life how we're building the Home of Homes. These are familiar themes if you're close to our business, and these are the levers we're using to drive our market share growth. Firstly, strengthening our customer offer, in particular with regard to value and choice. Secondly, extending and digitalizing our total retail system, with more stores planned and continued digital optimization. And thirdly, evolving our marketing into an ecosystem that's both national and local, digital and physical. Across these three themes, we continue to invest with discipline and long-term focus, as Karen has described, and we continue to have fun and not take ourselves too seriously. Our average item price is just GBP 14.
You can get a great cup of coffee for about GBP 2. Our colleagues are friendly, and we like to give our customers a little bit of joy when they're shopping. We're continuing to invest and evolve our pricing hierarchy. As you know, we're always aiming to have good, better, and best price quality tiers in our core ranges, and in reality, that's often a simplification. In plain dye sheets, as you've heard me say many times, we have over a dozen tiers between the lowest priced good tier to the highest priced quality tiers. The key to doing this successfully is that each tier needs to have meaningful differentiation, from a GBP 2 pillowcase pair made from a soft touch microfiber to GBP 35 for a pillowcase of the finest cotton pillow, from Dorma.
We're not changing the proportions of our range in each tier, but we're introducing more innovation this year into our better and best tiers as disposable income and confidence increases for some consumers. For example, in bedding, we're introducing under our Edited Life label, fine linens priced from GBP 80 for a duvet set for a single bed. Another example is the work we've done in our upholstered furniture to offer quick delivery lead times of five days and a wider choice of styles and sizes of sofas, sofa beds, and occasional chairs. We've done this without growing the size of the range we stock, removing duplication as we become more confident in product selection and thereby improving availability. The resulting sales and share growth has been positive, and we think there's a lot more to go after.
Cook and dine is another part of our business where we're growing strongly from a lower base in terms of market share. Less of a new category for us than furniture, it's an area where we've recently increased our investment in product design and sourcing. We've improved ranges in kitchen storage and glassware, for example, and we've introduced some popular third-party brands where these are additive to our offer. One final example, as we've described before, we're adding more choice and entering new areas by adding to our online ranges that are delivered directly to consumers. This is still curated product with the same product quality, focus, and outstanding value for money. Through it, we learn about new areas and build new relationships with new suppliers.
We're now up to just over 80,000 products, and recent additions include a much wider range of ottoman or storage beds and headboards. Being a good company is central to our thinking across the business. The progress we're making on our net zero roadmaps for materials, manufacturing, and circular design is resulting now in better product choices for our customers. Good and Circular are the words that we use to describe all of this. We've also included within this our work on ethical sourcing in our communities and with our charity partners. This is increasingly important to building brand trust for digital shoppers, especially, who often come across us for the first time on a specific product page or social post. More of our range is now able to carry our Conscious Choice label, meaning it comes from more sustainable materials and sources.
As we strive to make these choices available at no more cost to consumers, we're seeing good, high-quality supply of recycled polyester and more sustainable cotton open up. We're moving away from mixed materials, which are less valuable when recycled. For example, our Elements collection of bedding will now be made from 100% cotton rather than the previous polyester cotton mix. Another nice example is the exclusive collection we've launched with a sustainability-focused seafood restaurant in the southwest called Rockfish. Coastal-inspired tableware and textiles made from recycled ceramics, durable stoneware, and recycled fabrics. Mugs from GBP 7, and in fact, we're doing children's sized mugs as well as adult-sized ones, and those are from GBP 5. Being a good partner to community causes is also part of our DNA.
Born in the pandemic and Delivering Joy campaign this winter was our biggest ever, with over 125,000 gifts donated by our customers to local good causes through our store teams. Double the number of the previous year, the campaign grew again, grew virally and was picked up on news channels across the country. Moving on to our retail system, and we'll start with stores. Our stores continue to underpin our total retail system, amplifying our digital channels and being a key part of our marketing ecosystem, combining the benefits of physical shopping with the convenience of a digital offering. At the start of this year, we announced that we'd increase the rate of new store openings, broadening the range of sizes and locations from which we continue to test and learn.
We're on track with these plans, opening four stores in the half, as Karen mentioned, including both super stores and smaller formats, and across a range of location types, from a large shopping center to suburban schemes, to our more typical out-of-town sites. We're really pleased with the performance to date and continue to see our new stores achieve paybacks very quickly, on average, in less than three years. We'll continue to carry on testing and learning from our different store types, and a good example of this is the progress of two contrasting stores in the right-hand side of the page, which opened at the end of 2022. Weymouth is a 30,000 sq ft out-of-town superstore, creating effectively a new catchment for us, with drive times to existing stores over 40 minutes from Weymouth.
Feltham is half the size, and you could call this store an infill, as it's fairly close to existing Dunelm stores in West London. But with over 400,000 adults in a 20 minute catchment and a large number of urban customers not owning a car, it significantly increases our reach and convenience for consumers in this part of London. These two very different stores will achieve both very attractive paybacks, and as well as achieving good sales densities in the store itself, they're also growing our online sales. In Feltham, we've seen particularly high proportions of click and collect sales, while Weymouth has triggered a material increase in the online home delivery sales in its catchment.
As well as new stores, we continue to innovate in format and design, the learnings from which flow into our refit programs, both into the major refits we do from time to time with our older stores and into the smaller changes we roll back into many of our stores, if not most of them, such as new displays for our Dorma bedding, and we're testing at the moment, cook and dine formats in several new stores at the moment, which we'll roll back. So turning to our digital channels, you may recall that we've been breaking up our site into smaller, more manageable pieces of code, so-called micro front-ends. In November, we introduced this to our product details pages. These are our highest traffic pages, and we've seen a material increase in their speed and performance.
The table on the left shows the Google ranking for pages classified as having a good customer experience, which is a multifactor assessment of page speed and stability. Dunelm.com's moved up four places in the ranking from being, quite frankly, a site that was too slow to being in the pack with the biggest and the very best pure plays and multi-channel retailers. The improvement is material. We estimated that over 15 days of our winter sale, our customers saved 40,000 hours cumulatively on our website. A faster site improves our SEO rankings, organic traffic, and conversion. On the right-hand side, improved site architecture allows our engineers to work on development and optimization in smaller teams with more domain knowledge, and to test and release more efficiently.
A change we made just a few weeks ago, shown on the right, has improved the presentation of delivery options for our customers in checkout and checking out their local store availability more easily and intuitively. This small change is still meaningful. This one's worth an incremental 1% of digital channel sales. And finally, the third area, moving on to our marketing ecosystem. This picture is from our brand campaign, which is a long-term investment in building brand awareness and consideration across our multiple product categories. But it's also a short-term investment because we tested the in-year sales incrementality the previous autumn. When we run the campaign again this spring with Creative, which we're currently shooting, we'll repeat the incrementality test by holding out in one region. Our marketing ecosystem spans many different channels, which reinforce each other in terms of effectiveness and efficiency.
Let me bring this to life with some examples of what we're doing. On personalization, we're building with a goal to deliver content that feels specific and relevant to our customers based on their interactions with us. We've made some good initial steps and have good foundational capabilities in terms of data and systems, and in terms of people. We continue to test and learn in areas like complimentary product recommendations on the site or the best incentive to offer those customers who we assess as having a low propensity to repurchase. We'll shortly start to personalize our email newsletter distribution, for example, not sending our Fiver Friday emails, which feature products for less than GBP 5, to those customers who are less attracted to lower priced products, instead sending them alternative content. Performance marketing continues to be an area of optimization in paid search.
New campaigns and landing pages are improving our returns and making multiple marginal gains. In social media marketing, we're less developed, so we're incrementality testing on Meta and Pinterest platforms to confirm the scale of new opportunities. And meanwhile, we remain focused on generating free traffic and growing our SEO rankings. Locally, our store-run Facebook groups are also thriving, and every store works hard to build followership. In Cwmbran, when we opened that store recently, we had 5,000 followers on day one of opening. The stores choose local charity partners to help them. They'll create content based on what they want to promote in their store, and they're now tapping into local influencers as well as national ones, letting local influencers film in their shops, to make videos for their community.
And sometimes we'll help them with centrally managed special events to give them a boost and have some fun. This picture is from a broadcast we did last week on ITV's This Morning, which got us some good free coverage across our Facebook groups. So with a spring in our step, we've continued to perform strongly in the first half, outperforming a challenging market and demonstrating operational grip. The breadth of growth, both across our product categories and across different consumer groups, is the result of many disciplined actions and decisions to raise the bar on our customer offer and our operations, funded from the margins and the cash that our business generates so well. We'll carry on focusing on making good long-term decisions, offering more value and choice, extending our operating model and our marketing, and building the Home of Homes.
We'll continue to navigate and adapt to continued economic uncertainty. So far in the second half, we're pleased with trading, and we expect to deliver full-year PBT in line with market expectations. Thank you very much for listening.