Welcome in person, welcome online guests. Great to see so many people here. Thank you for coming. Good morning. It's our prelims presentation covering our last financial year. My name is Nick Wilkinson, and I'm delighted to say that I'm joined this morning by Karen Witts, and that we're in person and live from the offices of Peel Hunt in London.
I trust that in this period of national mourning, you are safe and well, and you feel connected with us and with our continuing story. Thank you for your interest, and let's get started. Here's our running order for this morning. We'll keep things nice and simple. I'll summarize our record results, and I'll talk about the current challenging environment and why, despite it, we are feeling confident.
I'll then hand over to Karen, who will take you through the full year financials and share her perspectives coming in with fresh eyes and all of her prior experience. I'll be back to talk about our plans and our update and our product and customer data and explain how we're growing over the longer term, as well as give you a flavor of what we're doing to improve our customer proposition and our operational grip in the current environment.
With the days drawing in, with our customers mindful of how to stay warm and be savvy shoppers, snuggle up and we'll get started. FY22, a record year, strong sales growth, good gross margins, and good operational leverage meant profit before tax up by about a third.
Free cash flow in the year was just over GBP 150 million, and we've announced a final dividend today of GBP 0.26 to bring the ordinary to 40p in the year. That's up 14%, and obviously that's on top of the special dividends that were paid during the course of the year.
Market share continues on its Long-term growth runway in both homewares and furniture, and the Dunelm brand continues to grow and broaden its appeal, with active customers up by 8.5% in the year, actually an acceleration during the second half when prior year comparables included store closures in the third national lockdown.
That's why we show here the year-on-3-year sales growth up just over 40%, which removes the noise from all of those Short-Term store closures and reopening effects.
While the year was a year when our shops were open throughout, it was not plain sailing. Significant global headwinds in terms of supply, especially in the first 3 quarters, and the impact of inflation, which has just made things more expensive for businesses and consumers alike.
Navigating all of this while delivering record results is a testament to the quality of relationships we work tirelessly to have with all of our stakeholders. We're committed to make decisions which are balanced and reflect the interests of everyone. I'll not run through all of this, and I'll talk later on about customers and communities and our work on sustainability, but a few things I would like to say here.
Our values have never been more firmly established, and our board never more focused on ensuring that they are reflected in the quality of decisions that we make for the long term. That's illustrated by some decisions we've made more recently with regard to our colleagues. As the year progressed, we've doubled down on filling as many new roles as possible with homegrown talent.
Career progression increases pay to colleagues as they face cost of living pressures. We're focusing on training and development like we've never done before. Colleague retention and engagement also drives productivity, so we've been thoughtful about pay reviews and have implemented higher increases for lower paid colleagues. For example, in our support centers, where roles are categorized into four broad tiers, the lowest paid tier received a bigger increase, 7%, similar to that received by store colleagues.
With our suppliers, we've worked together through supply chain challenges, worked alongside them to mitigate and manage cost price increases, and traveled to meet them overseas as soon as we've been allowed. We've kept the cash flowing in full and on time, and we've learned a lot from each other, sharing sourcing Know-How and insights, and their businesses have grown with ours. We can now look back post-lockdowns and say that we're a bigger and a stronger business.
In March 2020, we'd only recently introduced our new digital platform, and Click & Collect was barely 6 months old. Since then, we've continued to digitize the business at pace, foundational capabilities being built and improvements to customer and colleague experience being continuously released. Three years ago, I said we wanted to catch up online without losing our strength in stores. Post-pandemic, the stores are feeling really strong.
They've had a brilliant year, and our new digital capabilities are being applied as much to our legacy strengths in stores and product development as they are to our online content and channels. Job done, we're just getting started. Post-pandemic, we're actually more ambitious about our brand reaching more customers, more ambitious about being a good company, and more ambitious about profitable growth.
We'll continue to invest during the current economic downturn judiciously because the returns we're getting make us confident to do so. Of course, in the current environment, confidence is not a word to use lightly. The environment is as challenging as we have seen. We do not assume that inflation rates will abate in the short term, and we know our customers are fearful about making ends meet. Our eyes are wide open to the challenges and of what we need to do.
Firstly, we have to offer outstanding value to our customers. We are a value retailer. It is what we do. We're embracing the work required to do this because it's important for our customers and because, quite frankly, we enjoy it. I'll say much more about that later on in terms of what we're seeing from customers more recently. Secondly, we're clear on what we need to do in terms of relationships.
Basically, be hyper close and alongside our customers, colleagues and suppliers, seeking to learn from them and to help each other. We're also focused on staying adaptable because the future is unpredictable. Keep listening and learning is one of our business values and the behavior that our leaders role model, we recruit for, and we promote throughout the organization. Now many of these requirements play to our strengths as a business.
That is why despite the level of challenge out there, we are confident and view the next couple of years as an opportunity to get stronger still. I'll be back to talk about our plans shortly, but I'm delighted now to hand over to Karen to present our financial results and to share her insights.
Thanks, Nick. Good morning, everyone. It's great to see those of you who are in the room today, and thanks also to those of you who are joining virtually. As Nick has said, we're both very pleased to be presenting a strong set of results delivered in a complicated environment. This year, I can take no credit for the financial performance, but I'm nevertheless very happy to be presenting it to you today.
In my 3 months already as part of the Dunelm family, I've been really impressed by the relentless attention to operational detail, what we call operational grip, combined with an agility that allows us to adapt quickly to changing environments, which is really important just now. We manage this Short-Term focus with a genuine willingness to invest thoughtfully for the long term.
The result of this is a robustly underpinned business model with a strong brand, distinctive and relevant product offer, high-quality relationships with committed suppliers, and a total retail system which combines the advantages of digital and local shopping, all crucially supported by a reliably strong balance sheet. I've joined a confident but definitely not complacent team, as I hope you'll hear today.
Let's start with the financial summary, and I would like to remind you that we had the quirk of a 53rd week this year, something that only happens every 5 years or so. Consistent with our Q4 trading update, I'll present the P&L detail on a 52-week basis. The 52-week performance will be our comparator as we present FY23. However, you will see a memo of the statutory 53-week position and balance sheet and cash flow metrics will be on a 53-week basis.
Our business was fully open throughout FY22, and we delivered strong Top-Line growth of 16.2% at a gross margin of 51.2% for the full year. The strong sales growth helped us benefit from operational leverage in the year, and we also achieved efficiency and effectiveness improvements from our investment in capacity and capability.
We delivered profit before tax of GBP 209 million, up 32.4% compared to the same period last year. Our strong profit performance translated into GBP 153 million of free cash flow with a cash conversion rate of 70%. We ended the period with GBP 23.8 million of net debt and a net debt to EBITDA ratio of 0.1x, which is just below the bottom end of our target range.
EPS of 82.1 pence grew 30.5%, broadly in line with profit growth, with the difference being a higher effective tax rate in FY22 on a more normal level of R&D deductibles. In our interim update, we declared an ordinary dividend of 14 pence per share and a further special dividend of 37 pence per share.
Given the strong trading performance, our strong balance sheet and our confidence in the Long-term strength of the business, the board is proposing a final ordinary dividend of 26 pence. This makes our total ordinary dividend for the year 40 pence per share, a growth of 14% year on year. Including special dividends, we returned GBP 282 million to shareholders in the year. Looking at our sales.
Total sales of over GBP 1.5 billion were up 16.2% versus last year, and as Nick said, up more than 40% compared to the same period 3 years ago. For much of FY21, stores were closed, and we could only offer home delivery and Click & Collect services.
However, in FY22, we were fully open for business, and customers were once more able to enjoy the benefits of our total retail system, including friendly and convenient store shopping. As you would expect with all stores open, the share of digital sales reduced Year-On-Year by 11 percentage points. Nevertheless, digital sales still made up 35% of total sales in the year and were 2.5 times higher than they were before the pandemic.
Our growth overall reflected more customers shopping more frequently with active customer numbers up 8.5% year-on-year. We had a particularly strong 1/4 one in the year, which benefited from an extra summer sale being the one that was postponed from the end of the previous year, and also from a high level of pent-up consumer demand as stores reopened.
We were pleased with the growth we achieved across all of our product categories and our furniture categories grew 27% in areas such as dining and occasional chairs, living room furniture and home office, driven by improved availability and new ranges. Our seasonal ranges also performed very strongly and grew by over 30% with outdoor sofas and loungers, Christmas gifting and our Winter Warm ranges of throws and bedding and new oversized hoodies proving very popular with customers.
We continued to gain market share in homewares and furniture during the period. GlobalData UK analysis estimates our share of the homewares market at around 10%, some 140 basis points higher than last year. In a fragmented market with relatively low market share by category, we still have significant headroom to grow customer numbers, to grow the breadth of categories shopped by our customers, and to increase the frequency of shopping visits.
Moving on to gross margin. Our gross margin percentage for the year was 51.2%. Gross margins in FY21 and FY22 were higher than historic averages as we experienced lower customer participation in our sale events. However, customer participation in our June 2022 summer sale returned to more normal levels, resulting in a full year gross margin for FY22 40 basis points lower than FY21.
Given this return to more usual customer behavior, we expect a gross margin rate of around 50% in FY23, in line with our historic average. We managed significant input cost pressures over the year, largely coming from commodity prices from the start of the year and freight rates in the latter part of the year. We managed those pressures through a combination of self-help and working hard with our committed suppliers.
We have mitigated increased costs by creating sourcing benefits, by Re-Engineering products, and through freight contract renegotiations and freight cost optimization. From a customer perspective, we've managed the mix of products across price bands to ensure we manage our price structures and limit retail price increases as far as possible. Our stock levels are still higher than usual as we chose to invest in working capital to secure stock availability.
It's worth noting that inventory values also include the impact of higher freight and commodity costs. With continuing disruption in the supply chain, we will manage inventory levels, recognizing the external environment. For example, this year we've brought in our autumn and Christmas range earlier than we would normally.
We would nevertheless expect stock holdings to reduce in the second half of FY23. We're not a highly seasonal business. We carry continuity lines and we sell through well. I'm comfortable with the quality of the stock that we're holding. Operating costs of GBP 582 million grew less than the sales growth, and so the operating cost ratio of 37.5% was 1.6 percentage points lower than the prior year.
Operating costs for the full year increased by GBP 12 million due to the higher sales volume, and this included costs relating to our decision to hold higher levels of stock within our system to mitigate against the impact of supply chain volatility. The overall impact of the reintroduction of business rates and the repayment of JRS monies in FY22 increased operating costs by GBP 10 million in the year.
We're obviously experiencing unusually high levels of inflation across our cost base and inflationary pressures pushed costs up by GBP 17 million in the year. Pay increases accounted for the majority of the inflation. While energy costs also increased, these accounted for a relatively small proportion of our total operating cost base.
Despite having to manage the impact of upward pressures, we once again increased our investment in the business for capability and capacity by GBP 20 million in order to support growth. We focused on increasing supply chain capacity, including the new E-Commerce and furniture fulfillment sites, which are improving lead times for customers. We also continued our investments in digital and technology teams capability, particularly in our digital engineering crews and in product development.
As you can see from Dunelm's absolute growth since FY19, sorry, and from our continued market share gains, particularly in digital channels, these investments are already contributing to the development of our proposition and are improving our customer experience. Our numbers include the impact of efforts we're making on efficiency, on leveraging the benefits of investments that we've made and on generally making every pound count.
It is important to get the balance of cost management and investment right and we're very focused on this as we work through continued upward cost pressure in FY23. Just finishing off on our review of the profit and loss performance.
Financial income and expenses of GBP 4.8 million were GBP 3.8 million lower than the prior year, mainly due to the movement in foreign exchange gains and losses on dollar-denominated bank balances. The effective tax rate of 19.5% was slightly ahead of the headline rate due to our normal level of nondeductible items. Diluted earnings per share of 82.1 pence grew strongly by nearly 30.5%, reflecting the business performance. We're a highly cash generative business with a strong balance sheet.
In the year, we converted more than 70% of our operating profit to free cash flow. Cash from operations reflected a year when all of our channels were fully open and performing well. The working capital outflow of GBP 14.8 million was largely due to our decision to keep inventory levels strong.
Capital expenditure of GBP 42 million included GBP 24 million of core business spend relating to 2 new supply chain warehouse fit outs, 3 new store openings in Beverley, Leeds and Basildon, and our continuing program of store refits and improvements, including decarbonization activity such as the removal of gas boilers.
We also made a small acquisition to purchase the trade and assets of Sunflex, a blind fitting supplier, and GBP 18 million of the CapEx relates to this. The cash dividends of GBP 828 million include GBP 207 million relating to the special dividends paid in the year. After the uncertainties of the pandemic, we're now largely in line with our stated capital allocation policies.
We finished the year with a net debt to EBITDA ratio of 0.1 times, slightly below the bottom end of our target range. Today, the board is recommending a final ordinary dividend of GBP 0.26 per share. This brings the total ordinary dividend for the year to GBP 0.40, 14% higher than in the prior year and covered 2.1 times by earnings.
As I noted previously, in total, we returned GBP 282 million to shareholders during the year. We believe in a Long-term progressive dividend, and we expect to remain highly cash generative in FY 23. In terms of the outlook, I'd reiterate some of the points that Nick made. It's clear that we continue to operate in an uncertain and changing macro environment.
The strength of our business model means that we're resilient in the face of the pressures this brings, but we're not immune. We're working hard to manage inflationary pressures, remaining very much alive to the cost of living challenges faced by our employees and our customers.
Consumer behavior will be difficult to predict, but in a world where savvy customers will be very thoughtful about where they spend their money, we believe that they will continue to see the compelling choice and value from us at Dunelm.
Sales for 1/4 one will be below the same period last year. As you know, 1/4 one was particularly strong last year due to the timing of our summer sale and the recent reopenings of our stores and associated pent-up demand.
As I said earlier, we believe that in FY23, we will move back to our Long-term historic average gross margin of around 50%. We will manage our costs very tightly while continuing to invest in capability and for growth, and we will optimize these investments to reduce their Short-Term impact on costs.
We expect CapEx for the year to be in the region of GBP 20 million-GBP 30 million. This will be predominantly related to new stores and refits, where we get an attractive payback on our investment. As supply chain pressures ease and we reduce inventory to more normal levels, we would expect a small working capital inflow.
We're guiding to an effective tax rate 50-80 points above the headline range of corporation tax. 50-80 basis points above the headline rate of corporation tax. Thank you for your attention. I'll now hand back to Nick for more operational and strategic color on the business.
Great. Well, thanks very much, Karen. To give you a bit of flavor of what we're doing, just to recap, nothing particularly new here, our plan is to become our customers' first choice for home. By that we mean more customers shopping for their home with us, and those customers shopping more frequently across more product categories.
Our purpose remains to help our customers create the joy of truly feeling at home now and for generations to come. In the current environment, doing that brilliantly is our focus. To update you on our plans, I'll refer to 2 areas of focus, our investment in digitizing our business and our day in, day out work strengthening our customer offer. In a moment, I'll go through the four proposition areas on the right-hand side in turn. First, a word about digitizing the business.
In February, at the half year, we revealed that the majority of our sales growth, 85%, over the last 3, 5 and 10 years came from market share gains. We described the compounding effect of digitizing the business, by which we mean growing our product offer beyond the physical limits of a store space, growing our brand reach through digital content and channels, and growing our retail system, and especially by combining the advantages of physical stores with the ease and convenience of online sales.
We'll continue to make these investments prudently. We've pivoted more of our digital teams into areas like customer acquisition optimization and fulfillment efficiency, but we're also carrying on investing in foundational capabilities like product and customer data. In terms of digitizing our product offer, I thought you'd be interested in seeing which areas contributed to our growth last year.
In the financial year, our sales growth was Broad-Based across all categories. Let me just explain the chart. We operate in dozens of different home categories and subcategories, and in this picture we've mapped those against 5 broad shopping missions, which is a categorization we use in our consumer research.
I've listed some examples of which products sit in each of these groups. This is a good place to remind everyone that our average item value is only GBP 13. That's stores and online combined and all categories combined. That increased by a small amount in the year, low single digits, combining mix effects and a number of retail price increases. You may wish to compare this to the numbers at the 5-year numbers that we shared last time. If you do, you'll see the pattern is identical.
Broad-based growth growing everywhere, and not just in those product groups where our market shares are lower, but strong growth also in areas where our market share is higher. Indeed, a feature of the year was how strongly our stores channel performed, which flowed into higher rates of growth in product groups which have a relatively high proportion of store sales, like bedroom and bathroom textiles.
By digitizing the business across product, brand, and channels, we're attracting more customers and serving them in more categories. On this slide, you can see the brand and channel metrics that show this happening. We've added 8.5% more active customers in the last 12 months, and the growth is very Broad-Based, and this continued to be the case in the second half of the year. For example, we grew in all regions of the UK.
40% of additional customers were in London and the South. We grew across all income groups, faster than average in both the most and least affluent groups. We grew across all age groups. 16- to 24-Year-Olds growing at the same rate as the total brand, and a higher growth rate amongst over 65s reflecting the reopening of stores post-lockdowns.
The strong performance of the stores led to average frequency increasing by just over 10% in the year, with many of the customers who shopped with us for the first time online during the pandemic now shopping in stores and in both channels.
Once customers shop both channels and in multiple categories, we see a significant increase in frequency and spend, 5-7 times as much as a single category, single channel customer. This is the compounding effect in action.
A customer who shops multiple categories is more likely to shop both channels. One final insight from these numbers, which we view as a healthy indicator, we're increasing customer numbers overall, 8.5%, and at the same time increasing by a slightly faster rate the number of customers that we classify as our most valuable segment, growing by 16%.
That edges up slightly the concentration of sales, but it's still an 80/20 ratio. 41% of our sales coming from 11% of our customers. Now, all of this is the outcome of the hard work we do digitizing the business and our deliberate plans to broaden the appeal of our offer. Let's turn to the offer now, and I'll give you a flavor of what we're doing across those four areas. Starting with choice and value, which is our heartland.
The first picture updates you on a story I told at length at the interims, describing the constant detailed work we do to mitigate cost price increases where possible and to offer outstanding choice and value. The summary on fitted sheets is that we introduced a new lower price point product at our good tier, GBP 6 for a double, switched our better tier into 100% cotton sheets with more color choices, a bigger buy and therefore cost efficiencies.
We increased the retail price of our Dorma fitted sheets in the best tier because we are confident they still offered exceptional value for money. Across the 15 different tiers in our range, 5 went up in price by about 10%, 9 were unchanged, and the entry price good actually went down in price. What happened?
In the 6 months after those changes, we saw strong revenue growth across all 3 tiers. More volume went into the good tier. More volume also went into the wider choice of 100% cotton options in the better tier. The highest rate of revenue growth with volume and price increases was actually in the best tier where we had increased the prices.
What we're seeing from our customers is the interest in product quality and longevity is very high. Under pressures, customers want to be savvy, and they're seeking value at all price points. We now talk about choice in the same breath as value. Alongside the regular ranges of good, better, best are our seasonal campaigns, and this picture is from our Winter Warm collection recently launched.
In the final picture, alongside our regular ranges and our seasonal campaigns, we have a rolling program of special buys and impulse lines which we display in store walkways and in till areas and in their digital equivalents. We keep listening to customers and keep innovating, embedding more color options coming this season into the good tier, more special buys, particularly in higher quality tiers, and limitless scope for innovation and creativity in product design and sourcing.
This year, we decided that we are ready, we've learned enough to elevate sustainability into our overall customer offer. We have work streams in place to achieve net zero across Scope 1, 2 and 3, and we're working hard to build capabilities and knowledge, especially in circular product design.
We offer The Edited Life brand to appeal to our more environmentally focused customers, and our Natural History Museum collaboration is designed with product longevity in mind. We are now talking to all customers about how to make more environmentally aware choices. Our recently launched Conscious Choice collection consists of about 1,000 products for bathroom, bedroom and kitchens, and is a dynamic filter on our website.
Products are carefully selected against published criteria relating to the materials we use to make them and their anticipated length of life. Another very visible program is our Textile Takeback scheme, which allows customers to hand over unwanted textile items into their nearest store, with items being rehomed, reused, recycled, and turned into brand new products through a couple of interesting pilot schemes. The scheme is strong and gaining momentum all the time with customers nationwide.
Not only are these initiatives part of being a responsible business, they are also a source of competitive advantage. We like people coming into our stores with take back product, we like customers feeling they're doing the right thing, and we like the word-of-mouth recommendations from customers who use this service.
Indeed, we think friendly local services amplified through our community channels, which each store operates, and we've now reached 1 million local Facebook followers this year, is a new way of thinking about cost-effective local marketing for customer acquisition and retention.
These pictures show a variety of examples of products and services meeting digital content. Our highest opening rate of any recent email outside of sale, a community event in one of our cafes, and an influencer who shows us just how savvy our shoppers are in mixing products together to create a GBP 36 side table.
Now, I will show you this video. I warn you, it's pretty short, so you need to be all eyes on the screen on the right-hand side. Hopefully, it's gonna work online too.
1, 2, 3.
Savvy. We built this business by word of mouth. This is just the digitized version of that. All of this is prior to the leap forward we'll make by adding store data into our customer data platform once our new payment platform, Adyen, is live in stores at the end of this calendar year. It's now live online and soon to come in stores.
That would allow the content we've already got to be distributed in much more personalized ways and with many more marketing programs to be run at scale efficiently. I'm gonna end with a store story. We opened a new store in Rugby 2 weeks ago. There's nothing new about that. We open, as Karen described, 3-5 new stores a year, and a couple will be resites like Rugby.
Rugby was at one of our very first super stores, opened almost 30 years ago. We carry on with our disciplined rollout of stores towards our 200 target. If you want an indication of how stores are alive and well, then Rugby beat our 10-Year standing record for day one sales in a new store. Now, it's a big store. It's a former Out-Of-Town Debenhams on an Out-Of-Town retail park, but it's also a big step up for customers in this catchment.
For starters, the store has a much larger furniture department that offers a chance to see and try out a meaningful proportion of our quick delivery and made-to-order sofas and chairs, beds, and a large dining and kitchen furniture assortment.
The hosts who work here can offer a full sample service, and they have the technology and the skills to do video consultations with customers, whether booked in advance or live. We'll promote the awareness of these showrooms regionally and see how our customers use them. This and our new style cafe and the community group around this store and the response of our customers give us no doubt that our stores are alive and an integral part of our retail system.
Are we digital first? Are we stores first? When it comes to helping customers get what they want in an easy and convenient way, we don't think in those terms. Customers want both, we are both. Let me just wrap up with a few words on summary and outlook. It's time to draw things to a conclusion.
A record year, no time to pause 'cause we're now navigating a challenging environment post-pandemic. Yes, we're bigger, broader, and stronger, but we're still the same as we've always been, resilient, specialist, close to our stakeholders, keen to learn and adapt. In the first 10 weeks of the financial year, we've seen trading remain robust, taking into account the high comparables of last year.
We're happy with what we're seeing and confident in our ability to manage input inflation and deliver gross margins of about 50% while giving outstanding value to our customers. While the consumer outlook is unusually uncertain, we are on track to deliver FY23 results in line with your expectations. We're energized and focused on our customers and operating with grit and discipline. I'm very fortunate to be part of an outstanding team.
Thank you to all of my colleagues, and thank you for your attention. That draws the formal presentations to an end.