J Sainsbury plc

30 April 2020

 

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF REGULATION (EU) NO 596/2014 (MAR)

 

Update on the impact of COVID-19 and Preliminary Results for the 52 weeks to 7 March 2020

 

Update on the impact of COVID-19

The COVID-19 pandemic has had a significant impact on our business since early March. We have had three clear priorities throughout: keeping our customers and colleagues safe; helping to feed the nation and supporting our communities and the most vulnerable in society. Our colleagues have played an incredible role and have really pulled together to serve our customers. In particular, our store colleagues, our distribution centre colleagues, our drivers and customer Careline teams are working on the frontline, ensuring that customers have good access to food and other essential items. Our central teams have supported them, working closely with suppliers to increase orders and to move products quickly through the supply chain and into stores. Where they are able, our central teams are supporting colleagues by working in our stores. We are incredibly proud of the role our colleagues have played and their unwavering dedication and effort in serving our customers and supporting our local communities during this unprecedented time.

At this very early point in our financial year it is impossible to predict the full nature, extent and duration of the financial impact of COVID-19 over the course of the year and there is a wide range of potential profit outcomes, both short and medium term.

We have modelled a broad range of scenarios. Our base case assumes that lockdown restrictions will have eased by the end of our first quarter (end June), but that the business will continue to be disrupted until the end of the first half (mid-September). We also assume that consumer demand, particularly for general merchandise and clothing, will be impacted by weaker economic conditions thereafter. Sales assumptions are provided later in this statement. Under this scenario we would expect Group underlying profit before tax for the year to March 2021 to be broadly unchanged year on year. This includes a profit impact of over £500 million due to significant costs associated with protecting customers and colleagues, weaker fuel, general merchandise and clothing sales and lower financial services profitability, broadly offset by stronger grocery sales and approximately £450 million business rates relief. We have decided not to take up the government's offer of furlough payments or delaying VAT payment.

There are many sensitivities that sit behind these assumptions, above and beyond the duration of different stages of lockdown and there is not necessarily a linear relationship between the duration of COVID-19 impact, costs incurred and sales impact. Hence we cannot be more certain of this base case scenario than any other. It is simply our best estimate on each of the assumptions at this stage. Sales, profit and cash flow could be additionally impacted in the event of further periods of lockdown; the cost of protecting colleagues could exceed current estimates; colleague absence and/or measures to protect colleagues and/or customers could reach levels that make it necessary to restrict the number of sites that we are able to keep open and/or services we are able to offer. Consumer spending across grocery, general merchandise and clothing and the profitability of our financial services business could additionally be more heavily impacted by the longer-term impact of COVID-19 on the UK economy than we have assumed.

We have used more negative scenarios in stress-testing for financial viability purposes. Even with additional stress, we are confident that we have sufficient cash and committed funding in place to meet our obligations for the foreseeable future. 

However, given the wide range of potential profit and cash flow outcomes, the Board believes it is prudent to defer any dividend payment decisions until later in the financial year, when there will be improved visibility on the potential impact of COVID-19 on the business.

 

Mike Coupe, Chief Executive Officer, said:

"The last few weeks have been an extraordinary time for our business. First and foremost, I want to say thank you to all of our colleagues. They have shown outstanding commitment and resilience over the past few weeks and I am in awe of their adaptability and the efforts they have made to continue to serve our customers. Across every part of the business, colleagues have played their part as we have done everything possible to feed the nation and to prioritise those who are least able to access food and other essential services. This is an unsettling time for everyone, but I am incredibly proud of the way the business has responded, continually adapting and responding to customer feedback. We will continue to work hard to provide food and other essential products to households across the UK and Ireland who are adapting to a new way of living."

 

Keeping our customers and colleagues safe

Our highest priority throughout this period has been to keep our customers and colleagues safe. We have made changes to all aspects of our business to achieve this, which has added material costs. We have focused on feeding the nation and on ensuring that the most vulnerable in our communities can access food and other essential items. We have made significant donations and are working closely with Fareshare, Comic Relief and other charities and organisations to help people who have no other form of support. This includes:

·    Providing full basic pay for up to 12 weeks for extremely vulnerable and vulnerable colleagues and those living with extremely vulnerable members of their household. Colleagues who need to self-isolate will receive full pay for up to 14 days 

·    Recruiting thousands of temporary colleagues to work in stores, as drivers and in distribution centres

·    Giving a 10 per cent thank you payment to 157,000 colleagues and front line managers on hours worked from 8 March to 5 April

·    Prioritising all online grocery slots for elderly, disabled and vulnerable people, significantly increasing our home delivery and click and collect operations. We have now increased the total number of slots available weekly by nearly 50 per cent and we have an ambition to deliver 600,000 slots per week

·    Restricting the number of products customers can buy in a single shop so that essential items are available to a larger number of customers

·    Limiting the number of customers allowed into shops at any one time

·    Significantly increasing security and cleaning at all sites and introducing strict social distancing and hygiene measures

·    Limiting product ranges to prioritise availability of essential items

·    Closing fresh food counters and cafes in our supermarkets so that colleagues can focus on keeping essential food items on shelves

·    Closing all 573 standalone Argos stores from 24 March, as per Government guidance. Argos is currently an online-only retailer and we are advising customers to order home delivery where possible or to collect items from Sainsbury's stores when shopping for food and other essential items

·    Prioritising rapid changes to our operations over longer-term cost saving projects

 

Feeding the Nation - Sales update

Sales in recent weeks have reflected:

·    Strong grocery demand since the start of March, with particularly high demand over week 52 of our 2019/20 financial year and weeks 1 to 2 of our current financial year and some normalisation over recent weeks

·    Higher sales at Argos in the early days of lockdown, as customers equipped themselves for home working and spending more time in their homes. Growth has moderated in recent weeks following this early lockdown preparation activity and, since 24 March, has been impacted by the closure of all Argos standalone stores and reduced sales of items such as washing machines and furniture, due to colleagues no longer being able to enter customers' homes

·    Materially reduced clothing and general merchandise sales in Sainsbury's stores, reflecting different customer priorities and reduced stocks of clothing in stores as we have prioritised grocery deliveries

·    Materially reduced fuel sales 

 

Current Trading

 

	Q4 2019/20	Q1 2020/21 to date
Total sales growth %	9 wks to March 7th	7 weeks to April 25th
Grocery	2.0%	12%
Total General Merchandise	(1.3%)	3%
GM (Argos)	0.4%	9%
GM (Sainsbury's supermarkets)	(8.1%)	(22%)
Clothing	2.5%	(53%)
Total Retail ex fuel	1.3%	8%
Fuel	4.9%	(52%)

 

Total sales growth %
Financial year	2019/20		2020/21
Week no.	51	52	1	2	3	4	5	6	7
Week to	Feb 29th	March 7th	March 14th	March 21st	March 28th*	April 4th**	April 11th	April 18th***	April 25th****
Grocery	3%	12%	29%	48%	(4%)	5%	13%	(15%)	12%
Total General Merchandise	(4%)	(4%)	5%	53%	(10%)	(13%)	(1%)	(16%)	10%
GM (Argos)	(3%)	(2%)	9%	63%	(1%)	(10%)	3%	(10%)	14%
GM (Sainsbury's supermarkets)	(10%)	(13%)	(12%)	10%	(47%)	(28%)	(18%)	(41%)	(9%)
Clothing	12%	(9%)	(16%)	(44%)	(72%)	(67%)	(41%)	(71%)	(39%)
Total Retail ex fuel	2%	8%	23%	47%	(8%)	(2%)	8%	(18%)	9%
Fuel	0%	(0%)	(0%)	(3%)	(59%)	(74%)	(76%)	(78%)	(72%)

 

Sales trends in recent weeks, particularly grocery sales in the last three weeks, have additionally reflected seasonal variations:

*Includes Mother's Day in 2020/21  **Includes Mother's Day in 2019/20  ***Includes Easter Sunday (supermarkets closed) in 2020/21 ****Includes Easter Sunday (supermarkets closed) in 2019/20

 

Executive remuneration

Market conditions over the last financial year have been challenging and, despite the progress made by the business against its strategic priorities, overall remuneration levels for the Executive Directors are approximately 13 per cent lower for 2019/20 than the previous year.  

When determining executive pay outcomes for the year, the Committee has discretion to apply judgement and to adjust incentive payouts and award levels. The Remuneration Committee has decided that no cash annual bonuses will be paid to Executive Directors and the wider senior executive population in respect of 2019/20. Once the Board is in a position to make a decision regarding dividend payments, the Committee will consider the impact on shareholders and if there should be any implications on executive pay for the year 2020/21.

 

Retail Outlook - sales

We do not know how long COVID-19 will continue to directly impact our business and consumer behaviour or the impact that a changed economy will have on consumers over the remainder of the year. We have modelled a number of different scenarios. Our base case assumes that lockdown restrictions will have eased gradually by the end of the first quarter of our financial year (end June), but that the business continues to be disrupted until the end of the first half (mid-September). We additionally assume that consumer demand, particularly for general merchandise and clothing, will be impacted by weaker economic conditions thereafter. Key assumptions on sales include:

Grocery

·    High single digit percentage grocery sales growth through the lockdown period

·    Low single digit percentage sales growth over the remainder of H1, reflecting a greater number of meals being eaten inside the home rather than in schools, workplaces, cafes and restaurants.

·    A return to normal grocery market conditions in H2

 

General Merchandise

·    Low teens percentage sales declines at Argos whilst in lockdown, in line with more recent trends and reflecting the closure of 573 standalone Argos stores

·    Low teens percentage sales declines at Argos thereafter, reflecting anticipated subdued discretionary spending

·    Continued significant double digit percentage sales declines for General Merchandise in Sainsbury's stores during lockdown and continuing through the remainder of H1, moderating to mid-single digit percentage sales declines through the remainder of the year

 

Clothing

·    Significant continued sales declines while in lockdown, moderating through the remainder of the year towards low double digit percentage declines in H2

 

Fuel

·    Significant fuel volume declines in line with current trends until the end of lockdown, easing through Q2

·    A return to normal market conditions in H2

 

Retail outlook - costs

Operating expenses will be materially higher than budgeted, particularly in the areas of retail and logistics labour, absence and instore costs, where we assume disruption will continue for most of the first half of our financial year. In addition, we anticipate higher stock clearance in clothing and some key seasonal areas. Finally, many of our cost saving programmes will be delayed due to the disruption.

There are limited opportunities to mitigate these impacts. We have taken the decision not to take up the government's offer of furlough payments or delaying VAT payment. We are redeploying colleagues to different roles within the business wherever possible and colleagues in central roles are supporting in stores where they are able. There will be some offset from approximately £450 million of business rates relief on shops in England, Scotland and Northern Ireland.

 

Financial Services outlook

Financial Services profits for the year to March 2021 will be impacted by actions we have taken to date and the changed macroeconomic outlook.

·    Our base case outlook includes an increase in bad debt provisions, reflecting an assumed increase in unemployment

·    The business will incur additional costs and reduced revenue as a result of the actions necessary to protect colleagues and customers during the pandemic. There will be delays to restructuring activity

·    Commission income will be significantly impacted for both Travel Money and ATMs. Travel money bureaux are currently closed and ATM usage is significantly below normal levels. We anticipate a slow recovery in both post lockdown

 

As a consequence we expect the financial services business to make a loss in the financial year to February 2021.

Whilst this represents a very challenging trading environment, our financial services business is well capitalised. We have capital resources of around £1 billion, over £100 million of surplus capital at year end, an additional £58 million benefit from the Bank of England's reduction in the counter cyclical buffer requirement and £145 million of additional stress buffers. Together these provide more than £300 million of loss absorption. The financial services business additionally has significant excess liquidity of around £200 million. We are confident that the financial services business will not require capital injections from the Group. 

 

Liquidity

To date, the impact of higher sales has been positive from a working capital perspective. However, a number of factors have negatively impacted working capital in the short term, including:

·    Accelerated supplier payments. We are working collaboratively with suppliers to support them with vital cash flow where needed, including immediate payment to at least 1,500 smaller suppliers

·    Supporting our tenants and concession partners - through offering a one month rent free period and accepting monthly payments instead of quarterly payments in advance

·    Reduced fuel volumes

·    Lower Argos, general merchandise and clothing sales

 

Having modelled a wide range of scenarios for financial resilience purposes, we are confident that we have sufficient cash and committed funding in place to meet our obligations for the foreseeable future.

 

 

 

 

Preliminary Results for the 52 weeks to 7 March 2020¹

Creating a leading multi brand, multi channel retailer

 

·    Underlying profit before tax² down two per cent to £586 million; profit before tax up 26 per cent to £255 million

·    Strong Free Cash Flow³ and non-lease net debt⁴ reduction of £343 million, in line with guidance

·    Grocery sales improved through the year⁵, following investment in the customer offer, resulting in outperformance of main peers

·    Customer service scores consistently improving, reflecting store investments and digital innovations

·    Limited impact of COVID-19 on these results due to year end timing

 

Strategic highlights

·    Improving grocery sales, outperforming our main supermarket peers, driven by investment in low prices, entry price point ranges and new and improved products. We were named the UK's cheapest supermarket for branded groceries in 2019 by Which? consumer magazine

·    Sainsbury's customer service scores consistently increasing as customers respond to improvements in 451 supermarkets and 362 convenience stores and rollout of technology including SmartShop

·    Groceries Online sales grew 7.6 per cent, Convenience grew 1.3 per cent and supermarket sales declined 0.1 per cent, impacted particularly by general merchandise sales declines

·    General Merchandise markets remain challenging, with weakness in toy and gaming categories. Clothing grew 1.2 per cent and performed well online, growing 47 per cent

·    We are making progress against our five year Financial Services strategy. We stopped underwriting new mortgages, are simplifying our product portfolio and reducing costs

·    We launched our ambitious plan to invest £1 billion over 20 years to become Net Zero for greenhouse gas emissions by 2040 across all our operations by 2040

·    Following Mike Coupe's retirement, Simon Roberts will become Chief Executive Officer on 1 June

 

Financial highlights

·    Underlying profit before tax² down two per cent to £586 million year on year. Underlying profit² was up eight per cent in the second half, following a 15 per cent decline in the first half due to phasing of cost savings, higher marketing costs and tough weather comparatives

·    Statutory profit before tax of £255 million, up 26 per cent from £202 million and statutory profit after tax of £152 million, down from £186 million, due to a higher tax charge

·    Strong cash generation with retail free cash flow³ of £611 million, up 34 per cent year on year

·    Retail underlying operating profit² down four per cent to £938 million

·    Financial Services underlying profits² up by 55 per cent to £48 million

·    Non-lease net debt⁴ reduced by £343 million, in line with guidance to reduce non-lease net debt by at least £300 million in 19/20

·    Underlying net finance costs² reduced by five per cent to £400 million

·    Underlying basic earnings per share² decreased 4.3 per cent to 19.8 pence per share

 

Dividend

Given a wide range of potential profit and cash flow outcomes, the Board believes it is prudent to defer any dividend payment decisions until later in the financial year, when there will be improved visibility on the potential impact of COVID-19 on the business.

¹ The Group has defined and outlined the purpose of its alternative performance measures, including the measures used within the financial highlights, on pages 61 to 65.

²  'Underlying profit before tax', 'underlying earnings per share', and 'underlying net finance costs' measures exclude items which by virtue of their size or nature may obscure understanding of the Group's underlying performance.

³ Net cash generated from retail operations, after perpetual security coupons and cash capital expenditure but before strategic capital expenditure, and including payments of lease obligations, cash flows from joint ventures and associates and Sainsbury's Bank capital injections.

⁴ Net debt includes the capital injections into Sainsbury's Bank, but excludes the net debt of Sainsbury's Bank and its subsidiaries. Non-lease net debt excludes lease liabilities following the adoption of IFRS 16.

⁵ Kantar Total Grocers Till Roll 52 weeks to 23 February 2020

 

	2019/20	2018/19	Variance
Business Performance
Group sales (inc. VAT)6	£32,394m	£32,412m	(0.1)%
Group like-for-like sales (inc. VAT, excl. fuel)			(0.6)%
Underlying profit before tax2	£586m	£601m	(2)%
Underlying basic earnings per share2	19.8p	20.7p	(4.3)%
Proposed final dividend	0	7.9p	-
Proposed full year dividend	3.3p	11.0p	(70)%
Net debt (including perpetual securities)4	£6,947m	£7,346m	£399m
Non-lease net debt4	£1,179m	£1,522m	£343m
Return on capital employed7	7.4%	7.4%	-

 

 

 

	2019/20	2018/19
Statutory Reporting
Group revenue (excl. VAT, inc. fuel)	£28,993m	£29,007m
Profit before tax	£255m	£202m
Profit after tax	£152m	£186m
Basic earnings per share	5.8p	7.6p

 

⁶Group sales represents total sales less acquisition fair value unwinds on Argos Financial Services. Like-for-like sales represents the year-on-year growth in sales including VAT, excluding fuel, excluding Financial Services, for stores that have been open for more than one year.

⁷ Calculated as return divided by average capital employed. See page 65 for further details.

 

 

Trading Statement data for the 52 weeks to 7 March 2020

 

Like-for-like sales growth6	2018/19		2019/20
	Q3	Q4	Q1	Q2	H1	Q3	Q4	H2	FY
Like-for-like sales (excl. fuel)	(1.1)%	(0.9)%	(1.6)%	(0.2)%	(1.0)%	(0.7)%	1.3%	0.0%	(0.6)%
Like-for-like sales (inc. fuel)	0.3%	(0.5)%	(1.0)%	(0.4)%	(0.7)%	(1.1)%	1.3%	(0.3)%	(0.5)%

 

 

 

 

 

 

Total sales growth	2018/19		2019/20
	Q3	Q4	Q1	Q2	H1	Q3	Q4	H2	FY
Grocery	0.4%	(0.6)%	(0.5)%	0.6%	(0.1)%	0.4%	2.0%	1.0%	0.4%
General Merchandise	(2.3)%	1.5%	(3.1)%	(2.0)%	(2.5)%	(3.9)%	(1.3)%	(3.2)%	(2.9)%
Clothing	(0.2)%	(1.6)%	(4.5)%	3.3%	(1.2)%	4.4%	2.5%	3.8%	1.2%
Total Retail (excl. fuel)	(0.4)%	(0.2)%	(1.2)%	0.1%	(0.6)%	(0.7)%	1.3%	0.0%	(0.4)%
Total Retail (inc. fuel)	0.8%	0.0%	(0.6)%	0.1%	(0.3)%	(0.9)%	1.9%	0.0%	(0.1)%

           

Notes

All sales figures contained in this trading statement are stated including VAT from 2019/20 and in accordance with IFRS 15

 

Notes

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. They appear in a number of places throughout this announcement and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. Unless otherwise required by applicable law, regulation or accounting standard, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

 

A webcast presentation will be available to view on our website at 8am. The webcast can be accessed at the following link: https://webcasts.j-sainsbury.co.uk/sainsbury153 

Following the release of the webcast, a Q&A conference call will be held at 9:30am. This will be available to listen to on our website at the following link: https://webcasts.j-sainsbury.co.uk/sainsbury151 

A recorded copy of the webcast and Q&A call, alongside slides and a transcript of the presentation will be available at www.about.sainsburys.co.uk/investors/results-reports-and-presentations following the event

Sainsbury's will issue its 2020/21 First Quarter Trading Statement at 07:00 (BST) on 1 July 2020. 

 

Ends

 

Tim Fallowfield, Company Secretary and Corporate Services Director, was responsible for the disclosure of this announcement for the purposes of MAR.

 

Enquiries

 

Investor Relations	Media
James Collins	Rebecca Reilly
+44 (0) 7801 813 074	+44 (0) 20 7695 7295

 

 

 

 

 

 

 

 

Our strategy

 

Our purpose is to help our customers live well for less. To do this we will focus on seven priorities which are designed to ensure we continue to give our customers what they want in a rapidly changing retail marketplace, while also driving value for our shareholders.

 

These priorities are: to be competitive on price; to offer distinctive products and categories; to provide personalised and seamless physical and digital experiences; to be fast, friendly and convenient; to drive efficiency to reinvest; to be a place where we all love to work and to be Net Zero in our own operations by 2040.

 

 

Be competitive on price

 

To help customers live well for less we are focused on offering them quality products at affordable prices.

Through the year our food and grocery sales have been on an improving trend and we are outperforming our main supermarket peers. This is driven by strategic investments in our customer offer, reducing our prices and ensuring customers always get great value.

In January we lowered the price of some of our most popular produce lines - including apples, mangos and avocados - to 60 pence and we have now achieved our target to launch 200 entry price point products across 15 owned brand ranges such as Daily's, Farmhouse and J. James. We have moved away from short term promotions in favour of offering customers great every day value with regular Price Lockdown events, featuring hundreds of high-volume food lines across meat, fish, poultry, dairy, grocery and household products. This year around 2,300 products have been reduced or held at lower prices. We hold these prices for at least eight weeks, giving customers confidence that they will always get a great deal on food at Sainsbury's. We were named the UK's cheapest supermarket in 2019 for branded groceries by the consumer magazine, Which?.

The general merchandise market remains challenging and this year's performance was impacted by weakness in the toy and gaming markets. We are focusing on offering customers everyday low prices and have made choices to reduce our promotional activity, including our 3 for 2 toy stunts.

 

Tu clothing performed well during the year, growing by 1.2 per cent and gaining share in a highly competitive market. Tu clothing online grew by 47 per cent as more people choose to order clothing online for collection or home delivery. Tu clothing online, through both Sainsbury's and Argos's websites, has been very successful and we have seen strong and profitable sales growth through this channel. Our strategic decision to reduce the number of promotions and change their timing has led to better markdown management.

 

 

Offer distinctive products and new categories

 

Because of our distinctive offer, customers visit our stores to buy new and interesting products they cannot find elsewhere. We can also serve more of our customers' needs by selling distinctive and exclusive ranges.

Taste the Difference accounts for over £1 billion of sales and we relaunched our range this year, introducing nearly 700 new, reformulated or repackaged products in the financial year. This year Taste the Difference volumes grew by 0.3 per cent. We outperform the market in meat alternative, plant-based food ranges, catering for the increasing number of people who choose to limit their meat consumption for health or lifestyle reasons. We launched our Plant Pioneers brand in October, adding 26 new products across fresh, frozen and ambient categories to our existing range of over 200 meat alternative lines. These include banana blossom, a popular alternative to white fish, Smokey Vacon Rashers and meat-free Southern Fried Bites.

 

 

By bringing distinctive and innovative brands to the market we give our customers better choice and our stores benefit from incremental sales as a result. Our in-house Future Brands team gives these distinctive brands the opportunity to showcase their products exclusively in our stores and online. Since June 2018, we have introduced over 1,700 lines across 146 Future Brand ranges including Wasabi ready meals, Beavertown beer and Jude's ice cream. Future Brands delivered £146 million in sales this year, an increase of 77 per cent year on year. We also entered into a three year exclusive partnership with Leon to sell its fast and healthy food to go in over 600 of our stores.

 

We are creating dedicated hubs and aisles in growing categories where we can gain market share. For example, we now have 134 Beauty Halls which feature 19 new branded ranges. These Beauty Halls have been well received by customers, driving sales and frequency of visits to our stores. We have opened 48 Wellness Hubs in our stores, offering over 1,000 health-focused SKUs, from specialist food and drink to supplements and vitamins. This financial year we also invested in the pet market with new ranges and 20 in-store Pet Hubs.

 

This year we have made further progress to bring our Sainsbury's and Argos ranges and buying and merchandising teams together which enables us to buy better and offer customers a more integrated product offer in our stores and online.

 

The iconic Habitat brand is available in five stand-alone stores, 11 stores in Sainsburys supermarkets and online through habitat.co.uk, which accounts for over 68 per cent of its sales. We launched Habitat's first ever spa fragrance collection, sold exclusively in Sainsbury's stores and online in time for Christmas gifting, as well as a range of Habitat branded floral products. We see opportunities to further grow the Habitat brand and we will integrate Habitat into our home and furniture business and increase the accessibility and appeal of the brand.

 

Our Tu branded clothing continues to grow and gain market share in a highly competitive market. We launched new ranges in our Tu premium collection and we invested in building the brand through our branded above line and digital advertising campaigns.

 

 

Personalised and seamless physical and digital

Financial Services and Nectar provide our customers with affordable ways to manage their finances and reward them for their loyalty. Our Nectar loyalty programme is the biggest in the UK with over 18 million members and over 4.5 million people have now downloaded the new app. The app enhances customer engagement by offering personalised offers and access to promotions and rewards. We have 2.1 million active Sainsbury's Bank customers and 2.2 million Argos Financial Services customers. Over 75 per cent of Sainsbury's Bank customers are Nectar card holders and, by combining Sainsbury's and Argos's connected services into one digital ecosystem, we can reward customers in a meaningful and personalised way.

This year we extended our Nectar programme to Argos customers, making it possible for them to earn their Nectar points across all Argos channels. We also launched Nectar360, the business-to-business arm of the loyalty programme that enables brands to understand, reach and engage more effectively with their customers by giving them access to leading data, insights, digital and media capability. Over 500 brands have signed up to date.

In September, we unveiled a five year strategy for Sainsbury's Bank and Argos Financial Services to become an agile, capital and cost efficient provider of simple, mobile-led financial services to loyal Sainsbury's and Argos customers and we have made good progress. We have a leaner structure, greater digital uptake and we have stopped underwriting new mortgages. We will provide an update in November on the impact of COVID-19 on the financial services five year targets we announced in September 2019.

 

 

Fast, friendly and convenient

 

Great service and availability and faster ways to pay mean customers can save time as well as money by shopping with us. We are consistently improving our customer service scores, driven by investment in more than 450 supermarkets and 362 convenience stores. We now have 306 Argos stores in Sainsbury's supermarkets. We further maximise our supermarket space by introducing carefully selected concession partners that give our customers a range of essential services, as well as a broader choice of fantastic quality products, including 61 Specsavers and over 123 Sushi Gourmet counters.

 

Our convenience strategy is to deliver a relevant, flexible offer tailored to local customer needs. Over 184 convenience stores have Argos Click & Collect and this year we introduced more innovative new convenience formats. These include neighbourhood hub stores that offer local communities a convenient, one-stop shop for a broad range of groceries and general merchandise and two 'On the Go' city stores tailored to match the needs of busy city workers.

 

£6 billion of sales across the business are digital and we continue to invest to deliver easy, speedy and seamless shopping. At Argos, Black Friday broke records, with £60 million in online sales on the day. Argos Click & Collect grew by nearly eight per cent and Argos Fast Track delivery grew by nearly five per cent year on year. In Food and Grocery, Groceries Online grew by nearly eight per cent and we have over 141,000 Delivery Pass customers.

 

Sainsbury's has rolled out SmartShop technology to all supermarkets, delivering easier and convenient ways for customers to shop using in-store handsets or their own smartphone. Customers are increasingly choosing to shop with us in this way and SmartShop sales account for up to 20 per cent of sales in some stores. To further improve our supermarkets, we upgraded 3,639 self-checkouts. Recent customer service scores show that customers value these improvements. Ease of checkout is up three per cent and speed of checkout is up nearly four per cent. 

 

At Argos, we rapidly rolled out Pay@Browse to 386 Argos stores, offering customers a quicker way to pay in 548 Argos stores.

 

 

Drive efficiency to reinvest

 

We have met our objective to make savings to cover the impact of cost inflation and we are making good early progress with our target to structurally reduce our costs by approximately £500 million over five years by bringing Sainsbury's and Argos together. Reducing our costs means we can run our business more efficiently and continue to invest in the areas that customers value: choice, quality, low prices, convenience and great service.

 

We have reviewed our central support functions including logistics, supply and shared services and we are looking at ongoing capital prioritisation and procurement. In January we announced a major head office restructure which saw a reduction of hundreds of management roles.

 

We are developing an in-house 'Internet of Things' platform which connects multiple store elements including refrigeration, lighting, heating, ventilation and air conditioning and we are currently rolling this out to our supermarket estate. Behind the scenes we have rebuilt our entire data and analytics eco-system and have transformed store connectivity by replacing and updating the WiFi technology in the majority of our stores.

 

More colleagues have devices and are better connected than ever before. We are creating smarter stores, digitising day-to-day processes through a range of app developments, such as replenishment and stock apps, to drive efficiency and availability and give store colleagues more time to serve customers.

 

At our Capital Markets Day in September we unveiled our new five year property strategy, which included a review of our current estate to ensure we have the right stores in the right places for our customers. We announced a plan to open 10 Sainsbury's supermarkets, 95 convenience stores and 18 larger format convenience stores. We also said we would open more than 80 new Argos stores within Sainsbury's supermarkets. The review also means a closure programme of around 125 shops.

We opened two new supermarkets this year and closed two less profitable ones. We also opened 13 convenience stores and closed 27. We currently have 573 standalone Argos stores. Our model of Argos stores in Sainsbury's drives efficiencies and enables us to maximise our supermarket space. There are now 306 Argos stores in Sainsbury's supermarkets.

 

 

Be a place where we all love to work

 

Being a company that people love to work for means being an inclusive employer where colleagues are encouraged to develop their skills and fulfil their potential. It's about playing an active role in our communities and about having high ethical standards that we and our suppliers adhere to.

It is important for the long-term success of the business that our colleagues remain engaged and we measure this twice a year through our colleague engagement survey. We retained our Gold accreditation from Investors in People (IIP) for the fourth consecutive time over 10 years, despite the level of change in the business.

We have made good progress with our inclusivity agenda. We are a Disability Confident Leader for our work on disability and inclusivity and, looking ahead, we aim to increase our employment of Black, Asian and Minority Ethnic (BAME) representation at senior manager level. We also aim to increase the percentage of colleagues who agree with the statement 'I feel I am able to be myself at work' in our colleague engagement survey.

We continue to work on our gender pay balance across the business and have further reduced our gender pay gap by 1.6 per cent to 10.5 per cent this year, while our median gender pay gap remains at 3.8 per cent. Female representation at Board level is 33 per cent and female representation at senior levels has increased to 35 per cent by the year end. Across the entire business, female representation is 54.6%. There are 94,992 women and 78,983 men and the remaining colleagues did not identify as either women or men. We are committed to achieving our aspirational target of 40 per cent female representation in senior positions by 2021. For more information, see our Gender Pay Report on our corporate website.

In this complex retail environment, excellent leadership of our store teams is crucial. We have an award winning leadership programme for store colleagues and managers. We are also focused on ensuring that more junior colleagues can develop their skills and progress and measure the number of colleagues enrolled on an apprenticeship programme and the completion rate for those apprenticeships.

We play an active role in local communities and we raised £29 million this year for local and national causes. As part of our 150^th birthday, we launched 150 Days of Community and over 35,000 colleagues pledged their time to volunteer during working hours for over 2,400 local community projects. For more information on how our colleagues support the communities we serve, see our Sustainability update on our corporate website.

We are committed to complying with laws and regulations and set high ethical standards for our colleagues and suppliers. We expect all colleagues to abide by our Ethical Conduct Policy, covering areas including anti-bribery and corruption, conflicts of interest, suppliers, fraud and whistleblowing. Training on these policies is provided to colleagues in the commercial divisions as part of their inductions and then annually. This year we also updated policies and processes for our suppliers to gain a better understanding of risk, and updated our Human Rights policy which can also be found on our corporate website.

Alongside our community investment, we make positive economic contributions through our supply chain, our market-leading pay for colleagues and our responsible approach to tax, contributing £2.1 billion in taxes borne and collected this year.

 

Net Zero by 2040

Living well means living sustainably and we have committed to invest £1 billion over 20 years to become Net Zero across all our operations by 2040. We have seven key areas of focus and we will report progress against each of them at our interim results in November.

 

We are the only UK food retailer to receive an A rating in the Climate Disclosure Project for six consecutive years. We are proud to have achieved a 42 per cent reduction in carbon emissions over fifteen years, despite a 46 per cent increase in our estate. We have committed to reduce carbon emissions within our own operations to net zero greenhouse gas emissions, increasing the use of renewable energy. 

 

We were also the first retailer to achieve The Carbon Trust Water Standard in 2017 as well as this past year achieving the Climate Disclosure Project A-rating for water disclosure. We achieved our 2020 water reduction targets early, saving one billion litres since 2005. We have committed to minimise the use of water in our own operations, driving towards water neutral by 2040.

 

In 2005 we were the first retailer to introduce multiple traffic light labelling on the front of our own-brand packaging and we have reduced the number of red traffic lights since 2015. Through reformulation, 97 per cent of our own-brand products meet Public Health England's salt reduction targets and we have reduced the amount of sugar across soft drinks, ice cream, cereals and more by over 20 per cent since 2015.​ As part of our Net Zero commitment we will continue to develop healthy, tasty nutritious food for our customers and expand our popular meat alternative range.

 

We have committed to reduce our use of plastic packaging by 50 per cent by 2025 and then go further. We were the first retailer to remove plastic bags from our produce aisles and bakery counters; customers now use their own bags or buy a reusable bag made from a recycled plastic bottle. Among a large number of initiatives, we removed plastic bags from online deliveries and reduced the weight of plastic used in milk and water packaging.

 

We were the first retailer to achieve zero waste to landfill and we plan to reduce food waste by 50 per cent by 2030. Most of our stores redistribute good quality food safely to local charities and community groups through our food donation partnerships.

 

We will also increase the use of recycling in our own operations and make it easier for customers and colleagues to recycle. All our plastic hangers are made from 100 per cent recycled materials and last year we recycled 300 tonnes of them. As we move forward we will expand recycling facilities at our stores to help customers recycle metal cans, glass, plastic, paper, clothing and other materials.

 

Finally, we will ensure that the impact of our operation is net positive for biodiversity. We have planted nearly four million trees in partnership with the Woodland Trust since 2004 and we expect to plant more than 1.5 million trees by 2025. 99.1 per cent of the palm oil used in our products is sustainably sourced as is all our farmed seafood.

 

 

 

Financial Review of the year results for the 52 weeks to 7 March 2020

 

This is Sainsbury's first full year set of results prepared under IFRS 16, the new financial reporting standard on lease accounting. As previously indicated, we have adopted the standard fully retrospectively. The new standard results in material changes to the financial statements. All affected comparative figures included within this announcement have accordingly been restated. Further detail on this can be found in note 5 on page 34.

 

Please note a number of Alternative Performance Measures ('APMs') have been adopted by the Directors to provide additional information on the underlying performance of the Group. These measures are intended to supplement, rather than replace the measures provided under IFRS. Please see pages 61 to 65 for further information.

 

In the 52 weeks to 7 March 2020 the Group generated profit before tax of £255 million (2018/19: £202 million) and underlying profit before tax of £586 million (2018/19: £601 million)

 

 

Summary income statement	52 weeks to	52 weeks to
	07 March	09 March	Change
	2020	2019
	£m	£m	%
Group sales (including VAT)	32,394	32,412	(0.1)
Retail sales (including VAT)	31,825	31,871	(0.1)
Group sales (excluding VAT)	28,993	29,007	(0.0)
Retail sales (excluding VAT)	28,424	28,466	(0.1)
Underlying operating profit
Retail	938	981	(4)
Financial services	48	31	55
Total underlying operating profit	986	1,012	(3)
Underlying net finance costs1	(400)	(419)	5
Underlying share of post-tax profit from JVs2	-	8	(100)
Underlying profit before tax	586	601	(2)
Items excluded from underlying results	(331)	(399)	17
Profit before tax	255	202	26
Income tax expense	(103)	(16)	544
Profit for the financial period	152	186	(18)
Underlying basic earnings per share	19.8p	20.7p	(4.3)
Basic earnings per share	5.8p	7.6p	(23.7)
Dividend per share	3.3p	11.0p	(70.0)

 

 

1      Net finance costs including perpetual securities coupons before non-underlying finance movements.

2      The underlying share of post-tax profit from joint ventures and associates ('JVs') is stated before investment property fair value movements, non-underlying finance movements and profit on disposal of properties.

 

 

Group sales

Group and Retail sales (including VAT, including fuel) both decreased by 0.1 per cent year-on-year. Retail sales (including VAT, excluding fuel) decreased by 0.4 per cent driven by General Merchandise sales declines.

 

 

Total sales performance by category	52 weeks to	52 weeks to
	07 March 2020	09 March 2019	Change
	£bn	£bn	%
Grocery	19.5	19.5	0.4%
General Merchandise	6.4	6.5	(2.9)%
Clothing	1.0	1.0	1.2%
Retail (exc. fuel)	26.9	27.0	(0.4)%
Fuel sales	4.9	4.9	1.1%
Retail (inc. fuel)	31.8	31.9	(0.1)%

 

Grocery sales grew by 0.4 per cent year-on-year. A weak start to the year in the first quarter was offset by a strong performance in the second quarter which continued into the second half as customers responded positively to price investment and new entry price ranges and investments in our store estate. Clothing sales grew by 1.2 per cent with a strong performance in the second half as cooler weather helped drive sales in the winter ranges. General Merchandise sales declined by 2.9 per cent driven by the annualisation of last summer's hot weather and challenging market conditions particularly in toys and gaming.

 

Fuel sales grew 1.1 per cent, driven by both retail price inflation and volumes.

 

 

Year-on-year sales performance by channel		52 weeks to	52 weeks to
		07 March 2020	09 March 2019
Supermarkets (inc. Argos stores in Sainsbury's)		(0.1)%	1.0%
Convenience		1.3%	3.7%
Groceries Online		7.6%	6.9%

 

Supermarket sales declined by 0.1 per cent, impacted by weaker General Merchandise sales. Convenience sales grew by 1.3 per cent despite 27 store closures across the second half. Groceries Online sales grew by 7.6 per cent driven by order growth.

 

 

Retail like-for-like sales performance		52 weeks to	52 weeks to
		07 March	09 March
		2020	2019
Like-for-like sales (exc. fuel)		(0.6)%	(0.2)%
Like-for-like sales (inc. fuel)		(0.5)%	1.5%

 

 

Retail like-for-like sales, excluding fuel, decreased by 0.6 per cent (2018/19: 0.2 per cent decrease) as a result of General Merchandise declines.

 

Space

In 2019/20, Sainsbury's opened 2 new supermarkets and closed 2 (2018/19: opened 3 new supermarkets and closed 3). There were 14 new Convenience stores, including 1 replacement, opened in the year and 27 were closed (2018/19: 10 opened and 5 stores closed).

 

During the period Argos opened 25 new stores in Sainsbury's and one new standalone and closed 25 standalone Argos stores and 2 Argos in Homebase stores. The number of Argos collection points in Sainsbury's stores reduced from 317 to 281. As at 7 March 2020, Argos had 882 stores and 281 collection points. Habitat had 16 stores, of which 11 are in Sainsbury's.

 

Store numbers and retailing space
	As at	New stores	Disposals / closures	Extensions / refurbs / downsizes / replacements	As at
	09 March				07 March
	2019				2020
Supermarkets	608	2	(2)	-	608
Supermarkets area '000 sq. ft.	21,210	54	(43)	(54)	21,167
Convenience	820	13	(27)	1	807
Convenience area '000 sq. ft.	1,934	35	(74)	3	1,898
Sainsbury's total store numbers	1,428	15	(29)	1	1,415
Argos stores	594	1	(25)	-	570
Argos stores in Sainsbury's	281	25	-	-	306
Argos in Homebase	8	-	(2)	-	6
Argos total store numbers	883	26	(27)	-	882
Argos collection points	317	6	(42)	-	281
Habitat	16	-	-	-	16

 

Subject to potential disruption from COVID-19, in 2020/21, Sainsbury's expects to open 2 new supermarkets and around 15 new convenience stores. Sainsbury's also expects to close around 8 supermarkets and around 14 convenience stores. Sainsbury's also expects to open 35-40 Argos in Sainsbury's, and close around 50 Argos standalone stores.

 

Retail underlying operating profit

 

Retail underlying operating profit decreased by 4.4 per cent to £938 million (2018/19: £981 million), largely driven by tough weather comparatives and higher marketing costs in the first half of the year and a challenging General Merchandise market.

 

Retail underlying operating margin reduced by 15 basis points year-on-year to 3.30 per cent (2018/19: 3.45 per cent).

 

Retail underlying operating profit
	52 weeks to	52 weeks to		Change at
	07 March	09 March		constant fuel
	2020	2019	Change	prices
Retail underlying operating profit (£m)1	938	981	(4.4)%
Retail underlying operating margin (%)2	3.30	3.45	(15)bps	(15)bps
Retail underlying EBITDAR (£m)3	2,125	2,152	(1.3)%
Retail underlying EBITDAR margin (%)4	7.48	7.56	(8)bps	(8)bps

 

 

1      Retail underlying earnings before interest, tax and Sainsbury's underlying share of post-tax profit from joint ventures. Numbers are restated with the introduction of IFRS 16, this results in a material increase in Retail underlying operating profit, compared to previously reported numbers, due to the interest component being recognised below operating profit as a finance cost. Refer to note 4 for a reconciliation of Retail underlying operating profit pre and post IFRS 16.

2      Retail underlying operating profit divided by underlying retail sales excluding VAT.

3      Retail underlying operating profit before net rental income of £10 million and underlying depreciation and amortisation of £1,197 million.

4      Retail underlying EBITDAR divided by underlying retail sales excluding VAT.

 

In 2020/21, Sainsbury's expects a depreciation and amortisation charge of around £1,200 million, including around £500 million right of use asset depreciation.

 

Financial Services

 

Financial Services results
12 months to 29 February 2020
	2020	2019	Change
Underlying revenue (£m)	569	541	5%
Interest and fees payable (£m)	(125)	(102)	23%
Total income (£m)	444	439	1%
Underlying operating profit (£m)	48	31	55%
Cost:income ratio (%)	71	71	0bps
Active customers (m) - Bank	2.12	2.01	5%
Active customers (m) - AFS6	2.24	2.14	5%
Net interest margin (%)1	3.4	3.8	(40)bps
Bad debt as a percentage of lending (%)2	1.1	1.6	(50)bps
Tier 1 capital ratio (%)3	14.1	13.7	40bps
Total capital ratio (%)4	17.0	16.7	30bps
Customer lending (£bn)5	7.4	7.0	6%
Customer deposits (£bn)	(6.3)	(6.0)	5%

 

 

1      Net interest receivable divided by average interest-bearing assets.

2      Bad debt expense divided by average net lending.

3      Common equity Tier 1 capital divided by risk-weighted assets.

4      Total capital divided by risk-weighted assets.

5      Amounts due from customers at the Balance Sheet date in respect of loans, mortgages, credit cards and store cards net of provisions.

6      Prior year restated

 

 

 

Financial Services total income remained broadly flat year-on-year at £444 million, as higher interest and commission income was offset by increased interest payable, driven in part by selective lending growth impacting income whilst improving capital efficiency and a timing impact from the August 2018 Bank base rate rise. Net commission income increased £3 million driven by Travel Money and Banking fees. Financial Services underlying operating profit increased by 55 per cent year-on-year to £48 million, as guided in November 2019 (2018/19: £31 million), primarily due to an increase in contribution from Argos Financial Services as a result of changes to transfer pricing rules, the income factors noted and a reduction in impairment from both the harmonisation of policy and increased debt sales.

The Financial Services cost:income ratio was flat at 71 per cent. The costs of supporting new operating platforms and product growth were offset by a reduction in royalties payments to Argos linked to changes in transfer pricing. Further actions to reduce costs were delivered towards the end of the financial year so did not materially impact this ratio. The number of Bank active customers increased by five per cent year-on-year to 2.12 million, with Argos Financial Services customers also up five per cent to 2.24 million.

 

Net interest margin decreased by 40 basis points year-on-year to 3.4 per cent (2018/19: 3.8 per cent) driven primarily by the growth of the mortgage book and higher funding costs following the base rate rise. The mortgage book was closed to new business in September 2019. Bad debt expense as a percentage of lending decreased by 50 basis points to 1.1 per cent, primarily driven by the alignment of policy between AFS and Sainsbury's Bank and growth in mortgages.

 

The CET 1 capital ratio increased by 40 basis points year-on-year to 14.1 per cent, reflecting the effect of the additional £35m capital injection (2018/19: £110 million). Customer lending increased by six per cent to £7.4 billion, mainly due to growth across credit cards and mortgages. To support this lending, customer deposits also grew a similar five per cent to £6.3 billion.

 

Due to the negative impact of COVID-19, Financial Services are expected to report an operating loss in 2020/21. However, no further capital injections are expected into Financial Services following the £35 million injection in the first half of 2019/20.

 

Underlying net finance costs

Underlying net finance costs reduced by five per cent to £400 million (2018/19: £419 million). These costs include £77 million of net non-lease interest (2018/19: £86 million). The reduction of net non-lease interest is driven by the repayment of the £450 million Convertible Bond and reduced interest on inflation-linked loans. The interest costs on lease liabilities have reduced to £323 million (2018/19: £333 million) due to reduced lease liabilities and lower interest rates on new lease.

 

Sainsbury's expects underlying net finance costs in 2020/21 of between £370 million - £380 million, including around £310 million lease interest in 2020/21, following the introduction of IFRS 16.

 

 

Items excluded from underlying results

In order to provide shareholders with insight into the underlying performance of the business, items recognised in reported profit or loss before tax which, by virtue of their size and or nature, do not reflect the Group's underlying performance are excluded from the Group's underlying results and shown in the table below.

 

 

Items excluded from underlying results	52 weeks to	52 weeks to
	07 March	09 March
	2020	2019
	£m	£m
Store closure write-downs	(126)	-
Impairment charges	(126)	-
Other closure costs	(44)	-
Property strategy programme	(296)	-
Retail restructuring programme	(32)	(81)
Financial Services transition and other	(29)	(70)
Argos integration costs	-	(40)
Asda transaction costs	-	(46)
IAS 19 pension financing charge and scheme expenses	19	(118)
Other	7	(44)
Items excluded from underlying results	(331)	(399)

 

 

-     Property strategy programme costs of £296 million (2018/19: nil) within property, plant and equipment, intangible assets and right of use assets, relate to store closures and asset write downs that are part of our broader Property Strategy Programme announced on 25^th September 2019 as part of Capital Markets Day.

-     Retail restructuring costs of £32 million (2018/19: £81 million) relate to changes to store management structures; the closure of one Argos depot and costs incurred following announced head-office restructures during the year.

-     Financial Services transition and other costs of £29 million (2018/19: £70 million) were predominantly the previously announced costs incurred in transitioning to a new banking platform and write-downs of ATMs.

-     2018/19 IAS 19 pension costs of £118 million largely relate to equalising historic pension benefits between men and women following the High Court judgement in October 2018 against the Lloyds Banking Group.

-     Other movements of £7 million (2018/19: cost of £44 million) relate to property profits and acquisition adjustments.

 

The Property Strategy Programme one off costs are expected to be £330 million - £350 million in total (2019/20: £296 million). Since the initial announcement at Capital Markets Day in September 2019 the programme has been revisited and this has resulted in additional planned closures. Total cash costs for the programme are expected to be around £50 million (2019/20: £8 million) versus original guidance of £30m to £40m.

 

Taxation

The tax charge was £103 million (2018/19: £16 million), with an underlying tax rate of 25.4 per cent (2018/19: 24.5 per cent) and an effective tax rate of 40.4 per cent (2018/19: 7.9 per cent).

 

The effective tax rate ('ETR') of 40.4 per cent (2018/19: 7.9 per cent) is higher than the prior year (as restated). In 2019/20 the ETR is increased by the impact of non-tax deductible exceptional costs including the impairment of fixed assets, and by prior year Bruce adjustments, partially offset by the tax impact of property disposals. In 2018/19 the ETR was reduced by prior year adjustments, including a c.£50 million deferred tax credit which arose on the recognition of a UK capital loss which crystallised as part of transactions undertaken by the group in 2015/16, and the tax impact of property disposals.

 

The underlying tax rate ('UTR') is higher than the prior year (as restated), largely as a result of a year-on-year reduction in the underlying profit before tax. The adoption of IFRS 16 further increases the UTR as an element of the depreciation of the right-of-use assets is non-tax deductible to the extent it relates to capital items. The UTR is also impacted by prior year tax adjustments. However, the UTR is reduced in respect of the interest expense on the perpetual securities which, further to a recent amendment to IAS 12, is now recognised in the Income Statement rather than Statement of Changes in Equity as it was in prior years. 

 

Sainsbury's expects an underlying tax rate in 2020/21 of around 25 per cent.

 

Earnings per share

Underlying basic earnings per share decreased to 19.8 pence (2018/19: 20.7 pence) driven by the decrease in underlying earnings and the higher income tax charge in the year. Basic earnings per share decreased to 5.8 pence (2018/19: 7.6 pence).

 

Dividends

Given the wide range of potential profit and cash flow outcomes, the Board believes it is prudent to defer any dividend payment decisions until later in the financial year, when there will be improved visibility on the potential impact of COVID-19 on the business.

 

Net debt and retail cash flows

As at 7 March 2020, net debt was £6,947 million (9 March 2019: £7,346 million), a decrease of £399 million (2018/19: £229 million reduction). Excluding the impact of lease liabilities on net debt, Sainsbury's reduced net debt by £343 million in the year. Sainsbury's remains on track to reduce non lease net debt by £750 million over a three-year period compared to 2018/19 year end net debt excluding lease liabilities of £1,522 million. We will provide further guidance on net debt expectations for 2020/21 with our interim results.

 

Group net debt includes the impact of capital injections into Sainsbury's Bank, but excludes Financial Services' own net debt balances. Financial Services balances are excluded because they are part of the daily operating cycle of the Bank rather than for financing purposes.

 

Net debt includes lease liabilities under IFRS 16 of £5,768 million (2018/19: £5,824 million) and the perpetual securities of £496 million (2018/19: £496 million restated).

 

 

Summary cash flow statement 1,2	Retail	Retail
	52 weeks to	52 weeks to
	07 March	09 March
	2020	2019
	£m	£m
Adjusted retail operating cash flow before changes in working capital2	2,094	2,022
Increase in working capital	(71)	(38)
Net interest paid3	(405)	(423)
Pension cash contributions	(52)	(63)
Corporation tax paid	(113)	(61)
Net cash generated from/(used in) operating activities	1,453	1,437
Cash capital expenditure before strategic capital4	(599)	(508)
Repayments of obligations under leases	(419)	(430)
Initial direct costs on right-of-use assets	(13)	(11)
Proceeds from disposal of property, plant and equipment	81	64
Bank capital injections	(35)	(110)
JV capital injections	-	(5)
Dividends and distributions received	143	19
Retail free cash flow	611	456
Strategic capital expenditure - Argos integration3	-	(36)
Dividends paid on ordinary shares	(247)	(224)
Repayment of borrowings3	(379)	(446)
Other	(3)	(8)
Net increase/(decrease) in cash and cash equivalents	(18)	(258)
Decrease in Debt	798	876
Other non-cash and net interest movements5	(381)	(389)
Movement in net debt	399	229
Opening net debt	(7,346)	(7,575)
Closing net debt	(6,947)	(7,346)
of which:
Lease Liabilities	(5,768)	(5,824)
Net Debt Excluding Lease Liabilities	(1,179)	(1,522)

 

1 See note 7 for a reconciliation between Retail and Group cash flow.

2 Excludes working capital and pension contributions. 

3 Refer to the Alternative Performance Measures on page 63 for reconciliation.

4 Excludes Argos integration capital expenditure in 2018/19

5 Other non-cash includes new leases and lease modifications and fair value movements on derivatives used for hedging long term borrowings.

 

Adjusted retail operating cash flow before changes in working capital increased by £72 million year-on-year to £2,094 million (2018/19: £2,022 million) and working capital increased by £71 million. Cash capital expenditure excluding strategic capital was £599 million (2018/19: £508 million). In the year capital injections into the Bank were £35 million (2018/19: £110 million).  

 

Dividends and distributions received of £143 million (2018/19: £19 million) were predominantly as a result of the sale of properties held in a joint venture with British Land.

 

Retail free cash flow increased by £155 million year-on-year to £611 million (2018/19: £456 million). Free cash flow was used to fund dividends and reduce borrowings.

 

Dividends of £247 million were paid in the year, which were covered 2.5 times by free cash flow (2018/19 2.0 times). Strategic capital expenditure incurred in the prior year of £36 million related to Argos integration capital expenditure.

 

The Group held undrawn committed credit facilities of £1,450 million and undrawn uncommitted facilities of £195 million as at 7 March 2020.

 

Capital expenditure

 

Core retail cash capital expenditure was £599 million (2018/19: £508 million).

 

Sainsbury's expects core retail cash capital expenditure (excluding Financial Services) to be around £550-£600 million per annum over the medium term. Further guidance for 2020/21 will be provided with our interim results.

 

Financial ratios

 

Key financial ratios	52 weeks to	52 weeks to
	07 March	09 March
	2020	2019
Return on capital employed (%)1	7.4	7.4
Net debt to EBITDAR2	3.2 times	3.3 times
Fixed charge cover3	2.7 times	2.6 times

 

1      ROCE: Return is defined as a 52 week rolling underlying profit before interest and tax. Capital employed is defined as group net assets excluding the pension deficit/surplus and excluding net debt. The average is calculated on a 14 point basis.

2      Net debt of £6,947 million includes lease obligations under IFRS 16 and perpetual securities treated as debt, divided by Group underlying EBITDAR of £2,203 million.

3      Group underlying EBITDAR divided by rent (both capital and interest) and underlying net finance costs, where interest on perpetual securities is treated as an underlying finance cost.

 

 

Property value

 

As at 7 March 2020, Sainsbury's estimated market value of properties, including our 50 per cent share of properties held within property joint ventures, was £9.9 billion (9 March 2019: £10.4 billion), the reduction largely a result of the sale of 15 British Land joint venture properties and the decline in rental values.

 

Defined benefit pensions

 

The Pension Scheme is valued on different bases for different purposes. For the corporate annual accounts, the value of the retirement benefit is calculated under IAS19 while the funding of the Scheme is determined by the Trustee's triennial valuation.

 

At 7 March 2020, the net defined benefit surplus under IAS19 for the Group was £1,119 million (excluding deferred tax). The £160 million movement from 9 March 2019 was primarily driven by asset gains in both sections of the Scheme on matching and hedging assets due to the fall in gilt yields, reflected in the discount rate moving from 2.8 per cent to 1.6 per cent, along with most asset classes having positive returns over the period.  In the Argos section, there was a gain from no longer having to make an adjustment for IFRIC 14 as a result of a revision to the Scheme rules as part of the 2018 triennial valuation agreement.

 

The Scheme was subject to a triennial actuarial valuation, as at 30 September 2018, which was completed during the first half. The actuarial deficit reduced to £538 million, from £1,055 million in 2015.

 

As part of the agreement reached with the Trustee to complete the 2018 triennial valuation of the Sainsbury's Pension Scheme (the defined benefit scheme), we established a new asset backed contribution ('ABC') structure on 17 July 2019, replacing the existing property partnership.

Under the new ABC, properties with a value of £1.35 billion were transferred into a newly formed property holding company, a wholly owned subsidiary of the Group, and leased to other Group entities. Rental receipts facilitate payments of interest and capital on loan notes issued to a Scottish Limited Partnership, in which the Scheme holds an interest.

 

The Scheme's interest in the Partnership entitles it to annual distributions over up to 20 years. The distributions will be made through three payment streams:

 

1)   Payments to the Sainsbury's section (approximately £15 million per year)

2)   Payments to the Argos section (approximately £20 million per year)

3)   Switching payment stream, paid to either the Sainsbury's section or Argos section (initially approximately £23 million per year, increasing to £33 million by 2038)

 

In addition to the above, further cash contributions of £40 million have been agreed for 2020/21, and £10 million in 2021/22. No additional cash contributions have been agreed for subsequent years.

 

The payments to the Sainsbury's and Argos sections (streams 1 and 2) stop in 2030, or when the relevant section reaches its funding target if earlier.

 

The switching stream is initially paid to the Sainsbury's section. Once that funding target is achieved, payments switch to the Argos section. Payments continue until 2038 or until both sections have reached their funding targets if earlier.

 

The level of property in the Propco reduces as the Scheme reaches the funding targets.

 

Retirement benefit obligations
	Sainsbury's	Argos	Group	Group
	as at	as at	as at	as at
	07 March	07 March	07 March	09 March
	2020	2020	2020	2019
	£m	£m	£m	£m
Present value of funded obligations	(8,914)	(1,421)	(10,335)	(8,856)
Fair value of plan assets	10,025	1,466	11,491	9,983
Additional liability due to minimum funding requirements (IFRIC 14)	-	-	-	(134)
Pension surplus/(deficit)	1,111	45	1,156	993
Present value of unfunded obligations	(21)	(16)	(37)	(34)
Retirement benefit obligations	1,090	29	1,119	959
Deferred income tax (liability)/asset	(198)	(16)	(214)	(216)
Net retirement benefit obligations	892	13	905	743

 

 

 

 

 

Consolidated income statement

for the 52 weeks to 7 March 2020

 

		2020			2019 (restated)
		Before non-underlying items	Non-underlying items	Total	Before non-underlying items	Non-underlying items	Total
	Note	£m	£m	£m	£m	£m	£m
Revenue	7	28,993	-	28,993	29,007	-	29,007
Cost of sales		(26,699)	(278)	(26,977)	(26,708)	(11)	(26,719)
Gross profit		2,294	(278)	2,016	2,299	(11)	2,288
Administrative expenses		(1,345)	(114)	(1,459)	(1,342)	(383)	(1,725)
Other income		37	56	93	55	(17)	38
Operating profit		986	(336)	650	1,012	(411)	601
Finance income	9	4	28	32	5	19	24
Finance costs	9	(404)	6	(398)	(424)	(3)	(427)
Share of post-tax (loss)/profit from joint ventures and associates		-	(29)	(29)	8	(4)	4
Profit before tax		586	(331)	255	601	(399)	202
Income tax (expense)/credit	10	(149)	46	(103)	(147)	131	(16)
Profit for the financial year		437	(285)	152	454	(268)	186
Earnings per share	11			pence			pence
Basic earnings				5.8			7.6
Diluted earnings				5.8			7.5

 

The restatements relate to the adoption of IFRS 16 as explained in note 5.

 

 

 

Consolidated statement of comprehensive income

for the 52 weeks to 7 March 2020

 

 

The restatements relate to the adoption of IFRS 16 as explained in note 5.

 

 

 

 

Consolidated balance sheet

At 7 March 2020 and 9 March 2019

 

 

 

 

Consolidated cash flow statement

for the 52 weeks to 7 March 2020

 

 

Restatements relate to the adoption of IFRS 16 as explained in note 5.