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Sainsbury(J) PLC (SBRY)

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Thursday 07 November, 2019

Sainsbury(J) PLC

Half-year Report

RNS Number : 5583S
Sainsbury(J) PLC
07 November 2019
 

7 November 2019

J Sainsbury plc

 

Interim Results for the 28 weeks to 21 September 2019

Increased grocery momentum as we create one multi brand, multi-channel business

 

Operational Highlights

·    Positive momentum in Grocery market share1 and sales performance, driven by a strong customer response to lower prices and our new value brands. We launched 123 new value brand products, with 200 due by the end of the financial year

·    We continue to improve Sainsbury's service and availability and customer satisfaction scores increased by more than three percentage points year on year2. We are investing in technology to make shopping easier and SmartShop handheld self-scanning technology is now in over 350 supermarkets

·    We are investing in our store estate and have improved 172 supermarkets and 158 convenience stores this half. We will improve 450 supermarkets and 200 convenience stores this financial year

·    Clothing and General Merchandise performance improved quarter on quarter as comparatives normalised.  We are bringing Sainsbury's and Argos closer together to give customers easier access to all our products and services

·    Argos sales grew ahead of the market3 and Fast Track delivery and collection continue to grow

·    We have converted 176 Argos stores to our digital format this half and we will convert the majority of the remaining stores by the end of the year. [email protected] is now available in 362 Argos stores

·    Following a strategic review of Financial Services, we no longer sell mortgages, are reducing costs and are focusing on digitally-led products and services for Sainsbury's and Argos customers

·    We successfully launched digital Nectar nationwide, creating a platform for greater personalisation and reward. 2.1 million customers are now using the Nectar app

·    We became the first retailer to remove single use plastic produce and bakery bags and have committed to reducing our plastic packaging by 50% by 2025

·    Over 30,000 colleagues pledged to volunteer locally as part of our 150th birthday celebrations

 

Financial Highlights

·    Group sales of £16,856 million, down 0.2 per cent

·    Retail sales (excluding fuel) down 0.6 per cent

·    Like-for-like sales (excluding fuel) down 1.0 per cent

·    In line with guidance, underlying profit reduced by £41 million to £238 million due to the combined impact of the phasing of cost savings, higher marketing costs and tough weather comparatives

·    As set out at the Capital Markets Day, we have reviewed our store estate, leading to £203 million of largely non cash one-off costs recognised in this half. Total one-off costs in the first half are £229 million, resulting in statutory profit before tax of £9 million. We continue to expect the total cost of the property strategy programme to be in the range of £230 million to £270 million

·    Underlying earnings per share down 16 per cent to 7.9 pence

·    Retail free cash flow of £698 million, up £81 million year-on-year, reflecting continued strong cash generation plus distributions from the British Land joint venture

·    Net debt reduced by £568 million to £6,778 million, reflecting the above cash generation. As in previous years, net debt at half year benefited from working capital phasing which will reverse in the second half. We have committed to reduce non-lease net debt by at least £750 million in the next three years from £1,522 million4  and expect a reduction of at least £300 million in 2019/20

·    New longer-term asset-backed pension plan agreed, providing greater security to the Scheme. 2018 triennial valuation deficit is down to £538 million, from £1,055 million in 2015 resulting in cash contributions reducing immediately by approximately £50 million per annum on average

·    Unique opportunity to structurally reduce costs by c.£500 million over five years as we integrate Sainsbury's and Argos, in addition to ongoing cost savings to cover the impact of cost inflation

·    Interim dividend of 3.3 pence per share, up 6 per cent, in line with our policy of paying 30 per cent of prior full year dividend. Full year dividend policy will change to 1.9x cover by underlying earnings (versus 2.0x previously) to offset the dilutive non cash impact of IFRS 16 on underlying earnings

 

1      Kantar World Panel 12 w/e 06 October 2019

2      Supermarket customer satisfaction 4 weeks to 21 September 2019 vs 4 weeks to 20 Oct 2018

3      Argos v BRC non-food non-clothing market, 28 weeks to 21 September 2019

4      FY 2018/19 net debt including perpetual securities £1,636 million as previously announced, less £122 million finance leases (including hire purchase arrangements), plus £8 million other (predominantly derivatives no longer reported within net debt). See notes 2.3 and 16 to the interim financial statements for additional detail

 

 

 

28 weeks to

21 September 2019

28 weeks to
22 September

20185

Variance

 

 

 

 

Business Performance

 

Underlying group sales (inc. VAT)

£16,856m

£16,884m

(0.2)%

 

Like-for-like sales (inc. VAT, exc. fuel)

 

 

(1.0)%

 

Underlying profit before tax

£238m

£279m

(15)%

 

Underlying basic earnings per share

7.9p

9.4p

(16)%

 

Net debt

£(6,778)m

£(7,145)m

£367m

 

Non-lease net debt

£(1,008)m

£(1,272)m6

£264m

 

Return on capital employed

7.1%

7.4%7

 

 

Interim dividend

3.3p

3.1p

6%

 
         

 

 

 

 

28 weeks to 21 September

2019

28 weeks to
22 September

20185

 

 

 

Statutory Reporting

 

Group sales (exc. VAT, inc. fuel)

£15,097m

£15,128m

 

Items excluded from underlying results

£(229)m

£(172)m

 

Profit before tax

£9m

£107m

 

(Loss)/profit for the financial period

£(38)m

£123m

 

Basic earnings per share

(2.2)p

5.1p

 
       

 

 

5      Restated where appropriate in accordance with IFRS 16 and other changes - see note 3 to the financial statements for additional detail

6      Net debt including perpetual securities £1,328m as previously announced, less £107m finance leases (including hire purchase arrangements), plus £51 million other (predominantly derivatives no longer reported within net debt). See notes 2.3 and 16 to the financial statements for additional detail

7      ROCE is calculated on a 52 week rolling basis. 52 weeks to 22nd September 2018 is not available due to the implementation of IFRS 16. Comparatives therefore reflect the 52 weeks to 9th March 2019

 

 

Commenting on the Interim Results 2019, Mike Coupe, Chief Executive, said: 

 

"We have created positive momentum across the business through strategic investments in our customer offer. We have lowered prices on every day food and groceries, launched a range of value brands and are more competitive on price than we have ever been. We are investing in hundreds of Sainsbury's and Argos stores, introducing new products and services and continually improving service and availability. As a result, customer satisfaction has increased significantly year on year.

 

"We have set out our plan to create one multi brand, multi-channel business. This will make the combined Sainsbury's and Argos offer much more accessible for customers and gives us the opportunity to make our business more efficient. We offer great quality at affordable prices with convenient ways to shop. I would like to thank colleagues for all their hard work at this busy time of year. We are very much looking forward to delighting our customers throughout the upcoming festive period."

 

Outlook

 

Retail markets remain highly competitive and the consumer outlook remains uncertain. However, as guided in September, we expect profits in the second half to benefit from the annualisation of last year's colleague wage increase and a normalisation of marketing costs and weather comparatives.

 

Dividend

 

Interim dividend of 3.3 pence per share, up 6 per cent, in line with our policy of paying 30 per cent of prior full year dividend. This will be paid on 20 December 2019 to shareholders on the Register of Members at the close of business on 15 November 2019. Full year dividend policy will change to 1.9x cover by underlying earnings (versus 2.0x previously) to offset the dilutive non cash impact of IFRS 16 on underlying earnings.

 

Like-for-like sales performance

2018/19

2019/20

 

Q1

Q2

Q3

Q4

Q1

Q2

H1

Like-for-like sales (excl. fuel)

0.2%

1.0%

(1.1)%

(0.9)%

(1.6)%

(0.2)%

(1.0)%

Like-for-like sales (inc. fuel)

2.6%

3.4%

0.3%

(0.5)%

(1.0)%

(0.4)%

(0.7)%

           

Total sales performance  

2018/19

2019/20

 

Q1

Q2

Q3

Q4

Q1

Q2

H1

Grocery

0.5%

2.0%

0.4%

(0.6)%

(0.5)%

0.6%

(0.1)%

General Merchandise

1.7%

1.2%

(2.3)%

1.5%

(3.1)%

(2.0)%

(2.5)%

Clothing

0.8%

(3.4)%

(0.2)%

(1.6)%

(4.5)%

3.3%

(1.2)%

Total Retail (excl. fuel)

0.8%

1.7%

(0.4)%

(0.2)%

(1.2)%

0.1%

(0.6)%

Total Retail (inc. fuel)

3.2%

3.9%

0.8%

0.0%

(0.6)%

0.1%

(0.3)%

 

Notes

A. All sales figures contained in this trading statement are stated including VAT and from 2018/19 onwards in accordance with IFRS 15

 

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 results presentation for analysts and investors will be held at 09:30 on 7 November 2019.

 

To view the slides of the results presentation and the webcast: We recommend that you register for this event in advance. To do so, visit www.about.sainsburys.co.uk/investors/results-reports-and-presentations and follow the on-screen instructions. To participate in the live event, please go to the website from 09:00 on the day of the announcement, where there will be further instructions. An archive of the webcast will be available later in the day.

 

To listen to the results presentation: To listen to the live results presentation by telephone, please dial 0800 783 0906 (or +44 (0)1296 480 100) if you are unable to use the primary number). The pass code for the event is 674 848. A transcript of the presentation and an archive recording of this event will be available later in the day at www.about.sainsburys.co.uk/investors/results-reports-and-presentations 

 

Enquiries

Investor Relations

Media

James Collins

+44 (0) 20 7695 0080

Rebecca Reilly

+44 (0) 20 7695 7295

 

Strategic priorities

Our strategy is designed to help our customers live well for less. Our priorities are:

 

1.   Be competitive on price

 

We are focused on offering customers quality products at affordable prices. To do this, we have:

 

·      Lowered prices on over 1,000 high volume lines since February, which has significantly improved Grocery market share trends

·      Begun phasing out the Basics range and launched 12 new value brands in key categories including meat, fish, poultry and bakery. Brands include J James, Mary Ann's, Greengrocer and Frank's. 123 entry price point products are now in stores, with 200 planned by the end of the financial year

·      Launched a new 'Work It' campaign for Tu clothing to promote high quality, value-led work wear. Clothing Online sales grew by over 50 per cent and eight per cent of Clothing sales are now online

 

2.   Offer distinctive products and new categories

 

We can serve more of our customers' needs by selling more distinctive and exclusive ranges. To do this, we have:

 

·      Relaunched over 350 products across a number of categories in our £1 billion Taste the Difference range which has the biggest premium volume market share of our major competitors. Our premium ready meal growth is outperforming the market

·      Continued to grow incremental sales from over 160 distinctive, exclusive and owned brands. We have partnered with fast food retailer Leon to launch 14 exclusive grocery products in over 600 Sainsbury's stores. These include vegan and non-vegan sauces, mayonnaises, vinegars, olive oils, a balsamic vinegar and fresh bread

·      Continued to maximise our supermarket space by introducing new categories such as wellness, expanding categories such as beauty and integrating our General Merchandise and Clothing sections

·      Rolled out our new Beauty Hall proposition to more than 60 stores, with a bigger range, popular high value brands and enhanced merchandising and service. Beauty sales have increased by over 40 per cent in these stores and we have a clear opportunity to grow our share in this highly attractive market. We plan to roll Beauty Halls out to 100 stores by Christmas and 150 by June 2020

·      Continued to gain market share in Clothing helped by strong online growth on Tu.co.uk and [email protected]

·      Gained market share in key General Merchandise categories including furniture, tech and mobile. Sales were boosted by consumer electronics such as the Apple watch and the launch of the new iPhone 11

·      Announced that all eggs will be sourced from free range UK farms from April 2020

 

3.   Make shopping convenient, supported by great service

 

Great service and availability and faster ways to pay mean customers can save time as well as money by shopping with us. To make it easy for customers to shop with us across all our channels, we have:

 

·      Rolled out SmartShop, handheld self-scanning technology, to over 350 supermarkets

·      Introduced [email protected] in 200 more Argos stores in the half, bringing the total to 362

·      Invested in self-checkout technology to drive efficiency across our supermarket and convenience estate, which has led to year on year improvements in customer satisfaction for ease of checkout of 4.8 per cent in supermarkets and 6.8 per cent in convenience stores

·      Continued to benefit from Lettuce Know, our real-time store feedback channel

·      Increased customer satisfaction by more than three percentage points year-on-year8 in Sainsbury's stores

·      Introduced Smart Store technology which has helped us to remove around one thousand in-store tasks, saving one million hours of management time and enabling store management to spend more time helping customers and improving availability

·      Grown Groceries Online sales by seven per cent, which now contributes eight per cent of grocery sales

·      Tailored our convenience store offer to each local market, driving strong underlying sales growth. Convenience has industry leading trading intensity and outperforms the market in value and volume

·      Focused on optimising the inventory of Argos products in Sainsbury's, improving availability in key lines

·      Grown Argos Fast Track collection by 14 per cent and Fast Track delivery by five per cent year on year

 

4.   Drive efficiency to invest in the customer offer

 

We aim to deliver cost savings to cover the impact of cost inflation. We also have the opportunity to structurally reduce our costs by c. £500 million over five years by bringing Sainsbury's and Argos together. This 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 are doing this by:

 

·      Delivering cost savings that offset the impact of operating cost inflation

·      Making good early progress on structural cost reduction. Sainsbury's and Argos teams are now working together across key functions including marketing, commercial operations, digital and technology and offer an integrated service to customers across our brands and channels, helping us simplify the business

·      Delivering improvements to 450 supermarkets and 200 convenience stores by the end of the year

·      Opening five convenience stores, one replacement store, one standalone Argos store and seven Argos stores in Sainsbury's supermarkets. This brings the total to 288 Argos stores in Sainsbury's. We closed one supermarket, seven standalone Argos stores and two convenience stores

·      Creating savings through "buying better for less", our value chain analysis programme which works to eliminate cost through our own brand supply chain

 

5.   Grow connected services

 

Financial Services and Nectar allow us to help our customers live well for less when they shop with us, providing affordable ways to manage their finances and rewarding them for their loyalty. We have:

 

·      Completed a strategic review of Financial Services, we no longer sell mortgages, are reducing costs and are focusing on digitally-led products and services for Sainsbury's and Argos customers. We expect to double financial services UPBT, deliver double digit ROCE and return cash to the Group within five years

·      Stopped new mortgage sales from 25 September 2019

·      Signed up 1.4 million customers to our Argos Financial Services app, with just under half of active customers using this as their sole mechanic for payment

·      Established Nectar as the biggest loyalty programme in the UK, with over 18 million collectors. We launched our new digital Nectar App in October and there are now 2.1 million app users

·      Added Esso to our list of Nectar partners. Esso has more than 1,200 Esso-branded filling stations serving around 800,000 customers each day

·      Made it possible for Argos customers to spend their Nectar points across all Sainsbury's channels

 

6.   Provide a seamless customer experience

 

Customers are increasingly shopping online and we are investing in our digital offer to serve them as efficiently as possible. In order to deliver an increasingly joined up service across our multi brand, multi-channel business we are:

 

·      Making good progress on integrating our products and services to serve customers whenever and wherever they want. Customers who shop digitally with us spend over three times the amount of in- store-only customers

·      Integrating our full digital offer into a single application, which will make it easier for customers to shop across all our brands and services. 10 million customers are already able to access all our online products with a single sign-on

·      Expanding SmartShop self-scan which accounts for 15 per cent of sales, year to date, in the stores where it is available

·      Benefiting from significant investment in our base technology infrastructure, overall connectivity and hardware. We are predominantly Cloud based, bringing increased stability and the ability to bring functionality updates to our customers more frequently. Our grocery online page-load speeds are 50 per cent faster and our processing time is reduced by 75 per cent compared with two years ago

 

8      Supermarket customer satisfaction 4 weeks to 21 September 2019 vs 4 weeks to 20 Oct 2018

 

Financial Review of the half year results for the 28 weeks to 21 September 2019

 

This is Sainsbury's first 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 3 on page 24.

 

Summary income statement

28 weeks to

28 weeks to

 

52 weeks to

 

21 September

22 September

Change

9 March

 

2019

2018

 

2019

 

£m

£m

%

£m

 

 

 

 

 

Underlying Group sales (including VAT)

16,856

16,884

(0.2)

32,412

Underlying Retail sales (including VAT)

16,567

16,612

(0.3)

31,871

 

 

 

 

 

Underlying Group sales (excluding VAT)

15,097

15,128

(0.2)

29,007

Underlying Retail sales (excluding VAT)

14,808

14,856

(0.3)

28,466

 

 

 

 

 

 

 

 

 

 

Underlying operating profit

 

 

 

 

Retail

437

487

(10)

981

Financial services

20

16

25

31

Total underlying operating profit

457

503

(9)

1,012

 

 

 

 

 

Underlying net finance costs1

(219)

(228)

4

(419)

Underlying share of post-tax profit from JVs2

-

4

(100)

8

Underlying profit before tax

238

279

(15)

601

Items excluded from underlying results

(229)

(172)

(33)

(399)

Profit before tax

9

107

(92)

202

Income tax expense

(47)

16

N/A

(16)

Profit/(Loss) for the financial period

(38)

123

N/A

186

 

 

 

 

 

Underlying basic earnings per share

7.9p

9.4p

(16)

20.7p

Basic earnings per share

(2.2)p

5.1p

N/A

7.6p

Dividend per share

3.3p

3.1p

6

11.0p

 

 

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

Underlying Group sales (including VAT, including fuel) decreased by 0.2 per cent year-on-year. Underlying Retail sales (including VAT, including fuel) decreased by 0.3 per cent. Underlying Retail sales (including VAT, excluding fuel) decreased by 0.6 per cent driven by General Merchandise and Clothing sales declines.

 

Grocery sales fell by 0.1%, reflecting tough comparatives, particularly during the first quarter, when sales declined against a period of very good weather in the prior year. Grocery sales grew in the second quarter as comparatives normalised and customers responded positively to price investment and our new entry price ranges. In non-food, although we outperformed the market, General Merchandise sales declined by 2.5 per cent and Clothing declined by 1.2 per cent, driven by the annualisation of last summer's hot weather and a subdued non-food market.

 

Fuel sales grew 1.6 per cent, driven by both retail price inflation and volumes.

 

Total sales performance by category

28 weeks to

28 weeks to

 

 

21 September 2019

22 September 2018

Change

 

£m

£m

%

Grocery

10,335

10,340

(0.1)%

General Merchandise

3,033

3,110

(2.5)%

Clothing

488

494

(1.2)%

Retail (exc. fuel)

13,856

13,945

(0.6)%

Fuel sales

2,711

2,667

1.6%

Retail (inc. fuel)

16,567

16,612

(0.3)%

 

Convenience sales growth was two per cent driven by like-for-like growth despite tough comparatives. Groceries Online sales growth was seven per cent driven by order growth. Supermarket sales declined by 0.7 per cent.

 

Total sales performance by channel

 

28 weeks to

28 weeks to

 

 

21 September 2019

22 September 2018

Supermarkets (inc. Argos stores in Sainsbury's)

 

(0.7)%

1.6%

Convenience

 

2.0%

4.3%

Groceries Online

 

7.0%

6.9%

 

Retail like-for-like sales, excluding fuel, decreased by 1.0 per cent in the first half (2018/19: 0.6% increase).

 

Retail like-for-like sales performance

 

28 weeks to

28 weeks to

 

 

21 September

22 September

 

 

2019

2018

Like-for-like sales (exc. fuel)

 

(1.0)%

0.6%

Like-for-like sales (inc. fuel)

 

(0.7)%

3.0%

 

Space

In the first half of 2019/20, Sainsbury's opened no new supermarkets and closed one (2018/19: no new supermarkets opened and two closed). Five new Convenience stores were opened in the first half, one was closed and one was replaced (2018/19: three stores opened and four stores closed).

 

During the period Argos opened seven new stores in Sainsbury's and one new standalone and closed seven stand-alone Argos stores. The number of Argos collection points in Sainsbury's stores reduced from 317 to 282. As at 21 September 2019, Argos had 882 stores and 282 collection points. Habitat had 16 stores.

 

Store numbers and retailing space

 

 

 

 

 

As at

New stores

Disposals / closures

Extensions / refurbishments / downsizes

As at

 

09 March

 

 

 

21 September

 

2019

 

 

 

2019

 

 

 

 

 

 

Supermarkets

608

-

(1)

-

607

Supermarkets area '000 sq ft

21,210

-

(20)

(17)

21,173

 

 

 

 

 

 

Convenience

820

5

(2)

1

824

Convenience area '000 sq ft

1,934

12

(19)

2

1,929

Sainsbury's total store numbers

1,428

5

(3)

1

1,431

 

 

 

 

 

 

Argos stores

594

1

(7)

 

588

Argos stores in Sainsbury's

281

7

-

 

288

Argos in Homebase

8

-

(2)

 

6

Argos total store numbers

883

8

(9)

 

882

Argos collection points

317

1

(36)

 

282

Habitat

16

-

-

 

16

 

In 2019/20, Sainsbury's expects to open two new supermarkets, up to 15 new convenience stores and open around 25 Argos stores in supermarkets (of which 11 are relocations). This will result in around 305 Argos stores in supermarkets.

 

Retail underlying operating profit

Retail underlying operating profit decreased by 10.3 per cent to £437 million (2018/19: £487 million), due to the combined impacts of the phasing of cost savings, unseasonal weather against a strong comparative period last year and higher marketing costs.

 

Retail underlying operating margin reduced by 33 basis points year-on-year to 2.95 per cent (2018/19: 3.28 per cent), equivalent to a 32 basis point decrease at constant fuel prices.

 

Retail underlying operating profit

 

 

 

 

 

28 weeks to

28 weeks to

 

Change at

 

21 September

22 September

 

constant fuel

 

2019

2018

Change

prices

Retail underlying operating profit (£m)1

437

487

(10.3)%

 

Retail underlying operating margin (%)2

2.95

3.28

(33)bps

(32)bps

 

 

 

 

 

Retail underlying EBITDAR (£m)3

1,067

1,114

(4.2)%

 

Retail underlying EBITDAR margin (%)4

7.20

7.50

(30)bps

(28)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 2.3 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 a net rental income of £6 million and underlying depreciation and amortisation of £636 million.

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

 

 

In 2019/20, Sainsbury's expects cost inflation of two to three per cent. We continue to expect to deliver cost savings to offset the impact of cost inflation. We are additionally committed to structurally reduce operating costs by c. £500 million over five years as we bring the Sainsbury's and Argos businesses together.

 

In 2019/20, 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

 

 

 

6 months to 31 August 2019

 

 

 

 

2019

2018

Change

 

 

 

 

Underlying revenue (£m)

289

272

6%

Interest and fees payable (£m)

(62)

(46)

35%

Total income (£m)

227

226

0%

Underlying operating profit (£m)

20

16

25%

 

 

 

 

Cost:income ratio (%)

70

71

100bps

Active customers (m) - Bank

2.10

1.95

8%

Active customers (m) - AFS

2.20

2.10

5%

Net interest margin (%)1

3.5

4.0

(50)bps

Bad debt as a percentage of lending (%)2

1.3

1.6

30bps

Tier 1 capital ratio (%)3

13.7

12.7

100bps

Total capital ratio (%)4

16.7

15.7

100bps

Customer lending (£bn)5

7.4

6.2

          19%

Customer deposits (£bn)

(6.6)

(5.6)

          18%

 

 

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.

 

Financial Services total income remained broadly flat year-on-year at £227 million, as higher interest and commission income was offset by increased interest payable, driven in part by the scale of lending growth and timing impact from Bank base rate rise in August 2018. Financial Services underlying operating profit increased by 25 per cent year-on-year to £20 million. The increase is driven by an increase in the contribution from Argos Financial Services as a result of changes to transfer pricing rules.

Financial Services cost:income ratio improved by 100bps to 70%. The cost of supporting the new operating platforms and product growth was offset by a reduction in royalties payments to Argos linked to changes in transfer pricing. The number of Bank active customers increased by eight per cent year-on-year to 2.1 million, with AFS customers up 5 per cent to 2.2 million.

 

Net interest margin decreased by 50 basis points year-on-year to 3.5 per cent (2018/19: 4.0 per cent) driven primarily by the growth of the mortgage book which attracts a lower yield and higher funding costs following the base rate rise. Bad debt expense as a percentage of lending improved by 30 basis points to 1.3 per cent, primarily driven by the mix impact of growth in mortgages. We stopped new mortgage lending on 25th September 2019. Excluding mortgages, the bad debt ratio saw a slight improvement reflecting book maturity.

 

The CET 1 capital ratio increased by 100 basis points year-on-year to 13.7 per cent, reflecting the effect of additional funds contributed from the Parent. Customer lending increased by 19 per cent to £7.4 billion, mainly due to growth across credit cards and mortgages. To support this lending, customer deposits grew a similar 18 per cent to £6.6 billion.

 

Financial Services underlying operating profit is expected to be around £45 million in 2019/20, in line with previous guidance.

 

Capital injections into the Bank in the first half were £35 million, with no further capital injections expected.

 

Underlying net finance costs

Underlying net finance costs reduced by 4 per cent to £219 million (2018/19: £228 million). These costs include £45 million of non-lease interest (2018/19: £50 million). The reduction of non-lease interest is driven by the £568 million repayment of a secured loan in April 2018 and reduced interest on inflation-linked loans. The interest costs on lease liabilities have reduced to £174 million (2018/19: £179 million) as a result of the decreasing lease liability as the Group's lease portfolio matures, with more repayments than new leases and extensions.

 

Sainsbury's expects underlying net finance costs of around £405 million, including £320 million lease interest in 2019/20, following the introduction of IFRS 16.

 

This represents a c.£4m effective reduction in pre IFRS 16 guidance (implicitly £96m) as finance lease interest of £7m included in pre IFRS 16 underlying net finance costs is now included in the £320 million lease interest guidance. The reduction in underlying guidance is driven by the repayment of the 2019 convertible bond and its partial refinancing through a new five year bilateral loan.

 

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

28 weeks to

28 weeks to

 

21 September

22 September

 

2019

2018

 

£m

£m

Property strategy programme

(203)

-

Retail restructuring programme

(25)

(69)

Financial Services transition and other

(15)

(40)

Argos integration costs

-

(25)

Asda transaction costs

-

(17)

Other

14

(21)

Items excluded from underlying results

(229)

(172)

 

·    Property strategy programme costs of £203 million (2018/19: nil) within property, plant and equipment and right of use assets, relate to store closures and asset write downs as announced on 25th September 2019. We continue to expect the total cost of this programme to be in the range of £230 million to £270 million of which the cash costs are £30 million to £40 million

·    Retail restructuring costs of £25 million (2018/19: £69 million) relate to changes to store management structures and closure of one Argos depot.

·    Financial Services transition and other costs of £15 million (2018/19: £40 million) were predominantly the previously announced costs incurred in transitioning to a new, more flexible banking platform.

·    Other movements of £14 million (2018/19: cost of £21 million) relate to property profits, IAS 19 pension expense and acquisition adjustments.

 

Taxation

The income tax charge was £47 million (2018/19 interim tax credit: £16 million), with an underlying tax rate of 26.5 per cent (2018/19 interim: 25.7 per cent).

 

The effective tax rate of 522.2 per cent (2018/19 Interim: 15.0 per cent) is higher than prior year interim (as restated). In 2019/20 the ETR is increased significantly by the impact of non-tax deductible exceptional costs, including the impairment of fixed assets. To a lesser extent the ETR is also increased by a prior year deferred tax charge of c.£7 million relating to the implementation of the Group's new asset backed contribution arrangement. In 2018/19 the ETR was reduced by prior year adjustments, including a £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 by the tax impact of property disposals.

 

The underlying tax rate (UTR) for the interim period was higher year-on-year, largely as a result of the impact of an underlying prior year deferred tax charge identified in the first half and reflected in full in the interim UTR. As in prior years the most significant factor in the UTR being higher than the statutory rate (19.0%) relates to non-qualifying depreciation (an impact of 4.5%).

 

In 2019/20, Sainsbury's expects the full-year underlying tax rate to be between 25 and 26 per cent.

 

Earnings per share

Underlying basic earnings per share fell to 7.9 pence (2018/19: 9.4 pence) driven by the decrease in underlying earnings year-on-year and a higher underlying tax rate. Basic earnings per share decreased to negative 2.2 pence (2018/19: 5.1 pence), mainly as a result of the £229 million charge for items excluded from underlying results (2018/19: £172 million charge) and a higher effective tax rate.

 

Dividends

The Board has recommended an interim dividend of 3.3 pence per share, up 6%, in line with our policy of paying 30 per cent of prior full year dividend. This will be paid on 20 December 2019 to shareholders on the Register of Members at the close of business on 15 November 2019.

 

Sainsbury's plans to change the full year dividend policy to 1.9x cover by underlying earnings (versus 2.0x previously) to offset the dilutive (non cash) impact of IFRS 16 on underlying earnings.

 

Net debt and retail cash flows

As at 21 September 2019, net debt was £6,778 million (22 September 2018: £7,145 million), a decrease of £367 million.

 

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 required for business as usual activities.

 

Net debt now includes the lease liabilities under IFRS 16 of £5,770 million (2018/19: £5,873 million) and the perpetual securities of £496 million (2018/19: £496 million restated).

 

Summary cash flow statement1

Retail

Retail

Retail

 

28 weeks to

28 weeks to

52 weeks to

 

21 September

22 September

9 March

 

2019

2018

2019

 

£m

£m

£m

Operating cash flow before changes in working capital2

1,034

1,029

2,022

(Increase)/decrease in working capital

289

296

(38)

Net interest paid3

(226)

(235)

(423)

Pension cash contributions

(48)

(29)

(63)

Corporation tax paid

(8)

(15)

(61)

Net cash generated from operating activities

1,041

1,046

1,437

Cash capital expenditure before strategic capital4

(248)

(243)

(508)

Repayments of obligations under leases

(230)

(225)

(429)

Initial direct costs on right-of-use assets

(2)

(6)

(11)

Proceeds from disposal of property, plant and equipment

54

34

64

Bank capital injections

(35)

-

(110)

JV capital injections

-

(5)

(5)

Dividends and distributions received

118

16

18

Retail free cash flow

698

617

456

 

Summary cash flow statement1

Retail

Retail

Retail

 

28 weeks to

28 weeks to

52 weeks to

 

21 September

22 September

9 March

 

2019

2018

2019

 

£m

£m

£m

Strategic capital expenditure - Argos integration3

-

(31)

(36)

Dividends paid on ordinary shares

(174)

(156)

(224)

Repayment of borrowings3

(160)

(565)

(446)

Other3

1

(1)

(8)

Net increase/(decrease) in cash and cash equivalents

365

(136)

(258)

Decrease in debt

390

790

875

Other non-cash and net interest movements5

(187)

(224)

(388)

Movement in net debt

568

430

229

 

 

 

 

Opening net debt

(7,346)

(7,575)

(7,575)

Closing net debt

(6,778)

(7,145)

(7,346)

of which:

 

 

 

              Lease Liabilities

(5,770)

(5,873)

(5,824)

              Net Debt excluding Lease Liabilities

(1,008)

(1,272)

(1,522)

 

1      See note 5 for a reconciliation between the Retail and Group cash flows.

2      Excludes working capital and pension contributions.

3      Refer to the Alternative Performance Measures on page 56 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 £249 million year-on-year to £1,034 million (2018/19: £1,029 million) and working capital decreased by £289 million since the year end. As in previous years, the working capital decrease is principally driven by the difference in phasing of payables at half year and year end. Cash capital expenditure before strategic capital was £248 million (2018/19: £243 million).

 

Retail free cash flow increased by £81 million year-on-year to £698 million (2018/19: £617 million). Free cash flow was used to fund dividends and reduce borrowings. Capital injections into the Bank were £35 million (2018/19: £nil).  Dividends of £174 million were paid, being the final dividend in respect of 2018/19. Strategic capital expenditure incurred in the prior year of £31 million related to Argos integration capital expenditure.

The increase in dividends and distributions received to £118 million (2018/19: £16 million) was due to the sale of 12 British Land joint venture properties.

 

Net debt reduced by £568 million in the first half (2018/19: £430 million reduction).

 

As at 21 September 2019, Sainsbury's had drawn debt facilities of £1.82 billion including the perpetual securities (2018/19: £1.96 billion) and undrawn committed credit facilities of £1.45 billion. In July 2019, the Group entered into a new secured £250 million Bilateral Loan facility due July 2024 to part refinance the £450 million Convertible Bond that matures in November 2019. The Bilateral Loan Facility was undrawn as at 21 September 2019.

 

Compared to the 2018/19 year end net debt excluding lease liabilities of £1,522 million, Sainsbury's expects a reduction of at least £300 million within 2019/20 and £750 million over a three year period.

 

The increase to year end from the half year net debt position is principally driven by the unwind of the difference in phasing of payables at half year compared to year end.

 

Capital expenditure

Retail cash capital expenditure (including Argos integration capital expenditure) was £248 million (2018/19: £274 million).

 

In 2019/20, Sainsbury's expects core retail capital expenditure (excluding Financial Services) to be around £550 million. Core retail capital expenditure is expected to be between £550 million and £600 million per annum over the medium term.

 

Financial ratios

 

Key financial ratios

52 weeks to

52 weeks to

 

21 September

9 March

 

2019

20194

Return on capital employed (%)1

7.1

7.4

Net debt to EBITDAR2,3

3.1 times

3.3 times

Fixed charge cover2

2.6 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 £6,778 million includes lease obligations under IFRS 16 and perpetual securities treated as debt, divided by Group underlying EBITDAR of £2,171 million, calculated for a 52-week period to 21 September 2019.

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

4      52 weeks to 22nd September 2018 is not available due to the implementation of IFRS 16. Comparatives therefore reflect the 52 weeks to 9th March 2019.

 

 

Property value

As at 21 September 2019, Sainsbury's estimated market value of properties, including our 50 per cent share of properties held within property joint ventures, was £10.0 billion (9 March 2019: £10.4 billion), the reduction largely as a result of the sale of 12 British Land joint venture properties and the decline in rental value.

 

Defined benefit pensions

At 21 September 2019, the net defined benefit surplus for the Group was £1,382 million (excluding deferred tax). The £423 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 2.80 per cent to 2.15 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.

 

Under the revised funding plan, Sainsbury's established a new asset backed contribution (ABC) structure with the Scheme on 17 July 2019. This replaces 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. These are approximately £58 million per year until 2030, and subsequently approximately £15 million a year for the remaining period. The distributions will be made through three payment streams:

 

1)            Payments to the Sainsbury's section

2)            Payments to the Argos section

3)            Switching payment stream, paid to either the Sainsbury's section or Argos section

 

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 third 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 ABC reduces as the Scheme reaches funding targets. Additional cash contributions £40 million were also agreed for FY2019/20, and £10 million in FY2020/21.

 

Retirement benefit obligations

 

 

 

 

 

Sainsbury's

Argos

Group

Group

 

as at

as at

as at

as at

 

21 September

21 September

21 September

9 March

 

2019

2019

2019

2019

 

£m

£m

£m

£m

Present value of funded obligations

(8,521)

(1,356)

(9,877)

(8,856)

Fair value of plan assets

9,856

1,441

11,297

9,983

Additional liability due to minimum funding requirements (IFRIC 14)

-

-

-

(134)

Pension surplus

1,335

85

1,420

993

Present value of unfunded obligations

(23)

(15)

(38)

(34)

Retirement benefit obligations

1,312

70

1,382

959

Deferred income tax (liability)

(235)

(22)

(257)

(216)

Net retirement benefit obligations

1,077

48

1,125

743

 

Group income statement (unaudited)

for the 28 weeks to 21 September 2019

 

 

 

 

28 weeks to 21 September 2019

28 weeks to 22 September 2018 (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

 

5a

15,097

-

15,097

15,128

(1)

15,127

Cost of sales

 

 

(13,970)

(177)

(14,147)

(13,944)

(10)

(13,954)

Gross profit

 

 

1,127

(177)

950

1,184

(11)

1,173

Administrative expenses

 

 

(694)

(86)

(780)

(709)

(177)

(886)

Other income

 

 

24

44

68

28

(12)

16

Operating profit

 

 

457

(219)

238

503

(200)

303

Finance income

 

7

2

16

18

4

25

29

Finance costs

 

7

(221)

4

(217)

(232)

6

(226)

Share of post-tax (loss)/profit from joint ventures and associates

 

 

-

(30)

(30)

4

(3)

1

Profit before taxation

 

 

238

(229)

9

279

(172)

107

 

 

 

 

 

 

 

 

 

Income tax (expense)/credit

 

8

(63)

16

(47)

(72)

88

16

Profit/(loss) for the financial period

 

 

175

(213)

(38)

207

(84)

123

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

9

 

 

pence

 

 

pence

Basic (loss)/earnings

 

 

 

 

(2.2)

 

 

5.1

Diluted (loss)/earnings

 

 

 

 

(2.2)

 

 

5.0

 

 

 

 

52 weeks to 9 March 2019

(restated)

 

 

 

 

 

Before non-underlying items

Non-underlying items

Total

 

Note

 

 

 

£m

£m

£m

 

 

 

 

 

 

 

 

Revenue

5a

 

 

 

29,007

-

29,007

Cost of sales

 

 

 

 

(26,708)

(11)

(26,719)

Gross profit

 

 

 

 

2,299

(11)

2,288

Administrative expenses

 

 

 

 

(1,342)

(383)

(1,725)

Other income

 

 

 

 

55

(17)

38

Operating profit

 

 

 

 

1,012

(411)

601

Finance income

7

 

 

 

5

19

24

Finance costs

7

 

 

 

(424)

(3)

(427)

Share of post-tax profit/(loss) from joint ventures and associates

 

 

 

 

8

(4)

4

Profit before taxation

 

 

 

 

601

(399)

202

 

 

 

 

 

 

 

 

Income tax (expense)/credit

8

 

 

 

(147)

131

(16)

Profit/(loss) for the financial period

 

 

 

 

454

(268)

186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

9

 

 

 

 

 

pence

Basic earnings

 

 

 

 

 

 

7.6

Diluted earnings

 

 

 

 

 

 

7.5

 

The notes on pages 21 to 60 form an integral part of these Condensed Consolidated Interim Financial Statements.

 

Restatements relate to the adoption of IFRS 16 as explained in note 3.

 

Group statement of comprehensive income (unaudited)

for the 28 weeks to 21 September 2019

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

21 September

22 September

9 March

 

 

2019

2018

2019

 

 

 

(restated)

(restated)

 

Note

£m

£m

£m

 

 

 

 

 

(Loss)/profit for the financial period

 

(38)

123

186

 

 

 

 

 

Items that will not be reclassified subsequently to the income statement:

 

 

 

 

Remeasurement gains on defined benefit pension schemes

18

364

501

1,269

Deferred tax relating to items not reclassified

 

(62)

(85)

(216)

 

 

302

416

1,053

Items that may be reclassified subsequently to the income statement:

 

 

 

 

Currency translation differences

 

3

3

1

Movements on financial assets at fair value through other comprehensive income

 

(12)

7

55

Items reclassified from financial assets at fair value through other comprehensive income reserve

 

-

(10)

(10)

Cash flow hedges effective portion of fair value movements

 

58

74

71

Items reclassified from cash flow hedge reserve

 

(30)

(7)

(45)

Current tax on items that may be reclassified

 

-

1

2

Deferred tax relating to items that may be reclassified

 

(2)

(13)

(15)

 

 

17

55

59

Total other comprehensive income for the period (net of tax)

319

471

1,112

Total comprehensive income for the period

 

281

594

1,298

 

The notes on pages 21 to 60 form an integral part of these Condensed Consolidated Interim Financial Statements.

 

Restatements relate to the adoption of IFRS 16 as explained in note 3.

 

Group balance sheet (unaudited)

at 21 September 2019

 

 

 

21 September

22 September

9 March

 

 

2019

2018

2019

 

 

 

(restated)

(restated)

 

Note

£m

£m

£m

Non-current assets

 

 

 

 

Property, plant and equipment

11

8,943

9,284

9,193

Right-of-use assets

12

4,878

5,055

4,993

Intangible assets

13

1,008

1,051

1,043

Investments in joint ventures and associates

14

56

209

205

Financial assets at fair value through other comprehensive income

15b

838

541

645

Other receivables

 

50

58

57

Amounts due from Financial Services customers

15a

3,593

2,752

3,349

Derivative financial instruments

15b

8

18

9

Net retirement benefit surplus

18

1,382

266

959

 

 

20,756

19,234

20,453

Current assets

 

 

 

 

Inventories

 

1,953

1,879

1,929

Trade and other receivables

 

693

653

630

Amounts due from Financial Services customers

15a

3,808

3,482

3,638

Financial assets at fair value through other comprehensive income

15b

182

353

211

Derivative financial instruments

15b

41

47

21

Cash and cash equivalents

17

1,468

1,463

1,121

 

 

8,145

7,877

7,550

Assets held-for-sale

 

5

8

8

 

 

8,150

7,885

7,558

Total assets

 

28,906

27,119

28,011

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

 

(4,710)

(4,782)

(4,373)

Amounts due to Financial Services customers and other deposits

15a

(6,573)

(5,336)

(5,797)

Borrowings

16

(495)

(237)

(816)

Lease liabilities

16

(536)

(528)

(533)

Derivative financial instruments

15b

(12)

(6)

(17)

Taxes payable

 

(185)

(123)

(204)

Provisions

 

(127)

(111)

(109)

 

 

(12,638)

(11,123)

(11,849)

Net current liabilities

 

(4,488)

(3,238)

(4,291)

 

 

 

 

 

Non-current liabilities

 

 

 

 

Other payables

 

(69)

(83)

(87)

Amounts due to Financial Services customers and other deposits

15a

(1,594)

(1,850)

(1,804)

Borrowings

16

(1,023)

(1,299)

(844)

Lease liabilities

16

(5,240)

(5,352)

(5,298)

Derivative financial instruments

15b

(41)

(9)

(17)

Deferred income tax liability

 

(291)

(125)

(235)

Provisions

 

(104)

(104)

(95)

 

 

(8,362)

(8,822)

(8,380)

Net assets

 

7,906

7,174

7,782

 

 

 

 

 

Equity 

 

 

 

 

Called up share capital

 

632

629

630

Share premium account

 

1,151

1,140

1,147

Merger reserve

 

568

568

568

Capital redemption reserve

 

680

680

680

Other reserves

 

184

170

172

Retained earnings

 

4,195

3,491

4,089

Total equity before perpetual securities

 

7,410

6,678

7,286

Perpetual capital securities

 

248

248

248

Perpetual convertible bonds

 

248

248

248

Total equity

 

7,906

7,174

7,782

 

The notes on pages 21 to 60 form an integral part of these Condensed Consolidated Interim Financial Statements.

 

Restatements relate to the adoption of IFRS 16 as explained in note 3.

 

Group cash flow statement (unaudited)

for the 28 weeks to 21 September 2019

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

21 September

22 September

9 March

 

 

2019

2018

2019

 

 

 

(restated)

(restated)

 

Note

£m

£m

£m

Cash flows from operating activities

 

 

 

 

Profit before tax

 

9

107

202

Net finance costs

 

199

197

403

Share of post-tax loss/(profit) from joint ventures

 

30

(1)

(4)

Operating profit

 

238

303

601

Adjustments for:

 

 

 

 

Depreciation expense

11,12

597

606

1,119

Amortisation expense

13

70

75

143

Net impairment loss on property, plant and equipment, right of use assets, intangible assets

11,12,13

177

-

3

Non-cash adjustments arising from acquisitions

 

(1)

-

(2)

Financial Services impairment losses on loans and advances

 

47

49

98

(Profit)/loss on sale of properties and early termination of leases

4

(44)

12

17

Loss on disposal of intangibles

 

-

1

-

Share-based payments expense

 

19

19

39

Non-cash defined benefit scheme expenses

18

4

4

108

Cash contributions to benefit schemes

18

(48)

(29)

(63)

Operating cash flows before changes in working capital

 

1,059

1,040

2,063

Changes in working capital:

 

 

 

 

Increase in inventories

 

(24)

(69)

(118)

Increase in financial assets at fair value through other comprehensive income

16

(176)

(180)

(97)

(Increase)/decrease in trade and other receivables

 

(69)

54

92

Increase in amounts due from Financial Services customers and other deposits

 

(461)

(672)

(1,480)

Increase in trade and other payables

 

316

424

71

Increase in amounts due to Financial Services customers and other deposits

 

566

662

1,077

Increase/(decrease) in provisions and other liabilities

 

27

(66)

(93)

Cash generated from operations

 

1,238

1,193

1,515

Interest paid

16

(208)

(217)

(404)

Corporation tax paid

 

(6)

(22)

(68)

Net cash generated from operating activities

 

1,024

954

1,043

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Purchase of property, plant and equipment

 

(213)

(235)

(474)

Initial direct costs on new leases

 

(2)

(6)

(11)

Purchase of intangible assets

 

(52)

(58)

(116)

Proceeds from disposal of property, plant and equipment

 

54

34

64

Proceeds from financial assets at fair value through other comprehensive income

16

-

39

39

Investment in joint ventures

14

-

(5)

(5)

Interest received

16

2

2

4

Dividends and distributions received

14

118

16

18

Net cash used in investing activities

 

(93)

(213)

(481)

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Proceeds from issuance of ordinary shares

 

5

11

22

Proceeds from borrowings

16

80

-

135

Repayment of borrowings

16

(230)

(581)

(593)

Purchase of own shares

 

(4)

(12)

(30)

Repayment of capital element of lease obligations

16

(231)

(226)

(430)

Repayment of capital element of obligations under hire purchase arrangements

16

(10)

(23)

(27)

Dividends paid on ordinary shares

10

(174)

(156)

(224)

Dividends paid on perpetual securities

 

(20)

(20)

(23)

Net cash used in financing activities

 

(584)

(1,007)

(1,170)

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

347

(266)

(608)

 

 

 

 

 

Opening cash and cash equivalents

 

1,120

1,728

1,728

 

 

 

 

 

Closing cash and cash equivalents

17

1,467

1,462

1,120

 

The notes on pages 21 to 60 form an integral part of these Condensed Consolidated Interim Financial Statements. Restatements relate to the adoption of IFRS 16 as explained in note 3.

 

Group statement of changes in equity (unaudited)

for the 28 weeks to 21 September 2019

 

 

Called up share capital

Share premium account

Merger reserve

Capital  redemption and other reserves

Retained earnings

Total equity before perpetual securities

Perpetual capital securities

Perpetual convertible bonds

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 10 March 2019 (as previously reported)

630

1,147

568

852

4,763

7,960

248

248

8,456

Cumulative adjustment to opening balance on adoption of IFRS 16

-

-

-

-

(674)

(674)

-

-

(674)

At 10 March 2019 (restated)

630

1,147

568

852

4,089

7,286

248

248

7,782

Loss for the period

-

-

-

-

(40)

(40)

-

2

(38)

Other comprehensive income

-

-

-

19

364

383

-

-

383

Tax relating to other comprehensive income

-

-

-

(2)

(62)

(64)

-

-

(64)

Total comprehensive income for the period ended 21 September 2019

-

-

-

17

262

279

-

2

281

Transactions with owners:

 

 

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

(174)

(174)

-

-

(174)

Distribution to holders of perpetual convertible bonds

-

-

-

-

-

-

-

(4)

(4)

Amortisation of convertible bond equity component

-

-

-

(5)

5

-

-

-

-

Share-based payment

-

-

-

-

19

19

-

-

19

Purchase of own shares

-

-

-

-

(4)

(4)

-

-

(4)

Allotted in respect of share option schemes

2

4

-

-

(1)

5

-

-

5

Tax on items charged to equity

-

-

-

-

(1)

(1)

-

2

1

At 21 September 2019

632

1,151

568

864

4,195

7,410

248

248

7,906

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 11 March 2018 (as previously reported)

627

1,130

568

801

3,789

6,915

248

248

7,411

Cumulative adjustment to opening balance on adoption of IFRS 16

-

-

-

-

(641)

(641)

-

-

(641)

At 11 March 2018 (restated)

627

1,130

568

801

3,148

6,274

248

248

6,770

Day 1 accounting adjustments (net of tax)1

-

-

-

-

(56)

(56)

-

-

(56)

Profit for the period

-

-

-

-

121

121

-

2

123

Other comprehensive income

-

-

-

67

501

568

-

-

568

Tax relating to other comprehensive income

-

-

-

(12)

(85)

(97)

-

-

(97)

Total comprehensive income for the period ended 22 September 2018

-

-

-

55

481

536

-

2

538

Transactions with owners:

 

 

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

(156)

(156)

-

-

(156)

Distribution to holders of perpetual convertible bonds

-

-

-

-

-

-

-

(4)

(4)

Amortisation of convertible bond equity component

-

-

-

(6)

6

-

-

-

-

Share-based payment

-

-

-

-

18

18

-

-

18

Purchase of own shares

-

-

-

-

(12)

(12)

-

-

(12)

Allotted in respect of share option schemes

2

10

-

-

(1)

11

-

-

11

Tax on items charged to equity

-

-

-

-

7

7

-

2

9

At 22 September 2018 (restated)

629

1,140

568

850

3,491

6,678

248

248

7,174

 

1This is comprised of IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' day 1 adjustments.

 

The notes on pages 21 to 60 form an integral part of these Condensed Consolidated Interim Financial Statements.

 

Restatements relate to the adoption of IFRS 16 as explained in note 3.

 

 

Called up share capital

Share premium account

Merger reserve

Capital  redemption and other reserves

Retained earnings

Total equity before perpetual securities

Perpetual capital securities

Perpetual convertible bonds

Total equity

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

At 11 March 2018 (as previously reported)

627

1,130

568

801

3,789

6,915

248

248

7,411

Cumulative adjustment to opening balance on adoption of IFRS 16

-

-

-

-

(641)

(641)

-

-

(641)

At 11 March 2018 (restated)

627

1,130

568

801

3,148

6,274

248

248

6,770

Day 1 accounting adjustments (net of tax)1

-

-

-

-

(74)

(74)

-

-

(74)

Profit for the period

-

-

-

-

168

168

12

6

186

Other comprehensive income

-

-

-

72

1,269

1,341

-

-

1,341

Tax relating to other comprehensive income

-

-

-

(13)

(216)

(229)

-

-

(229)

Total comprehensive income for the period ended 10 March 2018

-

-

-

59

1,147

1,206

12

6

1,224

Transactions with owners:

 

 

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

(224)

(224)

-

-

(224)

Distributions to holders of perpetual convertible bonds

-

-

-

-

-

-

(16)

(7)

(23)

Amortisation of convertible bond equity component

-

-

-

(8)

8

-

-

-

-

Share-based payment

-

-

-

-

37

37

-

-

37

Purchase of own shares

-

-

-

-

(30)

(30)

-

-

(30)

Allotted in respect of share option schemes

3

17

-

-

2

22

-

-

22

Tax on items charged to equity

-

-

-

-

1

1

4

1

6

At 9 March 2019 (restated)

630

1,147

568

852

4,089

7,286

248

248

7,782

 

1This is comprised of IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' day 1 adjustments.

 

The notes on pages 21 to 60 form an integral part of these Condensed Consolidated Interim Financial Statements.

 

Restatements relate to the adoption of IFRS 16 as explained in note 3.

 

Notes to the Condensed Consolidated Interim Financial Statements (unaudited)

 

1.         General information

J Sainsbury plc is a public limited company (the 'Company') incorporated in the United Kingdom, whose shares are publicly traded on the London Stock Exchange. The Company is domiciled in the United Kingdom and its registered address is 33 Holborn, London EC1N 2HT, United Kingdom.

 

The Condensed Consolidated Interim Financial Statements are unaudited but have been reviewed by the auditors whose report is set out on page 55. The financial information presented herein does not amount to statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Annual Report and Financial Statements 2019 have been filed with the Registrar of Companies. The Independent Auditors' report on the Annual Report and Financial Statements 2019 was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.

 

The financial period represents the 28 weeks to 21 September 2019 (comparative financial period 28 weeks to 22 September 2018; prior financial year 52 weeks to 9 March 2019). The financial information comprises the results of the Company and its subsidiaries (the 'Group') and the Group's interests in joint ventures and associates.

 

The Group's principal activities are Food, General Merchandise & Clothing Retailing and Financial Services.

 

2.         Basis of preparation and changes to the Group's accounting policies

2.1       Basis of preparation

The Interim Results, comprising the Condensed Consolidated Interim Financial Statements and the Interim Management Report, have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting' as adopted by the European Union.

 

The financial information contained in the Interim Results is presented in sterling, rounded to the nearest million (£m) unless otherwise stated.

 

The financial information contained in the Condensed Consolidated Interim Financial Statements should be read in conjunction with the Annual Report and Financial Statements 2019, which were prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union.

 

The Group has adopted IFRS 16 'Leases' effective for the period ending 21 September 2019. IFRS 16 has been applied fully retrospectively and therefore comparatives for prior periods have been restated. Further details regarding the impact of IFRS 16 are included in note 3.

 

Sainsbury's Bank plc and its subsidiaries have been consolidated for the six months to 31 August 2019 (22 September 2018: six months to 31 August 2018; 9 March 2019: twelve months to 28 February 2019). Adjustments have been made for the effects of significant transactions or events that occurred between this date and the Group's balance sheet date.     

 

The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

 

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

 

In preparing these Condensed Consolidated Interim Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Consolidated Financial Statements for the year ended 9 March 2019, other than those in relation to leases, which are highlighted below.

 

2.2       New standards, interpretations and amendments adopted by the Group

 

The Group has considered the following amendments to published standards that are effective for the Group for the financial year beginning 10 March 2019 and concluded that, with the exception of IFRS 16, they are either not relevant to the Group or that they do not have a significant impact on the Group's financial statements other than disclosures. These standards and interpretations have been endorsed by the European Union.

 

-  IFRS 16 'Leases'

-  IFRIC Interpretation 23 'Uncertainty over Income Tax Treatments'

-  Amendments to IFRS 9 'Financial Instruments' on prepayment features with negative compensation

-  Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' on the definition of material

-  Amendments to IAS 19 'Employee Benefits' on plan amendments, curtailments or settlements

-  Amendments to IAS 28 'Investments in Associates and Joint Ventures' on long term interests in associates and joint ventures

-  Annual Improvements Cycle 2015-2017 (issued in December 2017)

 

Information regarding the adoption of IFRS 16 is included in note 3.

 

The accounting policies have remained unchanged from those disclosed in the Annual Report for the year ended 9 March 2019 except for the adoption of IFRS 16 set out in note 3.

 

2.3       Alternative performance measures (APMs)

 

In the reporting of financial information, the Directors use various APMs. These APMs should be considered in addition to, and are not intended to be a substitute for IFRS measurements. As they are not defined by International Financial Reporting Standards, they may not be directly comparable with other companies who use similar measures.

 

Purpose of APMs

The Directors believe that these APMs assist in providing additional useful information for understanding the financial performance and health of the Group. They are also used to enhance the comparability of information between reporting periods (such as like-for-like sales and underlying profit) by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid users in understanding the Group's performance.

 

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes.

 

The APMs that the Group has focused on in the period are detailed on page 56. All of the APMs relate to the current period's results and comparative periods where provided.

 

Changes to APMs

The following APMs have been updated during the period:

 

APM

Prior definition

Updated definition

Explanation

Retail free cash flow

Net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure but before strategic capital expenditure, and after investments in joint ventures and associates and Sainsbury's Bank capital injections.

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.

IFRS 16 replaces rental payments presented within operating profit with interest payments and capital repayments of the lease liability, with no overall change in total cash flow for the Group. Redefining Retail free cash flow to include payments of lease obligations ensures that the Group's reported free cash flow measures are consistent with those previously reported.

Net debt

Net debt includes the capital injections into Sainsbury's Bank, but excludes the net debt of Sainsbury's Bank and its subsidiaries.

 

It is calculated as: financial assets at fair value through other comprehensive income (excluding equity investments)

+ net derivatives + net cash and cash equivalents + loans + finance lease obligations.

 

Net debt includes the capital injections into Sainsbury's Bank, but excludes the net debt of Sainsbury's Bank and its subsidiaries.

 

It is calculated as: financial assets at fair value through other comprehensive income (excluding equity investments)

+ net derivatives to hedge borrowings + net cash and cash equivalents + loans + lease obligations + perpetual securities.

 

Following the adoption of IFRS 16, the definition of net debt has been updated to include lease obligations.

 

Whilst not impacted by IFRS 16, perpetual securities are now included within net debt. Although accounted for as equity in the financial statements, they have similarities to debt instruments due to the coupons, and are included by management when assessing Group borrowing.

 

As net debt is a measure of Group indebtedness, the derivatives included have been amended to only include derivatives used to hedge borrowings. All other derivatives are used as part of operating activities rather than financing activities, and have therefore now been excluded from net debt.

 

A reconciliation of net debt as previously reported to restated net debt for all comparative periods is shown below:

 

 

11 March

22 September

9 March

 

2018

2018

2019

 

£m

£m

£m

Net debt as previously reported

(1,364)

(834)

(1,142)

Remove previously reported finance leases (including hire purchase arrangements)

127

107

122

Add perpetual securities

(496)

(496)

(496)

Remove derivatives not linked to borrowings

55

(49)

(6)

Lease liabilities and hire purchase arrangements (Retail)

(5,897)

(5,873)

(5,824)

Restated net debt

(7,575)

(7,145)

(7,346)

 

Hire purchase arrangements included in the above lease liabilities are as follows:

 

 

11 March

22 September

9 March

 

2018

2018

2019

 

£m

£m

£m

Hire purchase arrangements

(37)

(14)

(10)

 

These are £nil at 21 September 2019.

Adjusted net debt to EBITDAR

Net debt plus capitalised lease obligations divided by Group underlying EBITDAR.

Net debt divided by Group underlying EBITDAR.

Due to updates to net debt (see above), lease liabilities are now already included within net debt.

Return on capital employed (ROCE)

Return on capital employed is calculated as return divided by average capital employed.

 

Return is defined as underlying profit before interest and tax.

 

Capital employed is defined as net assets excluding net debt. The average is calculated on a 14 point basis.

Return on capital employed is calculated as return divided by average capital employed.

 

Return is defined as 52 week rolling underlying profit before interest and tax.

 

Capital employed is defined as Group net assets excluding pension deficit/surplus, less net debt (excluding perpetual securities). The average is calculated on a 14 point basis.

Perpetual securities are now included within net debt (see above). They are excluded for ROCE as they are accounted for as equity in the financial statements and therefore not included within net assets.

 

Interest cover

Underlying operating profit, plus underlying share of post-tax profit from joint ventures and associates, divided by underlying net finance costs, where interest on perpetual securities is included in underlying finance costs.

N/A

Interest cover is no longer included as an APM used by management.

Gearing

Retail net debt divided by Group net assets.

N/A

Gearing is no longer included as an APM used by management.

Retail underlying operating profit

Underlying earnings before interest, tax, Financial Services operating profit and Sainsbury's underlying share of post-tax profit from joint ventures and associates.

Whilst the definition of Retail underlying operating profit has not changed, the prior period comparatives have been restated as a result of adopting IFRS 16. A reconciliation between the previously disclosed amounts and restated balances is included below:

 

 

 

 

 

 

28 weeks to

52 weeks to

 

 

22 September

9 March

 

 

2018

2019

 

 

£m

£m

Underlying operating profit pre IFRS 16

 

335

692

Add back rent

 

396

747

Depreciation on right-of-use assets

 

(251)

(470)

Other

 

7

12

Underlying operating profit post IFRS 16

 

487

981

 

 

 

 

 

Fixed charge cover

Group underlying EBITDAR divided by net rent and underlying net finance costs, where interest on perpetual securities is included in underlying finance costs.

Group underlying EBITDAR divided by rent (representing capital and underlying interest repayments on leases) and net underlying finance costs, where interest on perpetual securities is treated as an underlying finance cost. All items are calculated on a 52 week rolling basis.

Redefining fixed charge cover to include payments of lease obligations ensures that the Group's reported fixed charge cover measures are consistent with those previously reported.

 

3          Adoption of IFRS 16 'Leases'

 

IFRS 16 'Leases' supersedes IAS 17 'Leases', IFRIC 4 'Determining whether an Arrangement contains a Lease', SIC-15 'Operating Leases-Incentives' and SIC-27 'Evaluating the Substance of Transactions Involving the Legal Form of a Lease'. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for most leases under a single on-balance sheet model.

 

The Group has adopted IFRS 16 with a date of initial application of 10 March 2019. The Group adopted IFRS 16 using the full retrospective method of adoption as if it had already been effective at the commencement date of existing lease contracts. Accordingly, the comparative information in these condensed consolidated interim financial statements has been restated. The Group has elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option ('short-term leases'), and lease contracts for which the underlying asset is of low value ('low-value assets').

 

a.         Effect of adoption of IFRS 16

The Group's lease portfolio consists of properties including retail, distribution and office properties, as well as vehicles and other equipment. Before the adoption of IFRS 16, the Group classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. A lease was classified as a finance lease if it transferred substantially all of the risks and rewards incidental to ownership of the leased asset to the Group; otherwise it was classified as an operating lease. Assets funded through finance leases were capitalised as property, plant and equipment and depreciated over the shorter of their estimated useful lives or the lease term. The amount capitalised was the lower of the fair value of the asset or the present value of the minimum lease payments during the lease term. The resulting lease obligations were included in liabilities net of finance charges. Lease payments were apportioned between interest (recognised as finance costs) and reduction of the lease liability. For operating leases under IAS 17, the lease payments were recognised as rental expense in the income statement on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognised within "Other receivables" and "Trade and other payables", respectively.

 

Upon adoption of IFRS 16, the Group now applies a single recognition and measurement approach for all leases for which it is the lessee, except for short-term leases and leases of low-value assets. The Group recognises a right-of-use asset and a lease liability at the lease commencement date, and the rental charge is replaced with depreciation on the right-of-use asset and interest on the lease liability. The new accounting policies for leases are detailed in note 3b.

 

The impact of adopting IFRS 16 on the comparative information in this interim condensed consolidated financial statements is outlined below.

 

The effect of adoption of IFRS 16 on the consolidated balance sheet as at 10 March 2018 is as follows:

 

 

 

10 March

 

 

2018

 

 

£m

Assets

 

 

Property, plant and equipment

 

(500)

Right-of-use asset

 

5,091

Intangible assets

 

(1)

Other receivables

 

33

Non-current assets

 

4,623

 

 

 

Trade and other receivables

 

(25)

Current assets

 

(25)

 

 

 

Liabilities

 

 

Trade and other payables

 

50

Lease liabilities

 

(503)

Provisions

 

15

Current liabilities

 

(438)

 

 

 

Other payables

 

245

Lease liabilities

 

(5,275)

Deferred income tax liability

 

158

Provisions

 

71

Non-current liabilities

 

(4,801)

Net assets

 

(641)

 

 

 

Equity 

 

 

Retained earnings

 

(641)

Total equity

 

(641)

 

Reconciliation from previously reported operating lease commitments

 

 £m

Disclosed operating lease commitment at 10 March 2018

(10,019)

Operating lease commitment (discounted) at 10 March 20181

(5,939)

Application of lease specific discount rates

178

Effect of extension / break periods and other adjustments

(107)

Total IFRS 16 lease liability

(5,868)

Removal of finance leases already recognised

90

Net IFRS 16 lease liability impact

(5,778)

 

1      Comprises of £5,931m retail discounted operating lease commitments and £8m relating to financial services.

 

A full reconciliation of the impact of IFRS 16 on the Group income statement and balance sheet as at 22 September 2018 and 9 March 2019 is set out below:

 

Group income statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 weeks to

IFRS 16

28 weeks to

 

52 weeks

IFRS 16

52 weeks

 

22 September

Impact

22 September

 

9 March

Impact

9 March

 

2018

 

2018

 

2019

 

2019

 

(reported)

 

(restated)

 

(reported)

 

(restated)

 

£m

£m

£m

 

£m

£m

£m

 

 

 

 

 

 

 

 

Revenue

15,127

-

15,127

 

29,007

-

29,007

Cost of sales

(14,100)

146

(13,954)

 

(27,000)

281

(26,719)

Gross profit

1,027

146

1,173

 

2,007

281

2,288

Administrative expenses

(891)

5

(886)

 

(1,733)

8

(1,725)

Other income

16

-

16

 

38

-

38

Operating profit

152

151

303

 

312

289

601

Finance income

28

1

29

 

22

2

24

Finance costs

(49)

(177)

(226)

 

(99)

(328)

(427)

Share of post-tax profit from joint ventures and associates

1

-

1

 

4

-

4

Profit before tax

132

(25)

107

 

239

(37)

202

 

 

 

 

 

 

 

 

Analysed as:

 

 

 

 

 

 

 

Underlying profit before tax

302

(23)

279

 

635

(34)

601

Non-underlying items

(170)

(2)

(172)

 

(396)

(3)

(399)

 

132

(25)

107

 

239

(37)

202

 

 

 

 

 

 

 

 

Income tax credit/(expense)

12

4

16

 

(20)

4

(16)

Profit for the financial period

144

(21)

123

 

219

(33)

186

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

pence

 

pence

 

pence

 

pence

Basic earnings

6.1

(1.0)

5.1

 

9.1

(1.5)

7.6

Diluted earnings

5.8

(0.8)

5.0

 

8.9

(1.4)

7.5

Underlying basic earnings

10.3

(0.9)

9.4

 

22.0

(1.3)

20.7

Underlying diluted earnings

9.5

(0.7)

8.8

 

20.3

(1.2)

19.1

 

There is no material impact on other comprehensive income.

 

 Group balance sheet

 

 

 

 

 

 

 

 

 

 

28 weeks to

IFRS 16

28 weeks to

 

52 weeks to

IFRS 16

52 weeks to

 

 

22 September

Impact

22 September

 

9 March

Impact

9 March

 

 

2018

 

2018

 

2019

 

2019

 

 

(reported)

 

(restated)

 

(reported)

 

(restated)

 

 

£m

£m

£m

 

£m

£m

£m

Non-current assets

 

 

 

 

 

 

 

 

Property, plant and equipment

 

9,782

(498)

9,284

 

9,708

(515)

9,193

Right-of-use asset

 

-

5,055

5,055

 

-

4,993

4,993

Intangible assets

 

1,052

(1)

1,051

 

1,044

(1)

1,043

Investments in joint ventures and associates

 

209

-

209

 

205

-

205

Financial assets at fair value through other comprehensive income

 

541

-

541

 

645

-

645

Other receivables

 

30

28

58

 

33

24

57

Amounts due from Financial Services customers

 

2,752

-

2,752

 

3,349

-

3,349

Derivative financial instruments

 

18

-

18

 

9

-

9

Net retirement benefit surplus

 

266

-

266

 

959

-

959

 

 

14,650

4,584

19,234

 

15,952

4,501

20,453

Current assets

 

 

 

 

 

 

 

 

Inventories

 

1,879

-

1,879

 

1,929

-

1,929

Trade and other receivables

 

659

(6)

653

 

661

(31)

630

Amounts due from Financial Services customers

 

3,482

-

3,482

 

3,638

-

3,638

Financial assets at fair value through other comprehensive income

 

353

-

353

 

211

-

211

Derivative financial instruments

 

47

-

47

 

21

-

21

Cash and cash equivalents

 

1,463

-

1,463

 

1,121

-

1,121

 

 

7,883

(6)

7,877

 

7,581

(31)

7,550

Assets held-for-sale

 

8

-

8

 

8

-

8

 

 

7,891

(6)

7,885

 

7,589

(31)

7,558

Total assets

 

22,541

4,578

27,119

 

23,541

4,470

28,011

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Trade and other payables

 

(4,824)

42

(4,782)

 

(4,444)

71

(4,373)

Amounts due to Financial Services customers and other deposits

 

(5,336)

-

(5,336)

 

(5,797)

-

(5,797)

Borrowings (including lease liabilities)

 

(255)

(510)

(765)

 

(832)

(517)

(1,349)

Derivative financial instruments

 

(6)

-

(6)

 

(17)

-

(17)

Taxes payable

 

(123)

-

(123)

 

(204)

-

(204)

Provisions

 

(133)

22

(111)

 

(123)

14

(109)

 

 

(10,677)

(446)

(11,123)

 

(11,417)

(432)

(11,849)

Net current liabilities

 

(2,786)

(452)

(3,238)

 

(3,828)

(463)

(4,291)

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

Other payables

 

(333)

250

(83)

 

(340)

253

(87)

Amounts due to Financial Services customers and other deposits

 

(1,850)

-

(1,850)

 

(1,804)

-

(1,804)

Borrowings (including lease liabilities)

 

(1,388)

(5,263)

(6,651)

 

(950)

(5,192)

(6,142)

Derivative financial instruments

 

(9)

-

(9)

 

(17)

-

(17)

Deferred income tax liability

 

(287)

162

(125)

 

(397)

162

(235)

Provisions

 

(161)

57

(104)

 

(160)

65

(95)

 

 

(4,028)

(4,794)

(8,822)

 

(3,668)

(4,712)

(8,380)

Net assets

 

7,836

(662)

7,174

 

8,456

(674)

7,782

 

 

 

 

 

 

 

 

 

Equity 

 

 

 

 

 

 

 

 

Called up share capital

 

629

-

629

 

630

-

630

Share premium account

 

1,140

-

1,140

 

1,147

-

1,147

Merger reserve

 

568

-

568

 

568

-

568

Capital redemption reserve

 

680

-

680

 

680

-

680

Other reserves

 

170

-

170

 

172

-

172

Retained earnings

 

4,153

(662)

3,491

 

4,763

(674)

4,089

Total equity before perpetual securities

 

7,340

(662)

6,678

 

7,960

(674)

7,286

Perpetual capital securities

 

248

-

248

 

248

-

248

Perpetual convertible bonds

 

248

-

248

 

248

-

248

Total equity

 

7,836

(662)

7,174

 

8,456

(674)

7,782

 

Impact on Group cash flow statement

Prior to the adoption of IFRS 16, the repayment of interest on obligations under finance leases was presented within cash flows from financing activities. This was to be consistent with the presentation of payments of capital elements of finance leases. The repayment of interest on all lease obligations is now presented within cash flows from operating activities, as lease arrangements are part of the operating activities of the business.

 

Impact on the Group consolidated cash flow statement as at 22 September 2018 and 9 March 2019:

 

Group cash flow statement

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

28 weeks to

IFRS 16

28 weeks to

 

52 weeks to

IFRS 16

52 weeks to

 

22 September

Impact

22 September

 

9 March

Impact

9 March

 

2018

 

2018

 

2019

 

2019

 

(reported)

 

(restated)

 

(reported)

 

(restated)

 

£m

£m

£m

 

£m

£m

£m

 

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

 

Profit before tax

132

(25)

107

 

239

(37)

202

Net finance costs

21

176

197

 

77

326

403

Share of post-tax-profit from joint ventures and associates

(1)

-

(1)

 

(4)

-

(4)

Operating profit

152

151

303

 

312

289

601

Adjustments for:

 

 

 

 

 

 

 

Depreciation expense

354

252

606

 

649

470

1,119

Amortisation expense

75

-

75

 

143

-

143

Non-cash adjustments arising from acquisitions

-

-

-

 

(2)

-

(2)

Financial Services impairment losses on loans and advances

49

-

49

 

98

-

98

Loss on sale of properties

12

-

12

 

17

-

17

Loss on disposal of intangibles

1

-

1

 

-

-

-

Impairment charge of property, plant and equipment

-

-

-

 

3

-

3

Share-based payments expense

19

-

19

 

39

-

39

Non-cash defined benefit scheme expenses

4

-

4

 

108

-

108

Cash contributions to benefit schemes

(29)

-

(29)

 

(63)

-

(63)

Operating cash flows before changes in working capital

637

403

1,040

 

1,304

759

2,063

Changes in working capital:

 

 

 

 

 

 

 

Increase in inventories

(69)

-

(69)

 

(118)

-

(118)

Increase in current financial assets

(180)

-

(180)

 

(97)

-

(97)

Decrease in trade and other receivables

67

(13)

54

 

74

18

92

Increase in amounts due from Financial Services customers and other deposits

(672)

-

(672)

 

(1,480)

-

(1,480)

Increase in trade and other payables

415

9

424

 

94

(23)

71

Increase in amounts due to Financial Services customers and other deposits

662

-

662

 

1,077

-

1,077

Decrease in provisions and other liabilities

(75)

9

(66)

 

(105)

12

(93)

Cash generated from operations

785

408

1,193

 

749

766

1,515

Interest paid

(33)

(184)

(217)

 

(63)

(341)

(404)

Corporation tax paid

(22)

-

(22)

 

(68)

-

(68)

Net cash generated from operating activities

730

224

954

 

618

425

1,043

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of property, plant and equipment

(237)

2

(235)

 

(478)

4

(474)

Initial direct costs on right-of-use assets

-

(6)

(6)

 

-

(11)

(11)

Purchase of intangible assets

(58)

-

(58)

 

(116)

-

(116)

Proceeds from disposal of property, plant and equipment

34

-

34

 

64

-

64

Proceeds from financial assets at fair value through other comprehensive income

39

-

39

 

39

-

39

Investment in joint ventures

(5)

-

(5)

 

(5)

-

(5)

Interest received

2

-

2

 

4

-

4

Dividends and distributions received

16

-

16

 

18

-

18

Net cash used in investing activities

(209)

(4)

(213)

 

(474)

(7)

(481)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

11

-

11

 

22

-

22

Proceeds from borrowings

-

-

-

 

135

-

135

Repayment of borrowings

(581)

-

(581)

 

(593)

-

(593)

Purchase of own shares

(12)

-

(12)

 

(30)

-

(30)

Repayment of capital element of lease obligations

(2)

(224)

(226)

 

(5)

(425)

(430)

Repayment of capital element of obligations under hire purchase arrangements

(23)

-

(23)

 

(27)

-

(27)

Interest elements of lease obligations

(4)

4

-

 

(7)

7

-

Dividends paid on ordinary shares

(156)

-

(156)

 

(224)

-

(224)

Dividends paid on perpetual securities

(20)

-

(20)

 

(23)

-

(23)

Net cash used in financing activities

(787)

(220)

(1,007)

 

(752)

(418)

(1,170)

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

(266)

-

(266)

 

(608)

-

(608)

 

 

 

 

 

 

 

 

Opening cash and cash equivalents

1,728

-

1,728

 

1,728

-

1,728

 

 

 

 

 

 

 

 

Closing cash and cash equivalents

1,462

-

1,462

 

1,120

-

1,120

 

b.         Summary of new accounting policies

Set out below are the new accounting policies of the Group upon adoption of IFRS 16:

 

Right-of-use assets

Right-of-use assets are recognised at the commencement date of the lease (i.e. the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any subsequent remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognised, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received.

 

The recognised right-of-use assets are depreciated on a straight-line basis over the shorter of the estimated useful life and the lease term. Right-of-use assets are subject to impairment.

 

Lease liabilities

Lease liabilities are recognised at the commencement date of the lease and are measured at the present value of lease payments to be made over the lease term, discounted using the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily available.

 

The lease payments include fixed payments, including in-substance fixed payments, variable lease payments that depend on an index or a rate, less any lease incentives receivable. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Group and payments of penalties for terminating a lease, if the lease term reflects the Group exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognised as expense in the period in which the event or condition that triggers the payment occurs.

 

After the commencement date of the lease, the lease liability is subsequently measured at amortised cost using the effective interest rate method. The carrying amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured when there is a change in the future lease payments due to a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

 

Short-term leases and leases of low-value assets

The Group applies the short-term lease recognition exemption to those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option. It also applies the low-value asset recognition exemption to groups of underlying leases that are considered uniformly low value (i.e. below £5,000). Lease payments on short-term leases and leases of low-value assets are recognised as expensed to the income statement, as well as costs relating to variable lease payments dependent on performance of usage and 'out of contract' payments.

 

Lessor accounting

Where the Group subleases assets, the sublease classification is assessed with reference to the head lease right-of-use asset. Amounts due from lessees under finance leases are recorded as a receivable at an amount equal to the net investment in the lease.

 

The Group recognises finance income over the lease term, reflecting a constant periodic rate of return on the Group's net investment in the lease. Operating lease income is recognised as earned on a straight-line basis over the lease term.

 

Updates to judgements and estimates

 

Judgements

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

 

The Group has the option, under some of its leases to either lease the assets for additional terms, or terminate the lease early (a break option). The Group applies judgement in evaluating whether it is reasonably certain to exercise these options. That is, it considers all relevant factors that create an economic incentive for it to exercise them.

 

After the commencement date, the Group reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the options to renew (e.g. a change in business strategy).

 

Estimates

The discount rate used to calculate the lease liability is the rate implicit in the lease, if it can be readily determined and practically applied, or the lessee's incremental borrowing rate (IBR) if not.

 

The IBRs depend on the start date and term of the lease, and is determined using a reference (risk free) rate and an adjustment to reflect the Group's credit risk. The reference rates are based on UK overnight swap rates and the credit risk adjustments are based on the prices of instruments issued by the group and quoted credit default swaps ("CDS").  

 

4.         Non-GAAP performance measures

In order to provide shareholders with additional 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.

 

In addition, although the perpetual securities are accounted for as equity in line with IAS 32 'Financial Instruments: Presentation', coupons are accrued on a straight-line basis and included as an expense within underlying profit before tax.

 

Further information on the adjusted items is included within Alternative Performance Measures on page 56.

 

These adjusted items are as follows:

28 weeks to 21 September 2019

 

 

 

 

 

 

 

 

 

Revenue

Cost of sales

Admin expenses

Other income

Net finance income/

(costs)

Share of loss from JVs

Total adjustments before tax

Tax

Total adjustments

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

Property strategy programme

-

(176)

(27)

-

-

-

(203)

14

(189)

Retail restructuring programme

-

-

(25)

-

-

-

(25)

5

(20)

Financial Services transition and other

-

-

(15)

-

-

-

(15)

-

(15)

Total strategic programmes

-

(176)

(67)

-

-

-

(243)

19

(224)

 

 

 

 

 

 

 

 

 

 

Property, finance, pension and acquisition adjustments

 

 

 

 

 

 

Profit/(loss) on disposal of properties

-

-

-

44

-

(21)

23

(1)

22

Investment property fair value movements

-

-

-

-

-

(4)

(4)

-

(4)

Perpetual securities coupons

-

-

-

-

13

-

13

(2)

11

Non-underlying finance movements

-

-

-

-

(8)

(5)

(13)

-

(13)

IAS 19 pension expenses

-

-

(4)

-

15

-

11

1

12

Acquisition adjustments

-

(1)

(15)

-

-

-

(16)

3

(13)

Total property, finance, pension and acquisition adjustments

-

(1)

(19)

44

20

(30)

14

1

15

 

 

 

 

 

 

 

 

 

 

Tax adjustments

 

 

 

 

 

 

 

 

 

Under provision in prior years

-

-

-

-

-

-

-

(7)

(7)

Revaluation of deferred tax balances

-

-

-

-

-

-

-

3

3

 

 

 

 

 

 

 

 

 

 

Total adjustments

-

(177)

(86)

44

20

(30)

(229)

16

(213)

                     

 

(a)        Property strategy programme

·        At the Capital Markets Day on 25 September 2019, a programme of store closures was announced. This triggered a full impairment review by management on the Group's property portfolio. An impairment charge of £(177) million has been recognised on property, plant and equipment, right-of-use assets and goodwill allocated to stores. £(80) million of the charge is in relation to properties identified for closure. The remaining £(97) million relates to unprofitable and marginally profitable trading stores for which the cash flows no longer support the carrying amount.

·        In addition, store closure costs have been recognised in the period of £(26) million. They comprise £(23) million onerous contract charges, and £(3) million of other provisions, including redundancy.

 

(b)        Retail restructuring programme

·        Restructuring costs of £(25) million in the year comprise redundancy payments following changes to the Group's store management structure, responding to changing customer shopping habits and reducing costs throughout the store estate, as well as the closure of one Argos distribution centre, prior to the wider store closure programme announced at the Capital Markets Day.

 

(c)        Financial Services transition and other

·        These predominantly comprise Financial Services transition costs of £(12) million and were incurred in transitioning to a new, more flexible banking platform as part of the previously announced New Bank Programme. These principally comprise contractor and service provider costs relating to the migration of data and other services to the Bank's new infrastructure and operating model.

 

(d)        Property, finance, pension and acquisition adjustments

·        Profit on disposal of properties for the financial period comprised £44 million for the Group and £(21) million for the joint ventures.

·        The coupons on the perpetual subordinated capital securities and the perpetual subordinated convertible bonds are accounted for as equity in line with IAS 32 'Financial Instruments: Presentation', however are accrued on a straight-line basis and included as an expense within underlying profit before tax.

·        Non-underlying finance movements for the financial year comprised £(8) million for the Group and £(5) million for the joint ventures. These are presented separately in note 7.

·        Defined benefit pension expenses comprise pension finance income of £15 million and scheme expenses of £(4) million (see note 18). Included in the prior year-end were £(98) million non-cash past service costs relating to Guaranteed Minimum Pension (GMP) equalisation and £(2) million of pension related expenses incurred directly by the Group.

·        Acquisition adjustments of £(16) million reflect the unwind of non-cash fair value adjustments arising from the Sainsbury's Bank, Home Retail Group and Nectar UK acquisitions and are recognised as follows:

 

 

28 weeks to

28 weeks to

52 weeks to

 

21 September 2019

 

22 September 2018

9 March 2019

 

Financial Services

Argos

Nectar

Total Group

Financial Services

Argos

Nectar

Total Group

Financial Services

Argos

Nectar

Total Group

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

£m

Revenue

-

-

-

-

(1)

-

-

(1)

-

-

-

-

Cost of sales

-

1

-

1

-

1

-

1

-

2

-

2

Depreciation

-

(2)

-

(2)

-

(11)

-

(11)

-

(13)

-

(13)

Amortisation

-

(10)

(5)

(15)

-

(9)

(13)

(22)

(1)

(16)

(25)

(42)

 

-

(11)

(5)

(16)

(1)

(19)

(13)

(33)

(1)

(27)

(25)

(53)

 

28 weeks to 22 September 2018 (restated)

 

 

 

 

 

 

 

 

 

Revenue

Cost of sales

Admin expenses

Other income

Net finance income / (costs)

Share of profit/(loss) from JVs

Total adjustments before tax

Tax

Total adjustments

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

Retail restructuring programme

-

-

(69)

-

-

-

(69)

11

(58)

Financial Services transition and other

-

-

(40)

-

-

-

(40)

8

(32)

Argos integration costs

-

-

(25)

-

-

-

(25)

3

(22)

Asda transaction costs

-

-

(17)

-

-

-

(17)

-

(17)

Total strategic programmes

-

-

(151)

-

-

-

(151)

22

(129)

 

 

 

 

 

 

 

 

 

 

Property, finance, pension and acquisition adjustments

 

 

 

 

 

 

(Loss)/profit on disposal of properties

-

-

-

(12)

-

1

(11)

2

(9)

Impairments and investment property fair value movements

-

-

-

-

-

(3)

(3)

-

(3)

Perpetual securities coupons

-

-

-

-

13

-

13

(3)

10

Non-underlying finance movements

-

-

-

-

21

(1)

20

1

21

IAS 19 pension expenses

-

-

(4)

-

(3)

-

(7)

2

(5)

Acquisition adjustments

(1)

(10)

(22)

-

-

-

(33)

7

(26)

Total property, finance, pension and acquisition adjustments

(1)

(10)

(26)

(12)

31

(3)

(21)

9

(12)

 

 

 

 

 

 

 

 

 

 

Tax adjustments

 

 

 

 

 

 

 

 

 

Over provision in prior years

-

-

-

-

-

-

-

55

55

Revaluation of deferred tax balances

-

-

-

-

-

-

-

2

2

 

 

 

 

 

 

 

 

 

 

Total adjustments

(1)

(10)

(177)

(12)

31

(3)

(172)

88

(84)

 

52 weeks to 9 March 2019 (restated)

 

 

 

 

 

 

 

 

 

Revenue

Cost of sales

Admin expenses

Other income

Net finance (costs) / income

Share of loss from JVs

Total adjustments before tax

Tax

Total adjustments

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

Retail restructuring programme

-

-

(81)

-

-

-

(81)

15

(66)

Financial Services transition and other

-

-

(70)

-

-

-

(70)

13

(57)

Argos integration costs

-

-

(40)

-

-

-

(40)

8

(32)

Asda transaction costs

-

-

(37)

-

(9)

-

(46)

2

(44)

Total strategic programmes

-

-

(228)

-

(9)

-

(237)

38

(199)

 

 

 

 

 

 

 

 

 

 

Property, finance, pension and acquisition adjustments

 

 

 

 

 

 

Loss on disposal of properties

-

-

-

(17)

-

-

(17)

9

(8)

Impairments and investment property fair value movements

-

-

(3)

-

-

(2)

(5)

-

(5)

Perpetual securities coupons

-

-

-

-

23

-

23

(5)

18

Non-underlying finance movements

-

-

-

-

10

(2)

8

(3)

5

IAS 19 pension expenses

-

-

(110)

-

(8)

-

(118)

23

(95)

Acquisition adjustments

-

(11)

(42)

-

-

-

(53)

10

(43)

Total property, finance, pension and acquisition adjustments

-

(11)

(155)

(17)

25

(4)

(162)

34

(128)

 

 

 

 

 

 

 

 

 

 

Tax adjustments

 

 

 

 

 

 

 

 

 

Over provision in prior years

-

-

-

-

-

-

-

61

61

Revaluation of deferred tax balances

-

-

-

-

-

-

-

(2)

(2)

 

 

 

 

 

 

 

 

 

 

Total adjustments

-

(11)

(383)

(17)

16

(4)

(399)

131

(268)

 

Cash flow statement

The table below shows the impact of non-underlying items on the Group cash flow statement:

 

 

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

 

 

21 September

22 September

9 March

 

 

 

 

2019

2018

2019

 

 

 

 

£m

£m

£m

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

IAS 19 pension expenses

 

(4)

(4)

(10)

Sainsbury's Bank transition

 

(13)

(40)

(66)

Argos integration costs

 

(3)

(32)

(52)

Restructuring costs

 

 

(4)

(123)

(152)

Transaction costs relating to the proposed merger with Asda

(11)

(7)

(39)

Cash used in operating activities

(35)

(206)

(319)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

Proceeds from property disposals

54

34

64

Cash generated from investing activities

54

34

64

 

 

 

 

 

 

 

Net cash flows

 

 

19

(172)

(255)

 

5.         Segment reporting

 

The Group's businesses are organised into four operating segments:

 

•     Retail - Food;

•     Retail - General Merchandise & Clothing;

•     Financial Services (Sainsbury's Bank plc and Argos Financial Services entities);

•     Property Investment (The British Land Company PLC joint venture and Land Securities Group PLC joint venture).

 

Management has considered the economic characteristics, similarity of products, production processes, customers, sales methods and regulatory environment of its two Retail segments. In doing so, it has been concluded that they be aggregated into one "Retail" segment in the financial statements. This aggregated information provides users the financial information needed to evaluate the business and the environment in which it operates.

 

The Operating Board assesses the performance of all segments on the basis of underlying profit before tax. All material operations and assets are in the UK.

 

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

 

a.         Income statement and balance sheet

 

 

Retail

Financial
Services

Property
investment

Group

28 weeks to 21 September 2019

£m

£m

£m

£m

Segment revenue

 

 

 

 

Retail sales to external customers

14,808

-

-

14,808

Financial Services to external customers1

-

289

-

289

Underlying revenue

14,808

289

-

15,097

Revenue

14,808

289

-

15,097

 

 

 

 

 

Underlying operating profit

437

20

-

457

Underlying finance income

2

-

-

2

Underlying finance costs

(221)

-

-

(221)

Underlying share of post-tax profit from joint ventures and associates

-

-

-

-

Underlying profit before tax

218

20

-

238

Non-underlying expense

 

 

 

(229)

Profit before tax

 

 

 

9

Income tax expense

 

 

 

(47)

Loss for the financial period

 

 

 

(38)

 

 

 

 

 

Assets

19,308

9,542

-

28,850

Investment in joint ventures and associates

-

-

56

56

Segment assets

19,308

9,542

56

28,906

Segment liabilities

(12,478)

(8,522)

-

(21,000)

 

1      Financial Services income includes £204 million recognised using the effective interest rate method.

 

 

Retail

Financial
Services

Property
investment

Group

 

(restated)

(restated)

 

(restated)

28 weeks to 22 September 2018

£m

£m

£m

£m

Segment revenue

 

 

 

 

Retail sales to external customers

14,856

-

-

14,856

Financial Services to external customers1

-

272

-

272

Underlying revenue

14,856

272

-

15,128

Acquisition adjustment fair value unwind2

-

(1)

-

(1)

Revenue

14,856

271

-

15,127

 

 

 

 

 

Underlying operating profit

487

16

-

503

Underlying finance income

4

-

-

4

Underlying finance costs

(232)

-

-

(232)

Underlying share of post-tax profit from joint ventures and associates

-

-

4

4

Underlying profit before tax

259

16

4

279

Non-underlying expense

 

 

 

(172)

Profit before tax

 

 

 

107

Income tax credit

 

 

 

16

Profit for the financial period

 

 

 

123

 

 

 

 

 

Assets

18,486

8,424

-

26,910

Investment in joint ventures and associates

-

-

209

209

Segment assets

18,486

8,424

209

27,119

Segment liabilities

(12,405)

(7,540)

-

(19,945)

 

1        Financial Services income includes £192 million recognised using the effective interest rate method.

2        Represents fair value unwind on loans and advances to customers resulting from the Sainsbury's Bank and Home Retail Group Financial Services acquisitions.

 

 

 

Retail

Financial
Services

Property
investment

Group

 

(restated)

(restated)

 

(restated)

52 weeks to 9 March 2019

£m

£m

£m

£m

Segment revenue

 

 

 

 

Retail sales to external customers

28,466

-

-

28,466

Financial Services to external customers1

-

541

-

541

Underlying revenue

28,466

541

-

29,007

Revenue

28,466

541

-

29,007

 

 

 

 

 

Underlying operating profit

981

31

-

1,012

Underlying finance income

5

-

-

5

Underlying finance costs

(424)

-

-

(424)

Underlying share of post-tax profit from joint ventures and associates

-

-

8

8

Underlying profit before tax

562

31

8

601

Non-underlying expense

 

 

 

(399)

Profit before tax

 

 

 

202

Income tax expense

 

 

 

(16)

Profit for the financial period

 

 

 

186

 

 

 

 

 

Assets

18,885

8,921

-

27,806

Investment in joint ventures and associates

-

-

205

205

Segment assets

18,885

8,921

205

28,011

Segment liabilities

(12,284)

(7,945)

-

(20,229)

 

1     Financial Services income includes £385 million recognised using the effective interest rate method.

.

b.         Segmented cash flow statement

 

 

 

28 weeks to 21 September 2019

28 weeks to 22 September 2018

 

APM
reference

Retail

Financial Services

Group

Retail

Financial Services

Group

 

 

 

 

 

(restated)

(restated)

(restated)

 

 

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

Profit/(loss) before tax

 

2

7

9

131

(24)

107

Net finance costs

 

196

3

199

197

-

197

Share of post-tax loss/(profit) from joint ventures and associates1

30

-

30

(1)

-

(1)

Operating profit

 

228

10

238

327

(24)

303

Adjustments for:

 

 

 

 

 

 

 

Depreciation and amortisation expense

 

653

14

667

669

12

681

Net impairment charge on property, plant and equipment, right-of-use asset, investment property and intangible assets

 

177

-

177

-

-

-

Non-cash adjustments arising from acquisitions

 

(1)

-

(1)

(1)

1

-

Financial Services impairment losses on loans and advances

-

47

47

-

49

49

(Profit)/loss on sale of properties and early termination of leases

(44)

-

(44)

12

-

12

Loss on disposal of intangibles

 

-

-

-

1

-

1

Share-based payments expense

 

17

2

19

17

2

19

Non-cash defined benefit scheme expenses

 

4

-

4

4

-

4

Cash contributions to defined benefit scheme

 

(48)

-

(48)

(29)

-

(29)

Operating cash flows before changes in working capital

986

73

1,059

1,000

40

1,040

Changes in working capital

 

 

 

 

 

 

 

Decrease/(increase) in working capital

 

289

(110)

179

296

(143)

153

Cash generated from operations

 

1,275

(37)

1,238

1,296

(103)

1,193

Interest paid

a

(208)

-

(208)

(217)

-

(217)

Corporation tax paid

 

(8)

2

(6)

(15)

(7)

(22)

Net cash generated/(used) from operating activities

 

1,059

(35)

1,024

1,064

(110)

954

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of property, plant and equipment excluding strategic capital expenditure

 

(213)

-

(213)

(201)

(3)

(204)

Strategic capital expenditure

b

-

-

-

(31)

-

(31)

Purchase of property, plant and equipment

 

(213)

-

(213)

(232)

(3)

(235)

Initial direct costs on new leases

 

(2)

-

(2)

(6)

-

(6)

Purchase of intangible assets

 

(35)

(17)

(52)

(42)

(16)

(58)

Proceeds from disposal of property, plant and equipment

 

54

-

54

34

-

34

Proceeds from financial assets at fair value through other comprehensive income

d

-

-

-

39

-

39

Investment in joint ventures

f

-

-

-

(5)

-

(5)

Interest received

a

2

-

2

2

-

2

Dividends and distributions received2

f

118

-

118

16

-

16

Net cash used in investing activities

 

(76)

(17)

(93)

(194)

(19)

(213)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

e

5

-

5

11

-

11

Proceeds from borrowings

d

80

-

80

-

-

-

Repayment of borrowings

d

(230)

-

(230)

(581)

-

(581)

Purchase of own shares

e

(4)

-

(4)

(12)

-

(12)

Repayment of capital element of obligations under lease liabilities

c

(230)

(1)

(231)

(225)

(1)

(226)

Repayment of capital element of obligations under hire purchase agreements

d

(10)

-

(10)

(23)

-

(23)

Dividends paid on ordinary shares

 

(174)

-

(174)

(156)

-

(156)

Dividends paid on perpetual securities

a

(20)

-

(20)

(20)

-

(20)

Net cash used in financing activities

 

(583)

(1)

(584)

(1,006)

(1)

(1,007)

 

 

 

 

 

 

 

 

Intra group funding

 

 

 

 

 

 

 

Bank capital injections

 

(35)

35

-

-

-

-

Net cash (used in)/generated from intra group funding

 

(35)

35

-

-

-

-

 

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

365

(18)

347

(136)

(130)

(266)

                 

 

1      The £30 million is wholly derived from the Property Investment Segment (22 September 2018: £(1) million).

2      Dividends and distributions received of £118 million (22 September 2018: £16 million) have been received from the property investment joint ventures.

 

 

 

 

 

52 weeks to 9 March 2019

 

APM
reference

 

 

Retail

Financial Services

Group

 

 

 

 

(restated)

(restated)

(restated)

 

 

 

 

£m

£m

£m

 

 

 

 

 

 

 

Profit before tax

 

 

 

223

(21)

202

Net finance costs

 

 

 

403

-

403

Share of post-tax profit from joint ventures and associates1

 

 

 

(4)

-

(4)

Operating profit

 

 

 

622

(21)

601

Adjustments for:

 

 

 

 

 

 

Depreciation/amortisation

 

 

 

1,238

24

1,262

Net impairment charge on property, plant and equipment, right-of-use asset, investment property and intangible assets

 

 

 

3

-

3

Non-cash adjustments arising from acquisitions

 

 

 

(2)

-

(2)

Financial Services impairment losses on loans and advances

 

 

 

-

98

98

Profit on sale of properties and early termination of leases

 

 

 

17

-

17

Share-based payments expense

 

 

 

36

3

39

Non-cash defined benefit scheme expenses

 

 

 

108

-

108

Cash contributions to defined benefit scheme

 

 

 

(63)

-

(63)

Operating cash flows before changes in working capital

 

 

1,959

104

2,063

Changes in working capital

 

 

 

 

 

 

Increase in working capital

 

 

 

(38)

(510)

(548)

Cash generated from operations

 

 

 

1,921

(406)

1,515

Interest paid

a

 

 

(404)

-

(404)

Corporation tax paid

 

 

 

(61)

(7)

(68)

Net cash generated from operating activities

 

 

 

1,456

(413)

1,043

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Purchase of property, plant and equipment excluding strategic capital expenditure

 

 

 

(430)

(8)

(438)

Strategic capital expenditure

b

 

 

(36)

-

(36)

Purchase of property, plant and equipment

 

 

 

(466)

(8)

(474)

Initial direct costs on new leases

 

 

 

(11)

-

(11)

Purchase of intangible assets

 

 

 

(78)

(38)

(116)

Proceeds from disposal of property, plant and equipment

 

 

 

64

-

64

Proceeds from financial assets at fair value through other comprehensive income

d

 

 

39

-

39

Investment in joint ventures

f

 

 

(5)

-

(5)

Interest received

a

 

 

4

-

4

Dividends and distributions received2

f

 

 

18

-

18

Net cash used from in investing activities

 

 

 

(435)

(46)

(481)

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

e

 

 

22

-

22

Proceeds from borrowings

d

 

 

135

-

135

Repayment of borrowings

d

 

 

(593)

-

(593)

Purchase of own shares

e

 

 

(30)

-

(30)

Repayment of capital element of obligations under lease liabilities

c

 

 

(429)

(1)

(430)

Repayment of capital element of obligations under hire purchase agreements

d

 

 

(27)

-

(27)

Dividends paid on ordinary shares

 

 

 

(224)

-

(224)

Dividends paid on perpetual securities

a

 

 

(23)

-

(23)

Net cash used in financing activities

 

 

 

(1,169)

(1)

(1,170)

 

 

 

 

 

 

 

Intra group funding

 

 

 

 

 

 

Bank capital injections

 

 

 

(110)

110

-

Net cash (used in)/generated from intra group funding

 

 

 

(110)

110

-

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

 

(258)

(350)

(608)

 

1       Includes £4 million relating to the property investment segment.

2      Included within dividends and distributions received is £18 million of dividends received from property investment joint ventures.

 

 

6.         Supplier arrangements

 

Supplier incentives, rebates and discounts, collectively known as 'supplier arrangements', represent a material deduction to cost of sales and directly affect the Group's reported margin. The arrangements can be complex, with amounts spanning multiple products over different time periods, and there can be multiple triggers and discounts. The accrued value at the reporting date is included in trade receivables or trade payables, depending on the right of offset.

 

The types that involve a level of judgement and estimation are as follows:

 

·    Fixed amounts - these are agreed with suppliers primarily to support in-store activity including promotions, such as utilising specific space.

·    Supplier rebates - these are typically agreed on an annual basis, aligned with the Group's financial year. The rebate amount is linked to pre-agreed targets such as sales volumes.

·    Marketing and advertising income - income which is directly linked to the cost of producing the Argos catalogue, or through advertising income from suppliers through Insight 2 Communication.

 

The amounts recognised in the income statement for the above types of supplier arrangements are as follows (excluding non-judgemental discounts and supplier incentives outside the above categories):

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

21 September

22 September

9 March

 

 

2019

2018

2019

 

 

£m

£m

£m

 

 

 

 

 

Fixed amounts

 

108

90

281

Supplier rebates

 

34

34

69

Marketing and advertising income

 

58

78

107

Total supplier arrangements

 

200

202

457

 

Of the above amounts, the following was outstanding and held on the balance sheet at the period-end:

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

21 September

22 September

9 March

 

 

2019

2018

2019

 

 

£m

£m

£m

Within inventory

 

(7)

(7)

(7)

 

 

 

 

 

Within current trade receivables

 

 

 

 

Supplier arrangements due

 

31

58

39

Accrued supplier arrangements

 

53

49

39

 

 

 

 

 

Within current trade payables

 

 

 

 

Supplier arrangements due

 

12

10

22

Accrued supplier arrangements

 

2

13

-

Deferred income due

 

(4)

-

(1)

Total supplier arrangements

 

87

123

92

 

The above disclosure now includes accrued supplier arrangements within receivables in line with reporting at year end.

 

7.         Finance income and finance costs

 

 

28 weeks to 21 September 2019

28 weeks to 22 September 2018 (restated)

52 weeks to 9 March 2019 (restated)

 

Underlying

Non-underlying

Total

Underlying

Non-underlying

Total

Underlying

Non-underlying

Total

 

£m

£m

£m

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

 

 

Interest on bank deposits and other financial assets

1

-

1

3

-

3

3

-

3

Fair value remeasurements

-

1

1

-

25

25

-

19

19

IAS 19 pension finance income

-

15

15

-

-

-

-

-

-

Finance income receivable on net investment in leases

1

-

1

1

-

1

2

-

2

Finance income

2

16

18

4

25

29

5

19

24

 

 

 

 

 

 

 

 

 

 

Borrowing costs:

 

 

 

 

 

 

 

 

 

Secured borrowings

(26)

-

(26)

(31)

-

(31)

(55)

-

(55)

Unsecured borrowings

(9)

-

(9)

(11)

-

(11)

(19)

-

(19)

Lease liabilities

(175)

(5)

(180)

(180)

(4)

(184)

(333)

(9)

(342)

 

(210)

(5)

(215)

(222)

(4)

(226)

(407)

(9)

(416)

 

 

 

 

 

 

 

 

 

 

Other finance costs:

 

 

 

 

 

 

 

 

 

Interest capitalised - qualifying assets

2

-

2

3

-

3

6

-

6

Fair value remeasurements

-

(4)

(4)

-

-

-

-

-

-

IAS 19 pension financing charge

-

-

-

-

(3)

(3)

-

(8)

(8)

Transaction financing costs

-

-

-

-

-

-

-

(9)

(9)

Perpetual securities coupon

(13)

13

-

(13)

13

-

(23)

23

-

 

(11)

9

(2)

(10)

10

-

(17)

6

(11)

 

 

 

 

 

 

 

 

 

 

Finance costs

(221)

4

(217)

(232)

6

(226)

(424)

(3)

(427)

 

Fair value remeasurements relate to net fair value movements on derivative financial instruments not designated in a hedging relationship. The prior year includes a £10 million fair value gain on financial assets through other comprehensive income that was reclassified to the income statement on settlement of the related financial asset.

 

8.         Income tax expense

 

 

28 weeks to

28 weeks to

52 weeks to

 

21 September

22 September

9 March

 

2019

2018

2019

 

 

(restated)

(restated)

 

£m

£m

£m

 

 

 

 

Current tax expense

55

20

81

Deferred tax credit

(8)

(36)

(65)

Total income tax expense/(credit) in income statement

47

(16)

16

 

 

 

 

 

 

 

 

Underlying tax rate

26.5%

25.8%

24.5%

Effective tax rate

522.2%

(15.0)%

7.9%

 

The interim tax charge is calculated in accordance with IAS 34. The annual effective tax rate (excluding discrete items) is calculated and applied to the interim profit before tax. The tax effect of discrete items in the reporting period is then included to calculate the reported tax expense. Discrete items include non-underlying items (see note 4) and prior year deferred tax adjustments.

 

The effective tax rate of 522.2 per cent (28 weeks to 22 September 2018: (15.0) per cent) (as restated) is higher than (28 weeks to 22 September 2018: lower than) the standard rate of corporation tax in the UK of 19 per cent. This is largely a result of the amount of non-deductible expenses relative to profit before tax, particularly in respect of non-underlying discrete items.

 

The Finance Act 2016 included legislation which reduced the main rate of UK corporation tax from 20 per cent to 19 per cent from 1 April 2017 and to 17 per cent from 1 April 2020. These rate reductions were substantively enacted before this interim period. Therefore, there is no remeasurement of deferred tax balances in this period. Deferred tax on temporary differences and tax losses as at the balance sheet date are calculated at the substantively enacted rates at which the temporary differences and tax losses are expected to reverse.

 

9.         Earnings per share

 

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held by the Employee Share Ownership Plan trusts, which are treated as cancelled.

 

For diluted earnings per share, the earnings attributable to the ordinary shareholders are adjusted by the interest on the senior convertible bonds (net of tax) and by the coupons on the perpetual subordinated convertible bonds (net of tax). The weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year and the