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RNS
Sainsbury(J) PLC  -  SBRY   

Half-year Report

Released 07:00 08-Nov-2018

RNS Number : 7018G
Sainsbury(J) PLC
08 November 2018
 

8 November 2018

J Sainsbury plc

 

Interim Results for the 28 weeks to 22 September 2018

 

Operational Highlights

·    Underlying profit growth of £51 million driven by Argos synergies, delivered ahead of schedule

·    Food and general merchandise sales benefited from the hot summer; grocery sales grew 1.2 per cent and general merchandise sales grew 1.5 per cent, with total food transactions up 0.6 per cent, outperforming the market1

·    Continued pressure on general merchandise margins

·    Clothing sales declined 1 per cent due to changes in promotional phasing

·    Groceries Online grew nearly 7 per cent and Convenience grew over 4 per cent

·    We have transformed the way we run Sainsbury's stores, fundamentally changing how our 135,000 managers and colleagues work. The new, leaner management structure creates significant savings which we have reinvested into colleague pay. We now have one fair, consistent and more flexible contract for all Sainsbury's store colleagues and pay them a market leading rate of £9.20 per hour

·    We are maximising the productivity of our supermarket space. Adding Argos stores in Sainsbury's and repurposing our food space in a number of our stores is driving an increase in trading intensity2

·    We opened 60 Argos stores in Sainsbury's supermarkets in the half, bringing the total to 251 and they continue to trade well. We also have 233 order collection points in supermarkets and convenience stores 

·    During the half we delivered Argos EBITDA synergies of £63 million (£58 million EBIT), bringing the cumulative total to £150 million EBITDA

·    Since the half year we have realised the £160 million Argos EBITDA synergy target, nine months ahead of the original schedule

 

Financial Highlights

·    Group sales of £16,884 million, up 3.5 per cent

·    Retail sales (excluding fuel) up 1.2 per cent

·    Like-for-like sales (excluding fuel) up 0.6 per cent

·    Underlying profit before tax growth of 20 per cent, from £251million to £302 million

·    Profit after tax of £144 million, down 13 per cent from £166 million, reflecting further non-underlying charges relating to restructuring our store management teams, Argos integration, Sainsbury's Bank transition and the proposed combination with Asda

·    Bank profits down 53 per cent to £16 million, in line with full year guidance

·    Cost savings of £121 million

·    Underlying earnings per share up 18 per cent to 10.3 pence

·    Retail free cash flow of £619 million, up £183 million year-on-year due to strong cash generation and timing of bank capital injections

·    Net debt was down £530 million to £834 million, in part reflecting phasing benefits which will reverse in the second half. We continue to expect year end net debt before fair value movements on derivatives to reduce by around £100 million from the March 2018 position of £1,364 million

·    Interim dividend of 3.1 pence per share, in line with our policy of paying 30 per cent of prior full year dividend

 

 

 

28 weeks to

22 September 2018

28 weeks to
23 September

2017

Variance

 

 

 

 

Business Performance

 

Underlying group sales (inc. VAT)3

£16,884m

£16,310m

3.5%

 

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

 

 

0.6%

 

Underlying profit before tax3

£302m

£251m

20.3%

 

Underlying basic earnings per share3

10.3p

8.7p

18.4%

 

Net debt

£(834)m

£(1,387)m

£553m

 

Return on capital employed3

8.9%

8.3%

 

 

Interim dividend

3.1p

3.1p

 

 
         

 

 

 

 

 

28 weeks to 22 September

2018

28 weeks to
23 September

2017

 

 

 

Statutory Reporting

 

Group sales (exc. VAT, inc. fuel)

£15,127m

£14,644m

 

Items excluded from underlying results

£(170)m

£(31)m

 

Profit before tax

£132m

£220m

 

Profit for the financial period

£144m

£166m

 

Basic earnings per share

6.1p

7.1p

 
       

 

 

Commenting on the Interim Results 2018, Mike Coupe, Sainsbury's Group Chief Executive, said: 

 

 

"The market remains very competitive and we are transforming our business to meet rapidly changing customer needs. We have fundamentally changed how our 135,000 Sainsbury's store managers and colleagues work and I would like to thank them for their ongoing hard work through this period.

 

"We have delivered a solid first half performance and profit has increased because we have delivered significant Argos synergies ahead of schedule. Sales of food and general merchandise were boosted by the hot summer, but general merchandise margins remain under pressure.

 

"Our strategy of offering customers a distinctive range of high quality and great value food has driven like-for-like sales growth at Sainsbury's. Where we have invested to lower prices, volumes and transactions have increased.

 

"Our proposed combination with Asda will create a dynamic new player in UK retail, with the ability to further lower prices and to reduce the cost of living for millions of UK households. The Competition and Markets Authority is conducting its in-depth Phase Two review into the proposed combination and we continue to engage constructively with the CMA and Panel."

 

Outlook

 

The consumer outlook is uncertain as we head into our key trading period. The grocery, general merchandise and clothing markets continue to be highly competitive and very promotional. However, we remain on track to deliver current market consensus for 2018/19 UPBT of £634 million.4

 

Dividend

Interim dividend of 3.1 pence per share, in line with our policy of paying 30 per cent of prior full year dividend. This will be paid on 21 December 2018 to shareholders on the Register of Members at the close of business on 16 November 2018.

 

Like-for-like sales performance

inc. Argos in Base

 

2017/18

2018/19

 

Q1

Q2

Q3

Q4

Q1

Q2

H1

Like-for-like sales (exc. fuel)

2.3%

0.6%

1.1%

0.9%

0.2%

1.0%

0.6%

Like-for-like sales (inc. fuel)

1.6%

0.9%

1.2%

1.8%

2.6%

3.4%

3.0%

 

 

Total sales performance

inc. Argos in Base

2017/18

2018/19

 

Q1

Q2

Q3

Q4

Q1

Q2

H1

Grocery (exc. Pharmacy)

3.0%

1.4%

2.3%

2.1%

0.5%

2.0%

1.2%

General Merchandise

1.0%

(1.6)%

(1.4)%

(1.2)%

1.7%

1.2%

1.5%

Clothing

7.2%

6.3%

1.0%

0.4%

0.8%

(3.4)%

(1.0)%

Group (exc. fuel and exc. impact of sale of Pharmacy business)

2.7%

0.9%

1.2%

1.3%

0.8%

1.7%

1.2%

 

 

Total sales performance

exc. Argos in Base

 

2017/18

2018/19

 

Q1

Q2

Q3

Q4

Q1

Q2

H1

Group (exc. fuel and exc. impact of sale of Pharmacy business)

24.4%

17.0%

1.2%

1.3%

0.8%

1.7%

1.2%

Group (exc. fuel)

22.9%

16.0%

1.2%

1.3%

0.8%

1.7%

1.2%

Group (inc. fuel and exc. impact of sale of Pharmacy business)

20.1%

14.8%

1.4%

2.3%

3.2%

3.9%

3.5%

Group (inc. fuel)

18.9%

14.0%

1.4%

2.3%

3.2%

3.9%

3.5%

 

Notes

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

B. The sale of our Pharmacy business to LloydsPharmacy completed on 31 August 2016. The impact of this disposal is excluded from like-for-like sales for a period of one year from this date

 

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 8 November 2018.

 

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 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 939 802. 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

 

Enquiries

Investor Relations

Media

James Collins

+44 (0) 20 7695 0080

Rebecca Reilly

+44 (0) 20 7695 7295

 

Strategic Highlights

To deliver on the strategy we outlined in November 2014, we prioritised four key areas of our business where we can differentiate ourselves, grow and create value.  We have made significant progress with each of these in the first half:

 

Further enhance our distinctive food proposition

 

Food quality, innovation and value

·    Food is the core of our business and we work closely with suppliers to create our distinctive food ranges and offer customers great value

·    Our premium Taste the Difference food range performed well, with sales growing nearly three per cent and volumes growing nearly four per cent

·    We have developed new ranges of plant-based meat alternatives to cater for 'flexitarian' diets. Meat-free products such as 'Shroom Dogs' and BBQ pulled jackfruit have performed particularly well

·    We have a dedicated Future Brands team working closely with small suppliers to bring distinctive and innovative products to our customers. For example, this half we introduced a new vegan brand, Naturli, in 400 stores, which is exclusive to Sainsbury's in the UK

·    We are investing in our owned brands. Hyde and Wilde, our own craft beer range, has rapidly become our second biggest craft beer brand. We have expanded our Little Ones baby range which now accounts for 26 per cent of baby food volume

·    We have laid the foundations for a major makeover of our beauty offer by launching a spacious, department store-style beauty section in ten of our supermarkets, enabling our customers to buy market-leading and exclusive brands conveniently under one roof

·    We acquired Nectar, the UK's largest loyalty programme with over 19 million collectors, in line with our strategy of knowing our customers better than anyone else. Since the acquisition, we have signed three new partners to the scheme

 

Grocery channels

·    We are maximising the productivity of our supermarket space. Adding Argos stores in Sainsbury's and repurposing our food space in a number of our stores is driving an increase in trading intensity2

·    Carefully selected concession partners offer customers convenience and choice across a range of products and services. For example, we have 18 branches of Specsavers and we plan to double this number by the end of the financial year. We also have three branches of Clarks footwear

·    During the hot weather our convenience stores had their best-ever week for volumes and transactions. Sales in the half were up over four per cent

·    We are attracting new customers to Groceries Online and sales grew nearly seven per cent. We have introduced same day grocery delivery into 172 stores, covering nearly 60 per cent of UK postcodes, with more stores to follow. Orders received by midday can be collected at a store from 4pm or be delivered from 6pm

·    We have introduced new technology to make shopping quicker and more convenient. SmartShop self-scan shopping is available in 68 supermarkets and we were the first grocery retailer in Europe to enable customers to pay in store using just their smartphone, through SmartShop Mobile Pay

·    We opened three convenience stores in the first half

 

Customer service

·    We are transforming the way we run Sainsbury's stores, fundamentally changing how our 135,000 managers and colleagues work. Our new, leaner management structure creates significant savings which we have reinvested into colleague pay. We now have one fair, consistent and more flexible contract for all Sainsbury's store colleagues and pay them a market leading rate of £9.20 per hour

·    We won the Grocer Gold Service and Availability Awards for the sixth consecutive year, in recognition of the excellent job our colleagues do for our customers every day

 

Grow General Merchandise and Clothing and deliver synergies

 

·    General Merchandise sales, including Argos, grew 1.5 per cent and outperformed the market5 but margins remain under pressure. The hot summer boosted sales, particularly in categories such as garden furniture, outdoor games and barbeques. However, margins were impacted by strong sales of lower margin consumer technology products

·    During the half, we delivered Argos EBITDA synergies of £63 million (£58 million EBIT), bringing the cumulative total to £150 million EBITDA

·    Since the half year we have realised the £160 million Argos EBITDA synergy target, nine months ahead of the original schedule

·    We opened 60 Argos stores in Sainsbury's supermarkets, bringing the total to 251. Sales in stores which have been trading for more than three years are around 45 per cent higher than they were in their first year and sales in those that have been trading for more than two years are around 35 per cent higher. We are on track to achieve our guidance of 280 stores by the end of the financial year

·    We have a total of 233 collection points in our stores. Customers can conveniently collect their Argos, Tu, eBay and DPD orders from supermarkets and their Argos and Tu orders from 108 convenience stores

·    Argos is a technology-led retailer and we introduced Voice Shopping to Argos customers through Google Assistant and launched augmented reality technology across TV and toy categories

·    Sales through our market-leading Fast Track delivery service grew by 18 per cent and sales through Fast Track Click & Collect grew by 21 per cent. Argos is the only retailer that can offer same-day delivery across over 90 per cent of UK postcodes and immediate in-store collection

·    We launched Pay@Browse in a number of Argos stores, which allows customers to pay for Argos purchases in store without queuing at a checkout

·    We have made good progress in aligning general merchandise ranges and commercial teams across Sainsbury's and Argos

·    Clothing sales declined one per cent as we changed promotional phasing. Promotions are now more closely aligned with key seasonal events, offering customers great value when they want it most. Online sales grew 52 per cent following the launch of Tu at Argos. We also launched Tu Petite online and it will be available in stores in the coming months

·    We opened a new stand-alone Habitat store in London's Westfield Shopping Centre, bringing the total number of Habitat stores - including stores inside Sainsbury's supermarkets - to 16

 

Diversify and grow Sainsbury's Bank

 

·    Profits were down 53 per cent to £16 million, in line with full year guidance. This was driven by reduced interest margin, increased impairments resulting from IFRS 9 and Tier 2 interest costs

·    Net interest margin reduced 110bps year on year, driven by margin pressure in unsecured lending, mix driven by the launch of mortgages and higher Tier 2 interest payable

·    We successfully moved credit card accounts over to our new banking platform, completing the final major phase in our transition to a standalone bank

·    Customer numbers grew five per cent at Sainsbury's Bank and eight per cent at Argos Financial Services but total income was broadly flat. Higher interest income from mortgages, credit cards and Argos Financial Services was partially offset by a reduction in interest on personal loans, reflecting a competitive market and our more cautious approach to unsecured lending

·    Commission income increased, with good growth from Travel Money partially offset by lower ATM income as ATM transactions continue to decline. We have doubled car and home insurance sales and 90 per cent of customers use a Nectar card. Savings balances are up 12 per cent to £5.6 billion

·    Strong growth in mortgages, with lending nearly doubling in the period and now approaching £1 billion

·    Good growth in balances of Argos Storecards; 19 per cent of Argos sales are now made on the Argos storecard

·    Sainsbury's Bank was named Moneyfacts Best Card Provider (Introductory Rate) and, for the sixth consecutive year, we were awarded Best Online Personal Loan Provider by YourMoney.com

 

Continue cost savings and maintain balance sheet strength

 

 

Cost savings

·    We have delivered £121 million of cost savings in the first half of 2018/19 and are on track to realise our targets of £200 million by the end of the financial year and at least £500 million over the next three years

·    Our focus on efficiency and cost reductions will allow us to continue to improve our customer offer while delivering returns for shareholders

 

Balance sheet strength

·    We have a disciplined approach to capital expenditure. Retail free cash flow was £619 million, up £183 million year on year due to strong cash generation and the timing of bank capital injections 

·    We continue to strengthen our balance sheet. Net debt was down £530 million to £834 million, in part reflecting phasing benefits which will reverse in the second half. We continue to expect year end net debt before fair value movements on derivatives to reduce by around £100 million from the March 2018 position of £1,364 million

·    Core retail capital expenditure of £216 million (prior year at £239 million)

·    The combined Sainsbury's and HRG pension scheme surplus, net of tax, was £168 million, an improvement of £429 million versus a March 2018 deficit of £261 million. This is largely due to an increase in the discount rate (from 2.80 per cent to 3.10 per cent)

·    The Board has approved an interim dividend of 3.1 pence per share, in line with our policy of paying 30 per cent of the previous full year dividend

 

Notes

1. Nielsen Panel, Total FMCG, P7 18/19 rolling 12 weeks - Market Universe: Total Outlets

2. Trading intensity is defined as sales per square foot

3. Defined in Alternative Performance Measures on page 54

4. Analyst consensus is available on our corporate website www.about.sainsburys.co.uk

5. Argos v BRC non-food non-clothing market, 28 weeks to 22 September 2018

 

Financial Review of the half year results for the 28 weeks to 22 September 2018

 

Summary income statement

28 weeks to

28 weeks to

 

52 weeks to

 

22 September 2018

23 September 2017

Change

10 March

 

 

2018

 

£m

£m

%

£m

 

 

 

 

 

Underlying Group sales (including VAT)

16,884

16,310

3.5

31,735

Underlying Retail sales (including VAT)

16,612

16,055

3.5

31,220

 

 

 

 

 

Underlying Group sales (excluding VAT)

15,128

14,646

3.3

28,453

Underlying Retail sales (excluding VAT)

14,856

14,391

3.2

27,938

 

 

 

 

 

 

 

 

 

 

Underlying operating profit

 

 

 

 

Retail

335

272

23.2

625

Financial Services

16

34

(52.9)

69

Total underlying operating profit

351

306

14.7

694

 

 

 

 

 

Underlying net finance costs1

(53)

(62)

14.5

(119)

Underlying share of post-tax profit from JVs2

4

7

(42.9)

14

Underlying profit before tax

302

251

20.3

589

Items excluded from underlying results3

(170)

(31)

(448.4)

(180)

Profit before tax

132

220

(40.0)

409

Income tax credit/(expense)

12

(54)

122.2

(100)

Profit for the financial period

144

166

(13.3)

309

 

 

 

 

 

Underlying basic earnings per share

10.3p

8.7p

18.4

20.4p

Basic earnings per share

6.1p

7.1p

   (14.1)

13.3p

Dividend per share

3.1p

3.1p

-

10.2p

 

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.

3.     Refer to note 3 for details.

 

Group sales

Underlying Group sales (including VAT, including fuel) increased by 3.5 per cent year-on-year. Underlying retail sales (including VAT, including fuel) increased by 3.5 per cent. Retail sales (including VAT, excluding fuel) increased by 1.2 per cent due to both positive like-for-like performance and new space. Fuel sales grew 17.7 per cent, driven by both retail price inflation and volume growth.

 

Total sales performance by category

28 weeks to

 

22 September 2018

%

Grocery

1.2

General Merchandise

1.5

Clothing

(1.0)

Retail (exc. fuel)

1.2

Fuel sales

17.7

Retail (inc. fuel)

3.5

 

Grocery and General Merchandise sales benefitted from the hot summer, with Grocery sales growing by 1.2 per cent. General Merchandise sales grew by 1.5 per cent and outperformed the market. Clothing sales declined by 1.0 per cent due to changes in promotional phasing.

 

Convenience sales growth was over four per cent primarily driven by like-for-like growth. Groceries Online sales growth was nearly seven per cent driven by order growth. Supermarket sales declined by 0.5 per cent, driven by the continuing channel shift towards Online and Convenience.

 

Total sales performance by Channel

28 weeks to

28 weeks to

 

22 September 2018

%

23 September 2017

%

Supermarkets

    (0.5) 

0.7

Convenience

4.3

8.2

Groceries Online

6.9

7.2

 

Retail like-for-like sales, excluding fuel, increased by 0.6 per cent in the first half (2017/18: 1.6%) mainly as a result of continued retail price inflation and like-for-like transaction growth.

 

Retail like-for-like sales performance

28 weeks to

28 weeks to

 

22 September 2018

%

23 September 2017

%

Like-for-like sales (exc. fuel)

0.6

1.6

Like-for-like sales (inc. fuel)

3.0

1.3

 

Space

In the first half of 2018/19, Sainsbury's opened no new supermarkets and closed two supermarkets (2017/18: two new supermarkets opened and none closed). Three new Convenience stores were opened in the first half and one was closed (2017/18: 18 stores opened and four stores closed).

 

The 160,000 sq. ft. reduction in Sainsbury's supermarket space is mainly driven by 127,000 sq. ft. now belonging to Argos stores in Sainsbury's. During the period Argos opened 60 new stores in Sainsbury's and closed 36 stand-alone Argos stores. The number of Argos collection points in Sainsbury's stores increased to 233, with 69 openings partially offset by 28 closures due to their replacement by full Argos stores. As at 22 September 2018, Argos had 867 stores and 233 collection points. Habitat had 16 stores.

 

Store numbers and retailing space

 

 

 

 

 

As at

New stores

Disposals / closures

Extensions / refurbishments / downsizes

As at

 

10 March

22 September

 

2018

2018

 

 

 

 

 

 

Supermarkets

608

-

(2)

-

606

Supermarkets area '000 sq. ft.

21,296

-

(25)

(160)

21,111

 

 

 

 

 

 

Convenience

815

3

(1)

-

817

Convenience area '000 sq. ft.

1,913

7

(1)

-

1,919

Sainsbury's total store numbers

1,423

3

(3)

-

1,423

 

 

 

 

 

 

Argos stores

639

1

(36)

-

604

Argos stores in Sainsbury's

191

60

-

-

251

Argos in Homebase

14

-

(2)

-

12

Argos total store numbers

844

61

(38)

-

867

Argos collection points

192

69

(28)

-

233

Habitat

16

1

(1)

-

16

 

In 2018/19, Sainsbury's expects to open three new supermarkets and up to 15 new convenience stores.

 

In 2018/19, Sainsbury's expects to open around 90 Argos stores in supermarkets (of which around 50 are relocations) resulting in around 280 Argos stores in supermarkets.

 

Retail underlying operating profit

Retail underlying operating profit increased by 23.2 per cent to £335 million (2017/18: £272 million), principally driven by delivery of Argos synergies.

 

Retail underlying operating margin improved by 36 basis points year-on-year to 2.25 per cent (2017/18: 1.89 per cent), equivalent to a 39 basis point increase at constant fuel prices.

 

Retail underlying operating profit

 

 

 

 

 

28 weeks to

28 weeks to

 

Change at

 

22 September

23 September

 

constant fuel

 

2018

2017

Change

prices

Retail underlying operating profit (£m)1

335

272

23.2%

 

Retail underlying operating margin (%)2

2.25

1.89

36bps

39bps

 

 

 

 

 

Retail underlying EBITDAR (£m)3

1,108

1,037

6.8%

 

Retail underlying EBITDAR margin (%)4

7.46

7.21

25bps

34bps

 

1.     Retail underlying earnings before interest, tax and Sainsbury's underlying share of post-tax profit from joint ventures.

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

3.     Retail underlying operating profit before rent of £388 million and underlying depreciation and amortisation of £385 million.

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

 

In 2018/19, Sainsbury's expects cost inflation of around three per cent. We are on track to deliver at least £500 million of cost savings over the next three years with £200 million of these savings to be achieved in 2018/19 as we continue to realise efficiencies and simplify the business.

 

In 2018/19, Sainsbury's expects a depreciation and amortisation charge of around £700 million.

 

Our 2018/19 full-year underlying profit expectation for the combined Group remains in line with current market consensus (2018/19 UPBT consensus estimate of £634 million, as published on 14 September 2018 on www.about.sainsburys.co.uk/investors/analyst-consensus).

 

Synergies arising from the acquisition of Argos

In the first half of 2018/19, Sainsbury's achieved £150 million of cumulative EBITDA synergies (£140 million EBIT), of which £63 million (£58 million EBIT) were incremental to prior years. As part of the transaction to acquire Home Retail Group ('HRG'), Sainsbury's initially announced that the Group expected to achieve a cumulative £160 million of EBITDA synergies (£142 million EBIT) by the end of the first half of 2019/20. Since the half year, we have realised the £160 million Argos EBITDA synergy target, nine months ahead of the original schedule.

 

Original acquisition guidance was for exceptional integration costs of around £130 million and exceptional integration capital expenditure of around £140 million through to the completion of the integration program. In the first half of 2018/19, £25 million of exceptional integration costs and £31 million of exceptional integration capital expenditure have been incurred. We now expect exceptional integration costs of around £140 million and exceptional integration capital expenditure of around £130 million through to the completion of the integration program. Exceptional costs include the relocation of property, dilapidations, lease break costs, redundancy costs and other costs associated with integrating the two businesses. Exceptional capital expenditure includes the reformatting of supermarket space and the fitting out of the new Argos stores.

 

Financial Services

 

Financial Services results

 

 

 

6 months to 31 August

 

 

 

 

2018

2017

Change

 

 

 

 

Underlying revenue (£m)

272

255

7%

Interest payable (£m)

(46)

(30)

(53)%

Total income (£m)

226

225

0%

Underlying operating profit (£m)

16

34

(53)%

 

 

 

 

Cost:income ratio (%)

71

69

(200)bps

Active customers (m) - Bank

1.95

1.85

5%

Active customers (m) - AFS

1.94

1.80

8%

Net interest margin (%)1

4.0

5.1

(110)bps

Bad debt as a percentage of lending (%)2

1.6

1.4

(20)bps

Tier 1 capital ratio (%)3

12.7

13.9

(120)bps

Total capital ratio (%)4

15.7

13.9

180bps

Customer lending (£m)5

6,234

5,141

         21%

 

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

2.     Bad debt expense divided by average net lending. Excluding the first-time impact of IFRS 9 implementation in the year, bad debt as a percentage of lending was 1.4% for H1 2018/19.

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 flat year-on-year at £226 million, as higher interest and commission income was offset by increased interest payable. Financial Services underlying operating profit decreased by 53 per cent year-on-year to £16 million, in line with previous guidance, as a result of additional bad debt charges (due to IFRS 9 adoption), a more cautious approach to unsecured lending and higher costs.

Financial Services cost:income ratio has deteriorated by 200 basis points due to an increase in administrative expenses principally driven by higher operating expenses and amortisation relating to the new banking platforms brought into use as the Bank migrates away from Lloyds Banking Group. The number of Bank active customers increased by five per cent year-on-year to 1.95 million (2017/18: 1.85 million).

 

Net interest margin decreased by 110 basis points year-on-year to 4.0 per cent (2017/18: 5.1 per cent) driven by margin pressure and mix of business largely due to the launch of mortgages and the issuance of Tier 2 loan notes in November 2017. Bad debt levels as a percentage of lending increased to 1.6 per cent (2017/18: 1.4 per cent) primarily driven by the impact of IFRS 9 on the bad debt charge. However underlying arrears remain low relative to competitors and have remained stable year on year.

 

The CET 1 capital ratio decreased by 120 basis points year-on-year to 12.7 per cent (2017/18: 13.9 per cent), reflecting lending growth partially offset by the effect of additional funds contributed from the Parent in the second half of the prior financial year. Loan balances increased by 21 per cent to £6,234 million, mainly due to growth across credit cards and mortgages.

 

As previously announced, we have taken a more cautious approach to unsecured lending this year and margins will reduce in a competitive market. Combined with new accounting standards and interest payments on the external capital we raised in November, we expect Financial Services profits to reduce to around £30 million in 2018/19.

 

Capital injections into the Bank are expected to be £110 million in 2018/19 and are expected to average £100 million per year from 2019/20 onwards. This is to cover card and loan platforms, regulatory capital and growth in loan, card and mortgage balances.

 

Sainsbury's Bank transition costs are expected to be around £80 million.

 

Underlying net finance costs

Underlying net finance costs reduced by 14.5 per cent to £53 million (2017/18: £62 million), driven by the £568m repayment of the secured loan in April 2018.

 

Sainsbury's expects net finance costs of around £100 million in 2018/19.

 

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

 

22 September 2018

23 September 2017

 

£m

£m

Sainsbury's Bank transition costs

(40)

(20)

Argos integration costs

(25)

(29)

Property-related

(14)

5

Retail restructuring costs

(69)

-

Asda transaction costs

(17)

-

Other

(5)

13

Items excluded from underlying results

(170)

(31)

 

·    Sainsbury's Bank transition costs of £40 million (2017/18: £20 million) were part of the previously announced costs incurred in transitioning to a new, more flexible banking platform.

·    Argos integration costs for the period of £25 million were part of the previously announced requirement over three years.

·    Property-related items for the period comprise losses on disposal of properties and investment property fair value movements.

·    Retail restructuring costs in the period of £69 million relate to previously announced material changes to our store colleague structures and working practices.

·    £17 million of transaction costs have been incurred in relation to the proposed combination with Asda.

 

Taxation

The tax credit was £12 million (2017/18: charge of £54 million), with an underlying tax rate of 25.2 per cent (2017/18: 23.9 per cent) and an effective tax rate of (9.1) per cent (2017/18: 24.5 per cent).

 

The underlying tax rate for the interim period was higher year-on-year, largely as a result of the impact of underlying prior year adjustments being reflected in the 2018/19 underlying tax rate. The effective tax rate in 2018/19 decreased to (9.1) per cent. The tax credit recognised in the first half of 2018/19 is largely driven by a prior year deferred tax credit of £50 million arising on the recognition of a previously unrecognised UK capital loss.

 

In 2018/19, Sainsbury's expects the full-year underlying tax rate to be between 23 and 24 per cent.

 

Earnings per share

Underlying basic earnings per share increased to 10.3 pence (2017/18: 8.7 pence) driven by the increase in underlying earnings year-on-year, partially offset by a higher underlying tax rate as a result of underlying prior year adjustments. Basic earnings per share decreased to 6.1 pence (2017/18: 7.1 pence), mainly as a result of the £170 million charge for items excluded from underlying results (2017/18: £31 million charge), offset by a lower effective tax rate.

 

Dividends

The Board has recommended an interim dividend of 3.1 pence per share (2017/18: 3.1 pence) reflecting 30 per cent of the 2017/18 full year dividend per share. This will be paid on 21 December 2018 to shareholders on the Register of Members at the close of business on 16 November 2018.

 

Sainsbury's plans to maintain a full-year dividend covered two times by our full-year underlying earnings.

 

Net debt and retail cash flows

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. As at 22 September 2018, net debt was £834 million (23 September 2017: £1,387 million), a decrease of £553 million.

 

Summary cash flow statement1

Retail

Retail

Retail

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

20172

2018

 

£m

£m

£m

Adjusted retail operating cash flow before changes in working capital3

623

629

1,214

Decrease in working capital

291

269

196

Cash generated from retail operations4

914

898

1,410

Retirement benefit obligations

(25)

(26)

(151)

Net interest paid5

(55)

(61)

(105)

Corporation tax paid

(15)

(40)

(72)

Net cash generated from retail operating activities

819

771

1,082

Cash capital expenditure before strategic capital expenditure6

(245)

(277)

(542)

Proceeds from disposal of property, plant and equipment

34

44

54

Bank capital injections

-

(110)

(190)

Dividends and distributions received from JVs net of capital injections

11

8

28

Retail free cash flow

619

436

432

Dividends paid on ordinary shares

(156)

(144)

(212)

Strategic capital expenditure5

(31)

(35)

(80)

Acquisition of subsidiaries5

-

-

135

Repayment of borrowings including finance leases5

(567)

(81)

(174)

Other5

(1)

(9)

(2)

Net increase in cash and cash equivalents

(136)

167

99

Decrease in debt

567

81

174

Acquisition movements

-

-

(15)

Other non-cash and net interest movements7

(8)

(14)

(22)

Movement in net debt before fair value movements on derivatives

423

234

236

Fair value movements on derivatives

107

(144)

(123)

Movement in net debt

530

90

113

 

 

 

 

Opening net debt

(1,364)

(1,477)

(1,477)

Closing net debt

(834)

(1,387)

(1,364)

Closing net debt (inc. perpetual securities as debt)

(1,328)

(1,881)

(1,858)

 

1.     See note 4 for a reconciliation between the Retail and Group cash flows.

2.     HY 2017/18 retail free cash flow was restated to reflect capital injections made to Sainsbury's Bank and dividends and distributions received from JVs, net of capital injections.

3.     Excludes working capital and pension contributions.

4.     Excludes pension contributions.

5.     Refer to the Alternative Performance Measures on page 54 for reconciliation.

6.     Excludes Argos integration capital expenditure.

7.     Net interest excluding dividends paid on perpetual securities.

 

Adjusted retail operating cash flow before changes in working capital decreased by £6 million year-on-year to £623 million (2017/18: £629 million) and working capital decreased by £291 million since the year end. Capital expenditure before strategic capital expenditure was £245 million (2017/18: £277 million) driven by a reduction in Sainsbury's core retail capital expenditure.

 

Retail free cash flow increased by £183 million year-on-year to £619 million (2017/18: £436 million). Free cash flow was used to fund dividends and repay debt. There were no Bank capital injections made in the first half (2017/18: £110 million).  Dividends of £156 million were paid in the first half, which are covered 4.0 times by free cash flow (2017/18: 3.0 times). Strategic capital expenditure, relating to Argos integration capital expenditure of £31 million, was £4 million lower year-on-year (2017/18: £35 million).

 

Net debt before fair value movements on derivatives reduced by £423 million in the first half (2017/18: £234 million reduction). Fair value movements on derivatives of £107 million were primarily driven by an increase in the value of US Dollar foreign exchange derivatives held to mitigate the Group's exposure to fluctuations in US Dollar denominated purchases. The weighted average hedge rate ('WAHR') at 22 September 2018 was above the spot rate, generating an unrealised fair value gain (2017/18: unrealised loss as the WAHR at 23 September 2017 below the spot rate).

 

As at 22 September 2018, Sainsbury's had drawn debt facilities of £1.96 billion including the perpetual securities (2017/18: £2.63 billion) and undrawn committed credit facilities of £1.45 billion. The Group also held £85 million of uncommitted facilities, which were undrawn as at 22 September 2018. In April 2018, Sainsbury's re-paid debt of £568 million in relation to Commercial Mortgage Backed Securities.

 

Sainsbury's continues to expect 2018/19 year-end net debt before fair value movements on derivatives to reduce by around £100 million from the 2017/18 year end position of £1,364 million. The increase from the half year net debt position of £834 million is principally driven by the difference in phasing of payables at half year and year end, and the timing of capital injections to the Bank.

 

Sainsbury's is targeting adjusted net debt to EBITDAR (treating the perpetual securities as debt) to reduce to below three times in the medium term. We expect net debt to continue to reduce over the medium term.

 

Sainsbury's is targeting fixed charge cover of over three times in the medium term.

 

Capital expenditure

Core retail capital expenditure was £216 million (2017/18: £239 million). Retail capital expenditure (including Argos integration capital expenditure) was £247 million (2017/18: £274 million).

 

In 2018/19, Sainsbury's expects core retail capital expenditure including business as usual Argos capital expenditure (excluding Financial Services and Argos integration capital expenditure) to be around £550 million. Core retail capital expenditure is expected to be around £550 million per annum over the medium term.

 

Argos integration capital expenditure was substantially complete in the first half.

 

Financial ratios

 

Key financial ratios

As at

As at

 

22 September

23 September

 

2018

2017

Return on capital employed (%)1

8.9

8.3

Return on capital employed (exc. pension surplus/deficit) (%)1

8.5

7.5

Adjusted net debt to EBITDAR2

3.0 times

3.4 times

Interest cover3

 6.7 times

 5.0 times

Fixed charge cover4

 2.6 times

 2.4 times

Gearing5

10.6%

20.0%

Gearing (exc. pension surplus/deficit) 6

10.9%

18.1%

 

 

 

Key financial ratios

 

 

(with perpetual securities treated as debt)7 

 

 

Adjusted net debt to EBITDAR

3.2 times

3.6 times

Gearing

18.1%

29.2%

Gearing (exc. pension surplus/deficit)

18.5%

26.2%

 

 

 

Key financial ratios

 

 

(with perpetual securities coupons excluded from net underlying finance costs)

 

Interest cover8

 8.9 times

 6.4 times

Fixed charge cover9

 2.7 times

 2.5 times

 

1.     The 14 point period includes the opening capital employed as at 24 September 2017 and the closing capital employed for each of the 13 individual four-week periods to 22 September 2018.

2.     Net debt of £834 million plus capitalised lease obligations of £5,916 million, divided by Group underlying EBITDAR of £2,233 million, calculated for a 52-week period to 22 September 2018. Perpetual securities treated as equity.

3.     Underlying profit before interest and tax divided by underlying net finance costs, where interest on perpetual securities is included in underlying finance costs.

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

5.     Net debt divided by net assets. Perpetual securities treated as equity.

6.     Net debt divided by net assets, excluding pension surplus/deficit. Perpetual securities treated as equity.

7.     On a statutory basis, the perpetual securities are accounted for as equity on the Balance Sheet. Treating the perpetual securities, net of transaction fees, as debt increases net debt to £1,328 million, and reduces net assets to £7,342 million.

8.     Underlying profit before interest and tax divided by underlying net finance costs, where interest on perpetual securities is excluded from underlying finance costs.

9.     Group underlying EBITDAR divided by net rent and underlying net finance costs, where interest on perpetual securities is excluded from underlying finance costs.

 

 

Property value

As at 22 September 2018, Sainsbury's estimated market value of properties, including our 50 per cent share of properties held within property joint ventures, was £10.5 billion (10 March 2018: £10.5 billion).

 

Defined benefit pensions

At 22 September 2018, the net defined benefit surplus for the Group was £168 million (including Argos, the unfunded obligation and adjusting for associated deferred tax). The £429 million movement from deficit to surplus from 10 March 2018 was primarily driven by a rise in the discount rate from 2.80 per cent to 3.10 per cent. The discount rate is calculated on a consistent basis with 2017/18 year-end, and has increased in the half due to movements in corporate bond yields.

 

The Group is currently committed to make annual contributions of £124 million to the Sainsbury's Pension Scheme. A triennial valuation for the Scheme as at 10 March 2018 is currently in progress. A further valuation will be completed as at 30 September 2018 which will cover the merged Sainsbury's and Argos Scheme. 

 

Retirement benefit obligations

 

 

 

 

 

 

Sainsbury's

Argos

Group

Group

Group

 

as at

as at

as at

as at

as at

 

22 September

22 September

22 September

23 September

10 March

 

2018

2018

2018

2017

2018

 

£m

£m

£m

£m

£m

Present value of funded obligations

(8,166)

(1,194)

(9,360)

(10,626)

(10,028)

Fair value of plan assets

8,595

1,201

9,796

9,852

9,884

Additional liability due to minimum funding requirements (IFRIC 14)

-

(136)

(136)

(4)

(78)

Retirement benefit surplus/(deficit)

429

(129)

300

(778)

(222)

Present value of unfunded obligations

(20)

(14)

(34)

(37)

(35)

Retirement benefit surplus/(obligations)

409

(143)

266

(815)

(257)

Deferred income tax (liability)/asset

(126)

28

(98)

92

(4)

Net retirement benefit surplus/(obligations)

283

(115)

168

(723)

(261)

 

Group income statement (unaudited)

for the 28 weeks to 22 September 2018

 

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

 

22 September

23 September

10 March

 

 

 

2018

2017

2018

 

 

Note

£m

£m

£m

 

 

 

 

 

 

Revenue

 

4a

15,127

14,644

28,456

Cost of sales

 

 

(14,100)

(13,658)

(26,574)

Gross profit

 

 

1,027

986

1,882

Administrative expenses

 

 

(891)

(731)

(1,415)

Other income

 

 

16

28

51

Operating profit

 

 

152

283

518

Finance income

 

7

28

11

19

Finance costs

 

7

(49)

(75)

(140)

Share of post-tax profit from joint ventures and associates

 

 

1

1

12

Profit before taxation

 

 

132

220

409

 

 

 

 

 

 

Analysed as:

 

 

 

 

 

Underlying profit before tax

 

 

302

251

589

Non-underlying items

 

3

(170)

(31)

(180)

 

 

 

132

220

409

 

 

 

 

 

 

Income tax credit/(expense)

 

8

12

(54)

(100)

Profit for the financial period

 

 

144

166

309

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share

 

9

pence

pence

pence

Basic earnings

 

 

6.1

7.1

13.3

Diluted earnings

 

 

5.8

6.8

12.7

Underlying basic earnings

 

 

10.3

8.7

20.4

Underlying diluted earnings

 

 

9.5

8.3

19.1

 

Group statement of comprehensive income (unaudited)

for the 28 weeks to 22 September 2018

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

22 September

23 September

10 March

 

 

2018

2017

2018

 

Note

£m

£m

£m

 

 

 

 

 

Profit for the financial period

 

144

166

309

 

 

 

 

 

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

 

 

 

 

Remeasurement gains on defined benefit pension schemes

13

501

147

592

Current tax relating to items not reclassified

 

-

-

19

Deferred tax relating to items not reclassified

 

(85)

(25)

(118)

 

 

416

122

493

Items that may be reclassified subsequently to the income statement:

 

 

 

 

Currency translation differences

 

3

(3)

(4)

Financial assets fair value movements

 

7

6

14

Items reclassified from financial asset reserve1

 

(10)

-

2

Cash flow hedges effective portion of fair value movements

 

74

(121)

(139)

Items reclassified from cash flow hedge reserve

 

(7)

13

50

Deferred tax relating to items that may be reclassified

 

(12)

19

13

 

 

55

(86)

(64)

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

471

36

429

Total comprehensive income for the period

 

615

202

738

 

1. Under IFRS 9, "available-for-sale" assets are now presented as "financial assets", being fair valued through other comprehensive income. Full disclosures of reclassifications on adoption of IFRS 9 are shown in note 15.

 

Group balance sheet (unaudited)

at 22 September 2018

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

22 September

23 September

10 March

 

 

2018

2017

2018

 

Note

£m

£m

£m

Non-current assets

 

 

 

 

Property, plant and equipment

 

9,782

9,949

9,898

Intangible assets

 

1,052

833

1,072

Investments in joint ventures and associates

 

209

233

232

Financial assets

12b

541

465

540

Other receivables

 

30

39

44

Amounts due from Financial Services customers

12a

2,752

2,121

2,332

Derivative financial instruments

12b

18

1

17

Net retirement benefit surplus

13

266

-

-

 

 

14,650

13,641

14,135

Current assets

 

 

 

 

Inventories

 

1,879

1,928

1,810

Trade and other receivables

 

659

595

744

Amounts due from Financial Services customers

12a

3,482

3,020

3,360

Financial assets

12b

353

134

203

Derivative financial instruments

12b

47

18

10

Cash and cash equivalents

11

1,463

1,335

1,730

 

 

7,883

7,030

7,857

Assets held-for-sale

 

8

8

9

 

 

7,891

7,038

7,866

Total assets

 

22,541

20,679

22,001

 

 

 

 

 

Current liabilities

 

 

 

 

Trade and other payables

 

(4,824)

(4,184)

(4,322)

Amounts due to Financial Services customers and other deposits

12a

(5,336)

(4,803)

(4,841)

Borrowings

 

(255)

(696)

(638)

Derivative financial instruments

12b

(6)

(78)

(53)

Taxes payable

 

(123)

(141)

(247)

Provisions

 

(133)

(119)

(201)

 

 

(10,677)

(10,021)

(10,302)

Net current liabilities

 

(2,786)

(2,983)

(2,436)

 

 

 

 

 

Non-current liabilities

 

 

 

 

Other payables

 

(333)

(309)

(313)

Amounts due to Financial Services customers and other deposits

12a

(1,850)

(762)

(1,683)

Borrowings

 

(1,388)

(1,443)

(1,602)

Derivative financial instruments

12b

(9)

(39)

(26)

Deferred income tax liability

 

(287)

(171)

(241)

Provisions

 

(161)

(182)

(166)

Net retirement benefit obligations

13

-

(815)

(257)

 

 

(4,028)

(3,721)

(4,288)

Net assets

 

7,836

6,937

7,411

 

 

 

 

 

Equity 

 

 

 

 

Called up share capital

 

629

626

627

Share premium account

 

1,140

1,123

1,130

Capital redemption reserve

 

680

680

680

Merger reserve

 

568

568

568

Other reserves

 

170

102

121

Retained earnings

 

4,153

3,342

3,789

Total equity before perpetual securities

 

7,340

6,441

6,915

Perpetual capital securities

 

248

248

248

Perpetual convertible bonds

 

248

248

248

Total equity

 

7,836

6,937

7,411

 

Group cash flow statement (unaudited)

for the 28 weeks to 22 September 2018

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

22 September

23 September

10 March

 

 

2018

2017

2018

 

Note

£m

£m

£m

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

Profit before tax

 

132

220

409

Net finance costs

 

21

64

121

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

 

(1)

(1)

(12)

Operating profit

 

152

283

518

Adjustments for:

 

 

 

 

Depreciation expense

 

354

343

659

Amortisation expense

 

75

19

72

Non-cash adjustments arising from acquisitions

 

-

1

1

Financial Services impairment losses on loans and advances

49

35

68

Loss/(profit) on sale of properties

3

12

(10)

(11)

Loss on disposal of intangibles

 

1

2

2

Profit on disposal of joint ventures

 

-

-

(4)

Share-based payments expense

 

19

19

33

Retirement benefit obligations

13

(25)

(26)

(151)

Operating cash flows before changes in working capital

 

637

666

1,187

Changes in working capital

 

 

 

 

Increase in inventories

 

(69)

(153)

(36)

Increase in current financial assets

5

(180)

(58)

(192)

Decrease/(increase) in trade and other receivables

 

67

(19)

(44)

Increase in amounts due from Financial Services customers and other deposits

 

(672)

(571)

(1,161)

Increase in trade and other payables

 

415

403

142

Increase in amounts due to Financial Services customers and other deposits

 

662

644

1,602

(Decrease)/increase in provisions and other liabilities

 

(75)

(36)

28

Cash generated from operations

 

785

876

1,526

Interest paid

5

(33)

(45)

(89)

Corporation tax paid

 

(22)

(40)

(72)

Net cash generated from operating activities

 

730

791

1,365

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Purchase of property, plant and equipment

 

(237)

(282)

(561)

Purchase of intangible assets

 

(58)

(56)

(140)

Proceeds from disposal of property, plant and equipment

 

34

44

54

Acquisition of subsidiaries, net of cash acquired

 

-

-

135

Investment in joint ventures

 

(5)

(8)

(9)

Interest received

5

2

8

14

Dividends and distributions received

 

16

16

37

Net cash used in investing activities

 

(248)

(278)

(470)

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Proceeds from issuance of ordinary shares

 

11

3

12

Proceeds from borrowings

 

-

-

174

Proceeds from financial assets

5

39

-

-

Repayment of borrowings

5

(581)

(67)

(148)

Purchase of own shares

 

(12)

(12)

(14)

Repayment of capital element of obligations under finance lease borrowings

5

(25)

(14)

(26)

Interest elements of obligations under finance lease payments

5

(4)

(4)

(7)

Dividends paid on ordinary shares

10

(156)

(144)

(212)

Dividends paid on perpetual securities

 

(20)

(20)

(23)

Net cash used in financing activities

 

(748)

(258)

(244)

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(266)

255

651

 

 

 

 

 

Opening cash and cash equivalents

 

1,728

1,077

1,077

Closing cash and cash equivalents

11

1,462

1,332

1,728

 

Group statement of changes in equity (unaudited)

for the 28 weeks to 22 September 2018  

 

 

Called up share capital

Share premium account

Capital  redemption and other reserves

Merger reserve

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

627

1,130

801

568

3,789

6,915

248

248

7,411

Day 1 accounting adjustments (net of tax)1

-

-

-

-

(56)

(56)

-

-

(56)

Profit for the period

-

-

-

-

142

142

-

2

144

Other comprehensive income

-

-

55

-

416

471

-

-

471

Total comprehensive movement for the period ended 22 September 2018

-

-

55

-

502

557

-

2

559

Transactions with owners:

 

 

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

(156)

(156)

-

-

(156)

Distribution to holders of perpetual convertible bonds (net of tax)

-

-

-

-

-

-

-

(2)

(2)

Amortisation of convertible bond equity component

-

-

(6)

-

6

-

-

-

-

Share-based payment (net of tax)

-

-

-

-

25

25

-

-

25

Purchase of own shares

-

-

-

-

(12)

(12)

-

-

(12)

Allotted in respect of share option schemes

2

10

-

-

(1)

11

-

-

11

At 22 September 2018

629

1,140

850

568

4,153

7,340

248

248

7,836

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At 12 March 2017

625

1,120

873

568

3,190

6,376

248

248

6,872

Profit for the period

-

-

-

-

164

164

-

2

166

Other comprehensive (expense)/income

-

-

(86)

-

122

36

-

-

36

Total comprehensive (expense)/income for the period ended 23 September 2017

-

-

(86)

-

286

200

-

2

202

Transactions with owners:

 

 

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

(144)

(144)

-

-

(144)

Distribution to holders of perpetual convertible bonds (net of tax)

-

-

-

-

-

-

-

(2)

(2)

Amortisation of convertible bond equity component

-

-

(5)

-

5

-

-

-

-

Share-based payment (net of tax)

-

-

-

-

17

17

-

-

17

Purchase of own shares

-

-

-

-

(12)

(12)

-

-

(12)

Allotted in respect of share option schemes

1

3

-

-

-

4

-

-

4

At 23 September 2017

626

1,123

782

568

3,342

6,441

248

248

6,937

 

1. This is comprised of IFRS 9 'Financial Instruments' (note 15) and IFRS 15 'Revenue from Contracts with Customers' (note 16) day 1 adjustments.

 

 

Called up share capital

Share premium account

Capital  redemption and other reserves

Merger reserve

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 12 March 2017

625

1,120

873

568

3,190

6,376

248

248

6,872

Profit for the period

-

-

-

-

291

291

12

6

309

Other comprehensive (expense)/income

-

-

(64)

-

493

429

-

-

429

Total comprehensive (expense)/income for the period ended 10 March 2018

-

-

(64)

-

784

720

12

6

738

Transactions with owners:

 

 

 

 

 

 

 

 

 

Dividends paid

-

-

-

-

(212)

(212)

-

-

(212)

Distributions to holders of perpetual convertible bonds (net of tax)

-

-

-

-

-

-

(12)

(6)

(18)

Amortisation of convertible bond equity component

-

-

(8)

-

8

-

-

-

-

Share-based payment (net of tax)

-

-

-

-

33

33

-

-

33

Purchase of own shares

-

-

-

-

(14)

(14)

-

-

(14)

Allotted in respect of share option schemes

2

10

-

-

-

12

-

-

12

At 10 March 2018

627

1,130

801

568

3,789

6,915

248

248

7,411

 

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 53. 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 2018 have been filed with the Registrar of Companies. The Independent Auditors' report on the Annual Report and Financial Statements 2018 was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.

 

The financial period represents the 28 weeks to 22 September 2018 (comparative financial period 28 weeks to 23 September 2017; prior financial year 52 weeks to 10 March 2018). 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. Financial Services revenue to external customers is predominantly comprised of effective interest rate ("EIR") income.

 

2.         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 2018, which were prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union. The accounting policies have remained unchanged from those disclosed in the Annual Report for the year ended 10 March 2018 other than the adoption of the accounting standards set out below.

 

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 10 March 2018.

 

Sainsbury's Bank plc and its subsidiaries have been consolidated for the six months to 31 August 2018 (23 September 2017: six months to 31 August 2017; 10 March 2018: twelve months to 28 February 2018). 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.

 

New standards and interpretations

 

The Group applies, for the first time, IFRS 9 'Financial instruments' and IFRS 15 'Revenue from contracts with customers'. As required by IAS 34, the nature and effect of the changes are disclosed below.

 

The following standards and revisions will be effective for future periods:

·    IFRS 16 'Leases'

·    IFRIC 23 'Uncertainty over income tax treatments'

 

Additional information on these new effective standards was provided in the Group's Annual Report for the year ended 10 March 2018 and extended below:

 

IFRS 9 'Financial instruments'

IFRS 9 'Financial instruments' was endorsed for adoption by the EU in November 2016 and is effective for the year ending 9 March 2019.

 

The most significant impact on the Group is in relation to the impairment of financial assets, in particular amounts due from Financial Services customers at Sainsbury's Bank and its subsidiaries. IFRS 9 introduces a three stage expected credit loss ('ECL') model which is forward-looking and which generally will result in earlier recognition of credit losses and therefore higher impairment provisions.

 

On the initial adoption, an additional provision of £80 million (£66 million net of tax) has been recognised in accordance with new guidance. The balance sheet split on adoption was £47 million current and £33 million non-current. Prospectively, it is expected that the ECL model will lead to greater ongoing in-year provision costs to the profit and loss.  

 

Further disclosures pertaining to IFRS 9 are set out in note 15.

 

IFRS 15 'Revenue from contracts with customers'

IFRS 15 'Revenue from contracts with customers' is effective for the year ending 9 March 2019.

 

As reported in the Annual Report for the year ended 10 March 2018, the Group has performed a detailed impact assessment, identifying all sources of revenue and analysed the accounting requirements for each under IFRS 15. The impact of transition is immaterial to the accounts.

 

Full disclosures pertaining to IFRS 15 are set out in note 16.

 

IFRS 16 'Leases'

IFRS 16 'Leases' is effective for the year ending 7 March 2020.

 

IFRS 16 requires that all operating leases will need to be recognised on the balance sheet. Furthermore, rental expense in the income statement will be replaced with depreciation and interest expense. The transition will have a material impact on reported assets, liabilities and the Group income statement, including underlying profit, as well as the classification of lease-related cash flows within the Group cash flow statement.

 

The Group is in the process of finalising this work and setting out related accounting policies and procedures for leases. Until this work has been carried out, it is not practical to provide a reasonable estimate of the financial effect of IFRS 16.

 

3.         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.

 

These adjusted items are as follows:

 

 

28 weeks to
 22 September 2018

28 weeks to
 23 September 2017

52 weeks to
 10 March 2018

 

Gross

Tax

Gross

Tax

Gross

Tax

 

£m

£m

£m

£m

£m

£m

Underlying profit

302

(76)

251

(60)

589

(142)

 

 

 

 

 

 

 

Property-related

 

 

 

 

 

 

(Loss)/profit on disposal of properties

(11)

2

2

1

5

(1)

Investment property fair value movements

(3)

-

3

-

7

-

 

 

 

 

 

 

 

Argos

 

 

 

 

 

 

Argos integration costs

(25)

3

(27)

5

(75)

7

Homebase separation

-

-

(2)

-

(10)

1

 

 

 

 

 

 

 

Sainsbury's Bank transition costs

(40)

8

(20)

3

(38)

8

 

 

 

 

 

 

 

Nectar UK

 

 

 

 

 

 

Transaction costs relating to the acquisition of Nectar UK

-

-

-

-

(2)

-

Revaluation of previously held equity interest in Insight 2 Communication LLP

-

-

-

-

4

-

 

 

 

 

 

 

 

Asda

 

 

 

 

 

 

Transaction costs relating to the proposed merger with Asda

(17)

-

-

-

-

-

 

 

 

 

 

 

 

Retail restructuring costs

(69)

11

-

-

(85)

19

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

Perpetual securities coupons

13

(3)

13

(3)

23

(5)

Non-underlying finance movements

22

1

(2)

-

(2)

(1)

Acquisition adjustments

(33)

7

20

(3)

(2)

-

IAS 19 pension expenses

(7)

2

(18)

2

(5)

1

 

 

 

 

 

 

 

Tax adjustments

 

 

 

 

 

 

Over provision in prior years

-

55

-

-

-

12

Revaluation of deferred tax balances

-

2

-

1

-

1

 

 

 

 

 

 

 

Total adjustments

(170)

88

(31)

6

(180)

42

Profit

132

12

220

(54)

409

(100)

 

 

Property-related

·    Loss on disposal of properties for the period comprised £(12) million for the Group (23 September 2017: £10 million, 10 March 2018: £11 million) included within other income and £1 million for the property joint ventures (23 September 2017: £(8) million, 10 March 2018: £(6) million), included within share of post-tax profit from joint ventures and associates.

 

Argos

·    Argos integration costs for the period of £(25) million were part of the previously announced £(130) million required over the three years. We now expect exceptional integration costs of around £140 million through to the completion of the integration program.

·    Homebase separation and restructuring costs in the prior year were part of the revised anticipated total exceptional costs of £(45) million. There were no costs during the current financial year.

 

Sainsbury's Bank transition

·    Sainsbury's Bank transition costs of £(40) million (23 September 2017: £(20) million, 10 March 2018: £(38) million) were incurred in transitioning to a new, more flexible banking platform as part of the previously announced New Bank Programme.

 

Nectar

·    Transaction-related costs (included in administrative expenses and recognised outside underlying profit) amounted to £(2) million in the prior year. In addition, an acquisition fair value gain of £4 million on the previously held equity interest in Insight 2 Communication LLP was recorded in other income. There were no income/costs during the current financial year.

 

Asda

·    Transaction costs for the period of £(17) million were incurred in relation to the proposed merger with Asda.

 

Retail restructuring costs

·    Restructuring costs of £69 million in the period have been recognised following previously announced transformational changes to the Group's Retail operating model, responding to changing customer shopping habits and reducing costs throughout the store estate. These mainly consist of people costs.

 

Other

·    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 financing costs are accrued on a straight-line basis and included as an expense within underlying profit before tax, with a offsetting credit recognised in non-underlying items.

·    Non-underlying finance movements for the financial year comprised £23 million for the Group (23 September 2017: £(1) million, 10 March 2018: £1 million) and £(1) million for the joint ventures (23 September 2017: £(1) million, 10 March 2018: £(3) million).

·    Acquisition adjustments of £(33) million (23 September 2017: £20 million, 10 March 2018: £(2) million) reflect the unwind of fair value adjustments arising from the Sainsbury's Bank, Home Retail Group and Nectar UK acquisitions.

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

22 September 2018

 

23 September 2017

10 March 2018

 

 

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)

(2)

-

-

(2)

(3)

-

-

(3)

Cost of sales

-

1

-

1

-

1

-

1

-

2

-

2

Depreciation

-

(11)

-

(11)

-

(7)

-

(7)

-

(18)

-

(18)

Amortisation

 

-

(9)

(13)

(22)

(2)

30

-

28

(3)

22

(2)

17

 

 

(1)

(19)

(13)

(33)

(4)

24

-

20

(6)

6

(2)

(2)

                             

 

·    IAS 19 pension scheme expenses comprise the pension financing charge of £(3) million (23 September 2017: £(14) million, 10 March 2018: £(26) million) and defined benefit scheme expenses of £(4) million (23 September 2017: £(4) million, 10 March 2018: £(10) million). In the prior year this was offset by a £31 million past service credit in relation to a Pension Increase Exchange (PIE) at retirement option introduced from 1 April 2018, following a deed of amendment signed during the prior financial year.

 

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

 

 

 

 

22 September

23 September

10 March

 

 

 

 

2018

2017

2018

 

 

 

 

£m

£m

£m

 

 

 

 

 

 

 

Cash flows from operating activities

 

 

 

 

 

 

IAS 19 pension expenses

 

 

 

(4)

(4)

(10)

Sainsbury's Bank transition

 

 

 

(40)

(20)

(38)

Business rationalisation

 

 

 

-

-

(1)

Argos integration costs

 

 

 

(32)

(10)

(32)

Homebase separation

 

 

 

-

(10)

(14)

Restructuring costs

 

 

 

(123)

(9)

(28)

Transaction costs relating to the proposed merger with Asda

 

(7)

-

-

Cash used in operating activities

 

 

 

(206)

(53)

(123)

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

Proceeds from property disposals

 

 

 

34

44

54

Cash generated from investing activities

 

 

34

44

54

 

 

 

 

 

 

 

Net cash flows

 

 

 

(172)

(9)

(69)

 

4.         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. The period ended 22 September 2018 includes 28 weeks of Nectar UK results (year ended 10 March 2018: four weeks, 28 weeks ended 23 September 2017: nil weeks).

 

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

 

Segment revenue presents a disaggregation of revenue from customers consistent with the Group's primary revenue streams.

 

a)         Income statement and balance sheet

 

 

Retail

Financial
services

Property
investment

Group

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 customers

-

272

-

272

Underlying revenue

14,856

272

-

15,128

Acquisition adjustment fair value unwind1

-

(1)

-

(1)

Revenue

14,856

271

-

15,127

 

 

 

 

 

Underlying operating profit

335

16

-

351

Underlying finance income

3

-

-

3

Underlying finance costs2

(56)

-

-

(56)

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

-

-

4

4

Underlying profit before tax

282

16

4

302

Non-underlying expense

 

 

 

(170)

Profit before tax

 

 

 

132

Income tax credit

 

 

 

12

Profit for the financial period

 

 

 

144

 

 

 

 

 

Assets

13,913

8,419

-

22,332

Investment in joint ventures and associates

-

-

209

209

Segment assets

13,913

8,419

209

22,541

Segment liabilities

(7,172)

(7,533)

-

(14,705)

 

 

Retail

Financial
services

Property
investment

Group

28 weeks to 23 September 2017

£m

£m

£m

£m

Segment revenue

 

 

 

 

Retail sales to external customers

14,391

-

-

14,391

Financial Services to external customers

-

255

-

255

Underlying revenue

14,391

255

-

14,646

Acquisition adjustment fair value unwind1

-

(2)

-

(2)

Revenue

14,391

253

-

14,644

 

 

 

 

 

Underlying operating profit

272

34

-

306

Underlying finance income

8

-

-

8

Underlying finance costs2

(70)

-

-

(70)

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

3

-

4

7

Underlying profit before tax

213

34

4

251

Non-underlying expense

 

 

 

(31)

Profit before tax

 

 

 

220

Income tax expense

 

 

 

(54)

Profit for the financial period

 

 

 

166

 

 

 

 

 

Assets

13,783

6,663

-

20,446

Investment in joint ventures and associates

5

-

228

233

Segment assets

13,788

6,663

228

20,679

Segment liabilities

(7,963)

(5,779)

-

(13,742)

 

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

2. The coupons on the perpetual capital securities and the perpetual 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 finance costs, as detailed in note 3.

 

 

Retail

Financial
services

Property
investment

Group

52 weeks to 10 March 2018

£m

£m

£m

£m

Segment revenue

 

 

 

 

Retail sales to external customers

27,944

-

-

27,944

Financial Services to external customers

-

515

-

515

Underlying revenue

27,944

515

-

28,459

Acquisition adjustment fair value unwind1

-

(3)

-

(3)

Revenue

27,944

512

-

28,456

 

 

 

 

 

Underlying operating profit

625

69

-

694

Underlying finance income

14

-

-

14

Underlying finance costs2

(133)

-

-

(133)

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

4

-

10

14

Underlying profit before tax

510

69

10

589

Non-underlying expense

 

 

 

(180)

Profit before tax

 

 

 

409

Income tax expense

 

 

 

(100)

Profit for the financial period

 

 

 

309

 

 

 

 

 

Assets

13,897

7,872

-

21,769

Investment in joint ventures and associates

1

-

231

232

Segment assets

13,898

7,872

231

22,001

Segment liabilities

(7,694)

(6,896)

-

(14,590)

 

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

2. The coupons on the perpetual securities 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 finance costs, as detailed in note 3.

 

b.         Segmented cash flow statement

 

 

 

28 weeks to 22 September 2018

28 weeks to 23 September 2017

 

APM
reference

Retail

Financial Services

Group

Retail

Financial Services

Group

 

 

£m

£m

£m

£m

£m

£m

 

 

 

 

 

 

 

 

Profit/(loss) before tax

 

156

(24)

132

208

12

220

Net finance costs

 

21

-

21

64

-

64

Share of post-tax profit from joint ventures and associates1

(1)

-

(1)

(1)

-

(1)

Operating profit

 

176

(24)

152

271

12

283

Adjustments for:

 

 

 

 

 

 

 

Depreciation and amortisation expense

 

418

11

429

352

10

362

Non-cash adjustments arising from acquisitions

 

(1)

1

-

(1)

2

1

Financial Services impairment losses on loans and advances

-

49

49

-

35

35

Loss/(profit) on sale of properties

 

12

-

12

(10)

-

(10)

Loss on disposal of intangibles

 

1

-

1

-

2

2

Share-based payments expense

 

17

2

19

17

2

19

Retirement benefit obligations

 

(25)

-

(25)

(26)

-

(26)

Operating cash flows before changes in working capital

598

39

637

603

63

666

Changes in working capital

 

 

 

 

 

 

 

Decrease/(increase) in working capital

 

291

(143)

148

269

(59)

210

Cash generated from operations

 

889

(104)

785

872

4

876

Interest paid

a

(33)

-

(33)

(45)

-

(45)

Corporation tax paid

 

(15)

(7)

(22)

(40)

-

(40)

Net cash generated/(used) from operating activities

 

841

(111)

730

787

4

791

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of property, plant and equipment excluding strategic capital expenditure

 

(203)

(3)

(206)

(245)

(2)

(247)

Strategic capital expenditure

b

(31)

-

(31)

(35)

-

(35)

Purchase of property, plant and equipment

 

(234)

(3)

(237)

(280)

(2)

(282)

Purchase of intangible assets

 

(42)

(16)

(58)

(32)

(24)

(56)

Proceeds from disposal of property, plant and equipment

 

34

-

34

44

-

44

Investment in joint ventures

f

(5)

-

(5)

(8)

-

(8)

Interest received

a

2

-

2

8

-

8

Dividends and distributions received2

f

16

-

16

16

-

16

Net cash used in investing activities

 

(229)

(19)

(248)

(252)

(26)

(278)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

e

11

-

11

3

-

3

Proceeds from financial assets

d

39

-

39

-

-

-

Repayment of borrowings

d

(581)

-

(581)

-

-

-

Proceeds from long-term borrowings

d

-

-

-

(67)

-

(67)

Purchase of own shares

e

(12)

-

(12)

(12)

-

(12)

Repayment of capital element of obligations under finance lease payments

d

(25)

-

(25)

(14)

-

(14)

Interest elements of obligations under finance lease payments

a

(4)

-

(4)

(4)

-

(4)

Dividends paid on ordinary shares

 

(156)

-

(156)

(144)

-

(144)

Dividends paid on perpetual securities

a

(20)

-

(20)

(20)

-

(20)

Net cash used in financing activities

 

(748)

-

(748)

(258)

-

(258)

 

 

 

 

 

 

 

 

Intra group funding

 

 

 

 

 

 

 

Bank capital injections

 

-

-

-

(110)

110

-

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

 

-

-

-

(110)

110

-

 

 

 

 

 

 

 

 

Net (decrease)/increase in cash and cash equivalents

 

(136)

(130)

(266)

167

88

255

                 

 

1. The £(1) million is wholly derived from the Property Investment Segment (23 September 2017: £(2) million).

2. Dividends and distributions received of £16 million (23 September 2017: £16 million) have been received from the property investment joint ventures.

 

 

 

 

            52 weeks to 10 March 2018

 

APM
reference

 

 

 

Retail

Financial Services

Group

 

 

 

 

 

£m

£m

£m

 

 

 

 

 

 

 

 

Profit before tax

 

 

 

 

382

27

409

Net finance costs

 

 

 

 

121

-

121

Share of post-tax profit from joint ventures and associates1

 

 

 

(12)

-

(12)

Operating profit

 

 

 

 

491

27

518

Adjustments for:

 

 

 

 

 

 

 

Depreciation/amortisation

 

 

 

 

710

21

731

Non-cash adjustments arising from acquisitions

 

 

 

 

(2)

3

1

Financial Services impairment losses on loans and advances

 

 

 

 

-

68

68

Profit on sale of properties

 

 

 

 

(11)

-

(11)

Loss on disposal of intangibles

 

 

 

 

-

2

2

Profit on disposal of joint ventures

 

 

 

 

(4)

-

(4)

Share-based payments expense

 

 

 

 

30

3

33

Retirement benefit obligations

 

 

 

 

(151)

-

(151)

Operating cash flows before changes in working capital

 

 

1,063

124

1,187

Changes in working capital

 

 

 

 

 

 

 

Decrease in working capital

 

 

 

 

196

143

339

Cash generated from operations

 

 

 

 

1,259

267

1,526

Interest paid

a

 

 

 

(89)

-

(89)

Corporation tax paid

 

 

 

 

(72)

-

(72)

Net cash generated from operating activities

 

 

 

 

1,098

267

1,365

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

Purchase of property, plant and equipment excluding strategic capital expenditure

 

 

 

 

(473)

(8)

(481)

Strategic capital expenditure

b

 

 

 

(80)

-

(80)

Purchase of property, plant and equipment

 

 

 

 

(553)

(8)

(561)

Purchase of intangible assets

 

 

 

 

(69)

(71)

(140)

Proceeds from disposal of property, plant and equipment

 

 

 

 

54

-

54

Acquisition of subsidiaries

c

 

 

 

(33)

-

(33)

Cash acquired upon acquisition of subsidiaries

c

 

 

 

168

-

168

Investment in joint ventures

 

 

 

(9)

-

(9)

Interest received

a

 

 

 

14

-

14

Dividends and distributions received2

f

 

 

 

37

-

37

Net cash used in investing activities

 

 

 

 

(391)

(79)

(470)

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

Proceeds from issuance of ordinary shares

e

 

 

 

12

-

12

Repayment of borrowings

d

 

 

 

(148)

-

(148)

Proceeds from long-term borrowings

d

 

 

 

-

174

174

Purchase of own shares

e

 

 

 

(14)

-

(14)

Repayment of capital element of obligations under finance lease payments

d

 

 

 

(26)

-

(26)

Interest elements of obligations under finance lease payments

a

 

 

 

(7)

-

(7)

Dividends paid on ordinary shares

 

 

 

 

(212)

-

(212)

Dividends paid on perpetual securities

a

 

 

 

(23)

-

(23)

Net cash (used in)/generated from financing activities

 

 

 

 

(418)

174

(244)

 

 

 

 

 

 

 

 

Intra group funding

 

 

 

 

 

 

 

Bank capital injections

 

 

 

 

(190)

190

-

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

 

 

 

 

(190)

190

-

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

 

 

99

552

651

 

1. Includes £8 million (2017: £(18) million) relating to the property investment segment.

2. Included within dividends and distributions received is £30 million (2017: £55 million) of dividends received from property investment joint ventures.

 

5.         Analysis of net debt

 

The Group's definition of net debt includes the capital injections to Sainsbury's Bank, but excludes the net debt of Sainsbury's Bank and its subsidiaries. Sainsbury's Bank's net debt balances are excluded because they are required for business as usual activities.

 

A reconciliation of opening to closing net debt is included below. Balances and movements for the total Group and Financial Services are shown in addition to Retail to enable reconciliation between the Group balance sheet and Group cash flow statement.  

 

 

 

 

 

Cash movements

Non-cash movements

 

 

 

10 March
2018

Cashflows excluding interest

Net interest (received)/ paid

Other non-cash movements

Changes in fair value

22 September
2018

 

 

£m

£m

£m

£m

£m

£m

Retail

 

 

 

 

 

 

 

Financial assets1

 

40

(39)

-

-

-

1

Derivative assets

 

9

-

(5)

2

45

51

Derivative liabilities

 

(72)

-

3

(1)

62

(8)

Cash and cash equivalents

 

725

(137)

-

-

-

588

Bank overdrafts

 

(2)

1

-

-

-

(1)

Borrowings2

 

(1,937)

581

33

(35)

-

(1,358)

Finance leases

 

(127)

25

4

(9)

-

(107)

Retail net debt

 

(1,364)

431

35

(43)

107

(834)

 

 

 

 

 

 

 

 

Financial Services

 

 

 

 

 

 

 

Financial assets1

 

526

180

-

-

3

709

Derivative assets

 

18

-

-

-

(4)

14

Derivative liabilities

 

(7)

-

-

-

-

(7)

Cash and cash equivalents

 

1,005

(130)

-

-

-

875

Borrowings2

 

(174)

-

-

(2)

(1)

(177)

Financial services net debt

 

1,368

50

-

(2)

(2)

1,414

 

 

 

 

 

 

 

 

Group

 

 

 

 

 

 

 

Financial assets1

 

566

141

-

-

3

710

Derivative assets

 

27

-

(5)

2

41

65

Derivative liabilities

 

(79)

-

3

(1)

62

(15)

Cash and cash equivalents

 

1,730

(267)

-

-

-

1,463

Bank overdrafts

 

(2)

1

-

-

-

(1)

Borrowings2

 

(2,111)

581

33

(37)

(1)

(1,535)

Finance leases

 

(127)

25

4

(9)

-

(107)

Group net debt

 

4

481

35

(45)

105

580

 

1. Financial assets exclude other financial assets (see note 12b) which predominantly relate to the Group's beneficial interest in a commercial property investment pool.

2. Borrowings exclude bank overdrafts and finance leases as they are disclosed separately.

 

 

 

 

Cash movements

Non-cash movements

 

 

 

12 March 2017

Cashflows excluding interest

Net interest (received)/ paid

Acquisition movements

Other non-cash movements

Changes in fair value

23 September 2017

 

 

£m

£m

£m

£m

£m

£m

£m

Retail

 

 

 

 

 

 

 

 

Financial assets1

 

39

-

-

-

-

1

40

Derivative assets

 

103

-

(10)

-

11

(85)

19

Derivative liabilities

 

(38)

-

9

-

(9)

(63)

(101)

Cash and cash equivalents

 

630

164

-

-

-

-

794

Bank overdrafts

 

(6)

3

-

-

-

-

(3)

Borrowings2

 

(2,067)

67

38

-

(47)

3

(2,006)

Finance leases

 

(138)

14

4

-

(10)

-

(130)

Retail net debt

 

(1,477)

248

41

-

(55)

(144)

(1,387)

 

 

 

 

 

 

 

 

 

Financial Services

 

 

 

 

 

 

 

 

Financial assets1

 

333

58

-

-

-

-

391

Derivative assets

 

1

-

-

-

-

(1)

-

Derivative liabilities

 

(22)

-

-

-

-

6

(16)

Cash and cash equivalents

 

453

88

-

-

-

-

541

Financial Services net debt

 

765

146

-

-

-

5

916

 

 

 

 

 

 

 

 

 

Group

 

 

 

 

 

 

 

 

Financial assets1

 

372

58

-

-

-

1

431

Derivative assets

 

104

-

(10)

-

11

(86)

19

Derivative liabilities

 

(60)

-

9

-

(9)

(57)

(117)

Cash and cash equivalents

 

1,083

252

-

-

-

-

1,335

Bank overdrafts

 

(6)

3

-

-

-

-

(3)

Borrowings2

 

(2,067)

67

38

-

(47)

3

(2,006)

Finance leases

 

(138)

14

4

-

(10)

-

(130)

Group net debt

 

(712)

394

41

-

(55)

(139)

(471)

 

1. Financial assets exclude other financial assets (see note 12b) which predominantly relate to the Group's beneficial interest in a commercial property investment pool.

2. Borrowings exclude bank overdrafts and finance leases as they are disclosed separately.

 

 

 

 

Cash movements

Non-cash movements

 

 

 

12 March
2017

Cashflows excluding interest

Net interest (received)/ paid

Acquisition movements

Other non-cash movements

Changes in fair value

10 March 2018

 

 

£m

£m

£m

£m

£m

£m

£m

Retail

 

 

 

 

 

 

 

 

Financial assets1

 

39

-

(1)

-

1

1

40

Derivative assets

 

103

-

(20)

-

19

(93)

9

Derivative liabilities

 

(38)

-

17

-

(15)

(36)

(72)

Cash and cash equivalents

 

630

95

-

-

-

-

725

Bank overdrafts

 

(6)

4

-

-

-

-

(2)

Borrowings2

 

(2,067)

148

79

(15)

(87)

5

(1,937)

Finance leases

 

(138)

26

7

-

(22)

-

(127)

Retail net debt

 

(1,477)

273

82

(15)

(104)

(123)

(1,364)

 

 

 

 

 

 

 

 

 

Financial Services

 

 

 

 

 

 

 

 

Financial assets1

 

333

192

-

-

-

1

526

Derivative assets

 

1

-

-

-

-

17

18

Derivative liabilities

 

(22)

-

-

-

-

15

(7)

Cash and cash equivalents

 

453

552

-

-

-

-

1,005

Borrowings2

 

-

(174)

-

-

-

-

(174)

Financial services net debt

 

765

570

-

-

-

33

1,368

 

 

 

 

 

 

 

 

 

Group

 

 

 

 

 

 

 

 

Financial assets1

 

372

192

(1)

-

1

2

566

Derivative assets

 

104

-

(20)

-

19

(76)

27

Derivative liabilities

 

(60)

-

17

-

(15)

(21)

(79)

Cash and cash equivalents

 

1,083

647

-

-

-

-

1,730

Bank overdrafts

 

(6)

4

-

-

-

-

(2)

Borrowings2

 

(2,067)

(26)

79

(15)

(87)

5

(2,111)

Finance leases

 

(138)

26

7

-

(22)

-

(127)

Group net debt

 

(712)

843

82

(15)

(104)

(90)

4

 

1. Financial assets exclude other financial assets (see note 12b) which predominantly relate to the Group's beneficial interest in a commercial property investment pool.

2. Borrowings exclude bank overdrafts and finance leases as they are disclosed separately.

 

Borrowings

The Group maintains a contingent committed revolving credit facility of £1,450 million ('RCF'). The £1,450 million facility is split into two tranches: a £300 million Facility (A) maturing in April 2024 and a £1,150 million Facility (B) consisting of three tranches; a £300 million tranche A maturing October 2021, a £400 million tranche B maturing October 2022 and a £450 million tranche C maturing October 2023.

 

As at 22 September 2018, £nil had been drawn under the RCF (23 September 2017: £nil; 10 March 2018: £nil). 

 

Asda financing

In June 2018, the financing of the consideration for the proposed Asda transaction was arranged. Financing is in the form of Term Loans amounting to £3.5 billion, split over two Facilities. Facility A is for £2.0 billion and has an initial two year term with the Group having the option to extend the term by one year and a further six months. Facility B is for £1.5 billion and has an initial three year term with the Group having the option to extend the term by one year and a further one year. The Terms Loans are only available to the Group once the proposed Asda transaction completes.

 

In June 2018, an upsize of £550 million to Facility B of the existing Revolving Credit Facility was arranged in order to provide sufficient contingent funding to the Group following the completion of the proposed Asda transaction. The £550 million upsize to the Revolving Credit Facility is only available to the Group once the proposed Asda transaction completes.

 

Sainsbury's Bank

Sainsbury's Bank has pledged the rights to £1,598 million (23 September 2017: £993 million; 10 March 2018: £1,519 million) of its personal loans book with the Bank of England as collateral for its funding facilities. As at 22 September 2018 £950 million (23 September 2017: £250 million; 10 March 2018: £950 million) of borrowings were drawn under the Term Funding Scheme. There was no funding received under the Funding for Lending Scheme (23 September 2017: £260 million; 10 March 2018: £nil of Treasury Bills received). Funding for Lending Treasury Bills could be converted to cash as a source of future funding to the Bank however none had been converted as at 22 September 2018.

 

Sainsbury's Bank has assigned the beneficial interest in £379 million (23 September 2017: £378 million; 10 March 2018: £379 million) of its personal loans book to a Special Purpose Entity for use as collateral in securitisation transactions, facilitating £312 million (23 September 2017: £311 million; 10 March 2018: £312 million) of drawings.

 

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

 

22 September

23 September

10 March

 

2018

2017

2018

 

£m

£m

£m

 

 

 

 

Fixed amounts

90

104

261

Supplier rebates

34

42

97

Marketing and advertising income

78

48

92

Total supplier arrangements

202

194

450

 

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

 

22 September

23 September

10 March

 

2018

2017

2018

 

£m

£m

£m

Within inventory

(7)

(9)

(7)

 

 

 

 

Within current trade receivables

 

 

 

Supplier arrangements due

58

48

23

 

 

 

 

Within current trade payables

 

 

 

Supplier arrangements due

10

12

23

Accrued supplier arrangements

13

17

14

 

7.         Finance income and finance costs

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

 

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

3

-

3

8

-

8

14

-

14

Non-underlying finance movements

-

25

25

-

3

3

-

5

5

Finance income

3

25

28

8

3

11

14

5

19

 

 

 

 

 

 

 

 

 

 

Borrowing costs:

 

 

 

 

 

 

 

 

 

Secured borrowings

(31)

-

(31)

(41)

-

(41)

(79)

-

(79)

Unsecured borrowings

(11)

-

(11)

(16)

-

(16)

(30)

-

(30)

Obligations under finance leases

(3)

-

(3)

(4)

-

(4)

(7)

-

(7)

Provisions - amortisation of discount

(1)

(3)

(4)

(1)

(4)

(5)

(1)

(4)

(5)

 

(46)

(3)

(49)

(62)

(4)

(66)

(117)

(4)

(121)

 

 

 

 

 

 

 

 

 

 

Other finance costs:

 

 

 

 

 

 

 

 

 

Interest capitalised - qualifying assets

3

-

3

5

-

5

7

-

7

IAS 19 pension financing charge

-

(3)

(3)

-

(14)

(14)

-

(26)

(26)

Perpetual securities coupon

(13)

13

-

(13)

13

-

(23)

23

-

 

(10)

10

-

(8)

(1)

(9)

(16)

(3)

(19)

 

 

 

 

 

 

 

 

 

 

Finance costs

(56)

7

(49)

(70)

(5)

(75)

(133)

(7)

(140)

 

Non-underlying finance movements relate to net fair value movements on derivative financial instruments not designated in a hedging relationship

 

8.         Income tax expense

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

 

£m

£m

£m

 

 

 

 

Current tax expense

20

52

107

Deferred tax (credit)/expense

(32)

2

(7)

Total income tax (credit)/expense in income statement

(12)

54

100

 

 

 

 

 

 

 

 

Underlying tax rate

25.2% 

23.9%

24.1%

Effective tax rate

(9.1)%

24.5%

24.4%

 

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 number of shares that would be issued if all senior convertible bonds and perpetual subordinated convertible bonds are assumed to be converted.

 

Underlying earnings per share is provided by excluding the effect of any non-underlying items as defined in note 3. This alternative measure of earnings per share is presented to reflect the Group's underlying trading performance. All operations are continuing for the periods presented.

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

 

million

million

million

Weighted average number of shares in issue

2,195.9

2,185.1

2,186.2

Weighted average number of dilutive share options

40.6

18.7

21.8

Weighted average number of dilutive senior convertible bonds

147.6

142.2

143.5

Weighted average number of dilutive subordinated perpetual convertible bonds

80.5

77.6

78.3

Total number of shares for calculating diluted earnings per share

2,464.6

2,423.6

2,429.8

 

 

 

 

 

£m

£m

£m

Profit for the financial period, net of tax

144

166

309

Less profit attributable to:

 

 

 

Holders of perpetual capital securities

(7)

(7)

(12)

Holders of perpetual convertible bonds

(3)

(3)

(6)

Profit for the period attributable to ordinary shareholders, net of tax

134

156

291

 

 

 

 

 

£m

£m

£m

Profit for the financial period attributable to ordinary shareholders

134

156

291

Add interest on senior convertible bonds, net of tax

6

6

12

Add coupon on subordinated perpetual convertible bonds, net of tax

3

3

6

Diluted earnings for calculating diluted earnings per share

143

165

309

 

 

 

 

 

 

 

 

Profit from continuing operations attributable to ordinary shareholders of the parent

134

156

291

Adjusted for non-underlying items

170

31

180

Tax on non-underlying items

(88)

(6)

(42)

Add back coupons on perpetual securities (net of tax)1

10

10

18

Underlying profit after tax attributable to ordinary shareholders of the parent

226

191

447

Add interest on convertible bonds, net of tax

6

6

12

Add coupon on subordinated perpetual convertible bonds, net of tax

3

3

6

Diluted underlying profit after tax attributable to ordinary shareholders of the parent

235

200

465

 

 

 

 

 

Pence

Pence

Pence

 

per share

per share

per share

Basic earnings

6.1

7.1

13.3

Diluted earnings

5.8

6.8

12.7

Underlying basic earnings

10.3

8.7

20.4

Underlying diluted earnings

9.5

8.3

19.1

 

1. Underlying earnings per share calculation is based on underlying profit after tax attributable to ordinary shareholders. Therefore the coupons on the perpetual securities are added back.

 

10.       Dividends

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

Amounts recognised as distributions to equity holders in the period:

 

 

 

Dividend per share (pence)

7.1

6.6

9.7

Total dividend charge (£m)

156

144

212

 

Post the half-year, an interim dividend of 3.1 pence per share (23 September 2017: 3.1 pence per share) has been approved by the Board of Directors for the financial year ending 9 March 2019, resulting in a total interim dividend of £68 million (23 September 2017: £68 million). The interim dividend was approved by the Board on 7 November 2018 and as such has not been included as a liability at 22 September 2018.

 

11.       Cash and cash equivalents

 

Cash and cash equivalents comprise the following:

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

 

£m

£m

£m

Cash in hand and bank balances

357

515

585

Money market funds and deposits

541

575

462

Deposits at central banks

565

245

683

Cash and bank balances

1,463

1,335

1,730

 

 

 

 

Bank overdrafts

(1)

(3)

(2)

Net cash and cash equivalents

1,462

1,332

1,728

 

12.       Financial instruments

 

a.         Carrying amount versus fair value

Set out below is a comparison of the carrying amount and the fair value of financial instruments that are carried in the financial statements at a value other than fair value. The fair value of financial assets and liabilities are based on prices available from the market on which the instruments are traded. Where market values are not available, the fair values of financial assets and liabilities have been calculated by discounting expected future cash flows at prevailing interest rates. The fair values of short-term deposits, trade receivables, overdrafts and payables are assumed to approximate to their book values.

 

 

 

 

 

Carrying

amount

Fair

value

At 22 September 2018

 

 

 

£m

£m

Financial assets

 

 

 

 

 

Amounts due from Financial Services customers1

 

 

 

6,234

6,286

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

Loans due 2031

 

 

 

(717)

(930)

Bank overdrafts

 

 

 

(1)

(1)

Bank loans due 2019

 

 

 

(199)

(200)

Convertible bond due 2019

 

 

 

(442)

(499)

Tier 2 Capital due 2023

 

 

 

(177)

(180)

Obligations under finance leases

 

 

 

(107)

(108)

 

 

 

 

 

 

Amounts due to Financial Services customers and banks

 

 

 

(7,186)

(7,191)

1. Includes £2,765 million of interest rate swaps in a portfolio fair value hedging relationship.

 

 

 

 

 

 

Carrying

amount

Fair

value

At 23 September 2017

 

 

 

£m

£m

Financial assets

 

 

 

 

 

Amounts due from Financial Services customers1

 

 

 

5,141

5,156

 

Financial liabilities

 

 

 

 

 

Loans due 20182

 

 

 

(629)

(641)

Loans due 2031

 

 

 

(746)

(974)

Bank overdrafts

 

 

 

(3)

(3)

Bank loans due 2019

 

 

 

(199)

(199)

Convertible bond due 2019

 

 

 

(432)

(456)

Obligations under finance leases

 

 

 

(130)

(130)

Amounts due to Financial Services customers and banks

 

 

 

(5,565)

(5,567)

1. Includes £2,437 million accounted for as a fair value hedge.

2. Includes £136 million accounted for in a fair value hedge relationship.

 

 

 

 

 

Carrying

amount

Fair

value

At 10 March 2018

 

 

 

£m

£m

Financial assets

 

 

 

 

 

Amounts due from Financial Services customers1

 

 

 

5,692

5,736

 

 

 

 

 

 

Financial liabilities

 

 

 

 

 

Loans due 20182

 

 

 

(572)

(575)

Loans due 2031

 

 

 

(730)

(980)

Bank overdrafts

 

 

 

(2)

(2)

Bank loans due 2019

 

 

 

(199)

(199)

Convertible bond due 2019

 

 

 

(436)

(452)

Tier 2 Capital due 2023

 

 

 

(174)

(184)

Obligations under finance leases

 

 

 

(127)

(127)

Amounts due to Financial Services customers and banks

 

 

 

(6,524)

(6,514)

1. Includes £3,391 million of interest rate swaps in a portfolio fair value hedging relationship.

2. Includes £110 million accounted for in a fair value hedge relationship.

 

b.         Fair value measurements recognised in the balance sheet

The following table provides an analysis of financial instruments that are recognised at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

 

·    Level 1 fair value measurements are derived from quoted market prices (unadjusted) in active markets for identical assets or liabilities at the balance sheet date. This level includes listed equity securities and debt instrument on public exchanges;

·    Level 2 fair value measurements are derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of financial instruments is determined by discounting expected cash flows at prevailing interest rates; and

·    Level 3 fair value measurements are derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 

 

Level 1

Level 2

Level 3

Total

At 22 September 2018

£m

£m

£m

£m

Financial assets

 

 

 

 

Interest bearing financial assets

-

1

-

1

Other financial assets

14

-

170

184

Investment securities

709

-

-

709

 

 

 

 

 

Derivative financial assets

-

56

9

65

 

 

 

 

 

Derivative financial liabilities

-

(15)

-

(15)

 

 

 

Level 1

Level 2

Level 3

Total

At 23 September 2017

£m

£m

£m

£m

Financial Assets

 

 

 

 

Interest bearing financial assets

-

40

-

40

Other financial assets

13

-

155

168

Investment Securities

391

-

-

391

 

 

 

 

 

Derivative financial assets

-

19

-

19

 

 

 

 

 

Derivative financial liabilities

-

(105)

(12)

(117)

 

 

 

Level 1

Level 2

Level 3

Total

At 10 March 2018

£m

£m

£m

£m

 

Financial assets

 

 

 

 

 

Interest bearing financial assets

-

40

-

40

 

Other financial assets

-

13

164

177

 

Investment securities

526

-

-

526

 

 

 

 

 

 

 

Derivative financial assets

-

27

-

27

 

 

 

 

 

 

 

Derivative financial liabilities

-

(70)

(9)

(79)

 

 

c.         Reconciliation of Level 3 fair value measurements of financial assets

 

Details of the determination of Level 3 fair value measurements are set out below:

 

 

 

Financial assets

Commodity derivatives

 

 

Total

28 weeks to 22 September 2018

 

£m

£m

£m

Opening balance

 

164

(9)

155

Included in finance income in the income statement

 

-

18

18

Included in other comprehensive income

 

6

-

6

Total Level 3 financial assets and liabilities

 

 

170

9

179

           

 

 

 

Financial assets

Commodity derivatives

 

 

Total

28 weeks to 23 September 2017

 

£m

£m

£m

Opening balance

 

148

(15)

133

Included in finance income in the income statement

 

-

3

3

Included in other comprehensive income

 

7

-

7

Total Level 3 financial assets and liabilities

 

 

155

(12)

143

           

 

 

 

 

Financial assets

Commodity derivatives

 

 

Total

52 weeks to 10 March 2018

 

£m

£m

£m

Opening balance

 

148

(15)

133

Included in finance income in the income statement

 

-

6

6

Included in other comprehensive income

 

16

-

16

Total Level 3 financial assets and liabilities

 

 

164

(9)

155

           

 

Level 3 financial assets

Other financial assets relate to the Group's beneficial interest in a property investment pool. The net present value of the Group's interest in the various freehold reversions owned by the property investment pool has been derived by assuming a property growth rate of 0.6 per cent per annum (23 September 2017: 0.5 per cent; 10 March 2018: 0.6 per cent) and a discount rate of nine per cent (23 September 2017: nine per cent; 10 March 2018: nine per cent). The sensitivity of this balance to changes of one per cent in the assumed rate of property rental growth and one per cent in the discount rate holding other assumptions constant is shown below:

 

 

 

 

22 September 2018

23 September 2017

 

Change in discount rate

+/- 1.0%

 Change in growth rate

+/- 1.0%

Change in discount rate

+/- 1.0%

Change in growth rate

+/- 1.0%

 

£m

£m

£m

£m

Financial assets

(7)/8

12/(11)

(8)/9

13/(12)

 

 

 

 

 

 

 

 

 

 

10 March 2018

 

 

 

Change in discount rate

+/- 1.0%

Change in growth rate

+/- 1.0%

 

 

 

£m

£m

Financial assets

 

 

(8)/9

12/(12)

 

 

 

 

 

 

Level 3 derivative financial liabilities - power purchase agreement

The Group has entered into several long-term fixed-price power purchase agreements with independent producers. Included within derivative financial instruments is a net asset of £8 million relating to these agreements at 22 September 2018 (within derivative financial liabilities at 23 September 2017: £ (13) million; at 10 March 2018: £(10) million). The Group values its power purchase agreements as the net present value of the estimated future usage at the contracted fixed price less the market implied forward energy price discounted back at the prevailing swap rate. The Group also makes an assumption regarding expected energy output based on the historical performance and the producer's estimate of expected electricity output. The sensitivity of this balance to changes of 20 per cent in the assumed rate of energy output and 20 per cent in the implied forward energy prices holding other assumptions constant is shown below:

 

 

 

 

 

22 September 2018

23 September 2017

 

Change in volume

+/- 20.0%

Change in electricity forward price

+/- 20.0%

Change in volume

+/- 20.0%

Change in electricity forward price +/- 20.0%

 

£m

£m

£m

£m

Derivative financial instruments

2/(2)

12/(13)

(3)/3

12/(13)

 

 

 

 

 

               

 

 

 

 

 

 

 

10 March 2018

 

 

 

Change in volume

+/- 20.0%

Change in electricity forward price +/- 20.0%

 

 

 

 

£m

£m

 

Derivative financial instruments

 

 

(2)/2

11/(12)

 

                 

 

13.       Retirement benefit obligations

 

Retirement benefit obligations relate to one defined benefit scheme, the Sainsbury's Pension Scheme (the 'Scheme') as well as two unfunded pension liabilities relating to senior former employees of Sainsbury's and Home Retail Group. The Schemes are both closed to new entrants and future accruals.

 

On 20 March 2018, the Home Retail Group Pension Scheme was merged into the Sainsbury's Pension Scheme. The merger is on a segregated basis with two sections - the Argos section and the Sainsbury's section. This does not result in any change to members' benefits and each section's assets are ring-fenced for the benefit of the members of that section.

 

A triennial valuation for the Scheme as at 10 March 2018 is currently in progress. A further valuation will be completed as at 30 September 2018 which will cover the merged Scheme. The results are not yet available.

 

The unfunded pension liabilities are unwound when each employee reaches retirement and takes their pension from the Group payroll or is crystallised in the event of an employee leaving or retiring and choosing to take the provision as a one-off cash payment.

 

The amounts recognised in the balance sheet, based on valuations performed by KPMG, are as follows:

 

 

 

22 September 2018

23 September 2017

 

 

Sainsbury's

Home Retail Group

Group

Sainsbury's

Home Retail Group

Group

 

 

£m

£m

£m

£m

£m

£m

Present value of funded obligations

 

(8,166)

(1,194)

(9,360)

(9,257)

(1,369)

(10,626)

Fair value of plan assets

 

8,595

1,201

9,796

8,645

1,207

9,852

 

 

429

7

436

(612)

(162)

(774)

Additional liability due to minimum funding requirements (IFRIC 14)

-

(136)

(136)

-

(4)

(4)

Retirement benefit surplus/(deficit)

 

429

(129)

300

(612)

(166)

(778)

Present value of unfunded obligations

 

(20)

(14)

(34)

(22)

(15)

(37)

Retirement benefit surplus/(obligations)

 

409

(143)

266

(634)

(181)

(815)

Deferred income tax (liability)/asset

 

(126)

28

(98)

54

38

92

Net retirement benefit surplus/(obligations)

 

283

(115)

168

(580)

(143)

(723)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10 March 2018

 

 

 

 

 

Sainsbury's

Home Retail Group

Group

 

 

 

 

 

£m

£m

£m

Present value of funded obligations

 

 

 

 

(8,744)

(1,284)

(10,028)

Fair value of plan assets

 

 

 

 

8,669

1,215

9,884

 

 

 

 

 

(75)

(69)

(144)

Additional liability due to minimum funding requirements (IFRIC 14)

 

 

 

-

(78)

(78)

Retirement benefit deficit

 

 

 

 

(75)

(147)

(222)

Present value of unfunded obligations

 

 

 

 

(21)

(14)

(35)

Retirement benefit obligations

 

 

 

 

(96)

(161)

(257)

Deferred income tax (liability)/asset

 

 

 

 

(38)

34

(4)

Net retirement benefit obligations

 

 

 

 

(134)

(127)

(261)

                       

 

The retirement benefit obligations and the associated deferred income tax balance are shown within different line items on the face of the balance sheet.

 

The principal actuarial assumptions used at the balance sheet date are as follows:

 

 

 

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

 

 

 

22 September

23 September

10 March

 

 

 

 

 

2018

2017

2018

 

 

 

 

 

%

%

%

Discount rate

 

 

 

 

3.10

2.75

2.80

Inflation rate - RPI

 

 

 

 

3.20

3.25

3.15

Inflation rate - CPI

 

 

 

 

2.20

2.25

2.15

Future pension increases

 

 

 

 

1.95 - 3.05

1.95 - 3.10

1.90 - 3.00

 

The amounts recognised in the income statement in respect of the IAS 19 charges for the defined benefit schemes are as follows:

 

 

 

 

 

 

28 weeks to

52 weeks to

 

 

 

 

 

22 September

23 September

10 March

 

 

 

 

 

2018

2017

2018

 

 

 

 

 

£m

£m

£m

Excluded from underlying profit before tax:

 

 

 

 

 

 

 

Interest cost on pension liabilities

 

 

 

 

(149)

(156)

(289)

Interest income on plan assets

 

 

 

 

146

142

263

Total included in finance costs

 

 

 

(3)

(14)

(26)

 

 

 

 

 

 

 

 

Defined benefit pension scheme expenses

 

 

(4)

(4)

(10)

Past service credit

 

 

-

-

31

Total excluded from underlying profit before tax

 

 

 

 

(7)

(18)

(5)

 

 

 

 

 

 

 

 

Total income statement expense

 

 

 

 

(7)

(18)

(5)

 

The movements in the net defined benefit obligations are as follows:

 

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

22 September

23 September

10 March

 

 

2018

2017

2018

 

 

£m

£m

£m

As at the beginning of the period

 

(257)

(974)

(974)

Interest cost

 

(3)

(14)

(26)

Remeasurement gains

 

501

147

592

Pension scheme expenses

 

(4)

(4)

(10)

Contributions by employer

 

29

30

130

Past service credit

 

-

-

31

As at the end of the period

 

266

(815)

(257)

 

Cash contributions

Cash contributions for the full-year are expected to be £129 million.

 

Following agreement of the latest triennial actuarial valuations of both schemes, the Group is committed to make annual contributions of £124 million to the schemes (Sainsbury's scheme: £84 million; Argos scheme: £40 million). The next triennial valuation for the Sainsbury's section of the Scheme is due as at 10 March 2018.

 

There were no special contributions in the current financial period.

 

14.       Acquisition of Nectar

 

On 1 February 2018, the Group acquired 100 per cent of the share capital of Nectar Loyalty Holding Limited, a United Kingdom registered private company which owns the Nectar UK loyalty scheme as well as the remaining 50 per cent share of the Group's joint venture Insight 2 Communication LLP. The acquisition enables the full and independent operation of the Nectar Loyalty Programme in the UK.

 

Form of consideration

Consideration fair value at acquisition date

£m

Cash

 33

Acquisition-date fair value of the previously held equity interest

 6

Total

 39

 

None of the goodwill recognised of £147 million is expected to be deductible for income tax purposes. The goodwill was calculated as the difference between the fair value of consideration paid and the fair value of net assets acquired as set out in the following table.

 

The provisional assets and liabilities recognised as a result of the acquisition are as follows:

Fair value of net assets acquired (provisional)

£m

Fixed assets

3

Intangible assets

57

Trade and other receivables

141

Deferred tax assets

19

Cash and cash equivalents

168

Total assets acquired

388

 

 

Trade and other payables

(228)

Deferred revenue

(268)

Total liabilities acquired

(496)

Net identifiable liabilities acquired at fair value

(108)

 

 

Goodwill arising on acquisition

147

Purchase consideration transferred

39

 

In accordance with IFRS 3 'Business Combinations', the acquisition accounting will be finalised within 12 months of the acquisition date of 1 February 2018. There were no hindsight adjustments as at 22 September 2018.

 

15.       IFRS 9 'Financial Instruments'

 

IFRS 9 replaces IAS 39 for annual periods beginning on or after 1 January 2018, bringing together all three aspects of the accounting for financial instruments: classification and measurement; impairment; and hedge accounting. The main changes the new standard introduces are:

 

•       new requirements for the classification and measurement of financial assets and financial liabilities;

•       a new model for recognising impairments of financial assets; and

•       changes to hedge accounting by aligning hedge accounting more closely to an entity's risk management objectives.

 

The changes have been applied by adjusting the Group Balance Sheet on 11 March 2018, the date of initial application, with no restatement of comparative information. In accordance with IFRS 9 transition guidance, comparative financial information in the primary financial statements remains compliant with the classification and measurement requirements of IAS 39. 

 

a.         Classification and measurement

 

IFRS 9 introduced a principles-based approach to the classification of financial assets. Financial assets are

measured at fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortised cost. Classification is determined by the nature of the cash flows of the assets and the business model in which they are held. These categories replace the existing IAS 39 classifications. For financial liabilities, most of the pre-existing requirements for classification and measurement previously included in IAS 39 were carried forward unchanged into IFRS 9.

 

The assessment of the Group's business models was made as at the date of initial application on 11 March 2018 and applied prospectively.  The changes in classification resulted in no change in measurement as at 11 March 2018 and are not expected to result in a material impact going forward. A summary of the respective classifications under IAS 39 and IFRS 9 are presented below:

 

Balance sheet line

Periodicity

IAS 39

IFRS 9

11 March 2018

£m

Financial assets

 

 

 

 

Financial assets

Non-current

Available-for-sale

Fair value through other comprehensive income (with recycling) 1

                     540

Financial assets

Current

Available-for-sale

Fair value through other comprehensive income (with recycling) 1

                   203

Other receivables

Non-current

Loans & receivables

Amortised cost

                   44

Trade and other receivables

Current

Loans & receivables

Amortised cost

                   553

Trade and other receivables

Current

Loans & receivables

Fair value through profit and loss

191

Cash and cash equivalents

Current

Loans & receivables

Amortised cost

1,580

Cash and cash equivalents

Current

Loans & receivables

Fair value through profit and loss

150

Amounts due from Financial Services customers

Non-current

Loans & receivables

Amortised cost2

                2,332

Amounts due from Financial Services customers

Current

Loans & receivables

Amortised cost2

                3,360

Derivative financial instruments

Non-current

Fair value through profit & loss

Fair value through

profit & loss

                     17

Derivative financial instruments

Current

Fair value through profit & loss

Fair value through

profit & loss

                     10

 

1.    Balances "with recycling" have corresponding amounts within reserves which will be recognised within the income statement upon realisation.

2.  The balances presented are consistent with those presented as at 10 March 2018. The day 1 adjustment to amounts due from Financial Services customers, gross of tax, are split £47 million current and £33 million non-current. This represents the only difference between the valuation of assets under IFRS 9 relative to IAS 39. 

 

Balance sheet line

Periodicity

IAS 39

IFRS 9

 11 March 2018
£m

Financial Liabilities

 

 

 

 

Trade and other payables

Current

Loans & receivables

Amortised cost

              (4,322)

Other payables

Non-current

Loans & receivables

Amortised cost

                 (313)

Amounts due to Financial Services customers

Non-current

Loans & receivables

Amortised cost

              (1,683)

Amounts due to Financial Services customers

Current

Loans & receivables

Amortised cost

              (4,841)

Borrowings

Non-current

Loans & receivables

Amortised cost

              (1,602)

Borrowings

Current

Loans & receivables

Amortised cost

                 (638)

Derivative financial instruments

Non-current

Fair value through profit & loss

Fair value through profit & loss

                   (26)

Derivative financial instruments

Current

Fair value through profit & loss

Fair value through profit & loss

                   (53)

 

Similar to the requirements of IAS 39, IFRS 9 requires contingent consideration to liabilities be treated as financial instruments measured at fair value.

 

b.         Impairment

 

IFRS 9 introduces an expected credit loss impairment model that differs significantly from the incurred loss model under IAS 39 and results in earlier recognition of credit losses. Additional details on the key elements of the new expected credit loss model are described below.  The most significant impact is in relation to Sainsbury's Bank's unsecured lending portfolios.

 

Expected credit loss (ECL) impairment model

 

Under IFRS 9, credit loss allowances are measured on each reporting date according to a three-stage expected credit loss impairment model. As soon as a financial instrument is originated or purchased, 12-month expected credit losses are recognised in profit and loss and an impairment allowance is established (Stage 1).  If the credit risk increases significantly (and the resulting credit quality is not considered to be low credit risk) full lifetime expected credit losses are provided for (Stage 2).  Under both Stage 1 and Stage 2, interest income is recognised on the gross carrying value of the financial asset.  Financial assets move into Stage 3 when they are considered to be credit impaired, i.e. when one or more events has occurred that has a detrimental impact on the estimated future cash flows of the asset.  Stage 3 assets continue to recognise lifetime expected impairment losses and interest income is recognised on the net carrying amount (i.e. gross amount less impairment allowance).

 

The impact of the above is to increase the impairment provisions held within the Financial Services business as at 11 March 2018 by £80 million, with a corresponding reduction to retained earnings of £66 million, net of deferred tax of £14 million. The net impact to retained earnings has been segregated within the Group statement of changes in equity. Prospectively, it is expected that the ECL model will lead to greater ongoing in-year provision costs to the profit and loss.

 

c.         Hedge accounting

 

When initially applying IFRS 9, the Group has exercised the accounting policy choice to continue to apply the hedge accounting requirements of IAS 39 for its macro hedging relationships (applicable to the Financial Services business) and has adopted IFRS 9 in respect of its micro hedge accounting. Macro hedging concerns using instruments to address an entire balance sheet, whereas micro hedging focuses on a particular asset/liability risk. Although the micro hedge accounting requirements under IFRS 9 are generally less restrictive, this has not resulted in a material impact on the Group.

 

16.       IFRS 15 'Revenue from contracts with customers'

 

IFRS 15 establishes a five-step model to account for revenue arising from contracts with customers and is required for annual periods beginning on or after 1 January 2018. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer, and supersedes all current revenue recognition requirements of IFRS.

 

As reported in the Annual Report for the year ended 10 March 2018, the Group has performed a detailed impact assessment, identifying all current sources of revenue and analysing the accounting requirements for each under IFRS 15. The Group has adopted IFRS 15 using the full retrospective transition option. Full retrospective adoption of IFRS 15 requires comparatives to be restated in order to present values on a consistent basis. However, having quantified the impact of IFRS 15, management has assessed this impact as immaterial and has chosen not to restate the primary statements. The disclosure below sets out the impact of IFRS 15 on prior periods. 

 

Impact on the comparative statement of financial position on the adoption of IFRS 15:

 

 

Adjustment

28 weeks to 23 September 2017

52 weeks to 10 March 2018

 

 

£m

£m

Assets

 

 

 

Right of return assets

(a)

2

3

 

 

 

 

Liabilities

 

 

 

Provisions

(a)

(2)

(3)

Deferred revenue

(b)

-

10

 

 

 

 

Equity

 

 

 

Retained Earnings

(b)

-

(10)

 

Impact on the comparative statement of profit and loss on adoption of IFRS 15:

 

 

Adjustment

28 weeks to 23 September 2017

52 weeks to 10 March 2018

 

 

£m

£m

Revenue from contracts with customers

(c)

4

7

Cost of sales

(c)

(4)

(7)

 

There is no impact on gross margin. IFRS 15 does not impact other comprehensive income, nor is there a material impact on the statement of cash flow. There is a nil impact to both basic and diluted EPS.

 

(a) Right of return asset & provision

 

Under IFRS 15, the consideration received from the customer is variable because the contract allows the customer to return the products. The Group uses the expected value method to estimate the goods that will be returned because this method best predicts the amount of variable consideration to which the Group will be entitled. The impact upon adoption of IFRS 15 for the 52 weeks to 10 March 2018 is a £3 million increase in both the right to return asset and provision (28 weeks to 23 September 2017: £2 million increase). This is considered to be immaterial to the Group results and has not been restated within the comparatives on the statement of financial position. 

 

(b) Nectar

 

On 1 February 2018, the Group acquired the shares of Aimia Inc's UK business, enabling the full and independent operation of the Nectar Loyalty programme in the UK. From the point of acquisition, any points issued and redeemed in Sainsbury's and Argos were accounted for in line with IFRIC 13 'Customer Loyalty Programmes', meaning a portion of the transaction price was allocated to the loyalty programme using the fair value of points issued. There is an immaterial change to the loyalty programme upon the adoption of IFRS 15.

 

Under IAS 18, programme support fees ("PSF") for Nectar were deferred and recognised in line with the issuances and redemption profile. However on application of IFRS 15, revenue needs to be disaggregated against individual performance obligations. These fees are now recognised on a straight line basis over a period equalling the agreement term length. Applying IFRS 15 retrospectively, the brought forward deferred revenue balance includes £10 million of PSF relating to prior periods. This balance has been accumulated over many years, with the year on year impact considered to be immaterial to the Group. This restatement has been represented as a day 1 adjustment within the Statement of Changes in Equity.

 

(c) Agent vs principal 

 

From time to time the Group enters into contracts with suppliers for which an assessment must be made to determine whether the Group is acting as principal or agent when selling the related goods to customers. In performing its analysis, the Group has identified arrangements where there is a change in the agent/principal classification. The impact to revenue and cost of sales for the 52 weeks to 10 March 2018 is a £7 million reduction (28 weeks to 23 September 2017: £3.5 million reduction). This is immaterial to the Group results and has not been restated within the comparatives on the profit and loss statement.

 

17.       Capital expenditure and commitments

 

In the financial period, the following additions and disposals were made:

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

 

£m

£m

£m

Additions

 

 

 

Property, plant and equipment

253

293

578

Intangibles

59

57

139

 

 

 

 

Disposals - net book value

 

 

 

Property, plant and equipment

(16)

(11)

(29)

Intangibles

(2)

(2)

(2)

Assets held for sale

(1)

(2)

(1)

 

At 22 September 2018, capital commitments contracted, but not provided for by the Group, amounted to £123 million (23 September 2017: £103 million; 10 March 2018: £103 million), and £24 million for the property joint ventures (23 September 2017: £81 million; 10 March 2018: £55 million).

 

18.       Related party transactions

 

The Group's related parties are its joint ventures as disclosed in its Annual Report and Financial Statements 2018. 

 

Transactions with joint ventures and associates

 

For the 28 weeks to 22 September 2018, the Group entered into various transactions with joint ventures and associates as set out below:

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

 

£m

£m

£m

Services and loans provided to joint ventures

 

 

 

Management services provided

-

-

1

Revenue received from joint ventures

-

14

26

Dividend income received

16

16

37

Investment in joint ventures and associates

(5)

(8)

(9)

Disposal of joint ventures

-

-

2

Rental expenses paid

(20)

(25)

(46)

 

 

 

 

Balances arising from transactions with joint ventures and associates

 

 

28 weeks to

28 weeks to

52 weeks to

 

22 September

23 September

10 March

 

2018

2017

2018

 

£m

£m

£m

Receivables

 

 

 

Other receivables

5

10

6

Loans due from joint ventures

-

3

-

 

 

 

 

Payables

 

 

 

Loans due to joint ventures

(6)

(5)

(5)

 

19.       Contingent liabilities

 

The Group has a number of contingent liabilities in respect of historic lease guarantees, particularly in relation to the disposal of assets, which if the current tenant and their ultimate parents become insolvent, may expose the Group to a material liability. This is not expected to materialise.

 

Along with other retailers, the Group is currently subject to claims brought by approximately 2,000 current and ex-employees in the Employment Tribunal for equal pay under the Equality Act 2010 and/or the Equal Pay Act 1970. Typically, claims of this nature can take many years to be determined.  Given that the claims against the Company are still at an early stage and are currently stayed, the outcome of such claims is highly uncertain at this stage and the Group considers the likelihood of a material payout to be remote.

 

20.       Post balance sheet events

 

On 26 October 2018, the High Court of Justice of England and Wales issued a judgement in a claim between Lloyds Banking Group Pension Trustees Limited (claimant) and Lloyds Bank plc and others (defendants) regarding the rights of female members of certain pension schemes to equality of treatment in relation to pension benefits. The judgement concluded that the claimant is under a duty to amend the schemes in order to equalise benefits for men and women in relation to guaranteed minimum pension benefits.

 

The judgement also provided comments on the method to be adopted in order to equalise benefits, on the period during which a member can claim in respect of previously underpaid benefits, and on what should be done in relation to benefits that have been transferred into, and out of, the relevant schemes. The issues determined by the judgement arise in relation to many other occupational pension schemes. The extent to which the judgement will increase the liabilities of the Sainsbury's Pension Scheme and reduce the net accounting surplus of £266 million as at 22 September 2018 is under consideration. Any adjustment necessary is expected to be recognised by the Group in the second half of the period ending 9 March 2019.

 

Principal risks and uncertainties

Risk is an inherent part of doing business. The J Sainsbury plc Board has overall responsibility for the management of the principal risks and internal control of the Company. The Board has identified the following principal potential risks to the successful operation of the business. These risks, along with the events in the financial markets and their potential impacts on the wider economy, remain those most likely to affect the Group in the second half of the year. 

 

·    Brand perception

·    Business continuity and major incidents response

·    Business strategy and change

·    Colleague engagement, retention and capability

·    Data security following the decision to leave the EU we have seen increased economic uncertainty, exchange rate volatility

·    Environment and sustainability

·    Financial and treasury risk

·    Health and safety - people and product

·    Political and regulatory environment

·    Trading environment and competitive landscape

 

The Board continues to monitor the risks and in particular, the impact of the UK's decision to leave the European Union and the uncertainty around the nature of the departure.  As negotiations continue, the Board will monitor outcomes, assess the impact on customers, colleagues and supply chains and implement an appropriate response.

 

The above Principal Risks remain unchanged from those reported in the Group's Annual Report and Financial Statements 2018.  For more information on these risks, detail of these risks, please refer to pages 30 to 34 of the J Sainsbury plc Annual Report and Financial Statements 2018, a copy of which is available on the Group's corporate website www.about.sainsburys.co.uk/about-us.

 

Statement of Directors' responsibilities

The Directors confirm that this set of Condensed Consolidated Interim Financial Statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union, and that the Interim Management Report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

 

The Directors of J Sainsbury plc are listed in the J Sainsbury plc Annual Report and Financial Statements 2018 with the exception of Martin Scicluna who joined the Board on 1 November 2018 as Chairman-Designate and Non-Executive Director. A list of current directors is maintained on the Group's website: www.about.sainsburys.co.uk.

 

By order of the Board

 

 

 

 

 

 

Mike Coupe

Chief Executive

7 November 2018

 

 

 

 

 

 

Kevin O'Byrne

Chief Financial Officer

7 November 2018

 

 

INDEPENDENT REVIEW REPORT TO J SAINSBURY PLC

 

Introduction

 

We have been engaged by J Sainsbury plc (the company) to review the condensed consolidated set of financial statements in the interim financial report for the 28 weeks ended 22 September 2018 which comprises the Group income statement, the Group statement of comprehensive income, the Group balance sheet, the Group cash flow statement and the Group statement of changes in equity and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated set of interim financial statements.

 

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

 

Directors' Responsibilities

 

The interim financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the interim financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

 

Our Responsibility

 

Our responsibility is to express to the company a conclusion on the condensed consolidated set of financial statements in the interim financial report based on our review.

 

Scope of Review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of financial statements in the interim financial report for the 28 weeks ended 22 September 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

 

 

Ernst & Young LLP

London

7 November 2018 

 

 

Alternative performance measures (APMs)

 

In the reporting of financial information, the Directors use various APMs which they believe provide additional useful information for understanding the financial performance and financial health of the Group. 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.

 

All of the following APMs relate to the current period's results and comparative periods where provided.

 

 

APM

Closest equivalent IFRS measure

Definition/Purpose

Reconciliation

Income statement

 

 

Like-for-like sales

No direct equivalent

Year-on-year growth in sales including VAT, excluding fuel, excluding Financial Services, for stores that have been open for more than one year. The relocation of Argos stores into Sainsbury's supermarkets is classifed as new space, while the host supermarket is classified like-for-like. The measure is used widely in the retail industry as an indicator of current trading performance and is useful when comparing growth between retailers that have different profiles of expansion, disposals and closures.

The reported retail like-for-like sales growth of 0.6 per cent is based on a combination of Sainsbury's like-for-like sales and Argos like-for-like sales for the 28 weeks to 22 September 2018. See movements below:

 

 

 

28 weeks to

28 weeks to

 

 

 

22 September 2018

23 September 2017

 

 

 

%

%

Underlying retail like-for-like (exc. fuel)

 

 

                0.6

              1.6  

Underlying net new space impact

 

 

               0.6

               0.3

Underlying total retail sales growth (exc. fuel)1

 

 

               1.2

               1.9

Argos consolidation

 

 

                  -

             18.0

Underlying total retail sales growth (exc. fuel)

 

 

              1.2

             19.9

Fuel Impact

 

 

               2.3

             (3.1)

Underlying total retail sales growth (inc. fuel)

 

 

              3.5

             16.8

Bank impact

 

 

                   -

               0.3

Underlying Group sales inc. VAT

 

 

              3.5

          17.1

Underlying Group sales

Revenue

Total sales less acquisition fair value unwinds on Argos Financial Services.

A reconciliation of the measure is provided in note 4 of the financial statements.

This is the headline measure of revenue for the Group. It shows the annual rate of growth in the Group's sales and is considered a good indicator of how rapidly the Group's core business is growing.

 

Underlying profit before tax

Profit before tax

Profit or loss before tax before any items recognised which, by virtue of their size and/or nature, do not reflect the Group's underlying performance.

A reconciliation of underlying profit before tax is provided in note 3 of the financial statements.

 

1. Underlying total retail sales growth can be recalculated as 1.1% using the financial information presented in the Condensed Consolidated Interim Financial Statements. When accounting for the unadjusted IFRS 15 impact within the base (note 16) this value is 1.2%.

                              

APM

Closest equivalent IFRS measure

Definition/Purpose

Reconciliation

 

Retail underlying operating profit

Profit before tax

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

A reconciliation of the measure is provided in note 4 of the financial statements.

Underlying basic earnings per share

Basic earnings per share

Earnings per share using underlying profit as described above.

A reconciliation of the measure is provided in note 9 of the financial statements.

This is a key measure to evaluate the performance of the business and returns generated for investors.

Retail underlying EBITDAR

No direct equivalent

Retail underlying operating profit as above, before rent, depreciation and amortisation.

A reconciliation of the measure is provided on page 10 of the Financial Review.

 

 

Cash flows and net debt

 

 

 

 

 

 

Cash flow items in Financial Review

No direct equivalent

To help the reader understand cash flows of the business a summarised cash flow statement is included within the Financial Review. As part of this a number of line items have been combined. The cash flow in note 4 of the financial statements includes a reference to show what has been combined in these line items.

 

 

28 weeks to

28 weeks to

52 weeks to

 

 

22 September

23 September

10 March

 

 

2018

2017

2018

 

Ref

£m

£m

£m 

Net interest paid

a

(55)

(61)

(105)

Strategic capital expenditure

b

(31)

(35)

(80)

Acquisition of subsidiaries

c

-

-

135

Repayment/

proceeds from borrowings

d

(567)

(81)

(174)

Other

e

(1)

(9)

(2)

Joint ventures

f

11

8

28

 

 

 

 

 

 

 

 

Retail free cash flow1

Net cash generated from operating activities

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.

This measures cash generation, working capital efficiency and capital expenditure of the retail business.

Reconciliation of retail free cash flow

28 weeks to

28 weeks to

52 weeks to

 

 

22 September

23 September

10 March

 

 

2018

2017

2018

 

 

£m

£m

£m

Cash generated from retail operations

889

872

1,259

 

 

 

 

Net interest paid (ref (a) above)

(55)

(61)

(105)

Corporation tax

 

(15)

(40)

(72)

Retail purchase of property, plant and equipment

(234)

(280)

(553)

Retail purchase of intangible assets

(42)

(32)

(69)

Retail proceeds from disposal of property, plant and equipment

34

44

54

Add back: Strategic capital expenditure

31

35

80

Dividends and distributions received

16

16

37

Investment in joint ventures and associates

(5)

(8)

(9)

Bank capital injections

 

-

(110)

(190)

 

619

436

432

                   

 

1. The definition of retail free cash flow changed at year-end in the prior financial year from 'net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure but before strategic capital expenditure' to 'net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure but before strategic capital expenditure & after investments in joint ventures & associates and Sainsbury's Bank capital injections'.

 

APM

Closest equivalent IFRS measure

Definition/Purpose

Reconciliation

Cash generated from retail operations (per Financial Review)

Cash generated from operations

Retail cash generated from operations after changes in working capital but before pension contributions and exceptional pension contributions.

The reconciliation between retail and Group cash generated from operations is provided in note 4 of the financial statements.

This enables management to assess the cash generated from its core retail operations.

Core retail capital expenditure

No direct equivalent

Capital expenditure excludes Sainsbury's Bank, after proceeds on disposals and before strategic capital expenditure.

This allows management to assess core retail capital expenditure in the period in order to review the strategic business performance.

The reconciliation from the cash flow statement is included here.

Reconciliation of retail free cash flow 

 

 

28 weeks to

28 weeks to

 

 

 

22 September

23 September

 

 

 

2018

2017

 

 

 

£m

£m

Purchase of property, plant and equipment

 

 

(203)

(245)

Purchase of intangibles

 

 

(42)

(32)

Cash capital expenditure before strategic capital expenditure (note 4b)

 

(245)

(277)

Strategic capital expenditure (ref (b) page 30)

 

 

(31)

(35)

Proceeds on disposal

 

 

34

44

Cash capital expenditure including strategic capital expenditure

 

 

(242)

(268)

Capitalised interest

 

 

(3)

(4)

Other (including strategic capital expenditure)

 

 

31

35

Debtor movement

 

 

(2)

(2)

Total net retail core capital expenditure

 

 

(216)

(239)

Retail Net Debt

Borrowings, cash, derivatives, financial assets and finance leases

Net debt includes the capital injections in to Sainsbury's Bank, but excludes the net debt of Sainsbury's Bank and its subsidiaries. Sainsbury's Bank's net debt balances are excluded because they are required for business as usual activities.

A reconciliation of the measure is provided in note 5 of the financial statements.

It is calculated as: available-for-sale assets (excluding equity investments) + net derivatives + net cash and cash equivalents + loans + finance lease obligations. This shows the overall strength of the balance sheet alongside the liquidity and its indebtedness and whether the Group can cover its debt commitments.

Gearing

No direct equivalent

Retail net debt divided by Group net assets.

Retail net debt as per above and net assets as per the Group balance sheet.

Gearing measures the Group's proportion of borrowed funds to its equity.

Other