RNS Number : 8162M
Sainsbury(J) PLC
02 May 2018

2 May 2018

Preliminary Results for the 52 weeks to 10 March 2018

Delivering at pace across the Group

Proposed combination with Asda

On 30 April 2018, Sainsbury's separately announced a proposed combination with Asda to create a dynamic new player in UK retail

Financial highlights

Underlying profit before tax 589 million, a return to growth; H2 profit increase of 11 per cent

Strong cash generation with free cash flow of 432 million, up 113 million in the year

Net debt reduced by 113 million to 1,364 million. Targeting to reduce net debt by a further 100 million in 2018/19

Delivery of 185 million cost savings in the year, bringing the total to 540 million over three years, exceeding our original 500 million three year target. We will deliver further cost savings of at least 500 million over the next three years to 2020/21, starting with 200 million of savings this year

Underlying earnings per share decreased six per cent to 20.4 pence per share, primarily reflecting the impact of a full year's consolidation of the additional shares issued at the HRG acquisition

In line with our policy of paying a dividend that is covered 2.0 times by underlying earnings, we propose to pay a final dividend of 7.1 pence per share, an increase of eight per cent, bringing our full year dividend to 10.2 pence per share. The dividend is also covered 2.0 times by free cash flow

Sainsbury's Bank profits of 69 million; expected to reduce to around 30 million next year

Profit expectation for 2018/19 is in line with current market consensus of 629 million 1

Strategic highlights

Good food performance: transactions growing ahead of the market and an improving margin trend

Convenience and Groceries Online sales up nearly eight per cent and nearly seven per cent respectively

In the biggest retail change programme we have ever undertaken, we are transforming the way we work in our stores. We propose to simplify our structures and our operations and invest in technology to be more efficient and to improve customer service

General Merchandise and Clothing , including Argos, continue to outperform a challenging market 2

191 Argos stores open in Sainsbury's supermarkets; resulting in around 280 by the end of 2018/19, ahead of our plan to open 250 by March 2019. We will also deliver 160 million EBITDA synergies by March 2019, six months ahead of plan

Nectar acquisition supports our strategy of knowing our customers better than anyone else

2017/18

2016/17

Variance

Business Performance

Group sales (inc VAT)

31,735m

29,112m

9.0%

Group like-for-like sales (inc VAT, ex fuel)

1.3%

Underlying profit before tax (3)

589m

581m

1.4%

Underlying basic earnings per share (3)

20.4p

21.8p

(6.4)%

Proposed final dividend

7.1p

6.6p

7.6%

Proposed full year dividend

10.2p

10.2p

-

Net debt (including perpetual securities)

1,858m

1,971m

113m

Net debt (excluding perpetual securities)

1,364m

1,477m

113m

Return on capital employed (3)

8.4%

8.8%

2017/18

2016/17

Statutory Reporting

Group revenue (ex VAT, inc fuel)

28,456m

26,224m

Items excluded from underlying results

(180)m

(78)m

Profit before tax

409m

503m

Basic earnings per share

13.3p

17.5p

Mike Coupe, Group Chief Executive of J Sainsbury plc, said : "We have accelerated the rate of change and innovation across the Group and more customers are choosing to shop with us than ever before as a result. I am pleased to announce an increase in underlying profits before tax to 589 million, driven by delivery of Argos synergies, efficiency savings across the Group and improving food margin trends.

"We are focused on making Sainsbury's a destination of choice. We are clearly differentiated by the quality of our food and we have recently invested a further 150 million to lower prices. General Merchandise and Clothing are both performing ahead of the market and, in response to great customer feedback and financial returns, we are opening Argos stores in our supermarkets faster than we originally planned. We will also deliver 160 million EBITDA synergies by March 2019, six months ahead of plan.

"Sainsbury's Bank profits grew as we fully consolidated Argos Financial Services during the year. Looking to the year ahead, we expect lending margins to remain under pressure in a competitive market. Combined with new accounting standards and interest payments on the external capital we raised in November, we expect Bank profits to reduce significantly next year. We have decided to limit capital injections in the Bank to 110 million in 2018/19. We will take a cautious approach to unsecured lending while maintaining focus on mortgage growth.

"Our acquisition of Nectar supports our strategy of knowing our customers better than anyone else and I was pleased to welcome our Nectar colleagues to the Group in February.

"We continue to find ways to simplify our business and reduce costs. We have exceeded our original three year 500 million target and delivered a total of 540 million in savings. In addition, we will deliver at least 500 million of cost savings over the next three years to 2020/21. Net debt has reduced by 113 million to 1,364 million and we are targeting to reduce net debt by a further 100 million in 2018/19. I am optimistic about the year ahead."

Change of Directorate

Now that David Tyler has been Chairman for more than eight years, a search process has begun, led by Dame Susan Rice and the Nomination Committee, to find his successor as Non-Executive Chairman.

Dividend

In line with our policy of paying a dividend that is covered 2.0 times by underlying earnings, we propose to pay a final dividend of 7.1 pence per share, an increase of eight per cent, bringing our full year dividend to 10.2 pence per share.

Outlook

The market remains competitive. However, we are well placed to navigate the external environment and we remain focused on delivering our strategy. Despite the reduction in profits at Sainsbury's Bank, we are comfortable with current market consensus for 2018/19 UPBT of 629 million 1 .

Fourth Quarter Trading Statement data for the 9 weeks to 10 March 2018

Like-for-like sales growth (including Argos in the base)

2016/17

2017/18

Q3

Q4

Q1

Q2

H1

Q3

Q4

H2

FY

Like-for-like sales (excl. fuel)

1.0%

0.3%

2.3%

0.6%

1.6%

1.1%

0.9%

1.1%

1.3%

Like-for-like sales (inc. fuel)

2.2%

0.9%

1.6%

0.9%

1.3%

1.2%

1.8%

1.4%

1.4%

Total sales growth (including Argos in base)

2016/17

2017/18

Q3

Q4

Q1

Q2

H1

Q3

Q4

H2

FY

Grocery

0.3%

0.3%

3.0%

1.4%

2.3%

2.3%

2.1%

2.3%

2.3%

General Merchandise

3.7%

1.5%

1.0%

(1.6)%

(0.1)%

(1.4)%

(1.2)%

(1.4)%

(0.8)%

Clothing

9.4%

5.2%

7.2%

6.3%

6.8%

1.0%

0.4%

0.8%

3.8%

Total Retail (excl. fuel and excl. impact of sale of Pharmacy)

1.6%

0.7%

2.7%

0.9%

1.9%

1.2%

1.3%

1.2%

1.6%

Total sales growth

2016/17

2017/18

Q3

Q4

Q1

Q2

H1

Q3

Q4

H2

FY

Total Retail (excl. fuel and excl. impact of sale of Pharmacy)

33.1%

20.7%

24.4%

17.0%

21.2%

1.2%

1.3%

1.2%

10.6%

Total Retail (excl. fuel)

31.6%

18.9%

22.9%

16.0%

19.9%

1.2%

1.3%

1.2%

10.0%

Total Retail (inc. fuel and excl. impact of sale of Pharmacy)

29.8%

18.2%

20.1%

14.8%

17.8%

1.4%

2.3%

1.7%

9.4%

Total Retail (inc. fuel)

28.6%

16.7%

18.9%

14.0%

16.8%

1.4%

2.3%

1.7%

8.9%

Notes

A. All sales figures contained in this trading statement are stated including VAT and in accordance with IFRIC 13

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

C. Full year total retail sales growth is higher than the statutory accounts by 0.1 per cent due to the re-phasing of 2016/17 post-acquisition Argos sales into pre-acquisition quarters on a comparable basis

Strategic report

We are delivering the strategy we set out in November 2014. The market is competitive and the way customers shop continues to evolve. Our strategy is based on five pillars: knowing our customers better than anyone else; great products and services at fair prices; being there for our customers whenever and wherever; colleagues making the difference and our values making us different. To deliver this strategy we have prioritised four key areas of our business where we can differentiate ourselves, grow and create value:

Four key priorities

1. Further enhance our differentiated food proposition

We are committed to offering competitive prices and recently invested a further 150 million to lower the price of 930 essential items

Our share of transactions increased, with more customers choosing to shop at Sainsbury's than ever before

Convenience and Online remain strong drivers of growth, with sales up nearly eight per cent and nearly seven per cent respectively

We continue to invest in the quality of our food. We have re-launched 128 food ranges this year, covering 60 per cent of food sales

Our Slow Cook range offers customers restaurant quality food. Our share of this growing market has increased from four per cent to 17 per cent and we are now the market leader

Our gourmet Supper Club ready meal range, which launched in February, is a great example of the innovation in high quality food that differentiates us. It is performing well and growing share

We are focused on making our stores attractive retail destinations. Innovative and exclusive partnerships enhance our food offer and give customers more choice. These include Godiva chocolates which are available exclusively to Sainsbury's customers in 500 stores and Patisserie Valerie handmade cakes and pastries which are available in 44 stores, including Click & Collect

We have 59 Sushi Gourmet and Sushi Daily counters and we continue to work with selected concession partners such as Explore Learning, Specsavers, Timpsons and Crussh fit food and juice bars to maximise the use of space in our stores

Customers value saving time and having more control over how much they spend. Our Smart Shop 'scan as you shop' technology is now in 60 supermarkets

Our Same Day Groceries Online delivery option is now available to 40 per cent of the UK population

We are transforming the way we work in our stores. We propose to simplify our structures and our operations and invest in technology to be more efficient and to improve customer service

Our Nectar acquisition gives us the flexibility to trial and adapt our customer loyalty offer

Our colleagues continue to deliver market-leading customer service and product availability. We have won the Grocer Gold Awards for Service and Availability for the past five years

2. Grow General Merchandise and Clothing and deliver synergies

General Merchandise sales declined 0.8 per cent, outperforming the market and gaining market share 4

Clothing grew sales by nearly four per cent, with online growth of 45 per cent and outperformed the market 5 . T u clothing can now be ordered from the Argos website for home delivery or to collect from over 1,000 Argos stores and collection points across the UK

Strong Argos performance in key categories of Audio, Mobile and Video Games

Argos Fast Track is a key point of difference and our unique Hub and Spoke model enables us to deliver customer orders quickly and conveniently. Argos is the only retailer in the UK that can deliver to 90 per cent of postcodes within four hours. Fast Track home deliveries increased by 28 per cent and Fast Track in-store collections by 45 per cent in the year

Digital sales continue to grow and 60 per cent of sales now start online. Of those, 70 per cent are from mobile devices

191 Argos stores open in Sainsbury's supermarkets; resulting in around 280 by the end of 2018/19, ahead of our plan to open 250 by March 2019. We will also deliver 160 million EBITDA synergies by March 2019, six months ahead of plan

Customers can pick up their Argos and Tu clothing from 192 collection points in our supermarkets. 155 of these are in supermarkets where customers can also collect eBay and DPD parcels. We also have 37 collection points in Sainsbury's Local stores

3. Diversify and grow Sainsbury's Bank

Sainsbury's Bank delivered 69 million profit, up 11 per cent, primarily reflecting the full consolidation of Argos Financial Services. Good sales growth across the product range was offset by a reduction in margins in the competitive unsecured lending market and a modest increase in bad debt charges, as expected

While we remain confident in the Bank's potential to generate growth and healthy returns in the medium term, we expect Sainsbury's Bank profits to reduce significantly in the short term. We believe the banking market will remain competitive, with unsecured lending margins further impacted by cheap funding from the Bank of England's Term Funding Scheme. This year we are taking a cautious approach to unsecured lending and focusing on growing our mortgage book and our commission products. Together with the impacts of new accounting standards driving an additional 11 million impairment as a result of IFRS 9 adoption and the interest relating to the external capital we raised in November 2017, we expect this to result in profit of around 30 million in 2018/19

Sainsbury's Bank Mortgages, launched in April 2017, have performed well. We have eight new broker partners and lending in excess of 275 million

We have 1.9 million active Bank customers, up eight per cent

Credit Cards performed strongly, with 40 per cent year-on-year growth in new card sales; the Argos Card saw a 12 per cent increase in sales

Following the launch of the new banking platform, we grew savings by 41 per cent

Our insurance broker panel model, introduced in February 2017, has been popular with customers. Car Insurance new policy sales grew by 42 per cent and Home Insurance sales grew by 39 per cent

Travel Money grew 26 per cent, increasing market share

4. Continue cost savings and maintain balance sheet strength

Responding to changing customer shopping habits we are making transformational changes to our in-store operating model, and reducing costs throughout our store estate

We have achieved cost savings of 540 million over the past three years, exceeding our original target of 500 million. We will deliver at least a further 500 million of cost savings over the next three years to 2020/21

We achieved 185 million of these cost savings in 2017/18 across a number of areas including logistics, energy efficiency, store operations, procurement and marketing

We have well-developed plans in place 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 drive efficiencies and simplify the business

Our balance sheet remains strong. We have reduced net debt by 113 million to 1,364 million (excluding perpetual securities) and we are targeting to reduce net debt by a further 100 million in 2018/19

We continue to maintain high levels of liquidity, with facilities of 4.1 billion, of which only 2.5 billion was drawn down at the year end. We refinanced our revolving credit facility in October 2017, increasing it to 1.5 billion and extending its maturity. The ratio of lease adjusted net debt to earnings before interest, tax, depreciation and rent (EBITDAR) has improved to 3.2 times from 3.7 times a year ago

We achieved strong underlying cash generation, with free cash flow of 432 million in 2017/18 compared to 319 million in 2016/17

Our values

Our values are integral to how we do business and enable us to drive lasting positive change in communities across the UK and overseas.

Living healthier lives: 33,350 schools and clubs took part in our Active Kids scheme in 2017/18

Sourcing with integrity: Through Sainsbury's Dairy Development Group's ten year partnership with over 260 dairy farmers we have achieved higher milk yields, improved animal welfare, and a price guarantee

Respect for our environment: We have reduced packaging by 35 per cent since 2005 and we are working with WRAP to make plastic packaging recyclable

Making a positive difference in the community: We generated 35 million in 2017/18 for charities, communities and good causes

Great place to work: We were awarded Disability Confident Leader status by the Department for Work and Pensions for our work on disability and inclusivity - the largest retailer in the UK to achieve this status

Notes

1 Analyst consensus is available on our corporate website www.j-sainsbury.co.uk

2 General Merchandise grew ahead of the market (BRC non-food non-clothing market, consistently gaining share. Clothing grew ahead of the market (Kantar Worldpanel, 52 weeks ending 18 March 2018)

3 Defined in Alternative Performance Measures on page 48

4 BRC non-food non-clothing market, 52 weeks to 10 March 2018

5 Kantar Worldpanel, 52 weeks ending 18 March 2018

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 was held on 30 April 2018 at 9.30am.

To view the slides of the results presentation and the webcast please visit www.j-sainsbury.co.uk Results, Reports and Presentations section and follow the on-screen instructions.

Sainsbury's will report its 2018/19 First Quarter Trading Statement at 07:00 (BST) on 4 July 2018.

Enquiries

Investor Relations

Media

James Collins

Rebecca Reilly

+44 ( 0) 7392 105 164

+44 (0) 20 7695 7295

MARKET CONTEXT

The Market

Economic conditions became more challenging for UK consumers during the last year. The devaluation of Sterling and higher commodity prices fed through to food and non-food prices from the start of our financial year, with the consequence that wage growth fell behind inflation for the first time in over three years.

Higher inflation benefited food retail market growth, but the impact on disposable income of higher inflation saw non-food retail sales growth weaken over the course of the year. Combined with the impacts of wage inflation, online channel shift and other structural pressures on traditional non-food retailers, this is accelerating the process of consolidation in the non-food market.

Shopping habits and retail trends

Shopping habits continue to evolve as the UK consumer expects far greater choice and flexibility in how, when and where they shop for food, general merchandise and clothing, accessing a variety of channels.

In line with our expectations, consumers continue to shop more frequently across different channels and store formats, with convenience stores and online both showing strong growth. Discount and bargain retailers continue to open significant numbers of new stores and gain market share. These trends continue to place pressure on volumes through the core supermarket format. However, we anticipate that supermarkets will remain an important channel for groceries.

Consumers continue to move their general merchandise and clothing purchases online, accessing a wide choice of delivery and pick-up options. Click & Collect accounts for a significant proportion of UK online general merchandise and clothing sales, as the speed and ease of options continue to expand. Traditional store formats, particularly on the high street, are seeing footfall and sales decline as online participation grows.

In the future, retailers will need to offer a consistent and seamless experience to consumers and be able to rapidly fulfil their orders in a location and at a time that is most convenient to them.

Sainsbury's response to a changing market place

Our strategy reflects the changing marketplace and our business is well set to continue adapting to these changes. A strategy of being there for our customers whenever and wherever they choose to shop with us allows us to be flexible in adapting to these changing customer needs. We have accelerated the rate of change and innovation across the Group and we are focused on satisfying more customer missions. We remain competitive on price across food, clothing and general merchandise and are focused on providing great value across a wide range of products, making targeted investments to lower prices so that consumers can make choices to suit their budgets.

We are clearly differentiated by the quality of our food and we are adapting our supermarkets to serve a wider variety of shopping missions. This includes the opening of Argos stores within Sainsbury's supermarkets, along with other quality third party offers such as Sushi Gourmet, Sushi Daily and Explore Learning.

Our General Merchandise and Clothing business is performing ahead of the market and we are opening Argos stores in our supermarkets faster than we originally anticipated. Argos has a unique Hub and Spoke distribution model that enables fulfilment of customer orders for collection or home delivery quickly, conveniently and efficiently.

Our combination of a strong online proposition with a wide availability of delivery and pick-up options continues to be popular with consumers. Our convenience store estate is made up of over 800 stores and is outperforming the market as we continue to review the range we offer our customers to ensure it is reflective of their changing needs and shopping missions.

We have delivered 540 million of cost savings over the last three years and we have targeted at least another 500 million of cost savings for the business for the next three years. Together with a targeted 160 million EBITDA (142 million EBIT) of synergies from the acquisition of Argos and a focus on maintaining balance sheet strength, we are confident that we have the resources to remain highly competitive and to trade well through tougher market conditions.

STRATEGIC REPORT

Further enhance our differentiated food offer

Food has been the core of our business since 1869 and our customers trust in the quality and value of our offer. More people are shopping with us than ever before and our share of customer transactions increased.

Our strategic focus is to help our customers to live well for less, putting quality first and investing in our ranges. This year we improved 128 food ranges, covering 60 per cent of our food sales.

We are particularly strong in ranges where we offer customers quality and convenience as well as great value, such as Taste the Difference, Deliciously FreeFrom and On the Go. The strong trend towards gourmet quality ready meals led us to launch our Supper Club range in February and our restaurant quality Slow Cook range has become the market leader since its launch two years ago. The growth of these new food innovations shows customers trust both our high quality standards and our commitment to using the best ingredients while offering low prices.

We are using space innovatively in our larger supermarkets by partnering, often exclusively, with premium brands such as Godiva Belgian chocolates, available in 500 stores, and Patisserie Valerie, whose gateaux and pastries are popular with customers. Customers can buy the cakes over the counter in 31 stores, or order ahead for collection in an additional 13 stores. We work with selected concession partners to maximise our use of space and help make Sainsbury's an attractive retail destination. We have 59 Sushi Gourmet and Sushi Daily counters, as well as two Crussh fresh food and juice bars. Across our supermarket estate we are improving the layouts of our stores so that customers can shop quickly and conveniently. We are taking a disciplined approach to investing in stores, focusing on areas which matter most to customers.

We have been reducing cost from our end-to-end supply chain, working collaboratively with our suppliers to buy better for less. This has enabled us to invest a further 150 million in the price of 930 essential items so customers can be confident that they are getting great prices as well as great quality.

We are proposing to change the way we operate in stores and online. Improved systems are making us faster and more efficient with a simpler store management structure that will empower colleagues and improve service.

Convenience and Groceries Online continue to be strong drivers of growth, with sales up nearly eight per cent and nearly seven per cent respectively. Around 70 per cent of sales through our Convenience channel have been improved by ranging and merchandising activity. Sales through Convenience stores stand at around 2.7 billion. Groceries Online now offers Same Day delivery to 40 per cent of the UK population out of 102 stores and our Chop Chop one hour delivery service operates from seven stores in central London. Online Grocery orders can also be collected from over 100 stores. A new picking system, handsets and software have driven a 15 per cent improvement in pick-rate and we are achieving delivery punctuality of 97 per cent. Our popular Groceries Online app now accounts for around 20 per cent of food orders.

Our acquisition of Nectar allows us to explore innovative new ways to reward customer loyalty and supports our strategy of knowing our customers better than anyone else. We were pleased to welcome our Nectar colleagues to the Group in February.

Our colleagues continue to deliver excellent customer service and we have won the Grocer Gold Awards for Service and Availability for the past five years. We are proposing to invest 100 million to award store colleagues a market-leading rate of pay of 9.20 from September 2018, along with revised terms and conditions which will ensure consistency and fairness in contracts. We recognise that a small minority of colleagues will be adversely impacted by these proposals and have committed to additional payments for a period of 18 months for all those affected.

Grow General Merchandise and Clothing and deliver synergies

General Merchandise sales, including Argos, declined by 0.8 per cent and outperformed a challenging market. [1] General Merchandise performed strongly in key areas such as Audio, Mobiles and Video Games.

Offering high street style at supermarket prices has made Tu clothing very popular with our customers. Sales grew nearly four per cent, outperforming the market, and Clothing now contributes close to 1 billion of annual sales to the Group . Over eight million customers regularly buy the range, making us the sixth largest clothing retailer in the UK by volume. We are strongly positioned in womenswear and childrenswear, with opportunities for growth in menswear, which now accounts for 15 per cent of clothing sales and is our fastest growing clothing category. Sales of clothing online have increased by 45 per cent. We are now making the Tu ranges easily accessible to Argos customers through the Argos website, available for home delivery or collection from over 1,000 Argos and Sainsbury's stores across the UK.

In the 18 months since we acquired Argos we have been rapidly integrating our two businesses. Joint range planning has enabled us to rationalise our product offer and give customers better overall choice and value. W e have opened 191 Argos stores in Sainsbury's supermarkets and we expect to open around 90 more in the next financial year, bringing the total to around 280, ahead of our original schedule to open 250 Argos stores by March 2019. We are seeing strong like-for-like sales, with an uplift in grocery sales in supermarkets that have an Argos store.

Customers can pick up their Argos and Tu clothing from 192 collection points in our supermarkets. 155 of these are in supermarkets where customers can also collect eBay and DPD parcels. We also have 37 collection points in Sainsbury's Local stores.

We will deliver 160m EBITDA synergies by March 2019, six months ahead of plan. A key part of our strategy is to make it quick and convenient for customers to shop with us whenever and wherever they want. The Argos website is the third most visited retail website in the UK and online sales continue to grow, with 60 per cent of Argos sales originating online, over 70 per cent of which are generated through mobile devices.

Fast Track is a key point of difference for us, enabling us to leverage our unique Hub and Spoke model to deliver Argos orders quickly and conveniently. Customers have the choice of same day or next day Fast Track delivery or collection and this year Fast Track delivery increased by 28 per cent and Fast Track collection by 45 per cent. In November, we opened regional fulfilment centres in Reading and Birmingham.

Diversify and grow Sainsbury's Bank

Sainsbury's Bank profits increased by 11 per cent to 69 million, primarily due to the full year consolidation impact of Argos Financial Services. Good sales growth across the product range was offset by a reduction in margins in a competitive unsecured lending market and a modest increase in bad debt charges, as expected.

We have over 1.9 million active customers, an increase of eight per cent year on year. Over 81 per cent of insurance customers and 75 per cent of banking customers have, or are linked to, a Nectar card.

Credit Cards performed strongly, with 40 per cent growth in new Sainsbury's Bank card sales. The Argos Card saw a 12 per cent increase in sales and can now be used in both Argos and Sainsbury's, providing greater choice and convenience for customers. We launched our new, enhanced personal loan platform and around 70 per cent of all new personal lending goes to active Nectar card holders. New Savings account growth is up 41 per cent this year with growth in deposits up 21 per cent, which includes 32 per cent growth in ISA and Fixed Term deposits.

Since introducing our insurance broker panel model in February 2017, new policy sales in Car Insurance increased by 42 per cent and Home Insurance grew by 39 per cent. By working with a broader base of underwriting partners and looking at our data we have been able to offer more quotes to more Sainsbury's customers and give better discounts.

Our ATM estate grew by over five per cent to over 1,820 and we introduced 36 ATMs in high footfall Argos stores. 1 of every 11 dispensed from a LINK ATM transaction is from Sainsbury's Bank.

Travel Money grew 26 per cent in a competitive market. This year we opened a further nine Travel Money bureaux, taking the total to 241 across the estate. As well as an in store service in convenient locations across the UK, we also offer an online home delivery service.

We expect the banking market to remain competitive and will take a cautious approach to unsecured lending in favour of a greater focus on growing our commission products and mortgage book. Together with the impact of new accounting standards and the interest related to the external capital we raised in November 2017, this will impact Sainsbury's Bank profits in the short term, but we are confident that this is the right decision for the business and remain confident in the potential of the Bank to generate growth and healthy returns in the medium term.

Continue cost savings and maintain balance sheet strength

We have made fundamental changes to our operations to be more efficient and customer-focused. Technology and digital innovations are also helping us to improve systems across our business, increasing efficiency and improving productivity.Through these operational efficiencies, we have exceeded our three year cost saving target and saved 540 million. We delivered cost savings of 185 million in 2017/18, 40 million above our target. Over the next three years to 2020/21 we will deliver a minimum of 500 million of cost savings. We plan to deliver 200 million of these savings in 2018/19 by simplifying our store management structures and operations and creating efficiencies to improve service for our customers.

We continue to maintain a strong balance sheet. We have reduced net debt by 113 million to 1,364 million and we are targeting to reduce net debt by a further 100 million in 2018/19. The reduction is a result of continued strong cash generation from retail operations, further working capital improvements and the acquisition of Nectar. This was partly offset by capital expenditure, capital injections into Sainsbury's Bank, adverse movements on US dollar derivatives and continued dividend payments. Group core retail capital expenditure at 495 million was lower than last year even with the addition of a full year of Argos core retail capital expenditure. It remains significantly lower than the average capital expenditure in the previous five years of 793 million. Our pension deficit has reduced by 589 million from 850 million last year to 261 million at the year end.

In the medium term our increased focus on cash will deliver adjusted net debt to adjusted EBITDAR (treating perpetual securities as debt) of less than three times and fixed charge above three times.

The Group has financing facilities of 4.1 billion, of which only 2.5 billion was drawn down at year end. The Group refinanced its syndicated committed revolving credit facility. The revised facility of 1.45 billion has three, four and five year tranches, with an initial final maturity for the longer dated tranche of April 2023. The refinancing is expected to drive annual interest savings of approximately 20 million.

We expect net finance costs of around 100 million in 2018/19 following final repayment of the secured loan due in 2018.

Financial Review of the full year results for the 52 weeks to 10 March 2018

Dear Shareholder, 2017/18 has been another year of significant change, with continued progress in delivering our strategic priorities, strong cash generation, cost saving and synergy outperformance, the consolidation of a full year of Argos, the acquisition of Nectar, and the return to like-for-like sales growth, all delivered in the context of a rapidly changing and competitive retail environment.

Sainsbury's underlying Group sales (including VAT) were up 9.0 per cent to 31,735 million mainly as a result of the impact of consolidating a full year of Argos. On a 52-week rolling basis Sainsbury's market share (as measured by Kantar) declined 27 basis points, due to further price investment and the continuing new store expansion from discounters, whose combined market share increased by 132 basis points. By contrast the 'big four' declined by 96 basis points. Our General Merchandise sales continued to outperform the market with strong growth in many of our key categories, as we maintained market share (as measured by the British Retail Consortium, 'BRC') despite challenging market conditions.

During the year, we worked hard to protect our customers from the impact of cost price inflation and rising commodity prices by continuing to partner with our suppliers in looking at ways to reduce our sourcing and end-to-end supply chain costs. Against this backdrop we were pleased to record an improving food margin trend whilst General Merchandise margin remains under pressure in challenging market conditions. In 2017/18, retail underlying EBITDAR margin increased 4 basis points to 7.44 per cent and retail underlying operating margin declined 18 basis points to 2.24 per cent primarily as a result of the consolidation of a full year of Argos' results. Underlying profit before tax ('UPBT') increased by 1.4 per cent to 589 million (2016/17: 581 million). Profit before tax of 409 million (2016/17: 503 million) was down 18.7 per cent as a result of a 180 million charge recognised outside underlying results. This charge includes the proposed changes to our store operations that we have announced this year, Argos integration costs and Sainsbury's Bank transition costs. Cost savings of 185 million were delivered during the year resulting in a cumulative three-year total of 540 million, 40 million ahead of the target we set in 2014/15. We have well developed plans to deliver a further three-year cost saving target of 500 million by 2020/21 as we continue to simplify the business and we expect to achieve savings of around 200 million in 2018/19.

Sainsbury's Bank profits increased by 11 per cent to 69 million, primarily due to a full-year consolidation of Argos Financial Services results. Good sales growth across the product range was offset by a reduction in margins in the competitive unsecured lending market and an increase in bad debt charges, as expected. Next year, we expect lending margins to remain under pressure. Accordingly, we have decided to take a more cautious approach to unsecured lending and will focus on growing our mortgage book and our commission products. Together with the impacts of new accounting standards and the cost of the external capital we raised in November 2017, we expect Bank profits to reduce to around 30 million in 2018/19.

The balance sheet remains strong with a further reduction in net debt. Net debt was 1,364 million as at 10 March 2018 (11 March 2017: 1,477 million), a decrease of 113 million in the year, mainly as a result of continuing strong cash generation from our retail operations and further working capital improvements, offset by pension payments, capital expenditure and dividends paid. The Group has facilities of 4.1 billion with only 2.5 billion drawn at the end of the year.

The discount rate applied to the Group's pension schemes has been increased this year to use a revised approach that we believe better reflects expected yields on high quality corporate bonds over the duration of the Group's pension schemes. In addition, future mortality assumptions have been updated from CMI 2015 projections at 2017 year end to CMI 2017 projections. These changes have contributed to the reduction in our Group pension scheme IAS 19 accounting deficit (net of deferred tax) to 261 million (2016/17: 850 million deficit) as at 10 March 2018.

Underlying basic earnings per share decreased 6.4 per cent to 20.4 pence (2016/17: 21.8 pence), reflecting the full-year impact of the additional shares issued as a result of the Home Retail Group ('HRG') acquisition. Basic earnings per share decreased 24.0 per cent to 13.3 pence (2016/17: 17.5 pence), lower than the underlying earnings per share due to the 180 million charge recognised outside of underlying results .

The Board has recommended a final dividend of 7.1 pence (2016/17: 6.6 pence), resulting in an unchanged full-year dividend of 10.2 pence per share (2016/17: 10.2 pence per share).

Summary income statement

52 weeks to

52 weeks to

10 March 2018

11 March 2017

Change

m

m

%

Underlying group sales (including VAT)

31,735

29,112

9.0

Underlying retail sales (including VAT)

31,220

28,705

8.8

Underlying group sales (excluding VAT) 1

28,453

26,231

8.5

Underlying retail sales (excluding VAT) 2

27,938

25,824

8.2

Underlying operating profit

Retail

625

626

(0.2)

Financial services

69

62

11.3

Total underlying operating profit

694

688

0.9

Underlying net finance costs 3

(119)

(119)

-

Underlying share of post-tax profit from JVs 4

14

12

16.7

Underlying profit before tax

589

581

1.4

Items excluded from underlying results

(180)

(78)

130.8

Profit before tax

409

503

(18.7)

Income tax expense

(100)

(126)

20.6

Profit for the financial period

309

377

(18.0)

Underlying basic earnings per share

20.4p

21.8p

(6.4)

Basic earnings per share

13.3p

17.5p

(24.0)

Dividend per share

10.2p

10.2p

-

1. Underlying group revenue of 28,459 million, disclosed in note 4 of the accounts, includes 6 million of revenue consolidated post the acquisition of Nectar that is excluded from underlying group sales.

2. Underlying retail revenue of 27,944 million, disclosed in note 4 of the accounts, includes 6 million of revenue consolidated post the acquisition of Nectar that is excluded from underlying retail sales.

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

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

Group sales

Underlying group sales (including VAT, including fuel) increased by 9.0 per cent year-on-year, mainly as a result of the impact of consolidating a full year of Argos (2016/17: 27 weeks). Underlying retail sales (including VAT, including fuel) increased by 8.8 per cent. Including Argos in the base, retail sales (including VAT, excluding fuel) increased by 1.6 per cent due to an improved like-for-like performance. Fuel sales grew 2.6 per cent, largely driven by retail price inflation.

Total sales performance by category

52 weeks to

inc. Argos in base

10 March 2018

Grocery (exc. Pharmacy)

2.3%

General Merchandise

(0.8)%

Clothing

3.8%

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

1.6%

Fuel sales

2.6%

Retail (inc. fuel, exc. impact of sale of Pharmacy business)

1.7%

Grocery sales grew by 2.3 per cent driven by inflationary pressure across all food categories. A challenging General Merchandise market resulted in a sales decline of 0.8 per cent year-on-year. However, Clothing continued to perform well with sales growth of nearly four per cent year-on-year. We are the sixth biggest clothing retailer by volume.

Convenience growth was nearly eight per cent and Groceries Online sales growth was nearly seven per cent driven by order and basket size growth, supporting our ambition of becoming a multi-product, multi-channel retailer. There was sales growth across all Sainsbury's channels - Supermarkets, Convenience and Groceries Online.

Total sales performance by channel

52 weeks to

52 weeks to

10 March 2018

11 March 2017

Supermarkets

0.5%

(1.8)%

Convenience

7.5%

6.5%

Groceries Online

6.8%

8.2%

Retail like-for-like sales, excluding fuel, increased by 1.3 per cent in the year (2016/17: flat) mainly as a result of continued inflation.

Retail like-for-like sales performance

52 weeks to

52 weeks to

inc. Argos in base

10 March 2018

11 March 2017

Like-for-like sales (exc. fuel)

1.3%

0.0%

Like-for-like sales (inc. fuel)

1.4%

0.5%

On a 52-week rolling basis, Sainsbury's market share (as measured by Kantar for the 52 weeks to 25 February 2018) declined 27 basis points due to continued price investment and the continuing store expansion from the discounters whose combined market share increased by 132 basis points. By contrast the 'big four' combined market share declined by 96 basis points.

Space

In 2017/18, Sainsbury's opened three new supermarkets (2016/17: six new supermarkets). Convenience continued to grow, with 24 new stores opened in 2017/18, including two Euro Garages stores, and 15 stores closed (2016/17: 41 stores opened and eight stores closed). Net of replacements, closures and disposals, closing Sainsbury's space was 23,209,000 sq. ft. (11 March 2017: 23,397,000 sq. ft.).

As at 10 March 2018, Argos had 844 stores and 192 collection points. Habitat had 16 stores.

Store numbers and retailing space

As at

New stores

Disposals / closures

Extensions / refurbishments / downsizes

As at

11 March

10 March

2017

2018

Supermarkets

605

3

-

-

608

Supermarkets area '000 sq. ft.1

21,512

80

-

(296)

21,296

Convenience2

806

24

(15)

-

815

Convenience area '000 sq. ft.

1,885

59

(32)

1

1,913

JS total store numbers

1,411

27

(15)

-

1,423

Argos stores3

715

1

(77)

-

639

Argos stores in Sainsbury's3

39

152

-

-

191

Argos in Homebase

57

-

(43)

-

14

Temporary stores

2

-

(2)

-

-

Argos total store numbers

813

153

(122)

-

844

Argos collection points 4

37

194

(39)

-

192

Habitat

8

8

-

-

16

1 The net 296,000 sq. ft. reduction in Sainsbury's supermarket space is driven by 336,000 sq. ft. now belonging to Argos stores in Sainsbury's offset by 40,000 sq.ft. of other space initiatives.

2 Includes Euro Garages stores.

3 Two Argos store openings have been reclassified as Argos stores in Sainsbury's to reflect their utilisation of the Sainsbury's store portfolio.

4 2016/17 included one Habitat collection point.

In 2018/19, Sainsbury's expects to open two new supermarkets and around 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.

In 2018/19, Sainsbury's expects to close the remaining Argos stores within Homebase.

Retail underlying operating profit

Retail underlying operating profit decreased by 0.2 per cent to 625 million (2016/17: 626 million), reflecting continued investment in the customer offer, cost inflation and the consolidation of the Argos first half operating loss, partly offset by cost savings of 185 millionand cumulative EBITDA synergies of 87 million (EBIT of 82 million).

Retail underlying operating margin declined by 18 basis points year-on-year to 2.24 per cent (2016/17: 2.42 per cent), equivalent to a 17 basis point decline at constant fuel prices, as a result of the consolidation of Argos sales.

Retail underlying operating profit

52 weeks to

52 weeks to

Change at

10 March

11 March

constant fuel

2018

2017

Change

prices

Retail underlying operating profit (m)1

625

626

(0.2)%

Retail underlying operating margin (%)2

2.24

2.42

(18)bps

(17)bps

Retail underlying EBITDAR (m)3

2,078

1,912

8.7%

Retail underlying EBITDAR margin (%)4

7.44

7.40

4bps

8bps

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 740 million and underlying depreciation and amortisation of 713 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 have well-developed plans 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 drive efficiencies and simplify the business.

In 2018/19, Sainsbury's expects a depreciation and amortisation cost 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 629 million, as published on 5 March 2018 on www.j-sainsbury.co.uk/investors/analyst-consensus).

Acquisition of Nectar

On 1 February 2018, Sainsbury's acquired all Nectar businesses and related assets required for the full and independent operation of the Nectar Loyalty programme, including the remaining 50 per cent share of its joint venture with Aimia Inc., Insight 2 Communication LLP. The consideration of 39 million generated goodwill of 147 million. The transaction supports Sainsbury's strategy of knowing its customers better than anyone else.

Synergies arising from the acquisition of Argos

In 2017/18, Sainsbury's achieved 87 million of cumulative EBITDA synergies (82 million EBIT), of which 80 million were incremental to the 2016/17 full year. 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 . Due to the acceleration of some of this activity, we later announced that we expect to deliver these in 2018/19 (six months early).

In order to achieve these synergies, a total of 130 million of exceptional integration costs and 140 million of exceptional integration capital expenditure will be required. Exceptional costs will include the relocation of property, dilapidations, lease break costs and redundancy costs. Exceptional capital expenditure is required to reformat supermarket space and for fitting out the new Argos stores. The updated expected phasing of the synergies, exceptional costs and exceptional capital expenditure is shown below:

m

FY

FY

FY

2016/17

2017/18

2018/19e

Total

EBITDA synergies (incremental year-on-year)

7

80

73

160

EBIT synergies (incremental year-on-year)

6

76

60

142

Exceptional costs

(27)

(75)

(28)

(130)

Exceptional capital expenditure

(18)

(80)

(42)

(140)

In 2018/19, we expect incremental EBITDA synergies of 73 million (60 million EBIT), resulting in total EBITDA synergies of 160 million (142 million EBIT) since acquisition (six months early). Argos integration costs are expected to be around 30 million; integration capital expenditure is expected to be around 40 million in 2018/19.

Homebase separation

HRG announced on 18 January 2016 that the sale of Homebase would give rise to 75 million of additional exceptional costs in relation to the transaction, separation and restructuring. Up to the date of the acquisition, HRG had incurred 30 million of these costs; a further 4 million was incurred to 11 March 2017 and 10 million in 2017/18.

It is currently anticipated that the total exceptional costs will now only be 45 million, a reduction of 30 million from the original estimate.

Sainsbury's Bank

Sainsbury's Bank results

12 months to 28 February

2018

2017

Change

Underlying revenue (m)

515

407

27%

Interest payable (m)

(64)

(60)

7%

Total income (m)

451

347

30%

Underlying operating profit (m)

69

62

11%

Cost:income ratio (%)

70

72

200bps

Active customers (m) - Bank

1.92

1.77

8%

Active customers (m) - AFS

1.95

1.84

6%

Net interest margin (%)1

4.9

4.4

50bps

Bad debt as a percentage of lending (%)2

1.3

0.8

(50)bps

CET 1 capital ratio (%)3

14.1

13.3

80bps

Customer lending (m)4

5,691

4,599

24%

1 Net interest receivable divided by average interest-bearing assets. Excluding AFS, net interest margin was 3.6 per cent (2016/17: 3.9 per cent).

2 Bad debt expense divided by gross lending. Excluding AFS, bad debt as a percentage of lending was 0.9 per cent (2016/17: 0.6 per cent).

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

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

Sainsbury's Bank total income increased by 30 per cent year-on-year to 451 million mainly as a result of the full-year consolidation impact of Argos Financial Services ('AFS'). The consolidation also contributed to the 11 per cent increase year-on-year in Sainsbury's Bank underlying operating profit to 69 million.

Sainsbury's Bank cost:income ratio has improved by 200 basis points driven by sales growth across all products partially offset by an increase in administrative expenses. The number of Sainsbury's Bank active customers increased by eight per cent year-on-year to 1.92 million (2016/17: 1.77 million).

Net interest margin increased by 50 basis points year-on-year to 4.9 per cent (2016/17: 4.4 per cent) reflecting the acquisition of AFS that operates a higher risk and return operating model. Excluding AFS, net interest margin was 3.6 per cent, a decrease of 30 basis points year-on-year reflecting the increasingly competitive unsecured lending market. The acquisition also contributed towards the adverse movement in bad debt levels as a percentage of lending to 1.3 per cent (2016/17: 0.8 per cent). Excluding AFS, bad debt as a percentage of lending was in line with expectations at 0.9 per cent.

The CET 1 capital ratio increased by 80 basis points year-on-year to 14.1 per cent (2016/17: 13.3 per cent), reflecting the additional funds contributed during the year from the Parent.Loan balances increased by 24 per cent to 5,691 million, mainly due to growth across personal loans, credit cards and mortgages.

In November 2017, Sainsbury's Bank further diversified its funding through the issue of 175 million of fixed rate reset callable subordinated Tier 2 notes.

We have decided to take a more cautious approach to unsecured lending next 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 Sainsbury's Bank 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 55 million and transition capital costs are expected to be around 5 million.

Underlying net finance costs

Underlying net finance costs remained flat year-on-year at 119 million (2016/17: 119 million), as the impact of loan refinancing costs was offset by lower average net debt.

Sainsbury's expects net finance costs of around 100 million in 2018/19 following final repayment of the secured loan due in 2018.

Items excluded from underlying results

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

Items excluded from underlying results

52 weeks to

52 weeks to

10 March 2018

11 March 2017

m

m

Property related

12

36

Argos integration and Homebase separation

(85)

(53)

Sainsbury's Bank transition

(38)

(60)

Impact of the acquisition of Nectar UK

2

-

Divestments

-

15

Restructuring costs

(85)

(33)

Other

14

17

Items excluded from underlying results

(180)

(78)

Property-related items for the year comprise profit on disposal of properties and investment property fair value movements.

Argos integration costs for the year of 75 million were part of the previously announced 130 million required over three years in order to achieve the EBITDA synergies of 160 million. Homebase separation and restructuring costs were 10 million.

Sainsbury's Bank transition costs of 38 million (2016/17: 60 million) were part of the previously announced costs incurred in transitioning to a new, more flexible banking platform.

Restructuring costs in the year of 85 million relate to changes to our store colleague structures and working practices.

Taxation

The income tax charge was 100 million (2016/17: 126 million), with an underlying tax rate of 24.1 per cent (2016/17: 23.2 per cent) and an effective tax rate of 24.4 per cent (2016/17: 25.0 per cent).

The underlying tax rate was higher year-on-year, despite the statutory corporation tax rate being lower than the prior year. However, in the prior year there was the benefit of a one per cent revaluation of underlying deferred tax balances, whereas there was no such revaluation in 2017/18. The effective tax rate in 2017/18 was increased by the tax impact of property disposals and some non-tax deductible exceptional costs. In 2017/18 there was no benefit of a revaluation of non-underlying deferred tax balances.

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 decreased to 20.4 pence (2016/17: 21.8 pence) reflecting the full-year impact of the additional shares issued as a result of the HRG acquisition and a slightly higher underlying tax rate. Basic earnings per share decreased to 13.3 pence (2016/17: 17.5 pence), more than the fall in underlying basic earnings per share, mainly as a result of the 180 million charge for items excluded from underlying results (2016/17: 78 million charge).

Dividends

The Board has recommended a final dividend of 7.1 pence per share (2016/17: 6.6 pence). This will be paid on 13 July 2018 to shareholders on the Register of Members at the close of business on 8 June 2018, subject to approval by shareholders at the AGM. In line with the Group's policy to keep the dividend covered two times by underlying earnings, this will result in an unchanged full-year dividend of 10.2 pence (2016/17: 10.2 pence).

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 capital injections into Sainsbury's Bank, but excludes Sainsbury's Bank's own net debt balances. Sainsbury's Bank balances are excluded because they are required for business as usual activities. As at 10 March 2018, net debt was 1,364 million (11 March 2017: 1,477 million), a decrease of 113 million.

Summary cash flow statement 1

Retail

Retail

52 weeks to

52 weeks to

10 March

11 March

2018

2017

m

m

Adjusted retail operating cash flow before changes in working capital 2,3

1,214

1,179

Decrease in working capital3

196

61

Cash generated from retail operations 4

1,410

1,240

Retirement benefit obligations

(151)

(112)

Net interest paid5

(105)

(108)

Corporation tax paid

(72)

(87)

Net cash generated from retail operating activities 6

1,082

933

Cash capital expenditure before strategic capital expenditure7

(542)

(588)

Proceeds from disposal of property, plant and equipment

54

55

Bank capital injections

(190)

(130)

Dividends and distributions received from JVs net of capital injections

28

49

Retail free cash flow 8

432

319

Dividends paid on ordinary shares

(212)

(230)

Exceptional pension contributions

-

(199)

Strategic capital expenditure5

(80)

(92)

Acquisition of subsidiaries5

135

457

Repayment of borrowings including finance leases5

(174)

(211)

Other5

(2)

6

Net increase in cash and cash equivalents

99

50

Decrease in borrowings including finance leases

174

211

Acquisition movements

(15)

39

Fair value, other non-cash and net interest movements9

(145)

49

Movement in net debt

113

349

Opening net debt

(1,477)

(1,826)

Closing net debt

(1,364)

(1,477)

Closing net debt (inc. perpetual securities as debt)

(1,858)

(1,971)

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

2 Excludes working capital, pension contributions and exceptional pension contributions.

3 The Group cash flow statement comparatives have been reclassified, refer to note 4 for further details.

4 Excludes pension contributions and exceptional pension contributions.

5 Refer to the Alternative Performance Measures on page 48 for reconciliation.

6 Excludes exceptional pension contributions.

7 Excludes Argos integration capital expenditure.

8 Retail free cash flow restated to reflect capital injections made to Sainsbury's Bank and dividends and distributions received from joint ventures net of capital injections.

9 Net interest excluding dividends paid on perpetual securities

Adjusted operating cash flow before changes in working capital increased by 35 million year-on-year to 1,214 million (2016/17: 1,179 million) and working capital improved by 196 million. Capital expenditure before strategic capital expenditure was 542 million (2016/17: 588 million) driven by a reduction in Sainsbury's core retail capital expenditure partially offset by a full year's Argos core retail capital expenditure. Bank capital injections of 190 million were made in the year (2016/17: 130 million).

Free cash flow increased by 113 million in the year to 432 million (2016/17: 319 million). Free cash flow was used to fund dividends and repay debt. Dividends of 212 million were paid in the year, which are covered 2.0 times by free cash flow (2016/17: 1.4 times). Strategic capital expenditure was 12 million favourable year-on-year as no freehold purchases were made in the current year (2016/17: 74 million purchase of Chiswick), partly offset by Argos integration capital expenditure.

Fair value, other non-cash and interest movements of 145 million were primarily driven by a reduction 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 10 March 2018 was below the spot rate, generating an unrealised fair value loss (2016/17: unrealised profit as the WAHR at 11 March 2017 was above the spot rate).

As at 10 March 2018, Sainsbury's had drawn debt facilities of 2.5 billion (including the perpetual securities) and undrawn committed credit facilities of 1.45 billion. The Group also held 85 million of uncommitted facilities, which was undrawn as at 10 March 2018.

On 17 October 2017 the Group refinanced its syndicated committed revolving credit facility. The revised facility of 1.45 billion has three, four and five-year tranches with an initial final maturity for the longer dated tranche of April 2023.

Sainsbury's expects 2018/19 year-end net debt to reduce by around 100 million. We expect net debt to reduce over the medium term.

Sainsbury's expects adjusted net debt to EBITDAR (treating the perpetual securities as debt) to reduce below three times in the medium term.

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

Capital expenditure

Core retail capital expenditure was 495 million (2016/17: 547 million). Retail capital expenditure (including Argos integration capital expenditure) was 575 million (2016/17: 639 million).

In 2018/19, Sainsbury's expects core retail capital expenditure including business as usual Argos capital expenditure (excluding Sainsbury's Bank 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.

We expect Argos integration capital expenditure to be around 40million.

Financial ratios

Key financial ratios

As at

As at

10 March

11 March

2018

2017

Return on capital employed (%) 1

8.4

8.8

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

7.7

8.0

Adjusted net debt to EBITDAR 2

3.2 times

3.7 times

Interest cover 3

5.9 times

5.9 times

Fixed charge cover 4

2.5 times

2.6 times

Gearing 5

18.4%

21.5%

Gearing (exc. pension deficit) 6

17.8%

19.1%

Key financial ratios

(with perpetual securities treated as debt) 7

Adjusted net debt to EBITDAR

3.5 times

4.0 times

Gearing

26.9%

30.9%

Gearing (exc. pension deficit)

25.9%

27.3%

Key financial ratios

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

Interest cover 8

7.4 times

7.3 times

Fixed charge cover 9

2.6 times

2.7 times

1 The 14 point period includes the opening capital employed as at 11 March 2017 and the closing capital employed for each of the 13 individual four-week periods to 10 March 2018.

2 Net debt of 1,364 million plus capitalised lease obligations of 5,683 million, divided by Group underlying EBITDAR of 2,181 million, calculated for a 52-week period to 10 March 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 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 1,858 million, and reduces net assets to 6,917 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 10 March 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 (11 March 2017: 10.3 billion). The 0.2 billion increase was a result of a small yield movement.

Defined benefit pensions

At 10 March 2018, the retirement benefit obligation for the Group was 261 million (including Argos, the unfunded obligation and adjusting for associated deferred tax). The 589 million decrease in the deficit from 11 March 2017 was driven by a rise in the discount rate from 2.70 per cent to 2.80 per cent, and updates to future mortality assumptions. The discount rate has been increased this year to use a revised approach that the Group believes better reflects expected yields on high quality corporate bonds over the duration of the Group's pension schemes. Mortality assumptions have been updated from CMI 2015 projections at the 2017 year end to CMI 2017 projections.

Following agreement of the valuation 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 valuations are for the March 2018 year-ends for both schemes and will need to be completed by June 2019.

Retirement benefit obligations

Sainsbury's

Argos

Group

Group

As at

As at

As at

As at

10 March 2018

10 March 2018

10 March 2018

11 March 2017

m

m

m

m

Present value of funded obligations

(8,744)

(1,284)

(10,028)

(10,854)

Fair value of plan assets

8,669

1,215

9,884

9,920

Additional liability due to minimum funding requirements (IFRIC 14)

-

(78)

(78)

-

Pension deficit

(75)

(147)

(222)

(934)

Present value of unfunded obligations

(21)

(14)

(35)

(40)

Retirement benefit obligations

(96)

(161)

(257)

(974)

Deferred income tax (liability)/asset

(38)

34

(4)

124

Net retirement benefit obligations

(134)

(127)

(261)

(850)

Consolidated income statement

for the 52 weeks to 10 March 2018 and 11 March 2017

2018

2017

Note

m

m

Revenue

4

28,456

26,224

Cost of sales

(26,574)

(24,590)

Gross profit

1,882

1,634

Administrative expenses

(1,415)

(1,207)

Other income

51

215

Operating profit

518

642

Finance income

5

19

34

Finance costs

5

(140)

(136)

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

12

(37)

Profit before tax

409

503

Analysed as:

Underlying profit before tax

3

589

581

Non-underlying items

3

(180)

(78)

409

503

Income tax expense

6

(100)

(126)

Profit for the financial year

309

377

Earnings per share

7

Pence

Pence

Basic earnings

13.3

17.5

Diluted earnings

12.7

16.5

Underlying basic earnings

20.4

21.8

Underlying diluted earnings

19.1

20.4

Consolidated statement of comprehensive income

for the 52 weeks to 10 March 2018 and 11 March 2017

2018

2017

Note

m

m

Profit for the financial year

309

377

Items that will not be reclassified subsequently to the income statement

Remeasurement on defined benefit pension schemes

11

592

(407)

Current tax relating to items not reclassified

19

41

Deferred tax relating to items not reclassified

(118)

28

493

(338)

Items that may be reclassified subsequently to the income statement

Currency translation differences

(4)

5

Available-for-sale financial assets fair value movements

14

10

Items reclassified from available-for-sale assets reserve

2

(1)

Cash flow hedges effective portion of fair value movements

(139)

115

Items reclassified from cash flow hedge reserve

50

(87)

Current tax on items that may be reclassified

-

(1)

Deferred tax relating to items that may be reclassified

13

5

(64)

46

Total other comprehensive income/(expense) for the year (net of tax)

429

(292)

Total comprehensive income for the year

738

85

Consolidated balance sheet

At 10 March 2018 and 11 March 2017

2018

2017

Restated

Note

m

m

Non-current assets

Property, plant and equipment

9,898

10,006

Intangible assets

1,072

803

Investments in joint ventures and associates

232

237

Available-for-sale financial assets

540

435

Other receivables

44

69

Amounts due from Financial Services customers

2,332

1,916

Derivative financial instruments

17

10

14,135

13,476

Current assets

Inventories

1,810

1,775

Trade and other receivables

744

574

Amounts due from Financial Services customers

3,360

2,686

Available-for-sale financial assets

203

100

Derivative financial instruments

10

94

Cash and cash equivalents

9

1,730

1,083

7,857

6,312

Assets held for sale

9

10

7,866

6,322

Total assets

22,001

19,798

Current liabilities

Trade and other payables

(4,322)

(3,741)

Amounts due to Financial Services customers and other deposits

(4,841)

(4,284)

Borrowings

(638)

(172)

Derivative financial instruments

(53)

(22)

Taxes payable

(247)

(219)

Provisions

(201)

(148)

(10,302)

(8,586)

Net current liabilities

(2,436)

(2,264)

Non-current liabilities

Other payables

(313)

(304)

Amounts due to Financial Services customers and other deposits

(1,683)

(637)

Borrowings

(1,602)

(2,039)

Derivative financial instruments

(26)

(38)

Deferred income tax liability

(241)

(162)

Provisions

(166)

(186)

Net retirement benefit obligations

11

(257)

(974)

(4,288)

(4,340)

Net assets

7,411

6,872

Equity

Called up share capital

627

625

Share premium account

1,130

1,120

Capital redemption reserve

680

680

Merger reserve

568

568

Other reserves

121

193

Retained earnings

3,789

3,190

Total equity before perpetual securities

6,915

6,376

Perpetual capital securities

248

248

Perpetual convertible bonds

248

248

Total equity

7,411

6,872

The prior year restatements relate to hindsight adjustments to the acquired Home Retail Group plc balance sheet as required under IFRS 3 'Business Combinations'. See note 12 for more information.

Consolidated Cash flow statement

for the 52 weeks to 10 March 2018 and to 11 March 2017

2018

2017

Note

m

m

Cash flows from operating activities

Profit before tax

409

503

Net finance costs

121

102

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

(12)

37

Operating profit

518

642

Adjustments for:

Depreciation expense

659

600

Amortisation expense

72

28

Non-cash adjustments arising from acquisitions

1

12

Financial Services impairment losses on loans and advances

68

33

Profit on sale of properties

(11)

(101)

Loss on disposal of intangibles

2

36

Profit on disposal of joint ventures

(4)

-

Profit on disposal of Pharmacy business

-

(98)

Impairment charge of property, plant and equipment

-

55

Share-based payments expense

33

32

Retirement benefit obligations

(151)

(311)

Operating cash flows before changes in working capital

1,187

928

Changes in working capital

Increase in inventories

(36)

(6)

Increase in current available-for-sale financial assets

(192)

(126)

(Increase)/decrease in trade and other receivables

(44)

37

Increase in amounts due from Financial Services customers and other deposits

(1,161)

(681)

Increase in trade and other payables

142

29

Increase in amounts due to Financial Services customers and other deposits

1,602

1,166

Increase/(decrease) in provisions and other liabilities

28

(24)

Cash generated from operations

1,526

1,323

Interest paid

(89)

(95)

Corporation tax paid

(72)

(75)

Net cash generated from operating activities

1,365

1,153

Cash flows from investing activities

Purchase of property, plant and equipment

(561)

(634)

Purchase of intangible assets

(140)

(110)

Proceeds from disposal of property, plant and equipment

54

55

Acquisition of subsidiaries, net of cash acquired

135

101

Capital return to Home Retail Group plc shareholders

-

(226)

Share issuance costs on acquisition of Home Retail Group plc

-

(3)

Investment in joint ventures

(9)

(16)

Interest received

14

18

Dividends and distributions received

37

65

Net cash used in investing activities

(470)

(750)

Cash flows from financing activities

Proceeds from issuance of ordinary shares

12

6

Drawdown of short-term borrowings

-

448

Repayment of borrowings

(148)

(622)

Proceeds from borrowings

174

-

Purchase of own shares

(14)

-

Repayment of capital element of obligations under finance lease borrowings

(26)

(37)

Interest elements of obligations under finance lease payments

(7)

(8)

Dividends paid on ordinary shares

8

(212)

(230)

Dividends paid on perpetual securities

(23)

(23)

Net cash used in financing activities

(244)

(466)

Net increase/(decrease) in cash and cash equivalents

651

(63)

Opening cash and cash equivalents

1,077

1,140

Closing cash and cash equivalents

9

1,728

1,077

Consolidated statement of changes in equity

for the 52 weeks to 10 March 2018 and to 11 March 2017

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

Note

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 year

-

-

-

-

291

291

12

6

309

Other comprehensive (expense)/income

-

-

(64)

-

493

429

-

-

429

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

-

-

(64)

-

784

720

12

6

738

Transactions with owners:

Dividends

8

-

-

-

-

(212)

(212)

-

-

(212)

Distribution to holders of perpetual securities (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

At 13 March 2016

550

1,114

835

-

3,370

5,869

248

248

6,365

Profit for the year

-

-

-

-

359

359

12

6

377

Other comprehensive income

-

-

46

-

(338)

(292)

-

-

(292)

Total comprehensive income for the year ended 11 March 2017

-

-

46

-

21

67

12

6

85

Transactions with owners:

Dividends

8

-

-

-

-

(232)

(232)

-

-

(232)

Acquisition of subsidiaries

12

75

-

-

568

(3)

640

-

-

640

Adjustment to consideration in respect of share options

-

-

-

-

3

3

-

-

3

Distribution to holders of perpetual securities (net of tax)

-

-

-

-

-

-

(12)

(6)

(18)

Amortisation of convertible bond equity component

-

-

(8)

-

8

-

-

-

-

Share-based payment (net of tax)

-

-

-

-

32

32

-

-

32

Purchase of own shares

-

-

-

-

(9)

(9)

-

-

(9)

Allotted in respect of share option schemes

-

6

-

-

-

6

-

-

6

At 11 March 2017

625

1,120

873

568

3,190

6,376

248

248

6,872

1 Status of financial information

The financial information, which comprises the Group income statement, Group statement of comprehensive income, Group balance sheet, Group cash flow statement, Group statement of changes in equity and related notes, is derived from the full Group financial statements for the 52 weeks to 10 March 2018 and does not constitute full accounts within the meaning of section 435 (1) and (2) of the Companies Act 2006.

The Group Annual Report and Financial Statements 2018 on which the auditors have given an unqualified report and which does not contain a statement under section 498(2) or (3) of the Companies Act 2006, will be delivered to the Registrar of Companies in due course, and made available to shareholders in June 2018.

The financial year represents the 52 weeks to 10 March 2018 (prior financial year 52 weeks to 11 March 2017). The consolidated financial statements for the 52 weeks to 10 March 2018 comprise the financial statements of the Company and its subsidiaries (the 'Group') and the Group's share of the post-tax results of its joint ventures and associates.

Sainsbury's Bank and its subsidiaries have been consolidated for the twelve months to 28 February 2018 (28 February 2017). Adjustments have been made for the effects of significant transactions or events that occurred between this date and the Group's balance sheet date.

Nectar Loyalty Holding Limited and its subsidiaries have been consolidated for the four weeks from acquisition on 1 February 2018 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 year ended 10 March 2018 includes 52 weeks of Home Retail Group results (11 March 2017: 27 weeks).

The prior year balance sheet has been restated this year. The restatements relate to hindsight adjustments to the acquired Home Retail Group plc balance sheet as required under IFRS 3 'Business Combinations'. See note 12 for more information.

2 Basis of preparation

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union and International Financial Reporting Interpretations Committee ('IFRICs') and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.

The financial statements are presented in sterling, rounded to the nearest million ('m') unless otherwise stated. They have been prepared on a going concern basis under the historical cost convention, except for derivative financial instruments, defined benefit scheme assets, investment properties and available-for-sale financial assets that have been measured at fair value.

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.

Amendments to published standards

Effective for the Group and Company in these financial statements:

The Group has considered the following amendments to published standards that are effective for the Group for the financial year beginning 12 March 2017 and concluded that they are either not relevant to the Group or that they do not have a significant impact on the Group's financial statements other than disclosures. These standards and interpretations have been endorsed by the European Union.

- Amendments to IAS 7 'Statement of cash flows' on the disclosures in financial statements

- Annual Improvements Cycle - 2014-2016

- Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12

Standards and revisions effective for future periods:

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

- IFRS 9, 'Financial instruments', effective for the financial year commencing 11 March 2018

- IFRS 15, 'Revenue from contracts with customers', effective for the financial year commencing 11 March 2018

- IFRS 16, 'Leases', effective for the financial year commencing 10 March 2019

IFRS 9 'Financial Instruments'

In July 2014, the IASB issued the complete version of IFRS 9, which brings together the classification and measurement, impairment and hedge accounting phases of the IASB's project to replace IAS 39 'Financial Instruments: Recognition and Measurement' . 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 will be applied by adjusting the Group balance sheet on 11 March 2018, the date of initial application, with no restatement of comparative information.

a. Classification and measurement

IFRS 9 introduces 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 Group does not expect any material changes in relation to the classification and measurement of financial assets and liabilities, and the associated accounting policies as detailed in the notes to the financial statements.

b. Impairment

IFRS 9 introduces an expected credit loss impairment model that differs significantly from the incurred loss model under IAS 39 and is expected to result 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 will be on Sainsbury's Bank's unsecured lending portfolios.

Expected credit loss (ECL) impairment model

Under IFRS 9, credit loss allowances will be 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 must be recognised in profit and loss and an impairment allowance will be 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 will be 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 will move into Stage 3 when they are considered to be credit impaired, i.e. when one or more events have occurred that have a detrimental impact on the estimated future cash flows of the asset. Stage 3 assets will continue to recognise lifetime expected impairment losses and interest income will be recognised on the net carrying amount (i.e. gross amount less impairment allowance) - as under IAS 39.

The expected impact is an increase in impairment provisions held within the Financial Services business as at 11 March 2018 of approximately 80 million, with a corresponding reduction to retained earnings of approximately 66 million, net of deferred tax.

Post-Day 1 movements in the ECL provisions reported through the income statement are expected to reduce profits at the Bank next year and be more volatile than under IAS 39 due to the forward-looking nature of the new approach and the need to take account of future macro-economic conditions in the ECL modelling, which will be sensitive to management judgement and estimates.

c. Hedge accounting

When initially applying IFRS 9, the Group expects to exercise 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 will adopt IFRS 9 in respect of its micro hedge accounting. Although the micro hedge accounting requirements under IFRS 9 are generally less restrictive, this is not expected to have a material impact on the Group.

IFRS 15 'Revenue from Contracts with Customers'

IFRS 15 was issued in May 2014, and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. 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.

The new revenue standard will supersede all current revenue recognition requirements of IFRS. Either a full retrospective application or modified retrospective application is required for annual periods beginning on or after 1 January 2018. The Group plans to adopt IFRS 15 on 11 March 2018 using the full retrospective method. During the year-ended 11 March 2017, the Group performed a preliminary assessment of IFRS 15, which was continued with a more detailed analysis in the year-ended 10 March 2018.

The majority of sales transactions are for goods sold in store and online, where the sale (and delivery in the case of online sales) of these items is the only performance obligation. Revenue recognition occurs at a point in time when control of the asset is transferred to the customer. This is generally when the goods are purchased in store, or delivered to the customer. IFRS 15 therefore is not expected to have a material impact on the Group's consolidated financial statements.

The assessment also included areas that required additional specific consideration, including rights of return, principal vs agent considerations and Financial Services income. No material impact is expected to the Group's current revenue recognition policies which are disclosed in the notes to the financial statements.

Nectar loyalty programme

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. Refer to note 12 for further information.

Prior to acquisition, the Group's accounting policy for Nectar points was to recognise sales net of the cost of Nectar points issued and redeemed, based on agreed rates with Nectar UK. Since acquisition, any points issued and redeemed in Sainsbury's and Argos are accounted for in line with IFRIC 13 'Customer loyalty programmes'. Under IFRIC 13, on issuance of Nectar points within the Group, a portion of the transaction price is allocated to the loyalty programme using the fair value of points issued and a corresponding deferred revenue recognised in relation to points issued but not yet redeemed.

Under IFRS 15, the Group will need to allocate a portion of the transaction price to the loyalty programme based on relative standalone selling price instead of the allocation using the fair value of points issued, i.e. residual approach, as it did under IFRIC 13. Due to only consolidating four weeks of Nectar UK results during the year-ended 10 March 2018, the adjustment to current year revenue is not expected to be material. A more detailed assessment of the impact of IFRS 15 to the Group's consolidation of the Nectar scheme is currently underway.

IFRS 16 'Leases'

IFRS 16 was issued in January 2016 and introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees and will supersede the current lease guidance including IAS 17 'Leases' and the related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and the Group plans to adopt IFRS 16 on 10 March 2019.

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting and are replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees except for short-term leases and leases of low value assets.

The right-of-use asset is initially measured at cost and subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications.

Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease.

A preliminary assessment indicates that the Group's current operating lease arrangements will meet the definition of a lease under IFRS 16, and hence the Group will recognise a right-of-use asset and a corresponding liability in respect of all these leases unless they qualify as low value or short-term leases upon the application of IFRS 16. The Group is also currently assessing service type arrangements to determine whether any of those are deemed to include an embedded lease which would fall under the scope of IFRS 16.

IFRS 16 allows a choice of transitional approaches, either:

i. The full retrospective approach where IFRS 16 is applied to each prior reporting period presented and an adjustment is made to the opening retained earnings of the earliest comparative period presented; or

ii. The modified retrospective approach where the cumulative effect of initially applying IFRS 16 is recognised at the date of initial application.

The new requirement to recognise a right-of-use asset and a related lease liability is expected to have a significant impact on reported assets, liabilities and the income statement of the Group.

The Group has a comprehensive project underway to assess the impact to the Group of the transitional approaches available, determine the preferred transitional approach and to assess the overall impact to the Group's financial position of adopting IFRS 16. The project has also assessed the data required under each of the transitional approaches and is currently addressing these comprehensive data requirements.

IFRS 16 is expected to have the largest impact on the Group's property portfolio and will impact the leases of the Sainsbury's supermarkets the most due to the size of their passing rentals and their generally longer-term leases. The Argos property portfolio are generally shorter term and of lower value and will be impacted less.

In contrast, for finance leases where the Group is a lessee, as the Group has already recognised an asset and a related finance lease liability for the lease arrangement, and in cases where the Group is a lessor (for both operating and finance leases), the Directors of the Company do not anticipate that the application of IFRS 16 will have a significant impact on the amounts recognised in the Group's consolidated financial statements.

IFRS 16 requires the use of judgements in certain key areas which will directly affect the impact to the Group on adoption. These include:

The assessment of how reasonably certain it is considered to be that a lease option (extension, termination or purchase) will be exercised;

The determination of an appropriate discount rate used to present value the lease liability and to initially measure the right of use asset; and

When a lease is deemed to be embedded in a service type arrangement.

As part of the Group's implementation project, the Directors are evaluating what they believe to be appropriate judgements and policies to address the above.

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:

2018

2017

m

m

Underlying profit before tax

589

581

Property related

Profit on disposal of properties

5

98

Joint venture investment property fair value movements

7

(25)

Net impairment and onerous contract charge

-

(37)

Argos

Transaction costs relating to the acquisition of Home Retail Group

-

(22)

Argos integration costs

(75)

(27)

Homebase separation

(10)

(4)

Sainsbury's Bank transition

(38)

(60)

Nectar UK

Transaction costs relating to the acquisition of Nectar UK

(2)

-

Revaluation of previously held equity interest in Insight 2 Communication LLP

4

-

Divestments

Business rationalisation

-

72

IT write-offs

-

(57)

Restructuring costs

(85)

(33)

Other

Perpetual securities coupons

23

23

Non-underlying finance movements

(2)

10

Acquisition adjustments

(2)

8

IAS 19 pension expenses

(5)

(24)

Total adjustments

(180)

(78)

Profit before tax

409

503

Property related

- Profit on disposal of properties for the financial year comprised 11 million for the Group (2017: 101 million) included within other income and (6) million for the property joint ventures (2017: (3) million) included within share of post-tax profit from joint ventures and associates.

- Net impairment and onerous contract charge in the prior year comprised (19) million within property, plant and equipment and (18) million onerous lease provisions. There were no impairment charges nor reversals during the current financial year.

Argos

- Argos integration costs for the year of (75) million were part of the previously announced (130) million required over the three years in order to achieve the synergies of 160 million. These costs include the reallocation of property, dilapidations, lease break costs and people costs.

- The Homebase separation and restructuring costs for the year of (10) million were part of the revised anticipated total exceptional costs of 45 million.

Sainsbury's Bank transition

- Sainsbury's Bank transition costs of (38) million (2017: (60) million) were incurred in transitioning to a new, more flexible banking platform as part of the previously announced New Bank Programme.

Nectar UK

- Acquisition-related costs (included in administrative expenses and recognised outside of underlying profit) amount to (2) million in the year (see note 12). In addition, an acquisition fair value gain of 4 million on the previously held equity interest in Insight 2 Communication LLP has been recorded in other income (and excluded from underlying profit before tax).

Divestments

- Divestments in the prior year include 98 million profit on disposal of the Pharmacy business (included within other income), offset by (26) million of costs incurred closing non-core businesses to enable the Group to focus on its strategy. This included the closure of Netto, Sainsbury's Entertainment and Phoneshops.

- The Group incurred (57) million in the prior year in relation to the cessation of non-core IT projects. This includes (36) million in property, plant and equipment, (19) million in intangibles and (2) million other directly attributable costs.

Restructuring costs

- Restructuring costs in the year have been recognised following transformational changes to the Group's in-store operating model, responding to changing customer shopping habits and reducing costs throughout the store estate. These costs 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 are accrued on a straight-line basis and included as an expense within underlying profit before tax.

- Non-underlying finance movements for the financial year comprised 1 million for the Group (2017: 12 million) and (3) million for the joint ventures (2017: (2) million).

- Acquisition adjustments of (2) million (2017: 8 million) reflect the unwind of fair value adjustments arising from the Sainsbury's Bank, Home Retail Group and Nectar UK acquisitions and are split as follows:

2018

2017

Financial
Services

Argos

Nectar

Total
Group

Financial
Services

Argos

Nectar

Total
Group

m

m

m

m

m

m

m

m

Revenue

(3)

-

-

(3)

(7)

-

-

(7)

Cost of sales

-

2

-

2

-

(5)

-

(5)

Depreciation

-

(18)

-

(18)

-

(6)

-

(6)

Amortisation

(3)

22

(2)

17

(6)

32

-

26

(6)

6

(2)

(2)

(13)

21

-

8

- IAS 19 pension expenses comprise of the pension financing charge of (26) million (2017: (16) million) and scheme expenses of (10) million (2017: (8) million). These are offset this year 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 financial year. Refer to note 11 for more information.

Cash flow statement

The table below shows the impact of non-underlying items on the Group cash flow statement where not already separately presented in the cash flow statement:

2018

2017

m

m

IAS 19 pension expenses

(10)

(8)

Sainsbury's Bank transition

(38)

(47)

Divestments

(1)

(5)

Argos integration costs

(32)

(12)

Transaction costs relating to acquisition of Home Retail Group

-

(22)

Homebase separation

(14)

(2)

Restructuring costs

(28)

(19)

Cash used in operating activities

(123 )

(115)

Profit on disposal of properties

54

55

Divestments (sale of Pharmacy business)

-

(4)

Cash generated from investing activities

54

51

Net cash flows

(69 )

(64)

4 Segment reporting

Background

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 Investments (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 year ended 10 March 2018 includes 52 weeks of Home Retail Group results (11 March 2017: 27 weeks) and four weeks of Nectar UK results.

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 capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.

Income statement and balance sheet

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 (note 3)

(180)

Profit before tax

409

Income tax expense (note 6)

(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)

Other segment items

Capital expenditure3

640

77

-

717

Depreciation expense4

651

8

-

659

Amortisation expense5

59

13

-

72

Net impairment and onerous contract charge

-

-

-

-

Share based payments

30

3

-

33

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.

3 Retail capital expenditure consists of property, plant and equipment additions of 570 million and intangible asset additions of 70 million. Financial Services capital expenditure consists of property, plant and equipment additions of 8 million and intangible asset additions of 69 million.

4 Depreciation within the Retail segment includes an 18 million charge in relation to the unwind of fair value adjustments recognised on acquisition of HRG and Nectar UK.

5 Amortisation expense within the Retail segment includes 20 million income in relation to the unwind of fair value adjustments recognised on acquisition of HRG and Nectar UK. Amortisation expense within the Financial Services segment includes a (3) million charge in relation to the unwind of fair value adjustments recognised on acquisition of Sainsbury's Bank.

Retail

Financial
services

Property
investment

Group

52 weeks to 11 March 2017

m

m

m

m

Segment revenue

Retail sales to external customers

25,824

-

-

25,824

Financial Services to external customers

-

407

-

407

Underlying revenue

25,824

407

-

26,231

Acquisition adjustment fair value unwind1

-

(7)

-

(7)

Revenue

25,824

400

-

26,224

Underlying operating profit

626

62

-

688

Underlying finance income

18

-

-

18

Underlying finance costs2

(137)

-

-

(137)

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

-

-

12

12

Underlying profit before tax

507

62

12

581

Non-underlying expense (note 3)

(78)

Profit before tax

503

Income tax expense (note 6)

(126)

Profit for the financial period

377

Assets

13,637

5,924

-

19,561

Investment in joint ventures and associates

4

-

233

237

Segment assets (restated)

13,641

5,924

233

19,798

Segment liabilities (restated)

(7,762)

(5,164)

-

(12,926)

Other segment items

Capital expenditure3

741

58

-

799

Depreciation expense

593

7

-

600

Amortisation expense4

18

10

-

28

Net impairment and onerous contract charge5

37

-

-

37

Share based payments

30

2

-

32

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.

3 Retail capital expenditure consists of property, plant and equipment additions of 683 million and intangible asset additions of 58 million. Financial Services capital expenditure consists of property, plant and equipment additions of 12 million and intangible asset additions of 46 million.

4 Depreciation within the Retail segment includes a 6 million charge in relation to the unwind of fair value adjustments recognised on acquisition of HRG.

5 Amortisation expense within the Retail segment includes 32 million income in relation to the unwind of fair value adjustments recognised on acquisition of HRG. Amortisation expense within the Financial Services segment includes 6 million charge in relation to the unwind of fair value adjustments recognised on acquisition of Sainsbury's Bank.

Segmented Cash flow statement

52 weeks to 10 March 2018

52 weeks to 11 March 2017

APM
reference

Retail

Financial
Services

Group

Retail

Financial
Services

Group

m

m

m

m

m

m

Profit before tax1

382

27

409

516

(13)

503

Net finance costs

121

-

121

102

-

102

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

(12)

-

(12)

37

-

37

Operating profit

491

27

518

655

(13)

642

Adjustments for:

Depreciation/amortisation

710

21

731

611

17

628

Non-cash adjustments arising from acquisitions2

(2)

3

1

5

7

12

Financial Services impairment losses on loans and advances

-

68

68

-

33

33

Profit on sale of properties

(11)

-

(11)

(101)

-

(101)

Loss on disposal of intangibles

-

2

2

22

14

36

Profit on disposal of joint ventures

(4)

-

(4)

-

-

-

Profit on disposal of Pharmacy business

-

-

-

(98)

-

(98)

Impairment charge of property, plant and equipment

-

-

-

55

-

55

Share-based payments expense

30

3

33

30

2

32

Retirement benefit obligations

(151)

-

(151)

(112)

-

(112)

Exceptional pension contributions

-

-

-

(199)

-

(199)

Operating cash flows before changes in working capital

1,063

124

1,187

868

60

928

Changes in working capital

Decrease in working capital

196

143

339

61

334

395

Cash generated from operations

1,259

267

1,526

929

394

1,323

Interest paid

a

(89)

-

(89)

(95)

-

(95)

Corporation tax paid

(72)

-

(72)

(87)

12

(75)

Net cash generated from operating activities

1,098

267

1,365

747

406

1,153

Cash flows from investing activities

Purchase of property, plant and equipment excluding strategic capital expenditure

(473)

(8)

(481)

(530)

(12)

(542)

Strategic capital expenditure

b

(80)

-

(80)

(92)

-

(92)

Purchase of property, plant and equipment

(553)

(8)

(561)

(622)

(12)

(634)

Purchase of intangible assets

(69)

(71)

(140)

(58)

(52)

(110)

Proceeds from disposal of property, plant and equipment

54

-

54

55

-

55

Acquisition of subsidiaries

c

(33)

-

(33)

(447)

-

(447)

Cash acquired upon acquisition of subsidiaries

c

168

-

168

548

-

548

Capital return to Home Retail Group plc shareholders

c

-

-

-

(226)

-

(226)

Share issuance costs on acquisition of Home Retail Group plc

c

-

-

-

(3)

-

(3)

Investment in joint ventures

(9)

-

(9)

(16)

-

(16)

Interest received

a

14

-

14

18

-

18

Dividends and distributions received3

37

-

37

65

-

65

Net cash used in investing activities

(391)

(79)

(470)

(686)

(64)

(750)

Cash flows from financing activities

Proceeds from issuance of ordinary shares

e

12

-

12

6

-

6

Drawdown of short-term borrowings

d

-

-

-

448

-

448

Repayment of borrowings

d

(148)

-

(148)

(622)

-

(622)

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)

(37)

-

(37)

Interest elements of obligations under finance lease payments

a

(7)

-

(7)

(8)

-

(8)

Dividends paid on ordinary shares

(212)

-

(212)

(230)

-

(230)

Dividends paid on perpetual securities

a

(23)

-

(23)

(23)

-

(23)

Net cash used in financing activities

(418)

174

(244)

(466)

-

(466)

Intra group funding

Bank capital injections

(190)

190

-

(130)

130

-

HRG acquisition and AFS loan book refinancing

c

-

-

-

585

(585)

-

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

(190)

190

-

455

(455)

-

Net increase/(decrease) in cash and cash equivalents

99

552

651

50

(113)

(63)

1 Includes 8 million (2017: (18) million) relating to the Property Investment segment.

2 The total Group balance excludes a 1 million (2017: 20 million income) acquisition adjustment unwind expense already included in depreciation and amortisation in this note.

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

5 Finance income and finance costs

2018

2017

Underlying

Non-
underlying

Total

Underlying

Non-
underlying

Total

m

m

m

m

m

m

Interest on bank deposits and other financial assets

14

-

14

18

-

18

Non-underlying finance movements

-

5

5

-

16

16

Finance income

14

5

19

18

16

34

Borrowing costs:

Secured borrowings

(79)

-

(79)

(81)

-

(81)

Unsecured borrowings

(30)

-

(30)

(30)

-

(30)

Obligations under finance leases

(7)

-

(7)

(8)

-

(8)

Provisions - amortisation of discount

(1)

(4)

(5)

(2)

(4)

(6)

(117)

(4)

(121)

(121)

(4)

(125)

Other finance costs:

Interest capitalised - qualifying assets

7

-

7

7

-

7

IAS 19 pension financing charge (note 11)

-

(26)

(26)

-

(16)

(16)

Interest expense on Pharmacy sale advance proceeds

-

-

-

-

(2)

(2)

Perpetual securities coupon

(23)

23

-

(23)

23

-

(16)

(3)

(19)

(16)

5

(11)

Finance costs

(133)

(7)

(140)

(137)

1

(136)

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

Following the refinancing of the Group's revolving credit facility, 3 million of capitalised fees in relation to the previous facility have been recognised within borrowing costs this year.

6 Income tax expense

2018

2017

m

m

Current tax expense

107

113

Deferred tax (credit)/charge

(7)

13

Total income tax expense in income statement

100

126

Analysed as:

Underlying tax

142

135

Non-underlying tax

(42)

(9)

Total income tax expense in income statement

100

126

Underlying tax rate

24.1%

23.2%

Effective tax rate

24.4%

25.0%

7 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.

2018

2017

million

million

Weighted average number of shares in issue

2,186.2

2,049.0

Weighted average number of dilutive share options

21.8

18.2

Weighted average number of dilutive senior convertible bonds

143.5

137.7

Weighted average number of dilutive subordinated perpetual convertible bonds

78.3

75.1

Total number of shares for calculating diluted earnings per share

2,429.8

2,280.0

m

m

Profit for the financial year (net of tax)

309

377

Less profit attributable to:

Holders of perpetual capital securities

(12)

(12)

Holders of perpetual convertible bonds

(6)

(6)

Profit for the financial year attributable to ordinary shareholders

291

359

m

m

Profit for the financial year attributable to ordinary shareholders

291

359

Add interest on senior convertible bonds (net of tax)1

12

12

Add coupon on subordinated perpetual convertible bonds (net of tax)

6

6

Diluted earnings for calculating diluted earnings per share

309

377

m

m

Profit/(loss)for the financial year attributable to ordinary shareholders of the parent

291

359

Adjusted for non-underlying items (note 3)

180

78

Tax on non-underlying items

(42)

(9)

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

18

18

Underlying profit after tax attributable to ordinary shareholders of the parent

447

446

Add interest on convertible bonds (net of tax)

12

12

Add coupon on subordinated perpetual convertible bonds (net of tax)

6

6

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

465

464

Pence

Pence

per share

per share

Basic earnings

13.3

17.5

Diluted earnings

12.7

16.5

Underlying basic earnings

20.4

21.8

Underlying diluted earnings

19.1

20.4

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.

8 Dividend

2018

2017

2018

2017

Pence per share

Pence per share

m

m

Amounts recognised as distributions to ordinary

shareholders in the year:

Final dividend of prior financial year

6.6

8.1

144

155

Interim dividend of current financial year

3.1

3.6

68

77

9.7

11.7

212

232

After the balance sheet date on 30 April 2018 a final dividend of 7.1 pence per share (2017: 6.6 pence per share) was proposed by the Directors in respect of the 52 weeks to 10March 2018. This results in a total final proposed dividend of 156 million (2017: 144 million), an increase of 8.3 per cent on the previous year. Subject to shareholders' approval at the Annual General Meeting, the dividend will be paid on 13 July 2018 to the shareholders on the register at 8 June 2018. Theproposed final dividend has not been included as a liability at 10March 2018.

9 Cash and cash equivalents

Cash and cash equivalents comprise the following:

2018

2017

m

m

Cash in hand and bank balances

585

439

Money market funds and deposits

462

403

Deposits at central banks

683

241

Cash and bank balances

1,730

1,083

Bank overdrafts

(2)

(6)

Net cash and cash equivalents

1,728

1,077

10 Analysis of net debt

Cash changes

Non-cash changes

11 March
2017

Cash flows 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

Available-for-sale 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

Available-for-sale assets1

333

192

-

-

-

1

526

Derivative assets

1

-

-

-

-

17

18

Derivative liabilities

(22)

-

-

-

-

15

(7)

Cash and cash equivalents

453

552

-

-

-

-

1,005

Borrowings

-

(174)

-

-

-

-

(174)

Financial Services net debt

765

570

-

-

-

33

1,368

Group

Available-for-sale 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 The perpetual capital securities and perpetual convertible bonds are accounted for as equity in accordance with IAS 32 'Financial instruments: Presentation' and therefore are not included within net debt.

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

Cash changes

Non-cash changes

12 March
2016

Cash flows excluding interest

Net interest (received) / paid

Acquisition movements

Other non-cash movements

Changes in fair value

11 March 2017

m

m

m

m

m

m

m

Retail

Available-for-sale assets1

35

-

(1)

-

-

5

39

Derivative assets

64

-

(23)

39

23

-

103

Derivative liabilities

(89)

-

23

-

(23)

51

(38)

Cash and cash equivalents

577

53

-

-

-

-

630

Bank overdrafts

(3)

(3)

-

-

-

-

(6)

Borrowings2

(2,235)

174

78

-

(84)

-

(2,067)

Finance leases

(175)

37

8

-

(8)

-

(138)

Retail net debt

(1,826)

261

85

39

(92)

56

(1,477)

Financial Services

Available-for-sale assets1

204

126

-

-

1

2

333

Derivative assets

4

-

-

-

-

(3)

1

Derivative liabilities

(23)

-

-

-

-

1

(22)

Cash and cash equivalents

566

(113)

-

-

-

-

453

Financial Services net debt

751

13

-

-

1

-

765

Group

Available-for-sale assets1

239

126

(1)

-

1

7

372

Derivative assets

68

-

(23)

39

23

(3)

104

Derivative liabilities

(112)

-

23

-

(23)

52

(60)

Cash and cash equivalents

1,143

(60)

-

-

-

-

1,083

Bank overdrafts

(3)

(3)

-

-

-

-

(6)

Borrowings2

(2,235)

174

78

-

(84)

-

(2,067)

Finance leases

(175)

37

8

-

(8)

-

(138)

Group net debt

(1,075)

274

85

39

(91)

56

(712)

1 Available-for-sale assets exclude other financial assets which predominately 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.

11 Retirement benefit obligations

At 10 March 2018, retirement benefit obligations relate to two defined benefit schemes, the Sainsbury's Pension Scheme and from 2 September 2016, the HomeRetail Group Pension Scheme (the 'Schemes') 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.

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

Sainsbury's

Home Retail Group

Group

Sainsbury's

Home Retail Group

Group

2018

2018

2018

2017

2017

2017

m

m

m

m

m

m

Present value of funded obligations

(8,744)

(1,284)

(10,028)

(9,441)

(1,413)

(10,854)

Fair value of plan assets

8,669

1,215

9,884

8,708

1,212

9,920

(75)

(69)

(144)

(733)

(201)

(934)

Additional liability due to minimum funding requirements (IFRIC 14)

-

(78)

(78)

-

-

-

Retirement benefit deficit

(75)

(147)

(222)

(733)

(201)

(934)

Present value of unfunded obligations

(21)

(14)

(35)

(23)

(17)

(40)

Retirement benefit obligations

(96)

(161)

(257)

(756)

(218)

(974)

Deferred income tax (liability)/asset

(38)

34

(4)

77

47

124

Net retirement benefit obligations

(134)

(127)

(261)

(679)

(171)

(850)

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

The movements in the Group's net defined benefit obligation are as follows:

2018

2017

m

m

As at the beginning of the year

(974)

(408)

Acquisition of Home Retail Group plc (note 12)

-

(454)

Interest cost

(26)

(16)

Remeasurement gains/(losses)

592

(407)

Pension scheme expenses

(10)

(8)

Contributions by employer

130

319

Past service credit

31

-

As at the end of the year

(257)

(974)

The past service credit of 31 million is in relation to a Pension Increase Exchange (PIE) option introduced in the Sainsbury's Pension Scheme from 1 April 2018, following a deed of amendment signed during the current financial year.

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

2018

2017

%

%

Discount rate

2.80

2.70

Inflation rate - RPI

3.15

3.30

Inflation rate - CPI

2.15

2.30

Future pension increases

1.90 - 3.00

2.00 - 3.15

During the financial year the Group has changed the model used for deriving the discount rate assumption for valuing the Schemes' liabilities under IAS 19 to use an approach that the Group believes better reflects expected yields on high quality corporate bonds over the duration of the Group's pension schemes.

For long duration liabilities there exists limited data. Under the old model the extrapolation for long duration liabilities projected in line with a risk free curve, whereas the new method extrapolates the available corporate bond data at a credit spread above gilt rates. In addition, in order to broaden the corporate bond dataset, we have assumed that 'high quality' corporate bonds are those for which at least one of the main ratings agencies considers to be at least AA (or equivalent), whereas in previous years we required that the majority of the rating agencies rated a bond as AA. The discount rate used under the updated approach is 2.8 per cent.

The base mortality assumptions are based on the SAPS S2 tables, with adjustments to reflect the Scheme's population. Future mortality improvements have been updated from CMI 2015 projections at 2017 year-end to CMI 2017 projections with a long-term rate of improvement of 1.25 per cent p.a. at 10 March 2018.

IFRIC 14

IFRIC 14 is the interpretation that details when a company can recognise any pension surplus that exists. Furthermore, if the company has a funding commitment in excess of the IAS 19 deficit, then IFRIC 14 requires recognition of this excess in those circumstances when the surplus that would result on fulfilling that commitment cannot be recognised. A surplus may be recognised either because of an unconditional right to a refund to the company, orongrounds of a future contribution reduction where schemes are still open to future accrual.

For the Sainsbury's Pension Scheme, management is of the view that it has an unconditional right to a refund of surplus under IFRIC 14. As such no adjustment has been made for potential additional liabilities.

Based on the net deficit of the Home Retail Group Pension Scheme as at 10 March 2018 and the committed payments under the Schedule of Contributions signed on 2 September 2016, there is a notional surplus of 78 million. Management is of the view that, based on the scheme rules, it does not have an unconditional right to a refund of surplus under IFRIC 14, and therefore an additional balance sheet liability in respect of a 'minimum funding requirement' of 78 million has been recognised.

12 Acquisition of subsidiaries

a. Acquisition of Nectar Loyalty scheme

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. This 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 assets 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.

Intangible assets

Intangible assets of 57 million relate to the Nectar Brand, customer relationships and reacquired rights in relation to existing contractual relationships with Sainsbury's, as well as acquired software assets.

Trade and other receivables

Trade and other receivables of 141 million includes nil of provisions for doubtful debts.

Cash and cash equivalents

Cash acquired included cash left in the business to settle accounts payable balances owed to the Group.

Deferred revenue

265 million of the deferred revenue relates to points issued by issuance partners (including Sainsbury's) but not yet redeemed and have been included within trade and other payables within the Group balance sheet.

Revenue and profit contribution

Prior to acquisition, the Group's accounting policy for Nectar points was to recognise sales net of the cost of Nectar points issued and redeemed, based on agreed rates with Aimia UK. Since acquisition, any points issued and redeemed in Sainsbury's and Argos are accounted for in line with IFRIC 13 'Customer loyalty programmes'. Under IFRIC 13, on issuance of Nectar points within the Group, a portion of the transaction price is allocated to the loyalty programme using the fair value of points issued and corresponding deferred revenue recognised in relation to points issued but not yet redeemed or expired. Deferred revenue is then recognised as points are redeemed.

Nectar revenue earned from non-Sainsbury's redemption partners is included within other income and recognised once points have been redeemed.

Cash impact of acquisition

m

Cash consideration

(33)

Cash acquired

168

Acquisition of subsidiaries, net of cash acquired (included in cash flow statement)

135

Acquisition-related costs

Acquisition-related costs (included in administrative expenses and recognised outside of underlying profit) amount to 2 million in the year (see note 3). In addition, an acquisition fair value gain of 4 million on the previously held equity interest in Insight 2 Communication LLP has been recorded in other income (and excluded from underlying profit before tax).

b. Acquisition of Home Retail Group plc

On 2 September 2016, the Group acquired 100 per cent of the issued share capital of Home Retail Group plc (HRG), a listed company based in the United Kingdom, by means of a Scheme of Arrangement under Part 26 of the Act for a consideration of 1,093 million. The full analysis of the consideration is shown below:

Form of consideration

Consideration fair
value at acquisition date

m

Cash of 447 million (being 55p per existing share); fair value is based on Home Retail Group plc's share capital of 813,445,001 shares in existence as at the acquisition date

447

3 million in relation to the contractual requirement to settle certain existing HRG share scheme awards and options

3

261 million new J Sainsbury plc shares of 284? 7 p nominal value each were issued (being 0.321 new J Sainsbury plc shares per existing Home Retail Group plc share); fair value of the consideration is based on a J Sainsbury plc share price of 2.4610 as of 2 September 2016

643

Total

1,093

Home Retail Group's activities mainly comprise General Merchandise retail. The acquisition is expected to accelerate Sainsbury's growth strategy in General Merchandise & Clothing retail as well as its online presence. The combination brings together two of the UK's leading retail businesses with complementary product offers through an integrated, multi-channel proposition.

None of the goodwill recognised of 119 million is expected to be deductible for income tax purposes. This 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 assets and liabilities recognised as a result of the acquisition were finalised in September 2017 and are as follows:

Fair value of net assets acquired

As consolidated at
10 March 2018

m

As consolidated at
11 March 2017

m

Fixed assets

262

262

Intangible assets

322

322

Inventories

810

810

Trade and other receivables

146

146

Deferred tax assets

55

45

Amounts due from Financial Services customers (the 'loan book')

615

615

Other financial assets1

59

59

Cash and cash equivalents2

548

548

Total assets acquired

2,817

2,807

Trade and other payables2

(1,214)

(1,214)

Provisions

(175)

(104)

Defined benefit obligation

(454)

(454)

Total liabilities acquired

(1,843)

(1,772)

Net identifiable assets acquired at fair value

974

1,035

Goodwill arising on acquisition

119

58

Purchase consideration transferred

1,093

1,093

1 Other financial assets includes 9 million of J Sainsbury plc shares (converted from Home Retail Group plc own shares at the point of acquisition). On consolidation these become J Sainsbury plc own shares in the consolidated statement of changes in equity.

2 Cash and cash equivalents and trade and other payables acquired are both presented gross of the capital return of 226 million.

Intangible assets

Intangible assets include a brand of 179 million relating to the Argos brand name. This reflects its fair value at the acquisition date and is estimated to have a useful economic life of ten years.

Trade and other receivables

Trade and other receivables include 40 million of trade receivables, against which a bad debt provision of (1) million was held. Also included are prepayments and accrued income of 29 million, and other debtors of 78 million.

Amounts due from Financial Services customers (the 'loan book')

The loan book fair value of 615 million includes a fair value increase of 20 million and a provision for impairment of (66) million.

Acquisition-related costs

Acquisition-related costs (included in administrative expenses and recognised outside of underlying profit) amounted to 22 million in the prior year (see note 3). In addition 3 million of costs relating to the issuance of J Sainsbury plc shares were recognised directly within equity in the prior year.

Cash impact of acquisition

m

Cash consideration

(447)

Cash acquired

548

Acquisition of subsidiaries, net of cash acquired (included in prior year cash flow statement)

101

Capital return to shareholders of Home Retail Group plc (see below)

(226)

Net cash impact of acquisition

(125)

Capital return

Prior to the acquisition of Home Retail Group plc, it was announced that Home Retail Group plc shareholders would be entitled to a 226 million capital return comprising the following:

25.0 pence per share, reflecting the 200 million return to shareholders in respect of the sale of Homebase by Home Retail Group plc on 29 February 2016; and

2.8 pence per share (totalling 26 million) in lieu of a final dividend in respect of Home Retail Group plc's financial year ended 27 February 2016.

This was recorded as a liability in the net assets acquired above within trade and other payables. The full amount was paid on 12 September 2016.

Finalisation of acquisition balance sheet

The final acquisition balance sheet as consolidated as follows:

Restated

Prior period adjustment

As previously reported

m

m

m

Balance sheet at 11 March 2017

Intangibles

803

61

742

Current provisions

(148)

(13)

(135)

Deferred income tax liability

(162)

10

(172)

Non-current provisions

(186)

(58)

(128)

There has been no impact on the previously reported income statement, statement of other comprehensive income, statement of changes in equity or cash flow statement.

Since the year-end date of 11 March 2017, movements in the acquisition balance sheet relate to the following:

Provisions

An in-depth review of provisions within HRG has been performed since the acquisition, resulting in changes to the estimates and assumptions applied.

Deferred income tax liability

Relates to deferred tax on the above adjustments.

Intangible assets

Movement to goodwill of 61 million since year-end is as a result of the above adjustments.

13 Supplier arrangements

Supplier incentives, rebates and discounts, collectively known as 'supplier arrangements', represent a material deduction to cost of sales and administrative expenses 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 four key types are as follows:

Discounts and supplier incentives - these represent the majority of all supplier arrangements and are linked to individual unit sales. The incentive is typically based on an agreed sum per item sold on promotion for a period and therefore is considered part of the purchase price for that product.

Fixed amounts - these are agreed with suppliers primarily to support in-store activity including promotions, such as utilising specific space. These involve a degree of judgement and estimation in ensuring the appropriate cut-off of arrangements for fixed amounts which span period-end. These require judgement to determine when the terms of the arrangement are satisfied and that amounts are recognised in the correct period.

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 and requires estimates of the amount earned up to the balance sheet date, for each relevant supplier contract. Where agreements span a financial period-end, estimations are required of projected turnover and judgement may also need to be applied to determine the rebate level earned as agreements may involve multiple tiers. In order to minimise any risk arising from estimation, supplier confirmations are obtained to agree the value to be recognised at year-end, prior to it being invoiced. Rebates represent the smallest element of the Group's supplier arrangements and by aligning the agreements to the Group's financial year, where possible, the judgements required are minimised.

Marketing and advertising income - income which is directly linked to the cost of producing the Argos catalogue is recognised once agreed with the supplier and when the catalogue is made available to the Group which is the point at which the catalogue costs are recognised.

Of the above categories, fixed amounts, supplier rebates and marketing and advertising income involve a level of judgement and estimation. The amounts recognised in the income statement for these three categories in the financial year are as follows:

2018

2017

m

m

Within cost of sales

Fixed amounts

261

204

Supplier rebates

97

87

Marketing and advertising income

92

52

Total supplier arrangements

450

343

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

2018

2017

m

m

Within inventory

(7)

(9)

Within current trade receivables

Supplier arrangements due

23

29

Within current trade payables

Supplier arrangements due

23

25

Accrued supplier arrangements

14

13

Total supplier arrangements

53

58

The above amounts exclude supplier income in relation to discounts and supplier incentives which do not involve any level of judgement or estimation.

14 Post balance sheet events

On 20 March 2018, subsequent to year-end, the HRG 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. There is no change to members' benefits and each section's assets are ring-fenced for the benefit of the members of that section.

On 19 April 2018, a fixed rate amortising loan from Eddystone Finance plc with a final principle balance of 568 million, was repaid in full.

On 30 April 2018, Sainsbury's announced a proposed combination with Asda Group Limited, a wholly owned subsidiary of Walmart Inc (Walmart). In exchange for the entire issued share capital of Asda, Sainsbury's will issue to Walmart cash of 2.975 billion and 4.3 billion of shares, based on the closing share price of Sainsbury's on 27 April 2018 of 269.8 pence.

The shares will comprise ordinary voting shares representing 29.9 per cent of Sainsbury's enlarged ordinary voting share capital and ordinary non-voting shares, which are convertible into ordinary voting shares such that Walmart will hold 42 per cent of the issued equity share capital of the Combined Business.

Completion of the Combination is expected in the second half of calendar year 2019. The Combination is conditional upon, amongst other things, Sainsbury's shareholder approval, Competition and Markets Authority approval, approvals in connection with the Asda defined benefit pension scheme and other regulatory approvals.


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 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 are classified 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 1.3 per cent is based on a combination of Sainsbury's like-for-like sales and Argos like-for-like sales for the 52 weeks to 10 March 2018, i.e. assuming that Argos sales are in the base. Additionally, the impact of the disposal of Pharmacy is not treated as like-for-like. See movements below:

2018

2017

Underlying retail like-for-like (exc. Fuel, inc. Argos in base)

1.3%

-

Underlying net new space impact (exc. Pharmacy, inc. Argos in base)

0.3%

0.8%

Underlying total retail sales growth (exc. fuel, exc. Pharmacy, inc. Argos in Base)

1.6%

0.8%

Argos consolidation & Pharmacy impact

8.4%

13.3%

Underlying total retail sales growth (exc. fuel, inc. Pharmacy impact, exc. Argos in base)

10.0%

14.1%

Fuel Impact

(1.2)%

(1.5)%

Underlying total retail sales growth (inc. fuel)

8.8%

12.6%

Bank impact

0.2%

0.1%

Underlying Group sales inc VAT

9.0%

12.7%

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.

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.

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.

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 7.

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

Retail underlying EBITDAR

No direct equivalent/Profit before tax

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

A reconciliation of the measure is provided on page 14 of the Financial Review.

Retail rent excludes 2m relating to Sainsbury's Bank.

APM

Closest equivalent IFRS measure

Definition /Purpose

Reconciliation

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 includes a reference to show what has been combined in these line items.

2018

2017

Ref

m

m

Net interest paid

a

(105)

(108)

Strategic capital expenditure

b

(80)

(92)

Acquisition of subsidiaries

c

135

(128)

Repayment of borrowings

d

(174)

(211)

Other

e

(2)

6

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

2018

2017

m

m

Cash generated from retail operations

1,259

929

Add back: Exceptional pension contribution

-

199

Net interest paid (ref (a) above)

(105)

(108)

Corporation tax

(72)

(87)

Retail purchase of property, plant and equipment

(553)

(622)

Retail purchase of intangible assets

(69)

(58)

Retail proceeds from disposal of property, plant and equipment

54

55

Add back: Strategic capital expenditure

80

92

Dividends and distributions received

37

65

Investment in joint ventures and associates

(9)

(16)

Bank capital injections

(190)

(130)

Free cash flow

432

319

1. The definition of retail free cash flow has changed in the 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

Retail Net Debt

Borrowings, cash, derivatives and available-for-sale financial assets, 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 10.

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.

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.

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.

2018

2017

m

m

Purchase of property, plant and equipment

(473)

(530)

Purchase of intangibles

(69)

(58)

Cash capital expenditure before strategic capital expenditure (note 4)

(542)

(588)

Strategic capital expenditure (ref (b) above)

(80)

(92)

Proceeds on disposal

54

55

Cash capital expenditure including strategic capital expenditure

(568)

(625)

Capitalised interest

(7)

(7)

Other (including strategic capital expenditure)

80

85

Total net retail core capital expenditure

(495)

(547)

Other

Lease adjusted net debt/underlying EBITDAR

No direct equivalent

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

A reconciliation of this is provided in the Financial Review on page 20.

This helps management measure the ratio of the business's debt to operational cash flow.

Return on capital employed

No direct equivalent

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

Return is defined as underlying profit before interest and tax.

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

This represents the total capital that the Group has utilised in order to generate profits. Management use this to assess the performance of the business.

APM

Closest equivalent IFRS measure

Definition /Purpose

Reconciliation

Interest cover

No direct equivalent

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

Underlying operating profit as per note 4.

This measures the ability of the Group to pay the interest on its outstanding debt. This measurement is used by creditors, lenders and investors to determine the risk of lending funds to the Group.

Underlying share of post-tax profit from joint ventures and associates as per note 4.

Underlying net finance costs as per note 5.

Fixed charge cover

No direct equivalent

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

Group underlying EBITDAR is disclosed in the Financial Review on page 20.

This helps assess the Group's ability to satisfy fixed financing expenses from performance of the business.

Underlying net finance costs as per note 5.


[1] General Merchandise grew ahead of the market (BRC non-food non-clothing market, consistently gaining share. Clothing beat the market (Kantar worldpanel, 52 weeks ending 18 March 2018)


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