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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
---|---|---|---|---|---|
Sainsbury (j) Plc | LSE:SBRY | London | Ordinary Share | GB00B019KW72 | ORD 28 4/7P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
1.20 | 0.45% | 265.40 | 266.80 | 267.00 | 268.00 | 264.00 | 265.60 | 5,275,554 | 16:35:14 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
---|---|---|---|---|---|
Grocery Stores | 32.7B | 137M | 0.0581 | 45.92 | 6.29B |
TIDMSBRY
RNS Number : 3152E
Sainsbury(J) PLC
05 November 2020
J Sainsbury plc
5 November 2020
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF REGULATION (EU) NO 596/2014 (MAR)
Strategy Update and Interim Results for the 28 weeks ended 19 September 2020
-- Total Retail sales up 7.1 per cent (excluding fuel) with like-for-like sales up 6.9 per cent. Grocery sales up 8.2 per cent and General Merchandise sales up 7.4 per cent
-- Digital sales up 117 per cent to GBP5.8 billion, nearly 40 per cent of total sales. Groceries Online sales up 102 per cent
-- Statutory Group sales (excluding VAT) down 1.1 per cent, with fuel sales down 44.6 per cent
-- Loss before tax GBP(137) million, reflecting GBP438 million of one-off costs associated with Argos store closures and other strategic and market changes
-- Underlying profit before tax GBP301 million
-- Retail costs of approximately GBP290 million to protect customers and colleagues from COVID-19, partially offset by GBP230 million business rates relief
-- Free cash flow GBP943 million -- Non-lease net debt down by GBP912 million to GBP267 million
-- Special dividend of 7.3p to be paid in lieu of final dividend for the 2019/20 financial year, aligned to policy of 1.9x full year dividend cover by underlying earnings
-- Interim dividend of 3.2p, in line with policy of paying 30 per cent of prior full year dividend
-- Full year underlying profit before tax now expected to be at least five per cent higher than last year, reflecting stronger than expected sales, particularly at Argos
Strategy Update: Driven by our passion for food, together we serve and help every customer
We are refocusing on our core food business, putting food back at the heart of Sainsbury's. We will:
-- Lower food prices, focusing on offering customers consistently good value -- Accelerate food innovation, tripling the number of new products we launch each year -- Profitably grow Groceries Online sales to meet further demand
-- Increase the rate of new Convenience store and Neighbourhood Hub openings over the next three years
-- Continue to reduce plastic and food waste and inspire customers to eat healthier products, which will be better for the climate and environment, as we work towards becoming Net Zero by 2040
-- Close our meat, fish and deli counters, based on reduced customer demand. This will make stores simpler to run and reduce food waste. We will keep adding more quality and innovation in our aisles
Our other businesses and brands must deliver in their own right and actively support our ambition in food
-- We are building on the success of integrating Argos stores into Sainsbury's and accelerating the final stages:
o By March 2024 we will open up to 150 more Argos stores in Sainsbury's and add 150-200 more Argos collection points in supermarkets and convenience stores, so that every Sainsbury's supermarket will have either an Argos store in store or a collection point
o As we add more Argos stores and collection points in Sainsbury's, we will close around 420 Argos standalone stores, reducing the UK Argos standalone store estate to around 100 by March 2024
-- We are expanding our ambition for Habitat, which will become our main home and furniture brand in Argos and Sainsbury's
-- We are accelerating our plans for Nectar, bringing greater support for food and faster profit growth
-- We expect Financial Services returns and profits to double in five years, despite the challenges of COVID-19
We will accelerate the pace of change across our business, simplifying our operations, delivering structural cost savings to support investment into our core food offer and driving an inflection in profit momentum.
-- We will transform our approach to costs across the business, delivering a reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024
-- This will create at least GBP600 million of annual additional funding by March 2024 to reinvest in the customer offer and deliver improved financial returns. This will be after driving efficiencies to cover inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries
-- We are investing in the integration of our logistics and supply chain network and the accelerated restructuring of the Argos store estate, reducing costs and delivering working capital benefits
-- Reflecting our commitments to focus our resources and move faster, we are open to partnering or outsourcing where this efficiently accelerates our plans to improve our customer offer
We expect this new plan to drive an inflection in underlying profit momentum, with pre-tax profits in the year to March 2022 to exceed those reported in the year to March 2020 (which were not impacted by COVID-19)
-- We will continue our track record of strong cash generation, meeting our target of at least GBP750 million net debt reduction in the three years to March 2022 and generating average retail free cash flow of GBP500 million per year over the following three years to March 2025
-- Capital expenditure will increase to between GBP700 million and GBP750 million per year in the three years to March 2024 to support high returning infrastructure transformation investments before returning to around GBP600 million per year
-- We will incur one off costs from infrastructure, operating model and structure changes of GBP900 million to GBP1 billion in the period to March 2024 (approximately GBP300 million cash). We expect total non-underlying costs of around GBP625 million to be booked in the current financial year (around GBP100 million cash)
Simon Roberts, Chief Executive of J Sainsbury plc said :
"As we go into lockdown in England for the second time this year and restrictions are in place across the UK, we know our customers and colleagues are feeling anxious and we will do all we can to support them. Our colleagues have done an exceptional job going above and beyond for our customers every day which is why we are giving our frontline colleagues a second 10 per cent thank you payment. Above all else today, I want to express my heartfelt thanks to every one of my colleagues in our stores, in our depots, and across our store support centres for all your hard work and for your outstanding team effort. We also want to support our communities and those in need and are creating a GBP5 million community fund for local charities and good causes, in addition to the GBP7 million we donated to Fareshare and Comic Relief earlier this year. We want to do our bit to ensure that no one goes hungry at Christmas and to support those most in need.
"COVID-19 has accelerated a number of shifts in our industry. Investments over recent years in digital and technology have laid the foundations for us to flex and adapt quickly as customers needed to shop differently. Around 19 per cent of our sales were digital this time last year and nearly 40 per cent of our sales are digital today.
"While we are working hard to help feed the nation through the pandemic, we have also spent time thinking about how we deliver for our customers and our shareholders over the longer term.
"We will put food back at the heart of Sainsbury's. We are already working to make this happen - we have lowered prices on over 1,500 every day grocery products over the past few months and we will do more of this, focusing on the staple products that our customers buy every day. We know that customers are feeling the pinch and we want them to feel confident they will get always get great value, quality and service from Sainsbury's. We will focus on accelerating product innovation and will bring new and exclusive products to our customers much more often. To support our ambition in food, we are accelerating our ambition to structurally reduce our cost base right across the business so we can invest faster back into our core food offer.
"Our other brands - Argos, Habitat, Tu, Nectar and Sainsbury's Bank - must deliver for their customers and for our shareholders in their own right. Argos sales have been strong over the past six months and we have gained almost two million new customers as people have re-connected with Argos. Over the next three years we will make Argos a simpler, more efficient and more profitable business while still offering customers great convenience and value and improving availability. We will also make Habitat more widely available in Sainsbury's and Argos, giving customers access to stylish home and furniture products at more affordable prices. We are talking to colleagues today about where the changes we are announcing in Argos standalone stores and food counters impact their roles. We will work really hard to find alternative roles for as many of these colleagues as possible and expect to be able to offer alternative roles for the majority of impacted colleagues.
"Given the unprecedented circumstances of this year and the challenges facing our colleagues, including the changes we are announcing today, I have informed the Board that if a bonus is payable, I will waive any bonus entitlement for this financial year.
"We are raising our ambitions. By delivering improvements in value and quality and simplifying this business, we will do a better job for our customers and deliver an improved financial performance and stronger shareholder returns.
"Right here and now I and all the team are focused on supporting and delivering for our customers in the days and weeks ahead."
Tables
28 weeks to 19 September 28 weeks to 2020 21 September 2019 Statutory Reporting Group sales (exc. VAT, inc. fuel) GBP14,934m GBP15,097m ------------------------- -------------- Items excluded from underlying results GBP(438)m GBP(229)m ------------------------- -------------- (Loss)/profit before tax GBP(137)m GBP9m ------------------------- -------------- (Loss) for the financial period GBP(179)m GBP(38)m ------------------------- -------------- Basic loss per share (8.3)p (2.2)p ------------------------- -------------- 28 weeks to 28 weeks to 19 September 2020 21 September 2019 Business Performance Underlying group sales (inc. VAT) GBP16,557m GBP16,856m ------------------- -------------- Underlying profit before tax GBP301m GBP238m ------------------- -------------- Underlying basic earnings per share 10.1p 7.9p ------------------- -------------- Net debt GBP(6,168)m GBP(6,778)m ------------------- -------------- Non-lease net debt GBP(267)m GBP(1,008)m ------------------- -------------- Interim dividend 3.2p 3.3p ------------------- -------------- Special dividend 7.3p - ------------------- -------------- Like-for-like sales growth 2019/20 2020/21 --------------------------------- ---------------------------------- Q1 Q2 Q3 Q4 Q1 Q2 H1 ------- ------- ------- ------- -------- -------- -------- Like-for-like sales (exc. fuel) (1.6)% (0.2)% (0.7)% 1.3% 8.2% 5.1% 6.9% ------- ------- ------- ------- -------- -------- -------- Like-for-like sales (inc. fuel) (1.0)% (0.4)% (1.1)% 1.3% (2.3)% (0.5)% (1.6)% ------- ------- ------- ------- -------- -------- -------- 2019/20 2020/21 Total sales growth Q1 Q2 Q3 Q4 Q1 Q2 H1 --------------------------------- ------- ------- ------- ------- -------- -------- -------- Grocery (0.5)% 0.6% 0.4% 2.0% 10.5% 5.1% 8.2% ------- ------- ------- ------- -------- -------- -------- Total General Merchandise (3.1)% (2.0)% (3.9)% (1.3)% 7.2% 7.6% 7.4% ------- ------- ------- ------- -------- -------- -------- GM (Argos) 0.4% 10.7% 10.9% 10.8% ------- ------- ------- ------- -------- -------- -------- GM(Sainsbury's Supermarkets) (8.1)% (9.3)% (6.9)% (8.2)% ------- ------- ------- ------- -------- -------- -------- Clothing (4.5)% 3.3% 4.4% 2.5% (26.7)% (7.5)% (18.3)% ------- ------- ------- ------- -------- -------- -------- Total Retail (excl. fuel) (1.2)% 0.1% (0.7)% 1.3% 8.5% 5.2% 7.1% ------- ------- ------- ------- -------- -------- -------- Fuel 4.9% (56.1)% (29.3)% (44.6)% ------- ------- ------- ------- -------- -------- -------- Total Retail (inc. fuel) (0.6)% 0.1% (0.9)% 1.9% (2.1)% (0.4)% (1.4)% ------- ------- ------- ------- -------- -------- --------
Outlook
Sales during the first half were stronger than the base case assumptions we outlined in April, particularly at Argos, driving a strong underlying profit increase against a soft comparative base. Retail costs of around GBP290 million associated with protecting customers and colleagues from COVID-19 were partially offset by GBP230 million of business rates relief.
Grocery sales and general merchandise sales have remained strong to date in the second half of the year and we expect Financial Services to return to profit in the second half. Retail profits will, however, also reflect a tougher comparative base, investment in improving value for customers and ongoing costs associated with protecting customers and colleagues from COVID-19. We cannot fully predict the impact of COVID-19 and lockdown restrictions on retail sales and costs for the remainder of the second half of the year but our current assumptions would result in full year Group underlying profit before tax increasing by at least five per cent year on year.
Looking beyond this financial year, we will invest significantly to accelerate innovation, improve the quality of our food, lower our prices and meet the growing demand for online groceries. We will fund these investments through simplifying our business and accelerating our cost savings plans and expect underlying profits in the year to March 2021/22 to be higher than those reported in the year to March 2019/20(1) (which were not impacted by COVID-19).
Capital expenditure will increase over the next three years to fund high-returning logistics and Argos transformation plans. We expect these projects to generate working capital improvements and expect cash generation to remain strong. We will meet our target of reducing net debt by at least GBP750 million in the three years to March 2022 while maintaining our dividend policy. In outer years we expect to continue our track record of strong cash generation, with average retail free cash flow of GBP500 million per annum over the three years to March 2025.
Dividend
In April the Board chose, due to limited visibility at the time on the potential impact of COVID-19 on the business, to defer dividend payment decisions and did not pay a final dividend for the 2019/20 financial year. In the light of improved visibility, strong trading and a strong balance sheet position, the Board has chosen to pay a special dividend in lieu of a final dividend for the 2019/20 financial year. The dividend of 7.3p is aligned to policy of 1.9x full year dividend cover by underlying earnings. This will be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.
The Board has approved an interim dividend of 3.2p, in line with our policy of paying 30 per cent of prior full year dividend. This will also be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.
Notes
Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. They appear in a number of places throughout this announcement and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. Unless otherwise required by applicable law, regulation or accounting standard, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.
A webcast presentation will be available to view on our website at 7.30am. The webcast can be accessed at the following link: https://webcasts.sainsburys.co.uk/sainsbury157
Following the release of the webcast, a Q&A conference call will be held at 9:30am. This will be available to listen to on our website at the following link: https://webcasts.sainsburys.co.uk/sainsbury158
A recorded copy of the webcast and Q&A call, alongside slides and a transcript of the presentation will be available at www.about.sainsburys.co.uk/investors/results-reports-and-presentations following the event
Sainsbury's will issue its 2020/21 Third Quarter Trading Statement at 07:00 (BST) on 13 January 2021.
S1 2019/20 UPBT GBP586 million
Tim Fallowfield, Company Secretary and Corporate Services Director, was responsible for the disclosure of this announcement for the purposes of MAR.
Enquiries
Investor Relations Media James Collins Rebecca Reilly +44 ( 0) 7801 813 074 +44 (0) 20 7695 7295
Strategy Update: Driven by our passion for food, together we serve and help every customer
We will put food back at the heart of our business and will build on the changes we have made as we helped our customers through the COVID-19 pandemic. We are raising our ambitions and will speed up the pace of change across our business, simplifying our operations and accelerating our cost savings programmes so that we can invest more in food quality, choice, innovation and consistently lower prices for our customers. We will reduce complexity, transform our cost base and ensure that our portfolio of brands supports our focus on food, thereby improving financial performance and delivering stronger shareholder returns.
Food First
Our clear priority is to build on our strong brand heritage and reputation for quality, range and innovation and offer more consistent value to customers while making shopping more convenient. This is what we mean by putting food back at the heart of Sainsbury's. We will deliver delicious, great value food wherever and however customers want to shop with us.
-- We have lowered prices on over 1,500 products and will go much further. We will lower prices on thousands of every day food products, focusing on staple products that our customers buy every day
-- We will accelerate food product innovation by recruiting more product developers. Working closely with our suppliers, we will triple the number of new products and increase speed to market by at least 30 per cent. In September we launched 200 new fresh food products as part of the biggest re-vamp of our fresh food aisles in more than a decade
-- We closed our meat, fish and delicatessen counters in March as we focused all our efforts on feeding the nation. Customers have told us they are happy buying these products in the aisle. We have therefore decided to close permanently our meat, fish and delicatessen counters. Our pizza and patisserie counters remain open and we continue to freshly bake bread in 1,348 stores. These changes will help us focus on quality, value and availability, while reducing store complexity and waste
-- We have more than doubled our Groceries Online capacity and volume since March. 17 per cent of our grocery sales are now online compared with seven per cent in March. We are currently fulfilling over 700,000 online customer orders per week across home delivery and click and collect. By the end of this year we expect to be able to fulfil 760,000 orders per week and we will continue to grow capacity in order to meet customer demand going forward. Our groceries online business is profitable due to its scale and in-store pick model and we will focus on driving efficiencies to continually improve profitability. Our Chop Chop one hour food delivery service is now in 15 cities across the UK and our agreements with Uber Eats and Deliveroo will help us to reach even more new customers and serve more shopping missions
-- Our Net Zero sustainability plan is key to putting food at the heart of Sainsbury's. Customers want tasty food, great quality, low prices and they want to ensure that the food they buy is having the lowest impact on the environment, now and in the future. We are committed to helping customers to eat more healthy products, which is good for them and good for the climate and the environment. We will reduce our plastic usage by 50 per cent by 2025 and reduce our food waste
-- We will adapt our supermarkets and convenience stores to reflect changing shopping habits and local demand. We will expand the successful introduction of fresh food prepared on site - such as hot meals, sushi, freshly baked bread and hot coffee - and make more space available for our in-aisle fresh food ranges and food to go. To do this profitably, we will free up space, reduce complexity and cut excess costs in our supermarkets
-- We plan to open around 18 more 'Neighbourhood Hub' convenience stores over the next three years. These stores are larger than a typical convenience store and offer locally-tailored choice across food, beauty, clothing, seasonal and general merchandise. They are conveniently located, easy to shop and have all the benefits of the Argos offer. We expect them to be very popular one-stop shops for their local communities. We will also increase our rate of new convenience store openings to at least 20 per year over the next three years
Brands that Deliver
We will refocus the role of our portfolio brands to ensure that they contribute positively in their own right, actively support our ambition in food and do not dilute returns or divert focus and resources from the core.
Argos, Habitat, Tu, Nectar and Sainsbury's Bank will deliver for their customers and drive strong, sustainable, profitable growth to support our core food business.
-- Argos sales grew by nearly 11 per cent in the first half, with 90 per cent of sales originating online and almost two million customers re-discovering Argos despite standalone Argos stores being closed for 12 weeks. Building on this success we will accelerate the structural integration of Sainsbury's and Argos and further simplify the Argos business model, making it more efficient and profitable and improving our customer offer at the same time
-- 120 of our standalone Argos stores have not reopened since we closed them back in March. These stores will now close permanently. We currently have 315 Argos stores in our supermarkets and 296 collection points across supermarkets and convenience stores. Over the next three years we will open up to another 150 Argos Stores in supermarkets and a further 150-200 collection points. In total, we will close around 420 Argos stores by March 2024, reducing the total number of standalone stores to around 100
-- To support this streamlined infrastructure we will build a total of 32 Local Fulfilment Centres across the UK that will operate our fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country within hours. Through this transformation, we will significantly reduce our cost base and stock holding while improving speed, convenience and availability for customers
-- We stopped printing the Argos catalogue as customers are increasingly shopping online. By focusing our resources on our website we are able to deliver a more modern, dynamic and flexible approach to both pricing and new products. We will continue to print the iconic Christmas Gift Guide, which is bigger and better than ever this year
-- We are investing in Habitat, which will become our main home and furniture brand across Sainsbury's and Argos. Habitat is a strong brand and, by increasing its visibility in Sainsbury's and Argos stores and online, expanding the product range and making prices more affordable, we have a significant opportunity to grow market share
-- Tu Clothing has delivered very strong online sales growth and the range is growing both value and volume market share(1)
-- Nectar gives us a strong competitive advantage, supports our food business and is valued by our customers. It is also central to how we understand our customers because it identifies, in real time, how they shop with us and what they want. We will continue to grow our portfolio of coalition partners and build our Nectar360 digital media business
-- We have made good progress with our Financial Services transformation plan and streamlined our product offer . We still expect to double profit and returns in our Financial Services business within five years, despite the challenges of COVID-19. This reflects a strong balance sheet and effective cost management and we remain confident that no capital injections will be required from the Group
1 Kantar Total Clothing, Footwear and Acc for 24 weeks to 20 September 2020
Colleague impact
We are talking to colleagues today where the changes we are announcing impact their roles. We recruit 55,000 Retail colleagues every year and have already hired 52,000 people since March, including 29,000 additional colleagues to support our efforts to feed the nation. We have many job opportunities for colleagues who work on our food counters or in our Argos standalone stores that are closing, but vacancies might not always be in the right location or at suitable hours for all colleagues. Whilst we will aim to find alternative roles for as many colleagues as possible, around 3,500 of our colleagues could lose their roles as a result of our proposals. Including these proposals, we expect to increase our colleague population by 6,000 roles by the end of the financial year. We have an excellent track record of finding alternative roles for colleagues - for example, where we have moved colleagues from Argos standalone stores to stores in Sainsbury's supermarkets, we have retained 90 per cent of colleagues. We will do everything possible to find alternative roles for our colleagues.
Save to Invest
We will deliver a step change in efficiency by transforming our approach to costs, simplifying our organisation and delivering a structural reduction in our operating cost base. We are accelerating our cost saving plans to unlock new opportunities in order to fund the improvement of our food offer and to ensure we can meet the growth in customers shopping across a broad range of channels.
-- We will simplify our business and lower the overall cost base in our operations. We will deliver a step change reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024, creating around GBP600 million of annualised additional capacity to invest in the customer offer and deliver improved financial returns. The money we save will enable us to reinvest in our food business to give our customers better products, improved service and lower prices
-- This will require total cost savings significantly higher than GBP600 million given the need to additionally address inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries. We have extensive plans in place to deliver these cost savings across the business. Some key examples are:
o Creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury's and Argos. This will structurally reduce our costs by GBP150 million by March 2024
o Moving 150 Argos standalone stores into Sainsbury's and reducing the number of Argos standalone stores to 100 over the next three years will reduce our operating costs by GBP105 million by March 2024
o Reducing significantly our costs by further adapting our store operating model to better reflect customer demand and the way customers shop in our stores now and in the future. The closure of our meat, fish and delicatessen counters will save at least GBP60 million in operating costs and will reduce food waste and energy consumption in our stores
o Building on last year's property strategy programme, where we said 10 to 15 supermarkets and 30 to 40 convenience stores would close over two years, we now expect that 15 to 20 supermarkets and 50 to 60 convenience stores will close over the next three years. We expect to open 100 convenience stores over the next three years
Strategy Update - Key Financials
-- We expect an inflection in underlying profit momentum, driven by an improved food performance, improved financial services and general merchandise profits, lower interest costs and funding from the accelerated cost savings programmes outlined above
-- Based on an expectation that the impact of COVID-19 on profits will be limited to the financial year to March 2021, we expect underlying pre-tax profits in the financial year to March 2022 to exceed those reported in the financial year to March 2020
-- We expect to meet our target of reducing net debt by at least GBP750 million in the three years to March 2022 while maintaining a policy of paying a dividend covered 1.9x by underlying earnings and to generate average retail free cash flow of GBP500 million per year over the following three years
-- Capital expenditure will increase to around GBP700-750 million per year in the three years to March 2024 to support high returning investments in the transformation of our logistics platform and accelerated restructuring of the Argos store estate, before returning to around GBP600 million per year
-- The changes required to our physical infrastructure, store operating models and central structures will incur one-off costs of GBP900 million to GBP1 billion in the period to March 2024, of which around GBP300 million will be cash costs. We expect total non-underlying costs of around GBP625 million to be booked in the current financial year, of which around GBP100 million will be cash costs
Targets and metrics
We will better align internal and external metrics and targets and will report against these consistently. Key metrics will be:
-- Customer Satisfaction -- Grocery market share -- Colleague engagement -- Movement in operating costs as a percentage of sales -- Underlying Profit Before Tax -- Retail Free Cash Flow -- Net Zero by 2040 in our own operations
Financial Review for the 28 weeks to 19 September 2020
A number of Alternative Performance Measures ('APMs') have been adopted by the Directors to provide additional information on the underlying performance of the Group. These measures are intended to supplement, rather than replace the measures provided under IFRS. Please see Note 2.5 on page 30 for further information.
In the 28 weeks to 19 September 2020, the Group generated a loss before tax of GBP137 million (HY 2019/20: profit before tax of GBP9 million) and an underlying profit before tax of GBP301 million (HY 2019/20: GBP238 million).
Summary income statement 28 weeks 28 weeks Change 52 weeks to to to 7 March 19 September 21 September 2020 2019 2020 GBPm GBPm % GBPm Underlying Group sales (including VAT) 16,557 16,856 (1.8) 32,394 Underlying Retail sales (including VAT) 16,338 16,567 (1.4) 31,825 Underlying Group sales (excluding VAT) 14,934 15,097 (1.1) 28,993 Underlying Retail sales (excluding VAT) 14,715 14,808 (0.6) 28,424 Underlying operating profit/(loss) Retail 555 437 27 938 Financial services (55) 20 N/A 48 ------------------------------------ -------------- -------------- ------- ------------ Total underlying operating profit 500 457 9 986 Underlying net finance costs(1) (199) (219) 9 (400) Underlying profit before tax 301 238 26 586 Items excluded from underlying results (438) (229) (91) (331) ------------------------------------ -------------- -------------- ------- ------------ (Loss)/profit before tax (137) 9 N/A 255 Income tax expense (42) (47) 11 (103) ------------------------------------ -------------- -------------- ------- ------------ (Loss)/profit for the financial period (179) (38) (372) 152 ------------------------------------ -------------- -------------- ------- ------------ Underlying basic earnings per share 10.1p 7.9p 28 19.8p Basic (loss)/earnings per share (8.3)p (2.2)p (277) 5.8p Interim dividend per share 3.2p 3.3p (3) 3.3p Special dividend per share 7.3p N/A N/A N/A ------------------------------------ -------------- -------------- ------- ------------
1 Net finance costs including perpetual securities coupons before non-underlying finance movements.
Group sales
Group sales including VAT decreased by 1.8 per cent year-on-year whilst Retail sales (including VAT, including fuel) decreased by 1.4 per cent year-on-year. Retail sales (including VAT, excluding fuel) increased by 7.1 per cent driven by Grocery and General Merchandise sales.
Total sales performance by category 28 weeks to 28 weeks to 19 September 2020 21 September 2019 Change GBPbn GBPbn % ------------------------------------- ------------------ ------------------ -------- Grocery 11.2 10.3 8.2% General Merchandise 3.2 3.0 7.4% Clothing 0.4 0.5 (18.3)% ------------------------------------- ------------------ ------------------ -------- Retail (exc. fuel) 14.8 13.9 7.1% ------------------------------------- ------------------ ------------------ -------- Fuel sales 1.5 2.7 (44.6)% Retail (inc. fuel) 16.3 16.6 (1.4)% ------------------------------------- ------------------ ------------------ --------
A number of factors contributed to an 8.2 per cent growth in Grocery sales, with the primary driver being customers consuming more meals at home instead of at out of home locations such as pubs, restaurants and work places in response to the COVID-19 pandemic.
COVID-19 provided and continues to provide a challenging backdrop for customers and colleagues, but we have a clear mission as we focus on helping feed the nation. We have sought to make the customer journey convenient, whether in store or online, supported by great service from our colleagues across the business. We have invested in our estate to ensure customers and colleagues are able to shop and work safely, through protective measures such as checkout screens, personal protective equipment and increased cleaning. We continue to innovate and invest in customer experience through key initiatives such as SmartShop providing customers with scan as you go technology, which is increasingly popular.
We responded at great pace to the increase in demand for Groceries Online by more than doubling our online delivery and click and collect capacity. This was achieved at very little capital expense, as the capacity increase was driven predominantly through stores that already fulfilled online orders, with an increase of only 15 stores versus H1 last year (259 versus 244). We helped to protect and serve the most vulnerable in society through offering priority slots. In stores, customers are choosing to shop less frequently and buying more during each visit.
General Merchandise sales grew 7.4 per cent, with Argos sales up nearly 11 per cent despite all Argos standalone stores being closed for a number of weeks. Our strong execution combined with the strength and flexibility of the Argos supply chain and digital platform meant we were able to fulfil a 78 per cent increase in sales ordered online and delivered to home or collected in a Sainsbury's store. Customer shopping patterns were influenced by the pandemic with a notable increase in demand for Office equipment as customers transitioned towards working from home. Gaming also saw a year on year uplift driven by customer purchases of Hardware and Software whilst Seasonal sales benefitted from longer periods of warm weather in comparison to last year.
Clothing sales declined by 18.3 per cent as customers deprioritised non-essential spend during the pandemic. Nevertheless, Online Clothing sales grew by 75 per cent as customers switched to shopping digitally. Clothing was the hardest hit in the first few months of the pandemic, with sales steadily improving over the summer months.
Fuel sales declined by 44.6 per cent, due to both retail price deflation and lower volumes as a result of reduced travel during the pandemic.
Total sales performance by channel 28 weeks to 28 weeks to 19 September 21 September 2020 2019 ------------------------------------ ------------- ------------- Supermarkets (inc Argos stores in Sainsbury's) 3.2% (0.7)% Convenience (8.0)% 2.0% Groceries Online 102.2% 7.0% ------------------------------------- ------------- -------------
Supermarket sales increased by 3.2 per cent. Our investment into adapting our supermarket space to serve a wide variety of shopping missions has enabled us to serve customers as they consume more meals at home and move towards 'less frequent but larger' shops. We have been able to offer customers a broad range of products and services under one roof, through Argos stores in Sainsbury's and initiatives such as our Beauty Halls and Wellness aisles.
Convenience sales declined by 8.0 per cent partly due to COVID-19 resulting in the temporary closure of 26 stores, of which 15 have since reopened. Sales have grown strongly in neighbourhood locations, with customers spending more time at home and preferring to shop locally, but this was more than offset by reduced footfall in urban locations and reduced demand for Food on the Move.
Groceries Online sales increased by 102.2 per cent, predominantly driven by an increase in the number of orders. This increase in capacity has enabled us to serve and protect the most vulnerable in society and provide our customers with a more convenient shopping experience.
Retail like-for-like sales performance 28 weeks to 28 weeks to 19 September 21 September 2020 2019 Like-for-like sales (exc. fuel) 6.9% (1.0)% Like-for-like sales (inc. fuel) (1.6)% (0.7)% ----------------------------------------- ------------- -------------
Retail like-for-like ('LFL') sales, excluding fuel, increased by 6.9 per cent (HY 2019/20: 1.0 per cent decrease).
583 Argos stores were closed on Tuesday 24(th) March 2020 as a result of COVID-19 lockdown restrictions prohibiting the opening of non-essential retail stores. This included 570 standalone stores within the UK and Republic of Ireland ('ROI'); seven Argos in Sainsbury's stores and six Argos in Homebase stores. 38 ROI stores were reopened in May whilst the other stores were opened in phases between June and September. 137 reopened as part of phase one in June and July; 115 reopened as part of phase two in late July and 131 opened as part of phase three in September. As at 19 September 2020, 14 stores have been permanently closed and 148 stores, including 142 standalone stores and 6 Argos in Homebase stores, remain closed. A decision was made at the end of the half as announced as part of the Restructuring Programme (refer to Strategy Update on page 1), to permanently close these 148 stores. Of these 148 stores, 28 stores had previously been identified for closure in future periods as part of the programme announce at the Capital Markets Day on 25th September 2019. These closures have now been accelerated. The closure of the 120 additional stores has been announced today.
The impact on sales of stores which were temporarily closed due to COVID-19 have been included within LFL sales. Only permanently closed sites and those temporarily closed for non COVID-19 related reasons are treated as non LFL. The 148 stores which remained closed as of 19 September 2020, and which will now not reopen, will be treated as permanently closed from H2 for the purpose of like-for-like calculations.
Space
In the first half of 2020/21, Sainsbury's opened five new Convenience stores and closed two. During the period Argos opened four new stores in Sainsbury's and closed 14 standalone Argos stores. The number of Argos collection points in Sainsbury's stores increased from 281 to 308. In total Argos had 872 stores and 308 collection points at the end of the period. Habitat had 16 stores, of which 11 are in Sainsbury's.
As at 19 September 2020, closed stores due to COVID-19 include 11 Sainsbury's Convenience stores; 142 standalone Argos stores and six Argos in Homebase stores. A decision was made at the end of the half, as announced as part of the Restructuring Programme, to not reopen the 142 standalone Argos stores and six Argos in Homebase stores.
Store numbers and retailing space As at New stores Disposals / Extensions / As at closures(1,2) refurbishments / downsizes 7 March 19 September 2020 2020 -------------------------- -------- ----------- ------------------------- ------------------------- ------------- Supermarkets 608 - - - 608 Supermarkets area '000 sq. ft. 21,167 - - (1) 21,166 Convenience 807 5 (2) - 810 Convenience area '000 sq. ft. 1,898 14 (5) 6 1,913 Sainsbury's total store numbers 1,415 5 (2) - 1,418 -------------------------- -------- ----------- ------------------------- ------------------------- ------------- Argos stores 570 - (14) - 556 Argos stores in Sainsbury's 306 4 - - 310 Argos in Homebase 6 - - - 6 Argos total store numbers 882 4 (14) - 872 Argos collection points 281 31 (4) - 308 Habitat 16 - - - 16 -------------------------- -------- ----------- ------------------------- ------------------------- ------------- 1 Disposals/closures exclude those stores temporarily closed during the half.
2 Disposals/closures exclude the 148 Argos stores, to be closed permanently, following the decision made at the end of the half as part of the Restructuring Programme.
Subject to further disruption from COVID-19, in this financial year, Sainsbury's expects to open two supermarkets and 15-20 new convenience stores and to close around 11 supermarkets and around 16 convenience stores.
In FY 2020/21, Argos expects to open 30-35 stores in Sainsbury's, and close around 170 Argos standalone stores, of which 142 were already closed as at 19 September 2020.
The standalone Argos store estate will reduce to around 100 stores by March 2024, while we expect to open up to 150 new Argos stores in Sainsbury's supermarkets and 150-200 collection points.
Retail underlying operating profit
Retail underlying operating profit increased by 27 per cent to GBP555 million (HY 2019/20: GBP437 million). Retail underlying operating margin increased by 82 basis points year-on-year to 3.77 per cent (HY 2019/20: 2.95 per cent).
We invested heavily in our estate to ensure our customers and colleagues were able to operate safely under the challenging circumstances presented by the pandemic. We implemented protective measures in store such as checkout screens, personal protective equipment and increased cleaning. We supported our colleagues through absence caused by COVID-19 and saw an overall increase in labour hours as a result of social distancing, marshalling and the increase in online demand. We also incurred additional costs due to the pandemic within our Groceries Online channel from lower picking speeds as a result of social distancing measures and the reintroduction of bags as a COVID-19 precaution. We made a Thank You payment to our store colleagues in recognition of their efforts helping feed the nation, despite the challenging backdrop of the pandemic. We benefited from Rates Relief during the period, partially offsetting COVID-19 related costs.
We experienced higher operating cost inflation during the half but were able to more than offset this through savings. This was partly driven by improvements to our central operating model, which delivered efficiencies within a number of areas, including Logistics and Distribution. Changes to our store estate continue to bring our businesses together, lowering costs and providing a better integrated customer offer. We also achieved in Store efficiencies through initiatives such as Smart Shop and the Stock Replenishment App for colleagues. These investments in technology provide a more convenient shopping experience for our customers whilst simultaneously lowering our cost to serve. Fuel operating profit declined year-on-year, driven by lower volumes following reduced travel as a result of COVID-19 measures.
Retail underlying operating profit 28 weeks to 28 weeks to Change at 19 September 21 September constant fuel 2020 2019 Change prices Retail underlying operating profit (GBPm)(1) 555 437 27.0% Retail underlying operating margin (%)(2) 3.77 2.95 82bps 78bps Retail underlying EBITDAR (GBPm)(3) 1,194 1,067 11.9% Retail underlying EBITDAR margin (%)(4) 8.11 7.20 91bps 82bps ---------------------------------------------- ------------- ------------- ------- --------------
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 net rental expense of GBP4 million and underlying depreciation and amortisation of GBP635 million.
4 Retail underlying EBITDAR divided by underlying retail sales excluding VAT.
In 2020/21, Sainsbury's expects a depreciation and amortisation charge of around GBP1.2 billion, including around GBP500 million right of use asset depreciation.
Financial Services
Financial Services results 6 months to 31 Aug 2020 2020 2019 Change -------------------------------------------- Underlying revenue (GBPm) 219 289 (24)% Interest and fees payable (GBPm) (54) (62) (13)% Total income (GBPm) 165 227 (27)% Underlying operating (loss)/profit (GBPm) (55) 20 N/A -------------------------------------------- ------ ------ -------- Cost:income ratio (%) 77 70 700bps Active customers (m) - Bank 2.0 2.1 (5)% Active customers (m) - AFS 2.3 2.2 5% Net interest margin (%)(1) 3.1 3.5 (40)bps Bad debt as a percentage of lending (%)(2) 2.7 1.3 140bps Tier 1 capital ratio (%)(3) 14.9 13.7 120bps Total capital ratio (%)(4) 17.8 16.7 110bps Customer lending (GBPbn)(5) 6.2 7.4 (16)% Customer deposits (GBPbn)(5) (5.4) (6.3) (14)% -------------------------------------------- ------ ------ -------- 1 Net interest receivable divided by average interest-bearing assets. 2 Bad debt expense divided by average net lending. 3 Common equity Tier 1 capital divided by risk-weighted assets. 4 Total capital divided by risk-weighted assets.
5 Amounts due from customers at the Balance Sheet date in respect of loans, mortgages, credit cards and store cards net of provisions. The prior year comparative is as at the Year End balance sheet date.
Financial Services underlying operating loss of GBP55 million reflects the changed economic environment driven by COVID-19. We have seen significantly reduced demand across consumer credit, and less activity in our fee based products, particularly Travel Money and ATMs. We have also made a significant provision in anticipation of future credit losses, largely reflective of predictions for unemployment, partially offset by management actions on funding and costs.
Financial Services total income of GBP165 million has declined year-on-year (HY 2019/20: GBP227 million). The fall in interest income reflects a significant contraction in balances due to lower consumer demand and a tightening of credit appetite. Fee income has dropped markedly due to the closure of Travel Money Bureaux, and a decline in ATM income due to lower cash usage, particularly during lockdown.
The Financial Services cost:income ratio increased 700 basis points to 77 per cent (HY 2019/20: 70 per cent) and is reflective of the material drop in income in the half. However, we have also materially reduced costs, with cost savings being delivered through management actions including reducing FTE; digitising and improving customer journeys; transitioning credit card customers to paperless; efficiencies reducing resource required in call centres and reduced fraud costs due to enhanced fraud detection controls.
Net interest margin decreased by 40 basis points year-on-year to 3.1 per cent (HY 2019/20: 3.5 per cent) driven by a combination of some changes in customer behaviour, particularly in terms of spend and retention, and the reduction in base rate (with the associated impact on our interest rate swap portfolio). We have significantly reduced our savings rates which should recover some of the fall in the second half.
Bad debt expense as a percentage of lending increased by 1.4 per cent to 2.7 per cent (HY 2019/20: 1.3 per cent), mainly to account for the expected unemployment increases of COVID-19.
The number of Bank active customers reduced by five per cent year-on-year to 2.0 million driven by lower acquisition of new business in the half, particularly on Cards and Loans, whilst Argos Financial Services customers are up five per cent to 2.3 million driven by more customers taking out an AFS store card following improvements made to the customer online journey.
The Bank offered payment holidays across all of its lending products to support customers who were impacted by COVID-19. 61,000 payment holidays were granted, 84 per cent of which have matured and have returned to normal payment schedules following the initial 3 months. A small element requested a further 3 month extension.
The capital position is strong with the CET 1 capital ratio increasing by 120 basis points since August 2019 to 14.9 per cent (HY 2019/20: 13.7 per cent) with the capital released as a result of the contraction in balances more than offsetting the loss. Customer lending decreased by 16 per cent to GBP6.2 billion, driven by management actions to tighten credit and a decline in demand for loans, credit cards and store cards. Customer deposits decreased by 14 per cent to GBP5.4 billion, reflecting the reduced funding required due to the decline in lending.
We have made good progress with our Financial Services transformation plan and streamlined our product offering. We still expect to double profit and returns in our Financial Services business within 5 years, despite the challenges of the current environment. The Group's exposure to Financial Services has reduced in the half driven by lower demand and customers deleveraging. The level of credit provisions held against lending balances increased by 1.2% to 5.0%. This largely reflects an additional overlay of GBP43 million we booked in relation to COVID-19, reflecting our best estimate of future losses. We expect Financial Services will return to profit in the second half. Given our very strong capital and liquidity positions, together with effective cost management we remain confident that Financial Services will not require capital injections from the Group.
Underlying net finance costs
Underlying net finance costs reduced by nine per cent to GBP199 million (HY 2019/20: GBP219 million). These costs include GBP37 million of net non-lease interest (HY 2019/20: GBP45 million). The reduction of net non-lease interest is driven by the repayment of the GBP450 million Convertible Bond in November 2019 and redemption of the GBP250 million Hybrid Bond at the first call date in July 2020. Net Interest costs on lease liabilities have reduced to GBP162 million (HY 2019/20: GBP174 million), mainly due to lower interest rates on new leases.
Sainsbury's expects underlying net finance costs in 2020/21 of around GBP360 million, including around GBP300 million lease interest in 2020/21.
Items excluded from underlying results
In order to provide shareholders with insight into the underlying performance of the business, items recognised in reported profit or loss before tax which, by virtue of their size and or nature, do not reflect the Group's underlying performance are excluded from the Group's underlying results and shown in the table below.
Items excluded from underlying results 28 weeks to 28 weeks to 19 September 21 September 2020 2019 GBPm GBPm ----------------------------------------------- ------------- ------------- Restructuring programmes (259) (131) Impairment charges (214) (97) Financial Services transition (7) (15) Restructuring, impairment and integration (480) (243) ATM business rates reimbursement 42 - IAS 19 pension interest and expenses 8 11 Property, finance and acquisition adjustments (8) 3 Items excluded from underlying results (438) (229) ----------------------------------------------- ------------- -------------
Restructuring programmes:
- During the financial period, it has been agreed to accelerate the structural integration of Sainsbury's and Argos and further simplify the Argos business model. As a result, around 420 Argos stores will be closed by March 2024, leaving the total number of UK standalone stores at around 100. To support this, a total of 32 Local Fulfilment Centres will be built across the UK that will operate the Group's fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country.
- In addition, the Group is creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury's and Argos. As a result of this, a number of existing depots are closing.
- Further opportunities to rationalise the Group's supermarkets and convenience estate have been identified, building on last year's property strategy programme that was announced at the Capital Markets Day in September 2019. At that time it was communicated that 10 to 15 supermarkets and 30 to 40 convenience stores would close. It is now expected that 15 to 20 supermarkets and 50 to 60 convenience stores will close or be sold.
- Costs totalling GBP259 million have been recognised in the period in relation to the above and comprise impairment charges, property closure costs and redundancy costs.
Impairment charges:
- The Group has concluded that the combination of COVID-19 and the accelerated integration programme is an impairment indicator during the period.
- Additional impairment charges of GBP214 million have therefore been recognised over and above those recognised as part of the strategy review.
- Of this, GBP105 million has been recognised in relation to assets within the Financial Services Business, and GBP109 million in relation to Retail assets.
We estimate that we will incur one off costs from infrastructure, operating model and structure changes of GBP900 million to GBP1 billion in the period to March 2024 (approximately GBP300 million cash). We expect total non-underlying costs of around GBP625 million to be booked in the current financial year (around GBP100 million cash).
Other non-underlying items:
- Financial Services transition costs of GBP7 million (HY 2019/20: GBP15 million) were predominantly the previously announced costs incurred in transitioning to a new banking platform and write-downs of ATMs.
- ATM income of GBP42 million (HY 2019/20: GBPnil) arises following the Supreme Court's ruling that ATMs outside stores should not be assessed for additional business rates on top of normal store rates.
- IAS 19 Pension income of GBP8 million (HY 2019/20: GBP11 million) comprises pension finance income of GBP11 million and scheme expenses of GBP3 million.
- Property, Finance and Acquisition adjustments result in a cost of GBP8 million (HY 2019/20: GBP3 million income)
Taxation
The tax charge for the interim period was GBP42 million (2019/20 Interim tax charge: GBP47 million).
Despite the interim loss before tax, a tax charge rather than a tax credit was recognised in the first half of the year. This was mainly due to the derecognition of capital losses for deferred tax purposes reflecting a legislative change in the half resulting in GBP178 million gross costs, non-deductible one-off gross costs of GBP54 million and prior year adjustments with a tax effect of GBP12 million.
The resulting effective tax rate (ETR) in the 2020/21 interim accounts of negative 30.7 per cent (2019/20 interim: 522.2 per cent) differs significantly to the full year forecast ETR (297.9 per cent) because of the movement in profit (from a loss at interim) as well as the fact that the capital loss derecognition and most of the non-deductible one-off costs are recognised in full in first half of the year and thus reflected in the interim ETR.
The underlying tax rate (UTR) for the interim period was 27.6 per cent (2019/20 interim: 26.5 per cent). Sainsbury's expects an underlying tax rate for FY 2020/21 of around 26 per cent. As in prior years the most significant factor in the UTR being higher than the statutory rate (19.0 per cent) relates to adjustments in respect of non-qualifying property (4.9 per cent).
(Loss)/Earnings per share
Underlying basic earnings per share increased to 10.1 pence (HY 2019/20: 7.9 pence) driven by an increase in underlying earnings. Basic earnings per share decreased to negative 8.3 pence (HY 2019/20: negative 2.2 pence).
Dividends
In April the Board chose, due to limited visibility at the time on the potential impact of COVID-19 on the business, to defer dividend payment decisions and did not pay a final dividend for the 2019/20 financial year. In the light of improved visibility, strong trading and a strong balance sheet position, the Board has chosen to pay a special dividend in lieu of a final dividend for the 2019/20 financial year. The dividend of 7.3p is aligned to policy of 1.9x full year dividend cover by underlying earnings. This will be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.
The Board has approved an interim dividend of 3.2 pence per share (21 September 2019: 3.3 pence per share), in line with our policy of paying 30 per cent of prior full year dividend. This will be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.
Net debt and retail cash flows
As at 19 September 2020, net debt was GBP6,168 million (21 September 2019: GBP6,778 million), a decrease of GBP610 million (2019/20: GBP367 million reduction). Excluding the impact of lease liabilities on net debt, Sainsbury's reduced non lease net debt by GBP912 million in the half (21 September 2019: GBP514 million in the half). We remains on track to meet our target of at least GBP750 million net debt reduction in the three years to March 2022 and generate average retail free cash flow of GBP500 million per year over the following three years.
Group net debt includes the impact of capital injections into Sainsbury's Bank, but excludes Financial Services' own net debt balances. Financial Services balances are excluded because they are part of the daily operating cycle of the Bank rather than for financing purposes. Net debt includes lease liabilities under IFRS 16 of GBP5,901 million (HY 2019/20: GBP5,770 million) and the perpetual securities of GBP248 million (HY 2019/20: GBP496 million). Lease liabilities are analysed in more detail in note 11. Although the perpetual securities are accounted for as equity in the financial statements, they have similarities to debt instruments due to the coupons, and are therefore included by management when assessing Group borrowings.
The presentation of the summary cash flow statement has been updated to provide useful additional information of the build from Retail Underlying Operating Profit to the movement in net debt. Working capital movements also now exclude any movements due to non-underlying items. Additional reconciliations are included on pages 65 to 69 to bridge to statutory measures, with prior year comparatives adjusted accordingly.
Summary cash flow statement (1) Retail Retail Retail 28 weeks to 28 weeks to 52 weeks to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm Retail underlying operating profit 555 437 938 -------------------------------------------------------------------------- ------------- ------------- ------------ Adjustments for: Retail underlying depreciation and amortisation 635 636 1,197 Share based payments and other 15 17 34 Retail exceptional operating cash flows (excluding pensions) 3 (18) (49) Adjusted retail operating cash flow before changes in working capital(2,3) 1,208 1,072 2,120
-------------------------------------------------------------------------- ------------- ------------- ------------ Decrease/(increase) in working capital(3) 571 251 (97) Net interest paid(3) (213) (226) (405) Pension cash contributions (60) (48) (52) Corporation tax paid (88) (8) (113) ------------- ------------- ------------ Net cash generated from operating activities 1,418 1,041 1,453 -------------------------------------------------------------------------- ------------- ------------- ------------ Cash capital expenditure before strategic capital (290) (248) (599) Repayments of obligations under leases (223) (230) (419) Initial direct costs on right-of-use assets (3) (2) (13) Proceeds from disposal of property, plant and equipment 19 54 81 Bank capital injections - (35) (35) Dividends and distributions received(3) 22 118 143 Retail free cash flow 943 698 611 -------------------------------------------------------------------------- ------------- ------------- ------------ Dividends paid on ordinary shares - (174) (247) Repayment of borrowings(3) (519) (160) (379) Other(3) (26) 1 (3) Net increase/(decrease) in cash and cash equivalents 398 365 (18) -------------------------------------------------------------------------- ------------- ------------- ------------ Decrease in Debt 742 390 798 Other non-cash and net interest movements(4) (361) (187) (381) Movement in net debt 779 568 399 -------------------------------------------------------------------------- ------------- ------------- ------------ Opening net debt (6,947) (7,346) (7,346) -------------------------------------------------------------------------- ------------- ------------- ------------ Closing net debt (6,168) (6,778) (6,947) -------------------------------------------------------------------------- ------------- ------------- ------------ of which Lease Liabilities (5,901) (5,770) (5,768) Net Debt Excluding Lease Liabilities (267) (1,008) (1,179) -------------------------------------------------------------------------- ------------- ------------- ------------ 1 See note 4b for a reconciliation between Retail and Group cash flow. 2 Excludes working capital and pension contributions. 3 Refer to the Alternative Performance Measures on pages 67 to 68 for reconciliation.
4 Other non-cash includes new leases and lease modifications and fair value movements on derivatives used for hedging long term borrowings.
Adjusted retail operating cash flow before changes in working capital was GBP1,208 million (HY 2019/20: GBP1,072 million) and working capital decreased by GBP571 million since the year end. Working capital typically decreases between year end and half year, driven by seasonality and the phasing of payables. This impact is more pronounced this year as a result of the strong trading performance driving lower inventories and increased payables balances. In addition, challenges sourcing stock on certain product ranges have further reduced inventory, notably in our non-food business. This is partially offset by the impact of lower fuel sales. We expect most of the working capital benefit to reverse once trading and supply stabilises following the pandemic.
Cash capital expenditure was GBP290 million (HY 2019/20: GBP248 million). There were no capital injections into the Bank (HY 2019/20: GBP35 million). Dividends and distributions received declined to GBP22 million (HY 2019/20: GBP118 million), reflecting the sale of 12 British Land joint venture properties in the prior year.
Corporation tax of GBP88 million was paid (HY 2019/20: GBP8 million). This has increased with the change to the quarterly payment regime, whereby in this half year Sainsbury's has had to pay the first two quarterly instalments for 2020/21 based on early estimates for taxable profit for the year, as well as finalising quarterly payments for 2019/20.
Retail free cash flow increased by GBP245 million year-on-year to GBP943 million (HY 2019/20: GBP698 million).
As previously announced, Sainsbury's deferred the decision on the final dividend payment for 2019/20, and accordingly there was no dividend payment in the half (HY 2019/20: GBP174 million).
As at 19 September 2020 Sainsbury's has drawn debt facilities of GBP1.08 billion including the Perpetual securities (HY 2019/20 GBP1.82 billion). The Group holds undrawn committed credit facilities of GBP1.45 billion and undrawn uncommitted facilities of GBP195 million.
Compared to the 2018/19 year end net debt excluding lease liabilities of GBP1,522 million, Sainsbury's expects a reduction of at least GBP750 million over a three year period and to generate average retail free cash flow of GBP500 million per year over the following three years.
Capital expenditure
Core retail cash capital expenditure was GBP290 million (HY 2019/20: GBP248 million).
Sainsbury's expects core retail cash capital expenditure (excluding Financial Services) to be around GBP600 million in the 2020/21 financial year and for this to increase to around GBP700 million - GBP750 million in the 3 years to March 2024, reflecting investment in high-returning supply chain, logistics and infrastructure projects.
Financial ratios
Key financial ratios 52 weeks to 52 weeks to 52 weeks to 19 September 2020 21 September 2019 7 March 2020 Return on capital employed (%)(1) 7.9 7.1 7.4 Net debt to EBITDAR(2) 2.7 times 3.1 times 3.2 times Fixed charge cover(3) 2.8 times 2.6 times 2.7 times ----------------------------------- ------------------ ------------------ ------------
1 ROCE: Return is defined as a 52 week rolling underlying profit before interest and tax. Capital employed is defined as group net assets excluding the pension deficit/surplus and excluding net debt. The average is calculated on a 14 point basis.
2 Net debt of GBP6,168 million includes lease obligations under IFRS 16 and perpetual securities treated as debt, divided by Group underlying EBITDAR of GBP2,253 million, calculated for a 52-week period to 19 September 2020.
3 Group underlying EBITDAR divided by rent (both capital and interest) and net underlying finance costs, where interest on perpetual securities is treated as an underlying finance cost.
Property value
As at 19 September 2020, Sainsbury's estimated market value of properties was GBP9.9 billion (7 March 2020: GBP9.9 billion). This includes the Group's beneficial interest in a property investment pool.
Defined benefit pensions
The Pension Scheme is valued on different bases for different purposes. For the corporate annual accounts, the value of the retirement benefit is calculated under IAS19 while the funding of the Scheme is determined by the Trustee's triennial valuation.
At 19 September 2020, the net defined benefit surplus under IAS19 for the Group was GBP1,012 million (excluding deferred tax). The GBP107 million movement from 7 March 2020 was driven by an increase in the scheme liabilities due to changes in the financial assumptions, offset by favourable movements on plan assets, which are held at fair value. The discount rate has remained constant since year-end at 1.6 per cent.
As disclosed in April, the Scheme was subject to a triennial actuarial valuation, as at 30 September 2018, which was completed last year. As part of the agreement reached with the Trustee, we established a new asset backed contribution ('ABC') structure on 17 July 2019, replacing the existing property partnership.
The actuarial deficit reduced to GBP538 million, from GBP1,055 million in 2015.
Under the new ABC, properties with a value of GBP1.35 billion were transferred into a newly formed property holding company, a wholly owned subsidiary of the Group, and leased to other Group entities. Rental receipts facilitate payments of interest and capital on loan notes issued to a Scottish Limited Partnership, in which the Scheme holds an interest.
The Scheme's interest in the Partnership entitles it to annual distributions over up to 20 years. The distributions will be made through three payment streams:
1) Payments to the Sainsbury's section (approximately GBP15 million per year) 2) Payments to the Argos section (approximately GBP20 million per year)
3) Switching payment stream, paid to either the Sainsbury's section or Argos section (initially approximately GBP23 million per year, increasing to GBP33 million by 2038)
The payments to the Sainsbury's and Argos sections (streams 1 and 2) stop in 2030, or when the relevant section reaches its funding target if earlier.
The switching stream is initially paid to the Sainsbury's section. Once that funding target is achieved, payments switch to the Argos section. Payments continue until 2038 or until both sections have reached their funding targets if earlier.
The level of property in the Propco reduces as the Scheme reaches the funding targets.
Cash contributions and ABC distributions of GBP60 million have been paid in H1, with a further GBP42 million agreed in H2. Cash contributions and ABC distributions for 2021/22 are expected to be GBP76 million.
Retirement benefit obligations Sainsbury's Argos Group Group as at as at as at as at 19 September 19 September 19 September 7 March 2020 2020 2020 2020 GBPm GBPm GBPm GBPm Present value of funded obligations (9,043) (1,457) (10,500) (10,335) Fair value of plan assets 10,072 1,478 11,550 11,491 Pension surplus/(deficit) 1,029 21 1,050 1,156 Present value of unfunded obligations (21) (17) (38) (37) --------------------------------------- ------------- ------------- ------------- --------- Retirement benefit obligations 1,008 4 1,012 1,119 Deferred income tax (liability)/asset (191) (1) (192) (214) --------------------------------------- ------------- ------------- ------------- --------- Net retirement benefit obligations 817 3 820 905 --------------------------------------- ------------- ------------- ------------- ---------
Group income statement (unaudited)
for the 28 weeks to 19 September 2020
28 weeks to 19 September 28 weeks to 21 September 2020 2019 ------------------ ----- ------------------------------------------- ------------------------------------------- Before Non-underlying Total Before Non-underlying Total non-underlying items non-underlying items items items Note GBPm GBPm GBPm GBPm GBPm GBPm ------------------ ----- --------------- --------------- --------- --------------- --------------- --------- Revenue 4a 14,934 - 14,934 15,097 - 15,097 Cost of sales (13,644) (298) (13,942) (13,970) (177) (14,147) ------------------ ----- --------------- --------------- --------- --------------- --------------- --------- Gross profit/(loss) 1,290 (298) 992 1,127 (177) 950 Administrative expenses (801) (154) (955) (694) (86) (780) Other income 11 (5) 6 24 44 68 ------------------ ----- --------------- --------------- --------- --------------- --------------- --------- Operating profit/(loss) 500 (457) 43 457 (219) 238 Finance income 6 2 14 16 2 16 18 Finance costs 6 (201) 5 (196) (221) 4 (217) Share of post-tax loss from joint ventures and associates - - - - (30) (30) ------------------ ----- --------------- --------------- --------- --------------- --------------- --------- Profit/(loss) before tax 301 (438) (137) 238 (229) 9 Income tax (expense)/credit 7 (83) 41 (42) (63) 16 (47) ------------------ ----- --------------- --------------- --------- --------------- --------------- --------- Profit/(loss) for the financial period 218 (397) (179) 175 (213) (38) ------------------------- --------------- --------------- --------- --------------- --------------- --------- Loss per share 8 pence pence ------------------ ----- -------------------------------- -------------------------------- Basic loss (8.3) (2.2) Diluted loss (8.3) (2.2) ------------------ ----- -------------------------------- --------- -------------------------------- --------- 52 weeks to 7 March 2020 ----------------------------- ----- -------------------------------------------------- Before non-underlying Non-underlying Total items items Note GBPm GBPm GBPm ----------------------------- ----- ---------------------- --------------- --------- Revenue 4a 28,993 - 28,993 Cost of sales (26,699) (278) (26,977) ----------------------------- ----- ---------------------- --------------- --------- Gross profit/(loss) 2,294 (278) 2,016 Administrative expenses (1,345) (114) (1,459) Other income 37 56 93 ----------------------------- ----- ---------------------- --------------- --------- Operating profit/(loss) 986 (336) 650 Finance income 6 4 28 32 Finance costs 6 (404) 6 (398) Share of post-tax loss from joint ventures and associates - (29) (29) ----------------------------- ----- ---------------------- --------------- --------- Profit/(loss) before tax 586 (331) 255 Income tax (expense)/credit 7 (149) 46 (103) ----------------------------- ----- ---------------------- --------------- --------- Profit/(loss) for the financial period 437 (285) 152 ------------------------------------ ---------------------- --------------- --------- Earnings per share 8 pence ----------------------------- ----- --------------------------------------- Basic earnings 5.8 Diluted earnings 5.8 ----------------------------- ----- --------------------------------------- ---------
The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.
Group statement of comprehensive income (unaudited)
for the 28 weeks to 19 September 2020
52 28 weeks 28 weeks weeks to 19 to 21 to September September 7 March 2020 2019 2020 ----- ----------- ----------- --------- Note GBPm GBPm GBPm ----- ----------- ----------- --------- (Loss)/profit for the financial year (179) (38) 152 --------------------------------------------------- ----- ----------- ----------- --------- Items that will not be reclassified subsequently to the income statement ----- ----------- ----------- --------- Remeasurement on defined benefit pension schemes 18 (175) 364 89 ----- Movements on financial assets at fair value through other comprehensive income 28 - 17 Current tax relating to items not reclassified 23 - - Deferred tax relating to items not reclassified (24) (62) (18) (148) 302 88 --------------------------------------------------- ----- ----------- ----------- --------- Items that may be reclassified subsequently to the income statement ----- Currency translation differences - 3 - ----- Movements on financial assets at fair value through other comprehensive income 1 (12) 4 ----- Cash flow hedges effective portion of fair value movements 6 58 (1) ----- Items reclassified from cash flow hedge reserve - (30) (19) ----- Deferred tax on items that may be reclassified (2) (2) 3 ----- ----------- --------- 5 17 (13) ----- Total other comprehensive (loss)/income for the year (net of tax) (143) 319 75 Total comprehensive (loss)/income for the year (322) 281 227 --------------------------------------------------- ----- ----------- ----------- ---------
The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.
Group balance sheet (unaudited)
at 19 September 2020
19 September 21 September 7 March 2020 2019 2020 Note GBPm GBPm GBPm ----------------------------------------------- ----- ------------- ------------- --------- Non-current assets Property, plant and equipment 10 8,721 8,943 8,911 Right of use assets 11 4,796 4,878 4,826 Intangible assets 12 896 1,008 1,012 Investments in joint ventures and associates 5 56 9 Financial assets at fair value through other comprehensive income 14a 863 838 972 Trade and other receivables 52 50 43 Amounts due from Financial Services customers 14a 2,812 3,593 3,453 Derivative financial assets 14c 4 8 6 Net retirement benefit surplus 18 1,012 1,382 1,119 ----------------------------------------------- ----- ------------- ------------- --------- 19,161 20,756 20,351 ----------------------------------------------- ----- ------------- ------------- --------- Current assets Inventories 1,635 1,953 1,732 Trade and other receivables 748 693 811 Amounts due from Financial Services customers 14a 3,380 3,808 3,951 Financial assets at fair value through other comprehensive income 14a 61 182 82 Derivative financial assets 14c 28 41 12 Cash and cash equivalents 17 1,453 1,468 994 ----------------------------------------------- ----- ------------- --------- 7,305 8,145 7,582 Assets held for sale 2 5 4 ----------------------------------------------- ----- ------------- --------- 7,307 8,150 7,586 ----------------------------------------------- ----- ------------- ------------- --------- Total assets 26,468 28,906 27,937 ----------------------------------------------- ----- ------------- ------------- --------- Current liabilities Trade and other payables (4,702) (4,710) (4,275) Amounts due to Financial Services customers and other deposits 14a (5,906) (6,573) (6,890) Borrowings 16 (257) (495) (48) Lease liabilities 11 (538) (536) (510) Derivative financial liabilities 14c (38) (12) (53) Taxes payable (29) (185) (163) Provisions (136) (127) (108) ----------------------------------------------- ----- ------------- --------- (11,606) (12,638) (12,047) ----------------------------------------------- ----- ------------- ------------- --------- Net current liabilities (4,299) (4,488) (4,461) ----------------------------------------------- ----- ------------- ------------- --------- Non-current liabilities Other payables (1) (69) (11) Amounts due to Financial Services customers and other deposits 14a (904) (1,594) (1,204) Borrowings 16 (772) (1,023) (1,248) Lease liabilities 11 (5,369) (5,240) (5,264) Derivative financial liabilities 14c (60) (41) (36) Deferred income tax liability (328) (291) (265) Provisions (241) (104) (89) (7,675) (8,362) (8,117) ----------------------------------------------- ----- ------------- ------------- --------- Total liabilities (19,281) (21,000) (20,164) ----------------------------------------------- ----- ------------- ------------- --------- Net assets 7,187 7,906 7,773 ----------------------------------------------- ----- ------------- ------------- --------- Equity Called up share capital 635 632 634 Share premium 1,163 1,151 1,159 Merger reserve 568 568 568 Capital redemption reserve 680 680 680 Other reserves 194 184 168 Retained earnings 3,699 4,195 4,068 ----------------------------------------------- ----- ------------- ------------- --------- Total equity before perpetual securities 6,939 7,410 7,277 Perpetual capital securities - 248 248 Perpetual convertible bonds 248 248 248
----------------------------------------------- ----- ------------- ------------- --------- Total equity 7,187 7,906 7,773 ----------------------------------------------- ----- ------------- ------------- ---------
The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.
Group cash flow statement (unaudited)
for the 28 weeks to 19 September 2020
28 weeks 28 weeks 52 weeks to to to 19 September 21 September 7 March 2020 2019 2020 Note GBPm GBPm GBPm --------------------------------------------------- --------- ------------- ------------- --------- Cash flows from operating activities (Loss)/profit before tax (137) 9 255 Net finance costs 180 199 366 Share of post-tax loss from joint ventures - 30 29 Operating profit 43 238 650 Adjustments for: Depreciation expense 10,11 596 597 1,127 Amortisation expense 12 65 70 129 Net impairment loss on property, plant and equipment, right of use assets and intangible assets 10,11,12 292 177 263 Non-cash adjustments arising from acquisitions (1) (1) (2) Financial Services impairment losses on loans and advances 39 47 80 Loss/(profit) on sale of properties and early termination of leases 7 (44) (56) Share-based payments expense 16 19 37 Non-cash defined benefit scheme expenses 18 3 4 9 Cash contributions to benefit schemes 18 (60) (48) (52) Operating cash flows before changes in working capital 1,000 1,059 2,185 Changes in working capital Decrease/(increase) in inventories 97 (24) 197 Decrease/(increase) in financial assets at fair value through other comprehensive income 159 (176) (177) Decrease/(increase) in trade and other receivables 58 (69) (129) Decrease/(increase) in amounts due from Financial Services customers and other deposits 1,173 (461) (499) Increase/(decrease) in trade and other payables 409 316 (195) (Decrease)/increase in amounts due to Financial Services customers and other deposits (1,284) 566 492 Increase/(decrease) in provisions and other liabilities 180 27 (8) Cash generated from operations 1,792 1,238 1,866 Interest paid 15 (193) (208) (384) Corporation tax paid (88) (6) (110) Net cash generated from operating activities 1,511 1,024 1,372 --------------------------------------------------- --------- ------------- ------------- --------- Cash flows from investing activities Purchase of property, plant and equipment (257) (213) (519) Initial direct costs on new leases (3) (2) (13) Purchase of intangible assets (44) (52) (120) Proceeds from disposal of property, plant and equipment 19 54 81 Interest received 15 - 2 2 Dividends and distributions received 22 118 143 Net cash used in investing activities (263) (93) (426) --------------------------------------------------- --------- ------------- ------------- --------- Cash flows from financing activities Proceeds from issuance of ordinary shares 4 5 15 Proceeds from borrowings 15 - 80 250 Proceeds from short term borrowings 15 660 - - Repayment of borrowings 15 (269) (230) (169) Repayment of short term borrowings 15 (660) - - Repayment upon maturity of convertible bonds - - (450) Repayment of perpetual capital securities 15 (250) - - Purchase of own shares (30) (4) (18) Repayment of capital element of lease obligations 15 (224) (231) (420) Repayment of capital element of obligations under hire purchase arrangements 15 - (10) (10) Dividends paid on ordinary shares 9 - (174) (247) Dividends paid on perpetual securities (20) (20) (23) Net cash used in financing activities (789) (584) (1,072) --------------------------------------------------- --------- ------------- ------------- --------- Net increase/(decrease) in cash and cash equivalents 459 347 (126) Opening cash and cash equivalents 994 1,120 1,120 Closing cash and cash equivalents 1,453 1,467 994 --------------------------------------------------- --------- ------------- ------------- ---------
The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.
Group statement of changes in equity (unaudited)
for the 28 weeks to 19 September 2020
Capital Total Called redemption equity up Share and before Perpetual Perpetual share premium Merger other Retained perpetual capital convertible Total capital account reserve reserves earnings securities securities bonds equity GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm At 8 March 2020 634 1,159 568 848 4,068 7,277 248 248 7,773 -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- Loss for the period - - - - (183) (183) - 4 (179) Other comprehensive income/(loss) - - - 35 (175) (140) - - (140) Tax relating to other comprehensive income/(loss) - - - (9) 6 (3) - - (3) Total comprehensive income/(loss) for the period ended 19 September 2020 - - - 26 (352) (326) - 4 (322) ---------------- -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- Transactions with owners: Distribution to holders of perpetual securities - - - - - - - (4) (4) Share-based payment - - - - 16 16 - - 16 Purchase of own shares - - - - (30) (30) - - (30) Allotted in respect of share option schemes 1 4 - - (1) 4 - - 4 Redemption of perpetual capital securities - - - - (2) (2) (248) - (250)
Tax on items charged to equity - - - - - - - - - At 19 September 2020 635 1,163 568 874 3,699 6,939 - 248 7,187 ---------------- -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- At 10 March 2019 630 1,147 568 852 4,089 7,286 248 248 7,782 -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- Loss for the period - - - - (40) (40) - 2 (38) Other comprehensive income - - - 19 364 383 - - 383 Tax relating to other comprehensive income - - - (2) (62) (64) - - (64) Total comprehensive income for the period ended 21 September 2019 - - - 17 262 279 - 2 281 ---------------- -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- Transactions with owners: Dividends paid - - - - (174) (174) - - (174) Distribution to holders of perpetual convertible bonds - - - - - - - (4) (4) Amortisation of convertible bond equity component - - - (5) 5 - - - - Share-based payment - - - - 19 19 - - 19 Purchase of own shares - - - - (4) (4) - - (4) Allotted in respect of share option schemes 2 4 - - (1) 5 - - 5 Tax on items charged to equity - - - - (1) (1) - 2 1 At 21 September 2019 632 1,151 568 864 4,195 7,410 248 248 7,906 -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- Capital Total Called redemption equity up Share and before Perpetual Perpetual share premium Merger other Retained perpetual capital convertible Total capital account reserve reserves earnings securities securities bonds equity GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm At 10 March 2019 630 1,147 568 852 4,089 7,286 248 248 7,782 -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- Profit for the period - - - - 129 129 16 7 152 Other comprehensive income - - - 1 89 90 - - 90 Tax relating to other comprehensive income - - - - (15) (15) - - (15) Total comprehensive income for the year ended 7 March 2020 - - - 1 203 204 16 7 227 ---------------- -------- -------- -------- ----------- --------- ----------- ----------- ------------ ------- Transactions with owners: Dividends paid - - - - (247) (247) - - (247) Distribution to holders of perpetual convertible bonds - - - - - - (16) (7) (23) Amortisation of convertible bond equity component - - - (5) 5 - - - - Share-based payment - - - - 37 37 - - 37 Purchase of own shares - - - - (18) (18) - - (18) Allotted in respect of share option schemes 4 12 - - (1) 15 - - 15 Tax on items charged to equity - - - - - - - - - At 7 March 2020 634 1,159 568 848 4,068 7,277 248 248 7,773 -------- -------- -------- ----------- --------- ----------- ----------- ------------ -------
The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.
Notes to the Condensed Consolidated Interim Financial Statements (unaudited)
1. General information
J Sainsbury plc is a public limited company (the 'Company') incorporated in the United Kingdom, whose shares are publicly traded on the London Stock Exchange. The Company is domiciled in the United Kingdom and its registered address is 33 Holborn, London EC1N 2HT, United Kingdom.
The Condensed Consolidated Interim Financial Statements are unaudited but have been reviewed by the auditors whose report is set out on page 64. The financial information presented herein does not amount to statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Annual Report and Financial Statements 2020 have been filed with the Registrar of Companies. The Independent Auditors' report on the Annual Report and Financial Statements 2020 was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.
The financial period represents the 28 weeks to 19 September 2020 (comparative financial period 28 weeks to 21 September 2019; prior financial year 52 weeks to 7 March 2020). The financial information comprises the results of the Company and its subsidiaries (the 'Group') and the Group's interests in joint ventures and associates.
The Group's principal activities are Food, General Merchandise & Clothing Retailing and Financial Services.
2. Basis of preparation and accounting policies 2.1 Basis of preparation
The Interim Results, comprising the Condensed Consolidated Interim Financial Statements and the Interim Management Report, have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting' as adopted by the European Union.
The financial information contained in the Interim Results is presented in sterling, rounded to the nearest million (GBPm) unless otherwise stated.
The financial information contained in the Condensed Consolidated Interim Financial Statements should be read in conjunction with the Annual Report and Financial Statements 2020, which were prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union.
Sainsbury's Bank plc and its subsidiaries have been consolidated for the six months to 31 August 2020 (21 September 2019: six months to 31 August 2019; 7 March 2020: twelve months to 29 February 2020). Adjustments have been made for the effects of significant transactions or events that occurred between this date and the Group's balance sheet date.
2.2 Going concern
The Directors are satisfied that the Group has sufficient resources to continue in operation for a period of at least 12 months from the date of approval. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. The assessment period for the purposes of considering going concern is the 16 months to 5 March 2022.
In assessing the Group's ability to continue as a going concern, the Directors have considered the Group's most recent corporate planning process. This includes an annual review which considers profitability, the Group's cash flows, committed funding and liquidity positions and forecasted future funding requirements over three years, with a further two years of indicative movements. The most recent corporate plan was prepared in October 2020 and was reviewed by the Operating Board and ultimately by the PLC Board with involvement throughout from both the Chief Financial Officer and Chief Executive.
The Group manages its financing by diversifying funding sources, structuring core borrowings with long-term maturities and maintaining sufficient levels of standby liquidity via the Revolving Credit Facility. This seeks to minimise liquidity risk by maintaining a suitable level of undrawn additional funding capacity.
In September 2019 the maturity of part of the GBP1,450 million Revolving Credit Facility was extended by one year. The Revolving Credit Facility is split into two Facilities, a GBP300 million Facility (A) and a GBP1,150 million Facility (B). Facility A has a final maturity of April 2025 and Facility B has a final maturity of October 2024. As at 19 September 2020, the Revolving Credit Facility was undrawn. In addition, the Group maintains uncommitted facilities of GBP195m to provide additional capacity to fund short term working capital requirements. The uncommitted facilities were undrawn at 19 September 2020.
In assessing going concern, scenarios in relation to the Group's principal risks have been considered in line with those disclosed at year-end by overlaying them into the corporate plan and assessing the impact on cash flows, net debt and funding headroom.
COVID-19 continues to be an area of uncertainty, developing rapidly in 2020 with significant impacts on customer behaviour, and a second national lockdown now being implemented in the UK. In particular, the Group is exposed to a number of areas as follows:
-- Sales impact from the closure of certain stores, predominantly Argos -- Changing customer behaviours during lockdown
-- Operational cost increases, such as increased labour and other in-store costs, which are partly mitigated by business rates holiday until March 2021
-- Supply chain disruptions -- Exposure to credit risk within the Financial Services business
At the year-end, the Group outlined details of the base case scenario that was used for modelling the potential impact of COVID-19. Since then, costs of around GBP290 million associated with protecting customers and colleagues from COVID-19 were partially offset by GBP230 million of business rates relief received to date. These are broadly in line with the base case, whilst sales during the first half have been stronger than the base case assumptions, particularly at Argos.
For the going concern period, the impact of COVID-19 on sales and costs continues to be uncertain. Therefore for the going concern assessment, scenarios have been modelled that apply GDP movements seen during the recession of FY2008/09 to forecast sales, however to differing extents per category, as well as increased cash outflows over and above those in the corporate plan. The scenarios are hypothetical and severe for the purpose of assessing the Group's ability to continue as a going concern.
In performing the above analysis, the Directors have made certain assumptions around the availability and effectiveness of the mitigating actions available to the Group. These include reducing any non-essential capital expenditure and operating expenditure on projects, bonuses and dividend payments.
As a consequence of the work performed, the Directors considered it appropriate to adopt the going concern basis in preparing the Condensed Consolidated Interim Financial Statements with no material uncertainties to disclose.
2.3 Accounting judgements and estimates
The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.
In preparing these Condensed Consolidated Interim Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Consolidated Financial Statements for the year ended 7 March 2020 unless otherwise stated.
In light of the ongoing COVID-19 pandemic, the Group has provided more information in relation to its consideration of the following areas of estimation uncertainty.
-- Note 3: Profit before non-underlying items -- Note 13: Impairment of non-financial assets -- Note 14: Financial instruments -- Note 18: Retirement benefit obligations
The Group has updated its assumptions over the exercising of breaks for a number of its leases. More information is included in note 11.
2.4 New standards, interpretations and amendments adopted by the Group
The Group has considered the following amendments to published standards that are effective for the Group for the financial year beginning 8 March 2020 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 References to Conceptual Framework in IFRS Standards
- Amendments to IFRS 3 'Business Combinations' on the definition of a business
- Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' on the definition of material
- Amendments to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 7 'Financial Instruments: Disclosures' on the Interest Rate Benchmark Reform
The Group has noted the exemption granted in the 'COVID-19-related rent concessions' amendment to IFRS 16 'Leases'. This exemption applies for periods commencing on or after 1 June 2020, with an option to early adopt. The Group has elected not to apply the exemption granted as the Group has not received material COVID-19-related rent concessions as a lessee.
The accounting policies have remained unchanged from those disclosed in the Annual Report for the year ended 7 March 2020.
Interest Rate Benchmark Reform
During the period, the Group has adopted the 'Interest Rate Benchmark Reform' amendments to IFRS 9, as indicated above. A hedging relationship is affected by the reform if it gives rise to uncertainties about the timing and or amount of benchmark-based cash flows of the hedged item or the hedging instrument. The amendments allow the Group to continue hedge accounting for its benchmark interest rate exposures during the period of uncertainty arising from the reform. The Group will continue to apply these amendments until the uncertainty arising from the reform is no longer present with respect to the timing and amount of the interest rate benchmark cash flows.
Details of the hedging relationships for which the Group has applied the reform amendments are provided in note 14. These relate to the utilisation of derivatives to achieve the desired mix of fixed and floating debt.
2.5 Alternative performance measures (APMs)
In the reporting of financial information, the Directors use various APMs. These APMs should be considered in addition to, and are not intended to be a substitute for IFRS measurements. As they are not defined by International Financial Reporting Standards, they may not be directly comparable with other companies who use similar measures.
Purpose of APMs
The Directors believe that these APMs assist in providing additional useful information for understanding the financial performance and health of the Group. They are also used to enhance the comparability of information between reporting periods (such as like-for-like sales and underlying profit) by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid users in understanding the Group's performance.
Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes.
Changes to APMs
The following APMs have been updated during the period:
-- Like-for-like sales: Previously temporary closures have been excluded from like-for-like sales. The impact on sales of stores which were temporarily closed due to COVID-19 have been included within like-for-like sales. During the current period due to temporary store closures as a result of the COVID-19 pandemic there has been a material increase in digital sales. It is not possible to calculate the exact transfer of sales from temporarily closed stores to online as a result of the pandemic therefore the like-for-like definition has been adjusted to include temporary store closures as a result of COVID-19. Only permanently closed sites and those temporarily closed for non COVID-19 related reasons are excluded from like-for-like sales.
-- Cash flow presentation in Financial Review: The presentation of the summary cash flow statement within the Financial Review has been updated to provide useful additional information of the build from Retail Underlying Operating Profit to the movement in net debt. Working capital movements also now exclude any movements due to non-underlying items. Additional reconciliations are included on pages 65 to 69 to bridge to statutory measures, with prior year comparatives adjusted accordingly.
3. Profit before non-underlying items
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.
Underlying profit is how the Group measures performance internally, but is not an IFRS measure and therefore not directly comparable to other companies.
The most significant non-underlying items in the current year relate to restructuring programmes, impairment charges and income relating to the Supreme Court ruling on ATM business rates. More details on each are included further below.
The Group has also chosen to exclude the following items from underlying profit:
-- Financial Services transition - multi-year costs incurred in transitioning to a new, more flexible banking platform as part of the previously announced New Bank Programme. These principally comprise contractor and service provider costs relating to the migration of data and other services to the Bank's new infrastructure and operating model.
-- Profit or loss on disposal of properties - such disposals are not part of the Group's underlying business.
-- Investment property fair value movements - these reflect the difference between the fair value of an investment property at the reporting date and its carrying amount at the previous reporting date and are held within the property JVs. The valuations are impacted by external market factors and can therefore vary significantly year-on-year.
-- Perpetual securities coupons - these 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 as they are included by management when assessing Group borrowings.
-- Non-underlying finance movements - these include fair value remeasurements on derivatives not in a hedging relationship. The fair value measurements are impacted by external market factors and can fluctuate significantly year-on-year. Lease interest on impaired non-trading sites, including site closures, is excluded from underlying profit as those sites do not contribute to the underlying business.
-- IAS 19 pension interest and expenses include the financing element and scheme expenses of the Group's defined benefit scheme. These are reported outside underlying profit as they no longer relate to the Group's on-going activities following closure of the scheme to future accrual.
-- Acquisition adjustments - these reflect the adjustments arising from acquisitions including the fair value unwind and amortisation of acquired intangibles.
The Group has not included any additional costs incurred or credits received directly in relation to the impacts of COVID-19 within non-underlying items. Whilst some items (such as business rates relief and additional expenses incurred protecting colleagues and customers) are discrete and can be separately quantified others, such as incremental food sales cannot be reliably disaggregated from the Group's underlying performance. The Group has therefore concluded that presenting some movements as underlying and others as non-underlying would give an imbalanced view that is not easily comparable to past and subsequent periods.
28 weeks to 19 September 2020 ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- ------------- Cost Administrative Other Net finance Share Total Tax Total of expenses income income/(costs) of adjustments adjustments sales loss before from tax JVs GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- ------------- Restructuring programmes (244) (15) - - - (259) 45 (214) Impairment of non-financial assets (96) (118) - - - (214) 37 (177) Financial Services transition - (7) - - - (7) - (7) ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- ------------- Total restructuring, impairment and integration (340) (140) - - - (480) 82 (398) Property, finance, pension and acquisition adjustments ATM business rates reimbursement 42 - - - - 42 (8) 34 Loss on disposal of properties - - (5) - - (5) 1 (4) Investment property fair value movements - - - - - - - - Perpetual securities coupons - - - 10 - 10 - 10 Non-underlying finance movements - - - (2) - (2) - (2) IAS 19 pension interest and expenses - (3) - 11 - 8 (2) 6 Acquisition adjustments - (11) - - - (11) 2 (9) ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- ------------- Total property, finance, pension and acquisition adjustments 42 (14) (5) 19 - 42 (7) 35 Tax adjustments Under provision in prior years - - - - - - - - Revaluation of deferred tax balances - - - - - - (34) (34) Total adjustments (298) (154) (5) 19 - (438) 41 (397) ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- -------------
Restructuring programmes
During the financial period, it has been agreed to accelerate the structural integration of Sainsbury's and Argos and further simplify the Argos business model. As a result, around 420 Argos stores will be closed by March 2024, leaving the total number of UK standalone stores at around 100. To support this, a total of 32 Local Fulfilment Centres will be built across the UK that will operate the Group's fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country.
In addition, the Group is creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury's and Argos. As a result of this, a number of existing depots are closing.
Further opportunities to rationalise the Group's supermarkets and convenience estate have been identified, building on last year's property strategy programme that was announced at the Capital Markets Day in September 2019. At that time it was communicated that 10 to 15 supermarkets and 30 to 40 convenience stores would close. It is now expected that 15 to 20 supermarkets and 50 to 60 convenience stores will close or be sold.
Costs totalling GBP259 million have been recognised in the period in relation to the above and comprise the following:
GBPm ---------------------------------------------- ----- Write downs of property, plant and equipment 9 Write downs of leased assets 66 Write downs of intangible assets 3 Closure provisions 151 Redundancy provisions 30 ---------------------------------------------- ----- 259 ---------------------------------------------- -----
Closure provisions relate to onerous contract costs, dilapidations and strip out costs.
Impairment of non-financial assets
In addition to the above, in line with IAS 36 'Impairment of non-financial assets', the Group is required to assess whether there is any indication that an asset (or CGU) may be impaired (i.e. its carrying amount may be higher than its recoverable amount).
The COVID-19 pandemic has resulted in changes to customer shopping habits, patterns and sources of finance. Despite this, the Group has proved resilient through the pandemic, with additional in-store costs mostly offset by the grocery sales growth and business rates relief. However the changes in customer behaviour have led to an acceleration of the Group's structural integration of Sainsbury's and Argos during the period and through this, a review of the economic performance of the Group's assets has been performed as a result of store rationalisation, changes in channel mix, and changes in customer borrowing and cash usage behaviour. This has been deemed an indicator of impairment and a full impairment review has therefore been performed covering both Retail and Financial Services non-financial assets.
An impairment charge of GBP214 million has been recognised in the period and comprises:
GBPm --------------------------------------------- ----- Impairment of property, plant and equipment 60 Impairment of leased assets 62 Impairment of intangible assets 92 --------------------------------------------- ----- 214 --------------------------------------------- -----
Of the total charge of GBP214 million, GBP105 million is in relation to assets within the Financial Services segment, with the remaining GBP109 million within the Retail segment. Further details of the impairment charge are included within note 13.
With regards to the above restructuring and impairment charges, the costs incurred arise as a result of implementing changes for the future to evolve and reshape the business. They are therefore different in nature to the COVID-19-related income and costs that were incurred to maintain business as usual activity and which have been reported within underlying profit. In addition, they can be separately identified, are material in size / nature, and not related to the underlying operations of the business. This is consistent with the Group's existing accounting policy for non-underlying items and are therefore reported outside underlying profit.
Financial Services transition
These predominantly comprise Financial Services transition costs of GBP(7) million and were incurred in transitioning to new banking platforms as part of the previously announced New Bank Programme. These principally comprise contractor and service provider costs relating to the migration of data and other services to the Bank's new infrastructure and operating model. These also include circa GBP(1) million for the decommissioning of ATMs.
ATM business rates reimbursement
GBP42 million of income is due to be received from the Valuation Office following the Supreme Court's ruling that ATMs outside stores should not be assessed for additional business rates on top of normal store rates.
Property, finance, pension and acquisition adjustments
-- Loss on disposal of properties for the financial period comprised GBP(5) million for the Group and nil for the joint ventures.
-- The coupons on the perpetual subordinated capital securities and the perpetual subordinated convertible bonds are accounted for as equity in line with IAS 32 'Financial Instruments: Presentation', however are accrued on a straight-line basis and included as an expense within underlying profit before tax. During the year, the perpetual capital securities were redeemed.
-- Non-underlying finance movements for the financial year comprised GBP(2) million for the Group and nil for the joint ventures. These are presented separately in note 6.
-- Defined benefit pension interest and expenses comprises pension finance income of GBP11 million and scheme expenses of GBP(3) million (see note 18).
-- Acquisition adjustments of GBP(11) million reflect the unwind of non-cash fair value adjustments arising from Home Retail Group and Nectar UK acquisitions and are recognised as follows:
28 weeks to 28 weeks to 52 weeks to 19 September 21 September 7 March 2020 2020 2019 -------------- ------------------------ ------------------------ ------------------------ Argos Nectar Total Argos Nectar Total Argos Nectar Total Group Group Group GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm -------------- ------ ------- ------- ------ ------- ------- ------ ------- ------- Cost of sales 1 - 1 1 - 1 2 - 2 Depreciation 1 - 1 (2) - (2) (2) - (2) Amortisation (10) (3) (13) (10) (5) (15) (18) (8) (26) -------------- (8) (3) (11) (11) (5) (16) (18) (8) (26) -------------- ------ ------- ------- ------ ------- ------- ------ ------- -------
Comparative information
28 weeks to 21 September 2019 ---------------------------------------------------- -------- --------- ------ ------------- ----- ------------- Cost Admin Other Net Share Total Tax Total of expenses income finance of adjustments adjustments sales income/ loss before from tax JVs (costs) GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------------------------- ------- ---------- -------- --------- ------ ------------- ----- ------------- Property strategy programme(1) (176) (27) - - - (203) 14 (189) Retail restructuring programme(1) - (25) - - - (25) 5 (20) Financial Services transition and other - (15) - - - (15) - (15) ------------------------------- ------- ---------- -------- --------- ------ ------------- ----- ------------- Total strategic programmes (176) (67) - - - (243) 19 (224) Property, finance, pension and acquisition adjustments Profit/(loss) on disposal of properties - - 44 - (21) 23 (1) 22 Investment property fair value movements - - - - (4) (4) - (4) Perpetual securities coupons - - - 13 - 13 (2) 11 Non-underlying finance movements - - - (8) (5) (13) - (13) IAS 19 pension expenses - (4) - 15 - 11 1 12 Acquisition adjustments (1) (15) - - - (16) 3 (13) ------------------------------- ------- ---------- -------- --------- ------ ------------- ----- ------------- Total property, finance, pension and acquisition adjustments (1) (19) 44 20 (30) 14 1 15 Tax adjustments Under provision in prior years - - - - - - (7) (7) Revaluation of deferred tax balances - - - - - - 3 3 Total adjustments (177) (86) 44 20 (30) (229) 16 (213) ------------------------------- ------- ---------- -------- --------- ------ ------------- ----- ------------- 52 weeks to 7 March 2020 Cost Administrative Other Net finance Share Total Tax Total of expenses income income/(costs) of adjustments adjustments sales loss before from tax JVs GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- ------------- Property strategy programme(1) (255) (41) - - - (296) 28 (268) Retail restructuring programme(1) (21) (11) - - - (32) 6 (26) Financial Services transition and other (2) (27) - - - (29) 4 (25) ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- ------------- Total strategic programmes (278) (79) - - - (357) 38 (319) Property, finance, pension and acquisition adjustments Profit/(loss) on disposal of properties - - 56 - (21) 35 3 38 Investment property fair value movements - - - - (3) (3) - (3) Perpetual securities coupons - - - 23 - 23 (4) 19 Non-underlying finance movements - - - (17) (5) (22) 3 (19) IAS 19 pension expenses - (9) - 28 - 19 (4) 15 Acquisition adjustments - (26) - - - (26) 5 (21) ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- ------------- Total property, finance, pension and acquisition adjustments - (35) 56 34 (29) 26 3 29 Tax adjustments Over provision in prior years - - - - - - 8 8 Revaluation of deferred tax balances - - - - - - (3) (3)
Total adjustments (278) (114) 56 34 (29) (331) 46 (285) ------------------- ------- --------------- -------- ---------------- ------ ------------- ----- -------------
Prior year property strategy programme
During the prior year, the Group identified an impairment indicator following an approved programme of store closures. This programme was initially announced at the Capital Markets Day in September. It was subsequently revisited during the second half of the year resulting in additional planned closures. Impairment charges and closure costs were therefore recognised in the prior year as follows:
28 weeks to 21 September 52 weeks to 7 March 2019 2020 Property Impairment Property Impairment strategy review strategy review programme programme GBPm GBPm GBPm GBPm --------------------------------- ------------- ------------ ----------- ----------- Impairment of property, plant and equipment 51 69 70 84 Impairment of leased assets 24 15 51 29 Impairment of intangible assets 5 13 5 13 Store closure provisions 23 - 41 - Redundancy provisions 3 - 3 - --------------------------------- ------------- ------------ ----------- ----------- 106 97 170 126 --------------------------------- ------------- ------------ ----------- -----------
Prior year retail restructuring programme
Restructuring costs of GBP(32) million in the prior year mostly comprise redundancy payments following changes to the Group's store management structure, responding to changing customer shopping habits and reducing costs throughout the store estate, as well as the closure of one Argos distribution centre, prior to the wider store closure programme announced at the Capital Markets Day. Also included costs incurred following announced head-office restructures during the year.
Cash flow statement
The table below shows the impact of non-underlying items on the Group cash flow statement:
28 weeks 28 weeks 52 weeks to to to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm -------------------------------------------- ------------- ------------- --------- Cash flows from operating activities IAS 19 pension expenses (3) (4) (9) Financial Services transition (7) (13) (22) Argos integration costs - (3) (2) Restructuring programmes (9) (4) (34) ATM Rates reimbursement 12 - - Transaction costs relating to the proposed merger with Asda - (11) (13) ----------------------------------------------- ------------- ------------- --------- Cash used in operating activities (7) (35) (80) Cash flows from investing activities Proceeds from property disposals 19 54 81 ----------------------------------------------- ------------- Cash generated from investing activities 19 54 81 Net cash flows 12 19 1 --------------------------------------------- ------------- ------------- ---------
The Property strategy and Retail restructuring programmes disclosed in prior years are included within Restructuring programmes in the current year.
4. Segment reporting
The Group's businesses are organised into three operating segments:
-- Retail - Food -- Retail - General Merchandise & Clothing -- Financial Services (Sainsbury's Bank plc and Argos Financial Services entities)
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.
Previously the Group has disclosed a Property Investment segment, relating to its joint ventures with The British Land Company PLC and Land Securities Group PLC. Following the sale of properties from the joint venture with British Land to Reality Income Corporation during the prior year, management reassessed this segment, and determined that it no longer meets the definition of an operating segment due to its results not being reviewed by the chief operating decision maker to make decisions about resource allocations. As a result, financial information relating to this component is now included in the Group's Retail segment. Comparative information has been restated.
The Operating Board assesses the performance of all segments on the basis of underlying profit before tax. All material operations and assets are in the UK.
Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.
a. Income statement and balance sheet Retail Financial Group Services 28 weeks to 19 September 2020 GBPm GBPm GBPm ------------------------------------ --------- ---------- --------- Segment revenue Retail sales to external customers 14,715 - 14,715 Financial Services to external customers(1) - 219 219 ------------------------------------ --------- ---------- --------- Underlying revenue 14,715 219 14,934 ------------------------------------ --------- ---------- --------- Revenue 14,715 219 14,934 ------------------------------------ --------- ---------- --------- Underlying operating profit/(loss) 555 (55) 500 Underlying finance income 2 - 2 Underlying finance costs (201) - (201) ------------------------------------ --------- ---------- --------- Underlying profit/(loss) before tax 356 (55) 301 Non-underlying expense (note 3) (438) ------------------------------------ --------- ---------- --------- Loss before tax (137) Income tax expense (note 7) (42) ------------------------------------ --------- ---------- --------- Loss for the financial period (179) ------------------------------------ --------- ---------- --------- Assets 18,412 8,051 26,463 Investment in joint ventures and associates 5 - 5 ------------------------------------ --------- ---------- --------- Segment assets 18,417 8,051 26,468 ------------------------------------ --------- ---------- --------- Segment liabilities (12,133) (7,148) (19,281) ------------------------------------ --------- ---------- ---------
(1) Financial Services income includes GBP176 million recognised using the effective interest rate method.
Financial Retail Services Group 28 weeks to 21 September 2019 GBPm GBPm GBPm --------------------------------------------- --------- ---------- --------- Segment revenue Retail sales to external customers 14,808 - 14,808 Financial Services to external customers(1) - 289 289 --------------------------------------------- --------- ---------- --------- Underlying revenue 14,808 289 15,097 --------------------------------------------- --------- ---------- --------- Revenue 14,808 289 15,097 Underlying operating profit 437 20 457 Underlying finance income 2 - 2 Underlying finance costs (221) - (221) Underlying share of post-tax profit from joint ventures and associates - - - --------------------------------------------- --------- ---------- ---------
Underlying profit before tax 218 20 238 Non-underlying expense (note 3) (229) --------------------------------------------- --------- ---------- --------- Profit before tax 9 Income tax expense (note 7) (47) --------------------------------------------- --------- ---------- --------- Loss for the financial period (38) Assets 19,308 9,542 28,850 Investment in joint ventures and associates 56 - 56 --------------------------------------------- --------- ---------- --------- Segment assets 19,364 9,542 28,906 Segment liabilities (12,478) (8,522) (21,000) --------------------------------------------- --------- ---------- ---------
(1) Financial Services income includes GBP204 million recognised using the effective interest rate method.
Retail Financial Group Services 52 weeks to 7 March 2020 GBPm GBPm GBPm --------------------------------------------- --------- ---------- --------- Segment revenue Retail sales to external customers 28,424 - 28,424 Financial Services to external customers(1) - 569 569 --------------------------------------------- --------- ---------- --------- Underlying revenue 28,424 569 28,993 --------------------------------------------- --------- ---------- --------- Revenue 28,424 569 28,993 --------------------------------------------- --------- ---------- --------- Underlying operating profit 938 48 986 Underlying finance income 4 - 4 Underlying finance costs (404) - (404) Underlying share of post-tax profit - - - from joint ventures and associates --------------------------------------------- --------- ---------- --------- Underlying profit before tax 538 48 586 Non-underlying expense (note 3) (331) --------------------------------------------- --------- ---------- --------- Profit before tax 255 Income tax expense (note 7) (103) --------------------------------------------- --------- ---------- --------- Profit for the financial period 152 --------------------------------------------- --------- ---------- --------- Assets 18,463 9,465 27,928 Investment in joint ventures and associates 9 - 9 --------------------------------------------- --------- ---------- --------- Segment assets 18,472 9,465 27,937 --------------------------------------------- --------- ---------- --------- Segment liabilities (11,738) (8,426) (20,164) --------------------------------------------- --------- ---------- ---------
(1) Financial Services income includes GBP405 million recognised using the effective interest rate method.
b. Segmented cash flow statement 28 weeks to 19 28 weeks to 21 September September 2020 2019 APM Financial Financial reference Retail Services Group Retail Services Group GBPm GBPm GBPm GBPm GBPm GBPm Profit/(loss) before tax 31 (168) (137) 2 7 9 ---------------------------------------------------- ------- ---------- ------ -------- ----------- ------ Net finance costs 180 - 180 196 3 199 Share of post-tax loss from joint ventures - - - 30 - 30 Operating profit/(loss) 211 (168) 43 228 10 238 Adjustments for: Depreciation and amortisation expense 647 14 661 653 14 667 Net impairment loss on property, plant and equipment, right of use assets and intangible assets 187 105 292 177 - 177 Non-cash adjustments arising from acquisitions (1) - (1) (1) - (1) Financial Services impairment losses on loans and advances - 39 39 - 47 47 Loss/(profit) on sale of properties and early termination of leases 5 2 7 (44) - (44) Share-based payments expense 14 2 16 17 2 19 Non-cash defined benefit scheme expenses 3 - 3 4 - 4 Cash contributions to defined benefit scheme (60) - (60) (48) - (48) Operating cash flows before changes in working capital 1,006 (6) 1,000 986 73 1,059 Changes in working capital Decrease/(increase) in working capital 713 79 792 289 (110) 179 Cash generated from/(used in) operations 1,719 73 1,792 1,275 (37) 1,238 Interest paid a (193) - (193) (208) - (208) Corporation tax paid (88) - (88) (8) 2 (6) Net cash generated/(used) from operating activities 1,438 73 1,511 1,059 (35) 1,024 ---------------------------------------------------- ------- ---------- ------ -------- ----------- ------ Cash flows from investing activities Purchase of property, plant and equipment excluding strategic capital expenditure (257) - (257) (213) - (213) Initial direct costs on new leases (3) - (3) (2) - (2) Purchase of intangible assets (33) (11) (44) (35) (17) (52) Proceeds from disposal of property, plant and equipment 19 - 19 54 - 54 Interest received a - - - 2 - 2 Dividends and distributions received e 22 - 22 118 - 118 Net cash used in investing activities (252) (11) (263) (76) (17) (93) ---------------------------------------------------- ------- ---------- ------ -------- ----------- ------ Cash flows from financing activities Proceeds from issuance of ordinary shares d 4 - 4 5 - 5 Proceeds from borrowings c - - - 80 - 80 Proceeds from short term borrowings c 660 - 660 - - - Repayment of borrowings c (269) - (269) (230) - (230) Repayment of short term borrowings c (660) - (660) - - - Repayment of perpetual capital securities c (250) - (250) - - - Purchase of own shares d (30) - (30) (4) - (4) Repayment of capital element of obligations under lease liabilities b (223) (1) (224) (230) (1) (231) Repayment of capital element of obligations under hire purchase agreements c - - - (10) - (10) Dividends paid on ordinary shares - - - (174) - (174) Dividends paid on perpetual securities a (20) - (20) (20) - (20) Net cash used in financing activities (788) (1) (789) (583) (1) (584)
---------------------------------------------------- ------- ---------- ------ -------- ----------- ------ Intra group funding Bank capital injections - - - (35) 35 - Net cash (used in)/generated from intra group funding - - - (35) 35 - ---------------------------------------------------- ------- ---------- ------ -------- ----------- ------ Net increase/(decrease) in cash and cash equivalents 398 61 459 365 (18) 347 ---------------------------------------------------- ------- ---------- ------ -------- ----------- ------ 52 weeks to 7 March 2020 APM Financial reference Retail Services Group GBPm GBPm GBPm Profit before tax 235 20 255 ------------------------------------------------- -------- ---------- -------- Net finance costs 363 3 366 Share of post-tax loss from joint ventures and associates 29 - 29 Operating profit 627 23 650 Adjustments for: Depreciation and amortisation expense 1,225 31 1,256 Net impairment charge on property, plant and equipment, right-of-use asset, investment property and intangible assets 257 6 263 Non-cash adjustments arising from acquisitions (2) - (2) Financial Services impairment losses on loans and advances - 80 80 (Profit)/loss on sale of properties and early termination of leases (56) - (56) Loss on disposal of intangibles - - - Share-based payments expense 34 3 37 Non-cash defined benefit scheme expenses 9 - 9 Cash contributions to defined benefit scheme (52) - (52) Operating cash flows before changes in working capital 2,042 143 2,185 Changes in working capital Decrease/(increase) in working capital (71) (248) (319) Cash generated from operations 1,971 (105) 1,866 Interest paid a (384) - (384) Corporation tax paid (113) 3 (110) Net cash generated/(used) from operating activities 1,474 (102) 1,372 ------------------------------------------------- -------- ---------- -------- Cash flows from investing activities Purchase of property, plant and equipment excluding strategic capital expenditure (517) (2) (519) Strategic capital expenditure - - - Purchase of property, plant and equipment (517) (2) (519) Initial direct costs on new leases (13) - (13) Purchase of intangible assets (82) (38) (120) Proceeds from disposal of property, plant and equipment 81 - 81 Interest received a 2 - 2 Dividends and distributions received e 143 - 143 Net cash used in investing activities (386) (40) (426) ------------------------------------------------- -------- ---------- -------- Cash flows from financing activities Proceeds from issuance of ordinary shares d 15 - 15 Proceeds from borrowings c 250 - 250 Repayment of borrowings c (169) - (169) Repayment upon maturity of convertible bonds c (450) - (450) Purchase of own shares d (18) - (18) Repayment of capital element of obligations under lease liabilities b (419) (1) (420) Repayment of capital element of obligations under hire purchase agreements c (10) - (10) Dividends paid on ordinary shares (247) - (247) Dividends paid on perpetual securities a (23) - (23) Net cash used in financing activities (1,071) (1) (1,072) ------------------------------------------------- -------- ---------- -------- Intra group funding Bank capital injections (35) 35 - Net cash (used in)/generated from intra group funding (35) 35 - ------------------------------------------------- -------- ---------- -------- Net decrease in cash and cash equivalents (18) (108) (126) ------------------------------------------------- -------- ---------- -------- 5. Supplier arrangements
Supplier incentives, rebates and discounts, collectively known as 'supplier arrangements', represent a material deduction to cost of sales and directly affect the Group's reported margin. The arrangements can be complex, with amounts spanning multiple products over different time periods, and there can be multiple triggers and discounts. The accrued value at the reporting date is included in trade receivables or trade payables, depending on the right of offset.
The types that involve a level of judgement and estimation are as follows:
-- Fixed amounts - these are agreed with suppliers primarily to support in-store activity including promotions, such as utilising specific space.
-- Supplier rebates - these are typically agreed on an annual basis, aligned with the Group's financial year. The rebate amount is linked to pre-agreed targets such as sales volumes.
-- Marketing and advertising income - advertising income from suppliers through the Group's subsidiary Nectar 360 Services LLP.
The amounts recognised in the income statement for the above types of supplier arrangements are as follows (excluding non-judgemental discounts and supplier incentives outside the above categories):
28 weeks to 28 weeks to 52 weeks to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm ----------------------------- ------------- ------------- --------- Fixed amounts 89 108 278 Supplier rebates 32 34 68 Marketing and advertising income 34 58 105 Total supplier arrangements 155 200 451 ------------------------------ ------------- ------------- ---------
Of the above amounts, the following was outstanding and held on the balance sheet at the period-end:
28 weeks 28 weeks 52 weeks to to to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm ---------------------------------- ------------- ------------- --------- Within inventory (7) (7) (7) Within current trade receivables Supplier arrangements due 32 31 44 Accrued supplier arrangements 45 53 38 Within current trade payables Supplier arrangements due 8 12 12 Accrued supplier arrangements 3 2 - Deferred income due (1) (4) (2) ----------------------------------- ------------- ------------- --------- Total supplier arrangements 80 87 85 ----------------------------------- ------------- ------------- --------- 6. Finance income and finance costs 28 weeks to 19 28 weeks to 21 52 weeks to 7 September 2020 September 2019 March 2020 Underlying Non-Underlying Total Underlying Non-Underlying Total Underlying Non-Underlying Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm --------------- ----------- --------------- ------ ----------- --------------- ------ ----------- --------------- ------ Interest on bank deposits and other financial assets 1 - 1 1 - 1 2 - 2 Fair value measurements - 3 3 - 1 1 - - - IAS 19 pension financing income - 11 11 - 15 15 - 28 28 Finance income on net investment in leases 1 - 1 1 - 1 2 - 2 --------------- ----------- --------------- ------ ----------- --------------- ------ ----------- --------------- ------ Finance Income 2 14 16 2 16 18 4 28 32 --------------- ----------- --------------- ------ ----------- --------------- ------ ----------- --------------- ------ Borrowing costs: Secured borrowings (29) - (29) (26) - (26) (50) - (50) Unsecured borrowings (1) - (1) (9) - (9) (12) - (12) Lease liabilities (163) (5) (168) (175) (5) (180) (323) (9) (332) Fair value measurements - - - - - - - (8) (8) --------------- ----------- --------------- ------ ----------- --------------- ------ ----------- --------------- ------ (193) (5) (198) (210) (5) (215) (385) (17) (402) Other finance costs: Interest capitalised - qualifying assets 2 - 2 2 - 2 4 - 4 Fair value measurements - - - - (4) (4) - - - Perpetual securities coupon (10) 10 - (13) 13 - (23) 23 - --------------- ----------- --------------- ------ ----------- --------------- ------ ----------- --------------- ------ (8) 10 2 (11) 9 (2) (19) 23 4 Finance costs (201) 5 (196) (221) 4 (217) (404) 6 (398) --------------- ----------- --------------- ------ ----------- --------------- ------ ----------- --------------- ------
Fair value remeasurements relate to net fair value movements on derivative financial instruments not designated in a hedging relationship.
7. Income tax expense 52 weeks 28 weeks to 28 weeks to to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm ------------------------------------- ------------- ------------- --------- Current tax expense 5 55 88 Deferred tax expense/(credit) 37 (8) 15 ------------------------------------- ------------- ------------- --------- Total income tax expense in income statement 42 47 103 ------------------------------------- ------------- ------------- --------- Underlying tax rate 27.6% 26.5% 25.4% Effective tax rate (30.7)% 522.2% 40.4% ------------------------------------- ------------- ------------- --------- GBPm GBPm GBPm ------------------------------------- ------------- ------------- --------- Income tax expense on underlying profit 83 63 149 Income tax credit on non-underlying items (41) (16) (46) ------------------------------------- ------------- ------------- --------- Total income tax expense in income statement 42 47 103 ------------------------------------- ------------- ------------- ---------
The interim tax charge is calculated in accordance with IAS 34. The annual effective tax rate (excluding discrete items) is calculated and applied to the interim profit before tax. The tax effect of discrete items in the reporting period is then included to calculate the reported tax expense. Discrete items include non-underlying items (see note 3) and prior year deferred tax adjustments.
The effective tax rate of (30.7) per cent (28 weeks to 21 September 2019: 522.2 per cent) is lower than the standard rate of corporation tax in the UK of 19 per cent and results in a tax charge, rather than a tax credit, on the interim loss before tax. This is largely a result of the amount of non-deductible expenses, particularly in respect of non-underlying discrete items, the de-recognition of previously recognised deferred tax assets on capital losses, and prior year adjustments.
The main rate of UK corporation tax reduced from 20 per cent to 19 per cent from 1 April 2017. A further reduction in the corporation tax rate to 17 per cent, effective from 1 April 2020, was substantively enacted in a prior period, so its effect was reflected in the Group's balance sheet as at 7 March 2020. Deferred tax on temporary differences and tax losses as at the balance sheet date is calculated at the substantively enacted rates at which the temporary differences and tax losses are expected to reverse. A change to the corporation tax rate, so that it remains at 19 per cent rather than reducing to 17 per cent from 1 April 2020, was announced in the 2020 Budget and substantively enacted prior to 19 September 2020. Therefore, its effect is recognised in the current period.
Finance Act 2020 also includes legislation restricting the amount of chargeable gains that a company can relieve with its carried-forward capital losses from previous accounting periods. Broadly, from 1 April 2020 a company is only able to offset up to 50 per cent of chargeable gains using carried forward capital losses. The Group's carried forward capital losses were fully recognised at 7 March 2020. The Group has considered the expected impact of these changes in tax law in respect of the utilisation of carried-forward tax losses in future accounting periods. Accordingly approximately GBP178 million of the Group's carried forward capital losses have not been recognised as at 19 September 2020.
8. (Loss)/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 coupons on the perpetual subordinated convertible bonds (net of tax), and prior to redemption, interest on the senior convertible bonds (net of tax). The weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year and the number of shares that would be issued if all senior convertible bonds and perpetual subordinated convertible bonds are assumed to be converted.
Underlying earnings per share is provided by excluding the effect of any non-underlying items as defined in note 3. This alternative measure of earnings per share is presented to reflect the Group's underlying trading performance. All operations are continuing for the periods presented.
28 weeks 28 weeks 52 weeks to to to 19 September 21 September 7 March 2020 2019 2020 million million million ------------------------------------------------------ ------------- ------------- ---------- Weighted average number of shares in issue(1) 2,211.7 2,207.4 2,207.6 Weighted average number of dilutive share options(1) 18.7 16.5 24.1 Weighted average number of dilutive senior convertible bonds(1) - 153.6 153.7 Weighted average number of dilutive subordinated perpetual convertible bonds 86.7 83.8 84.6 Total number of shares for calculating diluted (loss)/earnings per share 2,317.1 2,461.3 2,470.0
------------------------------------------------------ ------------- ------------- ---------- GBPm GBPm GBPm ------------------------------------------------------ ------------- ------------- ---------- (Loss)/profit for the financial period (net of tax) (179) (38) 152 Less profit attributable to: Holders of perpetual capital securities - (8) (16) Holders of perpetual convertible bonds (4) (3) (7) (Loss)/profit for the financial period attributable to ordinary shareholders (183) (49) 129 ------------------------------------------------------ ------------- ------------- ---------- GBPm GBPm GBPm ------------------------------------------------------ ------------- ------------- ---------- (Loss)/profit for the financial period attributable to ordinary shareholders (183) (49) 129 Add interest on senior convertible bonds (net of tax)(1) - - 9 Add coupon on subordinated perpetual convertible bonds (net of tax)(1) - - 6 Diluted (loss)/earnings for calculating diluted (loss)/earnings per share (183) (49) 144 ------------------------------------------------------ ------------- ------------- ---------- GBPm GBPm GBPm ------------------------------------------------------ ------------- ------------- ---------- (Loss)/profit for the financial period attributable to ordinary shareholders of the parent (183) (49) 129 Adjusted for non-underlying items (note 3) 438 229 331 Tax on non-underlying items (41) (16) (46) Add back perpetual securities coupons (net of tax)(2) 10 11 23 ------------------------------------------------------ Underlying profit after tax attributable to ordinary shareholders of the parent 224 175 437 Add interest on convertible bonds (net of tax) - 6 9 Add coupon on subordinated perpetual convertible bonds (net of tax) 3 3 6 Diluted underlying profit after tax attributable to ordinary shareholders of the parent 227 184 452 ------------------------------------------------------ ------------- ------------- ---------- Pence Pence Pence per share per share per share ------------------------------------------------------ ------------- ------------- ---------- Basic (loss)/earnings (8.3) (2.2) 5.8 Diluted (loss)/earnings (8.3) (2.2) 5.8 Underlying basic earnings 10.1 7.9 19.8 Underlying diluted earnings 9.8 7.5 18.3 ------------------------------------------------------ ------------- ------------- ----------
(1) In accordance with IAS 33, 'Earnings per share', dilutive share options and their respective earnings adjustments are excluded from the calculation of diluted earnings per share when the impact is anti-dilutive.
(2) Underlying earnings per share calculation is based on underlying profit after tax attributable to ordinary shareholders. Therefore the perpetual securities coupons are added back.
9. Dividends 28 weeks 28 weeks 52 weeks to to to 19 September 21 September 7 March 2020 2019 2020 Amounts recognised as distributions to equity holders in the period: Dividend per share (pence) - 7.9 11.2 Total dividend charge (GBPm) - 174 247
In April the Board chose, due to limited visibility at the time on the potential impact of COVID-19 on the business, to defer dividend payment decisions and did not pay a final dividend for the 2019/20 financial year. In the light of improved visibility, strong trading and a strong balance sheet position, the Board has chosen to pay a special dividend in lieu of a final dividend for the 2019/20 financial year. The dividend of 7.3p was approved by the Board of Directors on 4 November 2020.
An interim dividend of 3.2 pence per share (21 September 2019: 3.3 pence per share), has been approved by the Board of Directors for the financial year ending 6 March 2021, resulting in an interim dividend of GBP71 million (21 September 2019: GBP73 million). The interim dividend was approved by the Board on 4 November 2020 and as such has not been included as a liability at 19 September 2020.
10. Property, plant and equipment 28 weeks to 28 weeks to 52 weeks 19 September 21 September to 7 March 2020 2019 2020 GBPm GBPm GBPm Net book value At the beginning of the period 8,911 9,193 9,193 Additions 230 210 528 Disposals (20) (6) (17) Transfer to assets held for sale - - 1 Depreciation charge (331) (334) (634) Impairment charge (69) (120) (160) At the end of the period 8,721 8,943 8,911
The net book value of property, plant and equipment comprises land & buildings of GBP6,937 million (21 September 2019: GBP7,108 million; 7 March 2020: GBP7,022 million) and fixtures & fittings of GBP1,784 million (21 September 2019: GBP1,835 million; 7 March 2020: GBP1,889 million).
At 19 September 2020, capital commitments contracted, but not provided for by the Group, amounted to GBP113 million (21 September 2019: GBP174 million; 7 March 2020: GBP112 million), and GBPnil for the property joint ventures (21 September 2019: GBP2 million; 7 March 2020: GBPnil).
11. Leases
Set out below are the carrying amounts of right-of-use assets and the movements during the period:
28 weeks to 28 weeks to 52 weeks 19 September 21 September to 7 March 2020 2019 2020 GBPm GBPm GBPm Net book value At the beginning of the period 4,826 4,993 4,993 New leases and modifications 363 187 406 Depreciation charge (265) (263) (493) Impairment charge (128) (39) (80) At the end of the period 4,796 4,878 4,826
Included within the above are land and buildings with a net book value of GBP4,496 million (21 September 2019: GBP4,650 million; 7 March 2020: GBP4,536 million), and equipment with a net book value of GBP300 million (21 September 2019: GBP228 million; 7 March 2020: GBP290 million).
Set out below are the carrying amounts of lease liabilities and the movements during the period:
28 weeks to 28 weeks to 52 weeks 19 September 21 September to 7 March 2020 2019 2020 GBPm GBPm GBPm At the beginning of the period 5,774 5,831 5,831 New leases and modifications 357 186 373 Interest expense 168 180 332 Payments (392) (421) (762) At the end of the period 5,907 5,776 5,774 Current 538 536 510 Non-current 5,369 5,240 5,264
The Group presents additions to lease liabilities and right of use assets in line with the disclosure requirements of IFRS 16 'Leases'. In doing so, additions to right of use assets and lease liabilities above include the net impact of new leases, lease extensions, terminations and the exercise of lease breaks.
Right-of-use assets are measured at cost (which includes the amount of any corresponding lease liability), less any accumulated depreciation and impairment losses, and adjusted for any subsequent remeasurement of lease liabilities. Lease liabilities are measured at the present value of lease payments to be made over the lease term, discounted using the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date of the lease, the lease liability is subsequently measured at amortised cost using the effective interest rate method, increasing to reflect the accretion of interest and reducing for the lease payments made.
The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The inclusion of a lease extension period or lease break period in the lease term is a key judgement for the Group and considers all relevant factors that create an economic incentive for it to exercise them. For leased properties, this includes the current and expected profitability of the respective site, as well as the length of time until the option can be exercised. Any changes to the Group's judgement over lease terms will impact both the right of use asset and lease liability.
The accelerated structural integration of Sainsbury's and Argos which commenced in the prior year has led to changes in the IFRS 16 right of use asset and lease liability balances.
The judgements applied in the exercising of lease breaks have changed. The store rationalisation programme is deemed a change in circumstances within the control of the Group and means that lease breaks will be exercised, whereas the judgement applied to these in FY 2020 was that the break would not be exercised. The Group has also revisited its assumptions about the way that lease breaks will be exercised across the portfolio and made it more specific for each part of the store estate. This acts to decrease the lease liability and right of use asset by circa GBP200m. With hindsight, the trigger for the recognition of this modification should have been the Capital Markets Day in September 2019.
In conjunction with store rationalisation, the Group has been actively pursuing lease extension opportunities across well-performing supermarket sites. This ensures key stores remain in the portfolio as the Group seeks to open more Argos store-in-stores, as well as increasing its online capacity through its in-store picking model. The extensions act to increase the lease liability and right of use asset as a result of committing to future additional rental payments, as well as reflecting updated discount rates which are typically lower than those previously used. Certain extensions agreed in the prior year were not reflected in lease modifications in the prior year. This acts to increase the lease liability and right of use asset by circa GBP375m.
The net impact of these items is an increase to lease liability and right of use assets of circa GBP175m. Since the impact on the 2020 income statement was less than GBP2m and considering a number of other qualitative factors, the Group has concluded this is not material and has therefore been reported within the GBP357m new leases and modifications in the current period above.
Income statement disclosures
The following are the amounts recognised in profit or loss:
28 weeks 28 weeks 52 weeks to 19 September to 21 September to 7 March 2020 2019 2020 GBPm GBPm GBPm Depreciation of right-of-use assets (265) (263) (493) Interest on lease liabilities (168) (180) (332) Variable lease payments not included in the measurement of lease liabilities (1) (1) (1) Finance income from sub-leasing of right-of-use assets 1 1 2 Operating sublet income 17 23 47 Expenses relating to short term leases (19) (15) (28) Expenses relating to leases of low value assets (1) (4) (8) At the end of the period (436) (439) (813) Total cash outflow for leases (412) (439) (798) 12. Intangible assets 28 weeks to 28 weeks to 19 21 September 52 weeks to September 2020 2019 7 March 2020 GBPm GBPm GBPm Net book value At beginning of the period 1,012 1,043 1,043 Additions 64 54 124 Disposals (20) (1) (3) Amortisation charge (65) (70) (129) Impairment charge (95) (18) (23) At the end of the period 896 1,008 1,012
The net book value of goodwill and intangible assets predominantly comprises goodwill of GBP367 million (21 September 2019: GBP378 million; 7 March 2020: GBP378 million), software assets of GBP412 million (21 September 2019: GBP494 million; 7 March 2020: GBP506 million) and acquired brands of GBP111 million (21 September 2019: GBP130 million; 7 March 2020: GBP122 million).
13. Impairment of non-financial assets
Approach and identification of cash generating units
At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset, being the higher of its fair value less costs to dispose and its value in use, is estimated in order to determine the extent of the impairment loss.
Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit (CGU) or groups of CGUs to which the asset belongs. For Retail property, plant and equipment, the CGU is deemed to be each trading store, store pipeline development site or in certain cases for Argos, a cluster of stores. For non-store assets, including depots and IT assets, the CGU represents all depot and IT assets, combined with either the population of Sainsbury's or Argos stores that they support as this is the lowest identifiable group of assets that generate cash inflows.
Previously Argos stores have been clustered together and tested as CGUs comprising a hub store (that holds and distributes inventory) and spoke stores (that hold smaller amounts of inventory). Argos clusters relate to its multi-channel network that enables customers to source the most convenient pick-up point for a product from a number of local stores. If unavailable at their chosen store, a customer can be directed to an alternative nearby store that holds the necessary inventory, or it can be delivered to their chosen store from another within the same catchment area. As a result, customers regularly switch between stores for their benefit and convenience. Clusters are created using store location, proximity to other stores and postcode catchment areas.
Typically, inventory would be moved between stores within a cluster, and hence they were assessed together. As a result of the Group's restructuring programme as detailed in note 3, this model has been re-assessed. In particular, to support the streamlined Argos infrastructure, a total of 32 Local Fulfilment Centres will be built across the UK that will operate the Group's fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country. Consequently it has been concluded that spokes will now be considered based on their individual cash flows. The clustering approach is deemed appropriate for hubs only which will hold and transfer inventory to spokes as required.
For Financial Services, the CGU is deemed to be each respective product or product group that is capable of generating cash flows independent of other products. Non-product assets are reviewed separately as collective CGUs with the products that they support.
Any impairment loss is recognised in the income statement in the year in which it occurs. Where an impairment loss subsequently reverses due to a change in the original estimate, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, or its original carrying value less notional accumulated depreciation if lower.
Identification of a triggering event
As detailed in note 3, the COVID-19 pandemic has resulted in changes to customer shopping habits, patterns and sources of finance. Despite this, the Group has proved resilient through the pandemic, with additional in-store costs mostly offset by the grocery sales growth and business rates relief. However the changes in customer behaviour have led to an acceleration of the Group's structural integration of Sainsbury's and Argos during the period and through this, a review of the economic performance of the Group's assets has been performed as a result of store rationalisation, changes in channel mix, and changes in customer borrowing and cash usage behaviour. This has been deemed an indicator of impairment and a full impairment review has therefore been performed covering both Retail and Financial Services non-financial assets.
Approach and assumptions
The recoverable amounts for CGUs have been determined using value in use calculations which are based on the cash flows expected to be generated, derived from the latest budget and forecast data which are reviewed by the Board. Budget and forecast data reflect both past experience and future expectation of market conditions. The key assumptions in the value in use calculation are as follows:
Assumption Retail segment Financial Services segment Composition Stores including Argos spokes of CGU / pipeline developments * Property, plant and equipment and intangible assets * Property, plant and equipment and any goodwill attributable to each product (or group of products attributable to individual stores. capable of generating independent cash flows). * For leased assets, the CGU also includes right-of-use assets and corresponding lease liabilities as management has concluded that lease liabilities need to be considered when determining the recoverable amount of the CGU. Depots and IT and other assets * Combined with the respective Sainsbury's or Argos stores that they support Argos hubs * Combined with the cluster of local stores that they support Cash flow years / * Derived from Board approved cash flow projections for * Derived from Board approved cash flow projections for assumptions five years and then extrapolated for a further 20 five years and then extrapolated over the remaining years for supermarkets and 10 years for convenience useful lives of the assets being tested for stores with no assumed growth rate, representing the impairment. typical time between refits. * Where lease terms are shorter than this, the remaining lease term has been used. * In the case of properties identified for closure, cash flows years relate to the remaining period that the store will trade for. Terminal value * For owned sites, a terminal value is included in the * No terminal value is applied within the Financial final cash flow year, representing the net cash flows Services segment, as cashflows are limited to the expected to be received for the disposal of the period of the remaining useful lives of the assets assets at the end of their useful life. being tested for impairment. * It is calculated using an assumed market rent for the stores, with an investment yield based on similar properties in the area. Discount rate * A post-tax discount rate representing the Retail * A post-tax discount rate representing the Financial segment's weighted average cost of capital (WACC), Services segment's weighted average cost of capital subsequently grossed up to a pre-tax rate of 7.7 per (WACC), subsequently grossed up to a pre-tax rate of cent. 12.8 per cent. * The post-tax WACC been calculated using the capital * The post-tax WACC has been calculated using a asset pricing model, the inputs of which include a combination of adjusted market analysis and the risk-free rate for the UK, a UK equity risk premium, actual cost of debt on Tier 2 capital instruments. levered debt premium and a risk adjustment using a 10 year average beta for the Group.
For store pipeline development sites the carrying value of the asset is compared with its value in use using a methodology consistent with that described above for sites that will be developed. Future cash flows include the estimated costs to completion. For sites where there is no plan to develop a store, the recoverable amount is based on its fair value less costs to dispose.
Outputs and sensitivities
Impairment charges recognised in the Retail segment relate to both sites identified for closure as part of the restructuring programme, as well as other impairments on stores that will continue to trade, but for which the cash flows no longer support the carrying amount of assets. Impairment charges recognised in the Financial Services segment are a result of forecast cashflows reflecting the uncertain macro-economic environment and changes to customer behaviour no longer supporting the carrying amount of underlying IT systems and ATM assets. The overall charges are as follows:
Restructuring programme Other impairments Total GBPm GBPm GBPm Impairment of property, plant and equipment 9 60 69 Impairment of leased assets 66 62 128 Impairment of intangible assets 3 92 95 78 214 292
Of the total impairment charge of GBP(292) million, GBP(187) million is in relation to assets within the Retail segment, with the remaining GBP(105) million within the Financial Services segment.
Of the above assumptions, the value-in-use calculations are most sensitive to changes in the discount rate, cash flows and inputs underpinning the terminal value. The tables below set out the key sensitivities performed on the value-in-use models. The sensitivity analysis performed considers the reasonably possible changes in these assumptions, which incorporates increased uncertainty caused by the COVID-19 pandemic.
Retail segment
Sensitivity area Sensitivity Increase / (decrease) in impairment GBPm Discount rate Increase of 1% 15 Decrease of 1% (3) Cash flows Increase of 5% (3) Decrease of 5% 6 Rental yield (input for terminal values) Increase of 1% 2 Decrease of 1% (3)
Financial Services segment
Sensitivity area Sensitivity Increase / (decrease) in impairment GBPm Discount rate Increase of 1% 10 Decrease of 1% (10) Cash flows Increase of 5% (18) Decrease of 5% 18 14. Financial instruments a. Financial assets and liabilities by category
Set out below are the accounting classification of each class of financial assets and liabilities:
Fair value through Fair value through profit Amortised cost OCI or loss Total Group GBPm GBPm GBPm GBPm At 19 September 2020 Cash and cash equivalents 1,342 - 111 1,453 Trade and other receivables 453 - 190 643 Amounts due from Financial Services customers 6,192 - - 6,192 Financial assets at fair value through other comprehensive income - 924 - 924 Trade and other payables (4,332) - - (4,332) Current borrowings (257) - - (257) Non-current borrowings (772) - - (772) Amounts due to Financial Services customers and
other deposits (6,810) - - (6,810) Derivative financial instruments - - (66) (66) Lease liabilities (5,907) - - (5,907) (10,091) 924 235 (8,932) Fair value Fair value through profit Amortised cost through OCI or loss Total Group GBPm GBPm GBPm GBPm At 21 September 2019 Cash and cash equivalents 1,296 - 172 1,468 Trade and other receivables 375 - 182 557 Amounts due from Financial Services customers 7,401 - - 7,401 Financial assets at fair value through other comprehensive income - 1,020 - 1,020 Trade and other payables (4,437) - - (4,437) Current borrowings (495) - - (495) Non-current borrowings (1,023) - - (1,023) Amounts due to Financial Services customers and other deposits (8,167) - - (8,167) Derivative financial instruments - - (4) (4) Lease liabilities (5,776) - - (5,776) (10,826) 1,020 350 (9,456) Fair value Fair value through profit Amortised cost through OCI or loss Total Group GBPm GBPm GBPm GBPm At 7 March 2020 Cash and cash equivalents 841 - 153 994 Trade and other receivables 506 - 169 675 Amounts due from Financial Services customers 7,404 - - 7,404 Financial assets at fair value through other comprehensive income - 1,054 - 1,054 Trade and other payables (3,835) - - (3,835) Current borrowings (48) - - (48) Non-current borrowings (1,248) - - (1,248) Amounts due to Financial Services customers and other deposits (8,094) - - (8,094) Derivative financial instruments - - (71) (71) Lease liabilities (5,774) - - (5,774) (10,248) 1,054 251 (8,943) b. Carrying amount versus fair value
Set out below is a comparison of the carrying amount and the fair value of financial instruments that are carried in the financial statements at a value other than fair value. The fair value of financial assets and liabilities are based on prices available from the market on which the instruments are traded. Where market values are not available, the fair values of financial assets and liabilities have been calculated by discounting expected future cash flows at prevailing interest rates. The fair values of short-term deposits, trade receivables, overdrafts and payables are assumed to approximate to their book values.
Carrying Fair value amount At 19 September 2020 GBPm GBPm Financial assets Amounts due from Financial Services customers(1) 6,192 6,235 Financial liabilities Loans due 2031 (649) (791) Bank loans due 2021 (200) (200) Tier 2 Capital due 2023 (180) (179) Lease liabilities (5,907) (5,907) Amounts due to Financial Services customers and banks (6,810) (6,820)
1 Includes GBP3,685 million of interest rate swaps in a portfolio fair value hedging relationship.
Carrying Fair value amount At 21 September 2019 GBPm GBPm Financial assets Amounts due from Financial Services customers(1) 7,401 7,440 Financial liabilities Loans due 2031 (687) (872) Bank overdrafts (1) (1) Bank loans due 2019 (200) (200) Convertible bond due 2019 (450) (451) Tier 2 Capital due 2023 (180) (181) Lease liabilities (5,776) (5,776) Amounts due to Financial Services customers and banks (8,167) (8,176)
1 Includes GBP4,145 million of interest rate swaps in a portfolio fair value hedging relationship.
Carrying Fair value amount At 7 March 2020 GBPm GBPm Financial assets Amounts due from Financial Services customers(1) 7,405 7,455 Financial liabilities Loans due 2031 (667) (888) Bank loans due 2019 (199) (199) Bank loans due 2024 (250) (250) Tier 2 Capital due 2023 (180) (177) Lease liabilities (5,774) (5,774) Amounts due to Financial Services customers and banks (8,093) (8,100)
1 Includes GBP4,512 million of interest rate swaps in a portfolio fair value hedging relationship.
c. Fair value measurements recognised in the balance sheet
The following table provides an analysis of financial instruments that are recognised at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:
-- Level 1 fair value measurements are derived from quoted market prices (unadjusted) in active markets for identical assets or liabilities at the balance sheet date. This level includes listed equity securities and debt instrument on public exchanges;
-- Level 2 fair value measurements are derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of financial instruments is determined by discounting expected cash flows at prevailing interest rates; and
-- Level 3 fair value measurements are derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Level Level Level Total 1 2 3 At 19 September 2020 GBPm GBPm GBPm GBPm Cash & cash equivalents 111 - - 111 Trade & other receivables 190 - - 190 Financial instruments at fair value through other comprehensive income Interest bearing financial assets - 1 - 1 Other financial assets - 14 265 279 Investment securities 644 - - 644 Derivative financial assets - 30 2 32 Derivative financial liabilities - (98) - (98) Level Level Level Total 1 2 3 At 21 September 2019 GBPm GBPm GBPm GBPm Cash & cash equivalents 172 - - 172 Trade & other receivables 182 - - 182 Financial instruments at fair value through other comprehensive income Interest bearing financial assets - 1 - 1 Other financial assets - 14 206 220 Investment Securities 799 - - 799 Derivative financial assets - 47 2 49 Derivative financial liabilities - (53) - (53) Level 1 Level 2 Level 3 Total At 7 March 2020 GBPm GBPm GBPm GBPm Cash & cash equivalents 153 - - 153 Trade & other receivables 169 - - 169
Financial instruments at fair value through other comprehensive income Interest bearing financial assets - 1 - 1 Other financial assets - 14 237 251 Investment securities 802 - - 802 Derivative financial assets - 18 - 18 Derivative financial liabilities - (86) (3) (89)
Level 3 Financial assets
Details of the determination of Level 3 fair value measurements are set out below:
Financial instruments Commodity at FVOCI derivatives Total 28 weeks to 19 September 2020 GBPm GBPm GBPm Opening balance 237 (3) 234 Included in finance income in the income statement - 5 5 Included in other comprehensive income 28 - 28 Total Level 3 financial assets and liabilities 265 2 267 Financial instruments Commodity at FVOCI derivatives Total 28 weeks to 21 September 2019 GBPm GBPm GBPm Opening balance 220 1 221 Included in finance income in the income statement - 1 1 Included in other comprehensive income (14) - (14) Total Level 3 financial assets and liabilities 206 2 208 Financial instruments Commodity at FVOCI derivatives Total 52 weeks to 7 March 2020 GBPm GBPm GBPm Opening balance 220 1 221 Included in finance income in the income statement - (4) (4) Included in other comprehensive income 17 - 17 Total Level 3 financial assets and liabilities 237 (3) 234
Other financial assets relate to the Group's beneficial interest in a property investment pool. The net present value of the Group's interest in the various freehold reversions owned by the property investment pool has been derived by assuming a property growth rate of zero per cent per annum (21 September 2019: 0.6 per cent; 7 March 2020: 0.6 per cent) and a discount rate of 7.7 per cent (21 September 2019: nine per cent; 7 March 2020: nine per cent). The sensitivity of this balance to changes of one per cent in the assumed rate of property rental growth and one per cent in the discount rate holding other assumptions constant is shown below:
19 September 2020 21 September 2019 Change in Change in Change in Change in discount rate growth rate discount rate growth rate +/- 1.0% +/- 1.0% +/- 1.0% +/- 1.0% GBPm GBPm GBPm GBPm Financial assets (7)/7 10/(10) (7)/7 11/(10) 7 March 2020 Change in Change in discount rate growth rate +/- 1.0% +/- 1.0% GBPm GBPm Financial assets (7)/7 11/(10)
Level 3 derivative financial liabilities - power purchase agreement
The Group has entered into several long-term fixed-price power purchase agreements with independent producers. Included within derivative financial instruments is a net asset of GBP2 million relating to these agreements at 19 September 2020 (at 21 September 2019: GBP2 million; at 7 March 2020: GBP(4) million). The Group values its power purchase agreements as the net present value of the estimated future usage at the contracted fixed price less the market implied forward energy price discounted back at the prevailing swap rate. The Group also makes an assumption regarding expected energy output based on the historical performance and the producer's estimate of expected electricity output. The sensitivity of this balance to changes of 20 per cent in the assumed rate of energy output and 20 per cent in the implied forward energy prices holding other assumptions constant is shown below:
19 September 2020 21 September 2019 Change in Change in Change in electricity Change in electricity volume forward price volume forward price +/- 20.0% +/- 20.0% +/- 20.0% +/- 20.0% GBPm GBPm GBPm GBPm Derivative financial instruments 0/(1) 6/(8) 0/(0) 9/(9) 7 March 2020 Change in Change in electricity volume forward price +/- 20.0% +/- 20.0% GBPm GBPm Derivative financial instruments (1)/1 6/(8) d. Financial risk management activities
IBOR reform
The Group has adopted the 'Interest rate benchmark reform' amendments to IFRS 9 'Financial Instruments' in the current financial year. These allow the Group to continue hedge accounting for its benchmark interest rate exposures during the period of uncertainty arising from interest rate benchmark reforms. The Group will continue to apply these amendments until the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and amount of the interest rate benchmark cash flows.
The Group initiated its London Interbank Offered Rate (LIBOR) transition plan in the prior financial year and, from August 2019, hedged balance sheet interest rate exposures within the Financial Services business using swaps referencing the Sterling Overnight Index Average (SONIA) index, being a risk-free rate. At 19 September 2020, the Group (within Financial Services) had remaining exposures to LIBOR impacted by the reform with a notional amount of GBP2,856 million, of which GBP2,847 million were designated in fair value hedge accounting relationships and GBP9 million not in a hedge relationship. Of these, GBP1,723 million are due to mature by December 2021. The Group expects to transition the remaining GBP1,133 million to SONIA by 31 December 2021. Further clarifications on hedge accounting implications for the financial statements are expected to be provided by IASB following endorsement of Phase 2 of the IASB IBOR Reform project.
Details of the hedging relationships for which the Group has applied the 'Interest rate benchmark reform'
amendments are given below. These relate to the utilisation of derivatives to achieve the desired mix of fixed and floating debt. The following table sets out the extent of the risk exposure associated with managing the fixed and floating debt mix as at 19 September 2020.
Carrying amount Line item in Interest financial statements Notional Asset Liability rate benchmark Hedge relationship GBPm GBPm GBPm Amounts due Interest rate from Financial swaps 2,784 - (39) LIBOR Fair Value Services customers Financial assets Interest rate at fair value swaps 63 - (2) LIBOR Fair Value through OCI
The Group's Retail cash flow hedge interest rate swaps, that are in a hedging relationship, mature prior to the transition, therefore the Group continues to apply hedge accounting for these.
e. Financial Services expected credit loss
Loans and advances are initially recognised at fair value and subsequently held at amortised cost, using the effective interest method, less provision for impairment and recognised on the balance sheet when cash is advanced:
19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm Non-current Loans and advances to customers 2,890 3,670 3,528 Impairment of loans and advances (78) (77) (75) 2,812 3,593 3,453 Current Loans and advances to customers 3,608 4,004 4,143 Impairment of loans and advances (228) (196) (192) 3,380 3,808 3,951 Loan commitment provisions (22) (20) (20) Total impairment provisions for loans and advances to customers and loan commitments (328) (293) (287) Impairment provisions as a percentage of loans and advances to customers 5.05% 3.82% 3.74%
During the reporting period there has been a deterioration in the economic outlook in the UK as a consequence of the COVID-19 pandemic and the measures taken by the government to control the spread of the virus. A significant reduction in UK economic output has begun to be observed and is expected to continue over an uncertain period, with a subsequent rise in unemployment expected to be a key driver of increased expected credit losses.
The full impact of the COVID-19 pandemic is unlikely to be known until a vaccine is widely available and government support has been withdrawn. For instance, the effects of the initial rollback of the Coronavirus Job Retention Scheme and the ending of initial Emergency Payment Freezes were only beginning to be observed as at 19 September 2020, and it is too early to understand the impact of further social restrictions imposed in Autumn 2020.
Due to the unprecedented nature of the COVID-19 pandemic and the UK government actions to support businesses and employees, the decision was made to overlay the impact of COVID-19 on top of the existing modelled outputs. The modelled outputs apply multiple economic scenarios which include an assessment of downside risk reflective of economic uncertainty prior to COVID-19. When the latest economic scenarios were applied to existing models they did not respond appropriately due to the unique nature of the current economic environment.
In order to estimate the increased credit losses resulting from COVID-19, the Group has developed unemployment scenarios which have been risk-weighted to determine an overlay rate applied to the existing IFRS 9 models. In line with guidance from the Bank of England, these scenarios assume that there will be significant economic disruption while social distancing measures are in place, followed by an expected recovery when these are lifted and have been triangulated with third-party data.
During the period expectations of a potential increase in peak unemployment and additional uncertainty involved in the nature of the recovery has resulted in an increase of approximately 50 per cent to the provision uplift of GBP30 million reported in note 41 of the Annual Report and Financial Statements 2020. Including risks to the economic outlook driven by the United Kingdom's departure from the European Union, the total economic overlay as at 19 September 2020 was GBP50 million.
15. Analysis of net debt
The Group's definition of net debt includes the capital injections to Sainsbury's Bank, but excludes the net debt of Sainsbury's Bank and its subsidiaries. Sainsbury's Bank's net debt balances are excluded because they are required for business as usual activities. The Group's definition of net debt includes lease liabilities as recognised under IFRS 16 and perpetual securities, and excludes derivatives that are not used to hedge borrowings.
A reconciliation of opening to closing net debt is included below. Balances and movements for the total Group and Financial Services are shown in addition to Retail to enable reconciliation between the Group balance sheet and Group cash flow statement.
Financial assets at fair value through other comprehensive income exclude equity related financial assets which predominantly relate to the Group's beneficial interest in a commercial property investment pool. Derivatives exclude those not used to hedge borrowings, and borrowings exclude bank overdrafts as they are disclosed separately.
Cash Movements Non-Cash Movements Cash Changes flows Interest Other in 8 March excluding (received)/ Accrued non-cash fair 19 September 2020 interest paid Interest movements value 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm Retail Financial assets at fair value through other comprehensive income 1 - - - - - 1 Net derivative financial instruments (15) - 3 (3) 2 (3) (16) Cash and cash equivalents 447 398 - - - - 845 Borrowings (excluding overdrafts) (1,116) 269 22 (24) - - (849) Lease liabilities (5,768) 223 168 (168) (356) - (5,901) Retail net debt (excluding perpetual securities) (6,451) 890 193 (195) (354) (3) (5,920) Financial Services Financial assets at fair value through other comprehensive income 802 (159) - - - 1 644 Net derivative financial instruments 4 - - - - (6) (2) Cash and cash equivalents 547 61 - - - - 608 Borrowings (excluding overdrafts) (180) - - - - - (180) Lease liabilities (6) 1 - - (1) - (6) Financial Services net debt 1,167 (97) - - (1) (5) 1,064 Group Financial assets at fair value through other comprehensive income 803 (159) - - - 1 645 Net derivative financial instruments (11) - 3 (3) 2 (9) (18) Cash and cash equivalents 994 459 - - - - 1,453 Borrowings (excluding overdrafts) (1,296) 269 22 (24) - - (1,029) Lease liabilities (5,774) 224 168 (168) (357) - (5,907) Group net debt (excluding perpetual securities) (5,284) 793 193 (195) (355) (8) (4,856) Retail net debt (excluding perpetual securities) (6,451) 890 193 (195) (354) (3) (5,920) Perpetual capital securities (248) 250 - - (2) - - Perpetual convertible bonds (248) - - - - - (248) Retail net debt (including perpetual securities) (6,947) 1,140 193 (195) (356) (3) (6,168) Of which: Leases (5,768) (5,901) Net debt excluding lease liabilities (1,179) (267)
Other non-cash movements predominantly comprise new leases and lease modifications.
Cash Movements Non-Cash Movements Cash Net Changes flows interest Other in 9 March excluding (received)/ Accrued non-cash fair 21 September 2019 interest paid Interest movements value 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm Retail Financial assets at fair value through other comprehensive income 1 - - - - - 1 Net derivative financial instruments (9) - 1 (3) - 5 (6) Cash and cash equivalents 466 365 - - - - 831 Bank overdrafts (1) - - - - - (1) Borrowings (excluding overdrafts and finance leases) (1,483) 150 25 (29) - - (1,337) Lease liabilities and hire purchase
arrangements (5,824) 240 180 (180) (186) - (5,770) Retail net debt (excluding perpetual securities) (6,850) 755 206 (212) (186) 5 (6,282) Financial Services Financial assets at fair value through other comprehensive income 622 176 - - - 1 799 Net derivative financial instruments - - - - - 2 2 Cash and cash equivalents 655 (18) - - - - 637 Bank overdrafts - - - - - - - Borrowings (excluding overdrafts and finance leases) (176) - - - - (4) (180) Lease liabilities and hire purchase arrangements (7) 1 - - - - (6) Financial Services net debt 1,094 159 - - - (1) 1,252 Group Financial assets at fair value through other comprehensive income 623 176 - - - 1 800 Net derivative financial instruments (9) - 1 (3) - 7 (4) Cash and cash equivalents 1,121 347 - - - - 1,468 Bank overdrafts (1) - - - - - (1) Borrowings (excluding overdrafts and finance leases) (1,659) 150 25 (29) - (4) (1,517) Lease liabilities and hire purchase arrangements (5,831) 241 180 (180) (186) - (5,776) Group net debt (excluding perpetual securities) (5,756) 914 206 (212) (186) 4 (5,030) Retail net debt (excluding perpetual securities) (6,850) 755 206 (212) (186) 5 (6,282) Perpetual capital securities (248) (248) Perpetual convertible bonds (248) (248) Retail net debt (including perpetual securities) (7,346) 755 206 (212) (186) 5 (6,778) Of which: Leases (5,824) (5,770) Net debt excluding lease liabilities (1,522) (1,008) Cash Movements Non-Cash Movements Cash Net flows interest Other Changes 9 March excluding (received) Accrued non-cash in fair 7 March 2019 interest / paid Interest movements value 2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm Retail Financial assets at fair value through other comprehensive income 1 - - - - - 1 Net derivative financial instruments (9) - 4 (5) 5 (10) (15) Cash and cash equivalents 466 (19) (2) 2 - - 447 Bank overdrafts (1) 1 - - - - - Borrowings (excluding overdrafts and finance leases) (1,483) 369 48 (50) - - (1,116) Lease liabilities and hire purchase arrangements (5,824) 429 332 (332) (373) - (5,768) Retail net debt (excluding perpetual securities) (6,850) 780 382 (385) (368) (10) (6,451) Financial Services Financial assets at fair value through other comprehensive income 622 177 - - - 3 802 Net derivative financial instruments - - - - - 4 4 Cash and cash equivalents 655 (108) - - - - 547 Bank overdrafts - - - - - - - Borrowings (excluding overdrafts and finance leases) (176) - - - - (4) (180) Lease liabilities and hire purchase arrangements (7) 1 - - - - (6) Financial Services net debt 1,094 70 - - - 3 1,167 Group Financial assets at fair value through other comprehensive income 623 177 - - - 3 803 Net derivative financial instruments (9) - 4 (5) 5 (6) (11) Cash and cash equivalents 1,121 (127) (2) 2 - - 994 Bank overdrafts (1) 1 - - - - - Borrowings (excluding overdrafts and finance leases) (1,659) 369 48 (50) - (4) (1,296) Lease liabilities and hire purchase arrangements (5,831) 430 332 (332) (373) - (5,774) Group net debt (excluding perpetual securities) (5,756) 850 382 (385) (368) (7) (5,284) Retail net debt (excluding perpetual securities) (6,850) 780 382 (385) (368) (10) (6,451) Perpetual capital securities (248) (248) Perpetual convertible bonds (248) (248) Retail net debt (including perpetual securities) (7,346) 780 382 (385) (368) (10) (6,947) Of which: Leases (5,824) (5,768) Net debt excluding lease liabilities (1,522) (1,179)
Reconciliation of net cash flow to movement in net debt
28 weeks to 28 weeks to 52 weeks to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm Opening net debt (6,947) (7,346) (7,346) Cash flow movements Net increase/(decrease) in cash and cash equivalents 459 347 (126) Elimination of Financial Services movement in cash and cash equivalents (61) 18 108 Repayment of perpetual capital securities 250 - - Decrease in Retail borrowings and overdrafts 269 150 369 Decrease in Retail lease obligations 223 240 429 Net interest paid on components of Retail net debt 193 206 382 Changes in net debt resulting from cash flow 1,333 961 1,162 Non-cash movements Accrued interest (195) (212) (385) Retail fair value and other non-cash movements (359) (181) (378) Changes in net debt resulting from non-cash movements (554) (393) (763) Movement in net debt 779 568 399 Closing net debt (6,168) (6,778) (6,947) 16. Borrowings
28 weeks to 19 September 28 weeks to 21 September 2020 2019 Current Non-current Total Current Non-current Total GBPm GBPm GBPm GBPm GBPm GBPm Loan due 2031 53 596 649 44 643 687 Bank overdrafts - - - 1 - 1 Bank loans due 2021 200 - 200 - 200 200 Bank loans due 2024 - - - - - - Convertible bond due 2019 - - - 450 - 450 Sainsbury's Bank Tier 2 Capital due 2023 4 176 180 - 180 180 Total borrowings 257 772 1,029 495 1,023 1,518 52 weeks to 7 March 2020 Current Non-current Total GBPm GBPm GBPm Loan due 2031 45 622 667 Bank loans due 2021 - 199 199 Bank loans due 2024 - 250 250 Sainsbury's Bank Tier 2 Capital due 2023 3 177 180 Total borrowings 48 1,248 1,296
Available facilities
In September 2019 the maturity of part of the GBP1,450 million Revolving Credit Facility was extended by one year. The Revolving Credit Facility is split into two Facilities, a GBP300 million Facility (A) and a GBP1,150 million Facility (B). Facility A has a final maturity of April 2025 and Facility B has a final maturity of October 2024. As at 19 September 2020, the Revolving Facility was undrawn (21 September 2019: nil; 7 March 2020: nil).
The Revolving Credit Facility incurs commitment fees at market rates and drawdowns bear interest at a margin above LIBOR.
The Group maintains uncommitted facilities to provide additional capacity to fund short term working capital requirements. Drawdowns on these uncommitted facilities bear interest at a margin over LIBOR. The uncommitted facilities were undrawn at 19 September 2020 (21 September 2019: nil; 7 March 2020: nil).
In July 2020 the Group prepaid in full the secured GBP250m Bilateral Loan Facility due July 2024.
17. Cash and cash equivalents
Cash and cash equivalents comprise the following:
28 weeks to 28 weeks to 52 weeks to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm Cash in hand and bank balances 461 467 519 Money market funds and deposits 580 639 202 Deposits at central banks 412 362 273 Cash and bank balances 1,453 1,468 994 Bank overdrafts - (1) - Net cash and cash equivalents 1,453 1,467 994
Of the above balance, GBP22 million (21 September 2019: GBP18 million; 7 March 2020: GBP21 million) was restricted at half-year.
18. Retirement benefit obligations
All retirement benefit obligations relate to the Sainsbury's Pension Scheme plus two unfunded pension liabilities relating to former senior employees of Sainsbury's and Home Retail Group.
The Sainsbury's Pension Scheme has two segregated sections: the Sainsbury's Section and the Argos Section.
The unfunded pension liabilities are unwound when each employee reaches retirement and takes their pension from the Group payroll or is crystallised in the event of an employee retiring and choosing to take the provision as a one-off cash payment.
The amounts recognised in the balance sheet, based on valuations performed by Isio are as follows:
19 September 2020 21 September 2019 Sainsbury's Argos Group Sainsbury's Argos Group GBPm GBPm GBPm GBPm GBPm GBPm Present value of funded obligations (9,043) (1,457) (10,500) (8,521) (1,356) (9,877) Fair value of plan assets 10,072 1,478 11,550 9,856 1,441 11,297 Retirement benefit surplus 1,029 21 1,050 1,335 85 1,420 Present value of unfunded obligations (21) (17) (38) (23) (15) (38) Retirement benefit surplus 1,008 4 1,012 1,312 70 1,382 7 March 2020 Sainsbury's Argos Group GBPm GBPm GBPm Present value of funded obligations (8,914) (1,421) (10,335) Fair value of plan assets 10,025 1,466 11,491 Retirement benefit surplus 1,111 45 1,156 Present value of unfunded obligations (21) (16) (37) Retirement benefit surplus 1,090 29 1,119
The principal actuarial assumptions used at the balance sheet date are as follows:
19 September 21 September 7 March 2020 2019 2020 % % % Discount rate 1.60 2.15 1.60 Inflation rate - RPI 2.90 3.10 2.70 Inflation rate - CPI 1.90 2.10 1.70 1.65 - Future pension increases 1.80 - 2.85 1.90 - 3.00 2.70
The amounts recognised in the income statement in respect of the IAS 19 charges for the defined benefit schemes are as follows:
28 weeks to 28 weeks 52 weeks 19 September to 21 September to 7 March 2020 2019 2020 GBPm GBPm GBPm Excluded from underlying profit before tax: Interest cost on pension liabilities (88) (134) (248) Interest income on plan assets 99 149 276 Total included in finance income (note 6) 11 15 28 Defined benefit pension scheme expenses (3) (4) (9) Total income statement credit 8 11 19
The movements in the net defined benefit obligations are as follows:
28 weeks to 28 weeks to 52 weeks 19 September 21 September to 7 March 2020 2019 2020 GBPm GBPm GBPm As at the beginning of the period 1,119 959 959 Interest cost 11 15 28 Remeasurement (loss)/gains (175) 364 89 Pension scheme expenses (3) (4) (9) Contributions by employer 60 48 52 As at the end of the period 1,012 1,382 1,119
Cash contributions
Cash contributions for the full-year are expected to be approximately GBP102 million.
Valuation of pension assets
The Pension Scheme has circa GBP2 billion of private market assets, split between private debt, private equity and property. These assets are held as they are expected to deliver a greater risk/return profile vs public market equivalents over the long term. The assets are illiquid (likely to be realised over 5+ years) but the Pension Scheme holds sufficient liquid assets (cash, gilts and other liquid securities) to be confident that it can meet its pension and collateral obligations over time.
The valuation of these assets is based on the audited accounts of the funds, where available, and net asset value statements from the investment managers where recent accounts are not available. For many of the investments the valuations provided are at 30 June. To reflect the high level of market volatility caused by the COVID-19 crisis, the Group has performed a roll-forward for these valuations using relevant liquid indices as follows:
Asset Class Return Global equity USD return 7.9% Global High Yield Debt GBP return 1.0% US loans GBP return 0. 2 % Global High Yield Debt local currency return 5.6% US loans USD return 4.8% UK REITS return 0.3%
This has increased the asset valuations by GBP36 million.
Sensitivities
The following sensitivities are based on management's best estimate of a reasonably anticipated change. The sensitivities are calculated using the same methodology used to calculate the retirement benefit obligation, by considering the change in the retirement benefit obligation for a given change in assumption. The net retirement benefit obligation is the difference between the retirement benefit obligation and the fair value of plan assets. Changes in the assumptions may occur at the same time as changes in the fair value of plan assets. There has been no change in the calculation methodology since the prior period.
Sainsbury's Argos Total GBPm GBPm GBPm An increase of 0.5% in the discount rate would decrease the present value of funded obligations by 841 145 986 A decrease of 0.5% in the discount rate would increase the present value of funded obligations by 968 168 1,136 An increase of 0.5% in the inflation rate would increase the present value of funded obligations by 642 146 788 A decrease of 0.5% in the inflation rate would decrease the present value of funded obligations by 579 130 709 An increase of one year to the life expectancy would increase the present value of funded obligations by 399 49 448 19. Related party transactions
The Group's related parties are its joint ventures as disclosed in its Annual Report and Financial Statements 2020.
Transactions with joint ventures and associates
For the 28 weeks to 19 September 2020, the Group entered into various transactions with joint ventures and associates as set out below:
28 weeks 28 weeks 52 weeks to to to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm Services and loans provided to joint ventures Dividends and distributions received 4 118 141 Disposal of joint ventures - - (21) Rental expenses paid (3) (4) (14)
Balances arising from transactions with joint ventures and associates
19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm Receivables Other Receivables - - 18 Payables Other Payables (1) (1) -
GBP18 million of dividends have been included within dividends and distributions in the cash flow statement in the current period for dividends which relate to the prior period but were received after 7 March 2020.
20. Contingent liabilities
The Group has a number of contingent liabilities in respect of historic guarantees, particularly in relation to disposed assets, which if the current tenant and their ultimate parents become insolvent, may expose the Group to a material liability. This is not expected to materialise.
Along with other retailers, the Group is currently subject to approximately 8,100 claims from current and ex-employees in the Employment Tribunal for equal pay under the Equality Act 2010 and/or the Equal Pay Act 1970. Typically, claims of this nature can take many years to be determined. Given that the claims against the Group are still at a relatively early stage and the outcome of such claims is highly uncertain at this stage, the Group considers the likelihood of a material pay-out to be remote.
21. Post balance sheet events
On 31 October 2020, the UK Government announced a four-week national lockdown, commencing 5th November. As this is after the Group's interim reporting date of 19 September 2020, it has been concluded that no adjustments are required to the Group's interim financial statements.
Further details of the Group's judgements and estimates in relation to COVID-19 are included in note 2 of the financial statements. As these already include COVID-related estimates, it is not expected that the additional lockdown will have a material effect on the Group's reported balances. Additionally, sensitivity analysis on the identified impairments during the period have been disclosed in note 13, and the COVID-19 impacts considered as part of the Group's going concern assessment are detailed in note 2.
Principal risks and uncertainties
Risk is an inherent part of doing business. The J Sainsbury plc Board has overall responsibility for the identification and management of the principal risks, emerging risks and internal control of the Company. The Board has identified the following principal potential risks to the successful operation of the business. These risks, along with the events in the financial markets and their potential impacts on the wider economy, remain those most likely to affect the Group in the second half of the year.
-- Brand perception -- Brexit -- Business continuity, operational resilience and major incidents response -- Business strategy and change -- Colleague engagement, attraction, retention and capability -- Data security -- Environment and sustainability -- Financial and treasury -- Health and safety - people and product -- Political and regulatory environment -- Sainsbury's Bank -- Trading environment and competitive landscape
The impact of COVID-19 on our customers, colleagues, business operations and supply chain continues to be actively monitored as the situation evolves, allowing ways of working and other mitigations to be flexed so that risks are managed.
The above Principal Risks remain unchanged from those reported in the Group's Annual Report and Financial Statements 2020. For more information on these risks, please refer to pages 36 to 45 of the J Sainsbury plc Annual Report and Financial Statements 2020, a copy of which is available on the Group's corporate website www.j-sainsbury.co.uk .
Statement of Directors' responsibilities
The Directors confirm that this set of Condensed Consolidated Interim Financial Statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union, and that the Interim Management Report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.
The Directors of J Sainsbury plc are listed in the J Sainsbury plc Annual Report and Financial Statements 2020.
A list of current directors is maintained on the Group's website: www.about.sainsburys.co.uk/about-us/our-management .
By order of the Board
Simon Roberts
Chief Executive
4 November 2020
Kevin O'Byrne
Chief Financial Officer
4 November 2020
INDEPENT REVIEW REPORT TO J SAINSBURY PLC
Introduction
We have been engaged by J Sainsbury plc (the company) to review the condensed consolidated set of financial statements in the interim financial report for the 28 weeks ended 19 September 2020 which comprises the Group income statement, the Group statement of comprehensive income, the Group balance sheet, the Group cash flow statement and the Group statement of changes in equity and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated set of interim financial statements.
This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.
Directors' Responsibilities
The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.
Our Responsibility
Our responsibility is to express to the Company a conclusion on the condensed consolidated set of financial statements in the interim financial report based on our review.
Scope of Review
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
Conclusion
Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of financial statements in the interim financial report for the 28 weeks ended 19 September 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
London
4 November 2020
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 Definition/ Purpose Reconciliation equivalent IFRS measure -------------- Income statement - Revenue Underlying Revenue A reconciliation of the measure is Group * Total sales less acquisition fair value unwinds on provided in note 4 of the financial sales Argos Financial Services. statements. -------------- * This is the headline measure of revenue for the Group. It shows the annual rate of growth in the Group's sales and is considered a good indicator of how rapidly the Group's core business is growing. Underlying Revenue A reconciliation of the measure is Retail * Underlying Group sales as above, less underlying provided in note 4 of the financial sales Financial Services revenue. statements. * Shows the annual rate of growth in the Group's Retail business sales. Like-for-like No direct The reported 28 weeks 28 weeks sales equivalent retail to 19 to 21 like-for-like September September sales growth of 2020 2019 6.9 per cent is based on a combination of Sainsbury's like-for-like sales and Argos like-for-like sales for the 28 weeks to 19 September 2020. See movements below: Underlying retail like-for-like (exc. fuel) 6.9% (1.0)% Underlying net new space impact 0.2% 0.4% Underlying total retail sales growth (exc. fuel) 7.1% (0.6)% Fuel Impact (8.5)% 0.3% Underlying total retail sales growth (inc. fuel) (1.4)% (0.3)% * 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 impact on sales of stores which were temporarily closed due to COVID-19 have been included within LFL sales. Only permanently closed sites and those temporarily closed for non COVID-19 related reasons are treated as non LFL. * 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. Income statement - Profit Retail Profit 28 weeks 28 weeks 52 weeks underlying before * Underlying earnings before interest, tax, Financial to to to operating tax Services operating profit and Sainsbury's underlying 19 September 21 September 7 March profit share of post-tax profit from joint ventures and 2020 2019 2020 associates. GBPm GBPm GBPm Group PBT (note 4a) (137) 9 255 Add back Group non-underlying items (note 3) 438 229 331 Group UPBT (note 4a) 301 238 586 Less: Bank underlying operating loss/(profit) (note 4a) 55 (20) (48) Retail underlying operating profit
(note 4a) 356 218 538 Net underlying finance costs (note 6) 199 219 400 Retail underlying operating profit (note 4a) 555 437 938 APM Closest Definition/ Purpose Reconciliation equivalent IFRS measure Underlying Profit Underlying profit before tax is bridged profit before * Profit or loss before tax before any items recognised to statutory profit before tax in the before tax which, by virtue of their size and/or nature, do not income statement and note 3 of the financial tax reflect the Group's underlying performance. statements. The adjusted items are as follows: * Financial Services transition - multi-year costs incurred in transitioning to a new, more flexible banking platform as part of the previously announced New Bank Programme. These principally comprise contractor and service provider costs relating to the migration of data and other services to the Bank's new infrastructure and operating model. * Profit/(loss) on disposal of properties - such disposals are not part of the Group's underlying business. * Investment property fair value movements - these reflect the difference between the fair value of an investment property at the reporting date and its carrying amount at the previous reporting date and are held within the property JVs. The valuations are impacted by external market factors and can therefore vary significantly year-on-year. * Perpetual securities coupons - these 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 as they are included by management when assessing Group borrowing. * Non-underlying finance movements - these include fair value remeasurements on derivatives not in a hedging relationship. The fair value measurements are impacted by external market factors and can fluctuate significantly year-on-year. Lease interest on impaired non-trading sites, including site closures, is excluded from underlying profit as those sites do not contribute to the underlying business. * IAS 19 pension interest and expenses include the financing element and scheme expenses of the Group's defined benefit scheme. These are reported outside underlying profit as they no longer relate to the Group's on-going activities following closure of the scheme to future accrual. * Acquisition adjustments - these reflect the adjustments arising from acquisitions including the fair value unwind and amortisation of acquired intangibles. * Other - these are items which are material and infrequent in nature and do not relate to the Group's underlying performance and in the current year include restructuring programmes, impairment of non-financial assets and ATM business rates reimbursement. Underlying Basic A reconciliation of the measure is provided basic earnings * Earnings per share using underlying profit as in note 8 of the financial statements. earnings per share described above. This is a key measure to evaluate per share the performance of the business and returns generated for investors. Retail No direct 28 weeks 28 weeks underlying equivalent * Retail underlying operating profit as above, before to to EBITDAR rent, depreciation, and amortisation. 19 September 21 September 2020 2019 GBPm GBPm Retail underlying operating profit (note 4a) 555 437
Add: Retail depreciation and amortisation expense (note 4b) 647 653 Less: Non underlying depreciation and amortisation (note 3) (12) (17) Add/Less: Net rental expense/(income) (note 11) 4 (3) Other - (3) 1,194 1,067 Underlying Finance A reconciliation of this measure is included net income * Net finance costs before any non-underlying items as in note 6 of the financial statements. finance less defined above that are recognised within finance costs finance income / expenses. The adjusted items are as follows: costs * Fair value remeasurement on derivatives not in a hedging relationship. The fair value measurements are impacted by external market factors and can fluctuate significantly year-on-year. * Lease interest on impaired non-trading sites, including site closures, is excluded from underlying profit as those sites do not contribute to the underlying business. * The financing element of the Group's defined benefit scheme. These are reported outside underlying profit as they no longer relate to the Group's ongoing activities following closure of the scheme to future accrual. * Perpetual securities coupons - these 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 as they are included by management when assessing Group borrowing. Underlying Effective The tax on non-underlying items is included tax rate tax rate * Tax on underlying items, divided by underlying profit in note 3 of the financial statements before tax. * Provides an indication of the tax rate across the Group before the impact of non-underlying items. APM Closest Definition/Purpose Reconciliation equivalent IFRS measure Cash flows and net debt Retail No direct cash flow equivalent items in 52 Financial 28 weeks 28 weeks weeks Review to to to 19 21 7 September September March 2020 2019 2020 Ref GBPm GBPm GBPm Net interest paid a (213) (226) (405) Repayment of lease liabilities b (223) (230) (419) Repayment of borrowings c (519) (160) (379) Other d (26) 1 (3) * 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 Dividends combined. The cash flow in note 4 of the financial and statements includes a reference to show what has been distributions combined in these line items. received e 22 118 143 Retail Net cash free cash generated flow from Reconciliation of 52 operating retail free cash 28 weeks 28 weeks weeks activities flow to to to 19 21 7 September September March 2020 2019 2020 GBPm GBPm GBPm Cash generated from retail operations 1,719 1,275 1,971 Net interest paid (ref (a) above) (213) (226) (405) Corporation tax (88) (8) (113) Retail purchase of property, plant and equipment (257) (213) (517) Retail purchase of intangible assets (33) (35) (82) Retail proceeds from disposal of property, plant and equipment 19 54 81 Initial direct costs on right-of-use assets (3) (2) (13) Repayments of obligations under leases (223) (230) (419) Dividends and distributions received 22 118 143 Bank capital injections - (35) (35)
* Net cash generated from retail operations, after perpetual security coupons and cash capital expenditure but before strategic capital expenditure, and including payments of lease obligations, cash flows from joint ventures and associates and Sainsbury's Bank capital injections. * This measures cash generation, working capital efficiency and capital expenditure of the retail Retail free business. cash flow 943 698 611 APM Closest Definition/Purpose Reconciliation equivalent IFRS measure Underlying No direct working equivalent 52 capital 28 weeks 28 weeks weeks movements to to to 19 21 7 September September March 2020 2019 2020 GBPm GBPm GBPm Retail working capital movements per cash flow (note 4b) 713 289 (71) Adjustments for: Retail non-underlying impairment charges (per note 4b) 187 177 257 Non-underlying restructuring and impairment charges (per note 3) (473) (228) (328) Less Bank impairment charges (per note 3) 105 - - ATM income (per note 3) 42 - - Other - (3) (3) Non-underlying working capital movements before cash movements (139) (54) (74) Non-underlying cash movements: Restructuring (per note 3) 9 4 34 ATM income (per note 3) (12) - - Argos integration costs (per note 3) - 3 2 Transaction costs relating to the proposed merger with Asda (per note 3) - 11 13 Other - (2) (1) (3) 16 48 Total adjustments for non-underlying working capital (142) (38) (26) * To provide a reconciliation of the working capital movement in the Financial statements to the underlying working capital movement in the Financial review. Underlying working * Removes working capital and cash movements relating capital to non-underlying items. movements 571 251 (97) Net cash Cash 28 weeks 28 weeks 52 weeks generated generated * This enables management to assess the cash generated to to to from retail from from its core retail operations. 19 September 21 September 7 March operations operations 2020 2019 2020 (per Financial Review) * A reconciliation between this and cash generated from GBPm GBPm GBPm operations per the accounts is shown here: Retail cash generated from operating activities (per note 4b) 1,438 1,059 1,474 Perpetual security coupons (20) (20) (23) Interest received - 2 (2) Net retail cash generated from operations in Financial Review 1,418 1,041 1,453 Core retail No direct capital equivalent 28 weeks expenditure 28 weeks to to 19 September 21 September 2020 2019 GBPm GBPm Purchase of property, plant and equipment (257) (213) Purchase of intangibles (33) (35) Cash capital expenditure before strategic capital expenditure (note 4b) (290) (248) * 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. APM Closest Definition/ Purpose Reconciliation equivalent IFRS measure Net debt Borrowings, A reconciliation of the measure is provided cash, * Net debt includes the capital injections into in note 15 of the financial statements. derivatives, Sainsbury's Bank, but excludes the net debt of In addition, to aid comparison to the balance financial Sainsbury's Bank and its subsidiaries. sheet, reconciliations between financial assets assets at FVTOCI and derivatives per the
at FVTOCI, balance sheet and Group net debt (i.e. including lease Financial Services) is included below: liabilities 28 weeks 28 weeks 52 weeks to to to 19 September 21 September 7 March 2020 2019 2020 GBPm GBPm GBPm Financial instruments at FVTOCI per balance sheet 924 1,020 1,054 Less equity-related securities (279) (220) (251) Financial instruments at FVTOCI included in Group net debt 645 800 803 Net derivatives per balance sheet (66) (4) (71) Less derivatives not used to hedge borrowings 48 - 60 Derivatives included in Group net debt (18) (4) (11) * It is calculated as: financial assets at fair value through other comprehensive income (excluding equity investments) + net derivatives to hedge borrowings + net cash and cash equivalents + loans + lease obligations + perpetual securities. * This shows the overall strength of the balance sheet alongside the liquidity and its indebtedness and whether the Group can cover its debt commitments. Other Net debt/ No direct Net debt as provided in note 15. Group underlying equivalent * Net debt divided by Group underlying EBITDAR. underlying EBITDAR is reconciled within EBITDAR the fixed charge cover analysis below. * This helps management measure the ratio of the business's debt to operational cash flow. Return No direct An explanation of the calculation is provided on capital equivalent * Return on capital employed is calculated as return in the Financial Review on page 18. employed divided by average capital employed. * Return is defined as 52 week rolling underlying profit before interest and tax. * Capital employed is defined as Group net assets excluding pension deficit/surplus, less net debt (excluding perpetual securities). The average is calculated on a 14 point basis. * This represents the total capital that the Group has utilised in order to generate profits. Management us e this to assess the performance of the business. Fixed No direct 24 weeks 28 weeks 52 weeks 52 weeks charge equivalent * Group underlying EBITDAR divided by rent to to to to cover (representing capital and interest repayments on 7 March 19 September 19 September 7 March leases) and underlying net finance costs, where 2020 2020 2020 2020 interest on perpetual securities is treated as an GBPm GBPm GBPm GBPm underlying finance cost. All items are calculated on Group underlying a 52 week rolling basis. operating profit (note 4a) 529 500 1,029 986 Add: Group * This helps assess the Group's ability to satisfy depreciation fixed financing expenses from performance of the and amortisation business. expense (note 4b) 589 661 1,250 1,256 Less: Non underlying depreciation and amortisation (note 3) (11) (12) (23) (28) Add/Less: Net rental expense/(income) (note 11) (7) 4 (3) (10) Other - - - (1) Group underlying EBITDAR 2,253 2,203 Repayment of capital element of lease obligations (note 4b) (189) (224) (413) (420) Underlying finance income (note 6) 2 2 4 4 Underlying finance costs (note 6) (183) (201) (384) (404) Fixed charges (793) (820) Fixed charge
cover 2.8 2.7
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