Proposed combination with Asda
Today, Sainsbury’s has separately announced a proposed combination with Asda to create a dynamic new player in UK retail

Financial highlights

• Underlying profit before tax £589 million, a return to growth; H2 profit increase of 11 per cent
• Strong cash generation with free cash flow of £432 million, up £113 million in the year
• Net debt reduced by £113 million to £1,364 million. Targeting to reduce net debt by a further £100 million in 2018/19
• Delivery of £185 million cost savings in the year, bringing the total to £540 million over three years, exceeding our original £500 million three year target. We will deliver further cost savings of at least £500 million over the next three years to 2020/21, starting with £200 million in savings this year
• Underlying earnings per share decreased six per cent to 20.4 pence per share, primarily reflecting the impact of a full year’s consolidation of the additional shares issued at the HRG acquisition
• In line with our policy of paying a dividend that is covered 2.0 times by underlying earnings, we propose to pay a final dividend of 7.1 pence per share, an increase of eight per cent, bringing our full year dividend to 10.2 pence per share. The dividend is also covered 2.0 times by free cash flow
• Sainsbury’s Bank profits of £69 million; expected to reduce to around £30 million next year
• Profit expectation for 2018/19 is in line with current market consensus of £629 million¹

Strategic highlights

• Good food performance: transactions growing ahead of the market and an improving margin trend
• Convenience and Groceries Online sales up nearly eight per cent and nearly seven per cent respectively
• In the biggest retail change programme we have ever undertaken, we are transforming the way we work in our stores. We propose to simplify our structures and our operations and invest in technology to be more efficient and to improve customer service
• General Merchandise and Clothing, including Argos, continue to outperform a challenging market²
• 191 Argos stores open in Sainsbury’s supermarkets; resulting in around 280 by the end of 2018/19, ahead of our plan to open 250 by March 2019. We will also deliver £160 million EBITDA synergies by March 2019, six months ahead of plan
• Nectar acquisition supports our strategy of knowing our customers better than anyone else

¹ Analyst consensus is available on our corporate website www.j-sainsbury.co.uk
² General Merchandise grew ahead of the market (BRC non-food non-clothing market, consistently gaining share. Clothing grew ahead of the market (Kantar Worldpanel, 52 weeks ending 18 March 2018)

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

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

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

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

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

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

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

Outlook
The market remains competitive. However, we are well placed to navigate the external environment and we remain focused on delivering our strategy. Despite the reduction in profits at Sainsbury’s Bank, we are comfortable with current market consensus for 2018/19 UPBT of £629 million¹.

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

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

Notes

• All sales figures contained in this trading statement are stated including VAT and in accordance with IFRIC 13
• The sale of our Pharmacy business to LloydsPharmacy completed on 31 August 2016. The impact of this disposal is excluded from like-for-like sales for a period of one year from this date
• Full year total retail sales growth is higher than the statutory accounts by 0.1 per cent due to the re-phasing of 2016/17 post-acquisition Argos sales into pre-acquisition quarters on a comparable basis

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

Four key priorities

1. Further enhance our differentiated food proposition

• We are committed to offering competitive prices and recently invested a further £150 million to lower the price of 930 essential items
• Our share of transactions increased, with more customers choosing to shop at Sainsbury’s than ever before
• Convenience and Online remain strong drivers of growth, with sales up nearly eight per cent and nearly seven per cent respectively
• We continue to invest in the quality of our food. We have re-launched 128 food ranges this year, covering 60 per cent of food sales
• Our Slow Cook range offers customers restaurant quality food. Our share of this growing market has increased from four per cent to 17 per cent and we are now the market leader
• Our gourmet Supper Club ready meal range, which launched in February, is a great example of the innovation in high quality food that differentiates us. It is performing well and growing share
• We are focused on making our stores attractive retail destinations. Innovative and exclusive partnerships enhance our food offer and give customers more choice. These include Godiva chocolates which are available exclusively to Sainsbury’s customers in 500 stores and Patisserie Valerie handmade cakes and pastries which are available in 44 stores, including Click & Collect
• We have 59 Sushi Gourmet and Sushi Daily counters and we continue to work with selected concession partners such as Explore Learning, Specsavers, Timpsons and Crussh fit food and juice bars to maximise the use of space in our stores
• Customers value saving time and having more control over how much they spend. Our Smart Shop ‘scan as you shop’ technology is now in 60 supermarkets
• Our Same Day Groceries Online delivery option is now available to 40 per cent of the UK population
• We are transforming the way we work in our stores. We propose to simplify our structures and our operations and invest in technology to be more efficient and to improve customer service
• Our Nectar acquisition gives us the flexibility to trial and adapt our customer loyalty offer
• Our colleagues continue to deliver market-leading customer service and product availability. We have won the Grocer Gold Awards for Service and Availability for the past five years

2. Grow General Merchandise and Clothing and deliver synergies

• General Merchandise sales declined 0.8 per cent, outperforming the market and gaining market share¹
• Clothing grew sales by nearly four per cent, with online growth of 45 per cent and outperformed the market². Tu clothing can now be ordered from the Argos website for home delivery or to collect from over 1,000 Argos stores and collection points across the UK
• Strong Argos performance in key categories of Audio, Mobile and Video Games
• Argos Fast Track is a key point of difference and our unique Hub and Spoke model enables us to deliver customer orders quickly and conveniently. Argos is the only retailer in the UK that can deliver to 90 per cent of postcodes within four hours. Fast Track home deliveries increased by 28 per cent and Fast Track in-store collections by 45 per cent in the year
• Digital sales continue to grow and 60 per cent of sales now start online. Of those, 70 per cent are from mobile devices
• 191 Argos stores open in Sainsbury’s supermarkets; resulting in around 280 by the end of 2018/19, ahead of our plan to open 250 by March 2019. We will also deliver £160 million EBITDA synergies by March 2019, six months ahead of plan
• Customers can pick up their Argos and Tu clothing from 192 collection points in our supermarkets. 155 of these are in supermarkets where customers can also collect eBay and DPD parcels. We also have 37 collection points in Sainsbury’s Local stores.

¹ BRC non-food non-clothing market, 52 weeks to 10th March 2018
² Kantar Worldpanel, 52 weeks ending 18 March 2018

3. Diversify and grow Sainsbury’s Bank

• Sainsbury’s Bank delivered £69 million profit, up 11 per cent, primarily reflecting the full consolidation of Argos Financial Services. Good sales growth across the product range was offset by a reduction in margins in the competitive unsecured lending market and a modest increase in bad debt charges, as expected
• While we remain confident in the Bank’s potential to generate growth and healthy returns in the medium term, we expect Sainsbury’s Bank profits to reduce significantly in the short term. We believe the banking market will remain competitive, with unsecured lending margins further impacted by cheap funding from the Bank of England’s Term Funding Scheme.  This year we are taking a cautious approach to unsecured lending and focusing on growing our mortgage book and our commission products. Together with the impacts of new accounting standards driving an additional £11 million impairment as a result of IFRS 9 adoption and the interest relating to the external capital we raised in November 2017, we expect this to result in profit of around £30 million in 2018/19
• Sainsbury’s Bank Mortgages, launched in April 2017, have performed well. We have eight new broker partners and lending in excess of £275 million
• We have 1.9 million active Bank customers, up eight per cent
• Credit Cards performed strongly, with 40 per cent year-on-year growth in new card sales; the Argos Card saw a 12 per cent increase in sales
• Following the launch of the new banking platform, we grew savings by 41 per cent
• Our insurance broker panel model, introduced in February 2017, has been popular with customers. Car Insurance new policy sales grew by 42 per cent and Home Insurance sales grew by 39 per cent 
• Travel Money grew 26 per cent, increasing market share

4. Continue cost savings and maintain balance sheet strength

• Responding to changing customer shopping habits we are making transformational changes to our in-store operating model, and reducing costs throughout our store estate
• We have achieved cost savings of £540 million over the past three years, exceeding our original target of £500 million. We will deliver at least a further £500 million of cost savings over the next three years to 2020/21
• We achieved £185 million of these cost savings in 2017/18 across a number of areas including logistics, energy efficiency, store operations, procurement and marketing
• We have well-developed plans in place to deliver at least £500 million of cost savings over the next three years with £200 million of these savings to be achieved in 2018/19 as we continue to drive efficiencies and simplify the business
• Our balance sheet remains strong. We have reduced net debt by £113 million to £1,364 million (excluding perpetual securities) and we are targeting to reduce net debt by a further £100 million in 2018/19
• We continue to maintain high levels of liquidity, with facilities of £4.1 billion, of which only £2.5 billion was drawn down at the year end. We refinanced our revolving credit facility in October 2017, increasing it to £1.5 billion and extending its maturity. The ratio of lease adjusted net debt to earnings before interest, tax, depreciation and rent (EBITDAR) has improved to 3.2 times from 3.7 times a year ago
• We achieved strong underlying cash generation, with free cash flow of £432 million in 2017/18 compared to £319 million in 2016/17

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

• Living healthier lives: 33,350 schools and clubs took part in our Active Kids scheme in 2017/18
• Sourcing with integrity: Through Sainsbury’s Dairy Development Group’s ten year partnership with over 260 dairy farmers we have achieved higher milk yields, improved animal welfare, and a price guarantee
• Respect for our environment: We have reduced packaging by 35 per cent since 2005 and we are working with WRAP to make plastic packaging recyclable
• Making a positive difference in the community: We generated £35 million in 2017/18 for charities, communities and good causes
• Great place to work: We were awarded Disability Confident Leader status by the Department for Work and Pensions for our work on disability and inclusivity – the largest retailer in the UK to achieve this status

Notes

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

A results presentation for analysts and investors will be held on 30 April 2018 at 9.30am.

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

To listen to the results presentation: To listen to the live results presentation by telephone, please dial 0800 783 0906 (or +44 (0)1296 480 100 if you are unable to use the primary number). The pass code for the event is 471 558. A transcript of the presentation and an archive recording of this event will be available later in the day at www.j-sainsbury.co.uk.

Sainsbury’s will issue Audited Preliminary Results for the year ended 10 March 2018 on 2 May and the 2018/19 First Quarter Trading Statement will be issued at 07:00 (BST) on 4 July 2018.