WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 - WorldReginfo
Annual report and financial statements 2012/13statements financial report and Annual PLC Supermarkets Morrison Wm More of what matters what of More
Annual report and financial statements 2012/13 Wm Morrison Supermarkets PLC Performance and strategy review Annual report and financial statements 2012/13 Morrisons at a glance
Who we are We provide great service to We are the UK’s fourth largest our customers by offering food retailer by sales, with annual turnover in excess of £18bn. We the best value fresh food, have c500 stores across the UK, prepared in-store by which includes 12 convenience our experts. formats. Over 11 million customers visit We are unique because of our stores each week, served by the transparency of our 129,000 friendly colleagues. supply chain and our focus
Financial performance 2012/13 on traditional crafts – we do more of what matters. Turnover £18.1bn Like-for-like sales % 53 week v 53 week basis (2.1) Profit before tax £879m Basic earnings p per share 26.7 Net debt £2.2bn Total dividend p per share 11.8
Note: Throughout the Directors’ report and business review (1) U nless otherwise stated, 2012/13 refers to the 53 week period ended 3 February 2013 and 2011/12 refers to the 52 week period ended 29 January 2012. 2012 and 2013 refer to calendar years. (2) Underlying profit is defined as profit before one off costs and credits, property transactions and IAS 19 pension interest, at a normalised tax rate, as reconciled in note 1 of the Group financial statements. Underlying operating profit is operating profit before property disposals. (3) L ike-for-like sales reflects the percentage change in year-on-year store sales (excluding VAT and fuel), stripping out the impact of new store openings and closures in the current or previous financial year. WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements
How we’ve performed against Directors’ report and business our strategic objectives review Performance and strategy review What we said we would do 2 Our business model – doing more of what matters 4 Understanding our customers and the challenges of our marketplace • Deliver even better value for 6 Chairman’s review our customers 8 Chief Executive’s review 12 Focused on our strategic objectives • Develop our core business through 14 Measuring performance against our strategic objectives opening more supermarkets and 16 Driving the topline 19 Increasing efficiency convenience stores 21 Capturing growth 24 Financial review • Continue to explore 28 Managing risks and uncertainties multi-channel capabilities 30 More of what matters for our people 33 C orporate responsibility
Governance What we did 36 Board of Directors and Management Board 40 Corporate governance report • Continued to offer customers great 45 Directors’ remuneration report value on fresh food prepared in store 55 G eneral information 58 Statement of Directors’ responsibilities • Opened 17 new stores and nine convenience stores Financial statements • Launched Morrisons Cellar, developed 59 Group financial statements our Kiddicare online offer and 59 Independent auditor’s report 60 Consolidated statement of comprehensive income continued to explore food online 61 Consolidated balance sheet 62 Consolidated cash flow statement 63 Consolidated statement of changes in equity What we will do next 64 Group accounting policies 70 Notes to the Group financial statements 96 Company financial statements • Increase our accessibility to customers 96 Company balance sheet by building our convenience portfolio 97 Company accounting policies to 100 stores 100 Notes to the Company financial statements • Continue to offer great value on Investor information Market Street with our ‘pick of the 109 Five year summary of results 110 S upplementary information street’ deals 111 Investor relations and financial calendar • Launch Morrisons online food offer in 2014
1 1 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Annual report and financial statements 2012/13 Our business model – doing more of what matters
What we do Where we do it Our business model is underpinned by We operate throughout the UK so we’re the manufacturing and sourcing of great closer to our suppliers and customers – food, sold across our stores by our friendly the people who matter. people – put simply we make, we buy, we move and we sell.
Morrisons has grown from a market stall in Bradford to Key the UK’s fourth largest supermarket group with c500 Head office stores including 12 Morrisons M local convenience stores. Online head office We employ 129,000 people across our business, including Distribution centres over 5,000 trained butchers, bakers and fishmongers. We have over 600 lorries and 150,000 trolleys! Manufacturing M local Each of our stores (including convenience) has its own Supermarkets Market Street, complete with trained colleagues using their craft skills to bring fresh products to our customers, 58 prepared just the way they like it. Every day in-store we Scotland bake 128,000 loaves, filet 5,000 fish and make 11,500 sandwiches. We make more fresh food in-store than any other supermarket. 90 We have always cared about the origin of our food. In the 1960s we began sourcing our meat from Woodhead North Brothers, a company which became part of the Morrisons family in 1991. We are now the UK’s second largest fresh food manufacturer and our vertical integration gives us both transparency over our supply chain and the flexibility to run industry leading promotions to support our profitability. 99
Our business model has evolved to reflect the changing Midlands demands of today’s consumer, in particular ‘when, where and how’ they shop. We continue to invest in the convenience market, recently buying 62 stores from other 85 retailers. We have made progress with our multi-channel offer, with Kiddicare and Morrisons Cellar, and the development of our online food proposition. 84 South East 70 Our head office, logistics and distribution teams support our South Central stores and we continuously invest in technology. Our Evolve South West programme has helped us increase efficiency by making sure we have the right systems in place to deliver continuous improvement across our operations.
We recognise the importance of developing our people and the Morrisons Academy gives colleagues the opportunity to learn skills to take them from ‘shop floor to top floor’. We are proud to be a British Group and close to both our customers and suppliers. We are committed to behaving responsibly (page 33) in everything we do, for example reducing waste through We are continuing to grow so that we can reach even more our Great Taste, Less Waste scheme. customers. In 2013/14 we plan to open 20 stores and increase our convenience store portfolio to 100. Our continued store We understand the need to protect our business from roll out means we’re creating local jobs across the UK. operational and reputational risk. Details of our risk management and mitigating factors are set out on page 28. We work closely with our communities to support local initiatives, such as Let’s Grow (our fun educational scheme for schools) and Raise a Smile (our charity partnership scheme).
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H ow we do it differently We provide great service to our customers by How we’re building on offering the best value fresh food, prepared in-store Fresh by our experts. We are unique because of the Value transparency of our supply chain and our focus on Service traditional crafts.
Fresh Value more of what matters more of what matters • fresh food – from field to fork, • honest prices – affordable for everyone catch to kitchen in hours • transparent promotions • made from scratch in-store every day • great availability • vertical integration – we own the supply We price our food honestly to offer the best value to chain and we source locally our customers. Our vertical integration allows us to drive • we guarantee our fresh credentials out efficiencies and quickly pass savings on to customers.
In Market Street our customers can see their food being prepared. Even our Morrisons M local stores have Market Street made products giving customers the same great fresh food. lue for o Owning our supply chain means we va ur s V h ng ha a know where our food comes from. s si re l e i h u We can also react more quickly to r im o e l F x d customer demands throughout the a e day, resulting in less waste. M r s
Service
Service more of what matters • craft skills in-store – see and We pride ourselves on our in-store craft skills. We have over 5,000 trained butchers, bakers taste the food on Market Street and fishmongers preparing food and delivering • friendly people, offering the exactly what our customers want, tailored to best advice and service suit local markets. • knowledgeable HOT (Hello, Offer, Thank) service
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Total shareholder return AsConsumer a result of Confidencethese external pressures, customers are becoming increasingly savvy about when, where and how they shop, trading 140 Challenging economic conditions -15 down and using coupons, only buying what’s needed and using 130 The economy continues to be extremely challenging and the the internet to check prices and shop around for the best deals. -20 120 tough trading conditions look set to remain as the UK faces 110 slow economic growth. -25 3 100 Inflation averaged 2.8%1 through the year, with CPI food inflation 74% 90 averaging 4.1%1. Inflation remains the number one issue for -30 monitor item pricing as a way 80 consumers with rises in food and commodity prices outstripping to manage their budget wage growth. This ‘squeeze’ is being felt by a wider group of -35 70
people than ever. GFK Consumer Confidence Value of hypothetical £100 holding 60 -40£ 3 Feb 2 Feb 1 Feb 1 Feb 30 Jan 3 Feb Jan Mar May Jul Sep Nov Jan 2008 2009 2010 2011 2012 2013 Average earnings and inflation 2012 2012 2012 2012 2012 2013 2013
Wm Morrison Supermarkets PLC FTSE 100 6 source: GFK NOP Consumer Confidence FTSE all share food and drug retailers index 5 3 source: Thompson Reuters 63% 4 look more closely at the price
% 3 of products before deciding what to buy 2
1
0 2007 2008 2009 2010 2011 2012 Share price performance over the last three years PBT v total remuneration (base salary + cash bonus) 44%3 for Chief Executive and Group Finance Director during Average earnings CPI inflation 350 the period 2008/09 to 2012/13 source: Capital Economics take more time choosing 325 1000 £5,000 their groceries 900 £4,500 Consumer confidence remains low, c60%2 of households are 300 800 £4,000 worried about their levels of debt; c50%2 of consumers are 700 £3,500 struggling to manage until payday and over 50%2 of households 3 source:275 IGD, 2012 600 £3,000 have little or no savings. 250
500 £2,500 Share price (p) (3) 1 source: Office of National Statistics 400 £2,000 2 source: Association of Business Recovery Practitioners, 2012 225 PBT (£m ) (1) (2) 300 £1,500 200 200 £1,000 100 £500
Feb 2010Apr 2010Sept 2010Dec 2010Feb 2011Apr 2011Sept 2011Dec 2011Feb 2012Apr 2012Sept 2012Dec 2012Feb 2013 0 £0 Base salary + cash bonus (£000) 2008/092009/102010/112011/122012/13 Wm Morrison Supermarkets PLC PBT Base salary + cash bonus
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Changes in food shopping behaviour, Stated importance – most important since Jan 2012 (Claimed) aspects in driving store choice (%) Only buying what is needed 53
Value for money 64 Reducing food waste 48 Local 60 Cooking with leftovers 35
Value is more crucial than ever NewSaves money channels on shopping to market 53 Cooking smaller portions 32 Good parking 49 Value remains the number one driver of store choice and is at The marketplace is continually evolving and being truly multi- Growing my own produce 24 the forefront of shoppers’ minds. There has been a further shift channelConsistently has low never prices been more important. Customers 47want to Removing items form trolley 20 in 2012, as low prices become the biggest consideration of value buyProduct ‘how availability and when they want’ evidenced by significant45 growth across all socio-economic groups. in online and convenience channels. Missing meals 14 Great quality food 41 4 0% 100% Promotions in isolation are no longer seen as a differentiator InRange 2012, of freshthe foodonline grocery market grew by 15.7%33 and online 4 and customers expect more personalised offers and vouchers. sales now account for 3.9% of the market. Online grocery Share of respondents (%) 4 Our promotions, such as ‘Fuel Saver’, have been well received retail is expected to almost double over the next five years as More Same Less smartphone,source: Drivers tablets of store choiceand other (IPI), Kantar technology segmentation enhancements panel, October make 2012 DATA? by customers. source: Shoppervista. IGD Research, online access easier. August 2012, IGD May 2012 Changes in food shopping behaviour, Stated importance – most important Customers also demand easy access to convenience stores with since Jan 2012 (Claimed) aspects in driving store choice (%) almost half of all households ‘topping up’ on staple products and shopping three or more times per week in order to reduce Only buying what is needed 53 waste. Morrisons has made progress in the convenience channel, Value for money 64 opening nine stores this year, with plans to reach 100 by the end Reducing food waste 48 of 2013/14. Local 60 Cooking with leftovers 35
Saves money on shopping 53 Development of these channels represents an opportunity to gain Cooking smaller portions 32 Good parking 49 market share and continue to meet the needs of our customers. Growing my own produce 4source: IGD 24 Consistently low prices 47 Removing items form trolley 20 Product availability 45 Missing meals 14 Dalton Philips Great quality food 41 Convenience sales – £bn 0% 100% Range of fresh food 33 2012 Target 33.9 Share of respondents (%) 2017 43.6 More Same Less Maximum source: Drivers of store choice (IPI), Kantar segmentation panel, October 2012 DATA? source: Shoppervista. IGD Research, Online sales – £bn August 2012, IGD May 2012 Richard Pennycook Own label growth 2012 5.6 2017 11.1 Target Retailer own brand sales have again performed more strongly Maximum than branded products this year, as customers seek efficient Actual Forecast ways to manage their budgets. source: IGD 0% 20% 40% 60% 80% 100% Value ranges in particular have seen the most significant growth Salary Pension Bonus LTIP and the M savers range remains a key part of our value proposition.
Convenience sales – £bn Dalton Philips
2012 33.9 Target
2017 43.6 Maximum
Online sales – £bn Richard Pennycook 2012 5.6 Value of UK grocery 2017 11.1 % Target market: £101bn Maximum Actual Forecast source: IGD Morrisons market share: 0% 20% 40% 60% 80% 100% source: Kantar Worldpanel 11.8 Salary Pension Bonus LTIP
5 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Annual report and financial statements 2012/13 Chairman’s review – delivering value in the short term and for the long term
Sir Ian Gibson Chairman
Our strategic objectives See page 12 for further information
How our KPIs link to strategy See page 14 for further information
See our report visit: morrisons.co.uk/corporate/ar2013
As anticipated, market conditions Operational highlights during the year have been challenging with ongoing commodity inflation Underlying profit m continuing to put further pressure before tax £901 on household budgets and an already fragile consumer confidence. Underlying earnings p per share 27.3 Against this difficult backdrop, Morrisons has worked hard to deliver a unique combination of value, freshness and quality to its customers. Although our overall performance has not been as Final proposed p good as we would have wished, an increase in underlying earnings dividend per share per share and a significant increase in the dividend demonstrate 8.31 both the resilience of our business model in a tough economic environment and the Board’s confidence in the future. Profit share pool m At the start of the year, we outlined a range of strategic initiatives: for colleagues the essential building blocks needed to support the development £46 of our business. These initiatives will enable us to deliver, over time, profitable sales growth, make Morrisons more efficient and secure new growth opportunities to deliver enhanced long term value Raised for Save m to shareholders. I am delighted to report that we have made the Children charity real progress in all these areas, particularly in the accelerated £2.1 development of our convenience store programme and our decision to launch Morrisons online food offer in 2014. Results Profit before tax of £879m was 7% below prior year. The underlying We will continue to implement a wide range of measures to address operating margin of 5.2% fell by 30bps compared to last year. the sales performance of the business, and progress our strategic Adjusting for the impact of a higher proportion of fuel sales in initiatives in order to provide a platform for successful long term the mix this year, the reduction was 20bps. growth. Our expectations are that the challenging consumer and market environment we saw in 2012 will persist through Net finance costs were £70m, an increase of £44m over the the coming year. prior period, of which £17m related to IAS 19 pension interest. The balance was primarily a result of a planned increase in net debt arising from an additional investment in capital expenditure and an acceleration of the equity retirement programme.
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Underlying profit is calculated after removing property disposals, At the year end the Group had committed but undrawn facilities multi-channel and convenience development costs and IAS 19 of £675m and a strong investment grade from Moody’s. pension interest. Underlying operating profit of £950m fell by £24m (2%) when compared to the prior year, with underlying In March 2012 we introduced Return on Capital Employed (ROCE) profit before tax of £901m down by 4%. as a key performance measure, emphasising our focus on capital discipline which was reflected in our decision to reduce planned Underlying basic earnings per share (EPS) increased by 7% to capital expenditure during the year by £200m. ROCE fell slightly 27.3p (2011/12: 25.6p) with a reduction in the rate of corporation during the year to 9.6%, a consequence of like-for-like performance tax and the positive impact of the Group’s equity retirement headwinds. We will continue to focus on delivering improvements programme more than offsetting a reduction in underlying in this key measure over the coming years, although the immediate earnings. Statutory basic earnings per share of 26.7p were priority is on driving our sales performance. in line with the previous year. Industry recognition In accordance with our policy of increasing the dividend in line with Morrisons is committed to providing its customers with great underlying earnings growth, subject to a minimum increase of 10% service and shop keeping, and to making it a great place to work in each of the three years to 2013/14, the Board is recommending for our colleagues. This has again been recognised with a number a final dividend of 8.31p per share. This brings the total dividend of prestigious industry awards. These include Grocer of the Year; for the year to 11.80p, an increase of 10% on 2011/12. The Employer of the Year, for the third year in a row; Best Service at dividend is covered 2.3 times by underlying earnings. the Grocer Gold awards; six Grocer Own Label Food and Drink awards and Retail Week Employer of the Year for the second Cash flow from operations of £1,432m was £168m (13%) higher successive year. than in the previous year, primarily as a result of improved working capital management. Community and the environment Our customers expect us to trade responsibly. We are committed As anticipated, capital expenditure and investments rose slightly to working with the communities in which we operate, maintaining to £1,016m, an increase of £115m (13%) over prior year. This ethical standards and managing resources carefully. capital investment reflected a planned acceleration in our new store opening programme, continuing investments in Evolve, Food matters to us; where it comes from and how it’s produced. our industry leading IT systems development programme, Over the past year we have increased our support for British dairy and continuing expansion of our vertical integration capacity. farmers and invested further in research into the long term viability It also included new investments to support our multi-channel of British farming. We continue to support the Government’s expansion, through the addition of new Kiddicare stores and in Public Health Responsibility Deal and have committed to join an online shopping capability. We will continue to accelerate a consistent national scheme of front of pack labelling. these essential investments in future growth and expect capital expenditure in 2013/14 to be £1.1bn, which includes £150m Our Let’s Grow programme, which aims to support the next for multi-channel development. generation of food growers, is currently in its fifth year and we have donated £18m of gardening equipment to schools. A further £579m was invested in our equity retirement programme of which £65m related to the purchase of shares held in treasury. We have made good progress towards our long term energy By the end of the financial year, a total of £947m had been invested reduction targets. Our colleagues and customers always go the and 312m shares had been cancelled in the period since we extra mile to support our selected charity. For the third consecutive commenced the programme in 2011. We have now met our year we have worked with Save the Children and this year raised objective of returning £1bn to shareholders, in addition to normal over £2.1m. dividend payments, over the two years to March 2013. The programme has had a positive impact of 4.2% on our reported Our colleagues underlying earnings per share in the year, and will have a further positive impact in the year ahead. These awards could not have been achieved without the dedication, hard work and passion of all our 129,000 colleagues throughout Net debt rose as expected to £2,181m (2011/12: £1,471m), the business who every day seek to make Morrisons ‘Different and reflecting these investments and increased tax payments. This Better Than Ever’ for the c11 million customers on average who brings our gearing to 42% – which remains a conservative level visit our stores each week. I am delighted that their efforts have for the sector. enabled them to share a profit share pool of £46m this year.
In line with its stated principles, the Group continues to maintain We believe in creating long term partnerships with our colleagues a strong balance sheet position. This is securely financed by a by giving them the time, qualifications and support they need to number of long dated bonds and revolving credit facilities at develop their skills. We have maintained our position as the largest competitive rates. During the period we strengthened our financial provider of apprenticeships in the UK with over 11,000 apprentices position by increasing the funds available to the Group and graduating during the year. We have supported this by provision extending the maturity profile of our borrowings. We increased of over 750,000 training days, the introduction of a number of the revolving credit facilities we have with our banks, which are specialised development courses and the creation of Morrisons available until 2016, by a further £150m to £1,350m. In July Centre of Excellence. 2012 we issued a £400m sterling bond to institutional investors repayable in 2026, and in November 2012 we agreed a £200m On behalf of the Board, I want to express our thanks to every one term loan with our bankers, repayable in 2014. of our colleagues for their dedication, professionalism and service throughout the year.
7 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Annual report and financial statements 2012/13 Chief Executive’s review – a clear vision and strategy that makes us different
Dalton Philips Chief Executive
Our strategic objectives See page 12 for further information
How our KPIs link to strategy See page 14 for further information
See our report visit: morrisons.co.uk/corporate/ar2013
This has been a challenging year for Operational highlights Morrisons but we have continued to grow sales and invest in the long term Average basket spend success of our business. (LFL basis) £22.85 Customers have felt the effects of the Market share %1 tough economy but our strategy remains 11.8 on track. We’re continuing to open convenience stores, develop our online Stores opened capabilities and doing more of what (includes nine convenience) 26 matters to help our customers. Gross profit £1.2bn
Over 2.7m customers visit our Fresh Format stores each week.
1 source: IGD
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Turnover analysis
Like-for-like Other 2012/13 2011/12 stores sales Total Total In-store (£m) 13,294 380 13,674 13,436 Fuel (£m) 4,172 69 4,241 4,039 Other sales (£m) – 201 201 188 Total turnover (ex-VAT) (£m) 17,466 650 18,116 17,663 In-store sales Sales per square foot (£) 20.24 11.70 19.84 20.74 Customer numbers per week (m) 11.0 0.4 11.4 11.4 Customer spend (£) 22.85 16.93 22.63 22.67
Turnover growth During the period total turnover increased by 3% to £18.1bn formats, using convenience stores for top up shopping, increasing (2011/12: £17.7bn). On a like-for-like basis, total store sales, their use of the online channel, putting fewer items into their excluding fuel, decreased slightly by 0.2% which included a baskets and managing their spend carefully. Average basket size, contribution from new store openings of 1.9% and a decrease despite inflation, was in line with the prior year. However, although in like-for-like sales of 2.1%. we welcomed an average of 11.4m customers each week into our stores, this was 0.4m fewer than in the prior year on a like-for-like Disposable incomes continued to come under pressure during basis. Once again sales growth was generally strongest in London the year from the unwelcome impact of inflation on commodities, and the South East although it is a mixed picture and in all regions with the increasing price of oil again being felt at the pump and of the country there are areas that are growing well. throughout the supply chain. For the third year in a row, consumers were faced with increases in the price of oil, albeit at a slower rate Our below market sales performance was disappointing. Whilst than previously, and in this environment consumers shop around we are at a structural disadvantage in that we do not yet have carefully to find the best deals. Our ‘Fuel Britannia’ programmes a meaningful presence in either convenience stores or in online, and innovative ‘Fuel Saver’ initiative have proved highly attractive the two fastest growing sectors of the market, we did not perform to budget conscious drivers. Total fuel sales increased by 5.0% as well as we should have in a trading environment that should in the year. have played more to Morrisons strengths. Whilst our base pricing was strong, we do need to do more to communicate our value Consumers also had to absorb the effects of significant increases message and our unique points of difference. We did run some in the prices of other core commodities, adding to the pressure good promotions but we need to do more to improve the overall on household budgets. In this environment customers inevitably effectiveness of our promotional programme and ensure that our changed their shopping habits. They shopped around in different pricing is clear and consistent. We will be addressing these issues in the coming year.
Our value proposition of everyday low prices, coupled with industry leading offers, and the flexibility of our vertical integration enabled us to meet our customers’ need for great fresh food at affordable prices.
Reinforce our Seize the differences opportunities
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Chief Executive’s review – a clear vision and strategy that makes us different – continued
Operating results During the year Group turnover grew by 3%. In a low sales growth environment it is important that we manage our cost base tightly. 2012/13 2011/12 After costs of goods sold, the two main areas of cost are store Summary income statement £m £m wages and distribution costs and we have continued to focus on Turnover 18,116 17,663 improving efficiency in both of these areas, whilst maintaining Gross profit 1,206 1,217 the highest standards of customer service. During the year, Gross profit margin % 6.7% 6.9% with improved processes and systems, we were once again able to improve our store labour costs relative to sales, with in-store Other operating income 80 86 labour productivity increasing by 4%. The investments we Administrative expenses (336) (329) have made in systems improvements also enabled us to build on Underlying operating profit 950 974 previous successes by improving Distribution productivity by 4%. Property transactions (1) (1) Other operating income fell by £6m (7%) primarily due to a Operating profit 949 973 decrease in recycling credits. Underlying operating 5.2% 5.5% Continuing the trend we reported last year, administration profit margin % expenses increased by 2.1%, a rate below the rate of inflation, Net finance charges (70) (26) which reflects the Group’s commitment to ongoing strong cost control. Taxation (232) (257) Profit for the period 647 690
We bring great value fresh food to our customers every day.
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Market overview In a tough economic climate, the UK grocery market continued to be a very challenging environment in which to operate, with consumers seeing no respite in the economy.
Market growth was driven by inflation, which averaged 2.8%1 during the year. CPI food inflation averaged 4.1%1 reaching 5.5%1 by the end of the year. With commodity and energy costs increasing faster than average wages, household incomes continued to be squeezed throughout 2012.
In 2012, the UK grocery market grew by 3.7%2 over the previous year and was worth £101bn2. The fundamental changes that are taking place in the market show shoppers being increasingly drawn away from traditional supermarkets towards the online, convenience and discount channels.
The online grocery market grew by 15.7%3 during the year to £6.5bn3. Online sales now account for 3.9%3 of the UK grocery market and are expected to grow significantly faster than traditional grocery over the coming years. The convenience market too is expected to continue growing at a faster rate than the traditional grocery market for some time to come.
More shoppers now regard price as their first consideration when choosing between products compared with a year ago. Consumers are also growing increasingly forensic in the way they shop; building their knowledge of how much things cost, down trading and switching to own label products, managing their consumption and actively searching and taking advantage of promotions. Our strategy reflects our view of how the market will evolve, The proliferation of promotional activity amongst retailers has what will be most appealing to our customers and how we make driven consumers to seek more personalised offers in return best use of our existing capabilities. It is based on six convictions for their loyalty and spend. Retailers are responding to this about the type of business that our customers want us to be: by leveraging their customer relationship management systems and improving their in-store experience. • Food focused not generalist Strategy In 2010 we outlined our vision to make Morrisons ‘Different • Experiential over purely functional and Better than Ever’. Three years on, we believe that our vision • Value is forever is even more relevant today and that we have the right strategy to achieve it. • Skills not just drills
We are proud of what makes us different – a distinctive offer • General merchandise – clicks not bricks to customers centred around fresh food, craft skills and vertical • Multi-format and multi-channel integration through our manufacturing businesses; the way we lead and support our colleagues; and our unique heritage. Being ‘different’ means building on these advantages, which set us apart We set these convictions out for the first time last year and they from all our competitors and position us to succeed. Being ‘better form the base for the business we are building today. Over the than ever’ is about improving the way we do business – doing past year we have seen continuing changes in the market. Value more of the things that matter for our customers – making great for money has come even more to the fore for consumers and food, offering outstanding service and being more efficient so there is an ongoing shift towards multi-format, multi-channel we can pass on the best savings possible. It also means seizing shopping, with more and more general merchandise being opportunities to grow the business profitably through new formats, bought online. These changes confirm our convictions and we channels and categories, to meet more of our existing customers’ are confident that we have the right strategy for future growth. needs and to reach new customers. We have a clearly defined set of initiatives which will enable us to deliver our vision. These are grouped under the three strategic objectives of driving the topline, increasing efficiency and capturing growth. 1 source: Office of National Statistics 2 source: Kantar Worldpanel 3 source: IGD
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Our vision Our convictions Our vision for the business, being Different Our vision reflects our view of how the market and Better than Ever, is anchored by our will evolve, what will be most appealing to our convictions, and we have a clearly defined customers and how we make best use of our set of strategic initiatives that will help us internal capabilities. It is based on six convictions deliver more of what matters. about the type of business that our customers want us to be.
Driving the topline 1 Food focused not generalist ———— ————— —————— 2 Experiential over purely functional ————— ————— ————— Increasing efficiency 3 Value is forever ————— ————— ————— 4 Skills not just drills ————— ————— ————— 5 Capturing growth General merchandise – clicks not bricks ————— ————— ————— 6 Multi-format and multi-channel
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Our strategic objectives Our strategic initiatives Our strategic objectives are based Our strategic initiatives provide a on our vision and our convictions. framework for delivering more of They are at the heart of Morrisons. what matters in everything we do..
Driving the topline > Completing National to Nationwide > Strengthening our own brand Measuring performance through our KPIs See pages 16 to 18 for further information > Moving further ahead on fresh
Increasing efficiency > Driving in-store productivity > Tackling indirect procurement See pages 19 to 20 for further information > Revamping our systems
> Becoming multi-channel
Capturing growth > Growing convenience See pages 21 to 23 for further information > Vertical integration
13 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Annual report and financial statements 2012/13 Measuring performance against our strategic objectives
We have identified measures that Like-for-like sales d are important to the success of the Definition Measures the percentage change in year-on-year store sales (excluding VAT Group’s financial performance and and fuel), stripping out the impact of new store openings and closures in the current or previous financial year. operational excellence, and to our Performance stakeholders, customers, suppliers Like-for-like sales have decreased by 2.1% on a 53 week v 53 week basis, and decreased by 0.3% on a 53 week v 52 week basis. We aim to increase like-for-like sales by continuing to strengthen our own brand and fresh food and colleagues. The Board considers offering and enhancing the service we provide to our customers. Measuring performance against our strategic objectives strategic our against performance Measuring these in assessing the achievement 2012/13 (2.1)% of the Group’s strategy. 2011/12 1.8% 2010/11 0.9% How do we identify our key performance indicators (KPIs)? There are many internal and external factors affecting UK grocery market share d G the performance of our business. We have focused on the key indicators that are measurable, comparable, and can Definition be acted on to reflect the performance and progress of The Group’s percentage of retail sales in the UK grocery sector, as measured our business. These KPIs have been identified to present by Kantar Worldpanel at the end of January. a fair, balanced and understandable picture of Morrisons. Performance KPIs are reviewed regularly and updated as appropriate. Our market share has fallen slightly during the year.
Why link our KPIs with our strategic objectives? We aim to grow our share by investing in new stores (including convenience) and continuing to develop our online offering. By linking our KPIs with our strategic objectives we are able to monitor and focus on areas that can be improved to 2012/13 11.8% increase sales, efficiency and growth in the future and help 2011/12 12.8% us achieve our vision of being ‘Different and Better than Ever’. 2010/11 12.8% A strategy linked to sustainability When we consider our future outlook and the goals we new Sales growth d G wish to achieve, we focus our attention on those areas of greatest significance to our business. We assess whether Definition there are any potential sustainability issues relating to Measures sales across the Group, excluding VAT and fuel. Shows the these areas and make a direct link between the sustainability impact of space increases through investment in the store estate and challenges we face and our business strategy. We recognise the convenience market. the importance of developing the right sustainability KPIs, Performance so that we can evaluate our performance against our strategy. Store sales have grown by 1.8% to £13.7bn. The Group has increased space by 4.0%, reflecting 17 new stores and the opening of nine further convenience stores.
2012/13 1.8% 2011/12 3.9% 2010/11 4.0%
Key to strategic objectives Key to KPIs Delivering the topline d Financial KPIs Increasing efficiency E Non-financial KPIs Capturing growth G
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Underlying profit d E Return on capital employed (ROCE) E
Definition Definition Measures the normal underlying business performance. Profits are adjusted ROCE is a relative profit measure showing the return generated from investment to remove volatile or one-off costs and credits. A reconciliation of underlying in assets, see page 27. profit is provided in note 1 of the Group financial statements. Performance Performance ROCE decreased slightly during the year reflecting the weaker trading Underlying profit before tax decreased by £34m. performance and increased capital spend on new stores.
We plan to increase underlying profit by increasing like-for-like sales, opening 2012/13 9.6% new stores and continuing to realise efficiencies across the business. 2011/12 10.1% 2012/13 £901m 2010/11 10.1% 2011/12 £935m 2010/11 £869m Colleague engagement new d E
Definition Underlying basic earnings per share (EPS) d E Colleague engagement is measured through our annual Climate surveys, supplemented by our shorter bi-monthly Pulse surveys. Participation in our Definition annual survey was >90%. The EPS measure uses underlying profit, as defined above, divided by the weighted average number of shares in issue at the year end date. A calculation Performance is provided in note 9 of the Group financial statements. During the year, colleague engagement improved by 6.2%.
Performance 2012/13 75.6pts Underlying basic EPS has increased to 27.3p, reflecting the benefit of the equity retirement plan. We aim to grow underlying EPS in line with underlying profit. 2011/12 71.2pts 2010/11 69.5pts 2012/13 27.3p 2011/12 25.6p 2010/11 23.0p Carbon footprint reduction E
Definition Our carbon footprint includes energy, waste, refrigeration and transport Net debt E for our stores, offices, manufacturing and packing facilities.
Definition Performance The Group’s overall debt position at the year end. A summary of net debt is We have set a long term commitment to reduce emissions in absolute terms provided in note 25 of the Group financial statements. by 30% by 2020 (2005 baseline). Progress slowed against continued business expansion but remains on a downward trend. We started measuring absolute Performance reduction in 2010/11. Net debt has increased by £710m, reflecting our planned acceleration in capital expenditure, investment in a multi-channel capability and our equity retirement 2012/13 19.3% programme. We will look to maintain our strong investment grade balance sheet going forward. 2011/12 14.6% 2010/11 12.0% 2012/13 £2,181m 2011/12 £1,471m 2010/11 £817m Waste to landfill reduction E
Definition Measured as waste from our stores that we are unable to recycle or have Capital investment d E G processed, expressed as a percentage of total waste compared to the prior year.
Definition Performance Measured as additions to property, plant and equipment, investment properties, Our commitment is to reduce direct waste to landfill to zero by December 2013. intangible assets and investments. We made further progress towards this target in the year.
Performance 2012/13 1.7% During the year, we invested £1,016m in capital projects reflecting our commitment to increasing space and investing in future growth, in particular 2011/12 5.6% through opening new stores (including convenience) and the Evolve programme.
2012/13 £1,016m 2011/12 £901m 2010/11 £592m
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What we said we would do Completing National to Nationwide • Roll out our Fresh Format to There are currently 6.4m households 90 stores in Britain not in close proximity to • Liberate 114,000 square feet a Morrisons store. of space There are therefore significant opportunities for us to grow, • Launch 5,000 new own particularly in the South where we are less well represented. brand lines In March 2011, we announced an accelerated programme to open 2.5m square feet of new space over the three years to 2013/14. During the current year we added a further 17 new core stores What we did to our estate, including three replacement stores, as well as nine convenience format stores. We ended the year with 13.4m • Rolled out Fresh Format to over square feet of net retail space in total and an estate of 498 stores, 90 stores including 12 in convenience format. Including convenience stores, our overall net selling space increased by 517,000 square feet • Continued to liberate space in our (4.0%), of which 40,000 square feet came from extensions. This is in line with the revised target we set out at the time of our interim grocery aisles results in September 2012 and is a result of our determination to • Launched over 5,000 own brand maintain capital discipline in a period of difficult trading. It also reflects a recognition that it is important that management is able lines, including NuMe to fully focus on current trading and our ambitious growth agenda. Deferring the addition of some of our planned new stores helps achieve these objectives. What we will do next We will maintain this approach in 2013/14, when we now expect to add a further 500,000 square feet of new space, a decrease • Continue the Fresh Format roll out, of 44% from our previous guidance. Over the three years to tailoring the concept to local markets 2013/14 we have reduced the amount of core space we will open by 800,000 square feet (32%) from our original target, and now • Relaunch 10,000 products expect to add a total of 1.7m square feet over that period. This by 2013/14 excludes convenience space, which was not included in our original estimates. In 2013/14 we also expect to add 250,000 square feet • Launch Nutmeg, Morrisons own of new space from the convenience channel. label children’s clothing
Own brand
Own brand lines launched this year 5,000 Sales growth of % M savers brand 37
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Our meat goes from field to fork in a matter of hours.
Strengthening our own brand
Having great own brand products In May we announced the introduction of our new healthy eating range, NuMe, with over 300 products across chilled, ambient and can give customers a reason to frozen categories. Customers are responding well to the broader range as well as to the healthier versions of old favourites. With the switch supermarkets. launch of our new premium M Signature range in March, which will Based on intensive research and customer insight, we are now include over 500 products when complete, we are well on our way around half way through a three year programme to deliver greater to building an appealing family of relevant brands. Our customers quality, whilst maintaining our strong value perception across have responded very positively and own label participation in our the whole of our own brand range of some 10,000 products by sales mix has increased consistently through the year and now Christmas 2013. stands at 48.3%.
Since the programme started, we have re-launched over 5,000 During the Autumn we re-launched Food To Go which now products and introduced four new Morrisons brands, in addition includes over 90 new and improved lines with a majority freshly to our core range of everyday family favourites, and we have had made in-store. great feedback from our customers. We have also announced that we will launch Nutmeg, our new M Kitchen, our exciting range of ready meals, continues to progress range of clothing for children aged 0 to 13, which will be available well, building on the success of its launch in 2011. M savers, our in over 90 stores from March 2013. new entry price-point range, is designed to be a clear proposition of good quality at the best price, in strong support of our conviction that value is forever. This has resonated strongly with “ I always shop at Morrisons because our customers, making M savers the fastest growing value own I know there’ll be a great selection label brand in the year with market share growth of 110bps. The range now has over 500 products, which allows our of fresh food available.” customers to do a full price led shop should they choose. Judith Hutton, customer, Leeds
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Driving the topline – continued
Moving further ahead on fresh Fresh Format is about providing customers with the best fresh food in the UK, unrivalled value for money and fantastic service from an environment that really feels different. This initiative is a key part of our strategy and is underpinned by our core convictions that customers want fresh food, great value and a more experiential and engaging shopping environment.
From the outset we have been very conscious that the new format would have to be tailored to reflect different stores sizes and the requirements of local demographics – one size would certainly We have continued to build on the initial progress we made in not fit all. 2011 by applying the Fresh Format concept to a further 76 of our existing stores, and implementing it in the 17 new stores we To highlight our points of difference and provide more of what opened during the year. In all we have now introduced this new matters to our customers, we have rationalised the space given thinking into 105 stores in our estate. These stores now account over to ambient grocery items and added a new ‘wow factor’ into for 26% of our retail store space and around 30% of our in-store Market Street, including introducing category experts to provide sales, with over 2.7m customers now visiting a Fresh Format store advice to customers. In some stores we have knocked down walls each week. Customer feedback has been very positive. so that customers can see our craft skills in practice, and in others we have introduced children’s clothing, a category customers now The Fresh Format stores that have been updated with the new expect to see in-store. fresh concept continue to deliver like-for-like sales growth of 4% to 6% above their control group benchmark. Their sales and margin During the year we introduced new packaging and new signage progression is in line with the targets we set for them, and we to our fish counters. We trained over 1,000 fishmongers in how are encouraged by their performance to date when compared to prepare and advise on fish to encourage customers to enjoy with their control group. We will continue to use the learnings our range of over 250 fish and seafood lines. from these stores as we take the concept into smaller stores and different demographics. We will tailor the core concept to meet local requirements, introducing only those elements that will meet customers’ needs. We also have plans to expand our food range further and introduce new, relevant categories by reducing our non-food ranges rather than moving aisles or replacing refrigeration, thereby reducing investment cost whilst meeting customer needs.
By the end of 2013/14 a further 100 stores will have benefited from the new fresh treatment. This will be at a reduced average capital cost of £0.5m per store, which is contained within our 2013/14 capital expenditure targets. This continuing evolution will see some 40% of our stores refreshed by the end of 2013/14.
Our fruit and veg is so fresh it’s award winning – we’ve won produce retailer of the year three years running.
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What we said we would do Driving in-store productivity • Implement new IT systems at our Efficiency remains paramount, Woodheads meat manufacturing site particularly in a low growth sales • Introduce a new distribution centre environment and with value for money forecasting system at the forefront of customers’ minds. • Deliver £40m of efficiency savings We continue to look for better ways of working, to improve the service we offer and to reduce unnecessary spend. We have implemented a number of long term initiatives to make Morrisons What we did more efficient but always with the guiding principle that great customer service is central to our business. • Rolled out new financial systems to In March 2011 we launched an initiative to focus on in-store all three meat manufacturing sites productivity and have made further good progress in the year, delivering productivity savings of 4% in addition to the £25m • Implemented our new distribution reported for 2011/12. During the year we completed the roll out centre forecasting system of intelligent labour planning across Market Street, reconfigured our check outs to reduce the amount of time required to process a • Continued to focus on cost control, till transaction, introduced more self service checkouts, increased delivering over £90m of savings our case rates and redesigned a number of other work processes including receipting systems for newspapers and magazines.
Individually each of these is a relatively small benefit but as What we will do next every hour per day we save across all of our stores equates to approximately £1.5m of annual cost saving, even small changes • Roll out supply chain forecasting can deliver big results. solution to four further distribution During the coming year we will continue to trial and roll out centres new ideas and we are well on track to deliver our target savings • Deliver new commercial systems of £100m by 2013/14. and processes to increase focus on promotions Tackling indirect procurement • Deliver £100m of further efficiency savings Our indirect procurement programme aims to reduce the cost of our goods and services without impacting customers. Our colleagues have played a significant part in helping us to identify and remove unnecessary costs from the business.
Key savings The programme involves reviewing every area of spend in the business, both revenue and capital expenditure, looking for ways to sensibly reduce cost, including the use of e-auctions, rate In-store and distribution % negotiations, consolidating spend and reducing consumption. productivity During the year we made further good progress delivering a further 4 £45m of annual revenue benefit in addition to the £40m we improvements in achieved in 2011/12. 2012/13 Some of the initiatives, such as rationalising our waste collections and consolidating the purchase of consumables, were significant. Indirect procurement Others, including the respecification of our flower buckets, the m consolidation and renegotiation of napkins purchases, a reduction savings £45 in postage stamps and the introduction of energy-efficient lighting, were smaller, but they are all contributing to our cost savings targets. We are on track to deliver our planned savings of £100m annually by 2013/14.
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Increasing efficiency – continued
Our Evolve programme has delivered significant improvements across all areas of the business.
Revamping our systems This is a significant step towards us delivering improved inventory We are now well over the half way stage control across the business. of our six year Evolve programme. All of these completed projects are now providing the benefits When complete, the programme will replace all the systems in our expected in our business case and during the year the programme business and provide us with industry leading software capability. delivered a further £28m of savings. Throughout the life of the programme we have taken great care to manage it through a comprehensive governance process, including In the coming year we will be building still further on this solid external assurance, to enable us to carefully manage any risks to base and will be making changes to our core manufacturing, the business. As expected, it has been a long journey but we are logistics, trading and retail systems, supported by improved delighted with the improvements we are delivering to the business. management information. We are on track to meet our target of delivering £100m of annual benefits by 2013/14. 2012/13 saw the deployment of new systems to many parts of the business. During the year we concluded the implementation of our EPOS till system, introducing it into our petrol filling stations and our stores. We substantially completed the roll out of new meat manufacturing solutions in Woodheads which link our buying, delivery, production and despatch to stores processes onto a single system, helping us to trace our meat products from ‘field to fork’. “The last few years have seen a lot We also commenced the implementation of the important supply chain module which has initially been introduced into the of changes in the way we work, Stockton warehouse and will ultimately enable us to consolidate but we’ve made sure we keep great our accounting, supplier ordering and distribution systems onto a single platform. customer service at the forefront of everything we do.”
Paul Finch, Store Manager, Cheadle Heath
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What we said we would do Becoming multi-channel • Trial more convenience stores Customers are changing the way • Open our first Kiddicare store they shop. • Continue to develop Morrisons Online, with a total market value of £31bn and forecast growth online food proposition of 13.6% in 2013 is now the fastest growing channel in the UK. General merchandise is migrating online, away from the high • Open Grimsby seafood factory street and from ‘big box’ supermarkets. There is a significant trend towards the growth of the multi-channel retailer and this is an exciting opportunity for Morrisons.
What we did Morrisons took the first steps in establishing itself in online retail through its acquisition, in 2011, of Kiddicare, a leading online baby • Opened nine convenience stores and infant merchandising retailer. We have expanded Kiddicare as a true multi-channel retailer. In March we announced the acquisition including a petrol forecourt and of ten stores from Best Buy which will be converted into flagship city centre locations Kiddicare showrooms to support its online proposition, allowing customers to try before they buy. We are making good progress • Acquired a dedicated convenience with our store opening programme, having opened stores in store distribution centre in Feltham Nottingham, Dudley and Thurrock during the year. Since the year end, our new Rotherham store has opened and six further outlets • Successfully opened three Kiddicare are planned for 2013. We are also leveraging the c11 million stores and our Grimsby seafood plant customers who shop in Morrisons each week by increasing their awareness of the Kiddicare business. • Launched wine online As planned, we have continued to integrate Morrisons and (Morrisons Cellar) Kiddicare brands using Kiddicare’s industry leading technology platform to provide the foundation for Morrisons first own online offer. In the second half of the year we launched Morrisons Cellar, What we will do next to offer an outstanding range of wines at great prices, with fulfilment from our distribution centre in Peterborough. We also • Continue to roll out convenience announced that in the Spring of 2013 we will expand our non-food business online by entering a partnership with Lakeland, offering stores, particularly in the South East kitchenware to customers through Morrisons.com. We will continue to expand our online presence by adding further new • Further develop Morrisonscellar.com categories that are relevant to our customers. In order to support and other online non-food categories our multi-channel non-food ambitions we have appointed Nigel Robertson as CEO of Kiddicare, with overall responsibility for all • Launch Morrisons online food offer Morrisons general merchandise online offer. in 2014 The online food market is currently growing at 16% and over the next five years is set to grow by 98%. In 2011 we took an initial step in online grocery through the acquisition of a minority stake in Fresh Direct, a leading online, fresh food retailer in New York. Convenience We established a very positive relationship with Fresh Direct which enabled us to embed a Morrisons team into their business for nearly a year. During that time we developed a detailed New convenience understanding of Fresh Direct’s operating model and how those learnings could be applied to launch a successful online business stores in 2012/13 9 in the UK. We have completed that evaluation and are now confident that Target convenience we have identified a model that will enable us to provide food stores by the end 100 online in a distinctive, customer focused way that reinforces of 2013/14 Morrisons leadership in fresh food by putting fresh food at the heart of its offer. Accordingly we will be launching Morrisons first online food offer in line with previous guidance by the end of January 2014. In order to do this, we will accelerate the development of our technology infrastructure and will further strengthen our online food management team.
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Capturing growth – continued
Growing convenience Customers want to be able to top up on the items they need without having to travel to their nearest large supermarket. The UK convenience market, which is currently worth £36bn, is a huge opportunity for Morrisons. It already accounts for 21% of UK grocery sales and is expected to grow by a further 30% in the five years to 2017.
Convenience is a market that Morrisons has only recently entered. It is an outstanding opportunity to leverage our points of difference, our unique vertical integration and great fresh and value credentials, and to develop a truly compelling new fresh food experience at the heart of local communities.
In this sector it is important to develop a proposition that is Increasing our presence in London and the South East, where flexible enough to meet the specific needs of different locations. we are significantly under represented, is a major opportunity for During the year we continued to experiment with the format, Morrisons and convenience outlets have a key role to play in that opening a Morrisons M local in a petrol filling station in Doncaster development. Increasing our convenience presence in this region and at a city centre location in Birmingham. By the end of the is a priority for 2013/14. After the year end we opened our first year we had 12 convenience stores open, primarily in the North two London convenience stores, in Ealing and Elm Park – their of England. These stores offer a very different and attractive initial performance has been very encouraging. shopping experience, with the same fresh food pricing as our core stores, and with half of the space dedicated to fresh food and We will support our expansion in London and the South East from scratch cooking. The performance in these stores has been well a 100,000 square foot distribution centre in Feltham, West London, ahead of our expectations and customer feedback has been which opened in the first quarter of 2013. In the coming year we particularly encouraging. will be looking to acquire a new convenience distribution centre (CDC) in the north of England to support our planned growth In February 2013, we announced that we had acquired a total of of convenience formats in that region. Outside of the major 62 stores from a variety of other retailers. These will be converted conurbations we will supplement this expanding CDC network to the Morrisons M local format and will open over the course of with our unique hub and spoke distribution system. the coming year. We are delighted to have acquired these stores, and as a result have increased our target for new convenience We believe that capturing strategic growth through the development format openings in 2013/14 by some 40%, taking our expected of multi-channel opportunities will be an important driver of total at the end of 2013/14 to 100. We will be looking to increase shareholder value in future years. Building these businesses has that number in the future. required incremental revenue expenditure of £17m in the year. This will increase to £40m in 2013/14 as we accelerate these opportunities. We also invested £40m of capital expenditure in our multi-channel operations in the year which will increase to £150m in the coming year. This sum is included within our projected total capital expenditure of £1.1bn for 2013/14.
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We have over 50 species of fish available seasonally. Vertical integration Vertical integration is crucial to our leadership in fresh food. Sourcing and processing fresh food through our own facilities has Flower World in 2011, and fresh meat packing following the long been a key point of difference for Morrisons. In addition to acquisition of a facility from Vion Group in the first half of the year. the flexibility that controlling our own supply chain brings to the This will enable us to extend the range of categories we produce business, it is a true source of competitive advantage which enables through Farmers Boy. In addition, we have expanded our authority us to offer great quality products for great prices. It also enables us in fresh fish by establishing a seafood processing facility in Grimsby to have control over the provenance, safety and quality of our fresh which is now on stream. We have also started to expand our Colne products. It is becoming increasingly important to consumers that abattoir to facilitate further pork processing and are adding further they are able to understand and trust where their food comes from. capacity through the expansion of our bakery in Wakefield. With half of the fresh products we sell in-store being processed through our own factories, Morrisons is uniquely placed to offer customers the reassurances they seek. “Morrisons own their own farm, In 2010, we set out our strategic objective to increase the scope so I can trust where the meat of our vertical integration by investing £200m over three years in additional capacity for relevant fresh categories to support our comes from.” retail operations. Since then we have expanded into several new categories. These include fresh flowers through the purchase of Nicola Jones, customer, St Albans
At our Grimsby site we fillet around 10,000 salmon, 10,000 cod and 10,000 haddock each week.
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Richard Pennycook Group Finance Director
Our Group financial statements See page 60 for further information
How our KPIs link to strategy See page 14 for further information
See our report visit: morrisons.co.uk/corporate/ar2013
Our financial performance has continued Highlights to be robust in difficult trading conditions. We remain committed to investing in Cash generated bn the future of the business and to sharing from operations £1.4 the benefits of our success with our shareholders. Gearing 42% Capital investment, bn including capital expenditure, £1.0 investments and acquisitions
Investment in equity m We have over 500 varieties of fruit retirement programme and vegetables in our stores. £579 during the year
Financial strategy The underlying principles behind this strategy are: • growing sales ahead of market; • delivering earnings that meet the expectations of shareholders; and • maintaining a strong investment grade balance sheet.
We are meeting these principles by: • growing sales organically; • converting sales growth into profitable growth; and • investing in our business to yield an appropriate rate of return.
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Tax The Chief Executive’s review on page 8 contains information about Corporation tax paid in the year was £243m. This cash outflow the Group’s financial performance for the year, in particular represented 50% of the total tax bill for the year to 29 January turnover growth, like-for-like sales and operating profit. 2012, and 50% of the tax for the year to 3 February 2013.
Underlying profit is the measure we use to assess normal underlying In the year the effective tax rate was 26.4% (2011/12: 27.1%) business performance and trends. Earnings are adjusted to remove which is slightly above the prevailing corporation tax rate of 24%. volatile or one-off costs and credits. A reconciliation of underlying This is due to a combination of non-qualifying depreciation and profit is provided in note 1 of the Group financial statements. expenses, for which the Group is unable to obtain a tax deduction and which has the effect of increasing the tax rate above the Summary cash flow statutory level. Offsetting this, the tax charge was reduced by a change in the main rate of corporation tax from 26% in the prior 2012/13 2011/12 £m £m year to 24%.
Cash generated from operations 1,432 1,264 Our in-house tax department’s primary focus is on ensuring that Tax, interest and servicing of finance (325) (330) the Group continues to pay the appropriate level of tax at the right time. We actively engage with the UK tax authorities and aim to Capital expenditure (980) (796) be transparent in all our activities with the tax authorities in all Proceeds from sale of plant, property and 5 4 the territories where we have operations. The Group, which is equipment predominantly UK-based, operates a simple business model and does not engage in sophisticated tax planning structures. Acquisitions (36) (74) (including debt acquired) Capital expenditure Investments – (31) The Group continues to invest in the infrastructure required to support long term growth. This includes building new stores, the Dividends paid (270) (301) ongoing replacement of IT systems, the strengthening of supply Proceeds from exercise of share options 42 – chain, and the development of new business channels. During the period total capital expenditure (including acquired businesses) Equity retirement (579) (368) was £1,016m. This included £512m on new store space (including Net cash outflow (711) (632) convenience), £104m for the continuing development of IT infrastructure and £33m on multi-channel investment. Non-cash movements 1 (22) Opening net debt (1,471) (817) During the period, we opened 17 new stores (a net 14 after three replacements/closures) and nine Morrisons M local convenience Closing net debt (2,181) (1,471) stores. We also invested in acquiring new sites to support our planned future growth. We extended five existing stores and refurbished a further 71 stores to incorporate our Fresh Format Net cash outflow increased by £79m during the period in line concept. At the end of the period, we had a total of 13.4m square with our planning assumptions around capital expenditure and feet of net selling space, an increase of 4.0% over prior year. our equity investment programme.
At New Store At Cash generated from operations 29 Jan stores1 extensions2 3 Feb Cash from operating activities increased by £168m reflecting 2012 2013 strong working capital management. Number of 472 14 5 486 core stores Interest Number of 3 9 – 12 As planned, our average net debt increased during the year and convenience stores as a result net interest paid of £82m was higher than in the prior year (2011/12: £49m). The Group’s effective interest rate of 4% Total number 475 23 5 498 was consistent with the prior year (2011/12: 4%). Interest was of stores covered 14 times (2011/12: 37 times). Excluding net pension Total area in square 12,904 477 40 13,421 interest expense (2011/12: income) interest was covered 14 feet (‘000) times (2011/12: 25 times). Number of petrol 300 13 – 313 filling stations
1 Net of replacements. 2 Number of store extensions is included in total number of stores.
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Financial review – continued
Pensions The Group maintains a rigorous capital expenditure programme The two defined benefit pension arrangements sponsored by the and all potential investments are required to meet prescribed Group are both managed externally to, and independently of, the hurdle rates. A post expenditure review programme is in place Group’s operations. This year we launched our Retirement Saver and appraisals of all major expenditure projects are carried out scheme (accounted for on a defined benefit basis) which provides by independent review teams. The findings of these appraisals a lump sum benefit based on a defined proportion of earnings. are reviewed by the Board regularly. This replaces the previous defined contribution scheme and is open to all colleagues. We retain a prudent approach to valuing Acquisitions our defined benefit pension obligations. During the year the Group invested £36m in extending the scope of its manufacturing operations. In March 2012, it extended its At 3 February 2013, the schemes had a deficit of £20m. capability in cooked meat production through the acquisition of The movement, from the deficit of £11m at 29 January 2012, the Winsford site for £21m and acquired the remaining 49% of is summarised in the table below. Farmers Boy Deeside for £15m. Pension bridge £m Further information on the nature of the acquisitions can be found Net pension deficit at 29 January 2012 (11) in note 27 of the Group financial statements. Actuarial gain recognised 145 Net debt Actuarial loss recognised (151) In line with previous guidance, net debt at the end of the year was £2,181m, an increase of £710m over the previous year. This Funding above annual service cost 1 increase was due to a combination of increased capital expenditure, Net pension interest (4) strategic investments in growth opportunities in multi-channel and manufacturing, increased dividend payments and the continuation Net pension deficit at 3 February 2013 (20) of our equity retirement programme.
During the year we have taken steps to increase the amount IAS 19 ‘Employee benefits’ requires the Group to assess the liabilities of funds and facilities available to the Group and sought to do with reference to the market conditions at the balance sheet date this in a way which extends and balances the maturity profile and the Directors’ best estimate of the experience expected from the of our borrowings. schemes. The movement in the year has been influenced by changes in assumptions due to changes in market conditions. In May 2012, the Group concluded a bilateral revolving credit facility of £150m with Svenska Handelbanken AB which matures Scheme assets performed better than assumed returns; however, in March 2016. Combined with the multi-bank facility concluded scheme liabilities increased to a greater extent due to a combination in March 2011, we now have committed facilities of £1,350m to of financial and demographic changes in assumptions. Over the March 2016. At the balance sheet date £675m of those facilities year, market conditions fluctuated significantly with corporate bond remained undrawn. yield returns and inflationary expectations decreasing. There has been no further update to longevity this year. In July 2012, the Group issued a 14 year sterling bond to institutional investors, which provided £400m of funding through The Trustees will undertake their triennial valuation of the pension to July 2026. In November 2012, the Group concluded a £200m schemes in April 2013. term loan with Lloyds Banking Group, which matures in May 2014.
The Group ended the year with a well diversified and mature funding base.
Gearing Our gearing ratio increased during the year, as planned, to 42% (2011/12: 27%). Moody’s, a leading credit agency, continues to recognise the strength of our balance sheet.
Our strawberries are handpicked first thing in the morning, packed in recyclable punnets and delivered to stores within 24 hours.
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Returns to shareholders Return on capital employed (ROCE) In March 2011, our preliminary results announcement set out ROCE is the key metric behind our investment strategy and in driving our policy of maintaining a progressive dividend, whereby dividend management performance. In order to monitor the progress of our growth would be in line with underlying earnings per share growth. capital efficiency measures we will publish a ROCE performance Additionally, we confirmed that in each of the three years to figure with our interim and preliminary results. The measure of 2013/14 the year-on-year increase would be at least 10%. ROCE that we have selected is calculated as:
In accordance with this policy, the Board has recommended a final dividend of 8.31 pence per share, making the total dividend ROCE = underlying profit before interest and rent paid, less tax for the year 11.80 pence per share, an increase of 10%. On this Net assets + net debt + 20 times rent payable basis dividend cover was 2.3 times (2011/12: 2.4 times).
Payment of the final dividend will be made on 19 June 2013 Despite a slight decrease this year, over the past five years we for shareholders registered on 17 May 2013. have delivered progressive improvement in returns, which stand well above the Group’s weighted average cost of capital. 2012/13 2011/12 Change 2008/09 2009/10 2010/11 2011/12 2012/13 Interim dividend paid 3.49p 3.17p +10% Adjusted 504 616 682 738 778 Final dividend proposed 8.31p 7.53p +10% underlying profit Total dividend for the year 11.80p 10.70p +10% after tax (£m) Capital employed 5,730 6,191 6,765 7,299 8,085 Equity retirement (£m) In March 2011, we announced an equity retirement plan to ROCE (%) 8.8% 10.0% 10.1% 10.1% 9.6% purchase £1bn of ordinary shares in the market over a two year period, for subsequent cancellation. During the year, £579m was invested in this ongoing programme and 186m shares were Key judgements and assumptions repurchased and cancelled, bringing the total invested under Judgements and assumptions made in these financial statements the scheme to £947m. The programme was completed on are reviewed each reporting period. Whilst some outcomes 8 March 2013. have been affected by the volatility in the financial markets, all judgements and assumptions in the accounting policies remain Basic underlying earnings per share for the year was 27.3p, an consistent with previous years. Consideration of impairment to increase of 6.7% over prior year. The impact of the investment the carrying value of assets has been made and we have concluded in the equity retirement plan in the year has been to increase that the individual carrying values of stores and other operating basic underlying earnings per share by 4.2%. assets are supportable either by value in use or by market values. The impact of the current economic conditions on the assessment of going concern has been considered in the general information section of the Directors’ report.
27 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Annual report and financial statements 2012/13 Managing risks and uncertainties
Our approach to risk management Business change d E G
Risk As with all businesses, we face risk and The Group is undertaking a number of major change programmes that will significantly impact existing ways of working. There is a risk that the business uncertainty, which could impact the fails to build the capacity and capability to support business changes resulting in service disruption or unintended costs. delivery of our strategy. The Board has Mitigation • Organisation Design structures and support established for multi-channel overall accountability for ensuring that and other change programmes. risks are effectively managed across • Multi-channel governance structure exists including Business Design Authority. the Group, and that there is a system for internal control. The Management Business interruption d Risk Board is responsible for implementing Our distribution and systems infrastructures are fundamental to ensuring the normal continuity of trading in our stores. If a major incident occurred and maintaining the system of controls. to this infrastructure or another key facility, this could have a detrimental impact on our ability to operate effectively.
Managing the risk Mitigation • Recovery plans exist for individual sites. management process • Investment in remote IT disaster recovery site and regular testing of recovery plans for key systems. The Board believes a successful risk management framework • Adherence to a stringent process for evaluating new suppliers/third parties. • Contingency arrangements documented for key suppliers. balances risk and reward, and applies reasoned judgement • Annual crisis simulation exercise. and consideration of likelihood and impact in determining the Group’s principal risks. The Group’s risks are reviewed regularly and updated as appropriate. Business strategy d G
1 Risk r De Effective long term management of the Group’s strategic risks will deliver ito s ve n s tra lo benefits to all our stakeholders. The Board understands that, if the strategy o n te p m tio g an and vision are not properly formulated, communicated or implemented, then d c y d n a a c a f n the long term aims of the Group may not be met and the business may suffer. o d o w s o m ie s b m v e j c e u e Mitigation c c n R u t i s i c • Strategy development led by the Chief Executive and senior management v 4 a e t with Main Board scrutiny and approval. s e • Engagement with a wide group of stakeholders to ensure the strategy remains current. Strong governance • Communication of strategy via numerous channels. • Clear link between strategic targets and business plans to drive implementation. • Close Board monitoring of business performance.
s k s i 3 r
M e t d G it a i lu Colleague engagement and retention g a at v e e ri d Risk sk an s fy We are a people business and our 129,000 colleagues make it happen for nti 2 Ide our customers. If we fail to retain, develop and motivate our colleagues, we will not provide our customers with the quality of service they expect.
Mitigation 1. Our strategy informs the setting of objectives across the • Competitive employment policies, remuneration and benefits packages business and is widely communicated. established. • Significant investment in training and development, including Morrisons 2. Risks are identified by colleagues fro m all business areas Academy and Coaching for Performance programmes. through a variety of mechanisms, including facilitated • Regular talent reviews and refresh of succession plans to meet the future workshops. The likelihood and impact of identified risks needs of the business. • Climate and Pulse surveys undertaken to understand and respond to is considered and captured. colleague concerns. 3. Responsibility for actions to mitigate risks is delegated to appropriate colleagues within the business, and risks and controls are recorded in the functional risk registers. 4. The Management Board considers the risks reported in the functional risk registers and, with assistance from Risk and Internal Audit, prepares a Group risk register. This is reviewed and approved by the Board of Directors.
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Customer proposition d Regulation d
Risk Risk We operate in a highly competitive industry and our customers’ shopping habits The Group operates in an environment governed by strict regulations to ensure are influenced by broader economic factors that our business does not control. the safety and protection of customers, shareholders, colleagues and other If we fail to keep our proposition aligned with customers’ expectations, then they stakeholders, and the operation of an open and competitive market. These may choose not to shop with us and sales will suffer. regulations include alcohol licensing, health and safety, the handling of hazardous materials, data protection, the rules of the stock exchange and Mitigation competition law. In all cases, the Board takes its responsibilities very seriously, • Insight team provides data and analysis to help identify customer needs and and recognises that breach of regulation can lead to reputational and financial wants which inform product ranging, marketing, advertising and the location damage to the Group. of new stores. • Regular review of positioning against competitors. Mitigation • Clear accountabilities for compliance with all areas of regulation exist. • Policies and procedures designed to accord with relevant laws and regulations, including GSCOP and Competition Law training. Financial and treasury d • Health and Safety and Compliance Steering Group together with the Management Board and Corporate Compliance and Responsibility Committee Risk oversee compliance with regulatory requirements. The main financial risks that the Group is exposed to relate to the availability of funding, the loss of a financial counterparty and the uncertainty produced by fluctuations in interest and foreign exchange rates. All of these things have the potential to undermine the Group’s ability to finance its trading activities and its Reputation d financial results. Risk Mitigation Morrisons is committed to taking good care and, if we fail to act as a responsible • Treasury Committee controls activities in line with Board approved policies corporate citizen or misjudge the ‘mood of the nation’, this could damage our and procedures and reports twice a year to the Audit Committee. reputation and, therefore, potentially lose the trust of our stakeholders and • Hedging and derivatives used to control risk and protect the business rather increase costs. than create profit. • Board approval of budgets and business plans. Mitigation • Morrisons Values embedded into colleague Performance Development Review (PDR) process. • Corporate Responsibility policies, targets and key performance measures Food and product safety d clearly defined and integrated into operational management activities. • Responsible Sourcing Group, Management Board and Corporate Compliance Risk and Responsibility Committee oversee delivery against targets. If we fail to deliver excellent standards of hygiene and safety in our products, • External assurance of Morrisons Corporate Responsibility report. there is a potential to harm our customers and damage our business reputation. • Further information is available in our Corporate Responsibility report at Our business focuses on fresh food and we have a vertically integrated business www.morrisons.co.uk/cr model; therefore, food safety is of paramount importance.
Mitigation • Strict standards and monitoring processes established to manage food safety Space optimisation d G risks throughout the Group and supply chain. • ISO22000 accreditation of food manufacturing businesses. Risk • Regular supplier assessments undertaken to ensure adherence to standards. The business is growing the size of its retail space through acquisition and • Stock withdrawal procedures operate throughout our supply chain to minimise by modernising and extending existing stores and facilities. If we fail to grow the impact to customers of any supplier recalls. our space profitably, we will lose market share and earnings will suffer. • Food Safety Steering Group, Management Board and Main Board provide oversight of operational activities. Mitigation • Property strategy develops stores to a well proven format. • Formal capital approval process, overseen by the Investment Board. IT systems E G
Risk A number of existing systems are approaching the end of their useful lives and the Group is investing significantly in a multi-channel technology platform. Morrisons is aware of the risks faced by any organisation seeking to successfully design and implement new systems.
Mitigation • We partner with some of the world’s leading technology companies for key projects. Change in the level • Project management methodology (‘The Method’) used to manage delivery. of risk from 2011/12 • Regular reviews undertaken by Risk and Internal Audit and other specialists provide assurance over Evolve and multi-channel programmes.
Key to strategic objectives Delivering the topline d Increasing efficiency E Capturing growth G
29 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Annual report and financial statements 2012/13 More of what matters for our people
Our people are at the forefront of Developing talent everything we do. Having the right Talented people are our greatest asset and the way we engage and train our colleagues helps us deliver more of what matters people is a key differentiator, allowing to our customers. us to deliver excellent customer service We believe in bringing the best out of people by offering and meet our strategic objectives. continuous training. A career at Morrisons starts with the Best First Day; a comprehensive induction to the Morrisons vision, At Morrisons, we create long term culture and values. partnerships with our people by giving Each colleague’s development includes regular feedback, them the time, qualifications and support supplemented by more formal performance reviews. Our colleagues also take part in the Morrisons Academy, our training needed to grow and develop their skills. function focusing on skills and qualifications development, leadership, and coaching and talent.
This year, we have provided over 750,000 training days to our colleagues, seen over 14,000 colleagues trained in retail skills Highlights and promoted over 2,100 people following successful job skills qualification.
Labour turnover 1 Colleagues at our new Fresh Format stores have received specific % training focusing on excellence in preparation and customer 15.0 service. In our Manufacturing team, we’ve helped 5,500 colleagues get closer to understanding what great food looks like through our Pinnacle Food Quality Standard. Colleague engagement %2 increased by We have maintained our position as the largest apprenticeship +6.2 provider in the country with 11,000 colleagues graduating this measured through our colleague year. We pride ourselves on our colleagues’ craft skills. Our engagement survey apprenticeships and training programmes are vital in transforming our people into skilled and knowledgeable butchers, bakers and fishmongers. Employee stability 3 % Alongside the apprenticeship programme, this year we have measured as colleagues with 86.2 inducted our largest ever cohort of graduates. We have also more than one year service launched a number of other development courses such as level 3 apprenticeships, which 6,000 colleagues are in the process of completing. Female managers 4 % We pride ourselves on our craft skills and in September we increased by +2.0 held Morrisons second Mastercraft competition. This year, the competition was expanded and as well as butchers, bakers, fishmongers and cheesemongers our wine experts, produce People progressing from 4 specialists, cake shop and florists were invited to compete. shop floor to management 1,205 The competition saw a number of challenges including live product knowledge tests, demonstration of craft skills, and – for our wine experts – blind taste tests. Participants in annual 5 colleague opinion survey 121,000 source: 1 12 months to 31 January 2013 2 Latest Pulse survey (Pulse 6), compared with Climate survey 2012 3 12 months to 31 December 2012 Awards won in 2012/13 4 3 February 2013, compared with 31 January 2012 5 Climate survey 2012
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Our Mastercraft competition saw colleagues from all over the UK showcasing their craft skills.
Employer of choice Following a number of qualifying rounds, 48 finalists were invited At Morrisons, we are passionate about providing a great place to a live final where they demonstrated their skills in front of 2,500 to work for our colleagues, which in turn provides a better colleagues in our busy head office. The winners of each category experience for our customers. We are proud to have won the were invited to take part in specially arranged European industry Grocer Gold ‘Employer of Year Award’ for the third time in a row visits to learn more about their crafts so that they could bring what and the Retail Week ‘Employer of the Year’ for the second year. they had learnt back to their local stores. We know that the current economic conditions are challenging We continue to support the progression of women in our business for our colleagues and this year we launched the ‘Save your Dough’ and 25% of our Main Board is female. This year we have increased education programme, featuring finance expert Alvin Hall. The the number of females in senior roles to 22%, an increase of 2% scheme has been received positively with over 45,000 colleagues on last year. We expect to meet our 2013/14 target of 30%. saying it has helped them manage and improve their finances.
At the end of their careers, our colleagues celebrate their Best Last We listen to what our people tell us and colleague suggestions Day. We then continue to support and keep in touch with them have been a key part of our strategic objective of improving through the M Plus scheme. efficiency. We also know the importance of communicating with our colleagues so that they know what’s going on at Morrisons. Our teams receive regular updates through our This year marked the launch of our Retirement Fresh news magazine and colleague communication boards. Saver scheme. This year, against a backdrop of significant pension changes, we introduced our ground breaking Retirement Saver colleague pension scheme, which offers colleagues a guaranteed pension pot when they choose to retire. The scheme received positive feedback and pension participation trebled within one month of its launch.
The health and wellbeing of our colleagues is key to a happy workforce. As well as offering healthy food options for our colleagues we also have free of charge health check machines available for colleagues. Absence and sickness are important metrics which are closely monitored. Our current absence rate is 3.7% and our sickness rate is 3.5%.
Formal feedback from colleagues is important and our annual Climate survey, supported by bi-monthly Pulse surveys are a key part of monitoring engagement. This year, our response rate is over 90% and our year-on-year engagement has increased by 6.2%.
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More of what matters for our people – continued
This year we launched the Feeding Britain’s Future scheme to help young people (16 to 24) get first hand experience of working in retail.
The participants spent three days in-store, visiting a number of different departments. We also provided skills training, including CV writing, interviewing skills and marketing experience.
The scheme received excellent feedback and we are pleased to have had more than 100 placement candidates join us as permanent colleagues.
Heart of the community At Morrisons, we want our stores to be truly part of the communities they serve. We are committed to growing our people to build a loyal and committed workforce, which provides the basis of a strong Morrisons culture and increased social mobility.
We also want our communities to benefit from our growth plans by creating opportunities. We continue to open new stores and, on average, 75% of colleagues in our new stores are recruited from the local area. We are committed to paying our colleagues fairly and all our apprentices earn at least twice the apprentice minimum wage.
Each of our stores has a community champion interacting with and benefiting our local communities. In particular, through our Raise a Smile scheme, we have worked with Save the Children and since April 2011 raised £4.5m.
We have a Market Street in all our stores.
“The Morrisons Academy has increased my confidence, allowing me to develop my skills in a supportive learning environment.”
Stacey Holmes, Morrisons Finance Graduate
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Our commitment At Morrisons, we don’t just sell products. We think about the life cycle of our products, from the suppliers that make them to the customers that buy them. Our vertical integration model allows us to carefully and efficiently manage our supply chain, giving customers quality products at affordable prices. We are committed to operating our business responsibly, protecting valuable resources whilst making a positive contribution to the communities in which we operate.
Management and responsibility for delivery of our core published commitments is led by our Management Board. Formal reports on innovation, progress, integration and challenges are made to both our Management Board and Corporate Compliance and Responsibility Committee.
Engaging with key stakeholder groups is essential to delivering an effective and impactful CR programme. We regularly communicate with a variety of stakeholders including investors, customers, government, non-governmental organisations, colleagues, communities and suppliers.
Responsibility for overall stakeholder engagement falls within the Corporate Services function of the business. It enables Morrisons Corporate responsibility highlights to identify the issues that matter most and ensure continuous improvement of strategy. In turn, this helps us to make informed and responsible decisions, respond to changing needs and adhere ‘Big Tick’ for our Let’s Grow programme at Business to regulatory and best practice. in the Community’s annual Awards of Excellence Last year we were the first of the top four supermarket retailers to have our corporate responsibility review independently assured Reduction in carbon to AA1000AS (2008) standard. We were recognised in Carbon % Smart’s sustainability assurance report, ‘On the right track?’, emissions (2005 baseline) 19.3 as ‘out in front’ of our competition for assurance reporting. achieved to date This section highlights just a few of our achievements in corporate responsibility in the year. Raised for our charity partner m Save the Children Details of our full programme can be found in our corporate £4.5 responsibility review 2012/13 at www.morrisons.co.uk/cr raised to date
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Corporate responsibility – continued
We’re passionate about doing more of what matters ...... for customers The past year has seen a number of developments in our work to provide customers with the information and products they need to make healthier choices.
In May, we launched our new healthier eating brand, NuMe, replacing our previous Eat Smart offering. NuMe offers a wide range of healthier products across all meal and snacking occasions. The range was developed by our in-house professional chefs, nutritional experts and product development team. Innovative labelling systems using clear labelling helps customers to easily identify healthier options.
Morrisons continues to support the Government’s Public Health Responsibility Deal which includes commitments such as working towards 2012 salt reduction targets and putting calorie information on our out of home eating options.
Our in-store café menus and counter items provide calorie information at point of choice, so that our customers can make informed decisions about the food they enjoy. This has been At Morrisons we take the welfare of livestock in our food chain very extended so that calorie information is also displayed in our seriously. It’s an important issue to our farmers and our customers. colleague canteens and further nutritional information about our We continue to invest in research that helps raise the bar for animal dishes are available on request. wellbeing. One example is our work with University of Bristol, investigating the benefits of raising broiler chickens in sheds which Customers who shop in Market Street can find nutrition have windows offering natural daylight, easy access to perches and information for those products on our website. pecking objects.
We continue to work with our farmers to help them with current ...for farmers farming challenges, including cutting costs and improving efficiency.
Now in its fourth year of operation, Morrisons farming programme We’re proud to be British and are committed to supporting whole has completed a number of industry led projects over the last year. crop farming. This means our farmers know exactly what we will buy, reducing their wastage. Ideas for projects come from farmers themselves with Morrisons providing funding and expertise to help improve their profitability. The Morrisons farm at Dumfries House hosted Scotsheep, a key A number of the projects have been trialled at our own farm, event in the British sheep farming calendar. For Morrisons, it was a Dumfries House, in Ayrshire, Scotland. chance to welcome our fellow farmers to the House and show them the progress we’ve made in transforming derelict farm buildings The programme’s core aim is to provide producers with new and barren land into a thriving beef and sheep enterprise. Nearly information that can help them build sustainable farm businesses 8,000 farmers joined our guest of honour HRH The Prince of Wales and enable Morrisons to secure a supplier base ready to meet our for an action packed day which included farm tours, insights customers’ need for transparency, quality and affordable food. into new technologies and debates on the future of the British sheep industry. The programme spans the UK and covers all areas, from red meat to poultry to dairy. Over 350 farmer suppliers converged at the Great Yorkshire Show ground for Keep Britain Farming, our second farming conference. We engaged with producers drawn from across the farming spectrum on how we can work together to build industry sustainability and produce British food that is both attractive and affordable for our customers.
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In 2012, we engaged communities across the UK by opening up ...for communities the programme to ‘Incredible Edible’ sites. These community Since 2008, through our Let’s Grow growing groups take over unused flower beds and planting areas, scheme, we have given away: allowing local people to grow and harvest their own crops. Thanks to Let’s Grow they can now collect vouchers in-store and receive 11,000 wellies free equipment.
In 2013, we are continuing to work with over 28,000 schools taking the ‘field to fork’ story even further by expanding our focus into cooking and preparing fresh food.
Morrisons actively supports Save the Children’s Families and Schools Together (FAST) programme; working with families, schools and communities to support children across the UK. 34,000 watering cans The FAST programme has a huge impact on the lives of families and children in the UK by helping them to improve learning, develop confidence and become more actively involved in their community. Let’s Grow is our award winning community investment programme that teaches schoolchildren about the story of fresh At the launch of the partnership in April 2011, we set an ambitious food and the practical experience of growing their own fruit target to raise £1m in our first year; thanks to the outstanding and vegetables. support and dedication of our colleagues and customers, an incredible £2m was raised within the first ten months. Since our programme began in 2008, we’ve given away £18m worth of gardening equipment to schools all over the UK. To date our partnership has raised over £4.5m. This means we’ve supported over 2,200 children, and their families, funding 49 Working closely with DEFRA to implement the recommendations FAST programmes. of the Growing Schools taskforce, we ensure teachers have valuable online teaching resources to support children’s learning, In 2013, we are continuing to work with Save the Children and aim including tutorial videos, activity sheets and assembly guides. to fund another 48 programmes, making a difference to thousands of children’s lives. Stores are also an integral part of the Let’s Grow story. Hundreds of schools have taken part in educational store visits, bringing the food story to life and showing how their produce, meat and bread goes from ‘field to fork’.
Schemes like Let’s Grow keep Morrisons at the heart of the community.
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Board of Directors (left to right)
Committee key N R C Sir Ian Gibson Nomination Committee N Remuneration Committee R Johanna Waterous N R C A Corporate Compliance and Responsibility Committee C Audit Committee A Nigel Robertson N R C A Philip Cox N R A Board Director biographies Penny Hughes N R C A See page 38 for further information
Richard Pennycook See our report visit: morrisons.co.uk/corporate/ar2013 Dalton Philips N C
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Management Board (left to right)
Neal Austin Management Board biographies See page 39 for further information Trevor Strain See our report Mark Amsden visit: morrisons.co.uk/corporate/ar2013 Dalton Philips Richard Pennycook Martyn Fletcher Martyn Jones Terry Hartwell Mark Harrison
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Board of Directors and Management Board – continued
1 – Sir Ian Gibson CBE 5 – Philip Cox CBE Chairman Chair of Audit Committee Sir Ian joined the Group as Non-Executive Deputy Chairman in Philip joined the Group as a Non-Executive Director in April 2009. September 2007 and was appointed Chairman in March 2008. Sir He is a member of the Audit, Nomination and Remuneration Ian is Chair of the Board’s Nomination Committee and a member Committees. Philip has been the Chief Executive Officer of of its Remuneration Committee and Corporate Compliance and International Power Plc since 2003; he will retire from this position Responsibility Committee. He is a Non-Executive Member of the on 30 April 2013. Philip is a Non-Executive Director of Meggitt Plc Public Interest Body of the UK firm of PricewaterhouseCoopers and will be appointed as a Non-Executive Director of PPL LLP. Previous Board appointments include Non-Executive Corporation with effect from 1 April 2013. He was a Non- Chairman of Trinity Mirror Plc, Chairman of BPB Plc, Deputy Executive Director at Wincanton Plc from 2001 to 2009, having Chairman of Asda Group Plc, and a Director of Chelys Limited, chaired their Audit Committee from 2001 to 2008 and was Chair GKN Plc, Greggs Plc and Northern Rock Plc. He is also a former of their Remuneration Committee from 2008. His previous Board member of the Court of the Bank of England. Sir Ian enjoyed a positions were as Chief Financial Officer at Siebe Plc. distinguished 30-year career in the motor industry, most recently as President of Nissan Europe. 6 – Penny Hughes CBE 2 – Dalton Philips Chair of the Corporate Compliance and Chief Executive Responsibility Committee Dalton joined the Group as Chief Executive in March 2010. He is Penny joined the Group as a Non-Executive Director in January a member of the Board’s Nomination Committee and Corporate 2010. She is a member of the Audit, Nomination, Remuneration Compliance and Responsibility Committee. Prior to joining and Corporate Compliance and Responsibility Committees. Penny Morrisons, he was Chief Operating Officer of Loblaw Companies is currently a Non-Executive Director of The Royal Bank of Scotland Limited, Canada’s largest food distributor and a leading provider of Plc and a trustee of the British Museum. Penny’s previous general merchandise. Prior to that position, he was Chief Executive experience includes 10 years with Coca-Cola GB and Ireland and of Irish department store group, Brown Thomas. Between 1998 various Non-Executive roles including Body Shop International Plc, and 2005 he worked for Walmart’s international divisions latterly GAP Inc, Reuters Plc, Skandinaviska Enskilda Banken, Trinity Mirror as Chief Operating Officer in Germany. Dalton started his career Plc, Vodafone Plc, Home Retail Group Plc and Cable and Wireless with Jardine Matheson, working in New Zealand and Spain. Dalton Worldwide Plc. is a Non-Executive Director at the Department for Business, Innovation & Skills. 7 – Johanna Waterous CBE Chair of the Remuneration Committee 3 – Richard Pennycook Johanna joined the Group as a Non-Executive Director in February Group Finance Director 2010. She is a member of the Audit, Nomination, Remuneration Richard joined the Board as Group Finance Director in October and Corporate Compliance and Responsibility Committees. She 2005 and has responsibility for finance, IT, strategy and multi- is currently a Non-Executive Director of RSA Group Plc, Non- channel development. Prior to joining Morrisons he was the Group Executive Director and Senior Independent Director of Rexam Plc Finance Director of RAC Plc, the quoted specialist motoring and and a Non-Executive Director of Shoppers Drug Mart Corporation vehicle management company. Previous senior roles include Group (listed on the TSE), as well as being an Operating Partner of Duke Finance Director of HP Bulmer Holdings Plc, Laura Ashley Plc and Street LLP and Chairman of Sandpiper CI. Her previous experience JD Wetherspoon Plc and Chief Executive of Welcome Break includes 22 years with McKinsey & Co, London, ultimately as Holdings Plc. He is also Senior Independent Director and Chairman Co-Leader of the firm’s Global Marketing and Sales Practice. She is of the Audit Committee of Persimmon Plc, Chairman of the Hut a Trustee of the Royal Botanic Garden Kew Foundation and of Kew Group Limited and will be appointed as a Non-Executive Director Enterprises Ltd. Between 1998 and 2006, she was Chairman of of Thomas Cook Group Plc with effect from 1 April 2013. Richard Tate Enterprises. will retire from the board on 10 April 2013.
4 – Nigel Robertson
Senior Independent Director 1 7 4 5 6 3 2 Nigel joined the Group as a Non-Executive Director in July 2005 and has been Senior Independent Director since March 2011. He is a member of the Nomination, Remuneration, Audit and Corporate Compliance and Responsibility Committees and was Chair of the Corporate Compliance and Responsibility Committee from September 2009 to March 2011. Working in the private equity sector, he is the Group Chief Executive of Health and Surgical Holdings Limited. Until the business was sold in 2007 he was the Chief Executive Officer of Chelsea Stores Holdings Limited and he was previously the Managing Director of Ocado, the online grocery shopping business set up in partnership with Waitrose. Nigel retired from the board on 13 March 2013.
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8 – Neal Austin 12 – Terry Hartwell Group Logistics and Supply Chain Director Group Property Director and interim HR Director Terry was appointed to the Management Board in October 2010 Neal joined the Management Board in October 2010 and is after joining the Group in May 2009 as Group Property Director. responsible for logistics and supply chain. He is also currently Prior to joining Morrisons, Terry was Group Property Director for overseeing the Human Resources function on an interim basis. the worldwide operations at Kingfisher Plc. He spent 25 years with He joined Morrisons in October 2006 from MFI, where, as Logistics Kingfisher Plc and, during that time, held a number of senior Director, he was involved in the sale of the retail business to private property positions, including a spell in front line operations, equity. Neal began his career in 1989 with Tesco as a graduate running the new depot division in the mid 1990s. He is a Chartered trainee in the buying division, where he undertook a number of Surveyor with experience in all aspects of commercial property buying and marketing roles, progressing to senior wine buyer. development, retail acquisition and property management. He then took a role with Asda as a senior buyer and progressed through the supply chain in a number of roles before being 13 – Martyn Jones appointed Supply Director. Group Corporate Services Director Martyn was appointed to the Management Board in October 2010 9 – Martyn Fletcher as Group Corporate Services Director, and is responsible for policy Group Manufacturing Director and technical standards. He joined Morrisons in 1990 as Trading Martyn became a member of the Management Board in October Manager and was promoted to Trading Operations Director in 2010 and is responsible for the Group’s food manufacturing 1993, Grocery Director in 1997 and then Senior Trading Director operations, including abattoirs, bakeries, processing and packing in 2002. Martyn spent three years on the Board as Group Trading facilities. He joined the Group in 1985 and has held a number of Director before changing role at the end of 2010 to Group roles within stores and in head office. In 1988, he was appointed as Corporate Services Director on the Management Board. Prior to Purchasing Manager and promoted to Purchasing Director in 1995. joining Morrisons, he spent eight years with J. Sainsbury Plc before In 2002, he was appointed as Production Director, responsible for moving into manufacturing with RHM Plc and then Campbells, the food manufacturing operation, before being appointed as gaining wide buying, marketing and product development Group Manufacturing Director in 2007. experience in fresh and frozen foods.
10 – Mark Harrison 14 – Trevor Strain Group Retail Director Group Finance Director designate Mark joined the Management Board in October 2010 and was Trevor joined Morrisons in June 2009 as Commercial and appointed Group Retail Director in June 2011. His responsibilities Operations Finance Director. In June 2011 he became Finance are retail operations, central retail operations and other retail Director Corporate and took responsibility for the Company’s related projects. He joined the Group in 1980 as a management productivity programmes. Prior to joining Morrisons he worked for trainee and quickly progressed to Store General Manager. After Tesco in a number of roles until his appointment as UK Property a successful career in store management, he held progressively Finance Director in 2006 and subsequently UK Planning and senior positions of regional management between 1996 and 2004. Reporting Finance Director. Trevor began his career with Arthur In 2004 he became Stores Director. Andersen and is a member of the Institute of Chartered Accountants in England and Wales. Trevor will succeed Richard 11 – Mark Amsden Pennycook as Group Finance Director in April 2013. Group General Counsel and Company Secretary Mark is a qualified lawyer who joined the Group and the Management Board on 1 February 2013. Prior to his arrival, Mark spent 25 years with a number of law firms. Between 1998 and 2013 he was a partner in leading national law firm Addleshaw Goddard LLP (previously Addleshaw Booth & Co), where he specialised in commercial litigation and was Head of the national IT Litigation team. Mark’s clients included many of the UK’s leading 3 companies, including retailers, manufacturers and suppliers. 8 14 11 2 9 13 12 10
39 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Governance Annual report and financial statements 2012/13 Corporate governance report
The Board Membership On 3 February 2013, the Board comprised a Non-Executive Chairman, two Executive Directors and four Non-Executive Directors.
There is a clear division of responsibilities between the Chairman and the Chief Executive, which has been set out in writing and agreed by the Board.
On 1 March 2013, Richard Gillingwater was appointed as a Non-Executive Director. As part of the orderly handover of responsibilities from outgoing Group Finance Director Richard Pennycook to Trevor Strain, it was announced on 8 March 2013 that Richard would retire from the Board, and Trevor would be Sir Ian Gibson appointed to the Board with effect from 10 April 2013. On Chairman 13 March 2013, Nigel Robertson stood down as a Non-Executive Director. Throughout the year, the majority of the Board consisted of independent Non-Executive Directors. Details of appointments, UK Corporate Governance Code roles and backgrounds of the Directors are set out on page 38. The Board has prepared this report Board diversity The Board currently includes two women members, 25% with reference to the UK Corporate of its total composition. The Board’s policy is that female representation should be maintained at not less Governance Code issued by the Financial than 20% and aspires that this should be higher than 30%. This policy will continue to be considered as part Reporting Council in June 2010. of the Nomination Committee’s regular review of the During 2011/12, the Board’s Corporate Compliance and Board’s composition and skills. Responsibility Committee reviewed and updated, and the Board approved, its Corporate Governance Compliance Statement, which Performance evaluation and training sets out how the Group complies with each of the provisions of the The performance of the Board, its committees and its Directors UK Corporate Governance Code (the ‘Code’). In light of the fact is assessed and appraised regularly. The Chairman is responsible that there were relatively few changes to the Code in the year, for monitoring the performance of the Chief Executive, who in turn there were no significant changes to the Corporate Governance is responsible for monitoring the performance of the Group Compliance Statement during 2012/13. That document also sets Finance Director. out the statement of the division of responsibilities between the Chairman and the Chief Executive, the list of matters reserved for Board review the Board, the membership of the Board and the various Board A review of the Board was carried out during the financial year. The committees, together with the terms of reference of the various review took the form of the completion of questionnaires by each standing Board committees. This document is available in the Director, prepared by the Company Secretary, and approved by the investor relations section of the Group’s website, Board’s Corporate Compliance and Responsibility Committee. www.morrisons.co.uk/corporate Those responses were collated by the Company Secretary’s office and reviewed by the Chairman and the Corporate Compliance and Responsibility Committee. The conclusions of that review were that the Board was effective, well informed and active, worked well as a team, and provided appropriate but supportive challenge to management as befits an effective board.
The effectiveness of the Board was considered within the context of three key criteria: • the Board’s ability to achieve its objectives, particularly with regard to the development of strategy, the oversight of risk and control, the monitoring of executive performance and the protection of shareholder and stakeholder interests; • the Board’s ability to work together effectively; and • the Board’s ability to maximise its use of time.
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The Board has accepted the recommendations of the Corporate During the year, the Non-Executive Directors met five times Compliance and Responsibility (CCR) Committee and in 2013/14 without management present to discuss the performance of the there will be a further independently facilitated external evaluation. business and management, and the wider economic, commercial and social environment in which the Group operates. The The Board is satisfied that the arrangements for review and Chairman arranges regular discussions between all the Non- appraisal of the performance of the Board, its committees and Executive Directors (including himself) as a group. These are not individual Directors are appropriate. The Board is also confident part of a strict timetable, as they are influenced by circumstances that the initiatives which have been implemented already or which from time to time. However, these discussions take place roughly are in progress will enable the Group to satisfy the best practice at or around every alternate Board meeting. The Senior recommendations of the Code in relation to Board evaluation. Independent Director has also coordinated a meeting of the Non-Executive Directors which carried out an appraisal of the During the course of 2012/13, the Group has continued with Chairman’s performance. As part of this process, he also sought ad-hoc Board training sessions and built on the extensive training the views of the Executive Directors. programme conducted by the Board in the two previous financial years, including training on food safety and competition law. Board responsibilities The Board is responsible for setting and approving the strategy and Nigel Robertson was appointed to the Audit Committee on key policies of the Group, and for monitoring the progress towards 9 February 2012. There were no further changes to the achieving these objectives. It monitors financial performance, composition of the Board’s principal committees or the critical operational issues and risks, including regular review and chairmanship of those committees during the year. formal approval of the Group’s risk register. The Board also approves all circulars, listing particulars, resolutions and Senior Independent Director correspondence to shareholders, including the annual report and Nigel Robertson was the Board’s Senior Independent Director from financial statements, half-yearly financial report and interim March 2011 until his resignation on 13 March 2013. He has, and management statements. had, extensive knowledge of the Group’s business and its activities. Throughout his period of tenure as Senior Independent Director, The formal schedule of matters reserved for the Board remains he was available to shareholders as an alternative to the Chairman, unaltered and further details are available in the Corporate the Chief Executive and the Group Finance Director. Nigel also Governance Compliance Statement set out in the investor relations coordinated the review of the performance of the Chairman by the section of the Group’s website, www.morrisons.co.uk/corporate Non-Executive Directors, the latest having been carried out in January 2013. Management Board The Management Board is made up of representatives of the senior Non-Executive Directors management of the Group and is chaired by the Chief Executive. The Non-Executive Directors bring a varied range of skills and It has detailed terms of reference and has responsibility for the experience to the Group. Details of their experience outside the day-to-day operations of the Group. This includes development Group are set out in their respective biographies on page 38. and implementation of strategy (subject to overall supervision by The Board is satisfied that all Non-Executive Directors, including the Board), financial performance, reporting and control, risk the Non-Executive Chairman, remain independent according to the management, operational improvement programmes, the entry definition contained in the Code. No Non-Executive Director: by the Group into major contracts and commitments, the • has previously been employed by the Group within the past development of corporate policies and procedures, and the five years; ongoing review and supervision of the operational activities of the • has had a material business relationship with the Group within business of the Group. It reviews and makes recommendations to the past three years; the Board in respect of budgets, long term planning and dividend • receives remuneration other than Director’s fees; levels, as well as reviewing proposed announcements, whether • has close family ties with any of the Group’s advisers, Directors financial or related to ad-hoc events. It also keeps under or senior employees; supervision the Group’s senior management talent, capabilities • holds cross-directorships or has significant links with other and succession plans. Directors through involvement in other companies or bodies; • represents a significant shareholder; or The Company Secretary organises the appropriate level of • has served on the Board for more than nine years. insurance cover for all Directors to defend themselves against legal claims and civil actions. The level of cover is currently £75m All Directors are provided with a comprehensive, formal and in aggregate. tailored induction to the business. The minimum time commitment expected of the Non-Executive Directors is one day per month Trevor Strain was appointed to the Management Board during attendance at meetings, together with attendance at the AGM, the year, and Casper Meijer joined the Company as Group Board away days and site visits, plus adequate preparation time. Trading Director and was appointed to the Management Board The Board is satisfied that each of the Non-Executive Directors on 1 March 2013. commits sufficient time to the business of the Group and contributes to the governance and operations of the Group. This has been confirmed by the Board effectiveness evaluation referred to earlier in this report.
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Corporate governance report – continued
Committees of the Board b) Remuneration Committee The principal committees of the Board are the Audit, The Remuneration Committee is chaired by Non-Executive Director Remuneration, Nomination and CCR Committees. Johanna Waterous. The objective of the Group’s remuneration policy is to encourage a strong performance culture and an Full terms of reference of the Board’s committees are available on emphasis on long term shareholder value creation. The intention is request and in the Corporate Governance Compliance Statement to position remuneration arrangements competitively against the set out in the investor relations section of the Group’s website, market with a clear reward structure to enable the Group to attract, www.morrisons.co.uk/corporate retain and motivate the best talent who are key to the Group’s past and future success. a) Nomination Committee The Nomination Committee is chaired by the Chairman, Sir Ian The HR Director and the HR and reward and benefits teams have Gibson. During the year, the activities of the Committee were advised the Group on all remuneration related matters, including focused on advice to the executive management on the search for pensions and Executive Directors’ contracts. Where necessary, this a new Group Finance Director, a new Commercial Director, a new was supplemented by advice from external advisers. Company Secretary, the composition of the Management Board and on senior management succession planning. The Committee The Committee also receives guidance from its appointed advisers has engaged an executive search agency, MWM Consulting, to on remuneration matters: Pension Capital Strategies Limited (a assist in the process of identification of potential Non-Executive member of the Jardine Lloyd Thompson Group) in respect of candidates to join the Board as and when appropriate. pensions, and Ashurst LLP in respect of Executive Directors’ contracts and PricewaterhouseCoopers LLP as its remuneration adviser.
The activities of the Remuneration Committee during the year are set out in more detail in the Remuneration report from page 45.
During the year, membership of the Committees was as follows:
Committee membership
Name Nomination Remuneration Audit CCR Sir Ian Gibson • 1 • • Dalton Philips • • Philip Cox • • • 1 Penny Hughes • • • • 1 Nigel Robertson • • • • Johanna Waterous • • 1 • •
1 Chair of the Committee
The Directors attended the following number of Board and Committee meetings:
Committee membership
Name Board Nomination Remuneration Audit CCR Sir Ian Gibson 11/11 5/5 9/9 – 3/3 Dalton Philips 11/11 5/5 – – 3/3 Richard Pennycook 11/11 – – – – Philip Cox 10/11 5/5 9/9 5/5 – Penny Hughes 10/11 4/5 9/9 4/5 3/3 Nigel Robertson 11/11 5/5 9/9 5/5 3/3 Johanna Waterous 11/11 5/5 9/9 5/5 3/3
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c) Audit Committee The Audit Committee is chaired by Non-Executive Director supply non-audit services and the Committee has reviewed the Philip Cox, who has the requisite recent and relevant financial scope of non-audit services provided by the external auditor to experience. The Board has delegated to the Audit Committee the ensure that there was no impairment of objectivity. A copy of the responsibility for reviewing on its behalf and making non-audit services policy is available in the Corporate Governance recommendations to the Board as to: Compliance Statement set out in the investor relations section of • the integrity of financial reports, including reviewing significant the Group’s website at www.morrisons.co.uk/corporate. This financial reporting issues and considering how these issues have non-audit services policy is designed to assist the Company and been addressed; each of its subsidiaries in ensuring that the engagement of the • the effectiveness of the Group’s internal control and risk external auditor to provide non-audit services: management system; and • is only carried out in appropriate circumstances; • the independence of the external auditor. • is transparent; and • does not impair the judgement or independence of the The Audit Committee’s responsibilities have not changed during external auditor. the year. When assessing the non-audit services for approval, the Audit The Audit Committee regularly considers the professional Committee will take the following into consideration: development needs of its members, and whether adequate • whether the skills and experience of the audit firm make it the technical information is being provided. Where necessary, it will most suitable supplier of the non-audit service; seek independent external advice at the Group’s expense, with • whether there are safeguards in place to ensure that there is no such arrangements made through the Company Secretary. The threat to the objectivity or independence in the conduct of the Chairman, the Chief Executive, the Group Finance Director, the audit resulting from the provision of such services by the Head of Risk and Internal Audit and other finance department external auditor; representatives have attended meetings by invitation. • the nature of the non-audit services, the related fee levels and the fee levels, individually and in aggregate, relative to the audit (i) Overview of actions taken by the Audit Committee in fee; and discharging its duties • the criteria which govern the compensation of the individuals The Committee has received and reviewed reports and performing the audit. presentations from senior management to fulfil its terms of reference. To meet its responsibilities in this respect, The external auditor also follows its own ethical guidelines and the Committee considered: continually reviews its audit team to ensure that its independence • interim and preliminary announcements, together with any other is not compromised. formal announcements relating to financial performance; • the accounting principles, policies and procedures adopted in the Although the auditor has been in place for a number of years, the Group’s financial statements, including, where necessary, auditor periodically changes its audit partners in accordance with challenging the judgements made; and professional and regulatory standards in order to protect • the potential effects of tax and pensions accounting, and other independence and objectivity and provide fresh challenge to significant judgemental and complex accounting issues dealt the business. with in the financial statements. The Audit Committee has noted the revisions to the UK Corporate The Audit Committee oversees the Group’s relationship with the Governance Code introduced by the FRC in September 2012 and, external auditor. Private meetings are held with the external in particular, the recommendation to put the external audit out to auditor, without management present. The purpose of these tender at least every ten years. meetings is to understand their views on the control and governance environment and management’s effectiveness within The Audit Committee is satisfied with the auditor’s effectiveness it. To fulfil its responsibilities in respect of the independence and and independence; and the degree of diligence and professional effectiveness of the external auditor, the Committee reviewed: scepticism in the external audit process. As such, the Committee • the terms, areas of responsibility, duties and scope of work of the has not considered it necessary to conduct a tender process for the external auditor as set out in the engagement letter; appointment of its auditor and has recommended to the board that • the external auditor’s work plan for the Group; the auditor be reappointed for 2013/14. • the detailed findings of the audit, including a discussion of any major issues that arose during the audit; The Audit Committee will review, not less than annually, whether • the letter from the external auditor confirming their the incumbent auditor should remain in place or whether an independence and objectivity; and auditor selection process should be initiated. • the audit fee and the extent of non-audit services provided by the external auditor. (ii) Internal control The Board is responsible for setting a system of internal In the year, the external auditor has continued to provide a controls for the Group and reviewing its effectiveness. Executive significant level of non-audit work, primarily to provide the Board management is responsible for implementing and maintaining with independent assurance in respect of IT systems replacement. the system of controls. This system is intended to manage rather The Board believes that this activity is a reasonable extension of than eliminate the risk of not meeting the Group’s strategic the auditor’s statutory work and that there are safeguards in place objectives; recognising that certain inherent risks may be outside to avoid a threat to the auditor’s independence or objectivity. The the Group’s control. Board has a policy on the engagement of the external auditor to
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Corporate governance report – continued
The Board delegates to the Audit Committee the review of the The Committee’s remit does not cover operational matters, but it effectiveness of the Group’s internal controls and risk management performs an oversight, monitoring and advisory role in relation to systems. During the year, the Committee discharged this these key areas in the Group’s governance and development. responsibility by: • receiving and considering regular reports from the Risk and The Committee, which reports to the Board, met three times Internal Audit function on the status of internal control and risk during the year and, as well as reviewing its terms of reference, management systems across the Group. The Committee also it received presentations on the Group’s CR, health and safety, reviewed the department’s findings, annual plan and the and competition compliance policies and procedures. resources available to it to perform its work; • reviewing the external auditor’s management letters on internal Our CR programme is published in our 2012/13 Corporate financial control; Responsibility Review, produced concurrently with this report. • seeking reports from senior management on the effectiveness The programme has been independently assured by Two of the management of key risk areas; and Tomorrows under the AA1000AS (2008) framework. • monitoring the adequacy and timeliness of management’s See www.morrisons.co.uk/cr response to identified audit issues. Shareholder relations The Audit Committee receives regular reports from the Head of The Chief Executive and the Group Finance Director meet regularly Risk and Internal Audit on any whistle blowing activity in respect with analysts and institutional shareholders. The Investor Relations of concerns expressed by colleagues about possible malpractice or Director also carries out a regular programme of work that reports wrongdoing. While there were no significant concerns raised by to the Board the views and information needs of institutional and colleagues, all actions required were discussed and agreed with major investors. This is part of the regular contact that the Group the Committee. The Audit Committee also reviews the progress maintains with its institutional shareholders. of the Group’s significant system changes. The Chairman regularly meets with major shareholders and he The Board is satisfied that a continual process for identifying, actively encourages major shareholders to contact him if they wish evaluating and managing significant risks has been in place for the to discuss any aspect of the Group or its governance arrangements financial year and up to the date of this annual report and financial with him. statements. To date, no material financial problems have been identified that would affect the results reported in these Additionally, the Group’s brokers sought independent feedback financial statements. The Board confirms that, if significant from investors following the 2011/12 annual and 2012/13 interim weaknesses had been identified during this review, the Board results. This feedback was reported to the Board. would have taken the necessary steps to remedy them. All Directors, Executive and Non-Executive, attend the AGM unless The Group’s internal controls over the financial reporting and unavoidably unable to do so. The Chairman and the Chairs of the consolidation processes are designed under the supervision of the Audit, Nomination, Remuneration and CCR Committees are Group Finance Director to provide reasonable assurance regarding available to answer any questions. the reliability of financial reporting, and the preparation and fair presentation of the Group’s published financial statements for Code compliance external reporting purposes in accordance with International Financial Reporting Standards. The Board is confident that its corporate governance policies and procedures are appropriate and that the Company is fully compliant Due to its inherent limitations, internal control over financial with the Code. In line with the best practice recommendation set reporting cannot provide absolute assurance, and may not prevent out in Code Principle B.7.1, all Directors will be submitted for or detect all misstatements, whether caused by error or fraud. re-election at its AGM.
The Group’s internal control over financial reporting and the Share capital and control preparation of consolidated financial information includes policies Details relating to share capital and control are contained within and procedures that provide reasonable assurance that the General Information section on page 55. transactions have been recorded and presented accurately. Management regularly conducts reviews of the internal controls in place in respect of the processes of preparing consolidated financial information and financial reporting. d) Corporate Compliance and Responsibility (CCR) Committee The CCR Committee, chaired by a Non-Executive Director, Penny Hughes, reviews and oversees the development and implementation of policy in relation to health and safety, environmental, competitive and ethical compliance, corporate responsibility (CR), including the Group’s engagement with community organisations and charitable bodies, and governance and other reputational management issues.
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140 -15 130 Performance and strategy review -20 120 Governance 110 Financial statements -25 100 Directors’ remuneration report90 -30 80 -35 70 GFK Consumer Confidence
Value of hypothetical £100 holding 60 -40 3 Feb 2 Feb 1 Feb 1 Feb 30 Jan 3 Feb Jan Mar May Jul Sep Nov Jan 2008 2009 2010 2011 2012 2013 Average earnings and inflation 2012 2012 2012 2012 2012 2013 2013 Pay for performanceWm Morrison Su atpe rmarMorrisonskets PLC FTSE 100 6 source: GFK NOP Consumer Confidence Remuneration summary FTSE all share food and drug retailers index The Remuneration Committee believes that the executive 5 How Executive Director pay is structured at Morrisons remunerationsource policy: Thompson and Reuter thes supporting reward structure provide 4 The major components of executive pay in 2012/13 were: clear alignment with the performance of Morrisons. To maintain this relationship, the Remuneration Committee constantly reviews
• base salary; % 3 • annual bonus plan, based on underlying profit before tax, Morrisons business priorities and the environment in which the strategic scorecard and personal objectives, of which 50% of any Company operates. 2 payment is deferred in shares for three years; and 1 • long term incentive plan (LTIP) delivered in shares, based 75% on The overall relationship is shown in the graph below. earnings per share (EPS) growth and 25% on like-for-like sales 0 growth over three years. PBT v total remuneration (base salary + cash bonus) 2007 2008 2009 2010 2011 2012 Share price performance over the last three years for Chief Executive and Group Finance Director during Key points from the 2012/13 remuneration report are: Average earnings CPI inflation 350 the period 2008/09 to 2012/13 source: Capital Economics • base salary levels for Dalton Philips and Richard Pennycook were 325 unchanged in 2012/13; 1000 £5,000 300 • no annual bonus was paid for the year 2012/13 as the business 900 £4,500 800 £4,000 missed the stretching underlying profit before tax growth target; 275 • the LTIP for the 2010/13 cycle did not vest as a result of the EPS 700 £3,500 600 £3,000 growth over that three year performance period falling short 250 500 £2,500 Share price (p) of target; (3) 400 £2,000 225 • following a review in February 2013, the Committee decided PBT (£m ) (1) (2) 300 £1,500 that there will be no base salary increases for Executive Directors 200 in 2013/14; 200 £1,000 • the balance of the annual bonus weighting between personal 100 £500 Feb 2010Apr 2010Sept 2010Dec 2010Feb 2011Apr 2011Sept 2011Dec 2011Feb 2012Apr 2012Sept 2012Dec 2012Feb 2013 objectives and strategic scorecard will be 20:20 (changed from 0 £0 Base salary + cash bonus (£000) 2008/092009/102010/112011/122012/13 10:30) for 2013/14; Wm Morrison Supermarkets PLC • the like-for-like sales growth and earnings per share targets PBT Base salary + cash bonus attached to the LTIP will be amended for grants from 2013/14 so that maximum vesting will occur if LFL sales growth equals or exceeds 1% v the IGD index and EPS reaches 10% above RPI; Notes • a return on capital employed (ROCE) underpin will be 1. No Chief Executive bonus paid in year due to departure of Marc Bolland implemented for LTIP grants from 2013/14; 2. Dalton Philips appointed as Chief Executive during year (salary and bonus shown • clawback provisions will apply to deferred shares and LTIP awards on annualised basis for 2010/11) from 2013/14; and 3. 2010/11 bonus opportunity increased to 200% to reflect competitive • shareholding guidelines have been increased for Directors to benchmarks; and introduction of bonus deferral into shares to reinforce the linkage of pay to long term shareholder value 200% of salary. Performance graph We pay for performance – our principles The graph below shows the Company’s total shareholder • encourage a strong performance culture; return (TSR) compared with the TSR of the FTSE 100 and FTSE • emphasise long term shareholder value creation; and food and drug retailers indices over the five year period to • position pay competitively in relation to our major peers. 3 February 2013. These indices have been selected as being appropriate in giving a broad equity view and the Company is Key performance indicators a constituent of both indices. 2012/13 2011/12 PBT growth over one year (7.2)% 8.4% Total shareholder return Consumer Confidence 140 Underlying EPS growth over one year 6.7% 10.9% -15 130 -20 Average share price growth (6.1)% 4.4% 120
Dividend payment 11.8p 10.7p 110 -25 100
90 -30
80 -35 70 GFK Consumer Confidence
Value of hypothetical £100 holding 60 -40 3 Feb 2 Feb 1 Feb 1 Feb 30 Jan 3 Feb Jan Mar May Jul Sep Nov Jan 2008 2009 2010 2011 2012 2013 Average earnings and inflation 2012 2012 2012 2012 2012 2013 2013
Wm Morrison Supermarkets PLC FTSE 100 6 source: GFK NOP Consumer Confidence FTSE all share food and drug retailers index 5 source: Thompson Reuters 4
% 3
45 2WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825
1
0 PBT v total remuneration (base salary + cash bonus) 2007 2008 2009 2010 2011 2012 Share price performance over the last three years for Chief Executive and Group Finance Director during Average earnings CPI inflation 350 the period 2008/09 to 2012/13 source: Capital Economics 325 1000 £5,000 900 £4,500 300 800 £4,000 700 £3,500 275 600 £3,000 250
500 £2,500 Share price (p) (3) 400 £2,000 225 PBT (£m ) (1) (2) 300 £1,500 200 200 £1,000 100 £500
Feb 2010Apr 2010Sept 2010Dec 2010Feb 2011Apr 2011Sept 2011Dec 2011Feb 2012Apr 2012Sept 2012Dec 2012Feb 2013 0 £0 Base salary + cash bonus (£000) 2008/092009/102010/112011/122012/13 Wm Morrison Supermarkets PLC PBT Base salary + cash bonus Governance Annual report and financial statements 2012/13
Directors’ remuneration report – continued Introduction from the Chairman
Short term incentives are based on a combination of underlying profit before tax targets, strategic corporate scorecard measures and personal objectives. For 2013/14, the Committee has increased the weighting for personal objectives metrics to 20%. This is intended to drive greater emphasis on personal impact in the business.
Long term incentives are based on EPS and like-for-like sales growth to support a sustainable approach to growth. The mix of the total remuneration package and the use of stretching performance targets ensures that there is alignment between pay and performance. In 2013/14, in addition to the EPS and sales growth measures, we will introduce a ROCE underpin to reinforce a focus on efficient use of capital. The like-for-like sales growth stretch target will be set at IGD +1% and the EPS performance range will be set at 1% to 10% above RPI, which the Committee believes remains challenging and reflects the structure and Johanna Waterous strategic growth priorities of the business. Chairman of the Remuneration Committee As a Committee, we are mindful of our responsibilities and review executive remuneration arrangements with a critical eye on Dear Shareholder corporate governance. We also welcome the recently published guidance from BIS in this regard. With this in mind, we have raised The Remuneration Committee remains the shareholding guideline for Executive Directors from 100% to 200% of salary, to be achieved over five years. We have also focused on ensuring rewards throughout introduced clawback provisions for both the deferred shares and LTIP which would be triggered in the event of financial the business incentivise a clear focus on misstatement or such similar acts by the Directors that could bring both short and long term financial the business into disrepute. performance as well as the key strategic The Committee believes that the adjustments to remuneration policy for 2013/14 set out above reinforce our focus on delivering objectives for the Company. stretching performance, driving the right behaviours in the executive team and doing the right thing for our shareholders. Elsewhere within the annual report you will read about the challenges facing the business over the last year. Tough conditions I would like to thank my fellow Committee members for their resulted in the business missing performance targets for both the support on these crucial issues for the business. annual bonus plan and long term incentive plan. Therefore no bonus payments will be made to Executive Directors for 2012/13 and the 2010/13 LTIP will not vest. In addition, there will be no Johanna Waterous base salary increases for Executive Directors for 2013/14. The Chairman of the Remuneration Committee Remuneration Committee and I strongly believe that these remuneration outcomes are appropriate given the performance of the business, and it demonstrates to shareholders that incentives for executives will only pay out when stretching performance targets have been achieved.
Looking forward the Committee remains focused on encouraging a strong performance culture, positioning pay competitively whilst doing the right things for our shareholders. In response to shareholders’ feedback, the Remuneration Committee has reviewed our reward policies and made a number of changes with effect from 2013/14.
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The Group is required to prepare a Directors’ remuneration report The Remuneration Committee’s key activities during the year are for the 53 weeks ended 3 February 2013 and put that report to a set out below: shareholder vote. A resolution to approve this report will be • approval of the 2011/12 bonus payments for Executive proposed at the AGM of the Company to be held on 13 June 2013. Directors and senior managers; • approval of vesting of 2009/12 LTIP; The auditor is required to report on part of the Directors’ • approval of annual bonus targets (including scorecard measures remuneration report and to state whether, in their opinion, that and personal objectives) for 2012/13; part of the report has been properly prepared in accordance with • approval of 2012/15 LTIP awards and performance conditions; the Companies Act 2006 and Schedule 8 of the Large and • annual review of Executive Directors’ base salaries and Medium-Sized Companies and Groups (Accounts and Reports) Chairman’s fee review; Regulations 2008. The report has, therefore, been divided into • approval of sharesave invitation, including assessment of ABI separate sections for unaudited and audited information. limits on share issue guidelines; • changes to shareholding guidelines; • amendment to the stretch attached to the like-for-like sales Unaudited information growth and EPS metrics for the 2013/16 LTIP; • implementation of a ROCE underpin; and Remuneration Committee • implementation of clawback provisions for the deferred shares During the year, the following individuals were members of the and LTIP. Remuneration Committee. Remuneration policy Membership The Remuneration Committee remains of the view that the Name of Director From To Company’s executive remuneration policies: J Waterous 1 Feb 2010 To date • should encourage a strong performance culture and emphasise (Chairman from 10 March 2011) long term shareholder value creation, with clear links between executive performance goals and business strategy; and P Cox 1 Apr 2009 To date • need to be positioned competitively to enable it to attract, retain I Gibson 1 Sep 2007 To date and motivate the best talent, which has been key to the Company’s success over the last few years and will be critical to P Hughes 1 Jan 2010 To date its future performance. N Robertson 1 Jul 2005 To date To achieve this, the Committee aims to: • position base salaries competitively; The remit of the Committee covers the total remuneration of the • operate a competitive and stretching suite of annual and long Executive Directors and other senior managers comprising the term incentives, so that a substantial proportion of total Management Board. The full terms of reference for the Committee, remuneration is subject to performance and so that executives which are reviewed annually, can be obtained from the Company are aligned with shareholders through share awards and share Secretary and can be found on the Company’s website at ownership; and www.morrisons.co.uk/corporate • ensure that total remuneration packages are competitive, reward stretching performance and are aligned to the The Committee has access to external advice as required. Company’s strategy. PricewaterhouseCoopers LLP are appointed by the Committee to provide external advice on executive remuneration. Pension In determining remuneration policy, the Remuneration Committee Capital Strategies Limited (a member of the Jardine Lloyd is mindful of environmental, social and governance concerns, and Thompson Group) also provided advice in respect of pensions and the approach to pay and conditions taken within the Group. The Ashurst LLP provided legal advice to the Committee on senior Committee seeks to ensure that remuneration arrangements do executive contracts. PricewaterhouseCoopers LLP also provides not encourage inappropriate behaviour. a range of unrelated human resource consulting services and advice on tax and accounting. Pension Capital Strategies provides advice to management on relevant pension matters and Ashurst LLP provides other legal services to the Company.
The Chief Executive, the Human Resources Director and other HR representatives are also invited to attend meetings (other than where their own remuneration is being discussed) by invitation. The Company Secretary acts as secretary to the Committee.
The Committee met on nine occasions during the year and the meeting attendance record is set out on page 42 within the corporate governance report.
47 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Changes in food shopping behaviour, Stated importance – most important since Jan 2012 (Claimed) aspects in driving store choice (%) Only buying what is needed 53
Value for money 64 Reducing food waste 48 Governance Annual report and financial statements 2012/13 Local 60 Cooking with leftovers 35
Saves money on shopping 53 Cooking smaller portions 32 Good parking 49 Growing my own produce 24 Consistently low prices 47 Directors’Removing items form trolleyremuneration20 report – continued Product availability 45 Missing meals 14 Great quality food 41 0% 100% Range of fresh food 33 Share of respondents (%)
More Same Less source: Drivers of store choice (IPI), Kantar segmentation panel, October 2012 DATA? source: Shoppervista. IGD Research, Performance-relatedAugust versus 2012, fixed IGD May remuneration 2012 Annual bonus A substantial proportion of the Executive Directors’ pay is performance-related. The following chart demonstrates the Structure balance between fixed and performance-related pay for the • Maximum bonus potential for Executive Directors is 200% 2013/14 financial year for the Chief Executive and the Group of base salary. Finance Director at target and maximum performance levels. • 50% of any bonus payable is deferred in shares under the Maximum performance assumes the achievement of maximum Deferred Share Bonus Plan (DSBP). bonus and full vesting of shares under the LTIP. • Under the DSBP, the shares comprising the deferred element of the bonus payment will vest three years from the date that the Performance-related versus fixed remuneration (%) deferred share award is made, and it is intended that dividend equivalents will accrue and be paid on shares that vest. These deferred shares are normally forfeited if the individual leaves Convenience sales – £bn Dalton Philips the Company prior to vesting.
2012 33.9 Target Performance measures 2017 43.6 Maximum The performance measures are underlying profit before tax, achievements against the strategic scorecard and personal Online sales – £bn objectives. These measures remain unchanged in 2013/14, Richard Pennycook however the weightings for strategic and personal objectives 2012 5.6 have been equalised at 20% each. 2017 11.1 Target Scorecard measures for 2012/13 focused on driving the topline, Maximum Actual Forecast increasing efficiencies, and capturing growth in areas of new space, source: IGD 0% 20% 40% 60% 80% 100% food production, the convenience sector and e-commerce. These Salary Pension Bonus LTIP are aligned with the key deliverables of the Group’s vision to be Different and Better than Ever.
Base salary Scorecard measures for 2013/14 will again focus on major strategic objectives. In order to set the right balance in Executive Directors’ packages, the policy is to set salaries competitively. The Remuneration For 2013/14, achievement of strategic corporate scorecard Committee has regard to the following when reviewing measures and personal objectives will be assessed independently salary levels: of the profit target. • the rates for similar roles in comparator companies, both in FTSE 100 retailers, particularly the Company’s major competitors, The management tier immediately below Executive Director level and, more generally, in UK-based companies of a similar size participates in an annual bonus plan with a similar structure. and complexity; • the performance of the individual concerned, together with any As in prior years, specific performance targets have not been change in responsibilities that may have occurred; disclosed, as they are considered to be commercially confidential. • avoiding the automatic ratcheting effects of following ‘median’ or ‘upper quartile’ levels of salary derived from comparator 2012/13 bonus payments company analyses; and • pay levels and structure throughout the Company. Underlying profit before tax for 2012/13 did not meet the required performance target for threshold payout. Positive performance Base salaries are normally reviewed annually in light of was achieved against the strategic corporate scorecard and personal performance, market data, where appropriate, and personal objectives of Directors, however as the threshold profit internal relativities. before tax target was not achieved, no bonus is payable for the 2012/13 financial year. Following a review in February 2013, the Committee decided that there will be no base salary increase for Executive Directors Long term incentive plan for 2013/14. The long term incentive plan is designed to reward management for achieving the Group’s strategic objectives and to provide an Base salaries for the Executive Directors are set out below: appropriate level of long term performance pay. Each year, participants receive conditional awards of shares in the Group, 2013/14 at 3 Feb 2013 which will normally vest three years after they are awarded subject D Philips £850,000 £850,000 to the satisfaction of performance conditions, measured over a three year period, and continued service. The plan’s individual R Pennycook £570,000 £570,000 annual limit is 300% of salary (face value of shares).
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Award levels 2013/16 LTIP
• An award of shares worth 275% of salary was made to Dalton Measure Proportion Target1 Philips and an award worth 240% of salary was made to Richard of award Pennycook, both in April 2012. Underlying 75% of • 25% of EPS element vests • For tiers below Executive Director, awards are made at lower earnings per maximum at growth of RPI +1% p.a. levels dependent upon seniority. share (EPS) award • 100% of EPS element vests growth Performance measures at growth of RPI +10% p.a. Performance under both the 2012/15 and 2013/16 LTIP plans are Like-for-like 25% of • 25% of sales growth measured over three years. non-fuel sales maximum element vests for matching growth relative award the index To guard against the possibility of individuals receiving value from to the Institute • 80% of sales growth the LTIPs as a result of sales targets being hit but EPS targets being of Grocery element vests for missed, no awards can vest under the sales targets, unless the Distribution outperforming the index by minimum EPS target has been met. (IGD) index 0.8% over the three year period Underlying EPS will be as referred to in note 9 of the Group • 100% of sales growth financial statements. The Group will report EPS in this way in its element vests for annual report and financial statements. outperforming the index by at least 1% over the three Like-for-like sales are defined as the reported sales from existing year period space, less total fuel sales (measured on a consistent basis to the IGD index). 1 Vesting is on a straight line basis between each of the above points.
2012/15 LTIP For the 2013/16 LTIP and all future awards, the Committee has agreed new performance requirements for the maximum award Measure Proportion Target1 of award to vest. The Committee has considered market expectations, strategic plans and general economic conditions in determining the Underlying 75% of • 25% of EPS element vests LTIP targets. earnings per maximum at growth of RPI +4% p.a. share (EPS) award • 35% of EPS element vests For the 2013/16 LTIP the Committee will take account of the growth at growth of RPI +5% p.a. Group’s Return on Capital Employed (ROCE) over the performance • 90% of EPS element vests period. If the Committee is not satisfied with ROCE performance at growth of RPI +9% p.a. over the period it will retain discretion to adjust vesting outcomes • 100% of EPS element vests downwards. This is to ensure that EPS performance is achieved in at growth of RPI +12% p.a. an efficient and sustainable manner. The ROCE underpin will apply for awards made from 2013 onwards and any application of Like-for-like 25% of • 25% of sales growth discretion by the Committee will be explained in the relevant non-fuel sales maximum element vests for matching Remuneration Report. growth relative award the index to the Institute • 100% of sales growth The Committee believes the performance measures provide direct of Grocery element vests for alignment between performance against the objectives set out Distribution outperforming the index by in the Group’s strategy and the outcomes under the plan. This (IGD) index at least 2% over the three provides participants and shareholders with a clear line of sight year period between performance and reward.
1 Vesting is on a straight line basis between each of the above points.
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Directors’ remuneration report – continued
Vesting outcomes Dalton Philips has fully complied with the shareholding 2009/12 requirement in respect of the share awards that have vested since he was appointed in March 2010. The LTIP awards granted in 2009 for the period 2009/12 matured in April 2012. Following the end of the 2011/12 financial year, the Pension arrangements Remuneration Committee was satisfied that the EPS performance (based on our audited figures) of 25.55p delivered 100% vesting Dalton Philips received a salary supplement equal to 25% of base of the EPS element and that the sales measure vested at 89% of salary during the year. maximum. Therefore 97% of the total 2009 LTIP award vested. Richard Pennycook participates in the Morrisons defined benefit 2010/13 pension scheme. His pension entitlement accrues at the rate of a maximum of 3% for each year under career average revalued The awards granted in 2010 for the period 2010/13 will not earnings (CARE). Accrued benefits, including those preserved from vest as EPS performance did not reach the required levels for the former final salary arrangement, increase in line with the RPI to threshold vesting. the date of leaving the Group.
All employee sharesave scheme The maximum pension of two-thirds pensionable pay at age 62 has The Group operates a sharesave scheme which is approved by HM been retained for CARE accrual. Pensionable pay for the Executive Revenue & Customs. All eligible employees, including Executive Directors is annual salary as at 6 April each year. Richard Directors, may be invited to participate on similar terms to save up Pennycook is subject to the Company’s maximum earnings limit, to a maximum of £250 each month for a fixed period of three years. which is currently £134,136 and is reviewed annually from 1 April At the end of the savings period, individuals may use their savings in line with RPI. Richard Pennycook received a cash supplement of plus a tax-free bonus to buy ordinary shares in the Company at a 15% of basic salary in excess of the Company maximum earnings discount capped at up to 20% of the market price, set at the limit in 2012/13. relevant launch date. A grant was made under the plan during 2012/13 at the maximum 20% discount, details of which are set The pension arrangements include life assurance cover whilst in out in note 26 of the Group financial statements. employment, a pension in the event of ill health or disability, and a pension for the individual’s spouse and any dependant children Share ownership guidelines on death. The Committee reviewed the shareholding guidelines for Executive Directors during the year and approved an increase in the No contributions were paid or are payable by any Directors under requirements to 200% of salary from 100% of salary. Under the the terms of the scheme. There are no enhanced early retirement guidelines, Executive Directors are expected to retain 50% of rights. Post-retirement pensions increase in line with the annual vested share awards (net of tax), including shares from the deferred increase in the RPI or by 5% per annum compound for pensions element of the annual bonus, until such time as they own shares accrued prior to 6 April 2006 and 2.5% for pensions accrued from worth 200% of their salary, after which point they will be expected 6 April 2006, whichever is the lower. to retain, as a minimum, this level of holding. Shares held under the Deferred Share Bonus Plan (DSBP) (calculated on a post tax Benefits basis) will be included in assessing the level of shareholding. This Benefits in kind include transport costs, private health provision shareholding guideline should be reached within five years of and, in certain cases, a telephone allowance. The Executive appointment to the Board or five years after the date of adoption Directors are eligible for an allowance towards the cost of of the policy for incumbent directors. independent financial advice and also receive the Company’s normal staff discount entitlement which is not taxable. The table below sets out the Executive Directors’ shareholding as at 3 February 2013. Outstanding awards under the long term Changes to Executive Directors incentive plan, and restricted share awards are not included in the In June 2012, Richard Pennycook announced his intention to resign Directors’ shareholding figures. as Group Finance Director. He will stand down from the Board on 10 April 2013, to be succeeded by Trevor Strain, Group Finance Dalton Richard Director designate. Philips Pennycook Base salary1 £850,000 £570,000 Richard Pennycook will be eligible for a bonus payment in respect of 2013/14 on a pro rata basis to the date he leaves employment. Shareholding as at 3 February 2013 246,119 300,346 Any payment will be subject to satisfaction of the performance Value of shareholding2 £619,482 £755,971 targets and to deferral as to 50% in the usual way. Richard Pennycook will be treated as a good leaver for the purposes of his Percentage of base salary 73% 133% LTIP award and Share Award due to vest in 2013. Again, Shareholding requirement3 200% 100% entitlement is subject to satisfaction of the performance conditions and will be calculated on a pro rata basis. He will be entitled to any Notes bonuses deferred under the DSBP on the normal date of vesting, 1 Base salary is as at 3 February 2013 i.e. three years after the grant date of the deferred bonus award. 2 Value of shareholding calculated using the closing mid-market price on the last trading day of the financial year ended 3 February 2013 of £2.517 3 Shareholding requirement maintained at 100% pending Richard Pennycook’s retirement
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Directors’ contracts a) Executive Directors All Executive Directors have a service agreement without an expiry date. These contracts can be terminated by either the Group or the relevant Director giving 12 months’ notice.
The Remuneration Committee has in place a model contract which provides that any compensation provisions for termination without notice will only extend to 12 months of salary, benefits and pension (which may be payable in instalments and subject to mitigation). Going forward, all new director contracts will be on that basis. The model contract does not contain change of control provisions. This policy was applied to Dalton Philips at the time of his recruitment.
Name of Director Date Notice period from of contract Company (months) D Philips 26 Jan 2010 12 R Pennycook 23 May 2006 12 Subject to Board approval, Executive Directors are permitted to accept outside appointments on external boards or committees as long as these are not deemed to interfere with the business of the Company. Any fees received in respect of these appointments, which are disclosed under the Directors’ emoluments table, are retained by the Executive Directors concerned. b) Non-Executive Directors The Board of Directors has adopted the best practice guidance set out in Provision B.7.1 of the UK Corporate Governance Code such that all Directors will be submitted for re-election at each AGM. In light of this, the terms of engagement of each of the Non-Executive Directors have been amended and they are all now engaged on letters of appointment which expire at the AGM. If a Non- Executive Director is re-elected at the AGM, a further letter of appointment will be entered into in respect of the period until the next AGM.
With the exception of Sir Ian Gibson, the appointments may be terminated earlier by, and at the discretion of, either party upon one month’s written notice. Sir Ian’s notice period is three months.
The remuneration of the Non-Executive Directors is a matter for the Non-Executive Chairman and executive members of the Board, and is reviewed from time to time with regard to the time commitment required and the level of fees paid in comparable companies. The remuneration of the Non-Executive Chairman is a matter for the Remuneration Committee and the Board, and is reviewed from time to time with regard to the time commitment required and the level of fees paid in comparable companies. Non-Executive Directors receive no benefits from their office other than fees and staff discount entitlement, and are not eligible to participate in the Group’s pension arrangements.
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Directors’ remuneration report – continued
Current fee levels are as follows:
Name Base Committee Senior Total £000 Chairmanship Independent £000 £000 Director £000 I Gibson 375 – – 375 P Cox 60 20 – 80 P Hughes 60 10 – 70 N Robertson 60 – 20 80 J Waterous 60 20 – 80
Audited information Directors’ emoluments and pension entitlements. The emoluments of the Directors were as follows:
Name Directors’ Benefits Pension Annual Total year to Total year to salaries/fees in kind1 supplement cash bonus2 3 Feb 2013 29 Jan 20123 £000 £000 £000 £000 £000 £000 Non-Executive Chairman I Gibson 375 – – – 375 375 Executive Directors D Philips 850 26 213 – 1,089 1,782 R Pennycook 570 32 65 – 667 1,178 Non-Executive Directors P Cox 80 – – – 80 80 P Hughes 70 – – – 70 69 N Robertson 80 – – – 80 79 J Waterous 80 – – – 80 78 Total 2,105 58 278 – 2,441 3,641
1 Details of benefits in kind are set out on page 50 of this Directors’ remuneration report and comprise transport costs, private health provision and, in certain cases, a telephone allowance. 2 For all Executive Directors, 50% of any total bonus earned is paid in cash, with 50% deferred in shares for three years under the Deferred Share Bonus Plan. Details of this plan are described under the annual bonus section on page 48 of this Directors’ remuneration report. 3 In addition to the amounts shown in the table for the year ended 29 January 2012, £472,000 was paid to Executive Directors and £33,000 was paid to Non-Executive Directors, who resigned from the Board during that year.
None of the Directors has a material interest in any contract significant to the Group’s business. For the period 2012/13, Richard Pennycook received cash fees from Persimmon of £61,000 and £8,000 from The Hut for his role as a Non-Executive Director.
The following Directors had accrued entitlements under defined benefit pension schemes as follows:
Name Accrued pension Accrued pension Additional pension Additional pension Transfer value Transfer value Transfer value of entitlement at entitlement at earned during earned during the of accrued of accrued increase in accrued 29 Jan 2012 3 Feb 2013 the period period above pension at pension at pension during the £000 £000 £000 inflation 29 Jan 2012 3 Feb 2013 period above £000 £000 £000 inflation £000 Executive Director R Pennycook 27 32 5 4 316 475 61
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Share awards As at 3 February 2013, Directors’ interests under the Long Term Incentive Plan (LTIP), shares awarded under the DSBP, and Restricted Share Awards were as follows:
Date Share price on At Shares Shares Shares At Share price at Vesting of grant date awards 29 Jan 2012 granted lapsed vested 3 Feb 2013 date awards date granted vested D Philips Restricted 31 Mar 293.50p 120,965 –– 120,965 – 306.80p 25 Mar Share Award 2010 2012 LTIP 22 Apr 296.80p 744,148 ––– 744,148 – 22 Apr 2010 2013 LTIP 18 Apr 284.50p 772,309 ––– 772,309 – 18 Apr 2011 2014 LTIP 13 Apr 291.14p – 802,878 –– 802,878 – 13 Apr 2012 2015 DSBP 28 Mar 270.20p 173,517 ––– 173,517 – 28 Mar 2011 2014 DSBP 27 Mar 303.04p – 237,592 –– 237,592 – 27 Mar 2012 2015 1,810,939 1,040,470 – 120,965 2,730,444 R Pennycook Restricted 16 Mar 272.20p 456,037 ––– 456,037 – 16 Mar Share Award 2011 2013 LTIP 9 Apr 260.25p 415,562 – 12,467 403,095 – 288.17p 9 Apr 2009 2012 LTIP 29 Jan 289.10p 184,770 – 5,544 179,226 – 256.80p 29 Jan 2010 2013 LTIP 22 Apr 296.80p 438,979 ––– 438,979 – 22 Apr 2010 2013 LTIP 18 Apr 284.50p 480,235 ––– 480,235 – 18 Apr 2011 2014 LTIP 13 Apr 291.14p – 469,877 469,877 – 13 Apr 2012 2015 DSBP 28 Mar 270.20p 123,409 ––– 123,409 – 28 Mar 2011 2014
DSBP 27 Mar 303.04p – 168,908 –– 168,908 – 27 Mar 2012 2015 2,098,992 638,785 18,011 582,321 2,137,445 –
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Directors’ remuneration report – continued
Share options Options granted to Directors to acquire ordinary shares in the Company under the sharesave scheme are as follows:
Number of options during the 53 weeks ended 3 Feb 2013 Exercisable
Date At Granted Exercised Lapsed At Exercise Market price Gain on From To of grant 29 Jan 2012 3 Feb 2013 price on day of exercise exercise £000 D Philips 17 May 2011 3,958 ––– 3,958 228p – – 1 Jul 1 Jan 2014 2015 R Pennycook 17 May 2011 3,958 ––– 3,958 228p – – 1 Jul 1 Jan 2014 2015
The ordinary share mid-market price ranged from 266.5p to 328.0p and averaged 295.2p during the period. The price on 3 February 2013 was 251.7p, compared to 292.6p on 29 January 2012.
Dilution and share usage Awards under the Group’s share option scheme (under which no options remain outstanding) and the SAYE scheme are satisfied by the issue of new shares within the limits agreed by shareholders when the plans were approved. These limits comply with the Association of British Insurers’ guidelines restricting dilution from employee share plans. The overall limits under the guidelines are that no more than 10% of a Group’s issued share capital may be used in any ten year period. Within the 10% limit, up to 5% may be used for discretionary share plans. As at 3 February 2013, the Group’s share usage against these limits was 6.57% and 1.53%, respectively.
It is currently intended that awards made under the LTIP will be satisfied by market purchased shares which are held in an Employee Benefit Trust. Market purchase shares will also be used to satisfy awards made under the Deferred Share Bonus Plan and restricted share plans. Directors’ interests The beneficial interests of the Directors and their families in the shares of the Company were as follows:
3 Feb 2013 29 Jan 2012 ordinary shares ordinary shares I Gibson 108,055 108,055 D Philips 246,119 188,183 R Pennycook 300,346 441,440 P Cox – – P Hughes – – N Robertson – – J Waterous 6,716 6,716
Approval This report, in its entirety, has been approved by the Remuneration Committee and the Board of Directors, and signed on its behalf by
Johanna Waterous Chairman of the Remuneration Committee 13 March 2013
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Directors’ report and business review Share capital Pages 2 to 58, inclusive, of this annual report and financial The authorised and called-up share capital of the Company, statements consist of a Directors’ report and business review that together with details of shares allotted and cancelled during the has been drawn up and presented in accordance with, and in year, are shown in note 22 of the Group financial statements. reliance on, English company law. The liabilities of the Directors in connection with that Directors’ report and business review shall be At the AGM of the Company held in June 2012, a special resolution subject to the limitations and restrictions provided by the was passed to renew the authority given at the AGM held in June Companies Act 2006. 2011 for the purchase by the Company of up to 248,797,066 ordinary shares representing approximately 10% of the issued Forward-looking statements ordinary share capital at that time. This authority remained valid on The Directors’ report and business review is prepared for the 3 February 2013. During the period, the Company purchased members of the Group and should not be relied upon by any other 185,805,022 of its own shares pursuant to that authority, which party or for any other purpose. Where the Directors’ report and will expire at the close of the 2013 AGM. business review includes forward-looking statements, these are made by the Directors in good faith based on the information In addition, 60,783 ordinary shares were issued during the period available to them at the time of their approval of this report. to employees exercising share options. Consequently, such statements should be treated with caution due to the inherent uncertainties, including both economic and Borrowing powers business risk factors, underlying such forward-looking statements The Articles of Association of the Company restrict the borrowings and information. of the Company and its subsidiary undertakings to a maximum amount equal to twice the share capital and consolidated reserves. Result and dividend The profit for the period after taxation attributable to the owners Substantial shareholdings of the Group amounted to £647m (2011/12: £690m). The As at 13 March 2013, the Company has been notified by the Directors have declared and recommend the following dividends: following shareholders (excluding Directors) that they have interests in 3% or more of the total voting rights in the Company: £m Number of shares % of holding Paid interim dividend of 3.49p per share 84 (2011/12: 3.17p) Invesco 133,357,656 5.74% Recommended final dividend of 8.31p per share 195 Brandes Investment Partners LP 132,155,077 5.69% (2011/12: 7.53p) Ameriprise Financial Inc 131,284,252 5.65% Nigel Pritchard 112,883,882 4.86% The final dividend, if approved by shareholders at the Annual General Meeting (AGM), is to be paid on 19 June 2013 to ordinary Walter Scott & Partners Limited 107,775,155 4.64% shareholders on the register of members at close of business on BlackRock Inc 107,035,375 4.61% 17 May 2013. If the final dividend is approved by shareholders, the total ordinary dividend for the year will be 11.80p per share. Legal & General Group Plc 104,976,462 4.52%
Auditor Susan Pritchard 94,720,169 4.08% A resolution to re-appoint KPMG Audit Plc as auditor and a Zurich Financial Services 81,286,130 3.50% separate resolution to authorise the Directors to set their remuneration is to be proposed at the forthcoming AGM. The number of shares appearing above is that appearing in the relevant notification to the Company. The percentage appearing Annual General Meeting above is the percentage that number represents of the issued share capital of the Company as at 13 March 2013. The notice of the 2013 AGM of the Company (to be held at the Company’s headquarters at Gain Lane in Bradford on 13 June 2013) is to be sent to shareholders with an accompanying explanatory letter from the Chairman. The Directors believe each of the resolutions to be proposed at the AGM are in the best interests of the Group and recommend shareholders to vote in favour of each of them. Shareholders will also receive notification of the availability of the annual report and financial statements on the Group’s website, unless they have positively elected to receive a printed version of the annual report and financial statements.
55 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Governance Annual report and financial statements 2012/13
General information – continued
Relating to beneficial owners of shares with Disclosure of information to the auditor ‘information rights’ The Directors who held office at the date of approval of this Beneficial owners of shares who have been nominated by the Directors’ report confirm that, so far as they are each aware, there registered holder of those shares to receive information rights is no relevant audit information of which the Group’s auditor is under section 146 of the Companies Act 2006 are required to unaware; and each Director has taken all steps that he or she ought direct all communications to the registered holder of their shares to have taken as a Director to make himself or herself aware of any rather than to the Company’s registrar, Capita Registrars, or to relevant audit information and to establish that the Group’s auditor the Group directly. is aware of that information.
Directors Going concern The current Directors of the Group and their biographies are shown The Directors’ assessment of the Group and the Company’s ability on pages 38 and 39. to continue as a going concern has taken into consideration the effect that the current economic climate has on the Group. In line with the best practice guidance of Provision B.7.1 of the UK Corporate Governance Code, the Board has resolved that all The Group’s ability to borrow cash has not been adversely affected Directors will submit themselves for re-election annually. by the continuing lack of liquidity in the financial markets and the Group has negotiated, and has available to it, committed, Accordingly, all of the current Directors, being eligible, will offer competitive facilities that will meet the Group’s needs in the short themselves for re-election at the 2013 AGM. and medium term.
The interests of the Executive and Non-Executive Directors of the The principal risks that the Group is challenged with have been Company and their immediate families in the shares of the set out on pages 28 and 29, along with how the Directors mitigate Company, along with share options, are contained in the Directors’ these risks in the current economic climate. remuneration report set out on pages 45 to 54. After reviewing the Group’s financial forecasts, including an At no time during the year did any of the Directors have a material assessment of working capital and other medium term plans, the interest in any significant contract with the Company or any of Directors are confident that the Company and the Group have its subsidiaries. adequate financial resources available to continue in operational existence for the foreseeable future. The going concern basis Employee relations has continued to be adopted in the preparation of the Morrisons is an equal opportunities employer. Equal opportunities financial statements. are offered to all regardless of race, colour, nationality, ethnic origin, sex (including gender reassignment), marital or civil partnership Payment to creditors status, disability, religion or belief, sexual orientation, age or trade Supplier credit is an important factor in the success of the business. union membership. It is Group policy to ensure all payments are made within mutually agreed credit terms. Where disputes arise, the Group attempts The Group gives full and fair consideration to applications for to sort these out promptly and amicably to ensure delays in employment made by people with disabilities. The policy is to offer payment are kept to a minimum. Trade creditors for the Group equal opportunity to all disabled candidates and employees who at the financial year end represented 30 days of purchases have a disability or become disabled in any way during the course (2011/12: 30 days). of their employment. A full assessment of the individual’s needs is undertaken and reasonable adjustments are made to the work Groceries Supply Code of Practice environment or practices in order to assist those with disabilities. The Groceries Supply Code of Practice (‘GSCOP’) came into effect on 4 February 2010 and applies to all grocery retailers with an All candidates and employees are treated equally in respect of annual turnover in excess of £1bn. recruitment, promotion, training, pay and other employment policies and conditions. All decisions are based on relevant merits The Group undertook a number of measures to ensure compliance and abilities. before commencement, including appointing a Code Compliance Officer (CCO), amending its standard Terms & Conditions of Political and charitable donations Purchase to incorporate the GSCOP, and undertaking a full training During the period, the Group made charitable donations amounting regime for its buyers and associated supporting colleagues. Over to £0.1m (2011/12: £0.1m). The donations were mainly small the last year the Group has built on its initial work by undertaking donations to support local communities. In addition, the Group a second full re-training programme for all relevant colleagues. The supported various charities and, in the year, over £2.1m (2011/12: Group has also had all of its supporting processes reviewed during £2.3m) was raised by customers and colleagues for the Charity of the year by the Internal Audit team. the Year. No political donations were made, which is Group policy. Alleged breaches were dealt with in accordance with the regulations and escalated internally up to and including the CCO where required. These matters are reported to the Corporate Compliance and Responsibility Committee.
Since the GSCOP came into effect the Group has successfully worked with suppliers to resolve disputes that have arisen with
56 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements
reference to its provisions. Details of such disputes have been interests in their voting shares) and they or any interested person reported to the Office of Fair Trading (OFT) periodically on request failed to supply the Company with the information requested within as part of the OFT’s monitoring. Ten matters have been reported by 14 days after delivery of that notice. The Board may also decide Morrisons to the OFT (two carried over from the previous financial that no dividend is payable in respect of those default shares and year). Of those, eight were withdrawn by suppliers or resolved and that no transfer of any default shares shall be registered. These two reported during the period were unresolved at the year end. restrictions end seven days after receipt by the Company of a notice No matters reported during the financial year progressed to of an approved transfer of the shares or all the information required arbitration during the period. by the relevant section 793 notice, whichever is the earlier.
As initially intended, the Government has appointed an Adjudicator The Directors may refuse to register any transfer of any share through new legislation to oversee the operation of the GSCOP. which is not a fully paid share, although such discretion may not be The Group looks forward to working with the Adjudicator to ensure exercised in a way which the Financial Services Authority regards that it adheres to best practice and remains in line with new guidance. as preventing dealings in the shares of the relevant class or classes from taking place on an open or proper basis. The Directors may Health and safety policy likewise refuse to register any transfer of a share in favour of more than four persons jointly. The Company is not aware of any other It is the Group’s intention, so far as is reasonably practicable, restrictions on the transfer of shares in the Company other than to ensure the health, safety and welfare of all its employees, certain restrictions that may from time to time be imposed by laws customers and visitors to its premises. In order to achieve this, and regulations (for example, insider trading laws). a comprehensive health and safety manual is in place for each division of the Company and subsidiary companies within the The Company is not aware of any agreements between Group. Each health and safety manual contains the policy and shareholders that may result in restrictions on the transfer of procedures for complying with the Health and Safety at Work Act securities or voting rights. 1974, including the provision, based on risk assessment, of safe working practices for all work activities across the Group. The Appointment and powers of Directors Group’s health and safety policy is approved by the Management Board. The Group has adopted the national targets set by the Directors are appointed by ordinary resolution at a general meeting Health and Safety Commission for the reduction of workplace of ordinary shareholders. The Directors have the power to appoint accidents and work-related ill health, and is on course to meet or a Director during the year, but any person so appointed must be put exceed these targets. Health and safety performance is monitored up for appointment at the next AGM. to ensure continuous improvement in all areas. Subject to its Articles of Association and relevant statutory law, Additional shareholder information and to such direction as may be given by the Company in general meeting by special resolution, the business of the Company shall Additional information for shareholders is required by the be managed by the Directors, who may exercise all powers of the implementation of the EU Takeover Directive into UK law. Company which are not required to be exercised by the Company in general meeting. Pursuant to section 992 of the Companies Act 2006, the Company is required to disclose certain additional information. Such Articles of Association disclosures, which are not covered elsewhere in this report, include the following paragraphs. The disclosures set out below are in some The Company’s Articles of Association may only be amended by cases a summary of the relevant provisions of the Company’s a special resolution at a general meeting of shareholders. Articles of Association and the relevant full provisions can be found in the Articles which are available for inspection at the Company’s Other disclosures registered office. There are no persons with whom the Group has contractual or other arrangements which are essential to the business of Share capital and rights attaching to the Company’s shares the Group. Under the Company’s Articles of Association, any share in the Company may be issued with such rights or restrictions, whether The Company is not party to any significant arrangements which in regard to dividend, voting, return of capital or otherwise as the take effect, alter or terminate upon a change of control of the Company may from time to time by ordinary resolution determine Company following a takeover bid. (or, in the absence of any such determination, as the Directors may determine). The Company does not have any employee share schemes where the shares to which the scheme relates have rights with At a general meeting of the Company, every member has one vote regard to the control of the Company which are not exercisable on a show of hands and, on a poll, one vote for each share held. The by employees. notice of general meeting specifies deadlines for exercising voting rights either by proxy or present in person in relation to resolutions By order of the Board to be passed at a general meeting.
No member is, unless the Board decides otherwise, entitled to attend or vote either personally or by proxy at a general meeting, or Mark Amsden to exercise any other right conferred by being a shareholder if they Company Secretary or any person with an interest in shares has been sent a notice 13 March 2013 under section 793 of the Companies Act 2006 (which confers upon public companies the power to require information with respect to
57 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Governance Annual report and financial statements 2012/13
Statement of Directors’ responsibilities in respect of the annual report and financial statements
The Directors are responsible for preparing the annual report and the Group and Parent Company financial statements Responsibility statement in accordance with applicable law and regulations. We confirm that to the best of our knowledge: • the financial statements, prepared in accordance with the Company law requires the Directors to prepare Group and Parent applicable set of accounting standards, give a true and fair view Company financial statements for each financial year. Under that of the assets, liabilities, financial position and profit law they are required to prepare the Group financial statements in or loss of the Company and its subsidiaries included in the accordance with IFRSs as adopted by the EU and applicable law and consolidation as a whole; and have elected to prepare the Parent Company financial statements • the Directors’ report includes a fair review of the development of in accordance with UK Accounting Standards and applicable law the business and the position of the Company and its subsidiaries (UK Generally Accepted Accounting Practice). included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair By order of the Board view of the state of affairs of the Group and Parent Company and of their profit or loss for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them Mark Amsden consistently; • make judgements and estimates that are reasonable Company Secretary and prudent; 13 March 2013 • for the Group financial statements, state whether they have been prepared in accordance with IFRSs as adopted by the EU; • for the Parent Company financial statements, state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Parent Company financial statements; and • prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Group and the Parent Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Parent Company and enable them to ensure that its financial statements comply with the Companies Act 2006. They have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group, and to prevent and detect fraud and other irregularities.
Under applicable law and regulations, the Directors are also responsible for preparing a Directors’ report, Directors’ remuneration report and Corporate governance statement that complies with that law and those regulations.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
58 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements Independent auditor’s report to the members of Wm Morrison Supermarkets PLC
We have audited the financial statements of Wm Morrison Opinion on other matters prescribed by the Supermarkets PLC for the 53 week period ended 3 February 2013 Companies Act 2006 set out on pages 60 to 108. The financial reporting framework In our opinion: that has been applied in the preparation of the Group financial statements is applicable law and International Financial Reporting • the part of the Directors’ remuneration report to be audited Standards (IFRSs) as adopted by the EU. has been properly prepared in accordance with the Companies Act 2006; and The financial reporting framework that has been applied in • the information given in the Directors’ report for the financial the preparation of the Parent Company financial statements period for which the financial statements are prepared is is applicable law and UK Accounting Standards (UK Generally consistent with the financial statements. Accepted Accounting Practice). Matters on which we are required to report by exception This report is made solely to the Company’s members, as a body, We have nothing to report in respect of the following: in accordance with Chapter 3 of Part 16 of the Companies Act Under the Companies Act 2006 we are required to report to you 2006. Our audit work has been undertaken so that we might if, in our opinion: state to the Company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. • adequate accounting reports have not been kept by the Parent To the fullest extent permitted by law, we do not accept or Company, or returns adequate for our audit have not been assume responsibility to anyone other than the Company and the received from branches not visited by us; or Company’s members, as a body, for our audit work, for this report, • the Parent Company financial statements and the part of or for the opinions we have formed. the Directors’ remuneration report to be audited are not in agreement with the accounting records and returns; or Respective responsibilities of directors and auditor • certain disclosures of Directors’ remuneration specified by As explained more fully in the Directors’ responsibilities law are not made; or statement set out on page 58, the Directors are responsible • we have not received all the information and explanations for the preparation of the financial statements and for being we require for our audit. satisfied that they give a true and fair view. Our responsibility is to audit, and express an opinion on, the financial statements in Under the Listing Rules we are required to review: accordance with applicable law and International Standards • the Directors’ statement, set out on page 56, in relation on Auditing (UK and Ireland). Those standards require us to to going concern; comply with the Auditing Practices Board’s (APB’s) Ethical Standards for Auditors. • the part of the Corporate governance statement on pages 40 to 44 relating to the Company’s compliance with the nine Scope of the audit of the financial statements provisions of the UK Corporate Governance Code specified for our review; and A description of the scope of an audit of financial statements is provided on the FRC’s website at www.frc.org.uk/ • certain elements of the report to shareholders by the Board on auditscopeukprivate directors’ remuneration.
Opinion on financial statements In our opinion: Adrian Stone • the financial statements give a true and fair view of the state of (Senior Statutory Auditor) the Group’s and of the Parent Company’s affairs as at for and on behalf of KPMG Audit Plc, Statutory Auditor 3 February 2013 and of the Group’s profit for the 53 week period then ended; Chartered Accountants • the Group financial statements have been properly prepared in 1 The Embankment accordance with IFRSs as adopted by the EU; Neville Street • the Parent Company financial statements have been properly Leeds prepared in accordance with UK Generally Accepted LS1 4DW Accounting Practice; and • the financial statements have been prepared in accordance 13 March 2013 with the requirements of the Companies Act 2006; and, as regards the Group financial statements, Article 4 of the IAS Regulation.
59 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Financial statements Annual report and financial statements 2012/13
Consolidated statement of comprehensive income 53 weeks ended 3 February 2013
2013 2012 Note £m £m Turnover 2 18,116 17,663 Cost of sales (16,910) (16,446) Gross profit 1,206 1,217
Other operating income 80 86 Administrative expenses (336) (329) Losses arising on property transactions (1) (1) Operating profit 5 949 973 Finance costs 6 (75) (47) Finance income 6 5 21 Profit before taxation 879 947 Taxation 7 (232) (257) Profit for the period attributable to the owners of the Company 647 690
Other comprehensive expense Actuarial loss arising in the pension scheme 20 (6) (65) Cash flow hedging movement (2) (23) Tax in relation to components of other comprehensive expense 7 (2) 19 Other comprehensive expense for the period, net of tax (10) (69)
Total comprehensive income for the period attributable to the owners of the Company 637 621
Earnings per share (pence) – basic 9 26.65 26.68 – diluted 9 26.57 26.03
60 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements Consolidated balance sheet 3 February 2013
2013 2012 Note £m £m Assets Non-current assets Goodwill and intangible assets 10 415 303 Property, plant and equipment 11 8,616 7,943 Investment property 12 123 259 Investments 13 31 31 Other financial assets 14 – 1 9,185 8,537 Current assets Stocks 781 759 Debtors 15 291 320 Other financial assets 14 5 2 Cash and cash equivalents 265 241 1,342 1,322 Liabilities Current liabilities Creditors 16 (2,130) (2,025) Other financial liabilities 17 (55) (115) Current tax liabilities (149) (163) (2,334) (2,303) Non-current liabilities Other financial liabilities 17 (2,396) (1,600) Deferred tax liabilities 19 (471) (464) Net pension liabilities 20 (20) (11) Provisions 21 (76) (84) (2,963) (2,159) Net assets 5,230 5,397
Shareholders’ equity Called-up share capital 22 235 253 Share premium 22 107 107 Capital redemption reserve 23 37 19 Merger reserve 23 2,578 2,578 Retained earnings and hedging reserve 23 2,273 2,440 Total equity attributable to the owners of the Company 5,230 5,397
The accounting policies on pages 64 to 69 and notes on pages 70 to 95 form part of these financial statements.
The financial statements on pages 60 to 95 were approved by the Board of Directors on 13 March 2013 and were signed on its behalf by:
Dalton Philips Richard Pennycook Chief Executive Group Finance Director
61 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Financial statements Annual report and financial statements 2012/13
Consolidated cash flow statement 53 weeks ended 3 February 2013
2013 2012 Note £m £m Cash flows from operating activities Cash generated from operations 24 1,432 1,264 Interest paid (85) (55) Taxation paid (243) (281) Net cash inflow from operating activities 1,104 928
Cash flows from investing activities Interest received 3 6 Investments – (31) Proceeds from sale of property, plant and equipment 5 4 Purchase of property, plant and equipment, investment property and software (846) (724) Purchase of intangible assets (134) (72) Cash outflow from acquisition of businesses 27 (36) (74) Net cash outflow from investing activities (1,008) (891)
Cash flows from financing activities Purchase of own shares 23 (514) (368) Purchase of treasury shares 23 (65) – Proceeds from exercise of share options 23 42 – New borrowings 843 1,102 Repayment of borrowings (81) (486) Dividends paid to equity shareholders 8 (270) (301) Net cash outflow from financing activities (45) (53)
Net increase/(decrease) in cash and cash equivalents 51 (16) Cash and cash equivalents at start of period 212 228 Cash and cash equivalents at end of period 25 263 212
Reconciliation of net cash flow to movement in net debt in the period
2013 2012 Note £m £m Net increase/(decrease) in cash and cash equivalents 51 (16) Cash outflow from decrease in debt and lease financing 81 486 Cash inflow from increase in borrowings (843) (1,102) Other non-cash movements 1 (22) Opening net debt (1,471) (817) Closing net debt 25 (2,181) (1,471)
62 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements Consolidated statement of changes in equity 53 weeks ended 3 February 2013
Attributable to the owners of the Company Capital Share Share redemption Merger Hedging Retained Total capital premium reserve reserve reserve earnings equity Note £m £m £m £m £m £m £m Current period At 29 January 2012 253 107 19 2,578 (12) 2,452 5,397 Profit for the period ––––– 647 647 Other comprehensive income: Actuarial loss arising in the pension 20 ––––– (6) (6) scheme Cash flow hedging movement –––– (2) – (2) Tax in relation to components of other 7 – – – – – (2) (2) comprehensive expense Total comprehensive income for the period –––– (2) 639 637 Shares purchased for cancellation 22, 23 (18) – 18 –– (514) (514) Employees share options schemes: Treasury share purchases and utilisation 23 ––––– (24) (24) for share options Share-based payments 26 – – – – – 4 4 Dividends 8 – – – – – (270) (270) Total transactions with owners (18) – 18 –– (804) (804) At 3 February 2013 235 107 37 2,578 (14) 2,287 5,230
Attributable to the owners of the Company Capital Share Share redemption Merger Hedging Retained Total capital premium reserve reserve reserve earnings equity Note £m £m £m £m £m £m £m Prior period At 30 January 2011 266 107 6 2,578 5 2,458 5,420 Profit for the period ––––– 690 690 Other comprehensive income: Actuarial loss arising in the pension 20 ––––– (65) (65) scheme Cash flow hedging movement –––– (23) – (23) Tax in relation to components of other 7 – – – – 6 13 19 comprehensive expense Total comprehensive income for the period –––– (17) 638 621 Shares purchased for cancellation 22 (13) – 13 –– (368) (368) Employees share options schemes: Share-based payments 26 ––––– 25 25 Dividends 8 – – – – – (301) (301) Total transactions with owners (13) – 13 –– (644) (644) At 29 January 2012 253 107 19 2,578 (12) 2,452 5.397
63 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Financial statements Annual report and financial statements 2012/13
Group accounting policies
General information New IFRS and amendments to IAS and interpretations Wm Morrison Supermarkets PLC is a public limited company There are a number of standards and interpretations issued by incorporated in the United Kingdom under the Companies Act the IASB that are effective for financial statements after this 2006 (Registration number 358949). The Company is domiciled reporting period. The following have not been early adopted in the United Kingdom and its registered address is Hilmore by the Group: House, Gain Lane, Bradford, BD3 7DL, United Kingdom. International Financial Effective for accounting Basis of preparation Reporting Standards periods starting on or after IAS 1* Amendment to financial 1 July 2012 The financial statements have been prepared for the 53 weeks statement presentation ended 3 February 2013 (2012: 52 weeks ended 29 January 2012) in accordance with International Financial Reporting Standards IAS 19* Amendment to employee 1 January 2013 (IFRS) and International Financial Reporting Interpretation benefits Committee interpretations (IFRIC) as adopted by the European IFRS 10** Consolidated financial 1 January 2013 Union and with those parts of the Companies Act 2006 applicable statements to companies reporting under IFRS. IFRS and IFRIC are issued IFRS 11** Joint arrangements 1 January 2013 by the International Accounting Standards Board (the IASB) IFRS 12** Disclosures of interests in 1 January 2013 and must be adopted into European Union law, referred to other entities as endorsement, before they become mandatory under the IAS Regulation. Shown below are recent standards and IFRS 10, Amendments in transition 1 January 2013 interpretations that have been issued by the IASB, indicating their 11 and 12 guidance status of endorsement. IFRS 13* Fair value measurement 1 January 2013 IAS 27** Separate financial statements 1 January 2013 The financial statements have been prepared on a going concern (revised 2011) basis. The Directors’ assessment of going concern has been considered within the general information section of the IAS 28** Associates and joint ventures 1 January 2013 Directors’ report. (revised 2011) IFRS 7* Amendment to financial 1 January 2013 The financial statements are presented in pounds sterling, instruments: disclosures rounded to the nearest million, except in some instances, IFRS 1 Amendment to first time 1 January 2013 where it is deemed relevant to disclose the amounts up to adoption two decimal places. They are drawn up on the historical cost basis IAS 32* Amendment to financial 1 January 2014 of accounting, except as disclosed in the accounting policies set instruments: presentation out below. * Endorsed by the European Union. ** Endorsed by the European Union for periods starting on or after The Group’s accounting policies are set out below and have, 1 January 2014. unless otherwise stated, been applied consistently to all periods presented in these consolidated financial statements. IAS 19 ‘Employee benefits’ was amended in June 2011. The impact on the Group will be immediately to recognise The following amendments to standards are mandatory for the all past service costs, and to replace interest cost and first time for the financial period beginning 30 January 2012, expected return on plan assets with a net interest amount but do not have a material impact on the Group: that is calculated by applying the discount rate to the net defined • Amendments to IFRS 7, ‘Financial Instruments: Disclosures benefit liability. on transfers of assets’; • Amendment to IFRS 1, ‘First time adoption’, on fixed dates The application of these standards and interpretations is and ‘hyperinflation’; and not anticipated to have a material effect on the Group’s • Amendment to IAS 12, ‘Income taxes’, on deferred tax. financial statements.
Accounting reference date Basis of consolidation The accounting period of the Group ends on the Sunday The consolidated financial statements incorporate the financial falling between 29 January and 4 February each year. statements of the Company and its subsidiaries (together the ‘Group’), being those undertakings that it controls. Control is achieved where the Company has the power to govern the financial and operating policy of an investee entity so as to obtain benefits from its activities. The financial statements of subsidiaries used in the preparation of the consolidated financial statements are prepared for the same reporting period as the parent Company and are based on consistent accounting policies. The results of subsidiaries acquired or disposed of during the period are included in the consolidated financial statements from the effective date of acquisition up to the effective date of disposal, as appropriate. Intra-group balances and any unrealised gains and losses or income and expenses arising from intra-group transactions, are eliminated in preparing the consolidated financial statements.
64 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements
Significant accounting policies Other operating income The Directors consider the following to be significant accounting Other operating income primarily consists of income not directly policies in the context of the Group’s operations: related to the operating of supermarkets and mainly comprises rental income from investment properties and income generated Segmental reporting from recycling of packaging. Rental income arising from operating The Group is required to determine and present its operating leases on investment properties is accounted for on a straight-line segments based on the way in which financial information is basis to the date of the next rent review. Details of rental income organised and reported to the chief operating decision-maker from investment property are provided in note 12. (CODM). The CODM has been identified as the Management Board as it is this Board that makes the key operating decisions Property transactions of the Group, is responsible for allocating resources and assess Property includes the balance sheet headings of property, performance of the operating segments. plant and equipment and investment property. The results of transactions relating to disposal of property are reported The Directors consider, based on its internal reporting framework, in profit for the period under profit/loss arising on property management and operating structure, that it has one operating transactions. Depreciation and any impairment charges or segment, that of retailing. The level of disclosure of segmental and reversals are recognised in cost of sales or administrative other information is driven by such assessment. Further details of expenses, as appropriate. the considerations made and the resulting disclosures are provided in note 3 to these financial statements. Borrowing costs All borrowing costs are recognised in the Group’s profit for Turnover recognition the period on an effective interest rate basis except for interest Turnover comprises the fair value of consideration received or costs that are directly attributable to the construction of buildings receivable for the sale of goods in the ordinary course of the and other qualifying assets which are capitalised and included Group’s activities. It is recognised when significant risks and within the initial cost of the asset. Capitalisation of interest ceases rewards of ownership have been transferred to the buyer, there is when the asset is ready for use. reasonable certainty of recovery of the consideration and the amount of revenue, associated costs and possible return Deferred and current tax of goods can be estimated reliably. The current income tax charge is calculated on the basis of the tax laws in effect during the period and any adjustments to tax a) Sale of goods in-store and fuel payable in respect of previous periods. Taxable profit differs from Sale of goods in-store is recorded net of VAT, returns, staff the reported profit for the period as it is adjusted both for items discounts, coupons, vouchers and the free element of multi-save that will never be taxable or deductible, and temporary transactions. Sale of fuel is recognised net of VAT and Morrisons differences. Current tax is charged to profit for the period, except Miles award points. Revenue is recognised when transactions are when it relates to items charged or credited directly in equity in completed in-store. which case the current tax is reflected in equity. b) Other sales Deferred tax is recognised using the balance sheet method. Other revenue primarily comprises income from concessions and Provision is made for temporary differences between the carrying commissions based on the terms of the contract and amounts of assets and liabilities for financial reporting purposes manufacturing sales made direct to third party customers and the amounts used for taxation purposes. recognised on despatch of goods. Revenue collected on behalf of others is not recognised as turnover, other than the related No deferred tax is recognised for temporary differences that arise commission. Sales are recorded net of value added tax and on the initial recognition of goodwill or the initial recognition of intra-group transactions. assets and liabilities that is not a business combination and that affects neither accounting nor taxable profits. Deferred tax is Cost of sales calculated based on tax law that is enacted or substantively Cost of sales consists of all costs to the point of sale including enacted at the reporting date and provided at rates expected to manufacturing, warehouse and transportation costs. Store apply when the temporary differences reverse. Deferred tax is depreciation, store overheads and store-based employee costs charged or credited to profit for the period except when it relates are also allocated to cost of sales. to items charged or credited directly to other comprehensive income, in which case the deferred tax is reflected in other Supplier income comprehensive income. Supplier incentives, rebates and discounts are collectively referred to as supplier income in the retail industry. Supplier income is Deferred tax assets are recognised to the extent that it is probable recognised as a deduction from cost of sales on an accruals basis, that taxable profit will be available against which the asset can based on the expected entitlement which has been earned up be utilised. Deferred tax assets recognised are reviewed at to the balance sheet date for each relevant supplier contract. each reporting date as judgement is required to estimate the The accrued incentives, rebates and discounts receivable at availability of future taxable income. Deferred tax assets and year end are included within prepayments and accrued income. liabilities are offset where amounts will be settled on a net basis Where amounts received are in the expectation of future as there is a legally enforceable right to offset. business, these are recognised in the income statement in line with that future business. Accruals for tax contingencies require management to make judgements and estimates of ultimate exposures in relation to tax compliance issues. All accruals are included in current liabilities.
65 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Financial statements Annual report and financial statements 2012/13
Group accounting policies – continued
Intangible assets Property, plant and equipment a) Business combinations and goodwill a) Property, plant and equipment is stated at cost less The acquisition method of accounting is used to account for accumulated depreciation and accumulated impairment losses. business combinations by the Group. The consideration Costs include directly attributable costs. Annual reviews are transferred for the acquisition of a subsidiary is the fair value made of estimated useful lives and material residual values. of the assets transferred, the liabilities incurred and the equity interests issued by the Group. The consideration transferred b) Depreciation rates used to write off cost less residual value on includes the fair value of any asset or liability resulting from a straight line basis are: a contingent consideration arrangement. Acquisition related costs are expensed as incurred. Identifiable assets acquired and Freehold land 0% liabilities and contingent liabilities assumed in a business Freehold buildings 2.5% combination are measured initially at their fair values at the Leasehold land Over the lease period acquisition date. On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at Leasehold buildings Over the shorter of lease fair value or at the non-controlling interest’s proportionate share period and 2.5% of the acquiree’s net assets. Plant, equipment, fixtures 10% to 33% and vehicles The excess of consideration transferred, the amount of any Assets under construction 0% non-controlling interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over Depreciation expense is primarily charged in cost of sales with an the fair value of the Group’s share of the identifiable net assets immaterial amount in administration expenses. acquired is recorded as goodwill. If this is less than the fair value of the net assets of the subsidiary acquired, in the case Investment property of a bargain purchase, the difference is recognised directly in Property held to earn rental income is classified as investment profit for the period. property. Investment property is recorded at cost, less accumulated depreciation and any recognised impairment loss. Goodwill arising on a business combination is not amortised The depreciation policy is consistent with that described for but is reviewed for impairment on an annual basis or more property, plant and equipment. frequently if there are indicators that goodwill may be impaired. Goodwill is allocated to cash generating units for the purpose of Impairment of non-financial assets impairment testing. Any impairment is recognised immediately in Property, plant and equipment, Investment property and profit or loss. Amortisation is included within cost of sales. Intangible assets are annually reviewed for indications of impairment, or when events or changes in circumstances indicate b) Brands that the carrying amount may not be recoverable. Brands acquired through a business combination are initially recognised at their fair value at the acquisition date and This is performed for each cash generating unit, which in the case amortised to profit or loss on a straight line basis over their of a supermarket is an individual retail outlet. If there are estimated useful economic life. Any impairment in value is indications of possible impairment then a test is performed on recognised immediately in profit or loss. the asset affected to assess its recoverable amount against carrying value. An impaired asset is written down to its c) Software development costs recoverable amount which is the higher of value in use or its fair Costs that are directly attributable to the creation of identifiable value less costs to sell. In assessing value in use, the estimated software, which meet the development asset recognition criteria future cash flows are discounted to their present value using a as laid out in IAS 38 ‘Intangible assets’ are recognised as pre-tax discount rate that reflects current market assessments intangible assets. Direct costs include consultancy costs, the of the time value of money and the risks specific to the asset. employment costs of internal software developers and borrowing If there is indication of an increase in fair value of an asset costs. Borrowing costs are capitalised until such time as the that had been previously impaired, then this is recognised software is substantially ready for its intended use. by reversing the impairment, but only to the extent that the recoverable amount does not exceed the carrying amount that All other software development and maintenance costs are would have been determined if no impairment loss had been recognised as an expense as incurred. recognised for the asset. Impairment losses previously recognised relating to goodwill cannot be reversed. Software development costs recognised as assets are held at historic cost less accumulated amortisation and impairment, Stocks and are amortised over their estimated useful lives (3 to 10 years) on a straight line basis. Stocks are measured at the lower of cost and net realisable value. Provision is made for obsolete and slow moving items. Cost is d) Licences calculated on a weighted average basis and comprises purchase Separately acquired pharmaceutical licences and software price, import duties and other non-recoverable taxes less rebates. licences are recognised at historic cost less accumulated Stocks represent goods for resale. Net realisable value is the amortisation and impairment. Those acquired in a business estimated selling price in the ordinary course of business, less the combination are recognised at fair value at the acquisition date. estimated costs necessary to make the sale. Pharmaceutical licences and software licences are amortised over their useful lives (3 to 10 years) on a straight line basis.
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Leases Retirement benefits Leases in which substantially all the risks and rewards of The Group operates defined benefit and defined contribution ownership are retained by the lessor are classified as operating schemes. A defined contribution scheme is a pension scheme leases; all other leases are classified as finance leases. under which the Group pays fixed contributions into a separate entity. A defined benefit scheme is one that is not a defined Lessor accounting – operating leases contribution scheme. Pension benefits under defined benefit Assets acquired and made available to third parties under schemes are defined on retirement based on age at date of operating leases are recorded as property, plant and equipment retirement, years of service and a formula using either the and investment property and are depreciated on a straight line employee’s compensation package or career average basis to their estimated residual values over their estimated useful revalued earnings. lives. Operating lease income is credited on a straight line basis to the date of the next rent review. The Group operates two defined benefit retirement schemes which are funded by contributions from the Group and members. Lessee accounting – operating leases The defined benefit schemes are not open to new members. Pension scheme assets, which are held in separate trustee Rental payments are taken to profit for the period on a straight administered funds, are valued at market rates. Pension scheme line basis over the life of the lease. Property leases are analysed obligations are measured on a discounted present value basis into separate components for land and buildings and tested to using assumptions as shown in note 20. The operating and establish whether the components are operating leases or financing costs of the scheme are recognised separately in profit finance leases. for the period when they arise. Death-in-service costs are recognised on a straight line basis over their vesting period. Lessee accounting – finance leases Actuarial gains and losses are recognised immediately in other The present value, calculated using the interest rate implicit comprehensive income. in the lease, of the future minimum lease payments is included within property, plant and equipment and financial liabilities as an The Group has a right to recognise an asset, should one arise, obligation to pay future rentals. Depreciation is provided at the in respect of the Group’s net obligations to the pension schemes. same rates as for owned assets, or over the lease period, Therefore either an asset or a liability is recognised in the balance if shorter. sheet, calculated separately for each scheme.
Rental payments are apportioned between the finance charge and The Group also operates a cash balance scheme, which provides a the outstanding obligation so as to produce a constant rate of lump sum benefit based upon a defined proportion of an finance charge on the remaining balance. employee’s earnings each year. This scheme is defined benefit in nature and is accounted for on that basis. Provisions Provisions are created where the Group has a present obligation Payments by the Group to the defined contribution scheme as a result of a past event, where it is probable that it will result in are charged to profit for the period as they arise. an outflow of economic benefits to settle the obligation, and where it can be reliably measured. Share-based payments The Group issues equity settled share-based payments to certain Provisions are made in respect of individual properties where employees in exchange for services rendered by them. The fair there are obligations for onerous contracts, dilapidations and value of the share-based award is calculated at the date of grant certain decommissioning obligations for petrol filling stations. and is expensed on a straight line basis over the vesting period The amounts provided are based on the Group’s best estimate with a corresponding increase in equity. This is based on the of the likely committed outflow to the Group. Where material, Group’s estimate of share options that will eventually vest. these estimated outflows are discounted to net present value. This takes into account movement of non-market conditions, being service conditions and financial performance, if relevant. Foreign currencies Transactions in foreign currencies are recorded at the rates of Fair value is measured by use of a binomial stochastic model. The exchange at the dates of the transactions. At each balance sheet expected life used in the model has been adjusted, based on date, monetary assets and liabilities that are denominated in management’s best estimate, for effects of non-transferability, foreign currency are retranslated at the rates of exchange at the exercise restrictions and behavioural considerations. balance sheet date. Gains and losses arising on retranslation are included in the income statement for the period except when they Financial instruments are deferred in other comprehensive income as qualifying cash Financial assets and liabilities are recognised on the Group’s flow hedges. balance sheet when the Group becomes a party to the contractual provisions of the instrument.
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Group accounting policies – continued
a) Financial assets The Group has cross-currency swaps designated as cash flow i) Trade and other debtors hedges. These derivative financial instruments are used to match Trade and other debtors are initially recognised at fair value and or minimise risk from potential movements in foreign exchange subsequently held at amortised cost. Provision is made when rates inherent in the cash flows of the US dollar private placement there is objective evidence that the Group will not be able to loan notes. recover balances in full, with the charge being included as an administrative expense. Balances are written off when the To minimise the risk from potential movements in energy prices, probability of recovery is assessed as being remote. the Group has energy price contracts which are designated as cash flow hedges. ii) Cash and cash equivalents Cash and cash equivalents for cash flow purposes includes To minimise the risk from potential movements in foreign cash-in-hand, cash-at-bank and bank overdrafts. In the balance exchange rates, the Group uses forward exchange contracts with sheet, bank overdrafts that do not have right of offset are financial institutions which are designated as cash flow hedges. presented within current liabilities. Derivatives are reviewed annually for effectiveness. Where a Cash held by the Group’s captive insurer is not available for use by derivative financial instrument is designated as a hedge of the the rest of the Group as it is restricted for use against the specific variability in cash flows of a recognised asset or liability, or highly liability of the captive. As the funds are available on demand, they probable forecast transaction, the effective part of any gain or meet the definition of cash in IAS 7 ‘Cashflow statements’. loss on the movement in fair value of the derivative financial instrument is recognised in other comprehensive income and iii) Investments presented in the hedging reserve in equity. Investments comprise investments in equity instruments. All equity instruments are held for long term investment and The gain or loss on any ineffective part of the hedge is are measured at fair value through other comprehensive income, immediately recognised in profit for the period within cost of where the fair value can be measured reliably. Where the fair sales in relation to the energy price contracts and within finance value of the instruments cannot be measured reliably, for income/costs in relation to the cross-currency swaps. If a hedge example, when there is variability in the range of estimates, of a forecast transaction subsequently results in the recognition the investment will be recognised at cost less accumulated of a financial asset or liability, the associated cumulative gains or impairment losses, in accordance with IAS 39 ‘Financial losses that were recognised directly in equity are reclassified into instruments: recognition and measurement’. Any impairment profit for the period when the transaction occurs. is recognised immediately in profit or loss. Share capital b) Financial liabilities Ordinary shares are classified as equity. Incremental costs directly i) Trade and other creditors attributable to the issue of new shares or options are shown in Trade and other creditors are initially recognised at fair value and equity as a deduction, net of tax, from the proceeds. subsequently held at amortised cost. Where any Group company purchases the Company’s equity share ii) Borrowings capital, the consideration paid, including directly attributable Interest-bearing loans and overdrafts are initially recorded at fair incremental costs, is deducted from retained earnings until the value, net of attributable transaction costs. Subsequent to initial shares are cancelled. On cancellation, the nominal value of the recognition, any difference between the redemption value and the shares is deducted from share capital and the amount is initial carrying amount is recognised in profit for the period over transferred to the capital redemption reserve. the period of the borrowings on an effective interest rate basis. Net debt c) Derivative financial instruments and hedge accounting Derivative financial instruments are initially measured at fair value Net debt is cash and cash equivalents, long term cash on deposit, and are remeasured at fair value through profit or loss, except bank and other current loans, finance lease debt, bonds, private where the derivative qualifies for hedge accounting. placement loan notes and derivative financial instruments (stated at current fair value). The Group documents at the inception of the transaction the relationship between hedging instruments and hedged items, Own shares held as well as its risk management objectives and strategy for The Group has an employee trust for the granting of Group shares undertaking various hedging transactions. The Group also to executives and members of the employee share plans. Shares in documents its assessment, both at hedge inception and on an the Group held by the employee share trust are presented in the ongoing basis, of whether the derivatives that are used in hedging balance sheet as a deduction from retained earnings. transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. The shares are deducted for the purpose of calculating the Group’s earnings per share. Cash flow hedges Derivative financial instruments are classified as cash flow Use of critical accounting assumptions and estimates hedges when they hedge the Group’s exposure to variability Estimates and judgements are continually evaluated and are in cash flows that are either attributable to a particular based on historical experience and other factors, including risk associated with a recognised asset or liability, or a highly expectations of future events that are believed to be reasonable probable forecasted transaction. under the circumstances.
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The Group makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equal the related actual results. The estimates and assumptions that have significant risk of causing a material adjustment to the carrying value of assets and liabilities are discussed below. a) Property provisions Provisions have been made for onerous leases, dilapidations and decommissioning costs. These provisions are estimates based on the condition of each property and market conditions for the relevant location. The actual costs and timing of future cash flows are dependent on future events. Any difference between expectations and the actual future liability is accounted for in the period when such determination is made. b) Pension scheme assumptions and mortality table The carrying value of defined benefit pension schemes is valued using actuarial valuations. These valuations are based on assumptions including the selection of mortality tables for the profile of members in each scheme. All these are estimates of future events. The mortality experience study conducted as part of the Safeway scheme triennial valuation is statistically significant and the longevity assumption is adjusted to reflect its results. As both of the Group’s schemes have a similar composition and type of members, this adjustment is also made to the Morrisons scheme. The mortality assumptions, financial assumptions and mortality experience study are based on advice received from the schemes’ actuaries. Where appropriate these are corroborated from time-to-time with benchmark surveys and ad hoc analysis. A sensitivity analysis of key assumptions is contained in note 20. c) Determination of useful lives, residual values and carrying values of intangible assets, property, plant and equipment and investment property Depreciation and amortisation are provided so as to write down the assets to their residual values over their estimated useful lives as set out in the accounting policies for intangible assets, property, plant and equipment and investment property. The selection of these residual values and estimated lives requires the exercise of judgement.
The Group is required to assess whether there is indication of impairment to the carrying values of assets. In making that assessment, judgements are made in estimating value in use in relation to future cash flows and discount rates. The Directors consider that the individual carrying values of stores and other operating assets are supportable either by value in use or market values. Appropriate provision is made for impairment.
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Notes to the Group financial statements 53 weeks ended 3 February 2013
1 Underlying profit The Directors consider that underlying earnings and underlying adjusted earnings per share measures referred to in the Chairman’s review, Chief Executive’s Review and financial review provide useful information for shareholders on underlying trends and performance. The adjustments are made to reported profit to (a) remove the impact of pension interest income volatility on the statement of comprehensive income; (b) remove losses or profits arising on property transactions since they do not form part of the Group’s principal activities; (c) remove significant one-off costs that do not relate to the Group’s principal activities; and (d) apply a tax rate of 26.5% (2012: 29.3%), being an estimated normalised tax rate.
2013 2012 £m £m Profit after tax 647 690 Add back: tax charge for the period1 232 257 Profit before tax 879 947 Adjustments for: Net pension interest expense/(income) (note 6)1 4 (13) Loss arising on property transactions1 1 1 One-off costs – multi-channel and convenience development1 17 – Underlying profit before tax 901 935 Taxation1 (239) (274)
Underlying profit after tax 662 661 Underlying earnings per share (pence) – basic (note 9(b)) 27.26 25.55 – diluted (note 9(b)) 27.17 24.93
1 Adjustments marked 1 equal £15m (2012: £29m) as shown in the reconciliation of earnings disclosed in note 9(b).
2 Sales analysis This table is provided to reconcile the like-for-like sales described in the performance and strategy review with the total turnover:
2013 2012 Like-for-like Total Total stores Other £m £m Sale of goods in-stores 13,294 380 13,674 13,436 Fuel 4,172 69 4,241 4,039 Total store-based sales 17,466 449 17,915 17,475 Other sales – 201 201 188 Total turnover 17,466 650 18,116 17,663
Fuel sales are removed from quoted like-for-like figures, given the volatility in the fuel price, to provide a more stable measure.
3 Segmental reporting The Group’s principal activity is that of retailing, derived solely from the UK. The Group is not reliant on any major customer for 1% or more of revenues.
Consideration of IFRS 8 ‘Operating segments’ The Group has made the following considerations in arriving at conclusions and the corresponding disclosure in these financial statements.
IFRS 8 requires consideration of the chief operating decision maker (CODM) within the Group. In line with the Group’s internal reporting framework and management structure, the key operating decisions and resource allocations are made by the Management Board. The Directors therefore consider the Management Board to be the CODM.
Consideration in particular was given to retail outlets, the fuel resale operation, the manufacturing entities and multi-channel operations.
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3 Segmental reporting – continued Key internal reports received by the CODM, primarily the Board Management Accounts, focus on the performance of the Group as a whole. The operations of all elements of the business are driven by the retail sales environment and hence have fundamentally the same economic characteristics. All operational decisions made are focused on the performance and growth of the retail outlets and the ability of the business to meet the supply demands of the stores. Given this, the Group has considered the overriding core principles of IFRS 8 and has determined that it has one operating segment.
Reconciliations of reportable segment revenues, profit or loss, assets and liabilities and other material items Performance is measured by the CODM based on profit as reported in the Board Management Accounts. This report presents the financial position before (a) income tax; (b) pension interest income volatility; and (c) profit/loss arising from property related transactions; (d) significant one-off costs that do not relate to the Group’s principal activities. This underlying profit figure is used to measure performance as management believes that this is the most relevant in evaluating the results of the Group relative to other entities that operate within the retail industry. This information and the reconciliation to the statutory position can be found in note 1. In addition, the Board Management Accounts present a Group balance sheet containing assets and liabilities. This balance sheet is as shown within the Consolidated balance sheet.
4 Employees and Directors
2013 2012 £m £m Employee benefit expense for the Group during the period Wages and salaries 1,780 1,733 Social security costs 118 124 Share-based payments (note 26) 4 24 Pension costs 45 35 1,947 1,916
2013 2012 No. No. Average monthly number of people, including Directors Stores 112,965 116,750 Manufacturing 6,598 6,062 Distribution 6,248 5,489 Centre 2,894 2,906 128,705 131,207
Directors’ remuneration A detailed analysis of Directors’ remuneration, including salaries, bonuses and long term incentives, and the highest paid Director, is provided under the headings Directors’ emoluments and pension entitlements, share awards and share options in the audited section of the Directors’ remuneration report, which forms part of these financial statements.
There is one Executive Director (2012: two) who has retirement benefits accruing under the Group’s defined benefit pension scheme.
The table below shows the remuneration of the Management Board, excluding members already included in the Directors’ remuneration report. The Management Board is considered to be key management personnel in accordance with the requirements of IAS 24 ‘Related party disclosures’.
2013 2012 £m £m Management Board Short term employee benefits 4.5 4.7 Post-employment benefits 0.1 0.3 Share-based payments (0.2) 2.1 4.4 7.1
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
5 Operating profit
2013 2012 £m £m The following items have been included in arriving at operating profit: Employee costs (note 4) 1,947 1,916 Depreciation and impairment: – Property, plant and equipment (note 11) 335 311 – Investment property (note 12) 4 8 Amortisation (note 10) 29 21 Operating lease rentals: – minimum lease payments 69 52 – sublease receipts (5) (5) Value of stock expensed 13,760 13,346
During the period KPMG Audit Plc, the Group’s auditor, provided the following services:
2013 2012 £m £m Audit services Fees payable to the Group’s auditor for the audit of the Group and the Company financial statements 0.4 0.4 Other services Fees payable to the Group’s auditors and its associates for other services: – the audit of the Group’s subsidiaries pursuant to legislation 0.2 0.2 – services relating to taxation 0.1 0.2 – other services 0.4 0.5 1.1 1.3
Other services includes £0.2m (2012: £0.4m) in relation to independent project assurance.
6 Finance costs and income
2013 2012 £m £m Interest payable on short term loans and bank overdrafts (11) (12) Interest payable on bonds (69) (39) Interest capitalised 15 12 Total interest payable (65) (39) Fair value movement of derivative instruments – (1) Provisions: unwinding of discount (4) (4) Other finance costs (2) (3) Net pension interest expense (note 20) (4) – Finance costs (75) (47) Bank interest received 3 6 Amortisation of bonds 2 2 Net pension interest income (note 20) – 13 Finance income 5 21 Net finance cost (70) (26)
Interest is capitalised at the effective interest rate incurred on borrowings before taxation of 5% (2012: 4%). Tax relief is obtained on interest paid and this reduces the tax charged for the period.
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7 Taxation a) Analysis of charge in the period
2013 2012 £m £m Corporation tax – current period 261 292 – adjustment in respect of prior period (32) (20) 229 272 Deferred tax – origination and reversal of timing differences (3) 5 – adjustment in respect of prior period 47 22 – impact of change in tax rate (41) (42) 3 (15) Tax charge for the period 232 257 b) Tax on items charged/(credited) in other comprehensive expense and equity
2013 2012 £m £m Actuarial gain/(loss) arising in the pension scheme 2 (13) Cash flow hedges – (6) Total tax on items included in other comprehensive expense 2 (19) Share-based payments 2 (1) Total tax on items included in other comprehensive expense and equity 4 (20)
Analysis of items charged/(credited) to other comprehensive expense and equity: Deferred tax (note 19) 4 (20) c) Tax reconciliation The tax for the period is higher (2012: higher) than the standard rate of corporation tax in the UK of 24.3% (2012: 26.3%). The differences are explained below:
2013 2012 £m £m Profit before tax 879 947 Profit before tax at 24.3% (2012: 26.3%) 214 249 Effects of: Expenses not deductible for tax purposes 10 12 Non-qualifying depreciation 39 38 Deferred tax on Safeway acquisition assets (10) (12) Effect of change in tax rate (41) (42) Other 5 10 Prior period adjustments 15 2 Tax charge for the period 232 257
Factors affecting current and future tax charges Legislation to reduce the rate of corporation tax from 24% to 23% was included in the Finance Act 2012, and as it had been substantively enacted at the balance sheet date the deferred tax balances as at 3 February 2013 have been measured at this rate. The impact of this change in tax rate is a credit of £41m to the income statement. In addition, further changes to the UK corporation tax system were announced in the Autumn Statement 2012. This includes a further reduction to the main rate to reduce the rate to 21% from 1 April 2014. This change had not been substantively enacted at the balance sheet date, and, therefore, is not included in these financial statements.
The proposed reduction of the main rate of corporation tax to 21% from 1 April 2014 will be enacted separately. The overall effect of this further change, if it applied to the deferred tax balance at 3 February 2013, would be to further reduce the deferred tax liability by an additional £40m.
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
8 Dividends Amounts recognised as distributed to equity holders in the period:
2013 2012 £m £m Interim dividend for the period ended 3 February 2013 of 3.49p (2012: 3.17p) 84 81 Final dividend for the period ended 29 January 2012 of 7.53p (2011: 8.37p) 186 220 270 301
The Directors are proposing a final dividend in respect of the financial period ending 3 February 2013 of 8.31p per share which will absorb an estimated £195m of shareholders’ funds. Subject to approval at the AGM, it will be paid on 19 June 2013 to shareholders who are on the register on 17 May 2013.
9 Earnings per share Basic earnings per share (EPS) is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period. For diluted EPS, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. The Company has two (2012: two) classes of instrument that are potentially dilutive: those share options granted to employees where the exercise price is less than the average market price of the Company’s ordinary shares during the period and contingently issuable shares under the Group’s long term incentive plan (LTIPs). a) Basic and diluted EPS (unadjusted) Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below:
2013 2013 2013 2012 2012 2012 Weighted Weighted average average number of number of Earnings shares EPS Earnings shares EPS £m millions pence £m millions pence Unadjusted EPS Basic EPS Earnings attributable to ordinary shareholders 647 2,428.0 26.65 690 2,586.6 26.68 Effect of dilutive instruments Share options and LTIPs – 7.0 (0.08) – 64.3 (0.65) Diluted EPS 647 2,435.0 26.57 690 2,650.9 26.03 b) Underlying EPS The reconciliation of the earnings used in the calculations of underlying earnings per share is set out below:
2013 2013 2013 2012 2012 2012 Weighted Weighted average average number of number of Earnings shares EPS Earnings shares EPS £m millions pence £m millions pence Underlying EPS Basic EPS Earnings attributable to ordinary shareholders 647 2,428.0 26.65 690 2,586.6 26.68 Adjustments to determine underlying profit (note 1) 15 – 0.61 (29) – (1.13) 662 2,428.0 27.26 661 2,586.6 25.55 Effect of dilutive instruments Share options and LTIPs – 8.5 (0.09) – 64.3 (0.62) Diluted EPS 662 2,436.5 27.17 661 2,650.9 24.93
The weighted average number of shares has decreased compared to the prior period as a result of the Group’s equity retirement programme, see note 23.
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10 Intangible assets
Software development Goodwill Brands costs Licences Total £m £m £m £m £m Current period Cost At 29 January 2012 34 15 269 22 340 Additions – – 130 4 134 Interest capitalised – – 7 – 7 At 3 February 2013 34 15 406 26 481
Accumulated amortisation and impairment At 29 January 2012 – 1 25 11 37 Charge for the period – 1 24 4 29 At 3 February 2013 – 2 49 15 66
Net book amount at 3 February 2013 34 13 357 11 415
The cumulative interest capitalised included within software development costs is £20m (2012: £13m). The cost of internal labour capitalised is not material for separate disclosure.
The goodwill arose on the acquisition of kiddicare.com Limited (‘Kiddicare’) (£24m), Flower World Limited (£3m) and Farmers Boy (Deeside) Limited £7m. The value of goodwill has been tested for impairment during the current financial year by comparing the recoverable amount on a value in use basis of each cash generating unit to the carrying value of goodwill.
The key assumptions for the Kiddicare value in use calculations are based on the latest Board approved cash flow projections, with long term projections based on a growth rate of 2%. These cash flows have been discounted at a pre-tax rate of 8%. Changes in income and expenditure are based on expectations of future changes in the market. No impairment arose during the year as a result of this test.
Impairment tests have been performed on the remaining goodwill based on value in use and similar assumptions to those above, or on a net asset basis where appropriate. No impairment loss was identified in the current financial year (2012: £nil).
The valuations indicate sufficient headroom such that a reasonably possible change to key assumptions is unlikely to result in an impairment of the related goodwill.
Software Goodwill Brands development costs Licences Total £m £m £m £m £m Prior period Cost At 30 January 2011 7 – 173 20 200 Acquired in a business combination 27 15 19 – 61 Additions – – 70 2 72 Interest capitalised – – 7 – 7 At 29 January 2012 34 15 269 22 340
Accumulated amortisation and impairment At 30 January 2011 – – 9 7 16 Charge for the period – 1 16 4 21 At 29 January 2012 – 1 25 11 37
Net book amount at 29 January 2012 34 14 244 11 303
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
11 Property, plant and equipment
Land and buildings Plant, equipment, Freehold Leasehold fixtures & vehicles Total £m £m £m £m Current period Cost At 29 January 2012 7,565 930 2,073 10,568 Acquired in a business combination (note 27) 14 – 6 20 Additions at cost 492 79 283 854 Interest capitalised 8 – – 8 Transfer from investment properties 136 – – 136 Disposals (10) – (22) (32) At 3 February 2013 8,205 1,009 2,340 11,554
Accumulated depreciation and impairment At 29 January 2012 977 153 1,495 2,625 Charge for the period 95 27 213 335 Transfer from investment properties 4 – – 4 Disposals (6) – (20) (26) At 3 February 2013 1,070 180 1,688 2,938
Net book amount at 3 February 2013 7,135 829 652 8,616
Assets under construction included above 306 2 87 395
The cost of financing property developments prior to their opening date has been included in the cost of the project. The cumulative amount of interest capitalised in the total cost above amounts to £259m (2012: £251m).
Land and buildings Plant, equipment, Freehold Leasehold fixtures & vehicles Total £m £m £m £m Prior period Cost At 30 January 2011 7,152 886 1,845 9,883 Acquisition of subsidiary undertakings 11 – 1 12 Additions at cost 438 46 233 717 Interest capitalised 5 – – 5 Transfer to investment properties (35) – – (35) Disposals (6) (2) (6) (14) At 29 January 2012 7,565 930 2,073 10,568
Accumulated depreciation and impairment At 30 January 2011 885 125 1,316 2,326 Charge for the period 97 30 184 311 Transfer to investment properties (4) – – (4) Disposals (1) (2) (5) (8) At 29 January 2012 977 153 1,495 2,625
Net book amount at 29 January 2012 6,588 777 578 7,943
Assets under construction included above 187 1 62 250
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11 Property, plant and equipment – continued Property, plant and equipment is reviewed for impairment when trigger events are identified. Impairment is measured at a cash generating unit level (CGU), with each store considered to be a CGU. Impairment losses are recognised for the amount by which the carrying amount may not be recoverable, calculated as the higher of fair value less costs to sell and value in use. Value in use has been assessed by projecting individual store cash flows over their useful life, with a growth rate applied after five years (based on long term growth rates for the UK food retail sector), and discounted back to present value at the Group’s weighted average cost of capital. The store cash flows are based on budgets reviewed by the Board.
Analysis of assets held under finance leases:
2013 2012 £m £m Leasehold land and buildings Cost 308 285 Accumulated depreciation (16) (14) Net book value 292 271
12 Investment property
2013 2012 £m £m Cost At start of period 325 283 Additions – 7 Transfer (to)/from property, plant and equipment (136) 35 At end of period 189 325
Accumulated depreciation and impairment At start of period 66 54 Charge for the period 4 8 Transfer (to)/from property, plant and equipment (4) 4 At end of period 66 66
Net book amount at end of period 123 259
Included in other operating income is £23m (2012: £23m) of rental income generated from investment properties. The fair value of investment properties at the end of the period was £255m (2012: £277m). The Directors do not believe that there has been a material change in yield since the last period. Investment properties transferred (to)/from property, plant and equipment have arisen following a review of asset categories, and remain within the same asset class for depreciation purposes.
13 Investments
2013 2012 £m £m Equity investments 31 31
The equity investments held for long term investment represents a 12% stake in Fresh Direct Inc, an internet grocer serving the New York market. The investment was made on 9 March 2011 and is held at cost.
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
14 Other financial assets
2013 2012 £m £m Non-current assets Energy price contracts – 1 Current assets Energy price contracts 1 2 Foreign exchange forward contracts 4 – 5 2
15 Debtors
2013 2012 £m £m Trade debtors 173 196 Less: provision for impairment of trade debtors (5) (5) 168 191 Other debtors 37 46 Prepayments and accrued income 86 83 291 320
The ageing analysis of trade debtors is as follows:
2013 2012 ` £m £m Neither past due nor impaired 158 183 Past due but not impaired: Not more than three months 9 7 Greater than three months 1 1 Impaired debt 5 5 173 196
As at 3 February 2013 and 29 January 2012, trade debtors, that were neither past due nor impaired, related to a number of debtors for whom there is no recent history of default. The other classes of debtors do not contain impaired assets.
16 Creditors – current
2013 2012 £m £m Trade creditors 1,501 1,409 Other taxes and social security payable 31 34 Other creditors 112 143 Accruals and deferred income 486 439 2,130 2,025
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17 Other financial liabilities The Group had the following current and non-current borrowings and other financial liabilities:
2013 2012 £m £m Current Bank loans and overdrafts due within one year or on demand: Bank overdraft 2 29 Short term borrowings 50 80 52 109 Energy price contracts 3 5 Forward foreign exchange contract – 1 55 115
2013 2012 £m £m Non-current £150m Sterling bonds 6.50% August 2014 152 153 £200m Sterling bonds 6.00% January 2017 201 202 £200m Sterling bonds 6.12% December 2018 203 203 £400m Sterling bonds 4.625% December 2023 397 397 £400m Sterling bonds 3.50% July 2026 393 – $250m US private placement loan notes 4.4% November 2026 156 156 Total non-current bonds and loan notes 1,502 1,111
Floating credit facility – 1.4% (2012: 1.4%) 671 470 Term loan – 0.9% 200 – Cross-currency swaps 12 8 Energy price contracts 4 4 Finance lease obligations 7 7 2,396 1,600
Borrowing facilities Borrowings are denominated in sterling and US dollars and bear fixed interest rates, with the exception of the floating credit facility and the term loan which bear floating interest rates. All borrowings are unsecured.
On 18 July 2012, the Group issued £400m of sterling bonds at a fixed rate of 3.50%, expiring in July 2026. The issue is part of a £3,000m Euro Medium Term Note Programme where the Group can from time-to-time issue notes denominated in any agreed currency. As at 3 February 2013, the Group had issued, in total, £800m of fixed rate sterling bonds as part of this programme.
On 26 November 2012, the Group entered into a £200m term loan, which expires on 28 May 2014.
In the event of default of covenants on the bank facility, the principal amounts and any interest accrued are repayable on demand.
The Group has the following undrawn floating committed borrowing facilities available in respect of which all conditions present had been met at the balance sheet date:
2013 2012 £m £m Undrawn facilities expiring: Between three and five years 675 725
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
18 Financial instruments a) Financial risk management The Group’s treasury operations are controlled centrally by the Treasury Committee in accordance with clearly defined policies and procedures that have been authorised by the Board. There is an amount of delegated authority to the Treasury Committee, but all activities are summarised in half yearly treasury reports which are presented to the Audit Committee.
The Group’s principal financial liabilities, other than derivatives, comprise bank loans and overdrafts, bonds, other borrowings, finance leases and trade and other creditors. The main purpose of these financial liabilities is to raise finance for the Group’s operations. The Group has various financial assets such as trade debtors and cash and short term deposits which arise directly from its operations.
The Group enters into derivative transactions, in the form of forward currency contracts, cross-currency swaps and energy price contracts. The purpose of these derivative instruments is to manage risks arising from the Group’s operations and its sources of finance. As part of normal banking arrangements, the Group utilises letters of credit in order to facilitate contracts with third parties.
The financial derivatives relating to commitments entered into during the year are to manage the risks arising from its usage of energy and foreign currency. It remains the Group’s policy not to engage in speculative trading of financial instruments. The objectives, policies and processes for managing these risks are stated below: i) Foreign currency risk The Group makes the majority of its purchases in sterling, however it incurs currency exposure in respect of overseas trade purchases made in currencies other than sterling, primarily being euro and US dollar. The Group’s objective is to reduce risk to short term profits and losses from exchange rate fluctuations. It is Group policy that any transactional currency exposures recognised to have a material impact on short term profits and losses will be hedged through the use of derivative financial instruments. At the balance sheet date, the Group had entered into forward foreign exchange contracts to mitigate foreign currency exposure on up to 74% (2012: 50%) of its forecasted purchases within the next six months.
Cross-currency swaps are used to mitigate the Group’s currency exposure arising from payments of interest and repayment of the principal in relation to US dollar private placement loan notes. The sensitivity to a reasonably possible change (+/- 10%) in the US dollar and euro exchange rates has been determined as being immaterial. ii) Liquidity risk The Group policy is to maintain a balance of funding with a range of maturities and a sufficient level of undrawn committed borrowing facilities to meet any unforeseen obligations and opportunities. Short term cash balances, together with undrawn committed facilities, enable the Group to manage its liquidity risk. The Group finances its operations with a combination of bank credit facilities, bonds and US private placement loan notes.
The Treasury Committee monitors rolling forecasts of the Group’s liquidity reserve on a quarterly basis, which comprises committed and uncommitted borrowing facilities on the basis of expected cash flow. At 3 February 2013, the Group had undrawn committed facilities of £675m (2012: £725m) (note 17). These facilities remain available to the Group.
The table below summarises the maturity profile of the Group’s other financial liabilities based on contractual undiscounted payments, which includes interest payments. Creditors and current tax liabilities have been excluded from this analysis. These balances are due within 12 months and their contractual undiscounted payments equal their carrying balances as the impact of discounting is not significant.
Where borrowings are subject to a floating rate, an estimate for interest has been made. The amounts included in the table are the contractual undiscounted cash flows, and therefore do not agree to the amounts disclosed on the balance sheet for borrowings.
2013 2012 £m £m Less than one year 133 149 One to two years 433 68 Two to three years 71 224 Three to four years 946 57 Four to five years 252 732 More than five years 1,264 988
The table on page 81 analyses the Group’s derivative financial instruments into relevant maturity groupings based on the remaining period at the balance sheet date to the contractual maturity date. The amounts disclosed in the table are the contractual undiscounted cash flows.
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18 Financial instruments – continued
< 1 year 1 – 5 years 5 + years At 3 February 2013 £m £m £m Derivatives settled on a gross basis Cross-currency swaps – cash flow hedges – Outflow (8) (31) (226) – Inflow 7 28 223 Forward contracts – cash flow hedges – Outflow (73) – – – Inflow 77 – – Derivatives settled on a net basis Energy price contracts – cash flow hedges – Outflow (4) (3) –
< 1 year 1 – 5 years 5 + years At 29 January 2012 £m £m £m Derivatives settled on a gross basis Cross-currency swaps – cash flow hedges – Outflow (8) (31) (234) – Inflow 7 28 230 Forward contracts – cash flow hedges – Outflow (67) – – – Inflow 66 – – Derivatives settled on a net basis Energy price contracts – cash flow hedges – Outflow (4) (3) – – Inflow 2 – – iii) Credit risk Credit risk is managed on a Group basis. Credit risk arises from cash and cash equivalents, deposits with banking groups as well as credit exposures from other sources of income such as supplier income and tenants of investment properties.
The Group maintains deposits with banks and financial institutions who must possess a long term credit rating of A3 or higher with Moody’s for a period not exceeding six months. Further, the Group has specified limits that can be deposited with any banking group or financial institution at any point. The maximum exposure on cash and cash equivalents and deposits is equal to the carrying amount of these instruments. The Group does not expect any significant performance losses from counterparties.
The Group trades only with recognised third parties. It is the Group’s policy that tenants of investment properties who wish to trade on credit terms are subject to credit verification procedures. In addition, receivable balances are monitored on an ongoing basis with the result that the Group’s exposure to bad debts is not significant. The maximum exposure is the carrying amount as disclosed in note 15. There are no significant concentrations of credit risk within the Group. iv) Other risks Pricing risk: The Group manages the risks associated with the purchase of electricity, gas and diesel consumed by its activities (excluding fuel purchased for resale to customers) by entering into bank swap contracts to fix prices for expected consumption.
The Treasury Committee reviews the Group’s market price exposure to these commodities on a quarterly basis and determines a strategy for utilising derivative financial products in order to mitigate the volatility of energy prices. A +/- 10 % change in the fair value of the commodity price at the balance sheet date impacts the hedging reserve by £24m (2012: £16m). The Group intends to hold derivatives to maintain cover of its energy purchases of up to 75% over an appropriate timescale.
Cash flow interest rate risk: The Group’s long term policy is to protect itself against adverse movements in interest rates by maintaining at least 60% of its total borrowings at fixed interest rates. As at the balance sheet date 62% (2012: 66%) of the Group’s borrowings are at fixed rate, thereby substantially reducing the Group’s exposure to adverse movements in interest rates.
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
18 Financial instruments – continued b) Capital management The Group defines the capital that it manages as the Group’s total equity and net debt balances, with an adjustment to reflect rental commitments.
The Group’s objectives are to safeguard its ability to continue as a going concern providing returns to shareholders, through the optimisation of the debt and equity balances, maintaining a strong investment grade credit rating and, having adequate liquidity headroom. The Group manages its capital structure and makes appropriate decisions in light of the current economic conditions and strategic objectives of the Group. Initiatives available to achieve the Group’s desired capital structure include adjusting the amount of dividends paid to shareholders, issuing new shares and buying back share capital. During the current financial year, the proportion of debt relative to equity has increased, resulting from £579m incurred on the equity retirement programme, and a strategy of pursuing a more diversified funding portfolio. Additional funding of £400m has been obtained through the Group’s bond programme and a £200m term loan with Lloyds Banking Group. This has contributed to a significant increase in average maturity period of the Group’s debt. A key objective of the Group’s capital management is to maintain compliance with the covenants set out in the revolving credit facility.The Group’s covenants require maintenance of a gearing ratio of less than 3.5 and interest cover of at least 3.0 times. Throughout the year, the Group has comfortably complied with these covenants. c) Fair values i) Financial assets All financial derivatives are held at fair value, which has been determined by reference to prices available from the markets on which the instruments are traded.
Cash and cash equivalents and debtors are held at book value, which equals the fair value. The values of other financial assets are disclosed within note 14. ii) Financial liabilities All financial liabilities are carried at amortised cost. The US dollar private placement loan notes are retranslated at balance sheet date spot rates. The fair value of the sterling bonds and US dollar private placement loan notes are measured using closing market prices. These compare to carrying values as follows:
2013 2013 2012 2012 Amortised Fair Amortised Fair cost value cost value £m £m £m £m Total bonds: non-current 1,346 1,455 955 1,057 Total loan notes: non-current 156 169 156 164 1,502 1,624 1,111 1,221
The fair value of other items within current and non-current borrowing equals their carrying amount, as the impact of discounting is not significant. d) Hedging activities Cash flow hedges At 3 February 2013 and 29 January 2012, the Group held cross-currency swaps which have been designated as cash flow hedges. Prior to this, the cross-currency swaps were designated as fair value hedges against the commitment to issue US private placement loan notes. This derivative financial instrument is used to minimise risk from potential movements in foreign exchange rates inherent in cash flow of certain liabilities.
The cross-currency swaps cover the Group from currency exposure arising from payments of interest and repayment of the principal in relation to US dollar private placement loan notes (note 17). The notional principal amount of the outstanding cross-currency swaps at 3 February 2013 was $250m (2012: $250m).
To minimise the risk from potential movements in energy prices, the Group has energy price contracts which are also designated as cash flow hedges.
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18 Financial instruments – continued The Group uses forward foreign exchange contracts to hedge the cost of future purchases of goods for resale, where those purchases are denominated in a currency other than the functional currency of the purchasing company. The hedging instruments are primarily used to hedge purchases in euros and US dollars. The cash flows hedged will occur within six months of the balance sheet date.
At 3 February 2013, the total notional amount of outstanding forward foreign exchange and option contracts to which the Group has committed was £154m (2012: £67m). The fair value of these outstanding contracts at the balance sheet date was an asset of £4m (2012: liability of £1m). e) Fair value hierarchy IFRS 7 requires an analysis of financial instruments carried at fair value, by valuation method. All financial instruments carried at fair value within the Group at 3 February 2013 and 29 January 2012 are financial derivatives and all are categorised as Level 2 instruments.
19 Deferred tax
2013 2012 £m £m Deferred tax liability (519) (509) Deferred tax asset 48 45 Net deferred tax liability (471) (464)
IAS 12 ‘Income taxes’ permits the offsetting of balances within the same tax jurisdiction. All of the deferred tax assets are available for offset against deferred tax liabilities.
The movements in deferred tax (liabilities)/assets during the period are shown below:
Other Property, short term plant and Share-based temporary equipment Pensions payments differences Total £m £m £m £m £m Current period At 29 January 2012 (509) 2 6 37 (464) (Charged)/credited to profit for the period (10) 5 (4) 6 (3) Charged to other comprehensive expense and equity – (2) (2) – (4) At 3 February 2013 (519) 5 – 43 (471)
Prior period At 30 January 2011 (534) (10) 3 42 (499) Credited/(charged) to profit for the period 25 (1) 2 (11) 15 Credited to other comprehensive expense and equity – 13 1 6 20 At 29 January 2012 (509) 2 6 37 (464)
Included within the total (charged)/credited to profit for the period is an amount credited of £41m (2012: £42m), and within the total charged to other comprehensive expense a charge of £4m (2012: £2m) in respect of the change in the tax rate at which deferred tax balances are expected to reverse.
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
20 Pensions a) Defined benefit pension scheme The Group operates two defined benefit pension schemes, the Morrison and Safeway schemes (the ‘schemes’), providing benefits defined on retirement based on age at date of retirement, years of service and a formula using either the employee’s compensation package or career average revalued earnings (CARE). The assets of the schemes are held in separate trustee administered funds; no part of the schemes is wholly unfunded. The latest full actuarial valuations, which were carried out at 6 April 2010 and 1 April 2010 for the Morrison and Safeway schemes respectively, were updated for IAS 19 ‘Employee benefits’ purposes for the period to 3 February 2013 by a qualified independent actuary.
The Deed and Rules of the Morrison Pension Scheme gives the Trustees power to set the level of contributions. In the Safeway Scheme this power is given to the Group, subject to regulatory override.
The current best estimate of employer contributions to be paid for the period commencing 4 February 2013 is £33m (2012: £31m). b) Assumptions The major assumptions used in this valuation to determine the present value of the schemes’ defined benefit obligation are shown below: i) Financial
2013 2012 Rate of increases in salaries 3.70% 4.55% Rate of increase in pensions in payment and deferred pensions 2.30%–3.70% 2.50%–3.30% Discount rate applied to scheme liabilities 4.85% 4.75% Inflation assumption (RPI/CPI) 3.70%/2.90% 3.30%/2.50% ii) Longevity The average life expectancy in years of a member who reaches normal retirement age of 65 and is currently aged 45 is as follows:
2013 2012 Male 24.5 24.4 Female 25.4 25.3
The average life expectancy in years of a member retiring at the age of 65 at balance sheet date is as follows:
2013 2012 Male 22.1 22.0 Female 23.1 23.0
Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The longevity assumption considers how long a member will live when they reach the age of retirement. Amongst the UK population, there is a continuing trend for a generation to live longer than the preceding generation, and this has been reflected in the longevity assumption. This means that a 45 year old today is assumed to live on average longer than a 65 year old today. This particular adjustment, described in the mortality tables below, is known as ‘long cohort’ and is in line with the latest advice from the Pension Regulator.
In calculating the present value of the liabilities, the actuary selects the appropriate mortality table that reflects the longevity assumption. The most up-to-date tables are used in each period. The current mortality table used is S1PMA/S1PFA-Heavy YOB (2012: S1PMA/S1PFA-Heavy YOB). As disclosed in the critical accounting assumptions and estimates section on page 69, the results of the experience study conducted for the Safeway scheme have been used to adjust the longevity assumption for both schemes.
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20 Pensions – continued iii) Expected return on assets The major assumptions used to determine the expected future return on the schemes’ assets, were as follows:
2013 2012 Long term rate of return on: Equities 7.30% 5.90% Corporate bonds 4.85% 4.75% Gilts – 2.90% Liability driven investments 3.30% – Cash 0.60% 1.50%
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. The expected return on plan assets is based on market expectation at the beginning of the period for returns over the entire life of the benefit obligation. c) Valuations Assets of the schemes are held in order to generate cash to be used to satisfy the schemes’ obligations, and are not necessarily intended to be realised in the short term. The allocation of assets between categories is governed by the investment principles of each scheme and is the responsibility of the trustees of each respective scheme. The trustees should take due consideration of the Group’s views and a representative of the Group attends Trustee Investment Committees. The fair value of the schemes’ assets, which may be subject to significant change before they are realised, and the present value of the schemes’ liabilities which are derived from cash flow projections over long periods and are inherently uncertain, are as follows:
2013 2012 £m £m Equities 1,213 1,054 Corporate bonds 793 724 Gilts – 805 Liability driven investments 831 – Cash 2 6 Total fair value of schemes’ assets 2,839 2,589 Present value of defined benefit funded obligation (2,859) (2,600) Net pension liability recognised in the balance sheet (20) (11) Related deferred tax asset (note 19) 5 2 Net deficit (15) (9)
The movement in the fair value of the schemes’ assets over the period was as follows:
2013 2012 £m £m Fair value of scheme assets at start of period 2,589 2,304 Expected return on scheme assets 120 140 Actuarial gain recognised in other comprehensive income 145 148 Employer contributions 33 31 Employee contributions 10 10 Benefits paid (58) (44) Fair value of scheme assets at end of period 2,839 2,589
The above pension scheme assets do not include any investments in the parent Company’s own shares or property occupied by any member of the Group.
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
20 Pensions – continued The movement in the present value of the defined benefit obligation during the period was as follows:
2013 2012 £m £m Defined benefit obligation at start of period (2,600) (2,266) Current service cost (32) (28) Employee contributions (10) (10) Interest on defined benefit obligation (124) (127) Actuarial loss recognised in other comprehensive income (151) (213) Benefits paid 58 44 Defined benefit obligation at end of period (2,859) (2,600) d) Sensitivities Below is listed the impact on the liabilities of changing key assumptions whilst holding other assumptions constant:
2013 2012 £m £m Discount factor +/- 0.1% 72 65 Longevity +/- 1 year 87 80 e) Profit for the period The following amounts have been charged in employee benefits in arriving at operating profit:
2013 2012 £m £m Current service cost 32 28
The amounts for current service cost have been charged in the following statement of comprehensive expense lines:
2013 2012 £m £m Cost of sales 25 22 Administrative expenses 7 6 32 28
The following amounts have been included in finance (expense)/income:
2013 2012 £m £m Expected return on pension scheme assets 120 140 Interest on pension scheme liabilities (124) (127) (4) 13
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20 Pensions – continued f) Actuarial gains and losses recognised in other comprehensive expense The amounts included in other comprehensive expense were:
2013 2012 £m £m Actual return less expected return on scheme assets 145 148 Experience gains and losses arising on scheme obligation – 2 Changes in financial assumptions underlying the present value of scheme obligations (151) (215) Actuarial movement recognised in other comprehensive expense (6) (65) Taxation on actuarial movement in other comprehensive expense (note 19) (2) 13 Net actuarial movement recognised in other comprehensive expense (8) (52)
2013 2012 £m £m Cumulative gross actuarial movement recognised in other comprehensive expense (196) (190) Taxation on cumulative actuarial movement recognised in other comprehensive expense 45 47 Cumulative net actuarial movement recognised in other comprehensive expense (151) (143)
The actual return on schemes’ assets can therefore be summarised as follows:
2013 2012 £m £m Expected return on schemes’ assets 120 140 Actuarial movement recognised in other comprehensive expense reflecting the difference between expected and actual return on assets 145 148 Actual return on schemes’ assets 265 288
The expected return on the schemes’ assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property investments reflect long term real rates of return experienced in the respective markets. g) History of experience gains and losses
2013 2012 2011 2010 2009 £m £m £m £m £m Difference between the expected and actual return on scheme assets: – Amount 145 148 62 245 (425) – Percentage of scheme assets 5.1% 5.7% 2.7% 11.6% (24.2)% Experience gains and losses arising on scheme liabilities: – Amount – 2 (128) – (4) – Percentage of present value of scheme obligation – 0.1% (5.6)% – (0.2)% Effects to changes in the demographic and financial assumptions underlying the present value of the scheme liabilities: – Amount (151) (215) 100 (316) 328 – Percentage of present value of scheme obligation (5.3)% (8.3)% 4.4% (14.8)% 18.2% Total amount recognised in other comprehensive income: – Amount (6) (65) 34 (71) (101) – Percentage of present value of scheme obligation (0.2)% (2.5)% 1.5% (3.3)% (5.6)% Total value of schemes’ assets 2,839 2,589 2,304 2,111 1,758 Present value of defined benefit obligation (2,859) (2,600) (2,266) (2,128) (1,807) Net pension (liability)/asset recognised in the balance sheet (20) (11) 38 (17) (49)
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
20 Pensions – continued h) Defined contribution pension scheme Employees joining the Group after September 2000 are no longer eligible to gain automatic entry into the defined benefit pension scheme. In June 2001, the Group established a stakeholder pension scheme, open to all employees, to which the Group makes matching contributions of a maximum of 5% of eligible earnings. This was closed to new members with effect from September 2012 following the introduction of the Morrisons Retirement Saver Plan. Pension costs for the defined contribution scheme are as follows:
2013 2012 £m £m Stakeholder pension scheme 5 5 i) Post retirement benefit plan On 24 September 2012, the Group opened a new post retirement benefit plan, the Morrisons Retirement Saver Plan. The scheme provides a lump sum benefit based upon a defined proportion of an employee’s earnings each year, revalued in line with a guaranteed rate prior to retirement. All employees joining the Group after 24 September 2012 are automatically enrolled. Existing employees are also eligible to join. In the year contributions of £4m were made into the scheme by the Group.
On 31 January 2013, the Group made a contribution to the Morrison and Safeway pension schemes of £90m. On the same day the pension schemes’ trustees invested £90m in Wm Morrison Property Partnership (SLP) as limited partners. SLP was established by Wm Property Investments Limited, a wholly owned subsidiary of the Group, to hold investments in retail and distribution properties of the Group with a market value of £141m. The Group retains control over the SLP, and as such it is fully consolidated within these Group financial statements. These properties have been leased to Wm Morrison Supermarkets Plc and Safeway Stores Limited. As a partner in SLP the Morrison and Safeway pension schemes are entitled to a semi-annual share of the profits of SLP each year for 20 years. The profits shared with the pension schemes will be reflected in the Group financial statements as pension contributions.
21 Provisions
Property provisions £m At 29 January 2012 84 Charged to profit for the period 3 Unused amounts reversed during the period (3) Utilised in period (12) Unwinding of discount 4 At 3 February 2013 76
Property provisions comprise onerous leases provision, petrol filling station decommissioning reserve and provisions for dilapidations on leased buildings.
Onerous leases relate to sublet and vacant properties. Where the rent receivable on the properties is less than the rent payable, a provision based on present value of the net cost is made to cover the expected shortfall. The lease commitments range from one to 59 years. Market conditions have a significant impact and hence the assumptions on future cash flows are reviewed regularly and revisions to the provision made where necessary. Other property provisions comprise petrol filling station decommissioning reserve and dilapidations cost. Provision is made for decommissioning costs for when the petrol filling station tanks reach the end of their useful life or when they become redundant and is based on the present value of costs to be incurred to decommission the petrol tanks. Dilapidation costs are incurred to bring a leased building back to the condition in which it was originally leased. Provision is made for these costs, which are incurred on termination of the lease.
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22 Called-up share capital
Number of shares Share capital Share premium Total millions £m £m £m Current period At 29 January 2012 2,532 253 107 360 Shares cancelled (186) (18) – (18) At 3 February 2013 2,346 235 107 342
Prior period At 30 January 2011 2,658 266 107 373 Shares cancelled (126) (13) – (13) At 29 January 2012 2,532 253 107 360
The total authorised number of ordinary shares is 4,000 million shares (2012: 4,000 million shares) with a par value of 10p per share (2012: 10p per share). All issued shares are fully paid. There were 60,783 shares issued pursuant to the exercise of options (2012: 245,378) with a nominal value of £0.01m (2012: £0.02m) and an aggregate consideration of £0.1m (2012: £0.5m). Shares cancelled of 185,805,022 (2012: 125,699,939) relate to the equity retirement programme (note 23). The holders of ordinary shares are entitled to receive dividends as declared from time to time and are entitled to one vote per share at the meetings of the Company.
23 Reserves
2013 2012 £m £m Capital redemption reserve 37 19 Merger reserve 2,578 2,578 Hedging reserve (14) (12) Retained earnings 2,287 2,452 Total 4,888 5,037
Trust shares Included in retained earnings is a deduction of £5m (2012: £21m) in respect of own shares held at the balance sheet date. This represents the cost of 2,284,993 (2012: 8,887,915) of the Company’s ordinary shares (nominal value of £0.3m (2012: £0.9m). These shares are held by a trust using funds provided by the Group and were acquired to meet obligations under the Group’s share option schemes. The market value of the shares at 3 February 2013 was £6m (2012: £26m). The trust has waived its rights to dividends. These shares are not treasury shares as defined by the London Stock Exchange.
Treasury shares In addition the Company acquired 23,803,406 of its own shares (nominal value of £2m) to hold as treasury shares for the same purposes. The total amount paid to acquire the shares, net of tax, was £65m and has been deducted from retained earnings. During the period, the Company utilised 21,033,186 treasury shares to satisfy options exercised by employees during the period. Proceeds received on exercise of these shares amounted to £42m and has been credited to retained earnings. At 3 February 2013, the remaining treasury shares of 2,770,220 had a nominal value of £0.3m. The Company has the right to re-issue these shares at a later date. a) Capital redemption reserve The capital redemption reserve at the start of the period related to 57,788,600 of the Company’s own shares which it purchased on the open market for cancellation between 31 March 2008 and 21 November 2008 at a cost of £146m, and 125,699,939 which it purchased between 10 March 2011 and 27 January 2012 at a cost of £368m.
The movement in the period of £18m relates to 185,805,022 of the Company’s own shares which it purchased on the open market for cancellation between 30 January 2012 and 1 February 2013. The total amount paid to acquire the shares, net of tax, was £514m and has been deducted from retained earnings within shareholders’ equity. The shares purchased represent 7% of the ordinary share capital at 3 February 2013. b) Merger reserve The merger reserve represents the reserve in the Company’s balance sheet arising on the acquisition in 2004 of Safeway Limited. In the opinion of the Directors, this reserve is not distributable and accordingly it will be carried forward as a capital reserve. c) Hedging reserve This represents the gains and losses arising on derivatives used for cash flow hedging, principally from the Group’s cross-currency swaps, energy price contracts and forward exchange contracts (note 17).
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
24 Cash flow from operating activities
2013 2012 £m £m Profit for the period 647 690 Adjustments for: Taxation 232 257 Depreciation and impairment 339 319 Amortisation 29 21 Loss on disposal of property, plant and equipment 1 2 Net finance cost 70 26 Other non-cash charges 1 25 Excess of contributions over pension service cost – (3) Increase in stocks (22) (117) Decrease/(increase) in debtors 29 (49) Increase in creditors 114 101 Decrease in provisions (8) (8) Cash generated from operations 1,432 1,264
25 Analysis of net debt
2013 2012 £m £m Cash and cash equivalents per balance sheet 265 241 Bank overdrafts (note 17) (2) (29) Cash and cash equivalents per cash flow 263 212 Foreign exchange forward contracts 4 – Energy price contracts 1 3 Other financial assets (note 14) 5 3 Short term borrowings (note 17) (50) (80) Energy price contracts (3) (5) Forward foreign exchange contracts – (1) Current financial liabilities (note 17) (53) (86) Bonds (1,346) (955) Private placement loan notes (156) (156) Floating credit facility (671) (470) Other unsecured loans (200) – Cross-currency swaps (12) (8) Energy price contracts (4) (4) Finance lease obligations (7) (7) Non-current financial liabilities (note 17) (2,396) (1,600) Net debt (2,181) (1,471)
Cash and cash equivalents include restricted balances of £39m (2012: £67m) held by the Group’s captive insurer subsidiary, Farock Insurance Company Limited. The cash is held to cover the liabilities of this entity.
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26 Share-based payments The Group operates a number of share-based payments schemes: the Executive share option scheme, the Sharesave scheme, an equity-settled long term incentive plan (LTIP), restricted share awards and deferred share awards. The net charge for the period relating to employee share-based payment plans was £4m (2012: £24m), all of which related to equity-settled share-based payment transactions. a) Share option schemes The Sharesave scheme has been in operation since May 2000 and all employees (including Executive Directors) are eligible once the necessary service requirements have been met. The scheme allows participants to save up to a maximum of £250 each month for a fixed period of three years. Options are offered at a discount of 20% to the mid-market closing price on the day prior to the offer and are exercisable for a period of six months commencing after the end of the fixed period of the contract. The exercise of options under this scheme is only subject to service conditions and is equity-settled. The scheme launched in May 2011 and is under the new scheme rules, approved by the shareholders in June 2010.
Options which have been granted to those eligible employees, including Directors, who chose to participate in the scheme have been fair valued using a binomial stochastic option pricing model. The fair value of options granted and the assumptions were as follows:
Grant date 14 May 2012 17 May 2011 18 May 2010 14 May 2009 Share price at grant date £2.79 £3.01 £2.70 £2.43 Fair value of options granted £9.12m £11.5m £9.7m £17.4m Exercise price £2.36 £2.28 £2.37 £1.98 Dividend yield 3.69% 3.20% 3.04% 2.38% Annual risk free interest rate 0.53% 1.65% 1.63% 2.10% Expected volatility* 19.4% 24.2% 26.5% 28.0%
*The volatility measured at the standard deviation of expected share price returns is based on statistical analysis on weekly share prices over the past 3.37 years prior to the date of grant.
The requirement that the employee has to save in order to purchase shares under the Sharesave plan is a non-vesting condition. This feature has been incorporated into the fair value at grant date by applying a discount to the valuation obtained from the binomial stochastic option pricing model using the assumptions disclosed above. The discount has been determined by estimating the probability that the employee will stop saving based on expected future trends in the share price and employee behaviour.
2013 2013 2012 2012
Weighted average Weighted average exercise price in Options exercise price in Options £ per share thousands £ per share thousands Movement in outstanding options Outstanding at start of period 2.17 48,402 2.14 38,701 Granted 2.36 23,135 2.28 15,380 Exercised 1.98 (21,094) 2.09 (88) Forfeited 2.30 (6,783) 2.25 (5,591) Outstanding at end of period 2.34 43,660 2.17 48,402 Exercisable at end of period 1.98 37 – –
2013 2013 2012 2012
Weighted average Number of Weighted average Number of share price at date shares share price at date shares of exercise £ thousands of exercise £ thousands Share options exercised in the financial period 1.98 21,094 2.94 88
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
26 Share-based payments – continued
2013 2012 Share options outstanding at the end of the period Range of exercise prices £1.98 to £2.37 £1.98 to £2.37 Weighted average remaining contractual life 2.0 years 1.7 years b) Long term incentive plans In May 2007, a discretionary LTIP for the benefit of certain employees as approved by the Remuneration Committee was introduced. The awards are free share-based awards, with non-market vesting conditions attached, that accrue the value of dividends over the vesting period.
The maximum total market value of shares over which awards may be granted to any employee during any financial period of the Company is 300% of salary. Awards normally vest three years after the original grant date, provided the relevant performance criteria have been met.
The fair value at the date of grant, which is being charged to profit for the period over the three year vesting period, has been calculated based on the following assumptions:
15 Oct 13 Apr 1 Oct 18 Apr 14 Oct 22 Apr 29 Jan Grant date 2012 2012 2011 2011 2010 2010 2010 Share price at grant date £2.68 £2.93 £3.02 £2.85 £2.96 £2.97 £2.93 Assumed leavers 5% 5% 5% 5% 8% 8% – Performance criteria 65% 65% 77% 77% 80% 80% 90% Fair value of share awards granted £28.1m £1.5m £1.4m £23.3m £1.7m £21.9m £1.1m
2013 2012
Share Share awards awards thousands thousands Movement in outstanding share awards Outstanding at start of period 22,706 19,725 Granted 10,185 8,651 Exercised (6,114) (4,258) Forfeited (2,147) (1,412) Outstanding at end of period 24,630 22,706 Exercisable at end of period – –
2013 2012 Share awards outstanding at the end of the period Weighted average remaining contractual life 1.4 years 1.8 years c) Restricted share awards As part of the package for certain senior management, restricted share awards may be granted. These are primarily designed to replace the value of share scheme awards forfeited from the previous employer. Vesting of these awards is only subject to service conditions and is equity-settled.
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26 Share-based payments – continued The fair value at the date of grant, which is being charged to profit for the period over the vesting period, has been calculated based on the following assumptions:
Grant date 2013 2012 Share price at grant date £2.71 £2.71 Assumed leavers 0% 0% Exercise price £nil £nil Fair value of share awards granted £1.9m £1.9m
Share awards outstanding at the end of the period are 566,250 (2012: 817,000). The movement in share awards during the period relates to share options being exercised.
The weighted average remaining contractual life of the share awards is 0.3 years (2012: 1 year). d) Deferred share bonus plan As part of the annual bonus plan, certain members of senior management are eligible for the deferred share bonus plan which allows 33% to 50% of any bonus payable to be deferred in shares for three years from the date the deferred shares award is made. Dividend equivalents accrue over the vesting period, to be paid when the shares vest. Vesting of these share awards is only subject to service conditions and is equity-settled.
The fair value at the date of grant, which is being charged to profit for the period over the vesting period, has been calculated based on the following assumptions:
Grant date 2012/13 scheme 2011/12 scheme Share price at grant date £3.03 £2.76 Assumed leavers 0% 0% Exercise price £nil £nil Fair value of share awards granted £2.9m £1.8m
Share awards outstanding at the end of the period are 1,423,512 (2012: 658,501). The movement in share awards during the period relates to new awards being granted of 968,148 and options exercised of 203,137. No awards have vested during the period.
The weighted average remaining contractual life of the share awards is 1.8 years (2012: 2.2 years).
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Notes to the Group financial statements – continued 53 weeks ended 3 February 2013
27 Business combinations IFRS 3 (revised) ‘Business combinations’ has been applied to the acquisitions completed during the current and prior periods.
53 weeks ended 3 February 2013 On 27 March 2012, the Group acquired a site at Winsford from Vion Food Group Limited, a meat packaging business based in Cheshire. Total cash consideration for the purchase was £21m; of this £20m is attributable to the property, plant and equipment acquired and £1m to other net assets. There was no goodwill arising.
In March 2012, the Group acquired from Cranswick plc the outstanding 49% shareholding in Farmers Boy (Deeside) Limited which it did not already own, for cash consideration of £15m. This business had previously been accounted for as a subsidiary due to the existence of option arrangements between the Group and Cranswick plc.
52 weeks ended 29 January 2012 On 28 February 2011, the Group acquired the trade and assets of kiddicare.com Limited (Kiddicare), a multi-channel online retailer. The total cash consideration for the purchase was £70m.
Fair values on acquisition Assets and liabilities recognised as a result of the acquisition: £m Property, plant and equipment (note 11) 9 Brand (included in intangibles) (note 10) 15 IT hardware and software 20 Other assets 2 Net identifiable assets acquired 46 Goodwill 24 Total cash consideration 70
Goodwill relates to the technological know-how and potential future multi-channel sales and is tax deductible.
The revenue included in the Consolidated statement of comprehensive income since 28 February 2011 up to 29 January 2012 contributed by Kiddicare was £43m. Kiddicare also contributed operating profit of £1m over the same period. Given the close proximity of the acquisition date to the beginning of the financial period, it is not considered material to disclose annualised revenue and profit results since 31 January 2011.
On 10 June 2011, the Group acquired 100% of the ordinary share capital of Flower World Limited, a wholesale flower business. Total consideration (including deferred consideration) was £6m. Goodwill and intangible assets acquired were £3m and other assets acquired were £3m.
28 Capital commitments
2013 2012 £m £m Contracts placed for future capital expenditure not provided in the financial statements (property, plant and equipment) 77 103
29 Operating lease arrangements a) Lessee arrangements The Group has outstanding commitments for future minimum lease payments under non-cancellable operating leases. The leases have varying terms, escalation clauses and renewal rights, and fall due as follows:
2013 2012
Vehicles, plant Vehicles, plant and and Property equipment Property equipment £m £m £m £m Within one year 58 11 50 10 More than one year and less than five years 218 27 184 9 After five years 691 – 669 – 967 38 903 19
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29 Operating lease arrangements – continued b) Lessor arrangements The Group has non-cancellable agreements with tenants with varying terms, escalation clauses and renewal rights. The future minimum lease income is as follows:
2013 2012 £m £m Within one year 26 28 More than one year and less than five years 89 95 After five years 114 127 229 250
30 Post balance sheet events On 18 February 2013, the Group announced it had acquired 49 stores from Blockbuster Entertainment Limited, and on 26 February 2013 six stores were acquired from the administrators of HMV. These will be used to expand the Group’s portfolio of Morrisons M local convenience stores.
31 Principal subsidiaries
Subsidiaries of Wm Morrison Supermarkets PLC Principal activity Equity holding % Farmers Boy Limited Manufacturer and distributor of fresh food products 100 Neerock Limited Fresh meat processor 100 Wm Morrison Produce Limited Produce packer 100 Safeway Limited Holding company 100 Optimisation Developments Limited Property development 100 Subsidiaries of other Group companies Safeway Stores Limited Grocery retailer 100 Farmers Boy (Deeside) Limited Manufacturer and distributor of fresh food products 100
The Group has taken advantage of the exemption under Section 410(2) of Companies Act 2006 by providing information only in relation to subsidiary undertakings whose results or financial position, in the opinion of the Directors, principally affected the financial statements. All of the above companies are registered in England and Wales and the principal area of trading for all the above companies is the United Kingdom. All equity holdings are in ordinary shares.
In March 2012, the Group purchased the remaining 49% of the share capital of Farmers Boy (Deeside) Limited for £15m by exercising existing options. In the prior period, and up to the date of purchase of the options, the subsidiary was consolidated and therefore treated as 100% owned for accounting purposes.
The Company is also part of a joint venture, with The Great Steward of Scotland Dumfries House Trust, to form The Morrisons Farm at Dumfries House Limited, whose principal activity is to farm 859 acres of agricultural land located on the Dumfries House Estate near Cumnock in Ayrshire, Scotland. This has been accounted for as a joint venture in accordance with IFRS, however, as the results are not material to the Group, no further disclosure has been made of the accounting policies within the consolidated financial statements.
In addition to the above, the Company has a number of other subsidiary companies, particulars of which will be annexed to the next annual return.
32 Related party transactions The Group’s related party transactions in the period include the remuneration of the Management Board (note 4), and the Directors’ emoluments and pension entitlements, share awards and share options in the audited section of the Remuneration report, which forms part of these financial statements.
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Wm Morrison Supermarkets PLC – Company balance sheet 3 February 2013
2013 2012 Note £m £m Fixed assets Tangible assets 35 3,528 3,288 Derivative financial assets 36 1 1 Investments 37 3,521 3,467 7,050 6,756 Current assets Stocks – goods for resale 502 478 Derivative financial assets 36 5 2 Debtors – amounts falling due within one year 38 1,146 668 Cash at bank and in hand 94 91 1,747 1,239 Creditors – amounts falling due within one year 39 (3,697) (3,594)
Net current liabilities (1,950) (2,355)
Total assets less current liabilities 5,100 4,401
Creditors – amounts falling due after more than one year 40 (1,906) (1,035)
Provisions for liabilities 41 (128) (109)
Net assets – excluding pension asset 3,066 3,257 Net pension asset 42 26 – Net assets – including pension asset 3,092 3,257
Capital and reserves Called-up share capital 44 235 253 Share premium 45 107 107 Capital redemption reserve 45 37 19 Merger reserve 45 2,578 2,578 Hedging reserve 45 (14) (12) Profit and loss account 45 149 312 Total shareholders’ funds 3,092 3,257
The accounting policies on pages 97 to 99 and notes on pages 100 to 108 form part of these financial statements.
The financial statements on pages 96 to 108 were approved by the Board of Directors on 13 March 2013 and were signed on its behalf by:
Dalton Philips Richard Pennycook Chief Executive Group Finance Director
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Basis of preparation Other operating income These separate financial statements of Wm Morrison Other operating income primarily consists of income not directly Supermarkets PLC (the Company) have been prepared on a going related to the operating of supermarkets and mainly comprises concern basis under the historic cost convention, except as rental incomes and income generated from recycling of disclosed in the accounting policies set out below, and in packaging. Rental income arising from operating leases is accordance with applicable accounting standards under UK GAAP accounted for on a straight-line basis to the date of the next and the Companies Act 2006. rent review.
The following accounting policies have been applied consistently Investments in dealing with items which are considered material in relation a) Investments in subsidiary undertakings to the Company’s financial statements. Investments in subsidiary undertakings are stated at cost less provision for impairment. Accounting reference date The accounting period of the Company ends on the Sunday falling b) Investments in equity instruments between 29 January and 4 February each year. All equity instruments are held for long term investment and are measured at fair value, where the fair value can be measured Turnover recognition reliably. Where the fair value of the instruments cannot be Turnover comprises the fair value of consideration received or measured reliably, the investment will be recognised at cost receivable for the sale of goods in the ordinary course of the less accumulated impairment losses in accordance with FRS 26 Company’s activities. It is recognised when significant risks and ‘Financial instruments: recognition and measurement’. rewards of ownership have been transferred to the buyer, there is Any impairment is recognised immediately in profit or loss. reasonable certainty of recovery of the consideration and the amount of revenue, associated costs and possible return of goods Tangible assets can be estimated reliably. Tangible assets are stated at cost less accumulated depreciation and accumulated impairment losses. Costs include directly a) Sale of goods in-store and fuel attributable costs. Annual reviews are made of estimated useful Sale of goods in-store is recorded net of value added tax, returns, lives and material residual values. staff discounts, coupons, vouchers and the free element of multi-save transactions. Sale of fuel is recognised net of value Depreciation added tax and Morrisons Miles award points. Revenue is The policy of the Company is to provide depreciation at rates recognised when transactions are completed in-store. which are calculated to write off the cost less residual value of tangible fixed assets on a straight line basis. The rates applied are: b) Other sales Other revenue primarily comprises income from concessions and Freehold land 0% commissions based on the terms of the contract. Revenue Freehold buildings 2.5% collected on behalf of others is not recognised as turnover, other than the related commission. Sales are recorded net of value Leasehold improvements Over the shorter of lease added tax and intra-group transactions. period and 2.5% Plant, equipment, Cost of sales fixtures and vehicles 10% to 33% Cost of sales consists of all costs to the point of sale including Assets under construction 0% manufacturing, warehouse and transportation costs. Store depreciation, store overheads and store based employee costs are Fixed assets are reviewed for indications of impairment when also allocated to cost of sales. events or changes in circumstances indicate that the carrying amount may not be recoverable. This is performed for each Supplier income income generating unit, which in the case of a supermarket Supplier incentives, rebates and discounts are collectively referred is an individual retail outlet. If there are indications of possible to as supplier income in the retail industry. Supplier income is impairment, then a test is performed on the asset affected recognised as a deduction from cost of sales on an accruals basis to assess its recoverable amount against carrying value. based on the expected entitlement which has been earned up to An impaired asset is written down to its recoverable amount, the balance sheet date for each relevant supplier contract. The which is the higher of value in use or its net realisable value. accrued incentives, rebates and discounts receivable at period end In assessing value in use, the estimated future cash flows are are included within prepayments and accrued income. Where discounted to their present value using a pre-tax discount rate amounts received are in the expectation of future business, that reflects current market assessments of the time value of these are recognised in the income statement in line with that money and the risks specific to the asset. future business. If there is indication of an increase in fair value of an asset that had been previously impaired, then this is recognised by reversing the impairment, but only to the extent that the recoverable amount does not exceed the carrying amount that would have been determined if no impairment loss had been recognised for the asset.
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Wm Morrison Supermarkets PLC – Company accounting policies – continued 53 weeks ended 3 February 2013
Financial instruments The gain or loss on any ineffective part of the hedge is Financial assets and liabilities are recognised on the Company’s immediately recognised in the profit and loss account within cost balance sheet when the Company becomes a party to the of sales for the energy price contracts and within interest payable contractual provisions of the instrument. in relation to the cross-currency swaps. If a hedge of a forecast transaction subsequently results in the recognition of a financial a) Financial assets asset or liability, the associated cumulative gains or losses that i) Trade and other debtors: Trade and other debtors are initially were recognised directly in equity are reclassified into the profit recognised at fair value and subsequently held at amortised cost. and loss account when the transaction occurs. Provision is made when there is objective evidence that the Company will not be able to recover balances in full, with the Capital management charge being recognised in the profit and loss account. Balances The capital management policy of the Company is consistent with are written off when the probability of recovery is assessed as that of the Group set out in note 18. being remote. Borrowing costs ii) Cash: Cash and cash equivalents includes cash-in-hand, All borrowing costs are recognised in the Company’s profit and cash-at-bank and bank overdrafts together with short term, loss account on an accruals basis, except for interest costs that are highly liquid investments that are readily convertible into known directly attributable to the construction of buildings and other amounts of cash, with an insignificant risk of a change in value, qualifying assets which are capitalised and included within the within three months from the date of acquisition. initial cost of the asset. Capitalisation of interest ceases when the asset is ready for use. b) Financial liabilities i) Trade and other creditors: Trade and other creditors are initially Pension costs stated at fair value and subsequently held at amortised cost. The Company operates defined benefit and defined contribution ii) Borrowings: Borrowings are initially recorded at fair value, net of schemes. A defined contribution scheme is a pension scheme under attributable transaction costs. Subsequent to initial recognition, which the Company pays fixed contributions into a separate entity. any difference between the redemption value and the initial A defined benefit scheme is one that is not a defined contribution carrying amount is recognised in profit for the period over the scheme. Pension benefits under defined benefit schemes are period of the borrowings on an effective interest rate basis. defined on retirement based on age at date of retirement, years of service and a formula using either the employee’s compensation c) Derivative financial instruments package or career average revalued earnings. Derivative financial instruments are initially measured at fair value, which normally equates to cost, and are remeasured at The Company operates a defined benefit retirement scheme fair value through profit or loss, except where the derivative which is funded by contributions from the Company and qualifies for hedge accounting. members. The defined benefit scheme is not open to new members. Pension scheme assets, which are held in separate Cash flow hedges trustee administered funds, are valued at market rates. Pension scheme obligations are measured on a discounted present value Derivative financial instruments are classified as cash flow hedges basis using assumptions as shown in note 41. The operating and when they hedge the Company’s exposure to variability in cash financing costs of the scheme are recognised separately in the flows that are either attributable to a particular risk associated profit and loss account in the period in which they arise. Death-in- with a recognised asset or liability, or a highly probable forecast service costs are recognised on a straight line basis over their transaction. vesting period. Actuarial gains and losses are recognised immediately in the STRGL. The Company has cross-currency swaps designated as cash flow hedges. These derivative financial instruments are used to match The Company has a right to recognise an asset, should one arise, or minimise risk from potential movements in foreign exchange in respect of the Company’s net obligations to the pension rates inherent in the cash flows of the US dollar private placement schemes. Therefore either an asset or a liability is recognised loan notes. in the balance sheet, and is stated net of deferred tax.
To minimise the risk from potential movements in energy prices, A liability or asset is recognised in the balance sheet in respect of the Company has energy price contracts which are designated as the Company’s net obligations to the scheme and is stated net cash flow hedges. of deferred tax.The Company also operates a stakeholder pension scheme and contributions are charged to the profit and loss To minimise the risk from potential movements in foreign account as they arise. exchange rates, the Company uses forward exchange contracts which are designated as cash flow hedges. Foreign currencies Derivatives are reviewed annually for effectiveness. Where Transactions in foreign currencies are recorded at the rates of a derivative financial instrument is designated as a hedge exchange at the dates of the transactions. At each balance sheet of the variability in cash flows of a recognised asset or liability, date, monetary assets and liabilities that are denominated in or highly probable forecast transaction, the effective part of foreign currency are retranslated at the rates of exchange at the any gain or loss on the movement in fair value of the derivative balance sheet date. Gains and losses arising on retranslation are financial instrument is recognised directly in equity through included in the profit and loss account for the period except when the statement of total recognised gains and losses (STRGL). they deferred in reserves as qualifying cash flow hedges.
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Provisions Stocks Provisions are created where the Company has a present legal Stocks are measured at the lower of cost and net realisable value. or constructive obligation as a result of a past event, where it is Provision is made for obsolete and slow moving items. Cost is probable that it will result in an outflow of economic benefits calculated on a weighted average basis and comprises purchase to settle the obligation from the Company, and where it can be price, import duties and other non-recoverable taxes less rebates. reliably measured. Stocks represent goods for resale. Net realisable value is the estimated selling price in the ordinary course of business, less Provisions are made in respect of individual properties where estimated costs necessary to make the sale. there are obligations for onerous contracts, dilapidations and certain decommissioning obligations for petrol filling stations. Share-based payments The amounts provided are based on the Company’s best estimate The Company issues equity-settled share-based payments to of the likely committed outflow to the Company. Where material, certain employees in exchange for services rendered by them. these estimated outflows are discounted to net present value. The fair value of the share-based award is calculated at the date of grant and is expensed on a straight line basis over the vesting Leases period with a corresponding increase in equity. This is based Leases in which substantially all the risks and rewards of on the Company’s estimate of share options that will eventually ownership are retained by the lessor are classified as operating vest. This takes into account movement of non-market conditions, leases; all other leases are classified as finance leases. being service conditions and financial performance, if relevant. The fair value of equity-settled awards granted is not Lessor accounting – operating leases subsequently revisited. Assets acquired and held for use under operating leases are recorded as fixed assets and are depreciated on a straight line Fair value is measured by use of a binomial stochastic option basis to their estimated residual values over their estimated useful pricing model. The expected life used in the model has been lives. Operating lease income is recognised on a straight line basis adjusted, based on management’s best estimate, for effects to the date of the next rent review. of non-transferability, exercise restrictions and behavioural considerations. The cost of the share-based award relating to Lessee accounting – operating leases each subsidiary is calculated, based on an appropriate apportionment and recharged through intercompany. Rental payments are taken to the profit and loss account on a straight line basis over the life of the lease. Financial contracts Lessee accounting – finance leases Where the Company enters into financial contracts to guarantee the indebtedness of other companies within its Group, the The present value of the minimum lease payments payable Company considers these to be insurance arrangements, and during the lease term is included within fixed assets and the accounts for them as such. In this respect, the Company treats corresponding lease commitments are shown as obligations the guarantee contract as a contingent liability until such time to the lessor. Lease payments are split between capital and as it becomes probable that the Company will be required to interest elements using the annuity method. Depreciation make a payment under the guarantee. on the relevant assets and interest are charged to the profit and loss account. Share capital Ordinary shares are classified as equity. Incremental costs directly Deferred and current taxation attributable to the issue of new shares or options are shown in Current tax payable is based on the taxable profit for the period equity as a deduction, net of tax, from the proceeds. using tax rates in effect during the period. Taxable profit differs from the profit as reported in the profit and loss account as it is Where the Company has purchased its own equity share capital, adjusted both for items that will never be taxable or deductible the consideration paid, including directly attributable incremental and timing differences. costs, is deducted from retained earnings until the shares are cancelled. On cancellation, the nominal value of the shares is Deferred tax is provided in full on timing differences which result deducted from share capital and the amount is transferred to the in an obligation at the balance sheet date to pay more tax, or a capital redemption reserve. right to pay less tax, at a future date, at average rates expected to apply when they crystallise, based on tax rates enacted or Exemptions substantively enacted at the balance sheet date. Timing differences arise from the inclusion of items of income and The Company has taken advantage of the exemption from the expenditure in taxation computations in different periods from disclosure requirements of FRS 29 ‘Financial instruments: those in which they are included in the financial statements. disclosures’. The cash flows of the Company and financial instruments disclosures are included in the consolidated financial A net deferred tax asset is recognised only when it is recoverable statements. on the basis that it is more likely than not that there will be suitable taxable profits against which to recover carried forward The Company is exempt under the terms of FRS 8 ‘Related parties’ tax losses and from which the future reversal of underlying timing from disclosing related party transactions with wholly owned differences can be deducted. Deferred tax assets and liabilities entities that are part of the Wm Morrison Supermarkets PLC Group. are not discounted. The Company has taken advantage of the exemption available under section 408 of the Companies Act 2006 and not presented a profit and loss account for the Company.
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Notes to the Company financial statements 53 weeks ended 3 February 2013
33 Profit and loss account The profit after tax for the Company for the 53 week period ended 3 February 2013 was £647m (52 weeks ended 29 January 2012: £86m). The Company’s auditor, KPMG Audit Plc, charged £0.4m (2012: £0.4m) for audit services in the year, £0.1m (2012: £0.2m) for services related to taxation and £0.4m (2012: £0.5m) for other services.
34 Employees and directors
2013 2012 £m £m Employee benefit expense for the Company during the period Wages and salaries 892 886 Social security costs 64 64 Share-based payments (note 46) 2 14 Pension costs 26 19 984 983
The average number of persons employed by the Company during the period was as follows:
2013 2012 No. No. Stores 53,092 54,048 Distribution 6,248 5,489 Centre 2,894 2,906 62,234 62,443
The aggregate remuneration paid to or accrued for the key management for services in all capacities during the period is the same as the Group and is shown in note 4.
35 Tangible assets
Land and buildings
Plant, equipment, Freehold Leasehold fixtures & vehicles Total £m £m £m £m Cost At 29 January 2012 2,859 586 1,391 4,836 Additions at cost 241 53 168 462 Interest capitalised – – 8 8 Transfers to another group subsidiary (1) – (1) (2) Disposals (14) – (16) (30) At 3 February 2013 3,085 639 1,550 5,274
Accumulated depreciation and impairment At 29 January 2012 640 90 818 1,548 Charged in the period 76 16 124 216 Disposals (4) – (14) (18) At 3 February 2013 712 106 928 1,746
Net book value At 3 February 2013 2,373 533 622 3,528 At 29 January 2012 2,218 495 575 3,288
Assets under construction included above At 3 February 2013 6 – 230 236 At 29 January 2012 2 – 138 140
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35 Tangible assets – continued Included above is an amount of £740m (2012: £728m) relating to non-depreciable land. The cost of assets held under finance leases at 3 February 2013 is £91m (2012: £20m), with related accumulated depreciation of £21m (2012: £1m). The cost of property assets held as lessor included above is £165m at 3 February 2013 (2012: £267m) and accumulated depreciation of £57m (2012: £58m).
Since 3 February 1985, the cost of financing property developments prior to their opening date has been included in the cost of the project.
The cumulative amount of interest capitalised in the total cost above amounts to £111m (2012: £103m). Interest is capitalised at the effective interest rate of 5% (2012: 4%) incurred on borrowings.
36 Derivative financial assets
2013 2012 £m £m Fixed assets Energy price contracts 1 1 Current assets Energy price contracts 1 2 Forward foreign currency contracts 4 – 5 2
37 Investments
Investment in Investment in equity subsidiary instruments undertakings Total £m £m £m Cost At 29 January 2012 31 3,437 3,468 Additions – 54 54 At 3 February 2013 31 3,491 3,522
Provision for impairment At 29 January 2012 and 3 February 2013 – (1) (1)
Net book value At 3 February 2013 31 3,490 3,521 At 29 January 2012 31 3,436 3,467
A list of the Company’s principal subsidiaries is shown in note 31. The Directors believe that the carrying value of the investments is supported by their underlying net assets.
38 Debtors – amounts falling due within one year
2013 2012 £m £m Trade debtors 123 145 Amounts owed by group undertakings 753 333 Other debtors 8 14 Prepayments 262 176 1,146 668
Prepayments includes £211m (2012: £130m) relating to amounts falling due after more than one year. Amounts owed by group undertakings are unsecured, interest free, and repayable on demand.
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Notes to the Company financial statements – continued 53 weeks ended 3 February 2013
39 Creditors – amounts falling due within one year
2013 2012 £m £m Trade creditors 1,335 1,282 Amounts owed to Group undertakings 1,730 1,856 Other taxation and social security 50 67 Other creditors 37 45 Bank overdraft 214 – Floating credit facility 50 80 Energy price contracts 4 5 Accruals and deferred income 277 259 3,697 3,594
Amounts owed to Group undertakings are unsecured, interest free and repayable on demand.
40 Creditors – amounts falling due after more than one year
2013 2012 £m £m Revolving credit facility 1.4% (2012: 1.4%) 671 470 US dollar private placement loan notes November 2026 156 156 £400m Sterling bonds 4.625% December 2023 397 397 £400m Sterling bonds 3.50% July 2026 393 – Term loan 0.9% 200 – Amounts owed to subsidiary undertakings 73 – Cross-currency swaps 12 8 Energy price contracts 4 4 1,906 1,035
On 18 July 2012, the Company issued £400m of sterling bonds at a fixed rate of 3.50%, expiring in July 2026. The issue is part of a £3,000m Euro Medium Term Note Programme where the Company can from time to time issue notes denominated in any agreed currency. As at 3 February 2013, the Company had issued, in total, £800m of fixed rate sterling bonds as part of this programme.
On 26 November 2012, the Group entered into a £200m term loan, which expires on 28 May 2014. The revolving credit facility entered into in the prior period expires in March 2016.
In the event of default of covenants on the bank facility, the principal amounts and any interest accrued are repayable on demand.
Finance leases Net obligations under finance leases of £71m (2012: £20m) are payable in two to five years, and are included in amounts owed to subsidiary undertakings in the table above.
41 Provisions for liabilities
Deferred taxation Property provisions Total £m £m £m At 29 January 2012 93 16 109 Charge recognised in profit and loss 16 (2) 14 Charge recognised directly in the STRGL 4 – 4 Unwinding of discount – 1 1 At 3 February 2013 113 15 128
Further details of the property provisions are provided in note 21.
Included within the deferred taxation provision, £11m (2012: £10m) has been credited to the profit and loss and £4m (2012: £3m) has been charged to the STRGL in the period in respect of the change in the tax rate at which deferred tax balances are expected to reverse.
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41 Provisions for liabilities – continued The potential deferred taxation on timing differences, calculated at 23% (2012: 25%), is set out below and has been provided for in full.
2013 2012 £m £m Excess of capital allowances over depreciation 129 123 Provisions and short term timing differences (15) (24) Share-based payments (1) (6) Provision at the period end excluding deferred tax on pension asset 113 93 Deferred tax liability on pension asset (note 42) 2 – Provision at the period end including deferred tax on pension asset 115 93
The deferred tax liability of £2m (2012: £nil) relating to the pension asset has been deducted in arriving at the net pension asset on the balance sheet.
42 Pensions a) Defined benefit pension scheme The Company operates a pension scheme (the ‘scheme’) providing benefits defined on retirement based on age at date of retirement, years of service and a formula using either the employee’s compensation package or career average revalued earnings (CARE). The assets of the scheme are held in a separate trustee administered fund. The latest full actuarial valuation was carried out at 6 April 2010 and was updated for FRS 17 ‘Retirement benefits’ purposes for the period to 3 February 2013 by a qualified independent actuary.
Under FRS 17 the investment held by the scheme represents a scheme asset in the Company financial statements. As a partner in SLP the scheme is entitled to a semi-annual share of the profits of SLP each year for 20 years. The current best estimate of employer contributions to be paid for the year commencing 4 February 2013 is £18m (2012: £18m). b) Assumptions The major assumptions used in this valuation to determine the present value of the scheme’s defined benefit obligation are shown below. i) Financial
2013 2012 Rate of increases in salaries 3.70% 4.55% Rate of increase in pensions in payment and deferred pensions 2.30% to 3.70% 2.50% to 3.30% Discount rate applied to scheme liabilities 4.85% 4.75% Inflation assumption (RPI/CPI) 3.70%/2.90% 3.30%/2.50% ii) Longevity The average life expectancy in years of a member who reaches normal retirement age of 65 and is currently aged 45 is as follows:
2013 2012 Male 24.5 24.4 Female 25.4 25.3
The average life expectancy in years of a member retiring at the age of 65 at balance sheet date is as follows:
2013 2012 Male 22.1 22.0 Female 23.1 23.0 Assumptions regarding future mortality experience are set based on actuarial advice and in accordance with published statistics. The longevity assumption considers how long a member will live when they reach the age of retirement. Amongst the UK population there is a continuing trend for a generation to live longer than the preceding generation, and this has been reflected in the longevity assumption. This means that a 45-year-old today is assumed to live on average longer than a 65-year-old today. This particular adjustment, described in the mortality tables below, is known as ‘long cohort’ and is in line with the latest advice from the Pension Regulator.
In calculating the present value of the liabilities the actuary selects the appropriate mortality table that reflects the longevity assumption. The most up-to-date tables are used in each period. The current mortality table used is S1PMA/S1PFA-Heavy YOB (2012: S1PMA/S1PFA-Heavy YOB).
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Notes to the Company financial statements – continued 53 weeks ended 3 February 2013
42 Pensions – continued iii) Expected return on assets The major assumptions used to determine the expected future return on the scheme’s assets, were as follows:
2013 2012 Long term rate of return on: Equities 7.30% 5.90% Bonds 4.85% 4.75% Gilts – 2.90% Liability driven investments 3.30% – Scottish Limited Partnership 4.05% – Cash 0.60% 1.50%
The assumptions used by the actuary are the best estimates chosen from a range of possible actuarial assumptions which, due to the timescales covered, may not necessarily be borne out in practice. c) Valuations The fair value of the scheme’s assets, which are not intended to be realised in the short term and may be subject to significant change before they are realised, and the present value of the scheme’s liabilities which are derived from cash flow projections over long periods and are inherently uncertain, were as follows:
2013 2012 £m £m Equities 310 260 Bonds 196 178 Gilts – 199 Liability driven investments 208 – Scottish Limited Partnership 30 – Cash 1 1 Total market value of assets 745 638 Present value of scheme liabilities (717) (638) Net pension asset 28 – Related deferred tax liability (2) – Net pension asset after deferred tax 26 –
The movement in the fair value of the scheme’s assets over the period was as follows:
2013 2012 £m £m Fair value of scheme assets at start of period 638 553 Expected return on scheme assets 30 34 Actuarial gain 37 36 Employer contributions 48 18 Employee contributions 5 5 Benefits paid (13) (8) Fair value of scheme assets at end of period 745 638
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42 Pensions – continued The movement in the present value of the defined benefit obligation during the period was as follows:
2013 2012 £m £m Defined benefit obligation at the beginning of the period (638) (537) Current service cost (17) (17) Employee contributions (5) (5) Other finance income (31) (30) Actuarial loss (39) (57) Benefits paid 13 8 Defined benefit obligation at the end of the period (717) (638) d) Sensitivities Below is listed the impact on the liabilities of changing key assumptions whilst holding other assumptions constant:
2013 2012 £m £m Discount factor + / – 0.1% 18 16 Longevity + / – 1 year 22 19 e) Profit and loss account impact The following amounts have been charged in arriving at operating profit in respect of pension costs:
2013 2012 £m £m Current service cost (17) 17
The amounts for current service cost and pensions credit have been charged in the following profit and loss account lines:
2013 2012 £m £m Cost of sales (14) (14) Administrative expenses (3) (3) (17) (17)
The following amounts have been included in other finance income:
2013 2012 £m £m Expected return on pension scheme assets 30 34 Interest on pension scheme liabilities (31) (30) (1) 4 f) Amounts recognised in statement of total recognised gains and losses The amounts included in the statement of total recognised gains and losses (STRGL) were:
2013 2012 £m £m Actual return less expected return on scheme assets 37 36 Experience gains and losses arising on scheme liabilities – 1 Changes in assumptions underlying the present value of scheme liabilities (39) (58) Actuarial loss recognised in the STRGL (2) (21)
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Notes to the Company financial statements – continued 53 weeks ended 3 February 2013
42 Pensions – continued
2013 2012 £m £m Cumulative gross actuarial movement recognised in the STRGL (166) (164) Taxation on cumulative actuarial movement recognised in the STRGL 38 41 Cumulative net actuarial movement recognised in the STRGL (128) (123)
The actual return on the scheme’s assets can therefore be summarised as follows:
2013 2012 £m £m Expected return on scheme’s assets 30 34 Actuarial movement recognised in the STRGL reflecting the difference between expected and actual return on assets 37 36 Actual return on scheme’s assets 67 70
The expected return on scheme’s assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields as at the balance sheet date. Expected returns on equity and property investments reflect long term real rates of return experienced in the respective markets. g) History of experience gains and losses
2013 2012 2011 2010 2009 £m £m £m £m £m Difference between the expected and actual return on scheme assets: Amount 37 36 13 48 (85) Percentage of scheme assets 5.0% 5.6% 2.4% 9.8% (21.4)% Experience gains and losses arising on scheme liabilities: Amount – 1 (52) –– Percentage of present value of scheme liabilities – 0.3% (9.7)% –– Effects of changes in the demographic and financial assumptions underlying the present value of the scheme liabilities: Amount (39) (58) 20 (72) 82 Percentage of present value of scheme liabilities (5.4)% (9.1)% 3.7% (15.4)% 20.5% Total amount recognised in statement of total recognised gains and losses Amount (2) (21) (19) (24) (3) Percentage of present value of scheme liabilities (0.3)% (3.3)% (3.5)% (5.1)% (0.8)% Total value of scheme’s assets 745 638 553 490 397 Present value of defined benefit obligation (717) (638) (537) (468) (400) Net pension asset/(liability) 28 – 16 22 (3) h) Defined contribution pension scheme Employees joining the Company after September 2000 are no longer eligible to gain automatic entry into the final salary pension scheme. In June 2001 the Company established a stakeholder pension scheme, open to all employees, to which the Company makes matching contributions of a maximum of 5% of eligible earnings. Pension costs for the defined contribution scheme are as follows:
2013 2012 £m £m Stakeholder pension scheme (3) (4) i) Other schemes On 24 September 2012, the Group opened a new cash balance scheme, the Morrisons Retirement Saver Plan. The scheme provides a lump sum benefit based upon a defined proportion of an employee’s earnings each year, revalued in line with a guaranteed rate prior to retirement. All employees joining the Company after 24 September 2012 are automatically enrolled. Existing employees are also eligible to join. In the year contributions of £3m were made by the Company into the scheme.
As explained further in note 20 of the Wm Morrison Supermarkets Plc consolidated financial statements, on 31 January 2013 the Company made a contribution to the pension scheme of £30m and, on the same day, the pension scheme invested this in Wm Morrison Property Partnership (SLP), a limited partnership controlled by Wm Morrison Supermarkets Plc group.
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43 Reconciliation of movements in equity shareholders’ funds
2013 2012 £m £m Profit for the financial period 647 86 Dividends (note 8) (270) (301) Retained profit/(loss) for the financial period 377 (215) Share-based payment (note 46) 2 25 Cash flow hedging movement (2) (23) Tax relating to cash flow hedging movement – 6 Actuarial loss on pension scheme (2) (21) Tax relating to pension scheme (2) 2 Shares purchased for cancellation (514) (368) Treasury share purchases and utilisation for share options (24) – Net reduction in equity shareholders’ funds (165) (594) Opening shareholders’ funds 3,257 3,851 Closing equity shareholders’ funds 3,092 3,257
44 Share capital
2013 2012 £m £m Authorised Equity share capital 4,000,000,000 ordinary shares of 10p each (2012: 4,000,000,000) 400 400 Issued and fully paid Equity share capital 2,346,567,871 ordinary shares of 10p each (2012: 2,532,312,110) 235 253 Ordinary shares
2013 2012 £m £m At start of period 253 266 Shares cancelled (18) (13) Shares options exercised – – At end of period 235 253
45 Reserves
Share premium Capital redemption account reserve £m Merger reserve Hedging reserve Profit and loss account £m £m £m £m At start of period 107 19 2,578 (12) 312 Retained in the period – – – – 377 Shares purchased for cancellation – 18 – – (514) Treasury share purchases and utilisation for – – – – (24) share options Share-based payments – – – – 2 Cash flow hedging movement – – – (2) – Actuarial loss recognised – – – – (2) Tax arising on actuarial loss – – – – (2) At end of period 107 37 2,578 (14) 149
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Notes to the Company financial statements – continued 53 weeks ended 3 February 2013
45 Reserves – continued a) Capital redemption reserve The capital redemption reserve at the start of the period related to 57,788,600 of the Company’s own shares which it purchased on the open market for cancellation between 31 March 2008 and 21 November 2008 at a cost of £146m, and 125,699,939 which it purchased between 10 March 2011 and 27 January 2012 at a cost of £368m. The movement in the period of £18m relates to 185,805,022 of the Company’s own shares which it purchased on the open market for cancellation between 30 January 2012 and 1 February 2013. The total amount paid to acquire the shares, net of tax, was £514m and has been deducted from retained earnings within shareholders’ equity. The shares purchased represent 7% of the ordinary share capital at 3 February 2013. b) Merger reserve The merger reserve represents the reserve arising on the acquisition in 2004 of Safeway Limited. In the opinion of the Directors, this reserve is not distributable and accordingly it will be carried forward as a capital reserve. c) Hedging reserve This represents the gains and losses arising on cash flow hedges from the Company’s energy price contracts and forward exchange contracts.
46 Share-based payments The disclosure requirements for FRS 20 ‘Share-based payment’ are identical to that of IFRS 2 ‘Share-based payment’. The charge for the year relating to the Company net of tax was £2m (2012: £14m). Full IFRS 2 disclosures are provided in note 26.
47 Capital commitments
2013 2012 £m £m Contracts placed for future capital expenditure not provided in the financial statements 36 15 (property, plant and equipment)
48 Operating lease commitments Annual commitments under non-cancellable operating leases:
2013 2013 2012 2012
Land and Plant, equipment, Land and Plant, equipment, buildings fixtures and vehicles buildings fixtures and vehicles £m £m £m £m Expiring within one year – 3 1 2 Expiring within two to five years inclusive 2 7 2 7 Expiring over five years 23 – 23 – 25 10 26 9
49 Contingent liabilities The Company has given an unlimited guarantee in respect of the overdraft of all the subsidiary undertakings within the Group’s banking offset agreement. The overdraft position at 3 February 2013 was £99m (2012: £164m).
The Company has also provided a guarantee in respect of sterling bonds amounting to £633m at fair value (2012: £633m) in respect of a subsidiary undertaking. Where the Company enters into financial contracts to guarantee the indebtedness of other Companies within its Group, the Company considers these to be insurance arrangements, and accounts for them as such. In this respect, the Company treats the guarantee contract as a contingent liability until such time as it becomes probable that the Company will be required to make a payment under the guarantee.
50 Related party transactions The Company has taken the exemption available in FRS 8 ‘Related parties’ from disclosing related party transactions with wholly owned entities that are part of the Wm Morrison Supermarkets PLC Group. Transactions between the Company and Farmers Boy (Deeside) Limited during the period it remained a non-wholly owned subsidiary within the Group (prior to the acquisition of its remaining shareholding disclosed in note 31) are as follows: The Company paid for goods and services on behalf of Farmers Boy (Deeside) Limited totalling cash payments of £0.2m (2012: £3m) and provided additional cash advances of £nil (2012: £15m). In addition, Farmers Boy (Deeside) Limited sold goods to the Company totalling £17m (2012: £79m).
108 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements Five year summary of results 53 weeks ended 3 February 2013
Consolidated statement of comprehensive income
2013 2012 2011 2010 2009 £m £m £m £m £m Turnover 18,116 17,663 16,479 15,410 14,528 Cost of sales (16,910) (16,446) (15,331) (14,348) (13,615) Gross profit 1,206 1,217 1,148 1,062 913 Other operating income 80 86 80 65 37 Administrative expenses (336) (329) (323) (315) (281) (Losses)/profits arising on property transactions (1) (1) (1) 4 2 Operating profit before pensions credit 949 973 904 816 671 Pensions credit – – – 91 – Operating profit 949 973 904 907 671 Net finance costs (70) (26) (30) (49) (16) Profit before taxation 879 947 874 858 655 Taxation (232) (257) (242) (260) (195) Profit for the period attributable to the owners of the Company 647 690 632 598 460 Underlying profit before tax 901 935 869 767 636 Earnings per share (pence) – basic 26.65 26.68 23.93 22.80 17.39 – diluted 26.57 26.03 23.43 22.37 17.16 – underlying basic 27.26 25.55 23.03 20.47 16.67 Dividend per ordinary share (pence) 11.80 10.70 9.60 8.20 5.80
Consolidated balance sheet
Restated1 Restated1 2013 2012 2011 2010 2009 £m £m £m £m £m Assets Intangible assets 415 303 184 – – Property, plant and equipment 8,616 7,943 7,557 7,439 6,838 Investment property 123 259 229 229 242 Net pension asset – – 38 – – Investments 31 31 – – – Other financial assets – 1 3 – 81 Non-current assets 9,185 8,537 8,011 7,668 7,161 Current assets 1,342 1,322 1,138 1,092 1,065 Liabilities Current liabilities (2,334) (2,303) (2,086) (2,152) (2,024) Other financial liabilities (2,396) (1,600) (1,052) (1,027) (1,049) Deferred tax liabilities (471) (464) (499) (515) (472) Net pension liabilities (20) (11) – (17) (49) Provisions (76) (84) (92) (100) (112) Non-current liabilities (2,963) (2,159) (1,643) (1,659) (1,682) Net assets 5,230 5,397 5,420 4,949 4,520 Shareholders’ equity Called-up share capital 235 253 266 265 263 Share premium 107 107 107 92 60 Capital redemption reserve 37 19 6 6 6 Merger reserve 2,578 2,578 2,578 2,578 2,578 Retained earnings and hedging reserves 2,273 2,440 2,463 2,008 1,613 Total equity attributable to the owners of the Company 5,230 5,397 5,420 4,949 4,520
1 Restated for amendment to IAS 17 ‘Leases’.
109 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Financial statements Annual report and financial statements 2012/13
Supplementary information 53 weeks ended 3 February 2013
2013 2012 2011 2010 2009 % % % % % Increase/(decrease) on previous year % Turnover 2.56 7.18 6.94 6.07 12.02 Operating profit (2.47) 7.63 10.78 21.601 9.74 Profit before taxation (7.18) 8.35 1.86 30.99 6.98 Profit after taxation (6.23) 9.18 5.69 30.00 (17.02) Underlying profit before taxation (3.64) 7.56 13.30 20.60 12.97 Diluted earnings per share 1.92 11.10 4.74 30.36 (17.01) Dividend per ordinary share 10.28 11.46 17.07 41.38 20.83
% of turnover Operating profit 5.24 5.51 5.49 5.59 4.62 Profit before taxation 4.85 5.36 5.30 5.57 4.51 Profit after taxation 3.57 3.91 3.84 3.88 3.16
Retail portfolio Size 000s sq ft (net sales area) 0–5 12 3 – – – 5–15 64 65 45 42 13 15–25 135 135 137 141 135 25–40 239 228 213 199 190 40+ 48 44 44 43 44 Total number of stores 498 475 439 425 382 Petrol filling stations 312 300 296 293 287 Total sales area (000s sq ft) 13,421 12,904 12,261 11,867 11,131 Total sales area excluding convenience (000s sq ft) 13,383 12,894 12,261 11,867 11,131 Average store size (000s sq ft)3 26.9 27.4 27.9 28.5 29.1 Average sales area (000s sq ft)2 13,396 12,456 11,959 11,452 11,061 Total supermarket takings ex petrol (gross) £m3 14,875 14,585 13,916 13,241 12,180 Average takings per sq ft per week (£)3 21.62 22.52 22.38 22.24 21.41 Average takings per store per week3 591 618 624 632 617 Average number of customers per store per week3 23,905 25,083 25,583 25,932 25,928 Average take per customer (£)3 24.73 24.62 24.40 24.90 23.86
Employees Full time 56,177 57,169 58,287 55,703 50,934 Part time 72,528 74,038 73,787 78,041 73,596 Total 128,705 131,207 132,074 133,743 124,530 Full time equivalent 91,760 94,114 95,181 94,724 89,855
Average per FTE employee: Turnover (£000s) 197 188 173 163 162 Operating profit (£) 10,342 10,339 9,498 8,6151 7,472 Employee costs (£) 21,327 19,530 19,311 18,021 17,996
1 Before pensions credit. 2 Includes sales area of divested stores. 3 Excludes convenience.
The impact of week 53 in the period ended 3 February 2013 was to increase turnover by £328m and increase profit before taxation by £11m.
110 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Performance and strategy review Governance Financial statements Investor relations and financial calendar
Financial calendar 2013/14 Annual General Meeting Financial events and dividends The AGM will be held on Thursday 13 June 2013 at Wm Morrison Supermarkets PLC Head Office, Gain Lane, Bradford BD3 7DL. Quarterly management statement 9 May 2013 Final dividend record date 17 May 2013 A separate notice convening the meeting is sent to shareholders, Annual General Meeting 13 Jun 2013 which includes an explanation of the items of special business to Final dividend payment date 19 Jun 2013 be considered at the meeting. Half year end 4 Aug 2013 Dividend reinvestment plan Interim results announcement 12 Sep 2013 The Company has a dividend reinvestment plan which allows Interim dividend record date 4 Oct 2013 shareholders to reinvest their cash dividends in the Company’s Interim dividend payment date 11 Nov 2013 shares bought in the market through a specifically arranged share Quarterly management statement 7 Nov 2013 dealing service. Full details of the plan and its charges, together with mandate forms, are available from the Registrars. Financial year end 2 Feb 2014
Company Secretary Morrisons website Mark Amsden Shareholders are encouraged to visit our website, www.morrisons.co.uk, to obtain information on Company history, Registered office stores and services, latest offers, press information and a local Wm Morrison Supermarkets PLC store finder. Hilmore House Gain Lane Share price information Bradford The investor information section of our website provides our BD3 7DL current and historical share price data and other share price Telephone: 0845 611 5000 tools. Share price information can also be found in the financial www.morrisons.co.uk press and the Cityline service operated by the Financial Times. Telephone: 0906 843 3545. Investor relations Telephone: 0845 611 5710 Online reports and accounts Email: [email protected] Our annual and interim Group financial statements are available to download from the website along with Corporate Corporate responsibility enquiries Responsibility reports and other financial announcements. Telephone: 0845 611 5000 The 2012/13 annual report is also available to view in HTML format at www.morrisons.co.uk/corporate/ar2013.
The information in the annual report and financial statements, Annual review and summary financial statements, and the Interim reports is exactly the same as in the printed version.
Environmental matters Our environmental footprint is taken very seriously. In the production of the 2012/13 annual report, we have contributed to the reduction in environmental damage in the following ways:
a) Website Shareholders receive notification of the availability of the results to view or download on the Group’s website, www.morrisons.co.uk/corporate, unless they have elected to receive a printed version of the results.
Shareholders are encouraged to view the report on the website which is exactly the same as the printed version, but using the internet has clear advantages such as lowering costs and reducing the environmental impact.
b) Recycled paper This document has been printed on recycled paper that is manufactured in mills with ISO 14001 accreditation from 100% recycled fibre. It is totally chlorine free and is an NAPM certified recycled product.
111 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Financial statements Annual report and financial statements 2012/13
Investor relations and financial calendar – continued
Registrars and shareholding enquiries Auditor Administrative enquiries about the holding of Morrisons shares, KPMG Audit Plc such as change of address, change of ownership, dividend 1 The Embankment payments and the dividend reinvestment plan should be Neville Street directed to: Leeds LS1 4DW
Capita Registrars Stockbrokers The Registry Jefferies Hoare Govett 34 Beckenham Road Vintners Place Beckenham 68 Upper Thames Street Kent BR3 4TU London EC4V 33J
Telephone: 0871 664 0300 Bank of America Merrill Lynch Overseas: +44 208 639 3399 Merrill Lynch Financial Centre Calls cost 10p per minute plus network extras. 2 King Edward Street London EC1A 1HQ www.capitaregistrars.com Investment bankers Solicitors NM Rothschild & Sons Limited Gordons LLP 1 King William Street Riverside West London EC4N 7AR Whitehall Road Leeds LS1 4AW Credit Suisse Securities (Europe) Limited Ashurst LLP One Cabot Square Broadwalk House London E14 4QJ 5 Appold Street London EC2A 2HA
Wragge & Co LLP 55 Colmore Row Birmingham B3 2AS
Shareholder information The number of shareholders at 3 February 2013 was 48,082 (2012: 46,410) and the number of shares in issue was 2,346,567,871 (2012: 2,532,312,110).
Analysis by shareholder Number of holders % holders Balances at 3 Feb 2013 % capital Private shareholder 41,322 85.94 270,452,415 11.52 Nominee companies 6,037 12.56 2,025,736,920 86.33 Deceased accounts 311 0.65 949,765 0.04 Limited companies 205 0.43 5,532,695 0.23 Other institutions 70 0.14 8,171,052 0.35 Bank and bank nominees 78 0.16 32,351,279 1.38 Investment trusts 24 0.05 130,404 0.01 Pension funds 24 0.05 3,177,200 0.14 Family interests 6 0.01 8,433 0.00 Insurance companies 5 0.01 57,708 0.00
Analysis by shareholder Number of holders % holders Balances at 3 Feb 2013 % capital 1–1,000 25,187 52.38 11,127,666 0.47 1,001–10,000 20,270 42.16 59,865,047 2.55 10,001–1,000,000 2,402 5.00 213,942,209 9.12 Over 1,000,000 223 0.46 2,061,632,949 87.86
112 WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 Compiled by Wm Morrison Supermarkets PLC Hilmore House, Gain Lane Bradford BD3 7DL
Design Salterbaxter www.salterbaxter.com Telephone: 020 7229 5720
The annual report and financial statements, the annual review and summary financial statements in both paper and HTML format, and the Corporate responsibility review were designed and produced by Salterbaxter.
Photography Richard Moran Oliver Wright
Printing Pureprint Paper stock: This report is printed on Amadeus Offset uncoated, a 100% recycled paper. Amadeus Offset is manufactured to the certified environmental management system ISO 14001. WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825
Annual report and financial statements 2012/13 Wm Morrison Supermarkets PLC WorldReginfo - 07349d63-9e88-4d10-9a41-36cf478c6825 - WorldReginfo
and follow the investor eComms link. Morrisons About willYou find information about the Group, its operations, strategy and structure, and past financial information. Shareholder information Shareholder Other relevant shareholder information is available, for example share price history, dividends, financial calendar and AGM minutes. communications Electronic Electronic communications (eComms) is the fastest and most environmentally with communicate to way friendly our shareholders. Instead of receiving paper copies of financialthe and annual interim results, notices of shareholder meetings and other shareholder documents, you will receive an email let to you know this information is available on our website. Visiting our website obtain to our results reduces our environmental impact by saving on paper and also reduces our print and distribution costs. Sign up eComms to on our website at www.morrisons.co.uk/corporate
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14 March14 are available. 2013
n viewing only the parts you want to, at www.morrisons.co.uk/corporate/ar2013 Webcasts Webcasts of the Directors delivering the o Corporate Our corporate website, www.morrisons.co.uk/corporate has the following sections. Morrisons with Work Career opportunities and information about working for Morrisons. For our dedicated recruitment website, go to www.iwantafreshstart.com Media centre Latest releases about the growing estate of Morrisons, along with promotions and product news. responsibility Corporate Here you can find out about our ethos, responsibility corporate including how we take good care of our environment, society and how we go about business. www.morrisons.co.uk/cr Investors User-friendly Presentations, announcements and financial reports can be quickly and easily downloaded or viewed on-screen as PDFs. can You easily navigate around the report annual and financial statements
Our suppliers Our Read aboutwhat food is produced fresh near your home and explore our seasonal calendar see to which foods are fresh at different times of the year. Let’s Grow Information about our Let’s Grow scheme, including how register, to facts, how it works and teaching resources. Kiddicare See our range of baby andtoddler products and order online at www.kiddicare.com
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Market Street Market More about our unique in-store offering, along with video presentations of where our food comes from and how buy, to cook and present it. can You now find nutrition information for Market Street on our website. Food and drink Information about our food ranges, healthy eating and mouth-watering recipes along with ideas of what drink goes well with each recipe. life Family From entertainment bringing to up baby and looking after your pets. View our current and archived bi-monthly magazine and read our handy health information for the whole family. • Sign Telephone: www.morrisons.co.uk website: our Visit Wm Morrison Supermarkets PLC Supermarkets Morrison Wm Hilmore House, Gain Lane Bradford • Specific • Press Consumer Our website, www.morrisons.co.uk allows you learn to more about Morrisons and our offering. Offers • Latest Information at your fingertips your at Information