Annual Report and Financial Statements 2018 Sainsbury’S Group Helping Customers Live Well for Less Has Been at the Heart of What We Do Since 1869

Live Well
For Less

Annual Report and Financial Statements 2018

Sainsbury’s Group

Helping customers live well for less has been at the heart of what we do since 1869.

We employ over 185,000 colleagues who work hard every day to make our customers’ lives easier and to provide them with great products, quality and service whenever and wherever it is convenient to access them.

Food

Our strategic focus is to help

608

our customers live well for less.
Sainsbury’s supermarkets
We offer customers quality

and convenience as well as great value. Our distinctive

102

ranges and innovative partnerships differentiate our offer. More customers are shopping with us than ever before and our share of customer transactions has increased. stores offering Same Day delivery to 40 per cent of the UK population

See more on page 12

General Merchandise

191

and Clothing

Argos stores in Sainsbury’s

We are one of the largest general merchandise and clothing supermarkets retailers in the UK, offering a wide range of products across our Argos, Sainsbury’s Home and Habitat brands, in stores and online. We are a market leader in toys, electricals and technology and Tu clothing offers high street style at supermarket prices.

16

Habitat stores and Click & Collect available

in over 2,300 locations
See more on page 14

Financial Services

Financial Services are an integral part of our business. Sainsbury’s Bank offers

3.9m

Active customers at Sainsbury’s Bank and Argos Financial Services accessible products such as credit cards, insurance, travel money and personal loans that reward loyalty. Our new mortgage offer has performed well and together, Sainsbury’s Bank and Argos Financial Services have 3.9 million

£69m

Sainsbury’s Bank profits delivered

active customers.
See more on page 16

Strategic Report

01

Performance highlights

01

Contents page

02 Chairman’s letter 04 Market context 06 Our business model 07 Our business strategy 08 Chief Executive’s Q&A

£31,735m £589m

10

Proposed combination of J Sainsbury plc

and Asda Group Limited

Group sales (inc VAT) up nine per cent Underlying profit before tax

12

Priority 1: Further enhance our

differentiated food offer
14 Priority 2: Grow General Merchandise and Clothing and deliver synergies
16

17 18
Priority 3: Diversify and grow Sainsbury’s Bank Priority 4: Continue cost savings and maintain balance sheet strength Our values make us different

1.3%

10.2p

Group like-for-like sales

Proposed full-year dividend

28 Our KPIs 30 Our principal risks and uncertainties 36 Financial Review

Governance Report

20.4p 13.3p

42 Board of Directors

Underlying basic earnings per share
Basic earnings per share

44 Operating Board 46 Corporate Governance 54 Nomination Committee Report 56 Audit Committee Report 64 Corporate Responsibility and
Sustainability Committee Report
66 Annual Statement from the
Remuneration Committee Chair
68 Summary of 2017/18 remuneration decisions 69 Summary of remuneration for 2018/19 70 Annual Report on Remuneration

£409m 8.4%

Statutory profit before tax

Return on capital employed

81

Directors’ Remuneration Policy

84 Additional statutory information

Financial Statements

£35m 83%

88 Statement of Directors’ responsibilities 89 Independent auditor’s report to the members of J Sainsbury plc

generated for charities,

of the packaging on our own-brand

communities and good causes

products is classed as ‘widely recycled’

94 Consolidated income statement 95 Consolidated statement of comprehensive income
96 Consolidated balance sheet 97 Consolidated cash flow statement 98 Consolidated statement of changes in equity 99 Notes to the consolidated financial statements

Read more about our financial KPIs on page 28

169 Five year financial record 170 Company balance sheet 171 Company statement of changes in equity 172 Notes to the Company financial statements 177 Additional shareholder information 181 Alternative performance measures 184 Glossary

Find out more at

www.j-sainsbury.co.uk/ar18

02

Chairman’s letter

In a competitive market, underlying profits before tax have returned to growth, increasing to £589 million. Encouragingly, although underlying basic earnings per share were down for the year as a whole, we achieved a rise of eight per cent in the second half.”

The combination with Asda offers a significant opportunity for customers, suppliers, colleagues and shareholders to benefit from a structurally stronger business.

David Tyler

Chairman

2017/18 highlights

10.2p

8.4%

Proposed full-year dividend
Return on capital employed

20.4p £432m

Underlying basic earnings per share
Free cash flow

In a retail marketplace that remains as competitive as ever, we believe we have the right strategy in place, driven by a skilled and experienced leadership team and supported by highly engaged and committed colleagues.

J Sainsbury plc Annual Report 2018

03

Strategy

Dividend

Board changes

The Board’s focus this year has been on driving shareholder value in a retail sector which continues to undergo significant change.
We are committed to paying an affordable dividend to our shareholders, fixing dividend
Mike Coupe leads a senior management team with deep experience and talent. cover at two times earnings. We are therefore In January, Phil Jordan took on the new recommending a final dividend of 7.1 pence per share, bringing the proposed full-year dividend to 10.2 pence per share which is the same as last year. role of Group Chief Information Officer and joined the Operating Board. Phil brings great knowledge to Sainsbury’s from previous senior roles at Telefonica and Vodafone UK and Ireland.
At our results presentation on 30 April we announced that we have agreed with Walmart Inc. to combine J Sainsbury plc and Asda Group Limited to create a dynamic new UK retail business. Asda is valued at approximately £7.3 billion¹on a cash-free, debt-free and pension-free basis. J Sainsbury plc would acquire the business by a cash payment of £2.975 billion and by issuing new shares to Walmart which would represent a 42 per cent share of the enlarged business. The Combined Business would be chaired by Sainsbury’s Chairman and led by Sainsbury’s CEO and CFO. The Asda CEO would join the Group Operating Board of the Combined Business and two Walmart representatives would join the J Sainsbury plc Board.

Business in the year

Following Mary Harris’s departure from the Board at the 2017 AGM, we were pleased to announce the appointment of Jo Harlow to the Board as a Non-Executive Director. Jo brings to the Board a wealth of experience in consumer-facing businesses and in the telecoms and technology industry, both in the UK and internationally, having held senior sales and marketing positions at P&G and Reebok. She has already made a strong contribution to the Board since she joined us in September 2017.
The business made encouraging progress in the last year. Food transactions are growing ahead of the market, with a differentiated, quality offer and competitive pricing on everyday essential items. We have exceeded our three-year cost savings target over the period 2015 to 2018 by £40 million, bringing the total of savings to £540 million. General Merchandise and Clothing continue to outperform in a challenging market and we are ahead of our schedule to open Argos stores in Sainsbury’s supermarkets, achieving synergies sooner than we expected.
Now that I have been Chairman for more

than eight years, a search process has begun, led by Dame Susan Rice and the Nomination Committee, to find my successor as NonExecutive Chairman.
We believe that the combination of these two strong businesses, with enhanced scale and a strengthened balance sheet, would bring great benefits for our customers, our colleagues and our suppliers, while creating value for shareholders. It will lead to significant synergies, enabling Sainsbury’s, Asda and Argos to invest in the areas that matter most to customers – price, quality and developing more flexible ways to shop. The Combined Business would unite two of the most talented teams in retail and benefit from the support of Walmart as a major shareholder and strategic partner.
As a business, we are focused on the increasingly important role that technology and the responsible use of data play in supporting great customer service. We have invested in developing our technology and digital capabilities and the earnings accretive acquisition of the Nectar loyalty card scheme in February supports our strategy of knowing our customers better than anyone else.

Outlook

In a retail marketplace that remains as competitive as ever, we believe we have the right strategy in place, driven by a skilled and experienced leadership team and supported by highly engaged and committed colleagues. The combination with Asda offers a significant opportunity for customers, suppliers, colleagues and shareholders to benefit from a structurally stronger business with the ability to adapt and grow.
This has been a year of innovation across the Group. We have proposed changes to retail management structures and colleague roles in our stores that will make us more efficient and improve our customer service. We have also proposed a market-leading pay award for Sainsbury’s colleagues, along with revised terms and conditions. Our colleagues provide outstanding service to our customers every day and I would like to thank them for their hard work and commitment. As a result of their excellent work, we have been awarded The Grocer Gold Awards for both Service and Availability for the past five years.
Our acquisition in 2016 of Argos has enabled us to offer more choice and convenience to customers in a changing industry landscape; the combination with Asda would create a more resilient Group providing an even more compelling offer in the face of this rapid change. Through our acquisition of Argos we have a strong track record of delivering synergy benefits and we are confident that the combination of Sainsbury’s and Asda will create a further £500 million of net synergies, post reinvestment in our customer offer. The Board believes the combination would create long-term value for shareholders and the opportunity for double digit earnings per share accretion by the second full-year post completion.

David Tyler

Chairman
Sainsbury’s Bank showed profit growth, primarily reflecting the full consolidation of Argos Financial Services. We will take a cautious approach to unsecured lending going forward which, together with the impact of new accounting standards and the cost of the external capital we raised in November 2017, will impact Sainsbury’s Bank profits in the short term. The Board remains confident

Results

In a competitive market, underlying profit before tax has returned to growth, increasing in the Bank’s potential to generate growth to £589 million. Underlying basic earnings per and healthy returns in the medium term. share were down 6.4 per cent to 20.4 pence per share.

1

Based on the closing price of Sainsbury’s shares of 269.8 pence

on 27 April 2018.

04

UK average weekly earnings growth vs inﬂation

Average weekly earnings (%) growth

Market context

4% 3% 2% 1% 0% -1%

2013

2014

2015

2016

2017

2018

Average annual weekly earnings

CPI inﬂation

The market

Source: ONS

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

BRC total retail market year-on-year growth, 3 month rolling

5.5% 4.5% 3.5% 2.5% 1.5%

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

0.5%
-0.5% -1.5%

Shopping habits and retail trends

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

2015

Food

2016

2017

2018

Non-food

Source: BRC

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

Consumer conﬁdence

7% 6% 5% 4% 3% 2% 1%
10
50-5 -10 -15

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

0%

2014

2015

2016

2017

2018

New retail sales 3m (% change)

GfK Consumer Conﬁdence

Source: BRC & GfK

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

Grocery market channel share

100%
80% 60% 40% 20%
0%

2017

2020F

Convenience

2023F

Supermarket

Discount

Online

Other

Source: Company estimates

05

Sainsbury’s response to a changing marketplace

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

Sainsbury’s Grocery, Convenience and Groceries Online YOY sales growth

FY2017/18 8% 7% 6% 5% 4% 3% 2% 1% 0%
7.5%
6.8%

2.3%

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

Grocery

Convenience

Groceries Online

Argos channel shift to online

% of sales

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

100% 80% 60% 40% 20% 0%

48%

54%

59%

digital

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

FY2016

Check and

FY2017

FY2018

Walk-in

Internet

Fast Track

delivery

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

reserve

home delivery

collection

06

Our business model

Creates value for our shareholders, customers and colleagues, both now and in the future.

Supply chain

We source products from over 70 countries, according to the ability of suppliers to meet our quality, safety and ethical standards. We invest in British farming through 2,200 members of our farmer and grower Development Groups and we are involved in 11 research projects to improve agricultural productivity and reduce the environmental impact of British farming.

a

Logistics

Seven days a week, we deliver fresh food, groceries, general merchandise and clothing from suppliers around the world, via 33 distribution centres, to our store and online customers, meeting their requirements for flexible, convenient shopping. Argos’s unique Hub and Spoke logistics network enables us to fulfil Fast Track Same Day home deliveries and store collections.

Brand + Trust
=
Customer Loyalty