Annual Report and Financial Statements 2016 Our values make us different There for our customers Colleagues making the difference Great products J Sainsbury plc and services Annual Report and Financial at fair prices Statements We know 2015 our customers better than anyone else Our vision To be the most trusted retailer where people love to work and shop. Our goal To make all our customers’ lives easier every day by offering great quality and service at fair prices. How we do it Our strategy is designed to address a changing marketplace and the continuing shifts in customer shopping patterns. It is based on five key pillars: — We know our customers better than anyone else — Great products and services at fair prices — There for our customers — Colleagues making the difference — Our values make us different Read more in our Strategic Report. Strategic Report Contents Financial Strategic Report 1 Financial highlights highlights 2 Business model 4 Chairman’s letter 6 Chief Executive’s letter 9 Our Business Strategy 10 Financial KPIs 12 Market context 14 We know our customers better than anyone else 16 Great products and services at fair prices 20 There for our customers 24 Colleagues making the difference 16.5% £587m 26 Our values make us different Market share Underlying profit 30 KPIs: Our values make us different maintained before tax 36 Our principal risks and uncertainties Down 13.8% 40 Financial Review Governance Report 48 Board of Directors 50 Operating Board 52 Corporate Governance £548m 56 Nomination Committee 58 Corporate Responsibility and Statutory profit Sustainability Committee before tax 61 Audit Committee +0.4% 66 Directors’ Remuneration Report 80 Other disclosures Total retail sales 82 Statement of Directors’ responsibilities (including VAT, excluding fuel) Financial Statements 83 Independent auditors’ report to the members of J Sainsbury plc -0.9% 88 Group income statement Like-for-like 89 Group statement of retail sales comprehensive income (including VAT, excluding fuel) 90 Balance sheets 23.9p 91 Cash flow statements Basic earnings 92 Group statement of changes in equity 12.1p per share 94 Company statement of changes in equity Full-year dividend 95 Notes to the financial statements per share 151 Five year financial record Down 8.3% 152 Additional shareholder information 155 Glossary 8.8% Return on capital employed 24.2p Down 88 bps Underlying basic earnings per share Down 8.3% Find out more at j-sainsbury.co.uk/ar16 1 Strategic Report Business model How we are organised to grow value for our shareholders Colleagues 27,805 colleagues making the with over difference 15 years’ service Suppliers Logistics Great products and sourcing and services at fair prices Around 2,000 Over 15,000 food suppliers 23 depots own-brand and 1,000 products non-food suppliers 1.2 million There for our store customers deliveries this year 773 Convenience stores 5 International sourcing offices Our values make 1 2 3 us different Living Sourcing with Respect for our healthier integrity environment lives 2 3 Strategic Report Name Badge 27,805 We know our colleagues with over customers 15 years’ 8 162,715 better than service training colleges colleagues anyone else for our colleagues 207 Travel Money 1,646 bureaux ATMs 439 stores 25.5 million sell clothing transactions and general per week merchandise Around 4,000 people contacted 601 online each Supermarkets week through ‘Trolley Talk’ Over 247,000 online orders on average per week Nectar Over 15 million 4 5 Nectar card Making a positive A great place customers difference to our to work community 2 3 Strategic Report Delivery against Strategy OUR VISION We know our customers better than anyone else. We will be there whenever and wherever they need us, offering great products and services at fair prices. Our colleagues make the difference, our Our strategyvalues make us is different. built on the fundamental strengths of our business of great heritage, quality food at fair prices and Maintained strong values market share at DAVID TYLER SAINSBURY’S CHAIRMAN 16.5% 12.1p Proposed full-year dividend, down 8.3% £681m Underlying Adaptingprofit before tax to a changing marketplace 4 Strategic Report Chairman’s Letter Your Board remains focused on building shareholder value and we are confident that by following our strategy, driving efficiencies and managing costs carefully, we will achieve this. Our strategy is built on the fundamental Accelerating our strategy also apply to around 40,000 colleagues under strengths of our business: our great The most significant event this year has been the age of 25. In addition, nearly 126,000 heritage, quality food at fair prices and your Board’s proposal to acquire Home Retail colleagues and management will share a strong values. It recognises that customers Group plc, owners of the Argos retail chain. bonus of around £100 million in recognition will increasingly shop through multiple The combination of Argos with Sainsbury’s of their hard work during the year. channels and according to their varying will create a leading food and non-food At our AGM on 6 July 2016, John McAdam, needs. Our business will continue to adapt retailer. It provides us with an opportunity to Senior Independent Director, will step down to changing shopping needs, ensuring that accelerate our strategy, delivering compelling after ten years as a Non-Executive Director. we exceed customer expectations in a fast- revenue and cost synergies. We will create a I would like to thank John for his very valuable paced, digital world. multi-product, multi-channel proposition contribution to Sainsbury’s, in particular for The UK retail sector is evolving rapidly in line with fast delivery networks which will be very his counsel in his role as Senior Independent with changing consumer behaviour. People attractive to customers. We are pleased that Director. Susan Rice, who has been a valued are shopping more often and are buying the Board of Home Retail Group plc has member of the Board since 2013, will succeed fewer items on a typical trip. Furthermore, recommended our offer to its shareholders, John as Senior Independent Director. customers are seeking greater choice, speed and our focus is now to obtain the necessary Brian Cassin, CEO of global information services and convenience, as well as high levels regulatory clearances and prepare for the company Experian plc, joined the Board as a of service, however they choose to shop. future integration of our two businesses. Non-Executive Director on 1 April 2016 and The grocery market continues to experience will be a member of the Audit Committee price competition and food price deflation, Dividend and the Nomination Committee. Brian brings and the growth of discount retailers and Your Board remains focused on building to us his experience of running a FTSE 40 new online entrants to the market have shareholder value and we are confident that company and of big data and analytics – changed the competitive landscape. by following our strategy, driving efficiencies topics of key importance to Sainsbury’s. In these conditions, it is clear that grocery and managing costs carefully, we will achieve retailers must adapt to stay ahead. this. We are committed to paying an affordable Outlook dividend to our shareholders and have fixed Like-for-like sales have declined this year as dividend cover at 2.0 times. We are therefore The UK grocery market will remain a result of pricing pressures and food price recommending a final dividend of 8.1 pence competitive. The growth of the discount deflation. Underlying profit before tax was per share this year, making the proposed retailers, food price deflation, ongoing down nearly 14 per cent to £587 million, full-year dividend 12.1 pence per share. price competition and the continuing underlying basic earnings per share was pressure on consumer expenditure look down just over eight per cent to 24.2 pence Management and colleagues set to continue throughout 2016. However, and return on capital employed declined 88 Mike Coupe leads a highly talented and we have a business that is well-placed to basis points year-on-year to 8.8 per cent. experienced management team and we have navigate this tough trading climate and we However, the strategy we outlined 18 months over 162,000 colleagues. The commitment, have significant opportunities to grow our ago is working and we are currently the skills and customer service standards our business and accelerate our strategy. best-performing of our main supermarket colleagues deliver make the difference. peers, growing volumes and maintaining market share. In August, we announced a four per cent pay increase for 137,000 colleagues who work in our stores across the country. Our David Tyler new standard hourly rate is well above the Chairman Government’s National Living Wage and will 5 Strategic Report Our values underpin all that we do We have won a significant number of customer service awards this year, testament to the fact that our colleagues really do make a difference MIKE COUPE SAINSBURY’S CEO Our vision To be the most trusted retailer where people love to work and shop £587m Underlying profit before tax Down 13.8% Volume growthand transaction 6 Strategic Report Chief Executive’s Letter We have made good progress this year, demonstrating that the strategy we outlined to you 18 months ago is delivering results. We outperformed our main supermarket peers and maintained our market share in a competitive environment. Our vision is to be the most trusted retailer Strategic progress This year we have simplified many of our where people love to work and shop and it is Our vision and the five pillars of our ranges, to focus on selling the products we our goal to make our customers’ lives easier.