Live Well for Less

Live Well For Less Annual Report and Financial Statements 2019 Sainsbury’s Group at a glance Helping customers live well for less has been at the heart of what we do for 150 years, since John James and Mary Ann Sainsbury opened the doors of our first shop in Drury Lane in 1869. We employ 178,000 colleagues who work hard every day to make our customers’ lives easier and provide them with great products, quality and service. Read more about our business model on page 08 Read more about our business strategy on page 09 Food 2.2% We are committed to helping our customers Growth in Taste the Difference volumes live well for less. We offer customers quality and convenience as well as great value. Our distinctive ranges and innovative partnerships differentiate our offer. Customers consistently rate the quality of our food as market-leading and continue to switch to us from more premium competitors. 57% Of UK households benefit from Same Day delivery See more on page 10 General Merchandise 281 and Clothing Argos stores in We are one of the largest general merchandise and clothing retailers in the UK, offering a wide range of products across Argos, Sainsbury’s Home and Habitat, in stores and online. We are a market leader in toys, electricals and technology and Tu clothing offers high street style at supermarket prices. Sainsbury’s supermarkets 1bn+ Visits to the Argos website every year and sales generated through mobile devices passed £2 billion for the first time See more on page 12 Financial Services 2m+ Financial Services are an integral part of our business. Sainsbury’s Bank offers accessible products such as credit cards, insurance, travel money and personal loans that reward loyalty to the Group. Sainsbury’s Bank and Argos Financial Services each have over two million active customers. Active customers at Sainsbury’s Bank and two million active customers at Argos Financial Services 45% Of Argos Card balance payments made via our app last year See more on page 14 Cover images ©The Sainsbury Archive, Museum of London Docklands Strategic Report 01 Performance highlights Strategic Report <ul style="display: flex;"><li style="flex:1">01 </li><li style="flex:1">Contents page </li></ul>02 Chairman’s letter 04 Chief Executive’s Q&A 06 Market context 08 Our business model 09 Our business strategy £32,412m £635m Group sales (inc VAT), up 2.1 per cent Underlying profit before tax, up 7.8 per cent <ul style="display: flex;"><li style="flex:1">10 </li><li style="flex:1">Priority 1: Differentiate food and grocery </li></ul>through quality, value and service Priority 2: Grow General Merchandise and Clothing 12 14 Priority 3: Offer our customers easy access to financial services <ul style="display: flex;"><li style="flex:1">(0.2)% </li><li style="flex:1">11.0p </li></ul><ul style="display: flex;"><li style="flex:1">Group like-for-like sales </li><li style="flex:1">Proposed full-year dividend, </li></ul>up 7.8 per cent <ul style="display: flex;"><li style="flex:1">15 </li><li style="flex:1">Priority 4: Generate efficiencies to invest </li></ul>in our digital future 17 18 Priority 5: Strengthen the balance sheet Our values make us different 28 Our KPIs 30 Our principal risks and uncertainties 38 Financial Review <ul style="display: flex;"><li style="flex:1">22.0p </li><li style="flex:1">9.1p </li></ul>Underlying basic earnings per share, up 7.8 per cent Basic earnings per share, down 31.6 per cent Governance Report 44 Board of Directors 46 Operating Board 48 Corporate Governance 58 Nomination Committee Report 60 Audit Committee Report 68 Corporate Responsibility and Sustainability Committee Report 70 Annual Statement from the Remuneration Committee Chair 74 Annual Report on Remuneration 86 Additional statutory information <ul style="display: flex;"><li style="flex:1">£239m </li><li style="flex:1">8.5% </li></ul>Statutory profit before tax, down 41.6 per cent Return on capital employed <ul style="display: flex;"><li style="flex:1">94% </li><li style="flex:1">35% </li></ul>Of stores partnered with local charities, up from 91 per cent Absolute reduction in carbon emissions against our 2005 baseline, achieving our 2020 target early Financial Statements 90 Statement of Directors’ Responsibilities <ul style="display: flex;"><li style="flex:1">91 </li><li style="flex:1">Independent auditor’s report </li></ul>to the members of J Sainsbury plc 96 Consolidated Financial Statements 101 Notes to the Consolidated Financial Statements 106 Income Statement Notes 118 Financial Position Notes 150 Cash Flow Notes Read more about our financial KPIs on page 28 153 Employee Remuneration Notes 163 Additional Disclosures 173 Company Financial Statements 175 Notes to the Company Financial Statements 181 Additional shareholder information 185 Alternative performance measures 188 Glossary Non-financial information statement We are pleased to set out below where you can find information relating to non-financial matters in our Strategic Report, as required under sections 414CA and 414CB of the Companies Act 2006. Where to find the information in the <ul style="display: flex;"><li style="flex:1">Annual Report </li><li style="flex:1">Matter </li><li style="flex:1">Page </li></ul>22 and 23 24 and 25 26 and 27 20 <ul style="display: flex;"><li style="flex:1">Environmental matters </li><li style="flex:1">Sourcing with integrity </li></ul>Respect for our environment Great place to work Living healthier lives Colleagues Social matters Making a positive difference to our community 21 Sourcing with integrity Sourcing with integrity Great place to work Great place to work 22 and 23 22 and 23 26 and 27 26 Human rights Anti-corruption and anti-bribery Reference to our policies, due diligence processes and information on how we are performing on various measures in these areas are contained throughout the Strategic Report. Information on our principal risks and uncertainties can be found on pages 30 to 36, information on our non-financial key performance indicators can be found on page 29 and a description of our business model can be found on page 08. Find out more at <a href="/goto?url=http://www.about.sainsburys.co.uk/ar2019" target="_blank">www.about.sainsburys.co.uk/ar2019 </a>02 <ul style="display: flex;"><li style="flex:1">Strategic Report </li><li style="flex:1">J Sainsbury plc Annual Report 2019 </li></ul>2018/19 highlights Chairman’s letter <ul style="display: flex;"><li style="flex:1">11.0p </li><li style="flex:1">8.5% </li></ul>Chairman Martin Scicluna sets out how we plan to deliver on our strategy and grow value for shareholders. <ul style="display: flex;"><li style="flex:1">Proposed full-year dividend </li><li style="flex:1">Return on capital employed </li></ul><ul style="display: flex;"><li style="flex:1">22.0p </li><li style="flex:1">£461m </li></ul><ul style="display: flex;"><li style="flex:1">Underlying basic </li><li style="flex:1">Free cash flow </li></ul>earnings per share I joined the Sainsbury’s Board in the knowledge that it is a highly respected, values-driven business, known for quality, value and customer service. Sainsbury’s has a long and distinguished heritage and I’m delighted to have become Chairman during the Company’s 150th anniversary year. The retail market remains highly competitive. We have the right strategy in place and a clear plan for the year ahead. Combined with committed, hard-working colleagues led by a talented, experienced leadership team, I believe we are well placed for the future.” Martin Scicluna Chairman <ul style="display: flex;"><li style="flex:1">Strategic Report </li><li style="flex:1">J Sainsbury plc Annual Report 2019 </li></ul>03 <ul style="display: flex;"><li style="flex:1">We have an excellent store estate in great </li><li style="flex:1">Our values are integral to our business and </li></ul>I am delighted that we are celebrating our 150th year by introducing a volunteering Joining the Board locations and will invest in over 800 I joined Sainsbury’s Board as Chairman Designate in November 2018 and took over as Chairman of Sainsbury’s Group in March 2019. I did so in the knowledge that I was joining a highly respected, values-driven business, known for quality, value and customer service. Sainsbury’s has a long and distinguished heritage and I’m delighted to have become Chairman during the Company’s 150th anniversary year. supermarkets and convenience stores this year, rolling out our beauty concept, wellness scheme that builds on our heritage, enabling aisles, food to go and integrated general merchandise and clothing sections. our colleagues to make a real difference in their local communities. £4.7 billion of our sales are generated through our digital channels and we will invest more in technology to make shopping across Sainsbury’s, Argos and Sainsbury’s Bank as easy and seamless as possible. Integrating Nectar more fully into the business also supports our strategy of knowing our customers better than anyone else. Board changes I would like to thank David Tyler for his significant contribution to the business and for his leadership of the Board during his time as Chairman. I am also personally grateful for the smooth transition he ensured for me when I joined the Board as Chairman Designate. I look forward to leading our strong and diverse Board, with its mix of skills, gender and ethnicity. I have spent my first few months learning as much as I can about the business by visiting stores, distribution centres and store support centres around the country. In talking to colleagues at all levels of the business, as well as to suppliers and other key industry stakeholders, I have been struck by a number of things. We are delivering on our strategic objective to grow the proportion of secured lending on Sainsbury’s Bank’s balance sheet and to reduce regulatory capital requirements. We appointed Clodagh Moriarty to the Operating Board in June to lead the Group’s digital strategy, ensuring customers have an integrated and seamless digital experience across Sainsbury’s, Argos, Sainsbury’s Bank and Nectar. Firstly, that in Sainsbury’s, Argos and Sainsbury’s Bank, we have three of the most trusted brands in UK retail. We offer customers strong, distinctive ranges of high quality food, clothing, general merchandise and financial services, available through convenient, well-established channels and with home delivery and Click & Collect. In a very competitive market, we have increased underlying profits to £635 million, growing underlying earnings per share by 7.8 per cent to 22.0 pence per share. Dividend In line with our policy of paying a dividend that is covered 2.0 times by underlying earnings, we propose to pay a final dividend of 7.9 pence per share, bringing our full-year dividend to 11.0 pence per share, an increase of 7.8 per cent. We have announced a number of steps we are taking to grow value for our shareholders. We will continue to strengthen our balance sheet and reduce net debt significantly and improve free cash flow over the next three years. I have also been hugely impressed by the enthusiasm and commitment of our colleagues, by their passion for our business and by their relentless focus on quality and customer service. Though the retail Outlook Business activity in the year Our customers continue to rate the quality of our food ahead of our competitors and we outperformed the market in our premium food ranges as well as in our growing convenience store and online grocery channels. We have successfully integrated Argos, which outperformed a highly competitive and promotional market this year and delivered £160 million of synergies nine months ahead of our original schedule. We have 281 Argos stores in our supermarkets, making shopping easy and convenient for our customers. Clothing sales declined in an extremely competitive market but full-price clothing sales increased after we removed one of our promotional events. The retail market remains highly competitive. We have the right strategy in place and a clear plan for the year ahead. Combined with committed, hard-working colleagues led by a talented, experienced leadership team, I believe we are well placed for the future. environment has become fiercely competitive and fast moving, I believe that our strong management team, working under the leadership of Mike Coupe, will continue to enhance our strong business. This has been a big year of change across the business and I would like to thank Mike, the Operating Board and all of our colleagues for their hard work and commitment. Martin Scicluna Chairman Strategy In the current retail market, it is obvious that standing still is not an option. We must continue to adapt to market forces and meet the needs of our customers. We were, therefore, very disappointed by the Competition and Markets Authority’s decision on our proposed merger with Asda. We strongly believe that the deal would have benefited our customers and our business. Sainsbury’s Bank is well positioned in a competitive financial services market and its underlying operating profits were in line with our guidance, at £31 million. We will continue to grow our mortgage business, increase revenues and drive customer loyalty over the coming year. Since we changed the way we run Sainsbury’s stores last year, our colleagues have worked hard to improve store standards, service and availability for our customers. We have also reduced costs, which supports our drive to invest in making commodity products better value for our customers. Customers continue to rate us top for quality food and we are growing our premium ranges. Technology has enabled us to improve efficiency and customer service across the business. SmartShop – available in over 100 supermarkets – allows customers to scan their purchases using a hand-held device or their mobile phone and customers can use Pay@Browse in 162 Argos stores, enabling them to pay digitally, without queuing at a till. 04 <ul style="display: flex;"><li style="flex:1">Strategic Report </li><li style="flex:1">J Sainsbury plc Annual Report 2019 </li></ul>2018/19 highlights £635m £32,412m <ul style="display: flex;"><li style="flex:1">Underlying profit before tax </li><li style="flex:1">Group sales (inc VAT) </li></ul>Q&A £220m £222m <ul style="display: flex;"><li style="flex:1">Cost savings </li><li style="flex:1">Reduction in net debt </li></ul>As we celebrate our 150th anniversary, Group Chief Executive Officer Mike Coupe looks back on the year. When we opened our doors on Drury Lane in 1869, Mary Ann and John James Sainsbury promised customers ‘quality perfect, prices lower’. I’m proud to say that our focus on giving customers high quality food at good value remains as true today as it was 150 years ago. We have been delivering on our strategy for the past four and a half years and the last year in particular has been a big year of change for the business. Shopping habits continue to evolve and we are therefore updating our strategic priorities. We have set the business up for the long term and have a clear plan for the year ahead.” Mike Coupe Group Chief Executive Officer <ul style="display: flex;"><li style="flex:1">Strategic Report </li><li style="flex:1">J Sainsbury plc Annual Report 2019 </li></ul>05 With our experienced management team <ul style="display: flex;"><li style="flex:1">How would you sum up the </li><li style="flex:1">Are you pleased with the </li></ul>and talented colleagues, we are well placed to maximise the opportunities for growth and create value for our stakeholders. As we look to the next 150 years, our success will be rooted in knowing what our customers want and we will continue to strive to ensure that our colleagues reflect the great diversity of the communities we serve. We must also keep pace with our customers’ changing lives, so that shopping with us remains easy and convenient and new technology will play an important role in this. <ul style="display: flex;"><li style="flex:1">last year? </li><li style="flex:1">Group’s performance? </li></ul>We are committed to helping customers live well for less, so I was disappointed by the Competition and Markets Authority’s decision on our proposed merger with Asda, which would have enabled us to reduce the cost of living for millions of households through £1 billion of lower prices. I am pleased that we have increased underlying profits, reduced net debt and increased the dividend. In the context of a very competitive retail market, though Group like-for-like sales decreased by 0.2 per cent, we continued to deliver on our strategy, growing underlying profit before tax to £635 million, driven by a solid food performance and the Argos synergies we have delivered ahead of schedule. I remain confident in our strategy as a standalone business. We know what we need to do to respond to changing customer shopping habits and an increasing focus on value. Food remains at the heart of our business. Our strength and growth in premium, value-added ranges help us to invest in making our commodity ranges better value. In this highly competitive area, we know we have more to do to grow sales. Following the important structural changes we made in Sainsbury’s stores last year, we have made significant improvements to store standards in recent months, which remain a focus. Our Convenience and Groceries Online channels remain strong drivers of growth, with sales increases of 3.7 per cent and 6.9 per cent respectively. What is the Group’s focus for the year ahead? We have been delivering on our strategy for the past four and a half years and the last year in particular has been a big year of change for the business. Shopping habits continue to evolve and we are therefore updating our strategic priorities for the year ahead. We have achieved a lot this year and we know there is more to do. Some of the key achievements include completing the largest reorganisation in Sainsbury’s stores for more than a decade. This transformed the way we work by creating a more efficient and effective management structure. A single fair and consistent contract for all Sainsbury’s store colleagues gives us greater flexibility to ensure colleagues are always in the right place for our customers. In recognition of this, we increased base rates of pay to an industryleading £9.20 per hour, taking Sainsbury’s store colleagues’ total pay increase over the past four years to 30 per cent. Customers rate us first for food quality, but we know there is more to do to make our commodity products better value for customers and grow sales in those categories. We have completed the Sainsbury’s store transformation and made significant improvements to store standards in recent months and this will continue to be a focus this year, using our new customer feedback service, Lettuce Know, to inform store managers on how customers feel about shopping in their specific store in real time. We are investing significantly in our store estate this year – we trialled enhanced beauty ranges, wellness aisles and new concession partnerships last year and will be rolling these out to more stores this year. In total, we will invest in over 400 supermarkets this year. General Merchandise and Clothing delivered a solid performance, with Argos outperforming a highly competitive and promotional market. Having reduced the number of promotional events, our Tu clothing range outperformed a challenging market and increased full price sales. We completed the integration of Argos, delivering synergies of £160 million nine months ahead of our original schedule. We have 281 Argos stores in Sainsbury’s supermarkets, as we make better use of the space in our stores to enable customers to do more of their shopping easily and conveniently under one roof. Our focus on increasing efficiencies delivered overall cost savings of £220 million. We have reduced net debt by £222 million to £1,636 million and we are targeting a further reduction in net debt of at least £600 million in the next three years. We have strong cash generation with retail free cash flow of £461 million. In line with our affordable dividend policy, this year’s final dividend is 7.9 pence per share, bringing the full-year dividend to 11.0 pence per share, an increase of We continue to adapt to changing customer shopping habits. Our digital capability is increasingly important, both to support colleagues and improve the shopping experience for our customers. Argos is a technology-led retailer and sales generated through mobile devices passed £2 billion this year. SmartShop is now available in over 100 supermarkets, allowing customers to scan their shopping using a hand-held device or their mobile phone. We were the first grocer in the UK to introduce SmartShop Mobile Pay, enabling customers in eight of our convenience stores to pay on their smartphone from anywhere in the store, saving them time and helping them manage their budgets. As we develop our Nectar offer, we are trialling a new digital proposition in Wales which gives customers greater choice over their rewards managed conveniently via their mobile phones. We have completed the Argos integration, delivering the £160 million of synergies and there is more we can do this year to continue to bring the businesses closer together to drive efficiencies and also to improve the customer experience. 7.8 per cent compared to last year.

Live Well for Less

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