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 ranges and innovative 102 partnerships differentiate stores offering Same Day our offer. More customers delivery to 40 per cent are shopping with us than of the UK population ever before and our share of customer transactions has increased. See more on page 12 General Merchandise 191 and Clothing Argos stores in Sainsbury’s We are one of the largest general supermarkets merchandise and clothing retailers in the UK, offering a wide range of products across our Argos, Sainsbury’s Home and 16 Habitat brands, in stores and Habitat stores and online. We are a market leader in Click & Collect available toys, electricals and technology in over 2,300 locations and Tu clothing offers high street style at supermarket prices. See more on page 14 Financial Services Financial Services are an 3.9m integral part of our business. Active customers Sainsbury’s Bank offers at Sainsbury’s Bank and accessible products such as Argos Financial Services credit cards, insurance, travel money and personal loans that reward loyalty. Our new mortgage offer has performed £69m well and together, Sainsbury’s Sainsbury’s Bank profits Bank and Argos Financial delivered Services have 3.9 million active customers. See more on page 16 Strategic Report 01 Performance highlights Strategic Report Strategic Report 01 Contents page 02 Chairman’s letter 04 Market context 06 Our business model 07 Our business strategy £31,735m £589m 08 Chief Executive’s Q&A Group sales (inc VAT) up nine per cent Underlying profit before tax 10 Proposed combination of J Sainsbury plc and Asda Group Limited 12 Priority 1: Further enhance our differentiated food offer 14 Priority 2: Grow General Merchandise and Clothing and deliver synergies 16 Priority 3: Diversify and grow Sainsbury’s Bank 1.3% 10.2p 17 Priority 4: Continue cost savings and Group like-for-like sales Proposed full-year dividend maintain balance sheet strength 18 Our values make us different Governance Report 28 Our KPIs 30 Our principal risks and uncertainties 36 Financial Review 20.4p 13.3p Governance Report Underlying basic earnings Basic earnings per share 42 Board of Directors 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 £409m 8.4% Remuneration Committee Chair Statutory profit before tax Return on capital employed 68 Summary of 2017/18 remuneration decisions 69 Summary of remuneration for 2018/19 70 Annual Report on Remuneration 81 Directors’ Remuneration Policy Statements Financial 84 Additional statutory information Financial Statements £35m 83% 88 Statement of Directors’ responsibilities generated for charities, of the packaging on our own-brand 89 Independent auditor’s report to communities and good causes products is classed as ‘widely recycled’ the members of J Sainsbury plc 94 Consolidated income statement 95 Consolidated statement of comprehensive income 96 Consolidated balance sheet Read more about our financial KPIs on page 28 97 Consolidated cash flow statement 98 Consolidated statement of changes in equity 99 Notes to the consolidated financial statements 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 Strategic Report Chairman’s In a competitive market, underlying letter profits before tax have returned to growth, increasing to £589 million. The combination with Asda Encouragingly, although underlying offers a significant opportunity for basic earnings per share were customers, suppliers, colleagues down for the year as a whole, we achieved a rise of eight per cent and shareholders to benefit from in the second half.” a structurally stronger business. David Tyler Chairman 2017/18 highlights 10.2p 8.4% Proposed full-year Return on capital dividend employed 20.4p £432m Underlying basic Free cash flow earnings per share 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. Strategic Report J Sainsbury plc Annual Report 2018 03 Strategy Dividend Board changes Strategic Report The Board’s focus this year has been We are committed to paying an affordable Mike Coupe leads a senior management on driving shareholder value in a retail dividend to our shareholders, fixing dividend team with deep experience and talent. sector which continues to undergo cover at two times earnings. We are therefore In January, Phil Jordan took on the new significant change. recommending a final dividend of 7.1 pence role of Group Chief Information Officer and per share, bringing the proposed full-year joined the Operating Board. Phil brings great At our results presentation on 30 April dividend to 10.2 pence per share which is the knowledge to Sainsbury’s from previous we announced that we have agreed with same as last year. senior roles at Telefonica and Vodafone UK Walmart Inc. to combine J Sainsbury plc and Ireland. and Asda Group Limited to create a dynamic Business in the year new UK retail business. Asda is valued at The business made encouraging progress in Following Mary Harris’s departure from the 1 approximately £7.3 billion on a cash-free, the last year. Food transactions are growing Board at the 2017 AGM, we were pleased to debt-free and pension-free basis. J Sainsbury ahead of the market, with a differentiated, announce the appointment of Jo Harlow plc would acquire the business by a cash quality offer and competitive pricing on to the Board as a Non-Executive Director. payment of £2.975 billion and by issuing new everyday essential items. We have exceeded Jo brings to the Board a wealth of experience shares to Walmart which would represent a our three-year cost savings target over the in consumer-facing businesses and in the 42 per cent share of the enlarged business. telecoms and technology industry, both period 2015 to 2018 by £40 million, bringing Governance Report The Combined Business would be chaired by the total of savings to £540 million. General in the UK and internationally, having held Sainsbury’s Chairman and led by Sainsbury’s Merchandise and Clothing continue to senior sales and marketing positions at P&G CEO and CFO. The Asda CEO would join the outperform in a challenging market and and Reebok. She has already made a strong Group Operating Board of the Combined we are ahead of our schedule to open Argos contribution to the Board since she joined us Business and two Walmart representatives stores in Sainsbury’s supermarkets, achieving in September 2017. would join the J Sainsbury plc Board. synergies sooner than we expected. Now that I have been Chairman for more We believe that the combination of these As a business, we are focused on the than eight years, a search process has begun, two strong businesses, with enhanced scale increasingly important role that technology led by Dame Susan Rice and the Nomination and a strengthened balance sheet, would and the responsible use of data play in Committee, to find my successor as Non- bring great benefits for our customers, supporting great customer service. We Executive Chairman. our colleagues and our suppliers, while have invested in developing our technology creating value for shareholders. It will lead to and digital capabilities and the earnings Outlook significant synergies, enabling Sainsbury’s, accretive acquisition of the Nectar loyalty In a retail marketplace that remains as Asda and Argos to invest in the areas that card scheme in February supports our competitive as ever, we believe we have matter most to customers – price, quality strategy of knowing our customers better the right strategy in place, driven by a and developing more flexible ways to shop. than anyone else. skilled and experienced leadership team Statements Financial The Combined Business would unite two of and supported by highly engaged and the most talented teams in retail and benefit This has been a year of innovation across the committed colleagues. The combination from the support of Walmart as a major Group. We have proposed changes to retail with Asda offers a significant opportunity shareholder and strategic partner. management structures and colleague roles for customers, suppliers, colleagues and in our stores that will make us more efficient shareholders to benefit from a structurally Our acquisition in 2016 of Argos has enabled and improve our customer service. We have stronger business with the ability to adapt us to offer more choice and convenience to also proposed a market-leading pay award and grow. customers in a changing industry landscape; for Sainsbury’s colleagues, along with revised the combination with Asda would create a terms and conditions. Our colleagues provide more resilient Group providing an even more outstanding service to our customers every compelling offer in the face of this rapid day and I would like to thank them for their change. Through our acquisition of Argos hard work and commitment. As a result of we have a strong track record of delivering David Tyler their excellent work, we have been awarded Chairman synergy benefits and we are confident that The Grocer Gold Awards for both Service and the combination of Sainsbury’s and Asda will Availability for the past five years.