Annual Report and Financial Statements 2005 Contents Annual review 2 Company overview 4 Chairman’s statement 6 Chief Executive’s operating review 20 Board of Directors 21 Operating Board 23 Operating and financial review 29 Governance 29 Report of the Directors 31 Statement of corporate governance 36 Remuneration report 46 Statement of Directors’ responsibilities in respect of the financial statements 47 Financial statements 47 Independent Auditors’ report to the members of J Sainsbury plc 48 Group profit and loss account 49 Group statement of total recognised gains and losses Reconciliation of movements in equity shareholders’ funds 50 Balance sheets 51 Group cash flow statement 52 Notes to the financial statements 81 Five year financial record 82 Additional shareholder information 82 Shareholder information 83 Financial calendar We’re on a journey It has been an important year in which we have reviewed every part of our business, identified the issues and laid out what needs to be done to make Sainsbury's great again. It's important that our shareholders understand our plans. So, in this report, we're setting out to answer the key questions we are being asked at the moment. This year has seen the very early signs of our recovery. We hope you'll continue to share the journey with us. Company overview Group performance 2005 2004 Sales (inc VAT) - continuing operations 1 £16,364m £15,517m Underlying operating profit – continuing operations 2 £334m £590m Underlying profit before tax 3 £254m £675m Profit before tax £15m £610m Profit after tax £65m £404m Underlying earnings per share 3, 4 9.0p 23.4p Equity dividend per share 7.80p 15.69p 1 Includes VAT of £1,162 million (2004: £1,077 million). 2 Before exceptional operating costs of £507 million (2004: £68 million) and amortisation of goodwill of £4 million (2004: £nil). 3 Before exceptional items of £234 million (2004: £54 million) and amortisation of goodwill of £5 million (2004: £11 million). 4 Before non–equity dividends. J Sainsbury plc comprises Sainsbury’s supermarkets, Our convenience division includes Sainsbury’s Local convenience stores, a home shopping service and stores, Bells Stores in North East England, Jacksons Sainsbury’s Bank. Stores across Yorkshire and the North Midlands, and JB Beaumont in the East Midlands. Sainsbury’s stands for great products at fair prices and our objective is simple; to serve customers well. Sainsbury's serves over 14 million customers a week We continually improve and develop our product and at the end of the financial year we had 727 stores ranges and work hard to give customers an ever throughout the UK. improving shopping experience. Sainsbury's Bank is owned by J Sainsbury plc We aim to ensure all colleagues have opportunities and HBoS. It aims to make finance easier to to develop their abilities and are well rewarded for understand and manage and has built a reputation their contribution to our business. At the end of the for offering excellent value products with extra 2004/05 financial year we employed 153,000 people. benefits, delivered in a simple and accessible way. We constantly win awards for the quality of our Our policy is to work with our suppliers fairly, service and competitiveness of the products offered. recognising the mutual benefit of satisfying customers' The current product range includes: car insurance, needs. We also aim to fulfil our responsibilities to the life cover, home insurance, travel insurance, pet communities and environments in which we operate. insurance, Visa credit cards, Child Trust Fund, Sainsbury's Supermarkets is Britain's longest- internet savings account, instant access savings standing major food retailing chain. A large account, direct saver account, personal loans, Sainsbury's supermarket offers around 30,000 and a car purchase scheme. products - 50 per cent of which are Sainsbury's own Sainsbury’s to You is our internet-based home brand including fresh produce. In addition to delivery service which covers around 77 per cent of a wide range of quality food and grocery products, the UK. Customers place orders online and choose many stores offer delicatessen, meat and fish when to have their shopping delivered. The online counters, complementary non-food products such service also includes Sainsbury’s Entertain You, which as clothing and homeware, pharmacies, coffee offers over 250,000 books, CDs, DVDs, videos and shops, restaurants and petrol stations. computer games and a DVD rental service with over 28,000 titles. Flowers, wine, gifts, kitchen appliances and electricals can also be purchased online. 2 J Sainsbury plc Annual Report and Financial Statements 2005 J Sainsbury plc consists of Sainsbury’s supermarkets, Sainsbury’s Local, Bells Stores, Jacksons Stores and JB Beaumont, Sainsbury’s to You, our internet-based home delivery service and Sainsbury’s Bank. Market share by region (%) Corporate responsibility Sainsbury’s approach to corporate responsibility is central to how we do business. We recognise that we need to act responsibly in managing our impacts on a range of stakeholders; customers, colleagues, communities, investors, suppliers and the environment. We publish a full corporate responsibility report and details of our activities in this area can be found on our website (www.j-sainsbury.co.uk/csr). Scotland 3.6 North East 3.6 Lancashire Dow Jones Sustainability Index FTSE4Good Index 6.2 Ranked best in sector for last Listed since Index began Yorkshire 6.1 three years. in 2001. Midlands East Wales 10.7 England Total market & West 11.4 7.7 share 10.4% London Business in the Community 18.3 Global 100 Corporate Responsibility Index South South West 13.9 The only food retailer out of the 32 Ranked first in food retailing for 11.2 British companies listed in the top 100 second year and joint fifth overall sustainable corporations. out of 144 companies. Source: TNS Store estate Colleagues Over 25,000 to 15,000 to Under 40,000 sq ft 40,000 sq ft 25,000 sq ft 15,000 sq ft Total 32% full time Convenience - - - 262 2621 68% part time Supermarkets 1582 176 79 52 465 Total stores 158 176 79 314 727 60% 40% 1 Before acquisition of 5 stores from SL Shaw Ltd in April 2005 female male 2 Includes 24 stores over 55,000 sq ft 153,000 colleagues Chairman’s statement Philip Hampton At the half-year we cut the interim dividend to 2.15 pence per share, a fall of 50 per cent. The final proposed dividend of 5.65 pence takes the total for the year to 7.8 pence as we outlined in October 2004. The dividend cover is still quite low at around 1.2 times and our objective, in the medium term, is to restore it to at least 1.5 times. The changes we have made have led to a time of great upheaval for all our colleagues. Everyone who works in Sainsbury’s has been stretched and tested. I am extremely proud of how they have performed and would like to offer my thanks to them. What about all the changes on the Board? The Board had to be reformed, bearing in mind the need to re-build Sainsbury’s reputation for good corporate governance. Justin King was working What attracted you to Sainsbury’s? to strengthen the operational management but to When I took up the Sainsbury’s chairmanship the outside world, the most visible changes were in July last year, I firmly believed that, in spite of those in the boardroom. its high profile problems, this was a business that was worth fighting for. Sainsbury’s is an iconic My arrival came as Sir Peter Davis left Sainsbury’s name in British retailing. It has a strong brand after four years. Sara Weller and Stuart Mitchell and all of the things that made it great, a passion both left the company in the early part of the year. for food, good value, a history of innovation and In September, two Non-Executive Directors, Lord a strong ethical approach to business, meant it Levene of Portsoken and Keith Butler–Wheelhouse, was a fundamentally attractive challenge. Almost resigned. Each made important contributions to a year on, I am more convinced than ever that Sainsbury’s in difficult conditions and I would like it is capable of being restored. to thank them for their service. They were replaced as Non–Executive Directors by Bob Stack, Group What was your number one priority? Human Resources Director of Cadbury Schweppes It was overseeing the stabilisation of Sainsbury’s plc, and Gary Hughes, Finance Director of media to enable us to operate more effectively in what group Emap plc. Bob and Gary have brought continues to be a very competitive market. Initially, experience and skills from two successful this meant yet more change, from the top of the consumer-facing businesses, which complement organisation to the bottom. Tough decisions had those of the existing team. to be made, not least the reorganisation of our head office, with further job losses, and the cutting In October, Roger Matthews, our Finance Director, of the dividend. We recognised that there had announced his plans to retire from the Board. been a long-term decline in Sainsbury’s competitive I would like to express my gratitude to Roger, position. Halting and reversing that decline could who has made a very significant contribution not be made without putting pressure on profits. to Sainsbury’s over six years. 4 J Sainsbury plc Annual Report and Financial Statements 2005 He will be succeeded by Darren Shapland who to the interests of our shareholders and designed joins us in August from Carpetright plc and whose to ensure there will be absolutely no payments strong operational approach will suit Sainsbury’s for failure.