18th May 2005 07:01
Sainsbury(J) PLC18 May 2005 18 May 2005 J Sainsbury plc announces Preliminary Results for the 52 weeks ending 26 March2005 Highlights • Recovery plans outlined in October 2004 Business Review on track • Early signs of improvement in performance • Strengthened Board and management team • Continuing improvement, and ongoing investment, in the customer offer Key Financials • Financial results affected by sale of Shaw's Supermarkets, investment in customer offer and exceptional costs relating to the Business Review outlined on 19 October 2004 • Total sales (1) from continuing operations of £16,364 million up 5.5 per cent (2004: £15,517 million) • Underlying profit before tax (2) of £254 million (2004: £675 million) • Total exceptional items of £234 million (2004: £54 million) (3), including Business Review exceptional costs of £510 million in 2004/05. Estimated further £50 million will be incurred in 2005/06 • Profit before tax of £15 million (2004: £610 million) • Underlying earnings per share (2) of 9.0 pence (2004: 23.4 pence) • Total dividend per share for the year of 7.8 pence as indicated on 19 October 2004, proposed final dividend per share of 5.65 pence • Sainsbury's Supermarkets' total sales (1) of £16,076 million up 5.1 per cent (2004: £15,297 million) • Like-for-like sales (4) down 0.4 per cent for the year but up 1.7 per cent in the final quarter • Sainsbury's Supermarkets' underlying operating profit (5) of £321 million (2004: £564 million) Sainsbury's Bank • Continued growth in customer numbers • Net income up 24 per cent (2004: 40%) • Operating profit below plan at £13 million (2004: £26 million) • Bad debt charge reflects high asset growth and prudent provisions Summary of Business Review announced on 19 October 2004 • Sales-led recovery: plans to grow sales by £2.5 billion by end of 2007/08 • New management team with retail expertise and track record of delivery • Restoration of unique brand proposition: great quality food at fair prices • Activity underway to fix operational basics and change cost structure • Significant investment of at least £400 million to improve customer offer over next three years • Ongoing buying efficiencies of 100-150 basis points per annum reinvested in customer offer • Trading position underpinned by deliverable operating efficiencies of at least £400 million over the next three years, tight cash flow management and valuable freehold property portfolio 1. Sales are stated including VAT at Sainsbury's Supermarkets of £1,162 million (2004: £1,077 million) and sales tax at Shaw's Supermarkets of £2 million (2004: £21 million). 2. Underlying profit before tax and underlying earnings per share are stated before exceptional items of £234 million (2004: £54 million) and amortisation of goodwill of £5 million (2004: £11 million). Underlying earnings per share are before non-equity dividends. 3. Includes profit on disposal of Shaw's Supermarkets of £275 million. 4. Like-for-like sales in this review are Easter adjusted and exclude petrol. 5. Underlying operating profit is before exceptional operating costs of £507 million (2004: £68 million) and before amortisation of goodwill of £4 million (2004: £nil). Including these items operating loss was £190 million (2004: operating profit £496 million). Philip Hampton, chairman, said: "Our plans to rebuild Sainbury's are based onstretching targets, but we believe that these can be delivered. Justin King hasbeen successful in recruiting outstanding retailers to enhance his executiveteam, while the Board has been strengthened with the addition of two highlyqualified non-executive directors. "We will be proposing a new employee share plan to shareholders at the AGM inJuly specifically designed to incentivise over 1,000 senior managers to deliverthe sales-led recovery programme announced earlier in the year. "While it is pleasing to be able to report that our sales performance improvedtowards the end of the year, these are early days and there is much to be doneto deliver our plans in a tough and competitive UK retail market. By continuingto focus resources on customer facing initiatives, we are all totally committedto Making Sainsbury's Great Again." Justin King, chief executive, said: "The past year has seen significant changefor Sainsbury's. We created an operating board in May 2004 and have attracted anumber of highly respected retailers at both this level and immediately below.They joined existing talent to help define our thinking and begin rebuilding theSainsbury's brand. "Our 150,000 colleagues company wide have wholeheartedly got behind the plans weoutlined on 19 October 2004 to Make Sainsbury's Great Again. We have made goodprogress and can see early signs of improvement in our customer offer and sales. We are on track but still in the very early stages of a long-term recoveryprogramme. We are committed to running a business that constantly improves theshopping experience for our customers and this is at the heart of all our plansand activities as we grow our sales." Making Sainsbury's Great Again - A sales-led recovery The first six months of the year were spent reviewing the business andaddressing immediate issues. Some were obvious such as the need to reduce rangechurn, reinvest in price, and renew focus on product quality to maintain andfurther our lead. Other findings informed our plans to Make Sainsbury's GreatAgain which we announced in October 2004. Since then we have started strategicprojects such as rebuilding our supply chain. We will continue to run short-termactivities alongside longer-term projects to improve our customer offer while werebuild a profitable and sustainable business. Sales in Sainsbury's Supermarkets for the year increased by 5.1 per cent to£16,076 million. Like-for-like sales were down 0.4 per cent for the year butthere was an improvement in the fourth quarter when we achieved like-for-likesales of 1.7 per cent (excluding petrol). Experienced Management Team Five new members have joined the operating board this year adding a range ofindustry expertise and knowledge to complement the existing talent of the team.Jim McCarthy is an expert in convenience retailing while Gwyn Burr, Mike Coupe,Lawrence Christensen, and Ken McMeikan, have all worked at senior level forthree main supermarket competitors, Tesco, Asda and Safeway. Darren Shapland,our new chief financial officer has a wealth of retail experience and joins usfrom Carpetright plc on 1 August 2005. At the level just below the operating board we have also attracted many newpeople from a broad range of competitors and related businesses. Around 40 percent of this team is either new to Sainsbury's during the past year or aninternal promotion. The breadth of capability and experience we have been ableto retain and attract shows the desire and appeal to be part of the teamrebuilding this brand. Together we have made good progress towards MakingSainsbury's Great Again, taking immediate action to improve the customer offerand address the key issues while laying building blocks for longer-termsustainable growth. Fixing the Basics A major priority has been to ensure customers are at the heart of all ourthinking and activity. This is a mindset as well as the basis for ourinvestment of £400 million over the next three years to improve pricing, productquality and customer service. We are rebuilding our brand positioning and theeffective delivery of this is fundamental to our recovery. We needed to makethings better for our customers as quickly as possible and will continue toimprove their shopping experience week by week. A key element to making such progress possible is the belief in the branddemonstrated by both customers and colleagues. We have been pleased with theearly progress we have made, particularly in our fourth quarter, and have seenthe first signs of growth in TNS independent market data. Customers are noticing the difference and we can see this in a number of ways.We had an overwhelming and positive response to a mailing sent to one millioncustomers and circulation of Sainsbury's magazine, which highlights news on ourranges and innovations, is up nearly five per cent year on year in a highlycompetitive market and recently won 'Customer Magazine of the Year' at a majorindustry awards. Despite having been through enormous change over the past three years our150,000 colleagues have wholeheartedly got behind the plans outlined in October.Since its launch last autumn, our colleague suggestion scheme has generated over7,000 ideas which have outlined simple but effective ways to improve theshopping experience for customers every day. It is often the small things thatmean a lot to customers and colleagues alike. The Customer Offer Availability We have made good progress on availability but there is still much to do. Wehave undertaken a comprehensive review of our distribution network and theprocesses that govern how products reach our shelves in store. We began theintroduction of new ways of working at the beginning of 2005. These includedthe turnaround of store orders within 24 hours (previously 48 hours), dedicatedretail support teams based at depots to assist stores with queries, and manualinterventions to improve the performance of our new depots. In October we stated our belief that many of our availability problems could besolved in store. Processes and stock inventories have been improved and testedin store. The results have been very encouraging and new practices have nowbeen rolled out company-wide with the last stores coming on stream at thebeginning of May. It will take time for these to become embedded in our businessbut in stores that have completed the conversion, the number of products 'out ofstock' has been reduced by around 75 per cent, a result noticed by customers andindependent industry commentators. We have stabilised the performance of our automated depots by over-riding someof the systems with manual solutions. They are now processing close to thevolumes originally intended although this is at a higher cost than thatanticipated in 2000. There is still much to do as our sales grow and we need toensure we understand the full capability of the whole supply chain before makingfurther changes. Our priority is not speed but, as with all our operations,enabling our colleagues to continue to deliver an improved customer experiencewhilst we make longer-term changes. Pricing We have made a significant investment in price over the past year as part of ourongoing commitment to improve value for our customers. This has also beenacknowledged by customers and independent surveys and we have taken a moreproactive stance to get better recognition for the value we offer both throughprice cuts and promotional offers. In January 2005 we ran an advertisingcampaign to highlight that 6,000 products were at lower prices than the sametime the previous year. We have updated this campaign with a further 1,000price cuts over the past four months when our deflation was 1.6 per cent. Mostimportantly we have ensured that quality has been maintained or improved. We arecommitted to ensuring that customers can shop competitively in our stores andget great quality at fair prices through our own label products. Our participation in the Nectar loyalty scheme also provides added value forcustomers. We remain committed to the programme and believe there is stilluntapped potential in this investment. In particular we believe we can useNectar more tactically and we are beginning to use the information it providesin a more practical way for our customers. Product Quality and Innovation Sainsbury's heritage is founded upon the commitment to provide customers withthe very best and affordable quality. The things that made Sainsbury's great inthe past are the things that customers want and expect from us. We are moreconvinced than ever that our heritage provides an ideal market position for ourbrand as customers strive to shop for healthy, safe, fresh and tasty food. Weare going through our entire product range to ensure it meets the standards werequire and in order for products to be branded with the Sainsbury's name. Thesestandards exceed those of our competitors so that we maintain and stretch ourlead on the quality and sourcing of ingredients through to processes andstandards in-store. We are further improving our product ranges to ensure we offer a good choicefrom entry-level items through to market leading innovation and quality. Wehave constantly improved and added to our premium 'Taste the Difference' rangewhich now has around 900 lines and four of our top selling lines last Christmaswere Taste the Difference products. In January 2005 we relaunched our low price range under the sub-brand 'Basics'.Comprising around 400 products, the range has sold well and in many cases growncategory sales in a given product category. This approach clearly has universalappeal; customers shop across the price/quality bands depending on their tastes,needs and budget. The freshest, most nutritious, food is that just picked and we are committed toensuring our customers are offered the season's best as highlighted in ourcurrent advertising campaign. This features a range of fresh produce such asJersey Royal new potatoes, asparagus, and watercress all of which reach ourstores as quickly as possible after being picked. We recently re-signed JamieOliver, who fronts this campaign, and in line with our commitment on value,these products are also at competitive prices. Our products have won numerous awards during the past 12 months. At range andcategory level, we became Meat Retailer of the Year, Multiple Seafood Retailerof the Year and European Wine and Spirits Retailer of the Year, amongst manyother accolades. Numerous individual products were also recognised such as ourTaste the Difference Lamb Shanks with roasted plum tomato sauce, organic thickcut Seville Orange Marmalade and Taste the Difference Smoked Haddock Fish Cakes.In November 2004 we again won the highest number of awards at the industry'sQuality (Q) Awards, collecting the honours in seven categories, including thecoveted overall Gold Q Award for our Taste the Difference Lemon Butter Thinbiscuits. As in previous years this exceeds the number of awards won by ourcompetitors. Integrity of product supply and processes is inherent in the Sainsbury's brand.Our salt reduction programme, part of a three-year plan developed alongside theFood Standards Agency, set challenging targets some of which have been achievedsix months ahead of schedule. This year we also led the industry with our Wheelof Health icon, which currently gives customers quick and simple recognition ofthe nutritional values of 120 of our products. The icon will be added to moreproducts during the year. Our relevance to a healthy diet and lifestyle has perhaps been best demonstratedby the phenomenal success of our Active Kids campaign which has attracted over23,500 schools. This is nearly 75 per cent of UK schools and easily more thanthe total of all schools within a five-mile radius of our stores. 'Active Kids'is designed to tackle the issue not only of what we eat, 'calories in', but howwe use the energy food provides, 'calories out'. It aims to help teachersinspire children into taking more exercise as obesity amongst children is now atits highest level. For every £10 spent in our stores customers receive avoucher which primary and secondary schools can then redeem for activities andsports equipment. We believe this is the only campaign supported by a major supermarket thatencourages consumers to buy and eat more healthily because for every £5 spent onfresh fruit and vegetables, we give a bonus "Active Kids" voucher. We have clearindications that purchases of fresh fruit and vegetables in our stores hasincreased since the scheme began. Kelly Holmes became an ambassador for thescheme which runs until the end of June and we anticipate we will donate around£5 million of equipment and activities with the aim of increasing the level ofactivity currently undertaken by children. Corporate Responsibility The Active Kids programme is a good example of how our approach to corporateresponsibility is central to how we do business. It also complements our "Tasteof Success" programme which we have supported for a number of years. Thispromotes food education and cookery in schools across the UK for pupils aged5-16. Supported by the Department for Education and Skills, it is run inpartnership with the British Nutrition Foundation and the Design & TechnologyAssociation. So far, over 250,000 school children have been involved. Last year we published (on-line) our first full corporate responsibility report.Reaction to the report was positive and we came joint 4th in an annual surveyconducted by CTN which assessed FTSE 100 on-line reporting. We have achieved anumber of commendations this year for our responsible business practice. InJanuary, for the second year running, we were first in our sector in Business inthe Community's Corporate Responsibility Index and ranked joint 5th overall outof 144 companies. In February we were the only food retailer out of the 32British companies listed in the 'Global 100's' most sustainable corporations. Wewere first in sector in the Dow Jones Sustainability Index and have consistentlybeen listed in the FTSE4Good Index since it started in 2001. In 2004/2005 Sainsbury's donated £6.8 million to charitable and communityprojects. This included almost £4 million through food donations to charitieshelping the homeless. In addition, our colleagues, customers and suppliersraised an additional £10.9 million including £1.7 million for the Asian Tsunamiappeal and £6.5 million for Comic Relief. Complementary Non-Food Much of our focus on non-food this year has been on trading our way throughsurplus stock while also identifying the best locations for trading non-foodproducts in our store network. In the short term we are concentrating on makingthe existing space work harder as making any bigger changes would, at thisstage, be too disruptive to our stores and customers. Overall we are pleased with the growth of general merchandise and clothing whichis in line with our plan. We identified that an additional £700 million of saleswould come from developing compelling non-food product ranges by the end of 2007/08. There is an opportunity to grow core ranges such as cards, wrapping paper, music and DVDs while clothing and home ranges, with their longer lead times, will contribute more significantly in years two and three of the plan. Last September we launched TU, our own label clothing range which is now in 170stores. We have received some excellent reviews from fashion commentators forthe range's style, quality and value and colleagues at our Sydenham store 'starred' in a BBC TV programme featuring the weeks leading up to the launch ofTU. Sainsbury's to You Home Delivery Service This is an important service for our customers but we put expansion on holdwhile we work hard to improve our performance. This service is now fullyintegrated with our stores and we have made good progress, particularly onavailability where, like stores, we have been able to reduce the number of outof stocks. Availability for home shopping has improved by 4.5 percentage pointsand is a good indication of the overall improvement being experienced by all ourcustomers. We have also made good steps forward in customer service over the past year.Website improvements have reduced the average time of shopping on-line by 25%for existing customers and 50% for first time users. In July 2004, 600 deliverydrivers rejoined Sainsbury's as full time employees instead of working for usthrough a third party. This has had a positive effect on our delivery service,which, for the past two months, has been rated as better than that of the marketleader. Simplifying Store Formats and Operations Convenience Stores We have closed nine of the 12 Sainsbury's Local convenience stores earmarked forclosure last October. Two more will close next month but the 12th store, inFenchurch Street, London, will remain open as improvements to the operation giveus confidence that it can now be profitable. Nearly 50 per cent of our convenience estate will be updated during the comingyear. Circa 50 Jacksons stores and 20 Bells stores are being converted to carrythe 'Sainsbury's at ...' brand and following trials to update the convenienceproposition, around 40 Sainsbury's Locals will be refurbished. Our target of£400 million of additional sales by the end of 2007/08 will be achieved throughboth organic growth and acquisition. In November 2004 we acquired our thirdconvenience store operator, JB Beaumont Ltd, a long established neighbourhoodconvenience store operator with six stores in the East Midlands. In April 2005we announced the acquisition of five neighbourhood convenience stores in thesouth east of England from SL Shaw Ltd. We also recently announced that the Bells and Jacksons head offices will becombined and based in Hull. Stephen Bell has retired from the business and thetwo chains are now managed by Angus Oughtred. Sainsbury's Supermarkets Following our Business Review we recruited 3,000 additional colleagues in storeto help step-change our customer service and availability. All colleagues arenow incentivised against these two measures so that everyone was aligned withthe priority to deliver an ever-improving service for our customers. We aredelighted that, given the improvements already made, 90 per cent of storesachieved either one or both targets and more than 90,000 colleagues will bereceiving a bonus to recognise this progress in the next few weeks. We have a valuable property portfolio. In October 2004 we identified 131 storeswhich would be refurbished over the next two years. We have completed threepilot projects and will refurbish around 30 per cent of these stores in thecurrent financial year. In April 2004 we acquired 14 stores from Safeway that wehave now opened as Sainsbury's. These stores are achieving their expected salesbut we can see many opportunities to improve performance through betterreflecting the trading patterns and customers in these locations. A key focus for the coming year is on increasing our investment in ourcolleagues to improve further the efficiency of our store operations. In thecoming year we will be investing 3.6 million hours in training. Today we haveannounced our search to recruit 10,000 additional colleagues over the age of 50,in the coming months as we believe this age group can offer a diverse range ofskills valued by our customers. IT Systems We continue to look at how to best develop our IT and our relationship withAccenture. We have now reduced the amount of capital expenditure on IT and arefocused on getting the best return possible from the investment already made.We continue to work on improving our systems and delivering what the businessrequires. Our new IT director, Angela Morrison, who joined us in March 2005from Wal-Mart, is now leading this process. Angela is also working withAccenture to re-evaluate our relationship. We expect this to take a few monthsto conclude given the size and complexity. In the meantime we are doubling thesize and capability of our internal IT team from 25 to 50 to enable us to have agreater control of development and service. Reducing Operating Costs Over the next 12 months we are focused on delivering £100 million of costsavings, primarily in stock-loss, IT systems and central costs. We haverestructured our central support functions. In addition to natural turnover,700 people have now left the company. We have also strengthened our customer-facing teams and continue to recruit in important areas such as buying. The newsimplified structure has created a more liberated working environment with clearaccountabilities. Sainsbury's Bank The Bank has had a challenging year. We have continued to see growth in customernumbers, assets and income but profit has been impacted by the pressure onmargins and increased bad debt provision. We are committed to a supermarket bankmodel which benefits from the relatively low cost of acquisition and our growthremains positive reflecting the excellent value offered by the products and anabove average quality customer base. Going forward the model will be biasedtowards insurance and commission based products such as car insurance which weare relaunching in a few weeks time. As a result we are reducing our in-storesales force. In line with the rest of our business the Bank has also looked tosimplify and restructure its central support team. Our target to increaseprofits to £90 million still remains but is stretching. We have taken prudentprovision for bad debts and expect a modest increase in profitability in 2005/06. Looking Forward We are fully engaged in putting into action the programme outlined in October2004. We have been pleased with progress over the last six months and the earlyimprovements we have seen, particularly in our quarter four trading. There is nodoubt that customers are noticing this change. The trading environment continuesto be tough and we are determined that we will respond as necessary to ensurecustomer-facing activities are not compromised as we rebuild our business.These are the first steps of a three year sales-led recovery and our priorityfor the next 12 months will be to continue investing in the customer offer,rather than improving margins, supported by delivering the cost efficiencies aslaid out in our plans to Make Sainsbury's Great Again. Enquiries: Investor relations Media+44 (0) 20 7695 7162 +44 (0) 20 7695 6127Roger Matthews Pip WoodLynda Ashton Note A presentation of the results for analysts and investors will take place at 9:45 BST. To view the slides of the Results Presentation and the Webcast: To participate please go to the website www.j-sainsbury.co.uk from 9.30am BSTand follow the on screen instructions. An archive of this event will beavailable from 16:00 BST in the form of a delayed webcast. To listen to the Results Presentation: To participate, dial +44 (0) 20 8515 2303 at least ten minutes before the startof the presentation. You will be asked to give your name and company details.You will then be placed on hold and will hear music until the presentationstarts. An archive of this event will be available from 12:30 BST on +44 (0) 20 85152499, pin number 648364# until midnight BST on Wednesday 25th May. Financial Review The financial year ended March 2005 was a year of major change and transitionacross the Group. Three key events had a material impact on the financialresults: • The sale of Shaw's Supermarkets in the United States on 30 April 2004 and the subsequent return of capital. • Pursuing a sales-led recovery through investment in the customer offer, in particular through lower prices, the recruitment of 3,000 additional colleagues into stores and investment in supply chain and store practices to improve availability. This has resulted in significantly lower operating profit and margins in an increasingly competitive food retailing market. • The Business Review, announced on 19 October 2004, identified exceptional costs estimated at £550 million. These costs are now estimated to total £560 million with £510 million charged in the year ending 26 March 2005 and an estimated £50 million, which will be incurred in the new financial year. Profit and Loss Account Group sales, including VAT, from continuing operations increased by 5.5 per centto £16,364 million (2004: £15,517 million). Underlying Group profit before tax,exceptional items and amortisation of goodwill was £254 million (2004: £675million). Profit before tax and after exceptional items and amortisation ofgoodwill was £15 million (2004: £610 million). Sales (1) Profit 2005 2005 change change £m % £m %Continuing operationsSainsbury's Supermarkets (2) 16,076 5.1 321 (43.1)Sainsbury's Bank 288 30.9 13 (50.0) Total continuing operations 16,364 5.5 334 (43.4)Discontinued operations (3) 209 11Sales/underlying operating profit (4) 16,573 (9.1) 345 (53.1)Net interest payable (92)Share of profit in joint ventures 1 Underlying profit before tax (5) 254Exceptional operating costs (507)Amortisation of goodwill (5)Non-operating exceptional items (6) 273 Profit before tax 15Tax 50 Profit after tax 65 1. Includes VAT at Sainsbury's Supermarkets of £1,162 million (2004: £1,077 million) and sales tax at Shaw's Supermarkets of £2 million (2004: £21 million). 2. Before exceptional operating costs of £507 million (2004: £68 million) and amortisation of goodwill of £4 million (2004:£nil). 3. Before amortisation of goodwill of £1 million (2004: £11 million) 4. Before exceptional operating costs of £507 million (2004: £68 million) and amortisation of goodwill of £5 million (2004: £11 million). Including these items, operating loss was £167 million (2004: operating profit £656 million). 5. Before exceptional costs of £234 million (2004: £54 million) and amortisation of goodwill of £5 million (2004: £11 million). 6. Non-operating exceptional items comprise a profit on disposal of properties of £21 million (2004: profit of £17 million) and a profit of £252 million on disposal of operations in 2005 (2004: loss of £3 million) 7. A statutory profit and loss account is shown on page 12. Sainsbury's Supermarkets Sales (including VAT) increased by 5.1 per cent to £16,076 million (2004:£15,297 million) reflecting a significant contribution from petrol and newspace. Like-for-like sales performance (Easter adjusted and excluding petrol)was down 0.4 per cent for the year. Profitability. Gross margin during the year was affected by the acceleration inthe investment in the customer offer. Underlying operating costs increased year-on-year. There were specificincreases in wastage, supply chain, in-store labour and performance bonus coststo support the drive for improved product availability and customer service. Consequently underlying operating profit reduced significantly to £321 million(2004: £564 million). Underlying operating margins (VAT inclusive) for the yeardecreased to 2.0 per cent from 3.7 per cent. Sainsbury's Bank Profits at Sainsbury's Bank were below plan despite continued growth incustomers and net income growth of 24 per cent over the previous year. Operating profit reduced significantly during the year to £13 million (2004: £26million) due to a combination of lower than forecast income growth, the highlevels of asset growth and above forecast provisioning for bad and doubtfuldebt. The provision for bad debt charged to the profit and loss account increased tothe £64 million (2004: £29 million). A significant part of this increase wasanticipated and planned due to the high volume of business written in 2004 andthe normal time lag associated with maturing debt written in 2002 and 2003.However, there were additional increases due to external factors, includinginterest rate increases, which resulted in credit performance issues in businesswritten in prior years. A prudent approach to provisioning has been maintained. The bad debt chargerepresents 2.8 per cent of average unsecured lending balances (2004: 1.9 percent), which continues to benchmark well against the industry, as does thequality of assets. An increasingly cautious approach to the unsecured lending market and creditexperience has led to a tightening of lending criteria during the year which weare confident will result in a further improvement in the quality of assetsgoing forward. Shaw's Supermarkets delivered an underlying operating profit performance of £11million prior to the completion of its sale to Albertson's Inc. on 30 April2004. Net interest payable of £92 million was an increase over the previous year(2004: £60 million), due to a lower level of capitalised interest at £5 million(2004: £26 million) together with the impact of the purchase of IT assets inFebruary 2004 and corporate activity during the year. Exceptional items Total exceptional costs for the year were £234 million (2004: £54 million)reflecting the Business Review operating exceptionals partially offset by theprofit on the sale of Shaw's and property profits. 2005 2004 £m £mExceptional operating costsBusiness Transformation Programme (22) (59)Business Review costs (1) (485) -Safeway bid costs - (9) Exceptional operating costs (507) (68) Non-operating exceptional itemsProfit/(loss) on disposal of operations - Shaw's Supermarkets 275 - - Other previously discontinued operations (23) (3)Profit/(loss) on sale of properties - Sainsbury's Supermarkets 21 18 - Shaw's Supermarkets - (1) Non-operating exceptional items 273 14 Total exceptional items (234) (54) 1. Total Business Review exceptional costs charged in 2004/05 total £510 million, of which £25 million has been charged to property profits. Exceptional operating costs Exceptional operating costs include £22 million relating to the conclusion ofthe Business Transformation Programme and Business Review exceptional costs. In total, Business Review exceptional costs are estimated to be £560 million,£10 million higher than anticipated in October 2004 caused mainly by higherstock charges offset by a reduction in the employee-related provision. £510million was charged in the year ending 26 March 2005 and it is estimated that£50 million of additional costs will be incurred in the new financial year. A significant proportion of these exceptional costs are of a non-cash nature.The impact on cash flow in the year ending 26 March 2005 was £14 million, with afurther estimated impact of £80 million in the new financial year. Non-operating exceptional items Surplus properties were sold in the year generating total cash proceeds of £266million and a property profit of £21 million. The Shaw's disposal was completed on 30 April 2004 for a total consideration of$2,475 million realising an exceptional profit on disposal of £275 million.This profit was partially offset by £23 million of adjustments relating to priordisposals. Taxation The Group's tax credit was £50 million (2004: charge of £206 million). Theeffective underlying rate was 36.2 per cent (2004: 32.4 per cent) beforeexceptional items and amortisation of goodwill. Earnings per share and dividends Underlying Group earnings per share before exceptional items and amortisation ofgoodwill decreased by 62 per cent to 9.0 pence (2004: 23.4 pence). Basicearnings per share decreased by 83 per cent to 3.5 pence (2004: 20.7 pence). A final dividend of 5.65 pence per share is proposed. The total proposeddividend for the year is 7.8 pence, which represents a decrease of 50 per centon last year, as indicated in the Business Review announcement. The reductionin dividend reflects the reduction in underlying earnings per share. The mediumterm objective is to restore dividend cover (pre exceptionals) to at least 1.5times. Acquisitions and Disposals The Group made a number of acquisitions and disposals during the year. Disposal of Shaw's The US supermarkets business Shaw's Supermarkets was sold to Albertson's Inc. on30 April 2004 for a total consideration of $2,475 million, including $368million in assumed lease liabilities. The Group received proceeds, net ofexpenses, of £1,170 million and a profit of £275 million was realised on thesale. Following the sale of Shaw's, Sainsbury's proposed a return of capital of 35pence per share, which equated to £680 million. Total capital returned toshareholders by 26 March 2005 amounted to £659 million, of which £112 millionwas by way of dividend and £547 million was share redemption. There remains afurther 62 million B shares valued at £21 million to be redeemed at a futuredate. In addition to the return of capital, there was a consolidation of Sainsbury'sordinary shares. For every eight Sainsbury's shares held at the close ofbusiness on 16 July 2004, shareholders received seven new ordinary shares. As aresult, the number of ordinary shares in issue reduced from 1,943 million to1,700 million. Acquisitions Supermarkets i. The acquisition of 14 stores from Morrisons in May 2004, comprising 13 Safeway branded stores and one Morrisons store. ii. The acquisition of two stores from Somerfield located in Bridgnorth and Guisborough. Convenience iii. In August 2004, the Group acquired Jacksons Stores Ltd with 114 neighbourhood convenience stores located across Yorkshire and the North Midlands. iv. The acquisition of JB Beaumont Ltd in November 2004, a convenience store operator with six stores in the East Midlands. Sainsbury's Bank - balance sheet presentation The presentation of the Group's balance sheet and cash flow has been revised toensure that the financial statements more closely reflect the requirements ofSchedule 4 to the Companies Act 1985. This change relates to the presentationof the current assets, liabilities and cash of Sainsbury's Bank. This is achange in presentation only. There is no impact on the Group's results netassets. The assets, liabilities and cash of Sainsbury's Bank are now presented withinthe Group's asset, liability and cash classifications. In previous periods,these were reported separately to the assets and liabilities of the rest of theGroup, both on the face of the balance sheet and within the notes to thefinancial statements. Prior year figures have been restated on a comparable basis. This has had theeffect of reducing opening net debt by £51 million to £2,037 million. Cash flow 2005 Restated1 2004 £m £m Operating cash inflows 936 869Group net interest (80) (88)Taxation (71) (183)Equity Dividends (254) (300)Payments for fixed assets (407) (801)Purchase of IT assets - (187)Sale of fixed assets 266 152Payments for intangible assets (4) - Free cash flow2 386 (538)Non equity Dividends (113) -Purchase of Safeway stores (313) - Cash outflow before sale and purchase of businesses (40) (538) Acquisitions and disposals 1,018 129 Net cash outflow before financing 978 (409)Issue of ordinary share capital 5 16Capital redeemed (547) -Capital redemption expenses (2) -Sainsbury's Bank minority shareholder investments - 4Non cash movements 206 (273)Movement in net debt 640 (662)Net debt (1,397) (2,037) 1. Restated for change in classification of Sainsbury's Bank's assets, liabilities and cash (see Note 1). 2. Free cash flow is before purchase of Safeway stores, payment of non-equity dividends and acquisitions and disposals. The net debt position improved significantly, reducing by £640 million to £1,397million. Excluding Sainsbury's Bank, net debt reduced by £615 million to £1,473million. This was as a result of positive free cash flow (before the purchaseof Safeway stores, payment of the non-equity dividend and acquisitions anddisposals) during the year of £361 million (excluding Sainsbury's Bank) andthrough the retained proceeds, of £254 million, from the disposal of Shaw's. Operationally, lower profits were offset by lower capital expenditure, improvedworking capital and higher disposal proceeds amounting to £266 million (2004:£152 million) from the sale of surplus non-trading properties. Sainsbury's Supermarkets working capital improved significantly year-on-year,which contributed to an operating cash inflow (excluding Sainsbury's Bank) of£911 million (2004: £847 million) in part helped by underlying improvements instock and creditors but also relating to the timing of Easter falling at theyear end. In addition, cash exceptionals relating to the Business Reviewestimated at £80 million will now be incurred in the new financial year.Eliminating these timing differences, underlying net debt at March 2005(excluding Sainsbury's Bank) is estimated to be between £1.6 billion to £1.7billion. Balance sheet Shareholders' funds decreased by £644 million to £4,374 million and net debtimproved by £640 million to £1,397 million in the year, decreasing gearing to 32 per cent (2004: 41 per cent). Return on Group capital employed decreased from 10.1 per cent to 4.9 per cent in the year reflecting lower operating profit performance and the disposal of Shaw's. Group capital expenditure Group capital expenditure reduced in the year to £797 million (2004: £838million). Sainsbury's Supermarkets capital expenditure was £457 million (2004:£572 million) excluding the acquisition of Safeway stores, a reduction of £115million over the previous financial year. This capital expenditure included£128 million (2004: £178 million) on new stores and £82 million (2004: £141million) on extensions and refurbishments. Group capital expenditure is forecast to be in the region of £550 million in thefinancial year ending March 2006. Pensions An actuarial valuation of the UK defined benefit pension schemes as at 29 March2003 indicated a deficit of £161 million. At 26 March 2005, the notional net deficit (after deferred tax), as disclosedunder FRS 17, on the defined benefit pension schemes was £346 million (2004:£441 million). The Group is not currently required to account for the profit and loss effect ofFRS 17. If the Group were to do this today, however, the profit before taxcharge would reduce by £10 million. International Financial Reporting Standards (IFRS) The Group will adopt IFRS for financial reporting in the year ending March 2006. It is estimated that the adoption of IFRS will have a small adverse impact onreported profit after tax, estimated to be between £0 million and £10 millionfor the year ended 26 March 2005. This impact excludes the effect of IAS 32 andIAS 39 - the Group has elected to take a one-year exemption in implementingthese standards as allowed under IFRS. The IFRS adjustments will have no impacton cash flow. The accounts for the year ended 26 March 2005 will also berestated under IFRS and will be available on 16 June 2005. Group profit and loss accountfor the 52 weeks to 26 March 2005 2005 2004 £m £m NoteTurnover including VAT and sales tax(i) 16,573 18,239VAT and sales tax (1,164) (1,098) Continuing operations 15,202 14,440Discontinued operations 207 2,701 Turnover excluding VAT and sales tax 3 15,409 17,141Cost of sales (including exceptional costs) 3 (14,726) (15,658)Gross profit 683 1,483 Group administrative expenses (including exceptional costs) 3 (850) (827) Continuing operations - underlying operating profit(ii) 2 334 590Exceptional operating costs 3 (507) (68)Amortisation of goodwill (4) -Continuing operations - operating (loss)/profit (177) 522 Discontinued operations - underlying operating profit(ii) 2 11 145Amortisation of goodwill (1) (11)Discontinued operations - operating profit 10 134 Group operating (loss)/profit 3 (167) 656Share of profit in joint ventures 1 -Profit on sale of properties 21 17Disposal of operations - discontinued 5 252 (3) Profit on ordinary activities before interest 107 670Net interest payable 6 (92) (60) Underlying profit on ordinary activities before taxation(iii) 254 675Exceptional items (234) (54)Amortisation of goodwill (5) (11)Profit on ordinary activities before taxation 15 610Tax on profit on ordinary activities 7 50 (206) Profit on ordinary activities after taxation 65 404Equity minority interest (4) (8) Profit for the financial year 61 396Non-equity dividends (113) -(Loss)/profit for the year after non-equity dividends (52) 396Equity dividends 8 (131) (301) Retained (loss)/profit (183) 95 Basic (loss)/earnings per share after non-equity dividends 9 (3.0)p 20.7pBasic earnings per share before non-equity dividends 9 3.5p 20.7pUnderlying earnings per share before non-equity dividends (iii) 9 9.0p 23.4pDiluted (loss)/earnings per share after non-equity dividends 9 (3.0)p 20.6pDiluted earnings per share before non-equity dividends 9 3.5p 20.6pUnderlying diluted earnings per share before non-equity dividends (iii) 9.0p 23.3p 9Equity dividends per share 8 7.8p 15.7p (i) Including VAT at Sainsbury's Supermarkets and sales tax at Shaw's Supermarkets. (ii) Before exceptional operating costs and amortisation of goodwill. (iii) Before exceptional items and amortisation of goodwill. Group statement of total recognised gains and lossesfor the 52 weeks to 26 March 2005 2005 2004 £m £m Profit for the financial year 61 396Currency translation differences on foreign currency net investments (3) (10)Total recognised gains and losses 58 386 There is no material difference between the above profit for the financial yearand the historic cost equivalent (2004: £nil). Reconciliation of movements in Group equity shareholders' funds Restated(i)for the 52 weeks to 26 March 2005 2005 2004 £m £mProfit for the financial year 61 396Non-equity dividends (113) -Equity dividends (131) (301) (183) 95Currency translation differences (3) (10)Goodwill previously written off to reserves 86 -Share redemption (547) -Share redemption expenses (2) -B share issue costs (1) -Shares vested 1 -Proceeds from ordinary shares issued for cash 5 16 Net movement in equity shareholders' funds (644) 101Opening equity shareholders' funds as restated(i) 5,018 4,917 Closing equity shareholders' funds 4,374 5,018 (i) Restated for change in accounting policy in accordance with UITF Abstract38 - Accounting for ESOP Trusts (see note 1). Shareholders' funds as publishedwere £5,104 million at 27 March 2004 before deducting a prior year adjustment of£86 million. Group balance sheet Restated(i)(ii)at 26 March 2005 and 27 March 2004 2005 2004 £m £m Fixed assetsIntangible assets 125 208Tangible assets 7,154 8,214Investments 20 30 7,299 8,452Current assetsStock 559 753Debtors Retail debtors (amounts falling due within one year) 271 319 Sainsbury's Bank debtors (amounts falling due within one year) 1,273 1,042 Sainsbury's Bank debtors (amounts falling due after more than one year) 1,342 1,170 2,886 2,531Assets held for resale 87 -Investments 114 228Cash at bank and in hand (including Sainsbury's Bank) 673 543 4,319 4,055Creditors: amounts falling due within one yearCreditors Retail creditors (2,152) (2,197) Sainsbury's Bank creditors (2,555) (2,279) (4,707) (4,476)Borrowings (354) (403)Sainsbury's Bank borrowings (36) (27)Net current liabilities (778) (851) Total assets less current liabilities 6,521 7,601Creditors: amounts falling due after more than one yearCreditors Retail creditors (4) (25) Sainsbury's Bank creditors (22) - (26) (25)Borrowings (1,704) (2,169) Provisions for liabilities and charges (332) (308)Total net assets 4,459 5,099 Capital and reservesCalled up share capital 620 486Share premium account 761 1,438Capital redemption reserve 547 -Revaluation reserve 22 22Profit and loss account 2,424 3,072Related Shares:
Sainsbury's