Final Results

16th May 2007 07:03

Sainsbury(J) PLC16 May 2007 16 May 2007 Preliminary Results for the 52 weeks ended 24 March 2007 New Targets set as Strong Performance puts Recovery ahead of Plan Financial Summary 2006/07 • Total sales (inc VAT) up 6.9 per cent to £18,518 million (2006: £17,317 million) • Underlying profit before tax (1) up 42.3 per cent at £380 million (2006: £267 million) • Profit before tax of £477 million (2006: £104 million) • Underlying basic earnings per share (2): 14.7 pence (2006: 10.5 pence) • Basic earnings per share of 19.2 pence (2006: 3.8 pence) • Proposed final dividend of 7.35 pence per share (2006: 5.85 pence), up 25.6 per cent making full year dividend of 9.75 pence (2006: 8.00 pence) up 21.9 per cent • Net debt £1.4 billion (2006: £1.5 billion ex Sainsbury's Bank), underlying cash (3) improvement of £162 million • Freehold and long leasehold property valued at £8.6 billion: 65 per cent above current net book value • Pension fund deficit (net of tax) reduced to £55 million from £431 million (IAS 19) • Retailing: sales growth of over £1 billion (inc VAT), like-for-like (4) sales excluding fuel up by 5.9 per cent and underlying operating profit (5) of £429 million up 21.9 per cent • Sainsbury's Bank: Underlying operating profit of £2 million (2006: operating loss of £10 million) Making Sainsbury's Great Again: Progress against 19 October 2004 Business Reviewtargets • Grown sales (6) by £1.8 billion: ahead of plan to reach £2.5 billion sales growth by March 2008 • Nine quarters of consecutive like-for-like sales growth • Over £450 million invested in customer offer: 20,000 lower prices since recovery plan announced and 13 out of 25 accolades at industry 'quality' awards • On track to deliver cost savings of £440 million by March 2008 • Strong profit growth as operational gearing coming through strongly • Sale of five per cent of Sainsbury's Bank to HBOS plc for £21 million creating 50:50 joint venture • Highest ever bonus: 118,000 colleagues to share £56 million bonus in June 2007 New three-year targets (2007 - 2010): From recovery to growth • New three-year targets overlap current plan and run to March 2010 • £3.5 billion of sales growth over next three years: (split grocery: two thirds and non-food: one third) (6) • Ten per cent growth in new space split equally between grocery and non-food • Over 50 per cent of property estate to be developed over next three years • £2.5 billion capital investment to support growth funded by operating cash flows • Online home delivery service to be expanded to 200 stores (currently 114 stores) • Price position maintained and quality improved via 100-150 basis points per annum from buying efficiencies reinvested in customer offer • 2007/08 cost target of £155 million on track: targeted savings thereafter to offset half of operating cost inflation Philip Hampton, chairman, said: "Over the past year we have delivered anotherstrong performance and our recovery is ahead of plan. Since March 2005, we havegrown sales by £1.8 billion with over £1 billion delivered in the 2006/07financial year. This means we are ahead of our target to grow sales by £2.5billion by March 2008. I'm especially pleased that we are now also demonstratingthat this strong sales performance is flowing through and is reflected inimproved profits. Our underlying profit before tax for the year was up 42.3 percent to £380 million. "This strong performance was delivered despite potential takeover speculation inthe last quarter of the year. The Board received a number of proposals from aprivate equity consortium all of which were subject to a number ofpre-conditions related to the consortium's proposed financing structure. "These conditions were outside the control of the Board and the consortiumconcluded they could not be satisfied and decided to withdraw. The Board did notreceive a formal bid approach capable of being put to shareholders. "Property has always been at the heart of our business and is closely aligned toour successful operation. Our estate still has considerable developmentpotential which we believe will maximise both operational and freehold propertyvalue. As we move from recovery to growth we believe it is right to retainownership of our properties. "We continue to review our capital structure on a regular basis. A year ago werefinanced our debt book with lower-cost property-backed securities. We haveagain looked at structural financing opportunities in the light of our revisedplans being announced today and believe that now is not the time for materialchange. We will, however, continue to review funding on a regular basis as thebusiness cash flows improve. "The Board is recommending a final dividend of 7.35 pence per share, making thefull year dividend 9.75 pence, an increase of 21.9 per cent compared to lastyear. This is covered 1.5 times by earnings which is in line with our previouslystated minimum objective. Going forward we expect dividend cover to rangebetween 1.5 times and 1.75 times." Justin King, chief executive, said "Our vision is simple; we are here to servecustomers well with a choice of great products at fair prices and by so doing,to provide shareholders with strong, sustainable financial returns. This hasdriven everything we have done since we outlined our Making Sainsbury's GreatAgain ("MSGA") recovery plan in October 2004. "Against clearly defined targets we made good progress this year. We've had astrong and sustained improvement in performance and this has added significantmomentum to our recovery. Sales remain the purest measure of customersatisfaction in our business, so this year's 7.3 per cent total sales growth (exSainsbury's Bank inc VAT) is a particularly important sign of progress. "Over the year we grew like-for-like sales excluding fuel by 5.9 per cent,despite limited maturing new space and extensions and the tougher comparativesof the previous year, delivering our ninth consecutive quarter of like-for-likesales growth in the last quarter of the year. This result represented growth ongrowth and demonstrated continued improvement and momentum. "This strong sales performance is ahead of our own expectations. It's also ourbest for many years. It shows that our recovery is ahead of plan and that we'vemade substantial progress in addressing many of the challenges outlined in ourrecovery plan. "These achievements give us a strong foundation on which to build. We believenow is the right time to look to the next stage of our recovery and to expandthe business to drive growth for the longer-term. "A key priority remains to build on and stretch our lead in food. It willalways be the number one reason why customers visit our stores. We share ourcustomers' passion for healthy, safe, fresh and tasty food and will continue toinnovate and provide leadership in delivering quality products, sourced withintegrity. But we want to speed up the development of our complementary non-foodoffer to give our customers a broader shopping experience. We will bring thesame principles of quality, value and innovation as we continue to build ourcapability and refine our customer offer. "Today we are announcing new three-year targets which build on the strongprogress we've made to date and move us from recovery to long-term growth. As weare tracking ahead of our original MSGA targets the new three-year targetsoverlap the final year of our MSGA recovery plan and run until March 2010. Ourfocus on driving sales continues with a target to deliver £3.5 billion ofadditional sales split two-thirds from grocery and one-third from non-foodranges from March 2007 to March 2010. Added to the £1.8 billion of sales growthalready delivered, this new target, if achieved, would give a total sales growthof £5.3 billion over the five-year period March 2005 to March 2010. "Delivering great product at fair prices will continue to be at the core of ourbusiness and the reinvestment of buying efficiencies (100-150 basis points perannum) in price and quality will be maintained and improved. We will alsocontinue to improve our operational efficiency to deliver an ever-improvingshopping experience for customers. We are on track to achieve our cost savingtarget of £155 million in 2007/08 and have targeted savings thereafter to offsethalf our operating cost inflation. "Our current store estate provides substantial development opportunities and weintend to extend a further 75 stores by March 2010. We're also actively seekingand developing a pipeline of new stores. Our target is to grow our total salesarea to over 19 million square feet as we increase our space by ten per centover the next three years. The new space will be split equally across groceryand non-food ranges. This goal enables us to continue to develop a great foodoffer while also growing total space for non-food ranges. "We're also extending the reach of the Sainsbury's brand. We plan to open 30 newsupermarkets and 100 convenience stores over the next three years. We also aimto extend our online home delivery service. This has been significantly improvedover the past two years and we will be increasing capacity in areas of highdemand, almost doubling the number of stores operating the service from justover 100 at the current time to 200. The performance of Sainsbury's Bank hasbeen stabilised and offers growth opportunities working with our partner HBOSplc. We are targeting pre-tax profits of £40 million in the year ending March2010 which, under our new joint venture arrangements, we would report half aftertax. "To support these ambitious expansion plans we expect our total capitalexpenditure over the next three years will be £2.5 billion, funded byoperational cash flows as we invest now for long-term growth and the creation ofongoing value. We expect to be broadly cash flow neutral over the three years. "These are ambitious plans which bring together the improvements we are makingin operational efficiency and in developing further our customer offer withongoing sales growth and the addition of new space. We expect to continue todeliver operational gearing with our planned sales growth flowing through toprofit at a percentage rate in the high single digits. As new space and ourother investments mature there will be a further step up in profit conversion infuture years. "The company is significantly stronger than it was when we launched our MSGAplan in 2004 and this has provided a firm base for future growth. Customers havebecome increasingly concerned with eating better and more healthily as well asthe social and ethical consequences of their supermarket shop. The Sainsbury'sbrand is well positioned and at the forefront of addressing these concerns. Wehave today laid out plans for the next three years and we are confident thatthese provide Sainsbury's with substantial opportunity for further developmentof our business and value creation for our shareholders." Notes: 1. Underlying profit before tax: Profit before tax from continuingoperations before any gain or loss on the sale of properties, impairment ofgoodwill, financing fair value movements and one-off items that are material andinfrequent in nature. In the current financial year, these one-off items werethe profit on part disposal of Sainsbury's Bank and past service gains ondefined benefit schemes. In the prior financial year, these one-off items werethe Business Review costs, IT insourcing costs and debt restructuring costs. 2. Underlying basic earnings per share: Profit after tax from continuingoperations attributable to equity holders before any gain or loss on the sale ofproperties, impairment of goodwill, financing fair value movements and one-offitems that are material and infrequent in nature, divided by the weightedaverage number of ordinary shares in issue during the year, excluding those heldby the ESOP trusts, which are treated as cancelled. 3. Underlying cash: Cash flow after adjusting for significant one-offitems. 4. Like-for-like sales: Like-for-like sales are adjusted to take intoaccount the timing of Easter falling on 16 April 2006 and 8 April 2007. 5. Underlying operating profit/(loss): Underlying profit before tax fromcontinuing operations before finance income and finance costs. 6. Sales target: This is defined as retailing sales inc VAT ex fuel, ofwhich the non-food element relates to general merchandise, health and beauty andclothing sales and the grocery element relates to food and household sales. 7. Certain statements made in this announcement are forward lookingstatements. Such statements are based on current expectations and are subjectto a number of risks and uncertainties that could cause actual events or resultsto differ materially from any expected future events or results referred to inthese forward looking statements. Unless otherwise required by applicable law,regulation or accounting standard, we do not undertake any obligation to updateor revise any forward-looking statements, whether as a result of newinformation, future developments or otherwise. 8. Sainsbury's will announce its First Quarter Trading Statement on 20June 2007. 9. We will be holding a presentation for analysts and investors at 9:45 am(BST). To view the slides of the Results Presentation and the Webcast: We recommend that you register for this event in advance, to do so, please visitwww.j-sainsbury.co.uk and follow the on-screen instructions. To participate inthe live event, please go to the website from 9.30 am (BST) on the day of theannouncement, and further instructions will be on the website. The archive ofthis event will be available from 16:00 (BST) on the day in the form of adelayed webcast. To listen to the Results Presentation: To participate, dial +44 (0) 20 7138 0817 at least ten minutes prior to thestart of the presentation. You will be asked to give your name and companydetails. You will then be placed on hold and will hear music until thepresentation starts. An archive of this event will be available from 12.30 BSTon +44 (0) 20 7806 1970, pin number 4886432# until midnight BST on Friday 18 May2007. To view the transcript of the presentation: Go to www.j-sainsbury.co.uk from 18May 2007. Enquiries: Investor Relations MediaElliot Jordan Pip Wood+44 (0) 20 7695 4931 +44 (0) 20 7695 6127 Operating review: strong progress this year Throughout the year Sainsbury's has focused on maintaining its lead in productquality and remaining very competitive on price. The company has also stepped upthe development of its complementary non-food offer, with the introduction ofmore ranges into more stores and it will also continue to grow its presence inthe convenience sector. Product availability is also now the best it has been for many years as thedepot network has been successfully reorganised to improve service to stores andnow handles more cases, in line with the increase in sales, at a reduced cost. Anew distribution centre, opening in Northampton later this year, is an importantstep in ensuring there is enough capacity to match growth expectations and willcreate 750 new jobs. With 788 stores across the UK, Sainsbury's is a mainstream retailer and thecompany has worked hard to restore 'universal appeal' - its ability to appeal toall shoppers. Sainsbury's has over 16 million customers each week, on average,and believes it can continue to grow. The company's emphasis on fresh and healthy food continues to differentiateSainsbury's and contributed to this year's strong sales performance. Itsheritage provides an ideal market position as customers increasingly wanthealthy, safe, fresh and tasty food. A focus on what customers want has driventhe recovery and will continue to do so. The strength of Sainsbury's offer Sainsbury's sales growth has been supported by the increasing relevance forcustomers of the values at the heart of its brand. The very values that madeSainsbury's stand out in the past, such as sourcing healthy and wholesome foodand respecting the environment, which have been a key focus of the MSGA recoveryplan, have become increasingly important to customers. This inspired thecompany as it addressed problems and worked to fix the basics of the operation. Best for food ... In October 2006 Sainsbury's was voted Supermarket of the Year at the RetailIndustry Awards and in November it again achieved outstanding success at theindustry's annual 'quality' awards, winning more than half of the 25 categories.The company has continued to invest in raising the quality of its food and whileit is always pleased to receive awards, the best recognition can be seen throughthe actions of customers buying more through their weekly shop. During the past year more than 5,000 own brand products are new or improved.This also includes making sure customers have clear and honest labelling as wellas leading the way on ingredient standards and the way in which products aresourced. In September 2006 the Taste the difference premium range was re-launched.Comprising nearly 1,400 products, and a £1 billion brand, the products meetstrict quality standards and now contain no artificial colours, flavours orhydrogenated fats, a move now being completed across all own label products.This is a huge task given the sheer volume of products sold. In January 2007 a number of changes were made to the company's 'basics' range toenable customers to make healthier choices. This included around 200 food anddrink products displaying the Wheel of Health multiple traffic light nutritionallabel, the lowering where possible, of salt, sugar and fat levels and a gradualprocess of removing unhealthy vegetable oils from the entire range of products.In April 2007 Sainsbury's became the first UK supermarket to announce theintention to remove all artificial colours and flavourings from own-brand softdrinks. This work will be completed by June 2007. These are just a few of themany improvements made. Sales of organic food continue to grow and the company sources all organicprimary chicken, beef, pork, milk, eggs, and in-season lamb from the UK. Thecompany sells around 1,000 different organic products with over 400 inSainsbury's SO organic range, the company's second largest sub brand. Customersvalue quality, fresh and seasonal food and Sainsbury's works with suppliers tosource as many products as possible from the UK, celebrating the freshness andseasonality of British produce. ...and health Eating a variety of foods is one of the most effective ways of achieving ahealthy diet and supermarkets have a key role to play in helping people balancetheir diet by providing a good, wide range of different products. Customers makeup their own mind about what they eat; so what they want is information to helpthem choose the right food for them. Sainsbury's believes its job is to provideclear and honest labelling about ingredients, cooking and nutrition. Sainsbury's was the first supermarket to put multiple traffic light nutritionallabels (MTLs) on the front of products when it introduced its Wheel of Healthsymbol in January 2005. The total number of items carrying the label is nowaround 4,500 products and the body of consumer research into nutritional labelsis building over time. As more retailers and manufacturers start labellingproducts, MTLs - the system approved by the Government's Food Standards Agency -are clearly emerging as the most effective and popular way to provide theinformation customers need to make healthier choices when shopping. Research carried out among 17,000 people on behalf of Netmums in February 2007showed that nearly 80 per cent of people preferred the MTL system over thealternative scheme which details guideline daily allowances (GDAs) on the frontof packs. GDAs are useful and Sainsbury's has put them on the back of packagingfor many years. It was also the first retailer to provide specific GDAs forchildren. But, MTL labels are even more effective because they give customersthe simple 'at-a-glance' information they want as they shop in store. Research from the Department of Health (DoH) showed that while people are awareof the concept of alcoholic units, they find it difficult to judge how many theyare drinking. In February the company became the first retailer to announce itwill follow the DoH's proposed voluntary guidelines on the labelling of alcoholon all own brand beers, wines and spirits encouraging sensible drinking byhelping people better understand the effects of alcohol. Work on labelling was just one of the initiatives singled out last November bythe National Consumer Council when it named Sainsbury's as the 'healthiestsupermarket'. Sainsbury's organised and hosted an event called 'New Ideas forHealth' in September 2006 to move forward the debate about food and health.Around 100 parents and professionals, including Caroline Flint, Minister forPublic Health, joined in the discussion with the company. Health issues arereceiving an increasingly higher profile but this event went further by tryingto identify the barriers to addressing problems, looking at who should takeresponsibility for doing this and coming up with some solutions. Following the event Sainsbury's began a three-year partnership with MEND, theUK's largest prevention and treatment programme for overweight and obesechildren and their families. The national partnership will see 450 MENDprogrammes rolled out over the next three years following a trial in eightareas. The trial delivered significant improvements to the health, wellbeing andself-confidence of participants. This is the first programme of this scalesponsored by a private company and it is being run by fully trained Sainsbury'sFood Advisors with the assistance of a local Youth Sport Trust colleague. Competitive pricing The £400 million investment in the customer offer outlined in our MSGA plan wascompleted by December 2006 and additional funds have subsequently been investedin early 2007. In total over £450 million has been invested in quality andprice. Having re-established competitiveness Sainsbury's guards its priceposition jealously and since January 2007 has cut a further 5,000 prices,bringing the total since announcing its commitment to 20,000. Ensuring Sainsbury's remains competitive on price was a key strand of therecovery plan and fundamental to making sure the brand appeals to the widestrange of people. But, what makes Sainsbury's different for customers is itsquality. In December 2006 it announced the decision to convert its entire banana range to100 per cent Fairtrade by July 2007. This is a great example of how Sainsbury'sheritage and customers' wishes have become increasingly aligned during the year.The company has worked with banana growers in the Windward Islands for the last50 years and its customers were already buying a large number of Fairtradebananas. Customers shopping in Sainsbury's can buy Fairtrade bananas for around25 pence a kilo less than Fairtrade bananas generally available and at the sameprice as that charged for conventional bananas in other mass marketsupermarkets. This represents an investment of approximately £4 million inquality that Sainsbury's customers value. Every minute 1,000 bananas are sold in Sainsbury's. By selling Fairtrade bananasat the same price as conventional bananas Sainsbury's customers are helping tomake an enormous difference to the Fairtrade farmers and their communities. Thisis the biggest conversion of its kind worldwide and Sainsbury's now sells moreFairtrade bananas than all other major UK supermarkets combined. Strong supplier relationships: sourcing with integrity Sainsbury's enjoys strong and balanced relationships with suppliers and sharesthe same aim to deliver innovative, high-quality products at fair prices forcustomers. In November 2006 it announced an industry first with the launch of anew payment management system to make it easier and quicker for suppliers toaccess account information and gain early payments. The system is currently inthe early stages of the trial process and will be rolled-out during the currentfinancial year. Suppliers view online their trading account including invoices,debit notes, remittance advices and payment dates, giving them much bettervisibility of their expected cash flow. Early cash settlements can also be madeif suppliers opt to sell their invoices, via the new system, to a third-partyfinancial institution. In May 2006 the 'Supply Something New' programme was launched where managersmeet new suppliers in the search for high quality and innovative, locallyproduced food for customers to enjoy. Six events have been held to dateresulting in over 20 new suppliers. This year 12 regional managers were alsoappointed, responsible for developing the regional sourcing programme,supporting and expanding the 3,000 regional products already sold. In October 2006 Sainsbury's Dairy Development Group was introduced, working witharound 400 dairy farmers to supply all 420 million litres of conventional milkbought by the company's customers each year. Sainsbury's believes the market isbest served by initiatives that connect farmers directly to consumers. Forexample, Farm Promise milk, launched in April 2006, gives farmers a fair premiumand makes a contractual commitment with farmers to support them in converting toorganic milk production. Through this and other initiatives the company will bepaying a £10 million premium directly to farmers each year. This approach is being extended into other areas of agriculture - a LambPartnership in Livestock scheme was set up in September 2006 and a similarapproach with pork suppliers is currently being developed. In January 2007 'FarmConnections' was launched providing 700 Taste the difference beef farmers withcomputers, software and training. This means they can compete in the market andbe better informed of industry matters and production costs. So far over 500farmers have signed up. Sainsbury's has built up innovative sustainability plans supported by the MarineConservation Society, and was the first retailer to sell Marine StewardshipCouncil (MSC) cod from a sustainable source. This was just one of many industryfirsts in fish and Sainsbury's sells the largest range of MSC products. None ofthe fish sold by Sainsbury's is 'red' rated based on a colour rating system andthe company is working to move all fish to 'green' ratings. Sainsbury's is oneof the UKs leading fishmongers and this means that taking the lead on suchimportant issues has an enormous effect on the fish being eaten in the UK. Thecompany also started selling 100 per cent line-caught cod and haddock and is thebiggest retailer to do this. Complementary non-food Food remains at the heart of Sainsbury's offer but the company set a target forcomplementary non-food to deliver £700 million of the £2.5 billion sales growthtarget. Over the last 18 months new layouts, fixtures, fittings and ranges havebeen trialled in 15 stores to assess the non-food products and presentation bestsuited to Sainsbury's customers. The most successful elements have beenintroduced into 48 stores as well as those which have been refurbished andextended and the process is a dynamic one with improvements being made on anongoing basis. The addition of sales space through both new store developmentand extensions is playing an important role as the growth of these ranges isaccelerated. Sainsbury's continues to build its infrastructure and capability in non-food andopened offices in Hong Kong and Poland in 2005. This is enabling the company towork directly with manufacturers in the development of higher quality bettervalue products. Sainsbury's reputation for quality, value and innovation is just as relevant toits non-food ranges as it is to food. In 'branded' areas such as music andentertainment the focus is on offering products at competitive prices and thecompany has gained significant market share of recent DVD and CD releases. Inclothing and 'home' ranges, innovation, design and value are all important tocustomers. In March 2007 the company introduced a new premium homeware rangeunder the 'Different by design' brand which mirrors the premium 'Taste thedifference' food offer. TU, Sainsbury's own label clothing range, continues to be a star performer andunderpins the company's non-food offer. It is a great example of Sainsbury'sapproach to non-food, offering stylish designs at competitive prices. In March2006 a range of clothing made from Fairtrade certified cotton was launched. Therange consists of 22 different styles across men's, women's and children'sclothing and is designed by an in-house design team as part of the TU clothingcollection. Availability Product availability is also now the best it has been for many years. The depotnetwork has been successfully reorganised to continue to improve service tostores. In line with the increase in sales, the depots now handle over a millionmore cases each week than in the previous year. Improved efficiencies have alsoreduced the cost per case and an additional 50 million cases are now deliveredfor the same costs achieved the previous year. A new distribution centre in Northampton will open later this year to ensurethere is enough capacity to match growth expectations, creating 750 new jobs.The depot will initially provide additional capacity this Christmas and will befully operational by the middle of next year. Another sign of increased salesperformance is the extension of the depot in East Kilbride and at Waltham Pointin Hertfordshire a re-configuration will improve the capacity and reliability ofthe depot. Corporate responsibility Corporate responsibility principles are at the core of Sainsbury's business andits brand and have been since the company opened its first store in 1869. Overthe past year there has been a huge increase in the interest in social andethical issues and Sainsbury's background has meant it has been well placed toaddress customer concerns. During the year most other retailers announced plansto address concerns over issues such as health and environmental impacts, soSainsbury's challenge is to keep leading, innovating and achieving greatresults. Five principles underpin the company's activities. These are to be 'the bestfor food and health', 'sourcing with integrity', to have 'respect for ourenvironment', 'making a positive difference to our community' and to be 'a greatplace to work'. Stretching targets are in place to focus work in these areas. In April 2007 Sainsbury's announced its 'Make the Difference' plan. Thisreflects the fact that customers are increasingly concerned about social andethical issues; they now expect companies to meet their responsibilities, butthey also want to know what they can do as well. This follows a long associationwith the We Are What We Do (WAWWD) global social change movement. The plan takes policy out of the boardroom and puts the company and itscustomers in partnership. Each month a Make the Difference day is being held toraise a specific issue and take action. Importantly customers are also shownhow they can take action too. With over 16 million customers each week, workingtogether means really making the difference. The first Make the Difference day was on 27 April 2007. During that daySainsbury's stopped issuing disposable plastic carrier bags and instead gavecustomers a 'Bag for Life'. This bag is made from 100 per cent recycledmaterial and is typically used around 20 times. When it is worn out customerscan exchange it for a new bag and Sainsbury's recycles their old one. These bagsnormally cost 10 pence each but on this day over six million were issued forfree. It was a perfect example of working together - customers receive the bagsbut must re-use them to help reduce the amount of disposable bags incirculation. Respect for our environment Sainsbury's has invested more than £15 million in energy efficiency projects andit won the Carbon Management City of London Liveable City Award 2006 through itsinnovative projects to reduce emissions. Much of the work is about good housekeeping and almost all large supermarketsnow have intranet linked, automated building controls to allow improvedefficiency and manage power loads to further reduce energy consumption. A big issue for customers is the amount of food packaging in use and itsenvironmental impact. Sainsbury's has already reduced excessive packaging onmany products, such as Easter eggs where since 2004, it has reduced the weightof packaging by up to 87 percent with the vast majority of the remainingpackaging now recyclable, reusable or compostable. In September 2006 the company announced the removal of 3,550 tonnes of plasticfrom its output every year. This was achieved by replacing 150 million plastictrays and bags on 500 ready meal and organic food products with 'compostablepackaging'. Instead of plastic, the packaging uses maize, sugar-cane or starchwhich can naturally break down in a garden compost heap. Sainsbury's shares its customers' belief that plastic bags contribute tolong-term environmental damage so in September it launched a new bag to replacethe previous free carrier. A third of the new orange bag is made from recycledmaterial and can, in turn, be recycled and made into another bag. This will save 1.7 billion old style carrier bags and 6,500 tonnes of plastic every year. Thecompany is still the only UK supermarket to offer customers a free carrier bagwith a high proportion of recycled material, but urges others to follow thislead. The company has promoted re-usable shopping bags since the mid 1990's. InNovember 2006 it teamed up with Arts Council England to produce limited editionre-usable bags designed by well-known artists. The bags were incredibly popularand sold out in 12 weeks. Sainsbury's was also the obvious outlet for a similarenvironment-friendly bag designed by leading accessories designer AnyaHindmarch, in collaboration with WAWWD. The bags went on sale in April and soldout in one hour. Making a positive difference to our community Sainsbury's stores are at the heart of the communities they serve and last yearthe company invested £18 million in community initiatives, and a further £12million from charity fundraising and donations in its stores. Activities focuson areas that matter most to colleagues and customers such as food, family,health and children. The Active Kids programme is a great example of this and 38,000 registrationshave been received for the 2007 scheme. For the first time this year thenation's one million Scouts and Girl Guides are also eligible to join. Customersearn Active Kids vouchers against spend in-store and online which can then beredeemed by schools against activity and cookery equipment. Since the launch ofActive Kids in 2005 £34 million of sports equipment, kit and coaching has beendonated to over 26,000 UK schools and nurseries. Active Kids also aims toencourage healthy eating as customers earn bonus vouchers for buying freshfruit, vegetables and salad, plus any of the 2,350 foods marked with the healthy'apple stamp', such as milk, pasta, rice and fresh fish. Sainsbury's also works with the Youth Sports Trust and English Schools AthleticsAssociation as part of its commitment to support grass roots activities ratherthan national sporting teams or events. All the profit from selling bags forlife, £159,000 in 2006/07, goes directly into local community projectsrecommended by store colleagues as part of a community grants programme. Another great example of a scheme that supports Sainsbury's business, thecommunity and the environment is its food donation scheme which uses surplusfood past its sell-by date but not its use-by date. This is distributed tocharities across the country such as the Salvation Army and FareShare. In theyear ending March 2007 £3.4 million of food was donated to homeless charitiesand 60 per cent of stores are linked to local charities through the scheme. Theaim is to increase this to 100 per cent and Sainsbury's remains the only UKsupermarket to donate food in this way all year round rather than just at peaktrading periods. Community involvement also goes beyond stores such as the sponsorship of ComicRelief and Sport Relief. This year over £7 million was raised for Comic Reliefthrough sales of Comic Relief merchandise and colleague activity. Thisrepresented 22 per cent of the total £32 million of money raised on the night. Colleagues: a great place to work The majority of store colleagues live within the communities served by theirstore and many donate time and effort to a broad range of good causes outsidework. The company's Local Heroes awards scheme, recognises and encouragescolleagues in stores, depots and offices who do this and funds raised bycolleagues are matched with awards of between £200 and £500. The scheme is nowin its sixth year during which time the company has donated around £750,000 togood causes. This year around £250,000 was donated, an increase of 48 per centover the previous year. Colleagues are key to the company's success and over the past year leadershiptraining to 9,000 managers throughout the business was completed. We track howengaged colleagues are with our goals and values through our 'talkback' surveyand last year saw marked improvements in both colleague engagement and ourleadership skills. The Tell Justin suggestion scheme was launched in September 2004. Nearly 17,000ideas have been received since that time and around ten per cent of suggestionsare actioned. This year Sainsbury's will pay its highest ever bonus with 118,000 colleaguessharing £56 million in bonus payments in June 2007. Including this payment,over the last three years Sainsbury's will have paid £145 million in bonusscheme payments. Developing stores Following the improvement in its performance the company renewed its search lastyear for locations where it could introduce Sainsbury's to new communities.During the 2006/07 financial year, space was increased by 3.8 per cent. Thiswas ahead of target primarily due to increased activity in the second half ofthe year. During the year 20 supermarkets were opened and 18 extended. A further 50 wererefurbished, one was downsized and 48 benefited from investment in theirnon-food offer. In the convenience operation, 20 stores opened, 22 wererefurbished and 30 converted to the 'Sainsbury's @' format. Two conveniencestores closed and two supermarkets were closed due to relocation to improvedsites. New space growth opportunities are now being developed as the company plans aten per cent growth in space over the next three years. The company plans toopen 30 new supermarkets and 100 new convenience stores and is targeting thecompletion of 75 extensions and 190 refurbishments with the large majorityundertaken in its freehold and long leasehold estate. The property portfolio continues to be actively managed. A specialist propertyteam is building a pipeline of new stores. In addition more than 50 per cent ofSainsbury's current estate will be developed by March 2010 and at least 60stores will be over 55,000 square feet with over 15,000 square feet. of non-foodranges by March 2010. The pipeline will be developed to deliver space growth atfive per cent per annum from 2009/10. The company is also exploringpartnerships to deliver major development opportunities. The ownership of property is aligned to these operational plans and providesoperational flexibility as well as significant opportunity to maximise bothoperational and freehold property value from Sainsbury's portfolio. Sainsbury's online The online operation has had an outstanding year. Sales grew by 49 per cent,with a record Christmas performance. Eighty-three per cent of UK postcodes arenow covered and the service has 64,000 customers each week. New customerscontinue to be attracted to the service via recommendations from family andfriends, the most powerful advocates there are. Sainsbury's is the first groceryretailer to operate an Electric Zero Emission vehicle. By Autumn 2008, the 3.5tonne van, which is suitable for highly urban areas, will be responsible for thetransport of 20 per cent of all online orders and drivers will continue tocollect customer's unwanted Sainsbury's plastic carrier bags for recycling. Going forward, the company believes there is significant growth potential in theonline operation and plans to increase capacity in areas of high demand. As aresult the number of stores operating the service will reach 200 by March 2010and sales are expected to more than double over the next three years. Sainsbury's Bank Sainsbury's Bank became a 50:50 joint venture operation in February 2007 whenfive per cent of the business was sold to the company's partner HBOS plc for £21million. The Bank remains an important part of the Group and the new ownershipstructure reflects the shared commitment Sainsbury's and HBOS plc has to growingthe business. The Bank has made good progress in stabilising its operations over the year anda tight focus on cost control and tighter risk management actions implementedover the past two years have offset what has been a worsening environment forconsumer credit. In 2006/07 Sainsbury's Bank made an underlying operatingprofit of £2 million. Sainsbury's Bank continues to offer growth opportunitiesand the company is targeting profits of £40 million in the year ending March2010 of which half would be reported after tax. Financial review: progress in year The financial results for the 52 weeks to 24 March 2007 reflect strong progresson the MSGA plan. Sales (inc VAT) increased by 6.9 per cent to £18,518 million(2006: £17,317 million). Underlying profit before tax was up 42.3 per cent at£380 million (2006: £267 million). Underlying basic earnings per shareincreased to 14.7 pence (2006: 10.5 pence). Profit before tax was £477 million(2006: £104 million). Basic earnings per share increased to 19.2 pence (2006:3.8 pence). A final dividend of 7.35 pence per share is proposed (2006: 5.85pence), making full year dividend of 9.75 pence (2006: 8.00 pence). Summary income statement 2007 2006for the 52 weeks to 24 March 2007 £m £m % changeContinuing operationsSales (inc VAT)Retailing - Supermarkets and Convenience 18,227 16,987 7.3Financial services - Sainsbury's Bank (1) 291 330 (11.8)Total sales (inc VAT) 18,518 17,317 6.9Sales (ex VAT)Retailing - Supermarkets and Convenience 16,860 15,731 7.2Financial services - Sainsbury's Bank (1) 291 330 (11.8)Total sales (ex VAT) 17,151 16,061 6.8Underlying operating profitRetailing - Supermarkets and Convenience 429 352 21.9Financial services - Sainsbury's Bank (1) 2 (10) 120.0Total underlying operating profit 431 342 26.0Underlying net finance costs (2) (51) (75) 32.0Underlying profit before tax 380 267 42.3Business Review operating costs - (51) n/aIT insourcing costs - (63) n/aDebt restructuring costs - (38) n/aProfit on sale of properties 7 1 600.0Profit on part disposal of Sainsbury's Bank 10 - n/aPast service gains on defined benefit schemes 72 - n/aFinancing fair value movements 8 (12) 166.7Profit before tax 477 104 358.7Income tax expense (153) (46) (232.6)Profit for the financial year 324 58 458.6 Underlying basic earnings per share 14.7p 10.5p 40.0Basic earnings per share 19.2p 3.8p 405.3Proposed dividend per share 9.75p 8.0p 21.9 (1) Sainsbury's Bank has been fully consolidated until theGroup sold five per cent shareholding in February; thereafter it has been equityaccounted as a joint venture. (2) Net finance costs pre financing fair value movements(2006: pre financing fair value movements and debt restructuring costs). Retailing sales (inc VAT) increased by 7.3 per cent to £18,227 million driven bygood like-for-like growth and new space. Key retailing metrics 2007 2006Like-for-like sales % (inc fuel) (Easter adjusted) 5.7 4.1Easter adjustment % (1) 0.3 (0.4)Implied impact of new space % 1.3 2.0Total sales % (inc fuel) 7.3 5.7 Like-for-like sales % (ex fuel) (Easter adjusted) 5.9 3.7Easter adjustment % (1) 0.3 (0.4)Implied impact of new space % 1.5 2.1Total sales % (ex fuel) 7.7 5.4 Grocery price inflation/(deflation) % (2) 1.0 (1.5) Retailing underlying operating profit (£m) 429 352Year on year growth % 21.9 14.3Retailing underlying operating margin % (3) 2.54 2.24 (1) Easter adjustment takes into account the timing of Easterfalling on 16 April 2006 and 8 April 2007. (2) The Group is not intending to provide inflation data infuture trading updates. (3) Retailing underlying operating profit divided by retailingsales ex VAT. In total, 639,000 square feet of net new space was added in the year, a spaceuplift of 3.8 per cent which was ahead of target due to a high level of propertydevelopment completed in the second half. In the next financial year the Groupis targeting incremental space growth of around two per cent. Retailing store numbers and space summary Supermarkets Convenience Total Number Area Number Area Number Area 000 sq ft 000 sq ft 000 sq ftAs at 25 March 2006 (1) 472 16,090 280 635 752 16,725 New stores 20 375 20 53 40 428Closures (2) (34) (2) (5) (4) (39)Extensions/downsizes/refurbishments 249 1 250As at 24 March 2007 490 16,680 298 684 788 17,364 MemorandumExtensions 18 272 - - 18 272Downsizes 1 (35) - - 1 (35)Refurbishments/conversions 50 12 52 1 102 13Complimentary non-food 48 - - - 48 -Total projects 117 249 52 1 169 250 (1) Reflects central supermarkets reclassified fromConvenience to Supermarkets and other size adjustments. Retailing underlying operating profit increased by 21.9 per cent to £429 million(2006: £352 million) reflecting the strong sales performance and a 30 basispoint improvement in retailing underlying operating margin (ex VAT) to 2.54 percent for the year (2006: 2.24 per cent). Continued improvement in operationalgearing has been driven from higher sales volumes and further cost savings.This helped to mitigate the impact of continued investment in price and productquality and higher energy prices in the second half. Key areas of cost saving have been in supply chain, labour and IT costs andthere continues to be a focus on managing central costs and improving stock lossalthough shrinkage challenges remain an issue as the external environmentremains tough. Overall, the Group remains on track to achieve the £440 millioncost savings over three years that underpin the MSGA recovery plan and supportsinvestment in the customer offer. Financial services - Sainsbury's Bank The accounting for Sainsbury's Bank in the financial year reflects the sale offive per cent shareholding in Sainsbury's Bank to HBOS plc on 8 February 2007.Until 8 February 2007, Sainsbury's Bank performance has been fully consolidatedinto the Group results and contributed £2 million at an operating level. Fromthis date the Group has accounted for its equity share (i.e. 50 per cent) ofSainsbury's Bank's post tax profit, which delivered a break even result in theperiod up to 24 March 2007. Underlying net finance costs Underlying net finance costs decreased by £24 million to £51 million (2006: £75million), which comprised a £2 million increase in underlying finance costs anda £26 million increase in finance income. The lower net finance costs reflectedthe £12 million benefit of lower financing rates following the debtrestructuring announced on 24 March 2006 as well as a reduction in underlyingnet debt through cash flow improvements. The increase in return on pensionassets offsets the additional interest cost from the pension contribution of£350 million. In the next financial year the Group expects underlying netfinance costs to remain broadly level year on year. Underlying net finance costs 2007 2006for the 52 weeks to 24 March 2007 £m £mInterest income 15 7Net return on pension scheme assets 41 23Underlying finance income (1) 56 30 Interest costs (117) (115) Capitalised interest 10 10Underlying finance costs (1) (107) (105) Underlying net finance costs (51) (75) (1) Pre financing fair value movements (2006: pre financingfair value movements and debt restructuring costs). Profit on sale of properties Surplus assets were sold during the year generating a profit on sale of £7million (2006: £1 million) and cash proceeds of £106 million (2006: £164million) which was ahead of target. The Group will continue to dispose ofsurplus assets and expects the proceeds in the next financial year to be around£75 million. Profit on part disposal of Sainsbury's Bank On 8 February 2007, the Group sold five per cent shareholding in Sainsbury'sBank for £21 million to HBOS plc. This sale generated a profit on disposal of£10 million. Past service gains on defined benefit schemes Following changes introduced by the Finance Act effective from 6 April 2006, thedefined benefit schemes have implemented revised terms to provide members withthe option to surrender a greater proportion of their pension for a tax-freecash lump sum payment. Accordingly, the Group revised its assumptions used incalculating the retirement benefit obligations in respect of this and certainminor changes in scheme rules and has recognised £72 million of past servicegains in the Group income statement. Financing fair value movements Fair value movements for the Group resulted in a £8 million gain (2006: £12million loss, of which £4 million loss related to Sainsbury's Bank). Taxation The income tax charge was £153 million (2006: £46 million), with an underlyingrate of 34.8 per cent (2006: 35.5 per cent) and an effective rate of 32.2 percent (2006: 44.2 per cent). The underlying rate exceeded the nominal rate of UKcorporation tax principally due to the lack of effective tax relief ondepreciation of UK retail properties. This disallowable depreciation amountedto £73 million in the financial year and the Group expects it to remain at asimilar level in the next financial year. With effect from 1 April 2008 thestandard rate of UK Corporation tax will reduce from 30 per cent to 28 per centand as a result will reduce the underlying rate in the financial year-endingMarch 2009. Underlying basic earnings per share Underlying basic earnings per share increased by 40.0 per cent from 10.5 penceto 14.7 pence, reflecting the improvement in underlying profit after taxattributable to equity holders, after adjusting for the minority interests atSainsbury's Bank. Dividends A final dividend of 7.35 pence per share is proposed (2006: 5.85 pence) and willbe paid on 20 July 2007 to shareholders on the Register of Members at the closeof business on 25 May 2007. The total proposed dividend for the year istherefore up 21.9 per cent to 9.75 pence (2006: 8.00 pence). Underlyingdividend cover increased in the year to 1.5 times (2006: 1.3 times). Goingforward the Group expects to achieve underlying dividend cover in the range of1.5 times to 1.75 times. Cash flow statement Group net debt as at 24 March 2007 was £1,380 million (2006: £1,415 million).Adjusting for the impact of Sainsbury's Bank, which was consolidated in theprior year, net debt reduced by £156 million (2006: ex Sainsbury's Bank £1,536million). Within the overall cash flow movement for the year there were a number ofsignificant one-off items. The significant cash outflows related to a £240million one-off pension contribution made in May 2006 and £90 million paid outin relation to one-off costs charged to the income statement in the prior year.These were offset by significant cash inflows relating to £93 million receivedin respect of property disposals and the sale of five per cent shareholding ofSainsbury's Bank, £81 million proceeds from issue of shares and around £150million relating to year-end timing differences on working capital which areexpected to reverse in the next financial year. After adjusting for theseitems, underlying cash flow for the year was £162 million favourable. In thenext financial year the Group expects to deliver an underlying cash flow neutralposition after adjusting for the reversal of the £150 million working capitaltiming differences. Summary cash flow statement 2007 2006 for the 52 weeks to 24 March 2007 £m £mCash generated from operations (1) 830 780Net interest (83) (156)Corporation tax received 9 3Cash flow before appropriations 756 627Purchase of non-current assets (788) (561)Disposal of non-current assets/operations 93 151Proceeds from issue of shares 81 22Capital redemption (2) (9)(Repayment of)/proceeds from borrowings (75) 65Debt restructuring costs (2) (22)Dividends paid (140) (131)Net (decrease)/increase in cash and cash equivalents (77) 142Decrease/(increase) in debt 79 (65)IAS 32 and IAS 39 adjustments - (51)Other non-cash movements 33 -Movement in net debt 35 26Opening net debt (1,415) (1,441)Closing net debt (1,380) (1,415)Of which:Retailing (1,380) (1,536)Financial services - 121Closing net debt (1,380) (1,415) (1) Includes £240 million (2006: £110 million) of cash paid into thedefined benefit pension schemes and £90 million cash outflow in relation toitems charged to the income statement in prior years (2006: £68 million). Financing The Group's financing requirements are managed by pre-funding cash flowrequirements and maturing debt obligations, maintaining a diversity of fundingsources with an appropriate mix of fixed, floating and inflation-linkedborrowings and by spreading debt repayments over a range of maturities. The Group's core funding takes the form of term loans secured over propertyassets. Short-term funds are raised on the wholesale money markets. Contingentliquidity is maintained through a new £400 million five-year revolving creditfacility, entered into in February 2007. As at 24 March 2007 there were £nildrawings under this facility (2006: £nil drawings under 2006 bank facility). Capital expenditure Capital expenditure increased in the year to £737 million (2006: £525 million).This included £308 million on new stores (2006: £203 million), of which £138million (2006: £59 million) relates to acquisitions and freehold purchases and£368 million on extensions and refurbishments (2006: £233 million). Capitalexpenditure is forecast to be in the region of £750 million for the nextfinancial year. This is an increase on previous guidance reflecting increasedspend on the new store development pipeline, extensions and a largerrefurbishment programme. Balance sheet Total equity as at 24 March 2007 was £4,349 million (2006: £3,965 million).Gearing reduced year on year to 32 per cent (2006: 36 per cent). Summary balance sheet 2007 2006 at 24 March 2007 £m £m Non-current assets 7,661 8,927 Inventories 590 576 Trade and other receivables 197 276 Amounts due from Sainsbury's Bank customers and other banks - 1,940 Cash and cash equivalents 1,128 1,028 Debt (2,508) (2,443) Net debt (1,380) (1,415) Trade and other payables and provisions (2,719) (3,031) Amounts due to Sainsbury's Bank customers and other banks - (3,308) Net assets 4,349 3,965 Equity shareholders' funds 4,349 3,886 Minority interests - 79 Total equity 4,349 3,965 Freehold property valuation The net book value of the Group's freehold and long leasehold properties is £5.2billion. The Group estimates the current market value to be around 65 per centhigher based on an investment basis valuation carried out by independentsurveyors as at 24 March 2007, giving a total value of £8.6 billion. The Grouphas 292 freehold and long leasehold properties comprising 286 supermarkets,which account for 62 per cent of total supermarket space, and six depots. Pensions The defined benefit schemes were subject to a triennial valuation carried out byWatson Wyatt, the schemes' independent actuaries at March 2006, on the projectedunit basis. The results of this valuation are expected to be approved by theschemes' trustees in June 2007. The retirement benefit obligations as at 24March 2007 have been calculated, where appropriate, in line with this draftvaluation. As at the 24 March 2007, the retirement benefit obligations less the fair valueof plan assets were £103 million (2006: £658 million). The net deficit afterdeferred tax was £55 million (2006: £431 million). The movement reflects theassumptions changes set out in note 12, £240 million of the £350 million one-offcash contributions (£110 million was paid in the prior financial year) andfavourable market conditions. Group income statement for the 52 weeks to 24 March 2007 2007 2006 Note £m £m Continuing operations Revenue 3 17,151 16,061 Cost of sales (15,979) (14,994) Gross profit 1,172 1,067 Administrative expenses (669) (839) Other income 17 1 Operating profit 520 229 Finance income 4 64 30 Finance costs 4 (107) (155) Profit before taxation 477 104 Analysed as: Underlying profit before tax (1) 380 267 Profit on sale of properties 7 1 Financing fair value movements 4 8 (12) One-off items 5 82 (152) 477 104 Income tax expense 6 (153) (46) Profit for the financial year 324 58 Attributable to: Equity holders of the parent 325 64 Minority interests (1) (6) 324 58 Earnings per share 7 pence pence Basic 19.2 3.8 Diluted 18.9 3.8 (1) Profit before tax from continuing operations before any gain or losson the sale of properties, impairment of goodwill, financing fair valuemovements and one-off items that are material and infrequent in nature. In thecurrent financial year, these one-off items were the profit on part disposal ofSainsbury's Bank and past service gains on defined benefit schemes. In theprior financial year, these one-off items were the Business Review costs, ITinsourcing costs and debt restructuring costs. Group statement of recognised income and expense for the 52 weeks to 24 March 2007 2007 2006 Note £m £mCurrency translation differences - 2Actuarial gains/(losses) on defined benefit pension schemes 179 (255)Available-for-sale financial assetsfair value movements 24 26Cash flow hedgeseffective portion of fair value movements - 1transferred to income statement - (1)Share-based payment tax deductions recognised directly in equity 6 17 5Deferred tax on items recognised directly in equity 6 (59) 68Net income/(loss) recognised directly in equity 161 (154) Profit for the financial year 324 58Total recognised income/(expense) for the financial year 485 (96) Attributable to:Equity holders of the parent 486 (90)Minority interests (1) (6) 485 (96) Effect of changes in accounting policy on adoption ofIAS 32 and IAS 39 for the 52 weeks to 25 March 2006: Equity holders of the parent (78)Minority interests - (78) Group balance sheet at 24 March 2007 and 25 March 2006 2007 2006 Note £m £mNon-current assets Property, plant and equipment 7,176 7,060Intangible assets 175 191Investments in joint ventures 98 10Available-for-sale financial assets 137 113Amounts due from Sainsbury's Bank customers - 1,473Other receivables 50 -Deferred income tax asset - 55 7,636 8,902Current assets Inventories 590 576Trade and other receivables 197 276Amounts due from Sainsbury's Bank customers and other banks - 1,888Available-for-sale financial assets - 52Cash and cash equivalents 10b 1,128 1,028 1,915 3,820Non-current assets held for sale 25 25 1,940 3,845Total assets 9,576 12,747 Current liabilities Trade and other payables (2,267) (2,094)Amounts due to Sainsbury's Bank customers and other banks - (2,299)Short-term borrowings (373) (253)Derivative financial instruments (2) (10)Taxes payable (65) (63)Provisions (14) (91) (2,721) (4,810)Net current liabilities (781) (965) Non-current liabilities Other payables (33) (30)Amounts due to Sainsbury's Bank customers and other banks - (1,009)Long-term borrowings (2,090) (2,178)Derivative financial instruments (43) (2)Deferred income tax liability (168) -Provisions (69) (95)Retirement benefit obligations 12 (103) (658) (2,506) (3,972)Net assets 4,349 3,965 Equity Called up share capital 495 489Share premium account 857 782Capital redemption reserve 670 668Other reserves 143 (1)Retained earnings 2,184 1,948Equity shareholders' funds 9 4,349 3,886 Minority interests 9 - 79Total equity 9 4,349 3,965 Group cash flow statement for the 52 weeks to 24 March 2007 2007 2006 Note £m £mCash flows from operating activities Cash generated from operations 10a 830 780 Interest paid (95) (159) Corporation tax received 9 3 Net cash from operating activities 744 624 Cash flows from investing activities Purchase of property, plant and equipment (778) (549)Purchase of intangible assets (7) (6)Proceeds from disposal of property, plant and equipment 106 164Acquisition of and investment in subsidiaries, net of cash acquired (3) (6)Proceeds from part disposal of Sainsbury's Bank 21 -Cash disposed on part disposal of Sainsbury's Bank (33) -Costs of disposal of operations (1) (13)Interest received 15 6Net cash from investing activities (680) (404) Cash flows from financing activities Proceeds from issuance of ordinary shares 81 22Capital redemption (2) (9)Repayment of short-term borrowings (53) (348)Repayment of long-term borrowings (22) (1,701)Proceeds from short-term borrowings - 50Proceeds from long-term borrowings - 2,056Debt restructuring costs (2) (22)Repayment of capital element of obligations under finance lease borrowings - (1)Interest elements of obligations under finance lease payments (3) (3)Dividends paid 8 (140) (131)Issue of loan from minority shareholder - 9Net cash from financing activities (141) (78) Net (decrease)/increase in cash and cash equivalents (77) 142 Opening cash and cash equivalents 842 700 Closing cash and cash equivalents 10b 765 842 Notes to the financial statements 1 Status of financial information The financial information, which comprises the Group income statement, Groupstatement of recognised income and expense, Group balance sheet, Group cash flowstatement and related notes, is derived from the full Group financial statementsfor the 52 weeks to 24 March 2007 and does not constitute full accounts withinthe meaning of section 240 of the Companies Act 1985 (as amended). The Group Annual Report and Financial Statements 2007 on which the auditors havegiven an unqualified report and which does not contain a statement under section237(2) or (3) of the Companies Act 1985, will be delivered to the Registrar ofCompanies in due course, and posted to shareholders in June 2007. The financial year represents the 52 weeks to 24 March 2007 (prior financialyear 52 weeks to 25 March 2006). The consolidated financial statements for the52 weeks to 24 March 2007 comprise the financial statements of the Company andits subsidiaries ('Group') and the Group's interests in associates and jointventures. 2 Basis of preparation The financial information has been prepared in accordance with InternationalFinancial Reporting Standards ("IFRS") as adopted by the European Union andInternational Financial Reporting Interpretations Committee ("IFRIC")interpretations and with those parts of the Companies Act 1985 applicable tocompanies reporting under IFRS. The financial statements are presented in sterling, rounded to the nearestmillion (£m) unless otherwise stated. They have been prepared under thehistorical cost convention, except for derivative financial instruments andavailable-for-sale financial assets that have been measured at fair value. 3 Segment reporting The Group's primary reporting format is business segments, with each segmentrepresenting a business unit that offers different products and serves differentmarkets. The businesses are organised into two operating divisions: • Retailing (Supermarkets and Convenience); and • Financial services (Sainsbury's Bank). All material operations are carried out in the UK. Segment results, assets and liabilities include items directly attributable to asegment as well as those that can be allocated on a reasonable basis. Segmentcapital expenditure is the total cost incurred during the period to acquiresegment assets that are expected to be used for more than one period. Retailing Financial Group £m services £m £m 2007 Segment revenue Sales to external customers 16,860 - 16,860 Services to external customers - 291 291 Total revenue 16,860 291 17,151 Underlying operating profit (1) 429 2 431 Profit on sale of properties 7 - 7 Profit on part disposal of Sainsbury's Bank - 10 10 Past service gains on defined benefit schemes 72 - 72 Segment result 508 12 520 Finance income 64 Finance costs (107) Income tax expense (153) Profit for the financial year 324 Assets 9,478 - 9,478 Investment in joint ventures 10 88 98 Segment assets 9,576 Segment liabilities 5,227 - 5,227 Other segment items Capital expenditure 733 4 737 Depreciation expense 469 10 479 Amortisation expense 19 2 21 Impairment of amounts due from Sainsbury's Bank customers - 89 89 2006 Segment revenue Sales to external customers 15,731 - 15,731 Services to external customers - 330 330 Total revenue 15,731 330 16,061 Underlying operating profit/(loss) (1) 352 (10) 342 Profit on sale of properties 1 - 1 Business Review operating costs (51) - (51) IT insourcing costs (63) - (63) Segment result 239 (10) 229 Finance income 30 Finance costs (155) Income tax expense (46) Profit for the financial year 58 Assets 9,058 3,679 12,737 Investment in joint ventures 10 - 10 Segment assets 12,747 Segment liabilities 5,281 3,501 8,782 Other segment items Capital expenditure 518 7 525 Depreciation expense 442 7 449 Amortisation expense 19 2 21 Impairment of amounts due from Sainsbury's Bank customers - 106 106 (1) Underlying profit before tax from continuing operations before financeincome and finance costs. 4 Finance income and finance costs 2007 2006 £m £mInterest on bank deposits 15 7Net return on pension schemes (note 12) 41 23Financing fair value gains (1) - Retailing 8 -Finance income 64 30 Financing fair value losses (1) - Financial services - (4) - Retailing - (8) - (12) Debt restructuring costs - (38) Borrowing costs Bank loans and overdrafts (2) (3)Other loans (111) (107)B share preference dividends - (1)Obligations under finance leases (3) (3)Provisions - amortisation of discount (1) (1) (117) (115)Interest capitalised - qualifying assets 10 10 Finance costs (107) (155) (1) Fair value gains/(losses) relate to fair value adjustments onderivatives relating to financing activities and hedged items in fair valuehedges. Total interest income amounted to £213 million (2006: £217 million), includinginterest income attributable to Sainsbury's Bank of £198 million (2006: £210million) included in revenue. Total interest costs amounted to £233 million(2006: £230 million) including interest costs attributable to Sainsbury's Bankof £116 million (2006: £115 million) included in cost of sales. 5 One-off items 2007 2006 £m £mOne-off items for the financial year comprised:Business Review operating costs - (51)IT insourcing costs - (63)Debt restructuring costs (note 4) - (38)Profit on part disposal of Sainsbury's Bank 10 -Past service gains on defined benefit schemes (note 12) 72 - 82 (152) Profit on part disposal of Sainsbury's Bank On 8 February 2007, the Company sold a five per cent shareholding in Sainsbury'sBank plc (the 'Bank') to the Bank of Scotland (a wholly owned subsidiary of HBOSplc) for a cash consideration of £21 million, resulting in a profit on disposalfor the Group of £10 million. This profit on disposal has been recognised asother income in the Group income statement. Consequently, the Bank became a 50:50 joint venture between the Company and HBOS plc. The results of the Bank have been fully consolidated into the Group resultsuntil 8 February 2007, with a corresponding minority interest shown for theminority share of these results. Following the sale on 8 February 2007, theBank is treated as a joint venture and equity accounted in the Group financialstatements. At 24 March 2007, the assets and liabilities of the Bank have not beenconsolidated in the Group balance sheet but instead a joint venture investmentof £88 million representing the Group's 50 per cent share of the Bank's netassets at that date has been included. The Group has accounted for its equityshare of the results of the Bank for the period from 8 February 2007 to 24 March2007. Past service gains on defined benefit schemes Following changes introduced by the Finance Act effective from 6 April 2006, thedefined benefit schemes have implemented revised terms to provide members withthe option to surrender a greater proportion of their pension for a tax-freecash lump sum payment. Accordingly, the Group revised its assumptions used incalculating the retirement benefit obligations in respect of this and certainminor changes in scheme rules and has recognised £72 million of past servicegains in the Group income statement. 6 Income tax expense 2007 2006 £m £mCurrent tax expenseCurrent year 2 38Over provision in prior years (25) (2) (23) 36Deferred tax expenseOrigination and reversal of temporary differences 158 15Under/(over) provision in prior years 18 (5) 176 10 Total income tax expense in income statement 153 46 Income tax expense on underlying profit (1) 132 95Tax on items below:Sale of properties (3) -Financing fair value movements 2 (3)Business Review operating costs - (15)IT insourcing costs - (19)Debt restructuring costs - (12)Past service gains on defined benefit schemes 22 - Total income tax expense in income statement 153 46 (1) Tax charge attributable to underlying profit before tax fromcontinuing operations. The effective tax rate of 32.2 per cent (2006: 44.2 per cent) is higher than thestandard rate of corporation tax in the UK. The differences are explainedbelow: 2007 2006 £m £mProfit before taxation 477 104 Income tax at UK corporation tax rate of 30% (2006: 30%) 143 31Effects of:Disallowed depreciation on UK properties 22 21Non-deductible expenses 3 1Non-taxable income (8) -Over provision in prior years (7) (7)Total income tax expense in income statement 153 46 Income tax charged or credited to equity during the year is as follows: 2007 2006 £m £mShare-based payment tax deductions recognised directly in equityCurrent tax payable (2) -Deferred tax asset (7) (5)Deferred tax losses associated with share-based payment tax deduction (8) - (17) (5)Deferred tax on items recognised directly in equity Actuarial gains/losses on defined benefit pension schemes 52 (75)Available-for-sale financial assets - fair value movements 7 7 59 (68) 42 (73) 7 Earnings per share Basic earnings per share is calculated by dividing the earnings attributable toordinary shareholders by the weighted average number of ordinary shares in issueduring the year, excluding those held by the Employee Share Ownership Plantrusts, which are treated as cancelled. For diluted earnings per share, the weighted average number of ordinary sharesin issue is adjusted to assume conversion of all potential dilutive ordinaryshares. These represent share options granted to employees where the exerciseprice is less than the average market price of the Company's ordinary sharesduring the year. Underlying earnings per share is provided by excluding the effect of any gain orloss on the sale of properties, impairment of goodwill, financing fair valuemovements and one-off items that are material and infrequent in nature. Thisalternative measure of earnings per share is presented to reflect the Group'sunderlying trading performance. All operations are continuing for the periods presented. 2007 2006 million millionWeighted average number of shares in issue 1,691.3 1,679.0Weighted average number of dilutive share options 28.5 13.2Total number of shares for calculating diluted earnings per share 1,719.8 1,692.2 £m £mProfit for the financial year attributable to equity holders of the parent 325 64(Less)/add: profit on sale of properties, net of tax (10) (1) financing fair value movements, net of tax (6) 7 Business Review costs, net of tax - 36 IT insourcing costs, net of tax - 44 debt restructuring costs, net of tax - 26 profit on part disposal of Sainsbury's Bank (10) - past service gains on defined benefit schemes, net of tax (50) -Underlying profit after tax 249 176 pence pence per share per shareBasic earnings 19.2 3.8Diluted earnings 18.9 3.8Underlying basic earnings 14.7 10.5Underlying diluted earnings 14.5 10.4 8 Dividend 2007 2006 pence pence 2007 2006 per share per share £m £mAmounts recognised as distributions to equity holders in theyear:Final dividend of prior financial year 5.85 5.65 99 95Interim dividend of current financial year 2.40 2.15 41 36 8.25 7.80 140 131 After the balance sheet date, a final dividend of 7.35 pence per share (2006:5.85 pence per share) was proposed by the Directors in respect of the 52 weeksto 24 March 2007, resulting in a total final proposed dividend of £126 million(2006: £99 million). The proposed final dividend has not been included as aliability at 24 March 2007. 9 Reconciliation of movements in equity Called up Share Capital Retained Equity Minority Total share premium redemption earnings shareholders' interests equity capital account and other funds reserves £m £m £m £m £m £m £mAt 26 March 2006 489 782 667 1,948 3,886 79 3,965Profit for the year - - - 325 325 (1) 324Dividends paid - - - (140) (140) - (140)Share-based payment - - - 55 55 - 55Part disposal of Sainsbury's Bank - - - - - (78) (78)Actuarial gains on defined - - 127 - 127 - 127benefit pension schemesAvailable-for-sale financialassetsfair value movements - - 17 - 17 - 17B shares redemption - - 2 (2) - - -Shares vested - - - 1 1 - 1Allotted in respect of share 6 75 - (3) 78 - 78option schemesAt 24 March 2007 495 857 813 2,184 4,349 - 4,349 At 27 March 2005 620 761 634 2,012 4,027 85 4,112IAS 32 and IAS 39 adjustments (133) 1 71 (17) (78) - (78)Restated at 27 March 2005 487 762 705 1,995 3,949 85 4,034Profit for the year - - - 64 64 (6) 58Dividends paid - - - (131) (131) - (131)Share-based payment - - - 28 28 - 28Currency translation differences - - 2 - 2 - 2Actuarial losses on defined - - (180) - (180) - (180)benefit pension schemesAvailable-for-sale financialassetsfair value movements - - 19 - 19 - 19Cash flow hedgeseffective portion of fair value - - 1 - 1 - 1movementstransferred to income statement - - (1) - (1) - (1)B shares redemption - - 121 (9) 112 - 112Shares vested - - - 1 1 - 1Allotted in respect of share 2 20 - - 22 - 22option schemesAt 25 March 2006 489 782 667 1,948 3,886 79 3,965 10 Notes to the cash flow statements (a) Reconciliation of operating profit to cash generated from operations 2007 2006 £m £mOperating profit 520 229Adjustments forDepreciation expense 479 449Amortisation expense 21 21Profit on sale of properties (7) (1)Profit on part disposal of Sainsbury's Bank (10) -Foreign exchange differences 6 -Share-based payments expense 38 23Operating cash flows before changes in working capital 1,047 721Changes in working capitalIncrease in inventories (12) (17)(Increase)/decrease in current available-for-sale financial assets (45) 38(Increase)/decrease in trade and other receivables (50) 7Decrease/(increase) in amounts due from Sainsbury's Bank customers and other banks 188 (805)Increase/(decrease) in trade and other payables 314 83(Decrease)/increase in amounts due to Sainsbury's Bank customers and other banks (198) 819(Decrease)/increase in provisions and other liabilities (1) (414) (66)Cash generated from operations 830 780 (1) Includes £240 million (2006: £110 million) of cash paid into thedefined benefit pension schemes (note 12). (b) Cash and cash equivalents For the purposes of the cash flow statements, cash and cash equivalents comprisethe following: 2007 2006 £m £mCash and cash equivalents 1,128 1,028Bank overdrafts (363) (186) 765 842 11 Analysis of net debt 26 March Cash flow Disposals Other 24 March 2006 non-cash 2007 movements £m £m £m £m £m Current assets Cash and cash equivalents (excluding Sainsbury's 862 266 - - 1,128Bank)Sainsbury's Bank cash and cash equivalents 166 (166) - - - 1,028 100 - - 1,128Current liabilities Bank overdrafts (186) (177) - - (363)Borrowings (67) 57 - - (10)Derivative financial instruments (10) - - 8 (2) (263) (120) - 8 (375)Non-current liabilities Borrowings (2,081) 22 - 20 (2,039)Finance leases (52) - - 1 (51)Loan from minority shareholder (45) - 45 - -Derivative financial instruments (2) - - (41) (43) (2,180) 22 45 (20) (2,133) (2,443) (98) 45 (12) (2,508)Total net debt (1,415) 2 45 (12) (1,380) Net debt incorporates the Group's borrowings (including accrued interest), bankoverdrafts, fair value of derivatives and obligations under finance leases, lesscash and cash equivalents. At 24 March 2007, Sainsbury's Bank plc is equity accounted for as a jointventure (note 5) and hence, its net debt is not included within Group net debt. Reconciliation of net cash flow to movement in net debt 2007 2006 £m £m(Decrease)/increase in cash and cash equivalents (77) 142Decrease in debt 79 91Loan disposed of with part disposal of Sainsbury's Bank 45 -Repayment of finance leases - 1Other non-cash movements (12) (5)Decrease in net debt before impact of IAS 32 and IAS 39 35 229 IAS 32 and IAS 39 adjustments to net debt - (203)Decrease in net debt in the year 35 26Opening net debt at the beginning of the year (1,415) (1,441)Closing net debt at the end of the year (1,380) (1,415) 12 Retirement benefit obligations Retirement benefit obligations relate to two funded defined benefit schemes, theJ Sainsbury Pension and Death Benefit Scheme ("JSPDBS") and the J SainsburyExecutive Pension Scheme ("JSEPS") and an unfunded pension liability relating tosenior employees. The defined benefit schemes were closed to new employees on 31January 2002. The assets of these schemes are held separately from the Group'sassets. The defined benefit schemes were subject to a triennial valuation carried out byWatson Wyatt, the schemes' independent actuaries, at March 2006 on the projectedunit basis. The results of this valuation are expected to be approved by theschemes' trustees in June 2007. The retirement benefit obligations at 24 March2007 has been calculated, where appropriate, on a basis consistent with thisdraft valuation. The unfunded pension liability is unwound when each employee reaches retirementand takes their pension from the Group payroll or is crystallised in the eventof an employee leaving or retiring and choosing to take the provision as aone-off cash payment. As part of the £350 million one-off contribution to the defined benefit schemes,the Group made the second tranche payment of £240 million on 19 May 2006 (2006:£110 million paid on 24 March 2006). The amounts recognised in the balance sheet are as follows: 2007 2006 £m £mPresent value of funded obligations (4,395) (4,361)Fair value of plan assets 4,298 3,710 (97) (651)Present value of unfunded obligations (6) (7)Retirement benefit obligations (103) (658)Deferred income tax asset 48 227Net retirement benefit obligations (55) (431) The retirement benefit obligations and the associated deferred income tax assetare shown within different line items on the face of the balance sheet. The amounts recognised in the income statement are as follows: 2007 2006 £m £mCurrent service cost - funded schemes (76) (68)Current service cost - unfunded scheme - (1)Past service cost (11) (12) (87) (81)Past service gains on defined benefit schemes (note 5) 72 -Total included in employee costs (15) (81) Interest cost on pension scheme liabilities (212) (190)Expected return on plan assets 253 213Total included in finance income (note 4) 41 23 Total income statement income/(expense) 26 (58) The principal actuarial assumptions used at the balance sheet date are asfollows: 2007 2006 % %Discount rate 5.3 4.9Expected return on plan assets 6.6 6.6Future salary increases 3.00 2.85Future pension increases 2.35 - 3.00 2.50 - 2.85 The combined life expectancy for both the schemes operated at the balance sheetdate for a pensioner at normal retirement age is as follows: 2007 2006 years yearsMale pensioner 21.4 19.3Female pensioner 22.9 21.7 In line with the scheme's experience and the generally observed trend amongstthe population, a greater allowance for future longevity has been adopted inrespect of the current mortality of pensioners. The effect of this change is toassume that a typical pensioner will live a further 0.9 years from normalretirement age. This allowance has had the impact of increasing the retirementbenefit obligations by £196 million compared to using the previous mortalityassumptions. The profile of members and the salary and pension increase assumptions have beenupdated from the last triennial valuation. The impact of these changes is toreduce the retirement benefit obligations by £59 million. Movements infinancial assumptions have resulted in a reduction in retirement benefitobligations of £108 million with a further actuarial gain on plan assets of £89million. Based on past experience, the Group has made the assumption that 80 per cent ofthe schemes' members will elect to surrender one quarter of their pension for acash lump sum payment. The impact of this commutation assumption is to reducethe retirement benefit obligations by £119 million. These items have been recognised in the Group statement of recognised income andexpense. In addition, following changes introduced by the Finance Act effective from 6April 2006, the defined benefit schemes have implemented revised terms toprovide members with the option to surrender a greater proportion of theirpension for a tax-free cash lump sum payment. The impact of this change andother minor changes to scheme rules has been to reduce retirement benefitobligations by £72 million. This change has resulted in past service gains of£72 million being recognised in the income statement (note 5). This information is provided by RNS The company news service from the London Stock Exchange

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