Final Results

17th May 2006 07:02

Sainsbury(J) PLC17 May 2006 17 May 2006 Preliminary Results for the 52 weeks ended 25 March 2006 Recovery on Track Making Sainsbury's Great Again: Highlights • 16 million customer transactions each week - an increase of 1.5 million over last year • Five quarters of consecutive like-for-like sales and market share growth • Significant improvement in the offer: price, range, quality, product availability and service • Refinancing provides stable and efficient long-term funding platform • Pension scheme deficit being addressed and steps taken to reduce long-term liability • IT functions successfully migrated back to Sainsbury's • Highest ever colleague bonus to be paid in June 2006: 117,000 colleagues share £52 million Financial Summary presented under IFRS • Underlying profit before tax from continuing operations (1) of £267 million (2004/05: £238 million) • One off charges for the year total £152 million (2004/05: £497 million) • Profit before tax from continuing operations of £104 million (2004/05: loss of £238 million) • Underlying basic earnings per share (2) from continuing operations: 10.5 pence (2004/05: 8.3 pence) • Basic earnings per share from continuing operations of 3.8 pence (2004/05: loss of 17.4 pence) • Proposed final dividend of 5.85 pence per share (2004/05: 5.65 pence), making full year dividend of 8.00 pence (2004/05: 7.80 pence) • Strong cash flow with underlying net debt (3) reduced by £77 million after funding £110 million additional pension contribution and unwinding of last year's positive Easter effect Sainsbury's Supermarkets • Total sales (inc VAT) up 5.7 per cent to £16,987 million • Sales growth of £722 million is a solid start towards £2.5 billion target (ex petrol and Bank) • Like-for-like sales (inc VAT) excluding petrol up by 3.7 per cent (Easter adjusted) (5) • Underlying operating profit (4) of £352 million up 14.3 per cent • Operational gearing starting to be delivered • Sainsbury's heritage and brand values provide position of strength on issues of increasing importance to customers such as health and the environment Sainsbury's Bank • Underlying operating loss (4) of £10 million (2004/05 restated: profit of £17 million) • Continued growth in customer accounts - up 8 per cent to 2.5 million • New CEO appointed and clear recovery plans underway Philip Hampton, chairman, said: "This has been a strong year of recovery forSainsbury's with a continued focus on the implementation of the plans outlinedin October 2004. During the year we have strengthened the Board. DarrenShapland joined the executive team as chief financial officer in August 2005,John McAdam was appointed senior independent director in July 2005 and earlierthis month we welcomed Anna Ford as a non-executive director. We are proposing afinal dividend of 5.85 pence per share which is an increase of 3.5 per cent.This will take the full year dividend to 8.00 pence per share, an increase of2.6 per cent compared to last year, covered 1.3 times by earnings. It is theBoard's intention to restore dividend cover to at least 1.5 times. The Boarddoes not wish to see the dividend eroded in real terms and the increase broadlyequals inflation in the year. "In March 2006 we completed a major refinancing, improving our long-term fundingprofile and providing a flexible financing platform for the future as well asunderpinning the Making Sainsbury's Great Again plan. The refinancing hasprovided us with cost effective long-term finance by unlocking value from ourproperty portfolio. It reduces annual interest costs and enables us tocontribute £350 million into our pension schemes." Justin King, chief executive, said: "We have made good progress during the yearand we are on track in our Making Sainsbury's Great Again plan. Total sales forthe year increased by 5.8 per cent to £17,317 million and like-for-like saleswere up 3.7 per cent. Excluding petrol and the Bank, we delivered sales growthof £722 million, representing a solid start towards our goal to grow sales by£2.5 billion as part of the Making Sainsbury's Great Again plan. At the end ofthe financial year we delivered our fifth consecutive quarter of like-for-likesales growth. This demonstrates a real step forward in our recovery ascustomers notice and experience the many improvements we have been making to ouroffer. "Our sales for the year were ahead of our plans. As a result operationalgearing in Sainsbury's Supermarkets is starting to be delivered although thisperformance has, in part, had to support the more difficult trading at the Bank.The sales performance endorses our belief in the Sainsbury's brand and showsthat we are now delivering a better and more consistent offer. Our growth hasbeaten the market and as a result our market share has increased. As the yearended we were serving over 16 million customers each week, 1.5 million more thanat the start of the year. In a highly competitive industry this is the resultof better quality products, lower prices, improved product availability andservice and our commitment to continually improve the shopping experience forour customers. However, it is early days in our recovery. We still have much todo to drive further improvements but our focus remains on putting the customerat the heart of all decision-making." Notes: 1. Underlying profit before tax from continuing operations:Profit before tax from continuing operations before any gain or loss on the saleof properties, impairment of goodwill, financing fair value movements and oneoff items that are material and infrequent in nature. In the current financialyear, these one off items were the Business Review costs, IT insourcing costsand debt restructuring costs. In the prior financial year, these one off itemswere the Business Review and Transformation costs. 2. Underlying basic earnings per share: Profit after tax fromcontinuing operations attributable to equity holders before any gain or loss onthe sale of properties, impairment of goodwill, financing fair value movementsand one off items that are material and infrequent in nature, divided by theweighted average number of ordinary shares in issue during the year, excludingthose held by the ESOP Trusts, which are treated as cancelled. 3. Underlying net debt: Net debt before IAS 32 and IAS 39 adjustments. 4. Underlying operating profit/(loss): Underlying profitbefore tax from continuing operations before finance income and finance costs. 5. Easter adjustment: Like-for-like sales are impacted by thetiming of the Good Friday trading week (none in 2005/06 and two in 2004/05). 6. Certain statements made in this announcement are forwardlooking statements. Such statements are based on current expectations and aresubject to a number of risks and uncertainties that could cause actual resultsto differ materially from any expected future events or results referred to inthese forward looking statements. 7. Sainsbury's will announce its first quarter trading statement on 21 June 2006. 8. We will be holding a presentation for analysts and investors at 9:45 am (BST) on 17 May 2006. 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 7365 1828 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 BST on +44 (0) 20 78061970, pin number 7549988 until midnight BST on Friday 19 May 2006. To view the transcript of the presentation: Go to www.j-sainsbury.co.uk from Friday 19 May 2006. Enquiries: Investor Relations MediaLynda Ashton Pip Wood+44 (0) 20 7695 7162 +44 (0) 20 7695 6127 Operating Review Sainsbury's focus on food Sainsbury's growth in food has out-paced the market over the past yearreflecting the company's differentiated stance of being the key scale playerconcentrating on food. Great food at fair prices is the foundation of the offerand the target to grow core grocery sales by £1.4 billion is dependent uponachieving the right balance of price and quality. Considerable investment hasbeen made during the year. There was grocery deflation of 1.5 per cent, and8,500 price reductions. 'Price-checked' products which are at the same or lowerprice than those of competitors, offers and promotions, and other pricereductions are highlighted under the 'Ways to Save' logo which was launched inAugust 2005 and has given greater prominence in store to Sainsbury's competitiveposition. Remaining price competitive is central to Sainsbury's universalappeal. Customers acknowledge the investment in price but also value Sainsbury'semphasis on better quality food and the focus on fresh and seasonal products.It is important that quality and integrity standards are not only maintained butalso further improved. The company continues to be recognised for its innovationwith numerous awards for both excellence in retailing and product quality. Atthe industry's leading retail Quality Food and Drink Awards in December 2005, 30Sainsbury's products were short-listed, the largest number of any retailer, andSainsbury's had all four nominations in the fresh produce category. Sainsbury'swon nine category awards and the company's Living Salad, a tray of fourdifferent salad leaves which customers pick straight from the living plant, tookthe overall coveted Gold Award, the third year running that Sainsbury's has wonthe prestigious award. Product quality has been an inherent part of the Sainsbury's brand for over 100years. In June 2006 the company is providing a traditional British picnic teafor the special 'Children's Party at The Palace' being held at Buckingham Palaceon 25 June as part of the Queen's 80th birthday events. A total of 2,000children and 1,000 adults have been invited from throughout the UK to celebrateHer Majesty's birthday and British children's literature. Over the past year Sainsbury's product quality and innovation team has beenconsiderably strengthened to further develop the company's lead in these areas.New training and development initiatives have seen colleagues undertake food 'master classes', and a year long cookery course is underway for producttechnologists and developers. In addition the company's team of food advisors,who work closely with schools, GP surgeries and local communities on a widerange of food and health issues, attend a workshop with Jamie Oliver four timesa year. Nutrition training is also provided for store colleagues. Sainsbury's has set standards for both product ingredients and nutritionalcontent. Clear standards have been developed for all sub-brand ranges to makesure that Sainsbury's products continue to maintain their lead over thoseoffered by competitors. A new IT system ensures that all standards are adheredto and significant enhancement has been made to the team of inspectors locatedin the company's depots. The inspectors check the quality of products beingdelivered before they are accepted into the Sainsbury's supply chain. This isparticularly relevant for fresh product areas, a key driver of customersatisfaction. Customers now give us their highest rating for healthy, fresh andtasty food since the company embarked on the Making Sainsbury's Great Againprogramme. Sainsbury's is committed to providing customers with fresh and tasty food andduring the year many new products and ranges have been further improved andintroduced. In September 2005 around 300 organic products were re-launched underthe brand 'Sainsbury's SO organic' which has stringent organic standards. Ourlarger stores carry the full range of over 700 Sainsbury's and branded productsand sales are up 20 per cent with good performances in fresh food areas whichare particularly valued by Sainsbury's customers. The ongoing development of around 500 'Basics' products has also been animportant part in addressing Sainsbury's universal appeal and is the company'sfastest growing sub-brand. The range covers everyday products from bananas tochocolate but also more exotic lines such as mangoes. The range has generatedincremental sales and research shows that around 50 per cent of customers buyfrom both ends of Sainsbury's food range - both 'Basics' and 'Taste theDifference'. New brand standards have been applied to 'Taste the Difference' products duringthe year. Ingredients used in the range of around 900 products now include onlyUK sourced meat except where the product is authentically produced in anothercountry (e.g. Parma ham) and free-range eggs. All hydrogenated vegetable oilshave been removed, a process that is being replicated across all Sainsbury'sproducts and which will be completed by January 2007. In January 2006 the company re-launched the 'Be Good to Yourself' (BGtY) rangewith an investment of around £10 million. The range was updated from a 'diet'brand to a more holistic health brand providing customers with the choice of lowfat diet products as well as healthier options and 'plus' meals which includeproducts which are fortified with added ingredients such as prebiotics,probiotics and Omega 3. BGtY comprises nearly 500 products, of which 100 werenew and 30 were first to market such as white, wholemeal and brown bread whichhave higher fibre and 15 per cent less salt. These replaced the company'sprevious standard products and as such is a good example of Sainsbury'sinvestment in the opportunity to make healthier choices widely available to allcustomers. The range is one of many developments which have driven customers torate Sainsbury's approach to healthy eating above that of all other competitors. In February 2006, a new 'Kids' range was introduced. Sainsbury's became thefirst retailer to provide Guideline Daily Amounts (GDAs) for children aged 5-10years on packaging following extensive research from the Institute of GroceryDistribution (IGD). This showed customers would actively welcome help in makinghealthy food choices for children and reflected the reality that many parentswant their children to eat the same meals as they do. GDAs for children are nowbeing rolled out across other product ranges. Every product category has now been reviewed. This involves the re-ranging andsimplification of ranges to ensure the best choice of products is in place anddisplayed appropriately in-store. This has helped drive Sainsbury's stronglike-for-like sales performance. The process will now begin again and beundertaken on a rolling basis to ensure that customers needs are constantlyaddressed. Close to 3,000 products are new or have been improved by Sainsbury's in the lastyear. Sainsbury's also sells over £6 billion of British food every year andstocks over 3,500 locally produced products. A new scheme called 'SupplySomething New' is being launched at the end of May 2006 and has been designed togive local suppliers access to a wider market through Sainsbury's stores.Senior managers from Sainsbury's will meet new suppliers across the country in asearch for high quality, innovative, locally produced food for customers toenjoy. Complementary non-food A target of £700 million of sales growth from non-food product ranges wasoutlined in October 2004. Complementary non-food ranges currently account foraround 10 per cent of Sainsbury's sales and saw an eight per cent growth insales during the 2005/06 financial year which was ahead of the market.Sainsbury's concentrates on products customers now reasonably expect to find ina supermarket. The focus during has been to make space already dedicated tothese products work harder. During the year, 41 pharmacies were opened bringingthe total to 169. Core ranges such as cards, wrapping paper, music and DVDs havebeen revamped and big product launches have been well supported. During the yearSainsbury's opened offices in Poland and Hong Kong to liaise more directly withsuppliers and it is expected that this will provide benefits across severalproduct categories although the initial focus is on non-food. In around 20 locations new products, fixtures and layouts have been trialled anddemonstrated that we can achieve the required sales densities. As planned, morenon-food space will be introduced as stores are extended and reformatted duringthe 2006/07 financial year. It is estimated that around 50 stores will bere-laid. TU, Sainsbury's own label clothing range which is on sale in 202 stores has beenan incredible success story. The range was originally launched in September 2004and sales continue to significantly out-perform those of the company's previousclothing offer. Like-for-like sales are up over 40 per cent and the rangecontinues to be developed and further improved. As part of the refurbishment andextension programme, the company plans to introduce clothing into around 40additional stores during the current financial year and extend the TU offer inaround 60 stores already carrying the range. Corporate responsibility Sainsbury's has always been an integral part of the communities in which ittrades and the company approaches its responsibility to all stakeholders as afundamental part of how it does business. It is a way of life and inherent inthe brand, not a new addition. This gives Sainsbury's a position of strength onissues that are of increasing importance to customers. Sainsbury's corporateresponsibility report is available online at the company's websitewww.j-sainsbury.co.uk/cr. The third edition of this report will be published inJune. Sainsbury's was also the first supermarket to publish its commitments tothe environment which it has now been doing for a decade. In February Sainsbury's launched 'Active Kids' for the second year. Thisprovides schools with activity equipment and experiences in return for vouchersearned in store. The scheme attracted 80 per cent of all UK primary andsecondary schools, and donated over £17 million of activity equipment. Onaverage each school received around £700 of rewards, a substantial contributionwhen considered against the annual primary school budget estimated at around£200 available for such equipment. The 2006 scheme has over 30,000 schools andnurseries now registered. Around 95 per cent of customers are aware of thescheme and believe it is important in supporting the local community. Sainsbury's has supported Comic Relief's Red Nose Day since 1999 and in June2005 the company announced its support of the biennial Red Nose Day and SportRelief campaigns as part of a new six-year deal which starts with Sport Reliefthis July and runs until 2011. Sainsbury's has worked alongside Comic Relief foreight years but this is the first time it will also be the key title sponsor forthe Sport Relief Mile. Red Nose Day is thought to be the biggest fundraisingevent in the UK calendar. The money raised helps poor and disadvantaged peoplein the UK and some of the poorest countries in the world to help make long-termchanges to their lives. In a market first, Sainsbury's started selling milk from British farmsconverting to organic standards at the beginning of this month. The risingdemand for organic milk currently outstrips UK supply so the company is workingwith farmers to cover the additional associated costs during conversion as wellas offering 12-month supply contracts once the milk is organic. Sainsbury'scommitment to sourcing products from the UK wherever possible drove the companyto find a solution in the UK rather than import organic milk and it is the onlysupermarket to do this. In a move to address the long-term supply of organic beef, Sainsbury's was thefirst supermarket to sign a contract for its British organic beef supply and hasplans for another 50 contracts within the next four months. Sainsbury's ultimateaim is to extend this commitment to the rest of its organic beef suppliers. The company is a long-standing supporter of the Fairtrade mark and the UK'sleading Fairtrade supermarket. The company achieved its best ever week withsales of over £1 million during Fairtrade Fortnight in March 2006 and hasintroduced many new products such as the UK's first Fairtrade baby food. InFebruary Sainsbury's placed the UK's single largest Fairtrade cotton order for200,000 T-shirts in support of its sponsorship of Sport Relief this July. Sainsbury's has introduced industry-leading fish sustainability plans, supportedby the Marine Conservation Society (MCS), which included the removal of skateand huss in February 2006. Since that time the company has become the first tosell Marine Stewardship Council (MSC) approved cod which is one of the mostendangered fish species. Sainsbury's led the industry on nutritional labelling in January 2005 byintroducing a multiple traffic light system called the 'Wheel of Health'. Thiswas developed after extensive consumer research and following input from theFoods Standards Agency (FSA). It was reviewed after six months and received ahuge vote of approval from customers who found it easy to understand and helpfulin deciding what products to buy. The traffic light colours of green, amber andred were universally understood and the 'Wheel of Health' is now on over 1,300products. More recent research conducted in April 2006 has found that around 80 per centof customers have noticed the labelling and believe it influences what they buy.Products with greens and ambers on the 'Wheel of Health' are generally showingpositive sales trends versus similar products with ambers and reds. The companybelieves the bolder step of colour-coding the salt, fat, saturates, total sugarsand calories in a serving of each product in grams goes much further in helpingcustomers know more about the food they eat than simply bringing informationalready on the back of packaging onto the front. This approach was endorsed bythe FSA when it announced its recommendations for nutritional labelling in March2006. The company has invested extensively in energy efficiency projects for manyyears and has recently been trialling state of the art recycling banks in sixLondon sites. The banks recycle a wide range of products from CDs and clothesas well as plastic and glass and Sainsbury's is now rolling them out to around50 stores this year. We have identified 347 sites where we believe there ispotential to run such a scheme. In the last year, Sainsbury's customers have recycled around 100 million plasticbags through its recycling collection points. Customers are also increasinglybuying 'permanent' bags such as Sainsbury's 'Bag for Life' which are currentlyselling at a rate of 120,000 each week. The company estimates that thesepermanent bags save about 50 million standard bags each year. Sainsbury's is also addressing the way its food is packaged. Last Easter theamount of packaging used on own-brand Easter eggs was reduced by 10 per cent andthe company is also trialling fully compostable GM-free wrap on organic applesand potatoes, the first of its kind in the UK, in 140 stores. Sainsbury's has delivered carbon emissions reductions from its sites in excessof 20 per cent since 2000. Almost all large Sainsbury's supermarkets haveintranet linked, automated building controls to not only improve efficiency butalso provide power load management, further reducing energy costs. Sainsbury's also takes a collaborative approach in its trading relationships.Joint business plans have been developed with the company's top 200 suppliers.Sainsbury's is now doing more direct sourcing as it believes this is a morepersonal approach and allows better management of quality standards and supplierrelationships. In May 2006 the company set out its commitment to best practicein a new handbook for suppliers which was reviewed and awarded a crystal mark bythe Plain English Campaign. The handbook aims to simplify and streamlineSainsbury's trading principles and reduces 14 different documents into onehandbook. During the year, donations to charitable organisations and other communityprojects totalled £5.6 million. In addition our Active Kids scheme donated£12.5 million (at cost) to schools and the company made significantcontributions to other community-related initiatives. Sainsbury's colleagues,customers and suppliers raised £3.25 million for charities such as Home-Startand the Children's Society, through events supported by the company. Availability When Sainsbury's announced its Making Sainsbury's Great Again recovery plan inOctober 2004 product availability was cited as the number one performance issue.Customers now enjoy industry-matching levels of product availability andSainsbury's is committed to driving performance further. Night shifts now operate in the majority of supermarkets and new processes inoperation across the store estate have helped reduce out-of-stocks by 75 percent. Sainsbury's has also introduced new systems to provide more up-to-dateinformation on which to base replenishment decisions. The roll-out of ahand-held stock and sales system (RSS), successfully completed at the end ofMarch 2006, provides real-time information for colleagues on the shop floor andhas improved the efficiency of the store replenishment process. Following a full review, the supply chain network has seen considerablereorganisation to ensure the most efficient distribution of product to stores.The operation at Charlton was transferred to Exel Logistics, depots atNorthfleet and Rotherham have both been closed and Basingstoke and St Albanshave been reorganised into composite facilities. The operation at Buntingford,which has provided additional capacity at Christmas for the past two years, hasnow been kept open to keep pace with the company's sales growth. Significantsupport was gained from colleagues and unions during the reorganisation. Thedepots at Waltham Point and Hams Hall are processing an average of two millioncases a week, significantly up on 2004/05. In January 2006 Roger Burnley was appointed as supply chain director. LawrenceChristensen has now moved into a part-time consulting role. With manyimprovements now evident in stores much of the current year will concentrate onconsolidation of the numerous changes already made. Work on availability willcontinue, including a focus upstream with suppliers to drive furtherenhancements and cost savings. Customer service Sainsbury's better trading performance is the result of the many changes thecompany has made since announcing the Making Sainsbury's Great Again recoveryplan. Every day small changes and improvements have built into a gradual andcumulative enhancement in the experience customers receive in store. Researchshows significant improvement in customer satisfaction not only for fundamentalareas such as price, availability and products but also in measures such ascustomer service, queue lengths and checkout service. Scan School is an exampleof one of the many initiatives undertaken during the year to effect the stepchanges now experienced in store. Two specially fitted double decker buses havetravelled around the country delivering training sessions so that 90,000colleagues at around 500 stores can give customers a faster, more friendly andefficient checkout service. Try Something New Today Given the progress made over the past year, encouraging people to visit theirlocal store and reappraise the Sainsbury's offer was a key stage in thecompany's recovery and in Making Sainsbury's Great Again. The catalyst for thiswas the launch of the 'Try Something New Today' branding in September 2005. This has been very well received by colleagues and customers and productsfeatured in the advertising campaign have experienced significant sales uplifts.The campaign has been successful in suggesting simple ways to make small butimpactful changes to the food we eat. Several products and ideas have beensampled by Sainsbury's colleagues so they can experience them first hand andover 90 per cent of colleagues now recommend new ideas to customers. Sevenmillion customers are now collecting 'tip cards' and over 100 million have beendistributed since launch last September. The strapline is now a regular feature on advertising and in-store displays,till receipts and delivery lorries but it has also been adopted as a fundamentalapproach to ways of working. Significant change, particularly at the Londonoffice was required and the building was renamed the 'store support centre' toplace stores at the centre of everyone's responsibilities. Colleagues The spirit and innovation in the Try Something New Today idea has galvanised andgiven direction to the entire business. Every store colleague received customerservice training last Autumn in the biggest commitment the company's seniormanagement has made to align colleagues behind the single aim of MakingSainsbury's Great Again. The operating board piloted a training course to changethe way the business was led and over 1,000 managers from stores and centralteams, attended a two-day training course by the end of 2005. Each course wasled by a member of operating board or senior management team. The training isnow being delivered to an additional 9,000 managers. The company tracks howengaged colleagues are with its goal and values on a rolling basis and markedimprovements have been achieved since September 2005. In March 2006 Sainsbury's was also voted London's Healthiest Large Employer bythe BBC as part of its Big Challenge Healthworks initiative. Sainsbury's wascommended for the health initiatives run for its colleagues throughout the UK.One of the schemes which caught the judges attention was the activities ofSainsbury's food advisors based at stores across the country. The company will pay its highest ever colleague bonus to date in June 2006 when£52 million will be shared between 117,000 colleagues. This reflects the hugeeffort and commitment colleagues have made across the business in its progresstowards delivering the Making Sainsbury's Great Again plan. In February 2006 Sainsbury's announced that it had made arrangements towardsaddressing the company's pension scheme deficit. A one off contribution of £350million is being made into the pension schemes in two installments. The first,£110 million, was paid in March 2006, the second, £240 million, will be paidduring May 2006. In addition, deficit payments have been increased by £18million to £38 million per annum, with the first of these payments to be made inMarch 2007. These combined contributions are designed to eliminate Sainsbury'sreported gross deficit calculated under IAS 19 as at 8 October 2005 of £582million. At the year end the gross deficit had increased to £658 million largelyas a result of the lower bond yields which are used in the calculationprescribed under IAS 19. In addition, the company announced that its defined benefit schemes would remainin place for existing members but in order to provide a more balanced sharing ofrisk and cost between members and the company, a number of changes such asincreased contributions and controls on future benefits are being introduced toimprove the funding of the schemes and increase the security of benefits. Last year the company introduced an incentive plan specifically to support theMaking Sainsbury's Great Again recovery plan. It was a one time arrangement andis now closed. This year Sainsbury's will be proposing a new long-term incentiveframework to shareholders at the AGM in July. This will form the basis forarrangements to be put in place over the next 10 years, starting with thecurrent financial year. It will build on last year's plan and also apply to thetop 1,000 centrally based and supermarket store managers in order to retain andmotivate talent beyond the 2008/09 milestone set last year. The key proposedmeasures are growth in ROCE and cash flow per share. In addition the companywill propose a new deferred bonus plan for top managers where the proposedmeasure is based on TSR. In both plans there has been extensive investorconsultation. The scheme is closely aligned with UK best practice and therewill be no rewards for failure. Stores and formats Supermarkets By the end of the year, 37 of the 131 stores earmarked in October 2004 forinvestment had been refurbished. In addition, ten stores were extended and 14new stores were opened, including nine Safeway branded stores purchased fromMorrisons. Sainsbury's had 455 supermarkets at the end of the year. The Safewaystores were refurbished and re-opened in time for Christmas trading. The 14stores previously acquired from Morrisons are on average achieving annualisedsales uplifts of around 20 per cent. Stores acquired from Somerfield and Budgensduring the year have now also been refurbished and opened. Following a period of relatively limited store development and new spaceaddition, Sainsbury's is now actively seeking new sites for supermarkets underthe leadership of Peter Baguley who joined Sainsbury's in August 2005 as thecompany's property director. Early indications from both councils and developersare encouraging with a number of opportunities starting to emerge. The companybelieves that it provides a different offer from other scale supermarkets withits focus on food and greater emphasis on quality. Convenience stores The company's convenience store division had another good year and is targetedto achieve £400 million of the £2.5 billion of additional sales in the company'srecovery plan. Sainsbury's now has 297 convenience stores. It opened 20 stores,refurbished 94, comprising 34 Sainsbury's Locals and 60 'Sainsbury's @'. Thestores acquired from Bells and Jacksons served on average around 700,000customers a week in 2005/06 in addition to the 16 million customer transactionsalready reported. These will be added into the overall customer transactionnumber when the conversion programme is completed. Sales uplifts of over 20 per cent are now being delivered by refurbished andconverted stores and 95 per cent of customers say that the converted storesprovide an improved offer. Customers particularly value the company's freshfood offer and sales of these products have increased by around 100 per cent.Future growth is expected to be delivered via both acquisition and organicopportunities. Jim McCarthy, who has been instrumental in the development of Sainsbury'sconvenience business will leave Sainsbury's in September 2006 to take up a newrole this Autumn. Sainsbury's Online This service is now fully integrated with stores and significant enhancementshave been made leading to more than a 25 per cent increase in sales. The websitewas re-launched at the end of September 2005 and has resulted in a markedreduction in the time taken for first time orders. Improvements in productavailability and customer service have substantially increased satisfaction andretention and also helped drive new customer acquisition throughrecommendations. At the start of 2006 new postcodes were added to the 97 storescurrently making deliveries and Sainsbury's has plans to extend the service to afurther 200,000 households. IT systems As previously announced the insourcing of IT systems was successfully completedin April, six months after announcing the decision to terminate the contractwith Accenture. This involved the transfer of all assets, third party contractsand approximately 470 colleagues into Sainsbury's. The company has taken a oneoff charge of £63 million as a result of the termination. Future cost savingsare expected to result in payback of the exit costs in less than two years. Operating costs Some £400 million of cost reductions were identified in October 2004 and £110million have been delivered in 2005/06. These have underpinned the investment inprice and the wider customer offer. Plans are in place to deliver an additional£175 million in the current year bringing the cumulative total to £285 millionand stretching the overall target to £440 million as a result of the additionalsavings from the insourcing of IT. Cost reductions have been achieved primarilyacross stock loss and central costs. Buying efficiencies continue to bereinvested back into the customer offer. Sainsbury's Bank The Bank has had a difficult year and made an underlying operating loss of £10million due to additional charges for bad debt. This relates largely to loansmade two and three years ago when the Bank's loan book was being expanded. Inaddition, during the past year the consumer credit environment worsened.Sainsbury's Bank has been particularly affected due to its product profile butthe position is now stabilising and processes have been put in place to tightencredit policy and associated risk controls. In March 2006 Tim Pile stepped down and earlier this month Rob Walker wasappointed as chief executive of the Bank. The Bank is an integral part of thecompany's customer offer and Sainsbury's and its partner HBoS are committed tothe operation and on working together to return it to profitability. The Bank istargeting breakeven in the 2006/07 financial year. Competition Commission Sainsbury's will co-operate fully with the Competition Commission in its inquiryand is pleased that this is covering the whole industry. Hamish Elvidge hastaken on responsibility for Sainsbury's response to the forthcoming CompetitionCommission inquiry and will therefore no longer sit on the operating board. Adedicated team, led by Hamish, has been created to deal with the issues raisedto ensure this will not distract the company from its continued commitment toserve customers in the best possible way. Looking forward The market remains challenging but Sainsbury's will continue to maintain itscompetitive position on pricing while building on its quality food offer andcontinuing to lead on issues that are of increasing importance to customers suchas health and the environment where the company's heritage and brand valuesprovide a position of strength. The company has now had five quarters ofconsecutive like-for-like sales and market share growth as more customers shopwith Sainsbury's each week. The recovery is on track and operational gearing in Sainsbury's Supermarkets isstarting to be delivered. With good sales momentum and emerging cost savings itis expected that the improving trend in operational gearing will continue. Asstated at the Interims in November 2005, there will be a significant increase inenergy costs in the second half of the year as the current contract comes to anend. This will impact the shape of the half on half profit growth. The priorityremains investment in the customer offer to maintain sales growth and theperformance to date gives confidence that Sainsbury's will continue to makeprogress towards Making Sainsbury's Great Again. Financial Review Summary The financial results for the 52 weeks ended 25 March 2006 reflect the firstfull year of solid progress on the Making Sainsbury's Great Again plan. • Sales (inc VAT) from continuing operations up 5.8 per cent to £17,317million (2004/05: £16,364 million) and up £722 million before petrol andSainsbury's Bank, a significant step towards the commitment to grow sales by£2.5 billion announced in the Making Sainsbury's Great Again plan • Sales (ex VAT) from continuing operations up 5.7 per cent to £16,061million (2004/05: £15,202 million) • Full year Easter adjusted like-for-like sales growth excluding petrolup 3.7 per cent and 4.1 per cent including petrol • Retail underlying operating profit up to £352 million (2004/05: £308million); the benefits of operational gearing have started to come through, withthe improvement in underlying retail operating profit margins reflected in the14.3 per cent underlying operating profit growth in 2005/06 • Sainsbury's Bank underlying operating loss of £10 million (2004/05restated: profit of £17 million) due to increased provisioning for bad anddoubtful debts • Underlying profit before tax from continuing operations up 12.2 percent at £267 million (2004/05: £238 million) • One off operating costs of £152 million (2004/05: £497 million) wereincurred during the year, relating to Business Review, IT insourcing and debtrestructuring • Profit before tax from continuing operations was £104 million (2004/05: £238 million loss) • Underlying basic earnings per share from continuing operationsincreased by 26.5 per cent to 10.5 pence (2004/05: 8.3 pence) and basic earningsper share from continuing operations increased to 3.8 pence (2004/05: 17.4 penceloss) • Underlying net debt improved year on year by £77 million despite theadditional one off pension contribution made during the year of £110 million andthe unwinding of the Easter benefit noted within 2004/05 • A final dividend of 5.85 pence per share is proposed; up 3.5 per cent(2004/05: 5.65 pence) The following key events had a significant impact on the business during theyear: The Group's debt restructuring - On 24 March 2006 the Group repurchased all itsoutstanding unsecured bonds totalling £1.7 billion with the proceeds from anissue of £2.1 billion of secured debt (the debt restructuring). The long-termfinancing arrangement has been secured over 127 freehold and leaseholdsupermarkets and is repayable over 12 and 25 year terms. This transaction hasenabled the Group to borrow at lower interest rates and provides a flexiblefinancing platform for the future. Interest savings of £12 million are expectedin 2006/07, although no benefit has been realised within 2005/06. The one offcharge associated with the debt restructuring was £38 million. Defined benefit pension changes - At the same time as the debt restructuring theGroup committed to make an additional one off contribution of £350 million intothe Group's defined benefit pension schemes. £110 million was paid during theyear with the remaining £240 million to be paid in May 2006. This one offcontribution, together with increasing the annual contributions by £18 millionto £38 million per annum over the next eight years, is designed to fund thereported gross deficit calculated under IAS 19 as at 8 October 2005. IT insourcing - On 28 April 2006 the Group successfully completed the migrationof IT services previously provided by Accenture, as announced on 27 October2005. This involved the transfer of all assets, third party contracts andapproximately 470 colleagues back into the Group, resulting in a one off chargeduring the year of £63 million, which future cost savings are expected topayback in less than two years. Business Review and Transformation costs - The final costs associated with theBusiness Review announced on 19 October 2004 were £51 million, in line withguidance provided at the last year end. These were primarily employee andpension related costs following further rationalisation of the supply chain.The Business Review is now complete and no further costs will be incurred inrelation to this one off activity. Summary Income Statement 52 weeks to 52 weeks to 25 March 26 March 2006 2005 %Continuing Operations £m £m changeSales (inc VAT)Retailing - Supermarkets and Convenience 16,987 16,076 5.7Financial Services - Sainsbury's Bank 330 288 14.6Total sales (inc VAT) 17,317 16,364 5.8Sales (ex VAT)Retailing - Supermarkets and Convenience 15,731 14,914 5.5Financial services - Sainsbury's Bank 330 288 14.6Total sales (ex VAT) 16,061 15,202 5.7Underlying operating profit from continuing operationsRetailing - Supermarkets and Convenience 352 308 14.3Financial services - Sainsbury's Bank (10) 17 (158.8)Total underlying operating profit from continuing operations 342 325 5.2Underlying net finance costs (1) (75) (88) 14.8Share of post-tax profit of joint ventures - 1 (100.0)Underlying profit before tax from continuing operations 267 238 12.2Business Review and Transformation operating costs (51) (497) 89.7IT insourcing costs (63) - n/aProfit on sale of properties 1 21 (95.2)Financing fair value movements (12) - n/aDebt restructuring costs (38) - n/aProfit/(loss) before tax 104 (238) 143.7Income tax (expense)/credit (46) 51 (190.2)Profit/(loss) from continuing operations 58 (187) 131.0Profit attributable to discontinued operations - 375 (100.0)Profit for the financial year 58 188 (69.1) Underlying basic earnings per share 10.5p 8.3pBasic earnings/(losses) per share from continuing operations 3.8p (17.4)pBasic earnings per share 3.8p 4.1pEquity dividend per share 8.0p 7.8p(1) Underlying net finance costs: Net finance costs pre financing fair value movements and debt restructuringcosts Retailing Sales (inc VAT) increased by 5.7 per cent to £16,987 million (2004/05: £16,076million) and 6.1 per cent on an Easter adjusted basis, with significantcontributions from like-for-like growth, new space and petrol. Easter adjustedlike-for-like sales excluding petrol were up 3.7 per cent, with strongperformances delivered within food, non-food and convenience. The positivesales growth was achieved with increased volumes, being offset by grocery pricedeflation of 1.5 per cent, as a result of continued investment in the customeroffer. KPIs 28 weeks to 24 weeks to 52 Weeks to 52 Weeks to 8 October 25 March 25 March 26 March 2005 2006 2006 2005Like-for-like sales excluding petrol - % (Easter 2.1 5.3 3.7 (0.4)adjusted)Grocery Price Deflation (2) - % (1.4) (1.6) (1.5) (1.0)Retail operating margin - % (underlying retail operating 2.06 2.43 2.24 2.07profit divided by retail sales excluding VAT)(2) Deflation noted for 52 weeks to 26 March 2005 relates to total retail deflation excluding petrol The impact of petrol on like-for-like growth remains positive with Easteradjusted like-for-like sales including petrol up 4.1 per cent. Sales (inc VAT) before petrol and Sainsbury's Bank increased by £722 million.This is a key indicator of underlying supermarket performance and the salesmeasure used within the J Sainsbury plc Share Plan 2005. This performance is animportant first step towards the commitment to grow these sales by £2.5 billionas part of the Making Sainsbury's Great Again plan. New space provided a significant contribution to sales growth during the year,with 367,000 square feet of floor space added, an increase of 2.2 per cent, ofwhich 0.6 per cent was from extensions. During the year 14 new supermarkets,including a further nine Safeway branded stores purchased from Morrison's, and20 new convenience stores were opened, five of which related to the acquisitionof SL Shaw Ltd. The Group made further investment through the completion ofnine extensions, 28 refurbishments and one downsize in the supermarket estateand 94 refurbishments and conversions of convenience stores. Supermarkets Convenience Total Number Area Number Area Number Area 000 sq ft 000 sq ft 000 sq ftAs at 26 March 2005 (1) 446 15,592 281 778 727 16,370 New stores 14 295 20 60 34 355Closures (5) (112) (4) (17) (9) (129)Extensions (2) - 141 - - - 141As at 25 March 2006 455 15,916 297 821 752 16,737(1) Restated for the transfer of Centrals into the convenience division (2) Includes the impact of downsizes and other size adjustments Underlying retailing operating profit increased to £352 million (2004/05: £308million). Higher sales volumes and cost efficiencies helped mitigate the impactof investment in price and increased store labour costs, as improved pricing andservice remain core to maintaining focus on what is right for the customer. Gross margin during the year continued to reflect the commitment to invest £400million in the customer offer (in both price and quality), outlined in theMaking Sainsbury's Great Again plan. This helped drive the sales led recovery byensuring that Sainsbury's continues to offer great food at fair prices. In 2005/06 the operating efficiencies which underpin the Making Sainsbury'sGreat Again plan began to emerge. Significant improvements were noted in theoverall level of stock loss, which given that it coincided with improvedavailability within stores was even more significant. Following the completionof the store support centre reorganisation savings were also realised within theGroup's central costs. In the second half of the year the Group started to see the early benefits ofprocess efficiency in store and supply chain coming through in lower costs. TheGroup is on track to deliver the target cost savings identified as part of therecovery plan and plans are in place to deliver the expected level of savings inthe current year. However, the Group remains sensitive to increasing externalcost pressures on the retail industry, principally relating to increases inrent, rates and general wage pressures. Additionally, the Group's fixed energycontract is due to expire in October 2006. This will add an estimated £55million to energy costs in the second half of the current year and an additional£20 million in the first half of 2007/08. Improved levels of availability and service in our stores were also reflected inour online home delivery operation, Sainsbury's Online. Online sales were upover 25 per cent during the year, with customer orders up over 20 per cent. Theservice is now being further extended. Financial services - Sainsbury's Bank Sainsbury's Bank increased total income by 15 per cent to £330 million (2004/5:£288 million), continuing to expand its customer base through the sale of itscore products: personal loans, savings accounts, credit cards, and general andlife insurance. Customer accounts grew by eight per cent during the year and netoperating income was up by 14 per cent to £215 million, primarily driven by anincrease in fee and commission income as the Group looks to expand and increaserevenue streams. During a more challenging year for the financial services industry, Sainsbury'sBank delivered an underlying operating loss of £10 million (2004/5: £17 millionprofit), in line with previous guidance. This was driven by provisions for badand doubtful debts, which increased in the year to £106 million (2004/05: £64million). The increase reflects the high volume of business written in 2003 and2004, which linked to a more indebted economic environment and with weakerlevels of consumer confidence has required additional provisions to be made.Steps have been taken during the year to tighten credit policy on unsecuredlending and significant progress has been made in credit management ofSainsbury's Bank's lending portfolio. Sainsbury's Bank will continue to grow customer numbers with further investmentin insurance, savings and commission based products, and with increased controlover historic bad and doubtful debts the bank is targeting break even in thecurrent financial year. The prior year comparative has been restated to reflect a reclassification ofinterest expense from operating profit into interest payable to ensure it isconsistent with the treatment for the year ending 25 March 2006. The impact ofthis reclassification is to increase Sainsbury's Bank's 2004/05 underlyingoperating profit and the Group's interest payable costs by £4 million. Underlying net finance costs Underlying net finance costs decreased by £13 million to £75 million (2004/05:£88 million), with a £27 million reduction in underlying finance costs beingoffset by lower finance income of £14 million. 52 weeks to 52 weeks to 25 March 26 March 2006 2005 £m £mInterest receivable 7 33Net return on pension scheme assets/liabilities 23 11Finance income 30 44 Interest payable (115) (137) Capitalised interest 10 5Underlying finance costs (1) (105) (132) Underlying net finance costs (75) (88) (1) Finance costs pre financing fair value movements and debt restructuring costs Finance income fell due to a reduction in interest receivable in the year as inthe prior year interest was earned from the cash proceeds realised from thedisposal of Shaw's Supermarkets in the first half. This was partially offset byan increase in the net return on pension scheme assets recognised in the year.Underlying finance costs were down as a result of lower average net debt duringthe second half of the year, improved working capital management and highercapitalised interest, reflecting an increase in expenditure on long term newdevelopments. The Group's cost of finance is estimated to reduce during 2006/07 as a result ofthe debt restructuring, although no benefit has been realised within 2005/06 asthe refinancing was completed on 24 March 2006. Debt restructuring costs £38 million of costs resulted from the changes made to the Group's debtstructure and have been treated as one off costs. The cash impact during theyear was £22 million with a further £2 million to be paid in the currentfinancial year. The transaction costs relating to the issue of new secured debtincurred as part of the refinancing are to be amortised over the life of theloans. 2006 £mBond buy back costs 24Non-cash swap close out costs 14Total debt restructuring costs 38 IT insourcing costs £63 million of costs were charged as a result of the migration of IT servicespreviously provided by Accenture back to Sainsbury's, with all termination andtransition costs being treated as one off. The 2005/06 cash impact of ITmigration was £3 million, with £41 million to be paid in the current financialyear. The cost savings arising from insourcing should ensure that pay back ofthe termination costs will be within two years. Business Review and Transformation operating costs £51 million of Business Review costs were incurred during the year, in line withguidance at the last year end. This represents the final tranche of costsbringing the total operating charges associated with the Business Review andTransformation over the two years to £548 million. During the year the cashoutflow in relation to these costs was £65 million, with a further estimatedimpact of £50 million in the current financial year. 2006 £mEmployee and pension related 47Other 4Business Review operating costs 51 Profit on sale of properties Surplus assets were sold in the year generating total cash proceeds of £164million (2004/05: £266 million) and an overall profit on sale of £1 million(2004/05: £21 million). This is a result of aligning the asset base to thefuture needs of the business by disposing of trading and non-trading assets thatwere deemed surplus to requirements. The Group will continue to dispose ofsurplus assets but expect proceeds to return to more modest levels of around £50million. Financing fair value movements The Group does not use derivatives for speculative purposes. However certainswaps, while providing effective economic hedges, do not qualify for hedgeaccounting under IAS 39 and changes in the fair value of non-qualifyingderivative instruments are recognised in the income statement. These arenon-cash and inherently volatile movements and are therefore excluded from thedefinition of underlying profit. Fair value movements for the year resulted in a £12 million loss, of which £4million relates to the Bank. The Group took the option to defer the implementation of IAS 32 and IAS 39 tothe 2005/06 year end and these standards are not applied to the results of theprior year. Taxation The income tax charge was £46 million (2004/05: credit of £51 million), with anunderlying rate of 35.5 per cent (2004/05: 37.4 per cent) and an effective rateof 44.2 per cent (2004/05: 21.4 per cent). The underlying rate exceeded thenominal rate of UK corporation tax principally due to depreciation charged onassets that did not qualify for capital allowances. Last year's tax creditarose from the effect of one off costs which were predominantly tax deductible.A £3 million refund of corporation tax was received during the year (2004/05:£71 million paid). Earnings per share Underlying basic earnings per share from continuing operations increased from8.3 pence to 10.5 pence, reflecting the improved underlying profit after taxattributable to equity holders, after adjusting for the minority interests atSainsbury's Bank, and the impact of the share consolidation during the 2004/05financial year. Basic earnings per share from continuing operations increased to 3.8 pence (2004/05: 17.4 pence loss) as the previous year was impacted by the higher level ofone off costs. Dividend A final dividend of 5.85 pence per share is proposed (2004/05: 5.65 pence) andwill be paid on 21 July 2006 to shareholders on the Register of Members at theclose of business on 26 May 2006. The total proposed dividend for the year is8.00 pence (2004/05: 7.80 pence). Underlying dividend cover increased in the year to 1.3 times (2004/05: 1.1times). As outlined in 2004/05, it remains the medium term objective to restoredividend cover (calculated as underlying post-tax earnings divided by dividends)to at least 1.5 times. Summary Cashflow Statement 52 weeks to 52 weeks to 25 March 26 March 2006 2005 £m £mOperating cash flows 780 946Net interest (156) (83)Taxation 3 (71)Cash flow before appropriations 627 792Purchase of fixed assets/operations (561) (823)Sale of fixed asset/operations 151 1,383Bond buy back costs (22) -Proceeds from issue of shares 22 5Equity dividends (131) (254)B share dividends paid - (113)Repayment of short-term borrowings (299) (130)Increase/(repayment) of long-term borrowings 364 (176)Capital redemption (9) (549)Net increase in cash and cash equivalents 142 135(Increase)/decrease in debt (65) 306Loans and finance leases disposed with subsidiaries - 230Movement in underlying net debt 77 671Closing IAS 32 and 39 adjustments (51) -Foreign exchange adjustments - (24)Movement in net debt 26 647Opening net debt (1,441) (2,088)Closing net debt (1,415) (1,441) On an underlying basis Group net debt has improved by £77 million with £41million attributable to Retailing and £36 million to Financial Services. The improvement in Retailing is despite the impact to net debt resulting fromthe £110 million pension contribution made during the year and the unwinding ofthe benefit noted in 2004/05 as a result of Easter falling at the year end.This reflects closer management of working capital and underlying profit growth. This performance highlights that the Group has achieved the objective ofpositive cash flow in 2005/06, which is ahead of the expectations set out withinthe Making Sainsbury's Great Again plan. The Group is working towards an cashneutral position in 2006/07, before the additional one off pension contributionof £240 million and the £93 million cash impact of 2005/06 one off items. Summary Balance Sheet 25 March 26 March 2006 2005 £m £m Non-current assets 8,902 8,630 Inventories 576 559 Trade and other receivables 2,241 1,723 Cash and cash equivalents 1,028 706 Debt (2,443) (2,147) Net debt (1,415) (1,441) Trade and other creditors and provisions (6,339) (5,359) Net assets 3,965 4,112 Equity shareholders' funds 3,886 4,027 Minority interest 79 85 Capital employed 3,965 4,112 Shareholders' funds decreased by £141 million in the year to £3,886 million,with gearing increasing to 36 per cent (2004/05: 35 per cent). The assets,liabilities and cash of Sainsbury's Bank are presented within the Group's asset,liability and cash classifications, in a manner consistent with the prior year. Group debt restructuring On 24 March 2006 the Group repurchased all of its outstanding unsecured bondstotalling £1.7 billion via a cash tender. The Group simultaneously refinancedthis debt with the proceeds from an issue of £2.1 billion of new debt securedagainst approximately half of the book value of the Group's supermarketportfolio. The new amortising debt is split between £1.2 billion of loans with finalrepayment in July 2018 and £0.9 billion of loans with repayment in July 2031. Pensions At the time of the debt refinancing, the Group made a commitment to make a oneoff contribution of £350 million into the Group's defined benefit pensionschemes. £110 million of this was paid into the scheme on 24 March 2006, with afurther £240 million in May 2006. In addition the Group has agreed to increaseannual contributions by £18 million to £38 million from March 2007. Thesecontributions along with the £350 million one off contribution are expected tofund the reported deficit calculated under IAS 19 as at 8 October 2005 over thenext eight years. As part of the commitment of the Group to increase contributions, active memberscan choose to increase contributions by an average of three per cent of pay orchoose to receive lower benefits in retirement. Under IAS 19 the difference between the fair value of the plan assets and thepresent value of the defined benefit obligation is recognised on the balancesheet. The profit and loss charge is split between the operating service chargeand the financing credit. Actuarial gains and losses are recognised through thestatement of recognised income and expense. 2006 2005 £m £mPresent value of funded obligations (4,361) (3,503)Fair value of plan assets 3,710 2,976 (651) (527)Present value of unfunded obligations (7) (9)Retirement benefit obligations (658) (536)Deferred taxation 227 161Net pension scheme liabilities (431) (375) An actuarial valuation of the UK defined benefit pension schemes as at 29 March2003 indicated a deficit of £161 million; the next actuarial valuation iscurrently in progress. At the 25 March 2006, the IAS 19 deficit (after deferredtax) was £431 million (2004/05: £375 million). The increase in the IAS 19deficit is primarily a result of the bond yields falling, impacting the discountrate by 60 basis points during the year, partially offset by the one offcontribution of £110 million and the rise in the value of investments during thesame period. Capital expenditure Capital expenditure reduced in the year to £525 million (2004/05: £901 millionwhich included the acquisition of stores from Morrison's), down on the £550million previously forecast. Retail capital expenditure excluding the acquisition and development of Safeway/Morrison stores and the acquisition of subsidiaries was £479 million (2004/05:£457 million), an increase of £22 million on the prior year. This capitalexpenditure included £133 million (2004/05: £128 million) on new stores, £53million (2004/05: £51 million) on extensions, and £193 million (2004/05: £109million) on refurbishments, which includes 28 of the 131 stores that havereceived limited investment for a number of years. Further expenditure of £100million (2004/05: £169 million) was incurred in relation to IT investments,supply chain and central projects. Capital expenditure in the current year is expected to increase to between £650million and £700 million as a result of the carry over from the prior year,additional extensions, the extra refurbishments to be completed as part of theMaking Sainsbury's Great Again plan and the development of our new storepipeline. Adoption of International Financial Reporting Standards The financial information presented has been prepared on the basis ofInternational Financial Reporting Standards (IFRS), which have been fullyadopted since the beginning of 2005/06. All comparatives have been restated ona consistent basis, with the exception of IAS 32 and IAS 39, as the Group tookthe option to defer their implementation until 2005/06. Overall there are no material differences between underlying profit on an IFRSor UK GAAP basis and the impact of the IFRS adjustments to underlying profitbefore tax are consistent with guidance given on 26 April 2005 and confirmedduring the interims. Treasury management Treasury policies are reviewed and approved by the Board. The chief executiveand chief financial officer have joint delegated authority from the Board toapprove finance transactions up to £300 million. The central treasury function is responsible for managing the Group's liquidresources, funding requirements and interest rate and currency exposures. Grouppolicy permits the use of derivative instruments but only for reducing exposuresarising from underlying business activity and not for speculative purposes. Sainsbury's Bank Treasury operations in respect of Sainsbury's Bank are managed separately fromthe central treasury function. Responsibility for the control of risk withinthe Bank is vested in the Risk Management Committee, which reports directly tothe Board of Directors of Sainsbury's Bank. Group Income Statementfor the 52 weeks to 25 March 2006 2006 2005 Note £m £m Continuing operations Revenue 3 16,061 15,202 Cost of sales (14,994) (14,544) Gross profit 1,067 658 Administrative expenses (839) (830) Other income 1 21 Operating profit/(loss) 229 (151) Finance income 4 30 44 Finance costs 4 (155) (132) Share of post-tax profit from joint ventures - 1 Profit/(loss) before taxation 104 (238) Analysed as: Underlying profit before tax from continuing operations (1) 267 238 Business Review and Transformation operating costs 5 (51) (497) IT insourcing costs 6 (63) - Profit on sale of properties 1 21 Financing fair value movements 4 (12) - Debt restructuring costs 4 (38) - 104 (238) Income tax (expense)/credit 7 (46) 51 Profit/(loss) from continuing operations 58 (187) Discontinued operations Profit attributable to discontinued operations - 375 Profit for the financial year 58 188 Attributable to: Equity holders of the parent 64 184 Minority interests (6) 4 58 188 Earnings/(losses) per share 8 pence pence Basic 3.8 4.1 Diluted 3.8 4.1 From continuing operations: Basic 3.8 (17.4) Diluted 3.8 (17.4) (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 Business Review costs, ITinsourcing costs and debt restructuring costs. In the prior financial year,these one off items were the Business Review and Transformation costs. Group Statement of Recognised Income and Expensefor the 52 weeks to 25 March 2006 2006 2005 Note £m £mCurrency translation differences 2 (3)Actuarial (losses)/gains on defined benefit pension schemes (255) 128Available-for-sale financial assets- fair value movements 26 -Cash flow hedges- effective portion of fair value movements 1 -- transferred to income statement (1) -Share-based payment tax deduction 5 -Tax on items recognised directly in equity 7 68 (38)Net (loss)/income recognised directly in equity (154) 87 Profit for the financial year 58 188Total recognised income and expense for the financial year (96) 275 Attributable to:Equity holders of the parent (90) 271Minority interests (6) 4 (96) 275 Effect of changes in accounting policy on adoption of 14 IAS 32 and IAS 39: Equity holders of the parent (78)Minority interests - (78) Group Balance Sheetat 25 March 2006 and 26 March 2005 2006 2005 Note £m £mNon-current assets Property, plant and equipment 7,060 7,076Intangible assets 191 203Investments 10 20Available-for-sale financial assets 113 -Amounts due from Sainsbury's Bank customers 1,473 1,331Other receivables - -Deferred income tax asset 55 - 8,902 8,630Current assets Inventories 576 559Trade and other receivables 276 319Amounts due from Sainsbury's Bank customers and other banks 1,888 1,227Available-for-sale financial assets 52 -Investments - 90Cash and cash equivalents 11b 1,028 706 3,820 2,901Non-current assets held for sale 25 87 3,845 2,988Total assets 12,747 11,618 Current liabilities Trade and other payables (2,094) (2,093)Amounts due to Sainsbury's Bank customers and other banks (2,299) (2,464)Short term borrowings (253) (354)Derivative financial instruments (10) -Taxes payable (63) (55) (4,719) (4,966)Net current liabilities (874) (1,978) Non-current liabilities Other payables (30) (31)Amounts due to Sainsbury's Bank customers and other banks (1,009) (22)Long term borrowings (2,178) (1,793)Derivative financial instruments (2) -Deferred income tax liability - (1)Provisions (186) (157)Retirement benefit obligations (658) (536) (4,063) (2,540)Net assets 3,965 4,112 Equity Called up share capital 489 620Share premium account 782 761Capital redemption reserve 668 547Other reserves (1) 87Retained earnings 1,948 2,012Equity shareholders' funds 10 3,886 4,027 Minority interests 10 79 85Total equity 10 3,965 4,112 Group Cash Flow Statementfor the 52 weeks to 25 March 2006 2006 2005 Note £m £mCash flows from operating activities Cash generated from operations 11a 780 946 Interest paid (159) (107) Corporation tax received/(paid) 3 (71) Net cash from operating activities 624 768 Cash flows from investing activities Purchase of property, plant and equipment (549) (710)Purchase of intangible assets (6) (14)Proceeds from disposal of property, plant and equipment 164 266Acquisition of subsidiaries, net of cash acquired (6) (99)(Costs)/proceeds from disposal of operations, net of cash disposed (13) 1,117Interest received 6 32Net cash from investing activities (404) 592 Cash flows from financing activities Proceeds from issuance of ordinary shares 22 5Capital redemption (9) (549)Repayment of short term borrowings (348) (14)Repayment of long term borrowings (1,701) (185)Proceeds from short term borrowings 50 -Proceeds from long term borrowings 2,056 -Debt restructuring costs (22) -Repayment of capital element of obligations under finance lease (1) (116)borrowingsInterest elements of obligations under finance lease payments (3) (8)Dividends paid 9 (131) (254)B share preference dividends paid 9 - (113)Issue of loan from minority shareholder 9 9Net cash from financing activities (78) (1,225) Net increase in cash and cash equivalents 142 135 Opening cash and cash equivalents 700 513Cash attributable to discontinued operations - 51 700 564Effects of foreign exchange rates - 1Closing cash and cash equivalents 11b 842 700 Notes to the financial information 1 Status of financial information The financial information is derived from the full Group financial statementsfor the 52 weeks to 25 March 2006 and does not constitute full accounts withinthe meaning of section 240 of the Companies Act 1985 (as amended). The GroupAnnual Report and Financial Statements on which the auditors have given anunqualified report which does not contain a statement under section 237(2) or(3) of the Companies Act 1985, will be delivered to the Registrar of Companiesin due course, and posted to shareholders in June. 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. These are the Group's first financial statements prepared under IFRS andtherefore, IFRS 1 'First-time Adoption of International Financial ReportingStandards' has been applied. An explanation of the transition to IFRS isprovided in note 13. The financial statements have been prepared under the historical costconvention, except for derivative financial instruments and available-for-salefinancial assets that have been measured at fair value in the 2005/06 financialyear. 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 continuing operations are carried out in the UK. Discontinuedoperations relate to the US supermarkets business, Shaw's Supermarkets, whichwas sold in the last financial year. 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. 2006 Retailing Financial Group £m services £m £m 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) from continuing operations (1) 352 (10) 342 Business Review and Transformation operating costs (51) - (51) IT insourcing costs (63) - (63) Profit on sale of properties 1 - 1 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 2005 Retailing Financial Group £m services £m £m Segment revenue Sales to external customers 14,914 - 14,914 Services to external customers - 288 288 Total revenue 14,914 288 15,202 Underlying operating profit from continuing operations (1) 308 17 325 Business Review and Transformation operating costs (497) - (497) Profit on sale of properties 21 - 21 Segment result (168) 17 (151) Finance income 44 Finance costs (132) Share of post-tax profit from joint ventures 1 - 1 Income tax credit 51 Profit attributable to discontinued operations 375 - 375 Profit for the financial year 188 Assets 8,754 2,854 11,608 Investment in joint ventures 10 - 10 Segment assets 11,618 Segment liabilities 4,843 2,663 7,506 Other segment items Capital expenditure 885 16 901 Depreciation expense 717 5 722 Amortisation expense 24 2 26 Impairment of amounts due from Sainsbury's Bank customers - 64 64 (1) Underlying profit before tax from continuing operations before financeincome and finance costs. 4 Finance income and finance costs 2006 2005 £m £mInterest on bank deposits 7 33Net return on pension schemes 23 11Finance income 30 44 Financing fair value movements (1)Fair value losses - Bank (4) - - Retail (8) - (12) - Debt restructuring costs (38) - Borrowing costs Bank loans and overdrafts (3) (3)Other loans (107) (126)B share preference dividends (1) -Obligations under finance leases (3) (8)Provisions - amortisation of discount (1) - (115) (137)Amounts included in the cost of qualifying assets Interest capitalised - qualifying assets 10 5Finance costs (155) (132) (1) Fair value movements relate to fair value adjustments on derivativesrelating to financing activities and hedged items in fair value hedges. Total interest income amounted to £217 million (2005: £220 million), includinginterest income attributable to Sainsbury's Bank of £210 million (2005: £187million) included in revenue. Total interest costs amounted to £230 million(2005: £237 million) including interest costs attributable to Sainsbury's Bankof £115 million (2005: £100 million) included in cost of sales. 5 Business Review and Transformation operating costs The Business Transformation Programme concluded in the year ended 26 March 2005,with no further costs recognised in the current financial year. Business Reviewcosts in the current financial year are primarily employee and pension relatedcosts associated with the reorganisation of the depot network, as set out below: 2006 2005 £m £mBusiness Transformation operating costs - 22 IT systems - 145Employee and pension related 47 41Inventories - 90Supply chain - 119Property - 65Other 4 15Business Review operating costs 51 475 Total Business Review and Transformation operating costs 51 497 6 IT insourcing costs On 27 October 2005, the Group announced that the IT services previously providedby Accenture would be migrated back to the Group, together with a number ofAccenture employees. The costs associated with the transition process are £63million, of which £3 million has been paid by 25 March 2006. The remaining £60million is held within provisions. 7 Income tax expense 2006 2005 £m £mCurrent tax expenseCurrent year 38 6Overprovision in prior periods (2) (4) 36 2Deferred tax expenseOrigination and reversal of temporary differences 15 (53)Overprovision in prior periods (5) - 10 (53) Total income tax expense/(credit) in income statement 46 (51) Tax expense on underlying profit Tax on underlying profit from continuing operations (1) 95 89Tax on Business Review and Transformation operating costs (15) (140)Tax on IT insourcing costs (19) -Tax on financing fair value movements (3) -Tax on debt restructuring costs (12) - 46 (51) (1) Tax charge attributable to underlying profit before tax fromcontinuing operations. The effective tax rate of 44.2 per cent (2005: 21.4 per cent) is higher than thestandard rate of corporation tax in the UK. The differences are explainedbelow: 2006 2005 £m £mProfit/(loss) before taxation 104 (238) Income tax at UK Corporation tax rate of 30% (2005: 30%) 31 (71)Effects of:Disallowed depreciation on UK properties 21 19Non-deductible expenses 1 5Over provision in prior years (7) (4)Total income tax expense/(credit) per income statement 46 (51) The deferred income tax charged or credited to equity during the year is asfollows: 2006 2005 £m £mTax on items taken to equity Actuarial gains and losses on defined benefit pension schemes (75) 38Available-for-sale financial assets 7 - (68) 38Share-based payment tax deduction (5) - (73) 38 8 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 period. 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. In thecurrent financial year, these one off items were the Business Review costs, ITinsourcing costs and debt restructuring costs. In the prior financial year,these one off items were the Business Review and Transformation costs. Thisalternative measure of earnings per share is presented to reflect the Group'sunderlying trading performance. 2006 2005 million millionWeighted average number of shares in issue 1,679.0 1,749.9Weighted average number of dilutive share options 13.2 6.7Total number of shares for calculating diluted earnings per share 1,692.2 1,756.6 £m £mProfit for the financial year attributable to equity holders of the parent 64 184Less: preference dividend on B shares classified in equity - (113)Profit for the financial year after B share preference dividends 64 71 Less: profit attributable to discontinued operations - (375)Profit/(loss) from continuing operations after B share preference dividends 64 (304)Add: preference dividend on B shares classified in equity - 113 Business Review and Transformation operating costs, net of tax 36 357 IT insourcing costs, net of tax 44 - profit on sale of properties (1) (21) financing fair value movements, net of tax 7 - debt restructuring costs, net of tax 26 -Underlying profit after tax from continuing operations 176 145 2006 2005 Pence Pence per share per shareAll operationsBasic earnings 3.8 4.1Diluted earnings 3.8 4.1 Continuing operationsBasic earnings 3.8 (17.4)Diluted earnings 3.8 (17.4)Underlying basic earnings 10.5 8.3Underlying diluted earnings 10.4 8.3 Discontinued operationsBasic earnings - 21.4Diluted earnings - 21.4 9 Dividend (a) Equity dividends 2006 2005 pence pence 2006 2005 per share per share £m £mAmounts recognised as distributions to equity holders in the year:Final dividend of prior year 5.65 11.36 95 218Interim dividend of current year 2.15 2.15 36 36 7.80 13.51 131 254 After the balance sheet date, a final dividend of 5.85 pence per share (2005:5.65 pence per share) was proposed by the Directors in respect of the 52 weeksended 25 March 2006, resulting in a total final proposed dividend of £99 million(2005: £95 million). The proposed final dividend has not been included as aliability at 25 March 2006. (b) B share preference dividends 2006 2005 £m £mB share preference dividend - 113 In the current financial year, B shares have been classified as short termborrowings in accordance with IAS 32 'Financial Instruments: Disclosure andPresentation' (note 14). Accordingly, preference dividends paid in respect of Bshares are shown as finance costs in the income statement (note 4) and as partof operating activities in the cash flow statement for the current financialyear. 10 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 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 - - (180) - (180) - (180)Available-for-sale financial - - 19 - 19 - 19assetsCash flow hedges- effective portion of fair value - - 1 - 1 - 1movements- transferred to income statement - - (1) - (1) - (1)B shares redemption - - 121 (9) 112 - 112Shares purchased - - - (1) (1) - (1)Shares vested - - - 2 2 - 2Allotted in respect of share 2 20 - - 22 - 22option schemesAt 25 March 2006 489 782 667 1,948 3,886 79 3,965 At 28 March 2004 486 1,438 - 2,735 4,659 81 4,740Profit for the year - - - 184 184 4 188B share preference dividends - - - (113) (113) - (113)Equity dividends - - - (36) (36) - (36)Prior year dividends paid - - - (218) (218) - (218)Share-based payment - - - 8 8 - 8Currency translation differences - - (3) - (3) - (3)Actuarial gains - - 90 - 90 - 90Issue of B shares (1) 680 (681) - - (1) - (1)B shares redemption (2) (547) - 547 (549) (549) - (549)Shares vested - - - 1 1 - 1Allotted in respect of share 1 4 - - 5 - 5option schemesAt 26 March 2005 620 761 634 2,012 4,027 85 4,112 (1) Share premium account includes B shares issue costs of £1 million. (2) Retained earnings include B shares redemption expenses of £2 million. 11 Notes to the cash flow statement (a) Reconciliation of operating profit/(loss) to cash generated fromoperations 2006 2005 £m £mOperating profit/(loss) 229 (151)Adjustments for:- Depreciation of property, plant and equipment 449 722- Amortisation of intangible assets 21 26- Profit on sale of property, plant and equipment (1) (21)- Share-based payments 23 8Operating cash flows before changes in working capital 721 584Changes in working capital- (Increase)/decrease in inventories (17) 38- Decrease in current available-for-sale financial assets 38 119- Decrease in trade and other receivables 7 17- Increase in amounts due from Sainsbury's Bank customers and other banks (805) (423)- Increase in trade and other payables 83 275- Increase in amounts due to Sainsbury's Bank customers and other banks 819 286- (Decrease)/increase in provisions and other liabilities (1) (66) 50Cash generated from operations 780 946 (1) Includes £110 million of cash paid into the definedbenefit pension schemes. (b) Cash and cash equivalents For the purposes of the cash flow statement, cash and cash equivalents comprisethe following: 2006 2005 £m £mCash and cash equivalents 1,028 706Bank overdrafts (186) (6) 842 700 12 Analysis of net debt 26 March IAS 32 Restated Cash flow Other 25 March 2005 27 March 2006 and IAS 39 2005 non-cash adjustments movements £m £m £m £m £m £m Current assets Cash and cash equivalents 585 103 688 174 - 862Sainsbury's Bank cash 121 - 121 45 - 166Derivative financial instruments - 7 7 (4) (3) - 706 110 816 215 (3) 1,028Non-current assets Derivative financial instruments - 151 151 (169) 18 - Current liabilities Bank overdrafts (6) (103) (109) (77) - (186)Borrowings (348) (143) (491) 321 103 (67)Derivative financial instruments - (36) (36) (2) 28 (10) (354) (282) (636) 242 131 (263)Non-current liabilities Borrowings (1,704) (181) (1,885) (46) (150) (2,081)Finance leases (53) - (53) 1 - (52)Loan from minority shareholder (36) - (36) (9) - (45)Derivative financial instruments - (1) (1) - (1) (2) (1,793) (182) (1,975) (54) (151) (2,180) (2,147) (464) (2,611) 188 (20) (2,443)Total net debt (1,441) (203) (1,644) 234 (5) (1,415) Of which:Net debt (excluding Sainsbury's Bank) (1,526) (203) (1,729) 198 (5) (1,536)Sainsbury's Bank 85 - 85 36 - 121 (1,441) (203) (1,644) 234 (5) (1,415) Net debt incorporates the Group's borrowings (including accrued interest), bankoverdrafts, fair value of derivatives and obligations under finance leases, lesscash and cash equivalents. Sainsbury's Bank derivatives and borrowings, whichrelate to the working capital of the bank, are excluded from the Group net debt. Reconciliation of net cash flow to movement in net debt 2006 2005 £m £mIncrease in cash and cash equivalents 142 135Decrease in debt 91 190Loans and finance leases disposed of with subsidiaries - 230Movement in finance leases 1 116Foreign exchange adjustments and other non-cash movements (5) (24)Decrease in net debt before impact of IAS 32 and IAS 39 229 647 IAS 32 and IAS 39 adjustments to net debt (203) -Decrease in net debt in the year 26 647Opening net debt at the beginning of the year (1,441) (2,088)Closing net debt at the end of the year (1,415) (1,441) 13 Explanation of transition to IFRS This is the first year that the Group has presented its financial statementsunder IFRS. The last financial statements under UK GAAP were for the 52 weeksended 26 March 2005 and the date of transition to IFRS was 28 March 2004. IFRS 1 'First-time Adoption of International Financial Reporting Standards'allows companies adopting IFRS for the first time to take certain exemptionsfrom the full requirements of IFRS in the year of transition (i.e. the financialyear ended 26 March 2005). The Group has elected to take the following key exemptions: (i) IFRS 3 - Business combinations The Group has elected not to apply IFRS 3 'Business Combinations'retrospectively to acquisitions that took place before the date of transition.As a result, the carrying amount of goodwill in the UK GAAP balance sheet at 27March 2004 is brought forward to the IFRS opening balance sheet withoutadjustment. (ii) IAS 19 - Employee benefits - actuarial gains and losses The Group has elected to recognise all cumulative actuarial gains and losses atthe date of transition. (iii) IAS 21 - Cumulative translation differences Under IFRS, cumulative translation differences arising on the consolidation offoreign entities are required to be recycled through the income statement when aforeign entity is sold as part of the gain or loss on sale. IFRS 1 allows theGroup to not record cumulative translation differences arising before the dateof transition. The Group has elected to take this exemption and has broughtforward a nil balance in respect of these translation differences. (iv) IAS 32 and IAS 39 - Financial instruments The Group has taken the option to defer the implementation of IAS 32 and IAS 39to the financial year ended 25 March 2006. Therefore, financial instrumentscontinue to be accounted for and presented in accordance with UK GAAP for theyear ended 26 March 2005. (v) IAS 16 - Valuation of properties The Group has elected to treat the revalued amount of properties at 28 March2004 as deemed cost as at that date and will not revalue properties foraccounting purposes in the future. (vi) IFRS 2 - Share-based payment IFRS 1 provides an exemption which allows entities to only apply IFRS 2 'Share-based Payment' to share-based payment awards granted after 7 November2002. The Group has not taken this exemption but has elected to apply IFRS 2 toshare options granted before 7 November 2002. The fair value of those optionshas been published on our website www.j-sainsbury.co.uk on 26 April 2005. Reconciliations between UK GAAP and IFRS Set out below are the UK GAAP to IFRS equity reconciliations for the Group at 28March 2004 (date of transition) and 26 March 2005 (last financial statementsunder UK GAAP) and profit reconciliation for the 52 weeks ended 26 March 2005. Subsequent to the IFRS transition announcement made on 16 June 2005 (pleasevisit our website www.j-sainsbury.co.uk for more details), further adjustmentshave been made to the reconciliations as set out below: • Leases with predetermined, fixed rental increases (reconciling itemnote (c)); • Retirement benefit obligations -inclusion of unfunded pensionliability (reconciling item note (d)); • Cash and cash equivalents (reconciling item note (m)); and • Revaluation reserve (reconciling item note (n)). Group reconciliations Reconciliation of equity at 28 March 2004 (date of transition) UK GAAP Adjustments IFRS Note £m £m £mNon-current assets Property, plant and equipment (a), (g), 8,214 (881) 7,333 (j), (l)Intangible assets (g), (l) 208 (74) 134Investments (l) 30 (10) 20Amounts due from Sainsbury's Bank customers 1,166 - 1,166 9,618 (965) 8,653Current assetsInventories (l) 753 (156) 597Trade and other receivables (l) 394 (74) 320Amounts due from Sainsbury's Bank customers and other banks 969 - 969Investments (m) 228 (19) 209Cash and cash equivalents (l), (m) 545 (32) 513 2,889 (281) 2,608Non-current assets held for sale (l) - 1,232 1,232 2,889 951 3,840Total assets 12,507 (14) 12,493 Current liabilitiesTrade and other payables (k), (l) (2,161) 460 (1,701)Amounts due to Sainsbury's Bank customers (2,200) - (2,200)Short term borrowings (403) - (403)Taxes payable (115) - (115) (4,879) 460 (4,419)Non-current liabilities held for sale (d), (l) - (493) (493) (4,879) (33) (4,912)Net current liabilities (1,990) 918 (1,072) Non-current liabilitiesOther payables (b), (c) (25) (21) (46)Long term borrowings (a), (l) (2,196) 168 (2,028)Deferred income tax liability (234) 213 (21)Provisions (d), (e) (74) - (74)Retirement benefit obligations (d) - (672) (672) (2,529) (312) (2,841)Net assets 5,099 (359) 4,740 EquityCalled up share capital 486 - 486Share premium account 1,438 - 1,438Other reserves (n) 22 (22) -Retained earnings 3,072 (337) 2,735Equity shareholders' funds 5,018 (359) 4,659Minority interests 81 - 81Total equity 5,099 (359) 4,740 Reconciliation of profit for the 52 weeks ended 26 March 2005 UK GAAP (1) Adjustments IFRS Note £m £m £mContinuing operationsRevenue (l) 15,409 (207) 15,202 Cost of sales (c), (d), (f), (14,722) 178 (14,544) (l)Gross profit 687 (29) 658Administrative expenses (a), (b), (f), (850) 20 (830) (h), (j), (l)Other income 21 - 21Operating loss (142) (9) (151)Finance income (d) 33 11 44Finance costs (a) (129) (3) (132)Share of post-tax profit from joint ventures 1 - 1Loss before taxation (237) (1) (238) Analysed as:Underlying profit before tax from continuing operations (2) 254 (16) 238Business Review and Transformation operating costs (j) (507) 10 (497)Profit on sale of properties 21 - 21Goodwill amortisation (h) (5) 5 - (237) (1) (238) Income tax credit 50 1 51Loss from continuing operations (187) - (187) Discontinued operationsProfit attributable to discontinued operations (d), (i), (l) 252 123 375 Profit for the financial year 65 123 188 Attributable to:Equity holders of the parent 61 123 184Minority interests 4 - 4 65 123 188 (1) £4 million of interest incurred by Sainsbury's Bank for the 52 weeksto 26 March 2005 has been reclassified from cost of sales to finance income/costs, in order to be consistent with the treatment in the current period. Thisadjustment does not impact underlying or statutory profit before tax. (2) 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 thisfinancial year, these one off items were the Business Review and Transformationcosts. Reconciliation of equity at 26 March 2005 UK GAAP Adjustments IFRS Note £m £m £mNon-current assetsProperty, plant and equipment (a), (g), 7,154 (78) 7,076 (j)Intangible assets (g), (h) 125 78 203Investments 20 - 20Amounts due from Sainsbury's Bank customers 1,331 - 1,331 8,630 - 8,630Current assetsInventories 559 - 559Trade and other receivables 319 - 319Amounts due from Sainsbury's Bank customers and other banks 1,227 - 1,227Investments (m) 114 (24) 90Cash and cash equivalents (m) 682 24 706 2,901 - 2,901Non-current assets held for sale 87 - 87 2,988 - 2,988Total assets 11,618 - 11,618 Current liabilitiesTrade and other payables (k) (2,188) 95 (2,093)Amounts due to Sainsbury's Bank customers and other banks (2,464) - (2,464)Short term borrowings (354) - (354)Taxes payable (55) - (55) (5,061) 95 (4,966)Net current liabilities (2,073) 95 (1,978) Non-current liabilitiesOther payables (b), (c) (4) (27) (31)Amounts due to Sainsbury's Bank customers and other banks (22) - (22)Long term borrowings (a) (1,740) (53) (1,793)Deferred income tax liability (173) 172 (1)Provisions (d), (e) (159) 2 (157)Retirement benefit obligations (d) - (536) (536) (2,098) (442) (2,540)Net assets 4,459 (347) 4,112 EquityCalled up share capital 620 - 620Share premium account 761 - 761Capital redemption reserve 547 - 547Other reserves (d), (n) 19 68 87Retained earnings 2,427 (415) 2,012Equity shareholders' funds 4,374 (347) 4,027Minority interests 85 - 85Total equity 4,459 (347) 4,112 Explanation of reconciling items between UK GAAP and IFRS (a) Capitalisation of building leases Under UK GAAP, the Group recognised finance leases under the recognitioncriteria set out in SSAP 21. Although the accounting treatment of financeleases remains largely the same under IFRS, the application of IAS 17 'Leases'results in the building element of a number of property leases being classifiedas finance leases. The impact on the Group's financial statements is set outbelow: • The Group's IFRS opening balance sheet at 28 March 2004 includesadditional property, plant and equipment of £37 million and additional financelease obligations (long term borrowings) of £53 million resulting in a reductionin net assets of £11 million after deferred tax of £5 million. • The main impact on the income statement is that the operating leasepayment charged to operating profit under UK GAAP is replaced with adepreciation charge on the finance lease asset and a financing charge on theobligation. The pre-tax impact on the income statement for the 52 weeks to 26March 2005 is a reduction in administrative expenses of £2 million and anincrease in finance costs of £3 million. This results in a net charge of £1million (£1 million after deferred tax). • The Group's IFRS balance sheet at 26 March 2005 includes additionalproperty, plant and equipment of £36 million and additional finance leaseobligations (long term borrowings) of £53 million resulting in a reduction innet assets of £12 million after deferred tax of £5 million. (b) Lease incentives Under UK GAAP, rent-free periods were recognised over the period to the firstmarket rent review. Under IAS 17, these are amortised over the term of thelease. The impact on the Group's financial statements is set out below: • The Group's IFRS opening balance sheet at 28 March 2004 includesadditional deferred income of £4 million, resulting in a reduction in net assetsof £3 million after deferred tax. • The pre-tax impact on the income statement for the 52 weeks to 26March 2005 is an increase in administrative expenses of £2 million (£1 millionafter deferred tax). • The Group's IFRS balance sheet at 26 March 2005 includes additionaldeferred income of £6 million, resulting in a reduction in net assets of £4million after deferred tax. (c) Leases with predetermined, fixed rental increases Comments by IFRIC have indicated that under IFRS it is necessary to account forleases with predetermined, fixed rental increases on a straight-line basis overthe life of the lease. Under UK GAAP, the Group accounted for these rentalincreases in the year they arose. The impact on the Group's financial statements is set out below: • The impact of this change at the date of transition 28 March 2004 isan addition of deferred income (non-current) of £17 million, resulting in areduction in net assets of £12 million after deferred tax. • The pre-tax impact on the income statement for the 52 weeks to 26March 2005 is an increase in cost of sales of £4 million (£3 million afterdeferred tax). • The Group's IFRS balance sheet at 26 March 2005 includes additionaldeferred income (non-current) of £21 million, resulting in a reduction in netassets of £15 million after deferred tax. (d) Pensions The Group applied the provisions of SSAP 24 under UK GAAP and provided detaileddisclosure under FRS 17 in accounting for pensions. Under IFRS, the Group'sbalance sheet reflects the assets and liabilities of the Group's defined benefitschemes. As allowed in the amendment to IAS 19 'Employee Benefits' (December2004), the Group has elected to recognise all cumulative actuarial gains andlosses through the statement of recognised income and expense. The impact on the Group's financial statements is set out below: • The Group's opening balance sheet at 28 March 2004 reflects theliabilities of the defined benefit schemes, with a total gross deficit of £715million. This liability represents a gross deficit of £665 million relating tothe UK defined benefit pension schemes and £50 million relating to the USsupermarkets business, Shaw's. The gross deficit relating to the UK defined benefit pension schemes of £665million is shown together with £7 million of unfunded pension liabilities,previously recorded within provisions under UK GAAP. The net pension deficit relating to Shaw's of £30 million (£50 million grossdeficit before deferred tax of £20 million - calculated at the US corporate taxrate of 40 per cent) has been transferred as part of the sale of Shaw's and hasbeen included under 'Non-current liabilities held for sale' in the IFRS balancesheet at 28 March 2004 (note (l)). • The income statement adjustment for the 52 weeks to 26 March 2005 is asmall increase in cost of sales of £2 million and a reduction in finance costsof £11 million, resulting in a net credit of £9 million (£6 million afterdeferred tax). The annual charge through the income statement is lower under IAS19 than under SSAP 24 because the SSAP 24 charge included additionalcontributions to amortise the £161 million actuarial deficit identified in March2003. The calculation of the IAS 19 income statement charge does not includethese contributions. In addition, the net pension deficit of £30 million relating to Shaw's has beentransferred as part of the sale of Shaw's with the effect of increasing thereported gain on sale. This is recorded as an increase in the 'Profitattributable to discontinued operations' in the income statement for the 52weeks to 26 March 2005. • The Group's IFRS balance sheet at 26 March 2005 reflects the grossdeficit of £527 million relating to the UK defined benefit pension schemes and£9 million of unfunded pension liabilities, previously recorded withinprovisions under UK GAAP. The gross actuarial gain of £128 million and its associated deferred tax impactof £38 million (net actuarial gain of £90 million) has been recognised in thestatement of recognised income and expense for the 52 weeks to 26 March 2005. The following table summarises the movement in the deficit described above: £mIAS 19 gross pension deficit at 28 March 2004 (715)Current service cost (75)Past service cost (8)Gain due to curtailments 1Total service costs and curtailments (82)Finance income 11Contributions 81Shaw's pensions settlements 50Gross actuarial gains 128IAS 19 gross pension deficit at 26 March 2005 (527)Unfunded pension liability previously recorded within provisions (9)Total gross pension deficit (536)Deferred tax asset 161Net pension deficit at 26 March 2005 (375) (e) Other employee benefits Under UK GAAP no provision was made for long-service awards. Under IAS 19, thecosts of long-service awards are accrued over the period the service is providedby the employee. The impact on the Group's financial statements is set out below: • A provision for long-service awards is included in the opening IFRSbalance sheet at 28 March 2004 to the value of £7 million (£5 million afterdeferred tax). • There is no income statement charge in respect of this provision forthe 52 weeks to 26 March 2005 and the provision for long-service awards remainsat £7 million (£5 million after deferred tax) in the Group's IFRS balance sheetat 26 March 2005. (f) Share-based payment IFRS 2 'Share-based Payment' requires that an expense for share-based payments,including SAYE schemes, be recognised in the financial statements based on theirfair value at the date of grant. The expense is recognised over the vestingperiod of the scheme. The additional pre-tax charge arising from the adoption of IFRS 2 on the Group'sincome statement for the 52 weeks to 26 March 2005 is £8 million (cost of sales:£5 million; administrative expenses: £3 million), resulting in a net charge of£7 million after deferred tax. The adjustment is comparatively low because theexecutive share options granted since 2002 are unlikely to vest and as a resultthere is no charge relating to these awards. (g) Software capitalisation Under UK GAAP, software was included within tangible fixed assets. Under IFRS,software is reclassified from tangible fixed assets and recorded withinintangible assets. The balance sheet reclassification amounts to £86 million at date of transition28 March 2004 and £74 million at 26 March 2005. There is no income statementimpact. (h) Goodwill Previously goodwill on acquisitions was capitalised and amortised over itsuseful economic life. Under IFRS, amortisation is no longer charged, insteadgoodwill is tested for impairment annually and again where indicators are deemedto exist. Goodwill is carried at cost less accumulated impairment losses. The impact on the Group's financial statements is set out below: • The goodwill amortisation charge for the 52 weeks to 26 March 2005under UK GAAP of £5 million (including £1 million of goodwill amortisationrelating to Shaw's) reverses in the IFRS accounts. No impairment charge relatingto acquired goodwill has been recognised as at 26 March 2005. • The impact on the Group's IFRS balance sheet at 26 March 2005 is toincrease the goodwill balance by £4 million, resulting in an increase in netassets of £4 million. (i) Goodwill - Sale of Shaw's Under UK GAAP, goodwill previously set off against reserves was recycled on thesale of the entity to which it related. However, this 'recycling' is notpermitted under IFRS. As a result, the goodwill recycled upon disposal of the USsupermarkets business, Shaw's is reversed, resulting in an increase of £86million to the gain on sale. This is recorded as an increase in the 'Profitattributable to discontinued operations' on the face of the income statement forthe 52 weeks to 26 March 2005. (j) Impairment of non-financial assets Under IFRS, the Group reviews the carrying amounts of its tangible andintangible assets to determine whether there is any indication that those assetsare impaired. If any such indication exists, the recoverable amount of the assetis estimated in order to determine the extent of the impairment loss (if any).Where the asset does not generate cash flows that are independent from otherassets, the Group estimates the recoverable amount of the cash-generating unit("CGU") to which the asset belongs. For tangible and intangible assets,excluding goodwill, the CGU is deemed to be each trading store. For goodwill,the CGU is deemed to be each retail chain of stores acquired. The impact on the Group's financial statements is set out below: • As at the opening balance sheet date, 28 March 2004, 27 stores weredeemed to be impaired, resulting in an impairment loss of £51 million (£44million after deferred tax) for property, plant and equipment. This totalincludes the 13 stores that the Group announced would be closed as part of theBusiness Review. • A similar impairment review was performed for the 52 weeks to 26 March2005 and no further impairment was deemed necessary. However, as a result ofthe above IFRS impairment adjustment at transition date, £11 million (£9 millionafter deferred tax) of UK GAAP depreciation charges and write-down costsrelating to those impaired stores is reversed for the 52 weeks to 26 March 2005. • The impact on the Group's IFRS balance sheet at 26 March 2005 is animpairment loss of £40 million (£35 million after deferred tax) for property,plant and equipment. The following table summarises the adjustments made to the opening impairmentvalue: £mIFRS impairment at 28 March 2004 (51)Reversal of UK GAAP depreciation and additions on impaired stores 1Reversal of the October 2004 Business Review costs relating to the write-down of those stores 10impaired under IFRS. These costs were treated as exceptional items under UK GAAP. 11IFRS impairment at 26 March 2005 (40)Deferred tax 5Reduction in net assets at 26 March 2005 (35) (k) Dividends Under UK GAAP, dividends were recognised in the period to which they relate.IFRS requires that dividends be recognised as a liability when they are declared(i.e. approved by shareholders or, in the case of interim dividends, when paid). Accordingly, the accrued final dividends of £218 million for the 2004 financialyear and £95 million for the 2005 financial year are reversed in the balancesheets at 28 March 2004 and 26 March 2005 respectively. The 2004 final dividendof £218 million is recognised directly as an appropriation of retained earningsin the balance sheet at 26 March 2005. (l) Discontinued operations Under IFRS, assets and liabilities of disposal groups are shown separately onthe balance sheet. This has the effect of having a single line 'Non-currentassets held for sale' represent the total assets of disposals groups and asingle line 'Non-current liabilities held for sale' represent the totalliabilities of disposal groups. Similarly, the results of discontinued operations are shown in the incomestatement separately from continuing operations. This has the effect of havingone line representing the trading profit of discontinued operations and any gainor loss on sale. This is a re-presentation and there is no impact on the totalGroup profit after tax as presented under UK GAAP. The change in presentation on the Group's IFRS financial statements is set outbelow: • At the date of transition 28 March 2004, the Group held a disposalgroup relating to the US supermarkets business, Shaw's. As a result, the assetsand liabilities of Shaw's are excluded from the Group's assets and liabilitiesand are shown separately in the balance sheet. The following table summarisesthe change in presentation in the balance sheet at 28 March 2004: £mProperty, plant and equipment 781Intangible assets 160Other investments 10Inventories 156Trade and other receivables 74Cash and cash equivalents 51Total assets 1,232 Represented by:Non-current assets held for sale 1,232 Trade and other payables (242)Long term borrowings (221) (463)Net pension scheme deficit (note (d)) (30)Total liabilities (493) Represented by:Non-current liabilities held for sale (493) • The results of Shaw's have been excluded from the Group's incomestatement for the 52 weeks to 26 March 2005 as follows: £mRevenue 207Cost of sales (189)Gross profit 18Administrative expenses (8)Operating profit 10 Analysed as:Underlying profit before tax from continuing operations 11Goodwill amortisation (1) 10 Income tax expense (3)Profit from discontinued operations 7Net pension scheme deficit (note (d)) 30Goodwill - sale of Shaw's (note (i)) 86Total adjustment to profit attributable to discontinued operations 123 (m) Cash and cash equivalents The definition of cash and cash equivalents under IFRS resulted in certaincurrent assets being reclassified from investments to cash equivalents. The balance sheet reclassification amounts to £19 million at date of transition28 March 2004 and £24 million at 26 March 2005. There is no income statementimpact. (n) Revaluation reserve Under IFRS, deferred tax is accounted for on the basis of taxable temporarydifferences between the tax base and accounting base of assets and liabilities.As a result, an additional deferred tax liability of £7 million arising from therevaluation reserve of £22 million has been recognised in the IFRS balancesheets at 28 March 2004 and 26 March 2005. In addition, the Group has elected to treat the revalued amount of properties asdeemed cost at date of transition 28 March 2004 and will not revalue foraccounting purposes in the future. As a result, the revaluation reserve of £22million under UK GAAP has been transferred directly to retained earnings in theGroup's IFRS balance sheets at 28 March 2004 and 26 March 2005. 14 First time adoption of IAS 32 and IAS 39 The Group has adopted IAS 32 'Financial Instruments: Disclosure andPresentation' and IAS 39 'Financial Instruments: Recognition and Measurement'with effect from 27 March 2005. The Group has taken the exemption available inIFRS 1 'First-time Adoption of International Financial Reporting Standards' notto restate comparatives for both IAS 32 and IAS 39. The adjustments to the opening balance sheets at 27 March 2005 are as follows: IFRS IAS 32 IAS 39 Restated adjustments adjustments IFRS 27 March 2005 27 March 2005 £m £m £m £mNon-current assetsProperty, plant and equipment 7,076 - - 7,076Intangible assets 203 - - 203Investments 20 (10) - 10Available-for-sale financial assets - 10 85 95Amounts due from Sainsbury's Bank customers 1,331 - - 1,331Derivative financial instruments - - 154 154 8,630 - 239 8,869Current assetsInventories 559 - - 559Trade and other receivables 319 - (20) 299Amounts due from Sainsbury's Bank customers and other banks 1,227 - (2) 1,225Available-for-sale financial assets - 90 - 90Derivative financial instruments - - 7 7Investments 90 (90) - -Cash and cash equivalents 706 103 - 809 2,901 103 (15) 2,989Non-current assets held for sale 87 - - 87 2,988 103 (15) 3,076Current liabilitiesTrade and other payables (2,093) - 68 (2,025)Amounts due to Sainsbury's Bank customers and other banks (2,464) - - (2,464)Short term borrowings (354) (236) (10) (600)Derivative financial instruments - - (36) (36)Taxes payable (55) - - (55) (4,966) (236) 22 (5,180)Non-current liabilitiesOther payables (31) - - (31)Amounts due to Sainsbury's Bank customers and other banks (22) - - (22)Long term borrowings (1,793) - (181) (1,974)Derivative financial instruments - - (3) (3)Deferred income tax liability (1) - (7) (8)Provisions (157) - - (157)Retirement benefit obligations (536) - - (536) (2,540) - (191) (2,731)Net assets 4,112 (133) 55 4,034 EquityCalled up share capital 620 (133) - 487Share premium account 761 1 - 762Capital redemption reserve 547 - - 547Other reserves 87 - 71 158Retained earnings 2,012 (1) (16) 1,995Equity shareholders' funds 4,027 (133) 55 3,949Minority interests 85 - - 85Total equity 4,112 (133) 55 4,034 Under IAS 39 all of the Group's derivative financial instruments are measured atfair value and recognised on the balance sheet. Where the instruments are partof a qualifying hedge relationship the carrying amount of the hedged item isadjusted by the change in fair value that reflects the designated hedged risk. The Group chooses not to hedge account for certain interest rate and crosscurrency swaps. In these cases the difference between the previously reportedcarrying value and the fair value of the derivative financial instrument hasbeen recognised directly in opening retained earnings. The difference betweenthe previously reported carrying value and the fair value of the hedged itemthat reflects the designated hedged risk has also been recognised directly inopening retained earnings and will be fully amortised through the incomestatement by maturity. A portion of the Group's interest rate swaps do not qualify as hedginginstruments under IAS 39. At the date of transition the difference between thepreviously reported carrying value and the fair value of these swaps was £23million (£16 million after deferred tax) and has been recognised directly inopening retained earnings. Movements in the fair value of these instruments arerecognised in the income statement. In addition, upon adoption of IAS 39, an available-for-sale financial asset of£85 million relating to the Group's beneficial interest in a property investmentpool has been recognised, with the corresponding credit made to reserves. Thisasset will be held at fair value with any fair value movements taken toreserves. The majority of the Group's bank accounts are pooled in an offset arrangementfor the purpose of charging interest. Under IAS 32 financial assets andfinancial liabilities must be separately disclosed. The effect of grossing upthe Group bank accounts at 27 March 2005 is to increase overdrafts and cash atbank by £103 million. Under IAS 32, the Group must present the B shares, which have previously beenincluded as part of equity, as a current liability. Dividends paid on the Bshares are recognised in the income statement as part of finance costs. Thecarrying value of the B share capital at 27 March 2005 was £133 million. This information is provided by RNS The company news service from the London Stock Exchange

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Related Shares:

Sainsbury's