Final Results

Release date: 8 March 2012

PRELIMINARY RESULTS FOR THE YEAR

ENDED 29 JANUARY 2012

Morrisons delivers in a challenging year

Financial summary

·; Turnover up 7% to £17.7bn (2010/11: £16.5bn)

·; Like-for-like sales (ex-fuel, ex-VAT) up 1.8% (2010/11: 0.9%)

·; Underlying profits before tax up 8% to £935m (2010/11: £869m)(1)

·; Profit before tax £947m (2010/11: £874m)

·; Operating margin up by 20bps(2)

·; Net debt £1,471m (2010/11: £817m) after capital investment of £901m (2010/11: £595m)

·; Gearing of 27% (2010/11: 15%)

·; Equity retirement £368m

·; Basic earnings per share 26.7p (2010/11: 23.9p)

·; Underlying earnings per share up 11% to 25.6p (2010/11: 23.0p)

·; Total dividend for the year up 11% to 10.7p (2010/11: 9.6p) - dividend cover of 2.4 times

Operating highlights

·; Record customer numbers - up 0.4m per week

·; 34 new supermarkets opened(3)

·; Own brand relaunched successfully through M Kitchen and M savers ranges

·; Productivity improvements in stores (2.9%) and distribution (4.3%)

·; HOT service programme delivering step-change in customer satisfaction(4)

·; Significant progress in the systems replacement programme

·; New South West regional distribution centre opened

Strategy highlights

·; Fresh Formats- new fresh food proposition delivered into 12 stores - roll out accelerating in 2012

·; Vertical integration - acquisition of Flower World. Future investments in meat and fish announced

·; Convenience - first three trial M local convenience stores performing well with further expansion planned for 2012(5)

·; Multi-channel- Launch of Morrisons.com on schedule for late 2012

Commenting on the results, Sir Ian Gibson, Chairman, said:

"This was another good year for Morrisons, despite a tough economic backdrop. Record numbers of customers visited our stores and we delivered an 8% increase in underlying earnings and an 11% increase in the dividend, whilst also investing for the long term health of the business".

Dalton Philips, CEO, said:

"This has been Morrisons best year yet with another good financial performance and growth ahead of the market. Customers were having a tough time but we responded with a new M savers brand for budget conscious shoppers, promotions that customers understood, and industry leading service.

We know that 2012 will be tough, and we will be working hard to deliver even better value for our customers. At the same time, we have ambitious plans for the long term development of the business, through new supermarkets, convenience stores and the development of our multi-channel capabilities. I am confident that Morrisons will make further progress this year."

Outlook

We expect a challenging year in 2012. Building on good performance last year, a growing customer base, tight cost discipline throughout the business and the range of new opportunities that are being pursued, we are well positioned to continue to deliver profitable growth.

Enquiries

Notes

The Group's full financial statements (comprising the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and related notes) are available for download on the Group's website at www.morrisonsplc.co.uk.

-ENDS-

This announcement may include forward looking statements, which are statements made about potential future events or occurrences. These statements are made by the Directors in good faith, based on the information available to them at the time of the announcement. Consequently such statements should be treated with caution due to the inherent uncertainties, including both economic and business risk factors, underlying such forward looking statements and information.

Chairman's statement

Against the backdrop of a very challenging environment for the consumer, where value, freshness and quality are key, I am pleased to report another year of good progress for Morrisons. Record numbers of customers visited our stores, demonstrating that Morrisons unique offer is in tune with the needs of consumers in these uncertain times. The delivery of good earnings growth and the resultant increase in the dividend demonstrates the resilience of our business model in a tough economic environment.

At the start of the year we outlined a range of initiatives to grow our sales profitably, make our business more efficient and to develop further growth opportunities that would deliver enhanced value to shareholders. The management team has made good progress in all these areas and we are on track to deliver our vision to make Morrisons 'Different and Better than Ever'.

Results

Profit before tax was £947m, an increase of £73m (8%) when compared with £874m last year. Underlying profit before tax, which we regard as the true measure of business performance, was up 8% to £935m(1). Statutory basic earnings per share increased by 11% over the previous year to 26.7p, with underlying basic earnings per share up by 11% to 25.6p.

Our policy is to increase the dividend in line with underlying earnings growth subject to a minimum increase of 10% in each of the three years to 2013/14. In line with this policy the Board is therefore recommending a final dividend of 7.53p per share, to bring the total dividend for the year to 10.7p, an increase of 11% on 2010/11. The dividend is covered 2.4 times by underlying earnings.

Cash flow from operations of £1,264m was up by £123m (11%), when compared to the previous year. Capital expenditure and investments of £901m were £306m higher than the previous year. This was the result of a planned acceleration in our store opening programme, the addition of a new regional distribution centre at Willow Green, Bridgwater and investments to support our expansion ambitions for online shopping and vertical integration. We expect capital expenditure to be higher in 2012/13 as we continue to invest for further growth. £368m was invested into our equity retirement programme and we are on track to meet our objective of returning £1bn to shareholders over the two years to March 2013, in addition to normal dividends.

These investments, together with an increased dividend payment, resulted in a rise in net debt to £1,471m (2010/11: £817m), to leave gearing at 27%. At this level it remains low for the sector. At the year end the Group had undrawn, committed facilities of £725m and a credit rating of A3 from Moody's. This is a strong investment grade which is only held by two other European retailers.

Community and the environment

Our customers expect us to trade responsibly, and we are committed to managing resources carefully, maintaining ethical standards and working with the communities in which we operate. During the year we have continued to undertake research projects through the Morrisons Farming Programme, have been enthusiastic supporters of the Government's Public Health Responsibility Deal and have made good progress towards our long term energy reduction targets. Our Let's Grow programme, now in its fifth year, continues to help schoolchildren throughout the UK to get out of the classroom and learn about the food cycle first hand.

It is a source of pride that our colleagues and customers always go out of their way to support our charitable activities, and I am delighted that Save the Children was selected by our colleagues, for the second successive year, as our charity partner. Specifically, we have helped fund its award-winning Families and Schools Together (FAST) programme across the UK, which is designed to give the most disadvantaged children a chance of a better future. With an array of fund raising activities we have raised £2.3m for FAST this year, successfully funding 24 programmes, as well as Save the Children's emergency appeals in Japan and East Africa. 

Industry recognition

Morrisons commitment to providing our customers with an outstanding shopping experience and making it a great place to work for our colleagues, has again been recognised with numerous industry awards. These included nine The Grocer Own Label Food and Drink Awards, Fresh Produce Retailer of The Year (multiple category) at the Retail Industry Awards and Employer of the Year from both Retail Week and The Grocer Gold Awards.

Our colleagues

These awards are testimony to the passion and hard work of our 131,000 colleagues who are making Morrisons "Different and Better than Ever" for our customers every day.

I am delighted that our growth during the year will provide a profit share pool for them of £49m, an increase of 8% over last year.

We continue to invest in training and skills. Our award winning Morrisons Academy provides specialist training to help colleagues develop new skills or work towards a nationally recognised qualification such as QCF. Over 100,000 colleagues were successfully accredited during the year and, at a time of rising youth unemployment, I am pleased that 40,000 of our colleagues are aged 16 to 24.

On behalf of the Board I want to express our thanks to every one of our colleagues for their dedication, professionalism and service throughout the year.

Business and strategy review

2011/12 was another good year for Morrisons. Against the backdrop of a difficult environment for the consumer, our unique fresh, quality and value offer made Morrisons a natural destination and more customers visited our stores than ever before. We continued to improve our financial performance whilst investing for future growth.

Turnover growth

Total turnover was £17.7bn, an increase of £1.2bn (7%). Our store sales (excluding fuel) grew by 3.9% to £13.4bn with a record 11.4m customers coming into our stores each week. Sales from new stores contributed 2.1% of our total growth. Like-for-like sales grew by 1.8%, customer numbers were up by 1.3% and average basket spend increased by 0.6%. Whilst sales growth was strongest in London and the South East, we were pleased with our sales performance in all regions of the country.

For the second year in a row consumers were faced with increases in the price of oil, exacerbated by ongoing sterling weakness. With unleaded prices at the pump up by 15.4p per litre and diesel increasing by 18.5p, motorists were paying an average of 15% more per litre at the pump than they did last year. The demand for fuel is relatively inelastic and whilst motorists continue to use their cars in times of austerity, they take time to shop around for the best deals, such as our "Fuel Britannia" programmes. As a result our volume sales increased by 4.8%. Overall, like-for-like fuel sales were up 18% in the year.

Inflationary effects took their toll on disposable incomes during the year, with the unwelcome impact of high oil prices feeding through not just at the petrol pumps but also throughout the supply chain. Other core commodities increased in price too, adding to the pressure. Market prices for beef and lamb rose by 15% and 11% respectively over the year, and average wheat prices were up by 32%.(7) The increase in fuel prices alone reduced our customers' disposable income by some £600m, income that could otherwise have been spent in our stores. In this environment consumers looked around for value and found it at Morrisons where our sharp pricing, supported by innovative promotions, was welcomed by customers.

Turnover analysis

We maintain a prudent approach to adding new space to our estate and only approve investments that meet the required financial hurdle rate. As a result, our space opening programme whilst being ahead of our published targets, was less, in relative terms, than our major competitors. Despite this, with good like-for-like sales, we maintained our market share.(8)

Throughout the year we noted the rise of the "professional shopper", with customers taking time to shop around and look very carefully at pricing and offers in order to search out value. This trend played to Morrisons strengths. Our value proposition of everyday low prices coupled with industry leading offers, and the flexibility of our vertical integration, enabled us to meet our customers' needs for great fresh food at affordable prices. Offers such as our 49p produce deal and our two loaves of bread for £1 promotion helped our customers manage on tight budgets. The market remained highly promotional, and our innovative promotions such as "Pay Day Price Crunch" and "Morrisons Millions" caught the mood of the nation.

Operating results

Gross profit grew by 6% to £1,217m during the year. The gross profit margin was 6.9%, a fall of 10bps against last year due to the increased proportion of low margin fuel sales in the mix this year. After cost of goods sold, the Group's two largest cost areas are store wages and distribution costs. We continued to manage costs and improve efficiency in both areas whilst maintaining excellent standards and customer service levels. As a result, we again improved our store labour costs relative to sales, with in-store labour productivity up by 2.9%. Distribution productivity improved by 4.3%, reflecting the benefits of the investment we have made in systems improvement.

Other operating income grew by 8% to £86m, primarily because of increased recycling credits.

Administration costs increased by 2%, well below the rate of profit and sales growth in the year. This reflects the strong cost control culture that exists throughout the business.

Although the operating margin of 5.5% was in line with the prior year, the underlying result was an improvement of 20bps, after adjusting for the increased proportion of low margin fuel sales.

Market overview

The UK grocery market continued to operate in a very tough economic climate with consumer confidence close to record lows during the year. In 2011 the market was worth £97bn, up by 4.2% on the previous year. Whilst this appears to be solid growth, it should be noted that space growth was approximately 4%, a historically high figure. Within these figures online grocery grew disproportionately, with 17% of UK adults buying food or groceries online, up from 10% three years ago. The convenience market, which is measured separately, grew 4.6% to £34bn in 2011, and is expected to continue growing at a faster rate than the traditional grocery market for some time to come.(6)

Retail grocery volumes were flat in the year and it was inflation, averaging 5.5% through the year, which drove growth. CPI food inflation as measured by the Office for National Statistics was above 6% for much of the year but started to come down through the last quarter, reaching 3.4% in January 2012. Categories that saw particularly high inflation include oils and fats (10%), coffee and tea (10%), and meat (6%).(7)

Value at the forefront of shoppers' minds

Household incomes were squeezed throughout 2011, due to the previously mentioned commodity and energy price pressures and also as a result of the Government's fiscal measures, particularly the rise in VAT to 20%. Cost pressures ran well ahead of wage settlements, with the result that disposable incomes overall fell 2.3% in 2011.  A general unease about current and future expectations for the economy and for personal finances also saw shoppers managing more closely to a budget.

As a result, pricing and overall value have become increasingly important factors in purchasing decisions. More shoppers now regard price as their first consideration when choosing between products compared with a year ago, with almost seven out of ten now saying they make the majority of their grocery shopping decisions before they get to store. This is an increase of 40% since 2008. Promotions are increasingly important when shoppers are deciding which stores to shop at and what products to buy. 70% of shoppers say promotions play a very important role in determining which stores they shop in compared to 64% of shoppers in December 2010.(9) The grocery retail market has responded to these customer needs through an increased weight of promotional activity on branded goods. Additionally, retailer own brand sales, which carry a lower average unit price, have been performing more strongly than branded products as shoppers look for ways to manage their expenditure.

Strategy

In 2010 we outlined our vision to make Morrisons 'Different and Better than Ever'. We are proud of what makes us different - a distinctive offer to customers centred around fresh food, craft skills and vertical integration through our manufacturing business; the way we lead and support our colleagues; and our unique heritage. Being 'different' means building on these advantages, which set us apart from all our competitors and position us to win. Being 'better than ever' is about improving the way we do business - doing more of the things that matter for our customers - making great food, offering outstanding service and being more efficient so we can pass on the best savings possible. It also means seizing opportunities to grow the business profitably through new formats, channels and categories, to meet more of our existing customers' needs and to reach new customers.

Our strategy reflects our view of how the market will evolve, what will be most appealing to our customers and how we make best use of our internal capabilities. It is based on six convictions about the type of business that our customers want us to be:

1. Food focused not generalist

We want to be the number one destination in the UK for fresh food at outstanding value for money. Fresh food is at the heart of the supermarket shopping experience and customers are seeking freshness, quality and provenance at great value as well as becoming more conscious about healthy eating.

Our manufacturing capabilities, unique craft skills, in-store food preparation, flexible supply chain and farming links all give us competitive advantage. We will continue to build on these to create a unique shopping experience offering customers the best fresh food in the UK, unrivalled value for money and fantastic service.

2. Experiential over purely functional

Customers are seeking a deeper engagement with food and food shopping and moving away from a purely functional experience. They want to see, touch and smell the food. We want it to look different and feel different when customers shop at Morrisons.

3. Value is for ever

The world is changing but some things are forever - value is one of them. This means offering an experience which is 'fun and frugal' through a combination of great range, quality and service, combined with great prices on every day products and industry leading deals. We are already well known for delivering great value and we will keep this at the heart of our offer.

4. Skills not just drills

Our great store colleagues are a competitive advantage we can build on. Customer experience is driven by friendly, knowledgeable service delivered through a skilled and engaged workforce who are all committed to offering customers a fantastic shopping experience.

5. General merchandise - clicks not bricks

General merchandise is increasingly migrating online, and away from 'big box' supermarkets and the traditional high street. We believe therefore that the future for general merchandise is in 'clicks not bricks'.

6. Multi-format and multi-channel

We will serve the evolving needs of our customers by expanding into new channels and formats, tailoring our offer to suit the needs of different customers.

Better technology and busy lifestyles are changing the way customers shop. Different customers in different locations want different products. They shop using different channels, going online, via kiosks and on their smart phones. They also visit different formats, doing their weekly shop in larger stores, topping up in convenience stores and seeking out specific products or expertise in speciality stores. To serve more customers, more of the time, we need to be multi-format and multi-channel, tailoring our offer to suit the needs of different customers.

Our vision for the business we are building is anchored by these convictions, and we have a clearly defined set of initiatives that will deliver it. We have grouped these initiatives under the three strategic objectives of 'driving topline', 'increasing efficiency' and 'capturing growth'.

Driving topline

Fresh Formats - 'Bringing together the thinking from our Fresh Lab and our Space Lab'

Fresh Formats is about offering customers the best fresh food in the UK, unrivalled value for money and fantastic service from an environment that really feels different. This initiative is a key part of our strategy and is underpinned by our core convictions that customers want fresh food, great value and a more experiential and engaging shopping environment.

We have brought together a number of separate strands of work to create a new shopping experience for our customers.

- Our Fresh Lab where we have created a fantastic fresh food environment, transforming our produce and flowers sections, introducing new ranges and revitalising our counters.

- Our Space Lab where we have found ways to work our space harder and eliminate duplicated items. The Lab has shown that we can "liberate" up to 750,000 square feet of our existing store space which will be available for an expanded fresh food offer and new ranges such as restaurant quality ready meals and childrens' clothing.

- HOT service is an initiative to enhance our service culture and ensure that our customers always get a warm and friendly experience in our stores. Over 110,000 store colleagues have received service skills coaching - the largest service training programme of its kind in the UK.

During the year, we transformed 12 of our stores using this new thinking. We knocked down walls so that customers could see our craft skills in practice, introduced 350 more fruit and vegetable products, moved complementary products next to each other and rationalised the space given over to ambient grocery items. The results to date have been strong, with produce up 14% and sales in the delicatessen up over 40%. Where we rationalised ambient space we successfully maintained sales and margins.

The work done in the Lab stores has enabled us to create a series of modules capable of being applied to our existing estate and to new stores. In 2012/13 we will tailor the core concept to different locations and store sizes, ensuring that we provide customers with the elements they really want whilst maximising the benefits from our investment. This continuing evaluation will see around 15% of our space operating all or most of the new concept by the end of the first half of the year with total capital expenditure per store of c£1.7m. This is contained within our 2012/13 capital expenditure targets.

Own Brand

We believe that having great own-brand products can give customers a reason to switch supermarkets, and we are ambitious to create an industry leading range. Much work was done during the year, starting with a detailed benchmarking of existing Morrisons products against competitors. In blind tastings, we found that our quality was already high, and overall was better than the average of our direct competitors. As always, there was room for improvement, particularly in going beyond just having a set of good own label products, to having a family of great relevant brands that influence customer behaviour.

2011/12 saw the start of a three year programme of new product development, and we made good progress. Informed by research and customer insight, we built a plan, created a talented team and began the execution that will see 5,000 new products introduced this year and more than 10,000 products relaunched by Christmas 2013. We commenced the roll out with our 'M Kitchen' range in October 2011, launching over 600 products in a category where we knew that we were performing below the market. Product quality is exceptional. Through close cooperation with suppliers and inspiration from great chefs including Pierre Koffman and Aldo Zilli, we developed an innovative and exciting range with exceptional product quality. The response from customers has been extremely positive and M Kitchen sales have increased 40% over the same categories last year.

In January 2012 we launched M savers, our new entry price-point range, which is designed to be a clear proposition of good quality at the best price, in strong support of our conviction that value is forever. We have increased our range to over 500 lines, competing with the broadest offer in the market and enabling customers to do a full value-led shop should they choose to do so.

National to Nationwide

We aim to offer customers throughout Great Britain easy access to a Morrisons store. Currently there are still approximately 6.6m households which do not have a Morrisons store in close proximity. This gives us significant headroom for growth, particularly in the South where we are less well represented.

During the year we opened a total of 37 new stores, including one replacement and three in our new convenience format. 19 of the new stores were previously operated by Netto. They have an average size of 8,000 square feet and are therefore much smaller than the majority of the Morrisons estate, which averages 27,100 square feet. Their success under the Morrisons brand and the performance of our new convenience format, reinforces our confidence that we can operate effectively in smaller store sizes, where previously we had very few stores below 10,000 square feet.

Our net selling space increased by 643,000 square feet (5.2%) during the year, slightly ahead of our previously announced target of 600,000 square feet through a combination of new stores, acquisitions and extensions. Of this, 107,000 square feet came from extending 15 stores in our existing estate. We ended the year with 12.9m square feet of net retail space and an estate of 475 stores.

In March 2011, we announced an accelerated space opening programme of 2.5m square feet of new space over the three years to 2013/14. This year we exceeded our first year target. In 2012/13 we expect to add a further 700,000 square feet and we are on track to meet our three year expansion objective.

Increasing efficiency

In-store productivity

Great companies continually strive to be more efficient. Morrisons has a number of initiatives underway which will drive efficiency and cut unnecessary cost out of our business.

Every hour per day we save in all of our stores equates to approximately £1.4m of annual cost saving - so even small changes can deliver big benefits. In March 2011 we launched an initiative to focus on store productivity and have delivered savings of £25m in the year. Good progress was made on a number of initiatives, including opening our specialist counters later in the morning, which reduces labour cost, but also allows customers to see our craftsmen setting up for the day; automating the receipt of news and magazines, which avoids manual checking and administration, and changing the way bananas are displayed to reduce the labour cost whilst also reducing the wastage that arises from handling the fruit too much. During the coming year we will continue to trial and roll out new ideas and we are on track to deliver our target of £100m saving by 2013/14.

IT systems

2011/12 saw the deployment of new systems to many parts of the business, as our six year programme of complete systems replacement reached the mid-way stage. Throughout the programme we have taken considerable care to manage any risks to the business through comprehensive governance including independent external assurance.

During the year we completed the rollout of the Group's new electronic point of sale system to stores and implemented the new trading product master file. The new production management system for manufacturing is now in operation at all of our produce sites. All of these completed projects are now providing benefits as expected in our business case. In the coming year we will be building still further on this solid base and will be making changes to our core manufacturing, logistics, trading and retail systems, supported by improved management information.

Tackling indirect procurement

Our indirect procurement programme has a target of saving £100m by 2013/14 and we made good progress during the year, delivering £40m of benefit. We reviewed every area of spend - both revenue and capital expenditure, and looked at a variety of ways to reduce cost including the use of e-auctions, rate negotiations, consolidating spend and reducing consumption. Examples of savings achieved include the renegotiation and re-specification of packaging across stores and manufacturing, the consolidation of waste contracts across stores and packhouses and a significant reduction in marketing print costs.

We also undertook an exercise to reduce the build and fit out costs of new stores, opening our first 'Lean Store' at Newport in November and achieving a saving of £2m against our original estimates, the equivalent of c30% of the total store build and fit out cost. Around half of these savings are already being applied to all new build stores. The remaining 50% will be trialled further and implemented when we are confident that we can take the cost out without compromising our high standards.

Increasing network efficiency

Our network optimisation initiative, which was launched in 2007, has focused on building capacity, reducing costs and increasing efficiency throughout our supply chain. In the final quarter of the year we completed the original programme with the opening of a new, state-of-the-art regional distribution centre (RDC) for the South West at Willow Green, Bridgwater. This 800,000 square foot site, which replaces a number of smaller centres, was opened ahead of schedule to enable us to manage the busy Christmas period and will become fully operational in the first quarter of 2012/13. The new RDC, a capital investment of £105m, enables us to consolidate service into one efficient centre and will deliver savings of £20m annually from 2014/15.

Capturing growth

Vertical integration

Vertical integration gives us a true source of competitive advantage and is crucial to our ambition of leading in fresh food - reinforcing our credentials around provenance and sourcing, giving us flexibility to run industry leading promotions and supporting group profitability.

In 2010 we set out our strategic objective to increase the scope of our vertical integration and to invest £200m in additional capacity for relevant fresh categories over three years. Over the last two years we have expanded into several new categories. In June 2011 we acquired Flower World, adding fresh flowers to our range of fresh competencies and in January 2012 we agreed to acquire a pork and lamb retail meat packing facility from Vion Group in Winsford. This 105,000 square foot site will enable us to gain greater control over the quality and provenance of our packed meat products by bringing more production in-house. In March 2012 we announced our intention to establish a seafood processing capability by the end of the year, in order to further expand our authority in fish. We remain well on track to deliver our financial targets and extend vertical integration further into new categories.

Moving online

The way customers shop is changing - they are becoming more and more accustomed to buying online. The total online market in the UK is almost £70bn and growing at 16% and the online grocery market is worth £6bn and growing at 19%.(10) (11)

This is a clear opportunity for Morrisons and we have taken the first steps in our journey to developing both an online food and general merchandise offer.

Online general merchandise

General merchandise is migrating online, away from the high street and from 'big box' supermarkets. We intend to complement our core supermarket offer with an online general merchandise offer in categories which have appeal and relevance to our customers. We started this year with the acquisition of Kiddicare - the most successful online baby retail business in the UK. We are expanding Kiddicare as a genuine "multi-channel" business and during the year announced plans for ten flagship stores throughout the UK. We are also leveraging our 11.4m weekly customers in Morrisons by increasing their awareness of the Kiddicare business, leading to strong growth. Additionally, using the industry leading operating platform acquired with Kiddicare, Morrisons.com will launch its first categories in the final quarter of 2012.

Online food

The online food market is growing fast and is expected to reach £11.2bn by 2016, some 6% of the total grocery market.(12) Morrisons does not yet offer an online service, as we do not believe any retailer in the UK has achieved the right balance of service to customers and profitable returns for shareholders. In 2011 we took an initial step in online grocery through acquiring a minority stake in Fresh Direct, a leading fresh food, online retailer in New York. We have established a very positive relationship with them, including the embedding of a team into the business in order to understand it in great detail before bringing it back to the UK. We will outline our plans for online food towards the end of 2012/13.

Convenience

The UK convenience market presents an opportunity for Morrisons to expand its business. It accounts for over £30bn of sales, represents £1 in every £5 spent on grocery and is growing at twice the rate of the rest of the UK retail market.(13)

Customers are seeking easier ways to shop and want to be able to top up on items they need without having to travel to their nearest large supermarket. This is particularly true at a time when budgets are tight and customers are looking to spend less per shopping trip and save on fuel costs.

We believe that no one else is currently offering a truly great convenience shopping experience - too often convenience is about compromise - poor quality, bad value and limited choice.

Morrisons therefore has the opportunity to create something different by leveraging its vertical integration and great fresh and value credentials to develop a really distinctive and compelling fresh food experience; offering customers great food at affordable prices at a location which is convenient for them.

As planned, we opened three trial stores. They offer a very different convenience experience and are fresh led, with fresh pricing in line with the prices available across all our stores. Over 50% of space is dedicated to fresh food and scratch cooking; significantly more than the industry average of 36%. We offer customers a broad range of c2,500 lines including over 100 fruit and vegetable products, a broad range of meat, fish, bakery and deli as well as freshly prepared sandwiches.

Although we are still trialling these formats the results to date have been ahead of our expectations, with very positive customer feedback. We will continue to open more M Locals during the course of 2012 and adapt our formats to cater for market opportunities and local customer needs, such as city centre formats and petrol station solutions. As our convenience estate grows we will be investing in the infrastructure required to support a larger network of convenience stores.

We believe that capturing strategic growth through increased vertical integration, multi-channel development and the roll out of convenience stores will be an important driver of shareholder value in future years. As we build these businesses this year we will require incremental revenue expenditure of £15m. We will also invest £100m of additional capital expenditure in our multi-channel and convenience programmes. This is included within our projected total capital expenditure of £1.2bn for 2012/13.

Notes

Wm Morrison Supermarkets PLC - Preliminary results for 52 weeks ended 29 January 2012

Consolidated statement of comprehensive income

52 weeks ended 29 January 2012

Consolidated balance sheet

29 January 2012

Consolidated cash flow statement

52 weeks ended 29 January 2012

Reconciliation of net cash flow to movement in net debt in the period

Consolidated statement of changes in equity

52 weeks ended 29 January 2012

1. General information and basis of preparation

The financial information, which comprises the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and related notes, is derived from the full Group financial statements for the year ended 29 January 2012, which have been prepared under European Union endorsed International Financial Reporting Standards (IFRS) and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.

It does not constitute full accounts within the meaning of section 434 of the Companies Act 2006. This financial information has been agreed with the auditors for release. The Group's full financial statements (comprising the consolidated statement of comprehensive income, consolidated balance sheet, consolidated statement of changes in equity, consolidated cash flow statement and related notes) are available for download on the Group's website at www.morrisonsplc.co.uk.

The full annual report and financial statements for the year ended 29 January 2012 on which the auditors have given an unqualified report and which does not contain a statement under section 498 of the Companies Act 2006, will be delivered to the Registrar of Companies in due course. The annual report and financial statements will be made available to shareholders from 10 May 2012.

The accounting policies used in completing this financial information have been consistently applied in all periods shown, except as shown below. These accounting policies are detailed in the Group's financial statements for the year ended 29 January 2012 which can be found on the Group's website (www.morrisonsplc.co.uk).

The following new standards, amendments to standards and interpretations are mandatory for the first time for the financial year beginning 30 January 2012, but do not have any impact on the Group:

* These standards and interpretations have been endorsed by the European Union.

Principal risks

In accordance with the Companies Act 2006, a description of the principal risks (and the mitigating factors in place in respect of these) is included below.

Responsibility statement

This statement is given pursuant to Rule 4 of the Disclosure and Transparency Rules. It is given by each of the Directors.

To the best of each Director's knowledge:

a) the Financial Statements, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit of the Company and the undertakings included in the consolidation taken as a whole; and

b) the strategic and business review contained in this report includes a fair review of the development and performance of the business and the position of the Company and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face.

2. Underlying profit

The Directors consider that underlying earnings per share measures referred to in the preliminary announcement provide useful information for shareholders on underlying trends and performance and reflects how the business is monitored internally. The adjustments are made to reported profit to (a) remove the impact of pension interest income volatility on profit for the period; (b) remove losses/profits arising on property transactions since they do not form part of the Group's principal activities; and (c) apply an effective tax rate of 29.3% (2011: 30%), being an estimated normalised tax rate.

1 Adjustments marked 1 equal £29m (2011: £24m) as shown in the reconciliation of earnings disclosed in note 6(b).

3. Sales analysis

Fuel sales are removed from quoted like-for-like figures given the volatility in the fuel price to provide a more stable measure.

4. Finance costs and income

5. Taxation

The standard rate of corporation tax in the UK changed from 28% to 26% with effect from 1 April 2011. Accordingly the Group's profits for this accounting period are taxed at an effective rate of 26.3% and will be taxed at 26% in the future.

6. Earnings per share

Basic earnings per share are calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. The Company has two (2011: two) classes of instrument that are potentially dilutive: those share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the period and contingently issuable shares under the Group's long term incentive plan (LTIPs).

a) Basic and diluted earnings per share (unadjusted)

Reconciliations of the earnings and weighted average number of shares used in the calculations are set out below: 

b) Underlying earnings per share

Given below is the reconciliation of the earnings used in the calculations of underlying earnings per share:

The weighted average number of shares has decreased compared to the prior period as a result of the Group's equity retirement programme.

7. Goodwill and intangible assets

8. Capital expenditure and commitments

a) Property, plant and equipment

b) Investment property

In addition to the depreciation charge above of £311m, £8m (2011: £7m) is charged on Investment properties.

Contracts placed for future capital expenditure not provided in the financial statements amount to £103m (2011: £178m).

9. Pensions

The Group operates two defined benefit pension schemes, the 'Morrison' and 'Safeway' schemes, providing benefits defined on retirement based on age at date of retirement, years of service and a formula using either the employee's compensation package or career average revalued earnings (CARE). The assets of the schemes are held in separate trustee administered funds; no part of the schemes is wholly unfunded. The latest full actuarial valuations, which were carried out at 6 April 2010 and 1 April 2010 for the Morrison and Safeway schemes respectively, were updated for IAS 19 Employee benefits purposes for the period to 29 January 2012 by a qualified independent actuary.

The movement in the net pension (liability)/ asset during the period was as follows:

10. Cash flow from operating activities

11. Analysis of net debt