REG - Sainsbury(J) PLC - Interim results <Origin Href="QuoteRef">SBRY.L</Origin> - Part 2
09/11/2016 07:06
- Part 2: For the preceding part double click ID:nRSI6797Oa
Sainsbury's stores to the current food offer and a wider range of general merchandise products in
Argos to Sainsbury's customers. At the same time we will benefit from lower operating costs, particularly rent and rates.
Cost synergies from central and support - £70 million. We will remove duplication and overlap from both central and
support functions at Sainsbury's and HRG. We will be able to realise product purchasing benefits from best practice and
the combined Group's scale.
Other revenue synergies - £15 million. We will sell Sainsbury's clothing, homewares, seasonal and leisure ranges through
the existing Argos network.
In order to achieve these synergies, £130 million of exceptional integration cost and £140 million of exceptional
integration capital expenditure will be required over the same three year time period. Exceptional costs will include the
relocation of property, dilapidations, lease break costs and redundancy costs. Exceptional capital expenditure is required
to reformat supermarket space and for fitting out the new Argos stores. The expected phasing of the synergies, exceptional
costs and exceptional capital expenditure is shown below:
£m H1 H2 FY FY FY H1
2016/17 2016/17e 2016/17e 2017/18e 2018/19e 2019/20e Total
Synergies (incremental year-on-year) - 0-5 0-5 55-60 65 35 160
Exceptional costs (6) (9) (15) (60) (40) (15) (130)
Exceptional capex (5) (15) (20) (55) (45) (20) (140)
Synergies are expected to be up to £5 million in the second half of 2016/17.
Homebase Transitional Services Agreement ('TSA')
HRG announced on 18 January 2016 that the sale of Homebase would give rise to £75 million of additional exceptional costs
in relation to transaction, separation and restructuring. Up to the date of the acquisition, HRG had incurred £30 million
of these costs and incurred a further £2 million in the period to the 24 September 2016.
Further costs of £10 million in relation to this are anticipated in the second half.
To support the transition, a TSA was entered into on 17 January 2016 to govern the provision of the key transitional
services to Wesfarmers Limited in advance of the completion of the sale of Homebase on 27 February 2016.
As previously reported by HRG, the business will continue to provide the transitional services for a period of time not
likely to exceed 18 months from inception. The cost reduction programme to minimise the overhang of the transitional costs
continues to perform well. Upon completion approximately £10 million of overhead costs from providing the services under
the TSA will have to be absorbed by HRG. It is expected that this will impact from the second half of the 2017/18 financial
year.
Of the original 18 services provided, HRG and Homebase have served notice on 14, nine of which have ceased to be provided.
The remaining four services include information systems, contact centre, distribution and two-man home delivery.
In addition, over a period of approximately 18 months, all Argos stores within Homebase stores will be removed. As
previously reported by HRG this is expected to result in a reduction in Argos' underlying profit of approximately £10
million. All Habitat stores within Homebase stores closed in advance of the Sainsbury's acquisition of HRG.
We expect the cumulative combined impact of the TSA and the closure of Argos stores within Homebase to be up to £5 million
in 2016/17, £10 million in 2017/18 and £20 million from 2018/19 onward.
Supplier arrangements
The two types of supplier arrangements that involve a level of judgement or estimation are:
· Fixed amounts - these are agreed with suppliers primarily to support in-store activity including promotions, such as
utilising specific space.
· Supplier rebates - these are typically agreed on an annual basis, aligned with the financial year, with the rebate
amount linked to pre-agreed targets such as sales volumes.
Within the Group, supplier rebate amounts are offset against cost of sales with fixed amounts offset against either cost of
sales or administrative expenses. Total supplier arrangements have reduced by £75 million to £102 million (2015/16: £177
million). The year-on-year reduction has been driven by the conscious decision to move away from supplier arrangements and
towards a reduction in the base cost of goods. The analysis below includes the consolidation of HRG, where relevant.
Supplier arrangements1
28 weeks to 28 weeks to 52 weeks to
24 September 2016£m 26 September 2015£m 12 March
2016
£m
Fixed amounts
Cost of sales 73 109 302
Admin expenses 2 - -
Total Fixed amounts 75 109 302
Supplier rebates 27 68 69
Total supplier arrangements 102 177 371
1 Supplier rebates do not include material estimation.
Of the above amounts, the following was outstanding and held on the balance sheet at 24 September 2016:
Supplier arrangements As at As at As at
24 September 2016£m 26 September 2015£m 12 March
2016
£m
Within current trade receivables
Supplier arrangements due 34 8 6
Within current trade payables
Supplier arrangements due 10 16 39
Accrued supplier arrangements 11 16 25
£30 million of the increase in trade receivables supplier arrangements due is as a result of the HRG acquisition and
subsequent consolidation of balances.
Financial services - Sainsbury's Bank
Sainsbury's Bank results16 months to 31 August
2016 2015 Change%
Revenue (£m) 173 166 4.2
Interest payable (£m) (29) (27) 7.4
Total income (£m) 144 139 3.6
Underlying operating profit (£m) 29 34 (14.7)
Net interest margin (%)2 3.8 3.9 (10)bps
Bad debt as a percentage of lending (%)3 0.5 0.3 (23)bps
Tier one capital ratio (%)4 14.4 14.0 32bps
1 Results are excluding the impact of Argos Financial Services due to Sainsbury's Bank consolidation being six months
to 31 August 2016.
2 Net interest receivable divided by average interest-bearing assets.
3 Bad debt expense divided by gross lending.
4 Tier 1 capital divided by risk-weighted assets.
Sainsbury's Bank delivered an underlying operating profit of £29 million, a 14.7 per cent decrease year-on-year. This
decrease was mainly as a result of the investment required to enter the mortgage market and the impact of reduced
interchange fees.
Net interest margin decreased by ten basis points year-on-year to 3.8 per cent (31 August 2015: 3.9 per cent) driven by the
diversification of the Bank's funding sources to include a greater mix of longer-term wholesale funds. Bad debt levels as a
percentage of lending increased to 0.5 per cent (31 August 2015: 0.3 per cent) reflecting growth in lending and higher loss
rates on pre-prime loans. The Tier 1 capital ratio increased by 32 basis points year-on-year to 14.4 per cent (31 August
2015: 14.0 per cent), reflecting capital injections in support of the transfer of the Argos Financial Services ('AFS')
business to Sainsbury's Bank.
Migration of our savings customers took place successfully in September 2016 and migration of ATMs was also completed. We
now expect to introduce our new loans platform by the end of 2017, and are assessing our options for cards following the
acquisition of HRG and the opportunity to create a common cards operating model. We are still planning to launch our new
mortgage offer in the first half of 2017.
In the first half, customer deposits increased by 15.6 per cent reflecting the additional funding raised at 31 August 2016
in advance of acquiring AFS. At the end of the first half, AFS was transferred to Sainsbury's Bank and refinanced with the
following key steps:
· £100 million capital injection from J Sainsbury plc to Sainsbury's Bank
· New customer deposits and a wholesale loan were raised by Sainsbury's Bank
· Sainsbury's Bank lent AFS circa £600 million by way of an intercompany loan
· AFS repaid its current circa £600 million intercompany loan with HRG subsidiaries which have previously funded the
business
· HRG subsidiaries paid a dividend to J Sainsbury plc of circa £600 million
· The £448 million draw down on the Revolving Credit Facility used as consideration for the HRG acquisition was repaid
in full
AFS holds a loan book with gross receivables of £681 million, offset by provision of £66 million resulting in a 9.7 per
cent provision as a percentage of receivables.
In 2016/17 underlying operating profit is expected to be around ten per cent lower year-on-year due to investment required
to enter the mortgage market and the impact of reduced interchange fees. A small second half contribution from AFS will be
offset by the ongoing cost of increased customer deposits used to refinance the AFS loan book.
Capital injections to the Bank in the first half of 2016/17 were £100 million as a result of the transfer of AFS into the
Bank. Capital injections are expected to be £20 million in the second half, taking full year capital injections to £120
million.
Property and other joint ventures ('JV')
Sainsbury's underlying share of post-tax profit from its JV with British Land was £7 million (2015/16: £8 million). Its
underlying share of post-tax profit from the JV with Land Securities was £nil (2015/16: £1 million).
An investment property fair value decrease of £14 million was recognised within the share of post-tax profit from the JVs
in the income statement (2015/16: £14 million decrease), mainly driven by average property yields of the JVs increasing to
5.3 per cent, or 14 basis points higher than the prior year (2015/16: 5.1 per cent).
Sainsbury's recognised a net £2 million share of loss (2015/16: net £5 million share of loss) from the other start-up JVs:
I2C and Netto (2015/16 includes Telecoms). On 2 July 2016 it was announced that the Netto JV would be closed and it ceased
trading on 30 July 2016.
In 2016/17, Sainsbury's expects the share of profit from the property JVs to be slightly lower year-on-year. Sainsbury's
share of loss from the continuing start-up JVs is expected to be slightly lower year-on-year following the decision to
close Netto.
Underlying net finance costs
Underlying net finance costs increased by £3 million year-on-year to £65 million (2015/16: £62 million), as a result of the
perpetual securities coupons, offset by lower interest costs as a result of lower net debt.
Underlying net finance costs1 28 weeks to 24 September2016£m 28 weeks to 26 September2015£m 52 weeks to12 March 2016£m
Underlying finance income 9 9 19
Interest costs (65) (71) (132)
Perpetual securities coupons (13) (4) (15)
Capitalised interest 4 4 7
Underlying finance costs (74) (71) (140)
Underlying net finance costs (65) (62) (121)
1 Finance income/costs before financing fair value movements and the IAS 19 pension financing charge.
Sainsbury's expects underlying net finance costs in 2016/17 to be slightly lower year-on-year as a result of lower average
net debt. Capitalised interest is expected to be similar year-on-year.
Items excluded from underlying results
Items excluded from underlying results totalled a profit of £95 million (2015/16: £31 million profit). Profit on disposal
of properties of £113 million for the first half includes £111 million of profit on the completion of the Nine Elms store,
which is a mixed-use development opened in August. Investment property fair value decreased by £14 million and the
non-underlying finance movements of £12 million mainly relate to a gain recognised in fixed price power purchase agreements
due to an increase in forecast forward energy prices. The increase in perpetual securities was due to the comparative not
including an amount for the full prior period, as they were issued on 30 July 2015.
Items excluded from underlying results
28 weeks to24 September 2016£m 28 weeks to26 September 2015£m 52 weeks to 12 March 2016£m
Profit on disposal of properties 113 94 101
Investment property fair value movements (14) (14) (18)
Non-underlying finance movements 12 (4) (22)
IAS 19 pension financing charge and scheme expenses (10) (15) (28)
Perpetual securities coupons 13 4 15
Acquisition adjustments 1 1 3
One-off items (20) (35) (90)
Total items excluded from underlying results 95 31 (39)
The loss in one-off items of £20 million (2015/16: £35 million loss) is mainly driven by:
· A £98 million profit recognised on disposal of the Pharmacy business to Celesio A.G, owners of LloydsPharmacy
· Costs of £16 million relating to Sainsbury's Bank's transition to a new, more flexible banking programme
· A £22 million charge relating to the one-off legal and advisory fees in relation to the acquisition of HRG
· £30 million of impairment charges and onerous contracts relating to lease exit and break costs and movements in the
market value of land
· A £23 million charge related to the closure of Netto as a result of writing off Sainsbury's investment in the joint
venture, other closure costs, increased lease exit and break costs
· A Homebase separation and restructuring charge of £2 million in the three week period of consolidating HRG, part of
the previously announced £75 million on the sale of Homebase
· Argos integration costs of £6 million were incurred in the first half, part of the previously announced £130 million
required over the three years in order to achieve the synergies of £160 million
· Internal restructuring costs of £19 million were incurred in the first half
One-off items 28 weeks to 24 September 2016£m 28 weeks to 26 September 2015£m 52 weeks to12 March
2016£m
Disposal of Pharmacy business 98 - (3)
Sainsbury's Bank transition costs (16) (25) (59)
HRG acquisition costs (22) - (12)
Impairment and onerous contract charge (30) 3 (1)
Netto closure (23) - -
Homebase separation and restructuring costs (2) - -
Argos integration costs (6) - -
Internal restructuring (19) (13) (15)
Total one-off items (20) (35) (90)
In 2016/17, Sainsbury's Bank costs for transitioning to a new, more flexible banking platform are expected to be around £40
million (capital costs relating to the transition are expected to be around £40 million).
No further property profits are expected in the second half.
The sale of the Pharmacy business was completed on 1 September 2016, and no further profits are expected in the second
half.
In 2016/17, Argos integration costs are expected to be around £15 million. In addition, Argos exceptional integration
capital expenditure is expected to be around £20 million. Both part of the previously announced £130 million exceptional
integration costs and £140 million exceptional capital expenditure required.
Taxation
The income tax charge was £73 million (2015/16: £75 million), with an underlying tax rate of 21.3 per cent (2015/16: 25.3
per cent) and an effective tax rate of 19.6 per cent (2015/16: 22.1 per cent). The underlying rate is lower than last year,
mainly due to falls in the statutory corporate tax rate being applied to deferred tax balances in the current year but not
in the prior year.
Underlying tax rate
28 weeks to 24 September 2016 Profit Tax Rate%
£m £m
Underlying profit before tax, and tax thereon 277 (59) 21.3
Adjustments (and tax thereon) for:
Items excluded from underlying results and revaluation of deferred tax balances 95 (14)
Profit before tax, and tax thereon 372 (73) 19.6
In 2016/17, Sainsbury's expects the full year underlying tax rate to be between 23 and 24 per cent.
Earnings per share
Underlying basic earnings per share decreased by 6.7 per cent to 11.2 pence (2015/16: 12.0 pence) reflecting the fall in
underlying profits and the effect of additional shares issued during the year, as a result of the HRG acquisition, partly
offset by a lower underlying tax rate year-on-year.
The weighted average number of shares in issue was 1,953.4 million (2015/16: 1,920.0 million), an increase of 33.4 million
shares or 1.7 per cent primarily driven by the additional shares issued on acquisition of HRG.
In total, 261.1 million shares were issued as part of the HRG acquisition. These shares increased the weighted average
number of shares in the first half by 32.2 million and will increase the full year weighted average number of shares by
130.3 million. In 2017/18, the full effect of the weighted average number of shares will be 261.1 million.
Basic earnings per share was 14.8 pence (2015/16: 13.6 pence). The basic earnings per share was higher than the underlying
basic earnings per share due to the items excluded from underlying results.
Underlying earnings per share
28 weeks to 24 September 2016 2016pence per share 2015pence per share
Basic earnings per share attributable to ordinary shareholders 14.8 13.6
Adjustments (net of tax) for:
Items excluded from underlying results and revaluation of deferred tax balances (3.6) (1.6)
Underlying basic earnings per share attributable to ordinary shareholders1 11.2 12.0
1 Underlying EPS calculation is based on underlying profit after tax attributable to ordinary shareholders.
Therefore the coupons on the perpetual securities are not added back.
Dividends
The Board has approved an interim dividend of 3.6 pence per share (2015/16: 4.0 pence), equivalent to 30 per cent of the
previous full year dividend. This will be paid on 4 January 2017 to shareholders on the Register of Members at the close of
business on 18 November 2016.
Sainsbury's plans to maintain a full year dividend covered two times by our full year underlying earnings.
Acquisition of Home Retail Group plc
On 2 September 2016, Sainsbury's completed the acquisition of HRG through a cash and shares offer, comprising 55 pence per
share and 0.321 shares in J Sainsbury plc for each share held of HRG. This resulted in total consideration of £1,093
million.
Consideration fair value at acquisition date £m
Cash of £447 million (being £0.55 per existing share); based on HRG's share capital of 813,445,001 shares 447
£3 million in relation to the existing HRG share scheme awards and options 3
261 million new J Sainsbury plc shares at a share price of £2.461 (2 September 2016) 643
Total 1,093
The fair value of assets acquired at that date was £1,075 million. This included net £615 million customer loan book, £322
million of cash (after the capital return to HRG shareholders of £226 million, mainly in relation to the sale of Homebase
by HRG) and £138 million of other net assets. The fair value of assets acquired was less than the fair value of the
consideration by £18 million, which has been treated as goodwill.
Fair value of net assets acquired At 2 September 2016 (provisional) £m
Fixed assets 274
Intangible assets1 326
Inventories 816
Trade and other receivables 141
Deferred tax assets 41
Amounts due from financial services customers (loan book) 615
Other financial assets 60
Cash and cash equivalents2 548
Total assets acquired 2,821
Trade and other payables2 (1,203)
Provisions (89)
Retirement benefit obligations (454)
Total liabilities acquired (1,746)
Net identifiable assets acquired at fair value 1,075
Goodwill arising on acquisition 18
Purchase consideration transferred 1,093
1 Intangible assets include a brand of £179 million relating to the Argos brand name, and reflect its fair value at
the acquisition date. It is estimated to have a useful economic life of ten years.
2 Cash and cash equivalents and trade and other payables acquired are both presented gross of the capital return of
£226 million.
Financing
The Group's key financing objectives are to diversify funding sources, to minimise refinancing risk and to maintain
appropriate contingent liquidity. As at 24 September 2016, the Group had drawn debt facilities of £2.3 billion, undrawn but
committed borrowing facilities of £1.15 billion at its disposal and £500 million of perpetual securities.
The principal elements of the Group's drawn debt facilities comprise two long-term loans of £718 million due 2018 and £761
million due 2031, both secured over property assets. In addition, the Group has further secured loans of £200 million due
August 2019 and E50 million due 30 September 2016, a five year £450 million Convertible Bond due November 2019, £81 million
of hire purchase facilities and £77 million of finance lease obligations.
On 18 March 2016, Sainsbury's entered into an amendment and restatement agreement in respect of the Revolving Credit
Facility ('RCF') and on 16 May 2016, extended the final maturity date of the first tranche, Facility (A), of £500 million,
from May 2018 to May 2019. The second tranche, £650 million Facility (B), matures in May 2020. The facility is secured
against supermarket properties, and contains no financial covenants. As at 24 September 2016, £nil was drawn from either
Facility.
Net debt and cash flows
Group net debt includes the capital injections in to Sainsbury's Bank, but excludes Sainsbury's Bank's own net debt
balances. Sainsbury's Bank balances are excluded because they are required for business as usual activities. As at 24
September 2016, net debt was £1,341 million (12 March 2016: £1,826 million), a decrease of £485 million since year-end.
This decrease was primarily driven by the acquired HRG cash balance, and a decrease in Retail working capital.
Net debt bridge £m
12 March 2016 net debt (1,826)
Retail operating cash flow before changes in working capital and exceptional pension contributions 553
Cash outflow on acquisition of HRG (447)
Cash acquired on acquisition, net of capital return to HRG shareholders1, 2 322
Impact of Argos loan book transfer and refinancing 504
Retail working capital movements 239
Net cash used in other investing activities (325)
Exceptional pension contributions (including HRG) (199)
Dividends (151)
Other items including interest and tax paid offset by FV and other cash movements (11)
24 September 2016 net debt (1,341)
1 This excludes £20 million of cash acquired that relates to AFS.
2 Capital return £226 million.
If the perpetual securities were treated as debt, net debt would increase from £1,341 million to £1,835 million (12 March
2016: £2,320 million).
Retail operating cash flows before changes in working capital and exceptional pension contributions decreased by 9.9 per
cent to £553 million (2015/16: £614 million).
The total impact of the HRG transaction included £504 million net impact of the Argos loan book refinancing, £548 million
of cash and cash equivalents acquired, partly offset by the £447 million cash consideration and the £226 million capital
return to HRG shareholders.
The £239 million decrease in retail working capital from 12 March 2016 was mainly due to an increase in trade and other
payables as a result of the timing of key payment runs at half year as compared to year-end.
Net cash used in other investing activities of £325 million included £307 million of expenditure on Property, Plant and
Equipment, and £47 million on intangible assets, partly offset by £15m of disposal proceeds received and other cash
movements of £14 million.
Exceptional pension contributions of £199 million include the planned £125 million cash payment made in August 2016 to the
Sainsbury's defined benefit pension scheme and £74 million of payments made to the HRG pension scheme in September 2016.
Dividends of £151 million in relation to the final dividend of 8.1 pence per share for the 2015/16 year were paid in the
period.
Included within other items were corporation and interest tax paid, dividends on perpetual securities, investments in JV's
partly offset by consolidation of the HRG derivative, dividends received and fair value and other non-cash movements.
Summary cash flow statement
28 weeks 28 weeks to 26 September 2015 52 weeks to 12 March 2016
to 24 September
2016
£m £m £m
Retail operating cash flow before changes in working capital (before exceptional pension contributions) 553 614 1,126
Decrease in retail working capital 239 191 23
Retail cash generated from operations 792 805 1,149
Bank operating cash flow before changes in working capital 27 18 29
Decrease/(increase) in Sainsbury's Bank working capital 226 (323) (429)
Group cash generated from operations 1,045 500 749
Interest paid (49) (65) (108)
Corporation tax paid (51) (63) (124)
Net cash from operating activities 945 372 517
Proceeds from sale of Pharmacy business - - 125
Acquisition of subsidiaries, excluding cash acquired (447) - -
Cash acquired from HRG transaction 548 - -
Capital return to HRG shareholders (226) - -
Sainsbury's Bank refinancing of Argos loan book (504) - -
Retail refinancing of Argos loan book 504 - -
Net cash used in other investing activities (325) (313) (525)
Proceeds from issue of shares 3 7 8
Purchase of own shares - - (20)
Proceeds from issue of perpetual securities - 247 247
Proceeds from issue of convertible bonds - 247 247
Repayment of borrowings (86) (293) (372)
Exceptional pension contributions (199) (125) (125)
Dividends paid (151) (157) (234)
Dividends paid on perpetual securities (20) - (4)
Increase/(decrease) in cash and cash equivalents 42 (15) (136)
Elimination of net increase in Sainsbury's Bank cash and cash equivalents 255 238 316
Decrease in debt 112 280 353
Fair value and other non-cash movements 76 (17) (16)
Movement in net debt 485 486 517
Group cash generated from operations increased by 109 per cent to £1,045 million (2015/16: £500 million), mainly due to a
decrease in Group working capital of £465 million (2015/16: £132 million increase) driven by the movement in Sainsbury's
Bank working capital.
The £226 million decrease in Sainsbury's Bank working capital was driven by additional customer deposits raised to fund the
acquisition of AFS and the diversification of the Bank's holdings of liquid assets, partly offset by an increase in
customer lending due to competitive propositions across personal loans and credit cards.
Borrowings of £86 million were repaid during the period in relation to Eddystone and Longstone debt and hire purchase
finance lease repayments.
Sainsbury's expects 2016/17 year-end net debt to reduce to around £1.5 billion (£2.0 billion treating the perpetual
securities as debt) mainly as a result of the HRG acquisition. Sainsbury's expects a small improvement in retail working
capital. We expect net debt to reduce over the medium term.
Retail capital expenditure
Sainsbury's core retail capital expenditure decreased by £64 million year-on-year to £237 million (2015/16: £301 million).
Core retail capital expenditure as a percentage of retail sales (including fuel, including VAT) was 1.7 per cent (2015/16:
2.2 per cent).
Sainsbury's opened two supermarkets (including one temporary replacement store at Redhill) during the first half (2015/16:
four supermarkets) and 16 new convenience stores (2015/16: 37 convenience stores).
During the half, no extensions were completed (2015/16: no extensions), five refurbishments (2015/16: eight refurbishments)
consisting of four supermarkets (2015/16: four supermarkets) and one convenience store (2015/16: 4 convenience stores).
Net retail capital expenditure was £315 million (2015/16: £298 million), mainly as a result of the purchase of a freehold
at Chiswick, where there may be future potential for a mixed use development and £5 million Argos integration capital
expenditure.
Retail capital expenditure
28 weeks to 24 September 2016 28 weeks to 26 September 2015 52 weeks to
12 March
2016
£m £m1 £m
New store development 39 107 207
Extensions and refurbishments 46 98 183
Other - including supply chain and Digital & Technology 152 96 152
Core retail capital expenditure 237 301 542
Acquisition of freehold and trading properties2 74 1 -
Debtor/creditor movements (1) (4) 1
Argos integration capital expenditure 5 - -
Net retail capital expenditure 315 298 543
Capex/sales ratio (%)3 1.7 2.2 2.1
1 Comparative figures within Core retail capital expenditure have been restated to reflect reclassification of certain
types of capital expenditure.
2 2015/16 balance includes income from Harvest, our JV with Land Securities, relating to the repayment of a loan.
3 Core retail capital expenditure divided by retail sales (including fuel, including VAT).
In 2016/17, Sainsbury's expects core retail capital expenditure including business as usual Argos capital expenditure
(excluding Sainsbury's Bank and Argos integration capital expenditure) to be around £600 million. Core retail capital
expenditure is expected to be around £600 million per annum over the medium term.
Sainsbury's depreciation in 2016/17 is expected to increase by around £20 million year-on-year primarily due to investment
in Digital and Technology that is depreciated over a shorter lifetime.
Return on capital employed
In light of the acquisition of HRG on 2 September 2016 and the disproportionate impact this has on the ROCE calculation
(using a two point average for Capital Employed and the inclusion of only three weeks of 'return') a calculation based on a
14 point average has been used with comparatives also restated.
The return on capital employed ('ROCE') on the 14 point average basis over the 52 weeks to 24 September 2016 was 8.4 per
cent (2015/16: 9.2 per cent), a year-on-year decrease of 79 basis points. Excluding the retirement benefit obligation (net
of deferred tax) from capital employed, ROCE over the 52 weeks to 24 September 2016 was 8.0 per cent (2015/16: 8.5 per
cent), 57 basis points lower than for the 52 weeks to 26 September 2015. ROCE decline was mainly due to the fall in
underlying operating profit.
Return on capital employed (14 point average)1
52 weeks to 52 weeks to
24 September 2016 26 September 2015
Total underlying operating profit (£m) 671 725
Underlying share of post-tax profit from JVs (£m) 9 4
Underlying profit before interest and tax (£m) 680 729
Average capital employed (£m) 8,087 7,921
Return on capital employed (%) 8.4 9.2
Return on capital employed (exc. pension fund deficit) (%) 8.0 8.5
52 week ROCE movement (79)bps
52 week ROCE movement (exc. pension fund deficit) (57)bps
1 The 14 point period average includes the opening capital employed as at 26 September 2015 and the closing capital
employed for each of the 13 individual periods to 24 September 2016.
Summary balance sheet
Shareholders' funds as at 24 September 2016 were £6,494 million (12 March 2016: £6,365 million), an increase of £129
million, mainly attributable to the acquisition of HRG, partly offset by increases in trade and other payables and an
increased retirement benefit obligation.
Net debt was £485 million lower than at 12 March 2016, driven by the acquisition of HRG, reduced capital expenditure and a
decrease in retail working capital.
Sainsbury's Bank net assets at 31 August 2016 of £764 million (29 February 2016: £650 million) have been consolidated and
separately identified.
Accounting for the perpetual securities as equity, adjusted net debt to EBITDAR was 4.0 times (2015/16: 4.0 times).
Adjusted net debt to EBITDAR is expected to reduce by year-end as additional Argos EBITDAR is included in the calculation
(first half 2016/17 calculation currently includes the full impact of capitalised leases with almost no EBITDAR
contribution due to only three weeks of performance consolidated). Interest cover reduced to 5.3 times (2015/16: 6.0 times)
due to lower underlying profit before tax. Fixed charge cover reduced to 2.6 times (2015/16: 2.7 times). Gearing decreased
during the half to 20.6 per cent (12 March 2016: 28.7 per cent) as a result of the reduction in net debt following the HRG
acquisition. Excluding the pension deficit, gearing decreased to 17.2 per cent (12 March 2016: 27.0 per cent).
Treating the perpetual securities as debt, adjusted net debt to EBITDAR increases to 4.3 times. Gearing increases to 30.6
per cent and gearing excluding the pension deficit increases to 25.1 per cent. Excluding the coupons from underlying net
finance costs, interest cover increases to 6.6 times and fixed charge cover increases to 2.7 times.
Summary balance sheet(Sainsbury's Bank separated) Group Group Group Group
As at 24 September 2016 Movement since 12 March 2016 As at 26 September 2015 As at
12 March
2016
£m £m £m £m
Land and buildings (freehold & long leasehold) 7,155 177 7,015 6,978
Land and buildings (short leasehold) 859 39 799 820
Fixtures and fittings 1,993 67 1,910 1,926
Property, plant and equipment 10,007 283 9,724 9,724
Other non-current assets 1,014 278 772 736
Inventories 1,909 941 1,013 968
Trade and other receivables 507 169 373 338
Sainsbury's Bank assets1 5,359 828 4,368 4,531
Cash and cash equivalents 874 297 622 577
Debt (2,215) 188 (2,479) (2,403)
Net debt (1,341) 485 (1,857) (1,826)
Trade and other payables and provisions (5,054) (1,218) (3,954) (3,836)
Retirement benefit obligations, net of deferred tax (1,312) (923) (473) (389)
Sainsbury's Bank liabilities1 (4,595) (714) (3,755) (3,881)
Net assets 6,494 129 6,211 6,365
1 As at 31 August 2016, 31 August 2015 and 29 February 2016.
Key Financial ratios As at 24 September 2016 As at 26 September 2015 As at 12 March2016
(with perpetual securities accounted for as equity)
Adjusted net debt to EBITDAR1 4.0 times 4.0 times 4.0 times
Interest cover2 5.3 times 6.0 times 5.9 times
Fixed charge cover3 2.6 times 2.7 times 2.7 times
Gearing4 20.6% 29.9% 28.7%
Gearing (excluding pension deficit)5 17.2% 27.8% 27.0%
Key Financial ratios
(with perpetual securities treated as debt)6
Adjusted net debt to EBITDAR 4.3 times 4.3 times 4.3 times
Gearing 30.6% 41.1% 39.5%
Gearing (excluding pension deficit) 25.1% 38.0% 37.1%
Key Financial ratios
(with perpetual securities coupons excluded from net underlying finance costs)7
Interest cover 6.6 times 6.4 times 6.7 times
Fixed charge cover 2.7 times 2.7 times 2.8 times
1 Net debt of £1,341 million plus capitalised lease obligations of £5,988 million (5.5 per cent discount rate),
divided by Group underlying EBITDAR of £1,836 million, calculated for a 52 week period to 24 September 2016.
2 Underlying profit before interest and tax divided by underlying net finance costs.
3 Group underlying EBITDAR divided by net rent and underlying net finance costs.
4 Net debt divided by net assets.
5 Net debt divided by net assets, excluding pension deficit.
6 Treating the perpetual securities, net of transaction fees, as debt increases net debt to £1,835 million, and
reduces net assets to £6,000 million.
7 Excluding the perpetual securities coupons, underlying net finance costs reduces to £52 million.
As at 24 September 2016, Sainsbury's estimated market value of properties, including our 50 per cent share of properties
held within property JVs, was £10.3 billion (12 March 2016: £10.6 billion). The £0.3 billion decrease during the half was
mainly due to a reduction in market rental values and a small yield movement. The summary balance sheet discloses
Sainsbury's Bank assets and liabilities separately to aid interpretation. A summary balance sheet is also presented with
Sainsbury's Bank consolidated by line.
Summary balance sheet(Sainsbury's Bank consolidated) GroupAs at 24 September 2016 GroupMovement since 12 March 2016 GroupAs at 26 September 2015 GroupAs at 12
March
2016
£m £m £m £m
Land and buildings (Freehold & long leasehold) 7,156 175 7,017 6,981
Land and buildings (Short leasehold) 859 39 799 820
Fixtures and fittings 2,032 69 1,938 1,963
Property, plant and equipment 10,047 283 9,754 9,764
Other non-current assets 3,202 454 2,548 2,748
Inventories 1,909 941 1,013 968
Trade and other receivables 3,327 1,076 2,290 2,251
Sainsbury's Bank cash and cash equivalents 311 (255) 644 566
Cash and cash equivalents 874 297 622 577
Debt (2,215) 188 (2,479) (2,403)
Net debt (1,341) 485 (1,857) (1,826)
Trade and other payables and provisions (9,649) (1,932) (7,708) (7,717)
Retirement benefit obligations, net of deferred tax (1,312) (923) (473) (389)
Net assets 6,494 129 6,211 6,365
Defined benefit pensions
As at 24 September 2016, the Group's post-tax pension deficit was £1,312 million which comprises the Sainsbury's pension
scheme and the HRG pension scheme.
The Sainsbury's pension scheme post-tax pension deficit was £1,063 million, an increase of £674 million since the year-end
(12 March 2016: £389 million). The increase in the deficit was mainly driven by a fall in the discount rate since the
year-end from 3.65 per cent to 2.20 per cent.
As at 24 September 2016, the HRG pension scheme post-tax pension deficit
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