Annual Report and Financial Statements 2016 Our values make us different There for our customers Colleagues making the difference Great products and services J Sainsbury plc Annual Report at fair prices and Financial Statements 2015 We know our customers better than anyone else Our vision To be the most trusted retailer where people love to work and shop. Our goal To make all our customers’ lives easier every day by offering great quality and service at fair prices. How we do it Our strategy is designed to address a changing marketplace and the continuing shifts in customer shopping patterns. It is based on five key pillars: — We know our customers better than anyone else — G reat products and services at fair prices — T here for our customers — Colleagues making the difference — Our values make us different Read more in our Strategic Report. Strategic Report Contents Financial highlights Strategic Report 1 Financial highlights 2 Business model 4 Chairman’s letter 6 Chief Executive’s letter 9 Our Business Strategy 10 Financial KPIs 12 Market context 14 W e know our customers better than anyone else £587m 16 Great products and services at fair prices 16.5% 20 There for our customers 24 Colleagues making the difference 26 Our values make us different Market share Underlying profit 30 KPIs: Our values make us different maintained before tax 36 Our principal risks and uncertainties Down 13.8% 40 Financial Review Governance Report 48 Board of Directors £548m 50 Operating Board 52 Corporate Governance 56 Nomination Committee +0.4% 58 C orporate Responsibility and Statutory profit Sustainability Committee before tax 61 Audit Committee 66 Directors’ Remuneration Report Total retail sales 80 Other disclosures 82 Statement of Directors’ responsibilities (including VAT, excluding fuel) Financial Statements -0.9% 83 I ndependent auditors’ report to the members of J Sainsbury plc 88 Group income statement Like-for-like 89 G roup statement of 23.9p retail sales comprehensive income (including VAT, excluding fuel) 90 Balance sheets 12.1p 91 Cash flow statements Basic earnings 92 G roup statement of changes in equity per share 94 C ompany statement of changes in equity Full-year dividend 95 Notes to the financial statements per share 151 Five year financial record Down 8.3% 152 Additional shareholder information 155 Glossary 8.8% 24.2p Return on capital employed Down 88 bps Underlying basic earnings per share Down 8.3% Find out more at j-sainsbury.co.uk/ar16 1 Strategic Report Business model How we are organised to grow value for our shareholders Colleagues 27,805 making the colleagues with over difference 15 years’ service Suppliers Logistics Great products and sourcing and services at fair prices Around 2,000 Over 15,000 food suppliers 23 depots own-brand and 1,000 products non-food suppliers There for our 1.2 million store customers deliveries this year 773 Convenience stores 5 International sourcing offices Our values make 1 2 3 us different Living Sourcing with Respect for our healthier integrity environment lives 2 3 Strategic Report Name Badge 27,805 We know our colleagues customers with over 15 years’ better than 8 162,715 service training colleges colleagues anyone else for our colleagues 207 Travel Money 1,646 bureaux ATMs 439 stores 25.5 million sell clothing transactions and general per week merchandise Around 4,000 people contacted 601 online each Supermarkets week through ‘Trolley Talk’ Over 247,000 online orders on average per week Nectar 4 5 Over 15 million Nectar card Making a positive A great place customers difference to our to work community 2 3 SSttrraatteeggiicc RReeppoorrtt Delivery against Strategy OUR VISION We know our customers better than anyone else. We will be there whenever and wherever they need us, offering great products and services at fair prices. Our colleagues make the difference, our Our strategy is built values make us different. on the fundamental strengths of our business of great heritage, quality food at fair prices and Maintained strong values market share at DAVID TYLER 16.5% SAINSBURY’S CHAIRMAN 12.1p £681m Proposed full-year dividend, down 8.3% Adapting Underlying profit before tax to a changing marketplace 4 Strategic Report Chairman’s Letter Your Board remains focused on building shareholder value and we are confident that by following our strategy, driving efficiencies and managing costs carefully, we will achieve this. Our strategy is built on the fundamental Accelerating our strategy also apply to around 40,000 colleagues under strengths of our business: our great the age of 25. In addition, nearly 126,000 The most significant event this year has been heritage, quality food at fair prices and colleagues and management will share a your Board’s proposal to acquire Home Retail strong values. It recognises that customers bonus of around £100 million in recognition Group plc, owners of the Argos retail chain. will increasingly shop through multiple of their hard work during the year. The combination of Argos with Sainsbury’s channels and according to their varying will create a leading food and non-food At our AGM on 6 July 2016, John McAdam, needs. Our business will continue to adapt retailer. It provides us with an opportunity to Senior Independent Director, will step down to changing shopping needs, ensuring that accelerate our strategy, delivering compelling after ten years as a Non-Executive Director. we exceed customer expectations in a fast- revenue and cost synergies. We will create a I would like to thank John for his very valuable paced, digital world. multi-product, multi-channel proposition contribution to Sainsbury’s, in particular for The UK retail sector is evolving rapidly in line with fast delivery networks which will be very his counsel in his role as Senior Independent with changing consumer behaviour. People attractive to customers. We are pleased that Director. Susan Rice, who has been a valued are shopping more often and are buying the Board of Home Retail Group plc has member of the Board since 2013, will succeed fewer items on a typical trip. Furthermore, recommended our offer to its shareholders, John as Senior Independent Director. customers are seeking greater choice, speed and our focus is now to obtain the necessary Brian Cassin, CEO of global information services and convenience, as well as high levels regulatory clearances and prepare for the company Experian plc, joined the Board as a of service, however they choose to shop. future integration of our two businesses. Non-Executive Director on 1 April 2016 and The grocery market continues to experience Dividend will be a member of the Audit Committee price competition and food price deflation, and the Nomination Committee. Brian brings and the growth of discount retailers and Your Board remains focused on building to us his experience of running a FTSE 40 new online entrants to the market have shareholder value and we are confident that company and of big data and analytics – changed the competitive landscape. by following our strategy, driving efficiencies topics of key importance to Sainsbury’s. In these conditions, it is clear that grocery and managing costs carefully, we will achieve retailers must adapt to stay ahead. this. We are committed to paying an affordable Outlook dividend to our shareholders and have fixed Like-for-like sales have declined this year as The UK grocery market will remain dividend cover at 2.0 times. We are therefore a result of pricing pressures and food price competitive. The growth of the discount recommending a final dividend of 8.1 pence deflation. Underlying profit before tax was retailers, food price deflation, ongoing per share this year, making the proposed down nearly 14 per cent to £587 million, price competition and the continuing full-year dividend 12.1 pence per share. underlying basic earnings per share was pressure on consumer expenditure look down just over eight per cent to 24.2 pence Management and colleagues set to continue throughout 2016. However, and return on capital employed declined 88 we have a business that is well-placed to Mike Coupe leads a highly talented and basis points year-on-year to 8.8 per cent. navigate this tough trading climate and we experienced management team and we have However, the strategy we outlined 18 months have significant opportunities to grow our over 162,000 colleagues. The commitment, ago is working and we are currently the business and accelerate our strategy. skills and customer service standards our best-performing of our main supermarket colleagues deliver make the difference. peers, growing volumes and maintaining market share. In August, we announced a four per cent pay increase for 137,000 colleagues who work in our stores across the country. Our David Tyler new standard hourly rate is well above the Chairman Government’s National Living Wage and will 5 Strategic Report Our values underpin all that we do We have won a significant number of customer service awards this year, testament to the fact that our colleagues really do make a difference MIKE COUPE SAINSBURY’S CEO Our vision To be the most trusted retailer where people love to work and shop £587m Underlying profit before tax Down 13.8% Volume and transaction growth 6 Strategic Report Chief Executive’s Letter We have made good progress this year, demonstrating that the strategy we outlined to you 18 months ago is delivering results. We outperformed our main supermarket peers and maintained our market share in a competitive environment. Our vision is to be the most trusted retailer Strategic progress This year we have simplified many of our where people love to work and shop and it is ranges, to focus on selling the products we Our vision and the five pillars of our our goal to make our customers’ lives easier. know are loved most by customers. We will strategy are designed to address a changing We have made good progress this year, continue to make targeted investment to marketplace and the continuing shifts in the demonstrating that the strategy we outlined remain competitive on price. The quality and way people shop. They are embedded across to you 18 months ago is delivering results. variety of the products we offer is a point the business and delivering tangible results. We outperformed our main supermarket of difference for us and we will continue to peers and maintained our market share in a make sure customers have choice across all We know our customers better competitive environment. price tiers. Our clothing, general merchandise than anyone else and financial services businesses are now Our continued focus on making Sainsbury’s a Customers are at the heart of our business firmly established and performing well, place where customers love to shop is making and our success and future growth is based and have significant opportunities for a difference. Investment in lower regular on being able to anticipate and then deliver further growth. prices and a commitment to delivering great to their needs. Customer insight informs the quality products and services are driving decisions we make; for example, customers There for our customers an increase in customer transactions at told us they wanted pricing to be simpler We are making our customers’ lives easier Sainsbury’s, with people buying more of our and clearer, so we have replaced many of our by offering them choice and convenience. products this year. Our core food offering has promotions, multi-buys and Brand Match Our multi-channel strategy means that performed well and non-food is showing real with lower regular prices on the products customers can shop with us whenever and strength, with clothing, general merchandise that really matter to them. This has been wherever they want. For example, people and financial services delivering significant well received and has helped drive significant often choose to go to our convenience growth over the past 12 months. In addition, increases in the number of transactions stores to top up on a few items and then the investment we have made in our through our tills and the volume of products order their bulk shopping online for later shopping channels means that people have we sell. delivery. Groceries Online continues to be even more choice now about where and a growing channel, with sales this year up when they choose to shop with us. Great products and services at nearly nine per cent and orders up nearly 15 fair prices per cent. Click & Collect is also popular with We have a robust balance sheet and we Our commitment to deliver great quality customers, and we will expand the service continue to manage carefully our costs and products and services at fair prices for to double our 101 current locations next capital expenditure. After making operating our customers across food, non-food and year. Convenience now generates sales of cost savings of £225 million this year, we are financial services is a business priority. We over £2.3 billion. We opened 69 convenience on track to deliver £500 million over three are continuing at pace with our programme stores during the year and delivered over years by the end of 2017/18. Ongoing pricing to improve the quality of 3,000 of our most nine per cent convenience sales growth. pressures and food price deflation continue to popular own-brand food lines and we are impact our sales and our operating margins. a market leader in delivering nutritious, As a result, underlying profit and earnings per healthy food for our customers. share are down this year versus last year. 7 Strategic Report Colleagues making the difference Service & Availability leader We want Sainsbury’s to be a place where Grocer 33 Service & Availability wins colleagues love to work. We have always put Sainsbury’s 19 our colleagues at the centre of our business and we have built a culture of inspiring leadership Morrisons 8 The staff at Sainsbury’s and committed colleagues. I am proud of Waitrose 6 the strong loyalty within our workforce, with are great, our local store Tesco 5 nearly 28,000 colleagues having worked at has brilliant colleagues, Sainsbury’s for 15 years or more. Asda 4 you can always rely on Aldi 1 them for help We have won a significant number of awards this year, including the industry-leading Source: The Grocer 33 Service & SAINSBURY’S CUSTOMER Grocer Gold Customer Service and Availability wins year-to-date 2015/16 EAST MIDLANDS Availability Awards for the third year running. We were named Grocer 33 Store of the Week 19 times in the year, the Our values make us different highest of any grocer. Our values are our guiding principles, from where we source our products and how we In August, we announced a four per cent work in our local communities to reducing pay increase for 137,000 colleagues who our carbon footprint across our estate. This work in our stores across the country. Our year we have evolved our Sustainability new standard hourly rate is well above the Plan to focus on the most material issues. Government’s National Living Wage and For example, waste, and in particular food will also apply to around 40,000 colleagues waste, is one of the most important issues under the age of 25. facing us all today. We are committed to Outlook helping our customers with this issue and to making a radical difference across UK The market is competitive and it will remain households. This year we launched our so for the foreseeable future. We believe ambitious Waste less, Save more initiative, we are following the right strategy and are to invest £10 million over the next five years taking the right decisions to achieve our to help households reduce their food waste. vision to be the most trusted retailer where people love to work and shop. Customers Accelerating our strategy enjoy shopping at Sainsbury’s for our great quality products, service and our fair prices. As shopping patterns continue to change, Our general merchandise and clothing and consumers increasingly expect more businesses offer growth opportunities and from retailers, we are committed to building Sainsbury’s Bank offers innovative, good on our strengths and have an opportunity to value products and services from a brand Groceries accelerate our strategy. they trust. Our proposal to acquire Home Retail Group Online plc, owners of the Argos retail chain, will enable us to accelerate our strategy. The acquisition presents an opportunity is growing and to bring together two of the UK’s leading sales increased retail businesses, with complementary Mike Coupe product offers, focused on delivering quality nearly 9% CEO products and services at fair prices. It also allows us to create a multi-product, multi- channel proposition with fast delivery networks and will additionally deliver compelling revenue and cost synergies. We believe that the combination of Home Retail Group and Sainsbury’s is a powerful one that will create long-term value for the shareholders of both companies. 8 9