TIDMSBRY

RNS Number : 3152E

Sainsbury(J) PLC

05 November 2020

J Sainsbury plc

5 November 2020

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION FOR THE PURPOSES OF ARTICLE 7 OF REGULATION (EU) NO 596/2014 (MAR)

Strategy Update and Interim Results for the 28 weeks ended 19 September 2020

-- Total Retail sales up 7.1 per cent (excluding fuel) with like-for-like sales up 6.9 per cent. Grocery sales up 8.2 per cent and General Merchandise sales up 7.4 per cent

-- Digital sales up 117 per cent to GBP5.8 billion, nearly 40 per cent of total sales. Groceries Online sales up 102 per cent

   --      Statutory Group sales (excluding VAT) down 1.1 per cent, with fuel sales down 44.6 per cent 

-- Loss before tax GBP(137) million, reflecting GBP438 million of one-off costs associated with Argos store closures and other strategic and market changes

   --      Underlying profit before tax GBP301 million 

-- Retail costs of approximately GBP290 million to protect customers and colleagues from COVID-19, partially offset by GBP230 million business rates relief

   --      Free cash flow GBP943 million 
   --      Non-lease net debt down by GBP912 million to GBP267 million 

-- Special dividend of 7.3p to be paid in lieu of final dividend for the 2019/20 financial year, aligned to policy of 1.9x full year dividend cover by underlying earnings

-- Interim dividend of 3.2p, in line with policy of paying 30 per cent of prior full year dividend

-- Full year underlying profit before tax now expected to be at least five per cent higher than last year, reflecting stronger than expected sales, particularly at Argos

Strategy Update: Driven by our passion for food, together we serve and help every customer

We are refocusing on our core food business, putting food back at the heart of Sainsbury's. We will:

   --      Lower food prices, focusing on offering customers consistently good value 
   --      Accelerate food innovation, tripling the number of new products we launch each year 
   --      Profitably grow Groceries Online sales to meet further demand 

-- Increase the rate of new Convenience store and Neighbourhood Hub openings over the next three years

-- Continue to reduce plastic and food waste and inspire customers to eat healthier products, which will be better for the climate and environment, as we work towards becoming Net Zero by 2040

-- Close our meat, fish and deli counters, based on reduced customer demand. This will make stores simpler to run and reduce food waste. We will keep adding more quality and innovation in our aisles

Our other businesses and brands must deliver in their own right and actively support our ambition in food

-- We are building on the success of integrating Argos stores into Sainsbury's and accelerating the final stages:

o By March 2024 we will open up to 150 more Argos stores in Sainsbury's and add 150-200 more Argos collection points in supermarkets and convenience stores, so that every Sainsbury's supermarket will have either an Argos store in store or a collection point

o As we add more Argos stores and collection points in Sainsbury's, we will close around 420 Argos standalone stores, reducing the UK Argos standalone store estate to around 100 by March 2024

-- We are expanding our ambition for Habitat, which will become our main home and furniture brand in Argos and Sainsbury's

-- We are accelerating our plans for Nectar, bringing greater support for food and faster profit growth

-- We expect Financial Services returns and profits to double in five years, despite the challenges of COVID-19

We will accelerate the pace of change across our business, simplifying our operations, delivering structural cost savings to support investment into our core food offer and driving an inflection in profit momentum.

-- We will transform our approach to costs across the business, delivering a reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024

-- This will create at least GBP600 million of annual additional funding by March 2024 to reinvest in the customer offer and deliver improved financial returns. This will be after driving efficiencies to cover inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries

-- We are investing in the integration of our logistics and supply chain network and the accelerated restructuring of the Argos store estate, reducing costs and delivering working capital benefits

-- Reflecting our commitments to focus our resources and move faster, we are open to partnering or outsourcing where this efficiently accelerates our plans to improve our customer offer

We expect this new plan to drive an inflection in underlying profit momentum, with pre-tax profits in the year to March 2022 to exceed those reported in the year to March 2020 (which were not impacted by COVID-19)

-- We will continue our track record of strong cash generation, meeting our target of at least GBP750 million net debt reduction in the three years to March 2022 and generating average retail free cash flow of GBP500 million per year over the following three years to March 2025

-- Capital expenditure will increase to between GBP700 million and GBP750 million per year in the three years to March 2024 to support high returning infrastructure transformation investments before returning to around GBP600 million per year

-- We will incur one off costs from infrastructure, operating model and structure changes of GBP900 million to GBP1 billion in the period to March 2024 (approximately GBP300 million cash). We expect total non-underlying costs of around GBP625 million to be booked in the current financial year (around GBP100 million cash)

Simon Roberts, Chief Executive of J Sainsbury plc said :

"As we go into lockdown in England for the second time this year and restrictions are in place across the UK, we know our customers and colleagues are feeling anxious and we will do all we can to support them. Our colleagues have done an exceptional job going above and beyond for our customers every day which is why we are giving our frontline colleagues a second 10 per cent thank you payment. Above all else today, I want to express my heartfelt thanks to every one of my colleagues in our stores, in our depots, and across our store support centres for all your hard work and for your outstanding team effort. We also want to support our communities and those in need and are creating a GBP5 million community fund for local charities and good causes, in addition to the GBP7 million we donated to Fareshare and Comic Relief earlier this year. We want to do our bit to ensure that no one goes hungry at Christmas and to support those most in need.

"COVID-19 has accelerated a number of shifts in our industry. Investments over recent years in digital and technology have laid the foundations for us to flex and adapt quickly as customers needed to shop differently. Around 19 per cent of our sales were digital this time last year and nearly 40 per cent of our sales are digital today.

"While we are working hard to help feed the nation through the pandemic, we have also spent time thinking about how we deliver for our customers and our shareholders over the longer term.

"We will put food back at the heart of Sainsbury's. We are already working to make this happen - we have lowered prices on over 1,500 every day grocery products over the past few months and we will do more of this, focusing on the staple products that our customers buy every day. We know that customers are feeling the pinch and we want them to feel confident they will get always get great value, quality and service from Sainsbury's. We will focus on accelerating product innovation and will bring new and exclusive products to our customers much more often. To support our ambition in food, we are accelerating our ambition to structurally reduce our cost base right across the business so we can invest faster back into our core food offer.

"Our other brands - Argos, Habitat, Tu, Nectar and Sainsbury's Bank - must deliver for their customers and for our shareholders in their own right. Argos sales have been strong over the past six months and we have gained almost two million new customers as people have re-connected with Argos. Over the next three years we will make Argos a simpler, more efficient and more profitable business while still offering customers great convenience and value and improving availability. We will also make Habitat more widely available in Sainsbury's and Argos, giving customers access to stylish home and furniture products at more affordable prices. We are talking to colleagues today about where the changes we are announcing in Argos standalone stores and food counters impact their roles. We will work really hard to find alternative roles for as many of these colleagues as possible and expect to be able to offer alternative roles for the majority of impacted colleagues.

"Given the unprecedented circumstances of this year and the challenges facing our colleagues, including the changes we are announcing today, I have informed the Board that if a bonus is payable, I will waive any bonus entitlement for this financial year.

"We are raising our ambitions. By delivering improvements in value and quality and simplifying this business, we will do a better job for our customers and deliver an improved financial performance and stronger shareholder returns.

"Right here and now I and all the team are focused on supporting and delivering for our customers in the days and weeks ahead."

Tables

 
 
                                            28 weeks to 19 September   28 weeks to 
                                             2020                       21 September 
                                                                        2019 
 
 Statutory Reporting 
 Group sales (exc. VAT, inc. fuel)          GBP14,934m                 GBP15,097m 
                                           -------------------------  -------------- 
 Items excluded from underlying results     GBP(438)m                  GBP(229)m 
                                           -------------------------  -------------- 
 (Loss)/profit before tax                   GBP(137)m                  GBP9m 
                                           -------------------------  -------------- 
 (Loss) for the financial period            GBP(179)m                  GBP(38)m 
                                           -------------------------  -------------- 
 Basic loss per share                       (8.3)p                     (2.2)p 
                                           -------------------------  -------------- 
 
 
 
 
                                         28 weeks to          28 weeks to 
                                          19 September 2020    21 September 
                                                               2019 
 
 Business Performance 
 Underlying group sales (inc. VAT)       GBP16,557m           GBP16,856m 
                                        -------------------  -------------- 
 Underlying profit before tax            GBP301m              GBP238m 
                                        -------------------  -------------- 
 Underlying basic earnings per share     10.1p                7.9p 
                                        -------------------  -------------- 
 Net debt                                GBP(6,168)m          GBP(6,778)m 
                                        -------------------  -------------- 
 Non-lease net debt                      GBP(267)m            GBP(1,008)m 
                                        -------------------  -------------- 
 Interim dividend                        3.2p                 3.3p 
                                        -------------------  -------------- 
 Special dividend                        7.3p                 - 
                                        -------------------  -------------- 
 
 
 
 Like-for-like sales growth                      2019/20                          2020/21 
---------------------------------  ---------------------------------- 
                                    Q1       Q2       Q3       Q4       Q1        Q2        H1 
                                   -------  -------  -------  -------  --------  --------  -------- 
 Like-for-like sales (exc. fuel)    (1.6)%   (0.2)%   (0.7)%   1.3%     8.2%      5.1%      6.9% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 Like-for-like sales (inc. fuel)    (1.0)%   (0.4)%   (1.1)%   1.3%     (2.3)%    (0.5)%    (1.6)% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 
                                                 2019/20                          2020/21 
 Total sales growth                 Q1       Q2       Q3       Q4       Q1        Q2        H1 
---------------------------------  -------  -------  -------  -------  --------  --------  -------- 
 Grocery                            (0.5)%   0.6%     0.4%     2.0%     10.5%     5.1%      8.2% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 Total General Merchandise          (3.1)%   (2.0)%   (3.9)%   (1.3)%   7.2%      7.6%      7.4% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 GM (Argos)                                                    0.4%     10.7%     10.9%     10.8% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 GM(Sainsbury's Supermarkets)                                  (8.1)%   (9.3)%    (6.9)%    (8.2)% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 Clothing                           (4.5)%   3.3%     4.4%     2.5%     (26.7)%   (7.5)%    (18.3)% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 Total Retail (excl. fuel)          (1.2)%   0.1%     (0.7)%   1.3%     8.5%      5.2%      7.1% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 Fuel                                                          4.9%     (56.1)%   (29.3)%   (44.6)% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 Total Retail (inc. fuel)           (0.6)%   0.1%     (0.9)%   1.9%     (2.1)%    (0.4)%    (1.4)% 
                                   -------  -------  -------  -------  --------  --------  -------- 
 

Outlook

Sales during the first half were stronger than the base case assumptions we outlined in April, particularly at Argos, driving a strong underlying profit increase against a soft comparative base. Retail costs of around GBP290 million associated with protecting customers and colleagues from COVID-19 were partially offset by GBP230 million of business rates relief.

Grocery sales and general merchandise sales have remained strong to date in the second half of the year and we expect Financial Services to return to profit in the second half. Retail profits will, however, also reflect a tougher comparative base, investment in improving value for customers and ongoing costs associated with protecting customers and colleagues from COVID-19. We cannot fully predict the impact of COVID-19 and lockdown restrictions on retail sales and costs for the remainder of the second half of the year but our current assumptions would result in full year Group underlying profit before tax increasing by at least five per cent year on year.

Looking beyond this financial year, we will invest significantly to accelerate innovation, improve the quality of our food, lower our prices and meet the growing demand for online groceries. We will fund these investments through simplifying our business and accelerating our cost savings plans and expect underlying profits in the year to March 2021/22 to be higher than those reported in the year to March 2019/20(1) (which were not impacted by COVID-19).

Capital expenditure will increase over the next three years to fund high-returning logistics and Argos transformation plans. We expect these projects to generate working capital improvements and expect cash generation to remain strong. We will meet our target of reducing net debt by at least GBP750 million in the three years to March 2022 while maintaining our dividend policy. In outer years we expect to continue our track record of strong cash generation, with average retail free cash flow of GBP500 million per annum over the three years to March 2025.

Dividend

In April the Board chose, due to limited visibility at the time on the potential impact of COVID-19 on the business, to defer dividend payment decisions and did not pay a final dividend for the 2019/20 financial year. In the light of improved visibility, strong trading and a strong balance sheet position, the Board has chosen to pay a special dividend in lieu of a final dividend for the 2019/20 financial year. The dividend of 7.3p is aligned to policy of 1.9x full year dividend cover by underlying earnings. This will be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.

The Board has approved an interim dividend of 3.2p, in line with our policy of paying 30 per cent of prior full year dividend. This will also be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.

Notes

Certain statements made in this announcement are forward-looking statements. Such statements are based on current expectations and are subject to a number of risks and uncertainties that could cause actual events or results to differ materially from any expected future events or results referred to in these forward-looking statements. They appear in a number of places throughout this announcement and include statements regarding our intentions, beliefs or current expectations and those of our officers, directors and employees concerning, amongst other things, our results of operations, financial condition, liquidity, prospects, growth, strategies and the business we operate. Unless otherwise required by applicable law, regulation or accounting standard, we do not undertake any obligation to update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

A webcast presentation will be available to view on our website at 7.30am. The webcast can be accessed at the following link: https://webcasts.sainsburys.co.uk/sainsbury157

Following the release of the webcast, a Q&A conference call will be held at 9:30am. This will be available to listen to on our website at the following link: https://webcasts.sainsburys.co.uk/sainsbury158

A recorded copy of the webcast and Q&A call, alongside slides and a transcript of the presentation will be available at www.about.sainsburys.co.uk/investors/results-reports-and-presentations following the event

Sainsbury's will issue its 2020/21 Third Quarter Trading Statement at 07:00 (BST) on 13 January 2021.

S
   1      2019/20 UPBT GBP586 million 

Tim Fallowfield, Company Secretary and Corporate Services Director, was responsible for the disclosure of this announcement for the purposes of MAR.

Enquiries

 
 Investor Relations       Media 
 James Collins            Rebecca Reilly 
  +44 ( 0) 7801 813 074   +44 (0) 20 7695 7295 
 

Strategy Update: Driven by our passion for food, together we serve and help every customer

We will put food back at the heart of our business and will build on the changes we have made as we helped our customers through the COVID-19 pandemic. We are raising our ambitions and will speed up the pace of change across our business, simplifying our operations and accelerating our cost savings programmes so that we can invest more in food quality, choice, innovation and consistently lower prices for our customers. We will reduce complexity, transform our cost base and ensure that our portfolio of brands supports our focus on food, thereby improving financial performance and delivering stronger shareholder returns.

Food First

Our clear priority is to build on our strong brand heritage and reputation for quality, range and innovation and offer more consistent value to customers while making shopping more convenient. This is what we mean by putting food back at the heart of Sainsbury's. We will deliver delicious, great value food wherever and however customers want to shop with us.

-- We have lowered prices on over 1,500 products and will go much further. We will lower prices on thousands of every day food products, focusing on staple products that our customers buy every day

-- We will accelerate food product innovation by recruiting more product developers. Working closely with our suppliers, we will triple the number of new products and increase speed to market by at least 30 per cent. In September we launched 200 new fresh food products as part of the biggest re-vamp of our fresh food aisles in more than a decade

-- We closed our meat, fish and delicatessen counters in March as we focused all our efforts on feeding the nation. Customers have told us they are happy buying these products in the aisle. We have therefore decided to close permanently our meat, fish and delicatessen counters. Our pizza and patisserie counters remain open and we continue to freshly bake bread in 1,348 stores. These changes will help us focus on quality, value and availability, while reducing store complexity and waste

-- We have more than doubled our Groceries Online capacity and volume since March. 17 per cent of our grocery sales are now online compared with seven per cent in March. We are currently fulfilling over 700,000 online customer orders per week across home delivery and click and collect. By the end of this year we expect to be able to fulfil 760,000 orders per week and we will continue to grow capacity in order to meet customer demand going forward. Our groceries online business is profitable due to its scale and in-store pick model and we will focus on driving efficiencies to continually improve profitability. Our Chop Chop one hour food delivery service is now in 15 cities across the UK and our agreements with Uber Eats and Deliveroo will help us to reach even more new customers and serve more shopping missions

-- Our Net Zero sustainability plan is key to putting food at the heart of Sainsbury's. Customers want tasty food, great quality, low prices and they want to ensure that the food they buy is having the lowest impact on the environment, now and in the future. We are committed to helping customers to eat more healthy products, which is good for them and good for the climate and the environment. We will reduce our plastic usage by 50 per cent by 2025 and reduce our food waste

-- We will adapt our supermarkets and convenience stores to reflect changing shopping habits and local demand. We will expand the successful introduction of fresh food prepared on site - such as hot meals, sushi, freshly baked bread and hot coffee - and make more space available for our in-aisle fresh food ranges and food to go. To do this profitably, we will free up space, reduce complexity and cut excess costs in our supermarkets

-- We plan to open around 18 more 'Neighbourhood Hub' convenience stores over the next three years. These stores are larger than a typical convenience store and offer locally-tailored choice across food, beauty, clothing, seasonal and general merchandise. They are conveniently located, easy to shop and have all the benefits of the Argos offer. We expect them to be very popular one-stop shops for their local communities. We will also increase our rate of new convenience store openings to at least 20 per year over the next three years

Brands that Deliver

We will refocus the role of our portfolio brands to ensure that they contribute positively in their own right, actively support our ambition in food and do not dilute returns or divert focus and resources from the core.

Argos, Habitat, Tu, Nectar and Sainsbury's Bank will deliver for their customers and drive strong, sustainable, profitable growth to support our core food business.

-- Argos sales grew by nearly 11 per cent in the first half, with 90 per cent of sales originating online and almost two million customers re-discovering Argos despite standalone Argos stores being closed for 12 weeks. Building on this success we will accelerate the structural integration of Sainsbury's and Argos and further simplify the Argos business model, making it more efficient and profitable and improving our customer offer at the same time

-- 120 of our standalone Argos stores have not reopened since we closed them back in March. These stores will now close permanently. We currently have 315 Argos stores in our supermarkets and 296 collection points across supermarkets and convenience stores. Over the next three years we will open up to another 150 Argos Stores in supermarkets and a further 150-200 collection points. In total, we will close around 420 Argos stores by March 2024, reducing the total number of standalone stores to around 100

-- To support this streamlined infrastructure we will build a total of 32 Local Fulfilment Centres across the UK that will operate our fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country within hours. Through this transformation, we will significantly reduce our cost base and stock holding while improving speed, convenience and availability for customers

-- We stopped printing the Argos catalogue as customers are increasingly shopping online. By focusing our resources on our website we are able to deliver a more modern, dynamic and flexible approach to both pricing and new products. We will continue to print the iconic Christmas Gift Guide, which is bigger and better than ever this year

-- We are investing in Habitat, which will become our main home and furniture brand across Sainsbury's and Argos. Habitat is a strong brand and, by increasing its visibility in Sainsbury's and Argos stores and online, expanding the product range and making prices more affordable, we have a significant opportunity to grow market share

-- Tu Clothing has delivered very strong online sales growth and the range is growing both value and volume market share(1)

-- Nectar gives us a strong competitive advantage, supports our food business and is valued by our customers. It is also central to how we understand our customers because it identifies, in real time, how they shop with us and what they want. We will continue to grow our portfolio of coalition partners and build our Nectar360 digital media business

-- We have made good progress with our Financial Services transformation plan and streamlined our product offer . We still expect to double profit and returns in our Financial Services business within five years, despite the challenges of COVID-19. This reflects a strong balance sheet and effective cost management and we remain confident that no capital injections will be required from the Group

   1      Kantar Total Clothing, Footwear and Acc for 24 weeks to 20 September 2020 

Colleague impact

We are talking to colleagues today where the changes we are announcing impact their roles. We recruit 55,000 Retail colleagues every year and have already hired 52,000 people since March, including 29,000 additional colleagues to support our efforts to feed the nation. We have many job opportunities for colleagues who work on our food counters or in our Argos standalone stores that are closing, but vacancies might not always be in the right location or at suitable hours for all colleagues. Whilst we will aim to find alternative roles for as many colleagues as possible, around 3,500 of our colleagues could lose their roles as a result of our proposals. Including these proposals, we expect to increase our colleague population by 6,000 roles by the end of the financial year. We have an excellent track record of finding alternative roles for colleagues - for example, where we have moved colleagues from Argos standalone stores to stores in Sainsbury's supermarkets, we have retained 90 per cent of colleagues. We will do everything possible to find alternative roles for our colleagues.

Save to Invest

We will deliver a step change in efficiency by transforming our approach to costs, simplifying our organisation and delivering a structural reduction in our operating cost base. We are accelerating our cost saving plans to unlock new opportunities in order to fund the improvement of our food offer and to ensure we can meet the growth in customers shopping across a broad range of channels.

-- We will simplify our business and lower the overall cost base in our operations. We will deliver a step change reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024, creating around GBP600 million of annualised additional capacity to invest in the customer offer and deliver improved financial returns. The money we save will enable us to reinvest in our food business to give our customers better products, improved service and lower prices

-- This will require total cost savings significantly higher than GBP600 million given the need to additionally address inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries. We have extensive plans in place to deliver these cost savings across the business. Some key examples are:

o Creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury's and Argos. This will structurally reduce our costs by GBP150 million by March 2024

o Moving 150 Argos standalone stores into Sainsbury's and reducing the number of Argos standalone stores to 100 over the next three years will reduce our operating costs by GBP105 million by March 2024

o Reducing significantly our costs by further adapting our store operating model to better reflect customer demand and the way customers shop in our stores now and in the future. The closure of our meat, fish and delicatessen counters will save at least GBP60 million in operating costs and will reduce food waste and energy consumption in our stores

o Building on last year's property strategy programme, where we said 10 to 15 supermarkets and 30 to 40 convenience stores would close over two years, we now expect that 15 to 20 supermarkets and 50 to 60 convenience stores will close over the next three years. We expect to open 100 convenience stores over the next three years

Strategy Update - Key Financials

-- We expect an inflection in underlying profit momentum, driven by an improved food performance, improved financial services and general merchandise profits, lower interest costs and funding from the accelerated cost savings programmes outlined above

-- Based on an expectation that the impact of COVID-19 on profits will be limited to the financial year to March 2021, we expect underlying pre-tax profits in the financial year to March 2022 to exceed those reported in the financial year to March 2020

-- We expect to meet our target of reducing net debt by at least GBP750 million in the three years to March 2022 while maintaining a policy of paying a dividend covered 1.9x by underlying earnings and to generate average retail free cash flow of GBP500 million per year over the following three years

-- Capital expenditure will increase to around GBP700-750 million per year in the three years to March 2024 to support high returning investments in the transformation of our logistics platform and accelerated restructuring of the Argos store estate, before returning to around GBP600 million per year

-- The changes required to our physical infrastructure, store operating models and central structures will incur one-off costs of GBP900 million to GBP1 billion in the period to March 2024, of which around GBP300 million will be cash costs. We expect total non-underlying costs of around GBP625 million to be booked in the current financial year, of which around GBP100 million will be cash costs

Targets and metrics

We will better align internal and external metrics and targets and will report against these consistently. Key metrics will be:

   --    Customer Satisfaction 
   --    Grocery market share 
   --    Colleague engagement 
   --    Movement in operating costs as a percentage of sales 
   --    Underlying Profit Before Tax 
   --    Retail Free Cash Flow 
   --    Net Zero by 2040 in our own operations 

Financial Review for the 28 weeks to 19 September 2020

A number of Alternative Performance Measures ('APMs') have been adopted by the Directors to provide additional information on the underlying performance of the Group. These measures are intended to supplement, rather than replace the measures provided under IFRS. Please see Note 2.5 on page 30 for further information.

In the 28 weeks to 19 September 2020, the Group generated a loss before tax of GBP137 million (HY 2019/20: profit before tax of GBP9 million) and an underlying profit before tax of GBP301 million (HY 2019/20: GBP238 million).

 
 Summary income statement 
                                            28 weeks        28 weeks   Change      52 weeks 
                                                  to              to             to 7 March 
                                        19 September    21 September 
                                                2020            2019                   2020 
                                                GBPm            GBPm        %          GBPm 
 
 Underlying Group sales (including 
  VAT)                                        16,557          16,856    (1.8)        32,394 
 Underlying Retail sales (including 
  VAT)                                        16,338          16,567    (1.4)        31,825 
 
 Underlying Group sales (excluding 
  VAT)                                        14,934          15,097    (1.1)        28,993 
 Underlying Retail sales (excluding 
  VAT)                                        14,715          14,808    (0.6)        28,424 
 
 
 Underlying operating profit/(loss) 
 Retail                                          555             437       27           938 
 Financial services                             (55)              20      N/A            48 
------------------------------------  --------------  --------------  -------  ------------ 
 Total underlying operating profit               500             457        9           986 
 
 Underlying net finance costs(1)               (199)           (219)        9         (400) 
 Underlying profit before tax                    301             238       26           586 
 Items excluded from underlying 
  results                                      (438)           (229)     (91)         (331) 
------------------------------------  --------------  --------------  -------  ------------ 
 (Loss)/profit before tax                      (137)               9      N/A           255 
 Income tax expense                             (42)            (47)       11         (103) 
------------------------------------  --------------  --------------  -------  ------------ 
 (Loss)/profit for the financial 
  period                                       (179)            (38)    (372)           152 
------------------------------------  --------------  --------------  -------  ------------ 
 
 Underlying basic earnings per 
  share                                        10.1p            7.9p       28         19.8p 
 Basic (loss)/earnings per share              (8.3)p          (2.2)p    (277)          5.8p 
 Interim dividend per share                     3.2p            3.3p      (3)          3.3p 
 Special dividend per share                     7.3p             N/A      N/A           N/A 
------------------------------------  --------------  --------------  -------  ------------ 
 

1 Net finance costs including perpetual securities coupons before non-underlying finance movements.

Group sales

Group sales including VAT decreased by 1.8 per cent year-on-year whilst Retail sales (including VAT, including fuel) decreased by 1.4 per cent year-on-year. Retail sales (including VAT, excluding fuel) increased by 7.1 per cent driven by Grocery and General Merchandise sales.

 
 Total sales performance by category          28 weeks to         28 weeks to 
                                        19 September 2020   21 September 2019    Change 
                                                    GBPbn               GBPbn         % 
-------------------------------------  ------------------  ------------------  -------- 
 Grocery                                             11.2                10.3      8.2% 
 General Merchandise                                  3.2                 3.0      7.4% 
 Clothing                                             0.4                 0.5   (18.3)% 
-------------------------------------  ------------------  ------------------  -------- 
 Retail (exc. fuel)                                  14.8                13.9      7.1% 
-------------------------------------  ------------------  ------------------  -------- 
 Fuel sales                                           1.5                 2.7   (44.6)% 
 Retail (inc. fuel)                                  16.3                16.6    (1.4)% 
-------------------------------------  ------------------  ------------------  -------- 
 

A number of factors contributed to an 8.2 per cent growth in Grocery sales, with the primary driver being customers consuming more meals at home instead of at out of home locations such as pubs, restaurants and work places in response to the COVID-19 pandemic.

COVID-19 provided and continues to provide a challenging backdrop for customers and colleagues, but we have a clear mission as we focus on helping feed the nation. We have sought to make the customer journey convenient, whether in store or online, supported by great service from our colleagues across the business. We have invested in our estate to ensure customers and colleagues are able to shop and work safely, through protective measures such as checkout screens, personal protective equipment and increased cleaning. We continue to innovate and invest in customer experience through key initiatives such as SmartShop providing customers with scan as you go technology, which is increasingly popular.

We responded at great pace to the increase in demand for Groceries Online by more than doubling our online delivery and click and collect capacity. This was achieved at very little capital expense, as the capacity increase was driven predominantly through stores that already fulfilled online orders, with an increase of only 15 stores versus H1 last year (259 versus 244). We helped to protect and serve the most vulnerable in society through offering priority slots. In stores, customers are choosing to shop less frequently and buying more during each visit.

General Merchandise sales grew 7.4 per cent, with Argos sales up nearly 11 per cent despite all Argos standalone stores being closed for a number of weeks. Our strong execution combined with the strength and flexibility of the Argos supply chain and digital platform meant we were able to fulfil a 78 per cent increase in sales ordered online and delivered to home or collected in a Sainsbury's store. Customer shopping patterns were influenced by the pandemic with a notable increase in demand for Office equipment as customers transitioned towards working from home. Gaming also saw a year on year uplift driven by customer purchases of Hardware and Software whilst Seasonal sales benefitted from longer periods of warm weather in comparison to last year.

Clothing sales declined by 18.3 per cent as customers deprioritised non-essential spend during the pandemic. Nevertheless, Online Clothing sales grew by 75 per cent as customers switched to shopping digitally. Clothing was the hardest hit in the first few months of the pandemic, with sales steadily improving over the summer months.

Fuel sales declined by 44.6 per cent, due to both retail price deflation and lower volumes as a result of reduced travel during the pandemic.

 
 Total sales performance by channel      28 weeks to    28 weeks to 
                                        19 September   21 September 
                                                2020           2019 
------------------------------------   -------------  ------------- 
 Supermarkets (inc Argos stores 
  in Sainsbury's)                               3.2%         (0.7)% 
 Convenience                                  (8.0)%           2.0% 
 Groceries Online                             102.2%           7.0% 
-------------------------------------  -------------  ------------- 
 

Supermarket sales increased by 3.2 per cent. Our investment into adapting our supermarket space to serve a wide variety of shopping missions has enabled us to serve customers as they consume more meals at home and move towards 'less frequent but larger' shops. We have been able to offer customers a broad range of products and services under one roof, through Argos stores in Sainsbury's and initiatives such as our Beauty Halls and Wellness aisles.

Convenience sales declined by 8.0 per cent partly due to COVID-19 resulting in the temporary closure of 26 stores, of which 15 have since reopened. Sales have grown strongly in neighbourhood locations, with customers spending more time at home and preferring to shop locally, but this was more than offset by reduced footfall in urban locations and reduced demand for Food on the Move.

Groceries Online sales increased by 102.2 per cent, predominantly driven by an increase in the number of orders. This increase in capacity has enabled us to serve and protect the most vulnerable in society and provide our customers with a more convenient shopping experience.

 
 Retail like-for-like sales performance      28 weeks to    28 weeks to 
                                            19 September   21 September 
                                                    2020           2019 
 Like-for-like sales (exc. fuel)                    6.9%         (1.0)% 
 Like-for-like sales (inc. fuel)                  (1.6)%         (0.7)% 
-----------------------------------------  -------------  ------------- 
 

Retail like-for-like ('LFL') sales, excluding fuel, increased by 6.9 per cent (HY 2019/20: 1.0 per cent decrease).

583 Argos stores were closed on Tuesday 24(th) March 2020 as a result of COVID-19 lockdown restrictions prohibiting the opening of non-essential retail stores. This included 570 standalone stores within the UK and Republic of Ireland ('ROI'); seven Argos in Sainsbury's stores and six Argos in Homebase stores. 38 ROI stores were reopened in May whilst the other stores were opened in phases between June and September. 137 reopened as part of phase one in June and July; 115 reopened as part of phase two in late July and 131 opened as part of phase three in September. As at 19 September 2020, 14 stores have been permanently closed and 148 stores, including 142 standalone stores and 6 Argos in Homebase stores, remain closed. A decision was made at the end of the half as announced as part of the Restructuring Programme (refer to Strategy Update on page 1), to permanently close these 148 stores. Of these 148 stores, 28 stores had previously been identified for closure in future periods as part of the programme announce at the Capital Markets Day on 25th September 2019. These closures have now been accelerated. The closure of the 120 additional stores has been announced today.

The impact on sales of stores which were temporarily closed due to COVID-19 have been included within LFL sales. Only permanently closed sites and those temporarily closed for non COVID-19 related reasons are treated as non LFL. The 148 stores which remained closed as of 19 September 2020, and which will now not reopen, will be treated as permanently closed from H2 for the purpose of like-for-like calculations.

Space

In the first half of 2020/21, Sainsbury's opened five new Convenience stores and closed two. During the period Argos opened four new stores in Sainsbury's and closed 14 standalone Argos stores. The number of Argos collection points in Sainsbury's stores increased from 281 to 308. In total Argos had 872 stores and 308 collection points at the end of the period. Habitat had 16 stores, of which 11 are in Sainsbury's.

As at 19 September 2020, closed stores due to COVID-19 include 11 Sainsbury's Convenience stores; 142 standalone Argos stores and six Argos in Homebase stores. A decision was made at the end of the half, as announced as part of the Restructuring Programme, to not reopen the 142 standalone Argos stores and six Argos in Homebase stores.

 
 Store numbers and 
 retailing space 
                               As at   New stores                Disposals /               Extensions /          As at 
                                                               closures(1,2)           refurbishments / 
                                                                                              downsizes 
                             7 March                                                                      19 September 
                                2020                                                                              2020 
--------------------------  --------  -----------  -------------------------  -------------------------  ------------- 
 
 Supermarkets                    608            -                          -                          -            608 
 Supermarkets area '000 
  sq. ft.                     21,167            -                          -                        (1)         21,166 
 
 Convenience                     807            5                        (2)                          -            810 
 Convenience area '000 sq. 
  ft.                          1,898           14                        (5)                          6          1,913 
 Sainsbury's total store 
  numbers                      1,415            5                        (2)                          -          1,418 
--------------------------  --------  -----------  -------------------------  -------------------------  ------------- 
 
 Argos stores                    570            -                       (14)                          -            556 
 Argos stores in 
  Sainsbury's                    306            4                          -                          -            310 
 Argos in Homebase                 6            -                          -                          -              6 
 Argos total store numbers       882            4                       (14)                          -            872 
 Argos collection points         281           31                        (4)                          -            308 
 Habitat                          16            -                          -                          -             16 
--------------------------  --------  -----------  -------------------------  -------------------------  ------------- 
 
   1     Disposals/closures exclude those stores temporarily closed during the half. 

2 Disposals/closures exclude the 148 Argos stores, to be closed permanently, following the decision made at the end of the half as part of the Restructuring Programme.

Subject to further disruption from COVID-19, in this financial year, Sainsbury's expects to open two supermarkets and 15-20 new convenience stores and to close around 11 supermarkets and around 16 convenience stores.

In FY 2020/21, Argos expects to open 30-35 stores in Sainsbury's, and close around 170 Argos standalone stores, of which 142 were already closed as at 19 September 2020.

The standalone Argos store estate will reduce to around 100 stores by March 2024, while we expect to open up to 150 new Argos stores in Sainsbury's supermarkets and 150-200 collection points.

Retail underlying operating profit

Retail underlying operating profit increased by 27 per cent to GBP555 million (HY 2019/20: GBP437 million). Retail underlying operating margin increased by 82 basis points year-on-year to 3.77 per cent (HY 2019/20: 2.95 per cent).

We invested heavily in our estate to ensure our customers and colleagues were able to operate safely under the challenging circumstances presented by the pandemic. We implemented protective measures in store such as checkout screens, personal protective equipment and increased cleaning. We supported our colleagues through absence caused by COVID-19 and saw an overall increase in labour hours as a result of social distancing, marshalling and the increase in online demand. We also incurred additional costs due to the pandemic within our Groceries Online channel from lower picking speeds as a result of social distancing measures and the reintroduction of bags as a COVID-19 precaution. We made a Thank You payment to our store colleagues in recognition of their efforts helping feed the nation, despite the challenging backdrop of the pandemic. We benefited from Rates Relief during the period, partially offsetting COVID-19 related costs.

We experienced higher operating cost inflation during the half but were able to more than offset this through savings. This was partly driven by improvements to our central operating model, which delivered efficiencies within a number of areas, including Logistics and Distribution. Changes to our store estate continue to bring our businesses together, lowering costs and providing a better integrated customer offer. We also achieved in Store efficiencies through initiatives such as Smart Shop and the Stock Replenishment App for colleagues. These investments in technology provide a more convenient shopping experience for our customers whilst simultaneously lowering our cost to serve. Fuel operating profit declined year-on-year, driven by lower volumes following reduced travel as a result of COVID-19 measures.

 
 Retail underlying operating profit 
                                                  28 weeks to    28 weeks to                Change at 
                                                 19 September   21 September            constant fuel 
                                                         2020           2019   Change          prices 
 Retail underlying operating profit (GBPm)(1)             555            437    27.0% 
 Retail underlying operating margin (%)(2)               3.77           2.95    82bps           78bps 
 
 Retail underlying EBITDAR (GBPm)(3)                    1,194          1,067    11.9% 
 Retail underlying EBITDAR margin (%)(4)                 8.11           7.20    91bps           82bps 
----------------------------------------------  -------------  -------------  -------  -------------- 
 

1 Retail underlying earnings before interest, tax and Sainsbury's underlying share of post-tax profit from joint ventures.

   2      Retail underlying operating profit divided by underlying retail sales excluding VAT. 

3 Retail underlying operating profit before net rental expense of GBP4 million and underlying depreciation and amortisation of GBP635 million.

   4      Retail underlying EBITDAR divided by underlying retail sales excluding VAT. 

In 2020/21, Sainsbury's expects a depreciation and amortisation charge of around GBP1.2 billion, including around GBP500 million right of use asset depreciation.

Financial Services

 
 Financial Services results 
 6 months to 31 Aug 2020 
                                                2020    2019    Change 
-------------------------------------------- 
 
 Underlying revenue (GBPm)                       219     289     (24)% 
 Interest and fees payable (GBPm)               (54)    (62)     (13)% 
 Total income (GBPm)                             165     227     (27)% 
 Underlying operating (loss)/profit (GBPm)      (55)      20       N/A 
--------------------------------------------  ------  ------  -------- 
 
 Cost:income ratio (%)                            77      70    700bps 
 Active customers (m) - Bank                     2.0     2.1      (5)% 
 Active customers (m) - AFS                      2.3     2.2        5% 
 Net interest margin (%)(1)                      3.1     3.5   (40)bps 
 Bad debt as a percentage of lending (%)(2)      2.7     1.3    140bps 
 Tier 1 capital ratio (%)(3)                    14.9    13.7    120bps 
 Total capital ratio (%)(4)                     17.8    16.7    110bps 
 Customer lending (GBPbn)(5)                     6.2     7.4     (16)% 
 Customer deposits (GBPbn)(5)                  (5.4)   (6.3)     (14)% 
--------------------------------------------  ------  ------  -------- 
 
   1      Net interest receivable divided by average interest-bearing assets. 
   2      Bad debt expense divided by average net lending. 
   3      Common equity Tier 1 capital divided by risk-weighted assets. 
   4      Total capital divided by risk-weighted assets. 

5 Amounts due from customers at the Balance Sheet date in respect of loans, mortgages, credit cards and store cards net of provisions. The prior year comparative is as at the Year End balance sheet date.

Financial Services underlying operating loss of GBP55 million reflects the changed economic environment driven by COVID-19. We have seen significantly reduced demand across consumer credit, and less activity in our fee based products, particularly Travel Money and ATMs. We have also made a significant provision in anticipation of future credit losses, largely reflective of predictions for unemployment, partially offset by management actions on funding and costs.

Financial Services total income of GBP165 million has declined year-on-year (HY 2019/20: GBP227 million). The fall in interest income reflects a significant contraction in balances due to lower consumer demand and a tightening of credit appetite. Fee income has dropped markedly due to the closure of Travel Money Bureaux, and a decline in ATM income due to lower cash usage, particularly during lockdown.

The Financial Services cost:income ratio increased 700 basis points to 77 per cent (HY 2019/20: 70 per cent) and is reflective of the material drop in income in the half. However, we have also materially reduced costs, with cost savings being delivered through management actions including reducing FTE; digitising and improving customer journeys; transitioning credit card customers to paperless; efficiencies reducing resource required in call centres and reduced fraud costs due to enhanced fraud detection controls.

Net interest margin decreased by 40 basis points year-on-year to 3.1 per cent (HY 2019/20: 3.5 per cent) driven by a combination of some changes in customer behaviour, particularly in terms of spend and retention, and the reduction in base rate (with the associated impact on our interest rate swap portfolio). We have significantly reduced our savings rates which should recover some of the fall in the second half.

Bad debt expense as a percentage of lending increased by 1.4 per cent to 2.7 per cent (HY 2019/20: 1.3 per cent), mainly to account for the expected unemployment increases of COVID-19.

The number of Bank active customers reduced by five per cent year-on-year to 2.0 million driven by lower acquisition of new business in the half, particularly on Cards and Loans, whilst Argos Financial Services customers are up five per cent to 2.3 million driven by more customers taking out an AFS store card following improvements made to the customer online journey.

The Bank offered payment holidays across all of its lending products to support customers who were impacted by COVID-19. 61,000 payment holidays were granted, 84 per cent of which have matured and have returned to normal payment schedules following the initial 3 months. A small element requested a further 3 month extension.

The capital position is strong with the CET 1 capital ratio increasing by 120 basis points since August 2019 to 14.9 per cent (HY 2019/20: 13.7 per cent) with the capital released as a result of the contraction in balances more than offsetting the loss. Customer lending decreased by 16 per cent to GBP6.2 billion, driven by management actions to tighten credit and a decline in demand for loans, credit cards and store cards. Customer deposits decreased by 14 per cent to GBP5.4 billion, reflecting the reduced funding required due to the decline in lending.

We have made good progress with our Financial Services transformation plan and streamlined our product offering. We still expect to double profit and returns in our Financial Services business within 5 years, despite the challenges of the current environment. The Group's exposure to Financial Services has reduced in the half driven by lower demand and customers deleveraging. The level of credit provisions held against lending balances increased by 1.2% to 5.0%. This largely reflects an additional overlay of GBP43 million we booked in relation to COVID-19, reflecting our best estimate of future losses. We expect Financial Services will return to profit in the second half. Given our very strong capital and liquidity positions, together with effective cost management we remain confident that Financial Services will not require capital injections from the Group.

Underlying net finance costs

Underlying net finance costs reduced by nine per cent to GBP199 million (HY 2019/20: GBP219 million). These costs include GBP37 million of net non-lease interest (HY 2019/20: GBP45 million). The reduction of net non-lease interest is driven by the repayment of the GBP450 million Convertible Bond in November 2019 and redemption of the GBP250 million Hybrid Bond at the first call date in July 2020. Net Interest costs on lease liabilities have reduced to GBP162 million (HY 2019/20: GBP174 million), mainly due to lower interest rates on new leases.

Sainsbury's expects underlying net finance costs in 2020/21 of around GBP360 million, including around GBP300 million lease interest in 2020/21.

Items excluded from underlying results

In order to provide shareholders with insight into the underlying performance of the business, items recognised in reported profit or loss before tax which, by virtue of their size and or nature, do not reflect the Group's underlying performance are excluded from the Group's underlying results and shown in the table below.

 
  Items excluded from underlying results           28 weeks to    28 weeks to 
                                                  19 September   21 September 
                                                          2020           2019 
                                                          GBPm           GBPm 
-----------------------------------------------  -------------  ------------- 
 Restructuring programmes                                (259)          (131) 
 Impairment charges                                      (214)           (97) 
 Financial Services transition                             (7)           (15) 
 Restructuring, impairment and integration               (480)          (243) 
 
 ATM business rates reimbursement                           42              - 
 IAS 19 pension interest and expenses                        8             11 
 Property, finance and acquisition adjustments             (8)              3 
 Items excluded from underlying results                  (438)          (229) 
-----------------------------------------------  -------------  ------------- 
 

Restructuring programmes:

- During the financial period, it has been agreed to accelerate the structural integration of Sainsbury's and Argos and further simplify the Argos business model. As a result, around 420 Argos stores will be closed by March 2024, leaving the total number of UK standalone stores at around 100. To support this, a total of 32 Local Fulfilment Centres will be built across the UK that will operate the Group's fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country.

- In addition, the Group is creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury's and Argos. As a result of this, a number of existing depots are closing.

- Further opportunities to rationalise the Group's supermarkets and convenience estate have been identified, building on last year's property strategy programme that was announced at the Capital Markets Day in September 2019. At that time it was communicated that 10 to 15 supermarkets and 30 to 40 convenience stores would close. It is now expected that 15 to 20 supermarkets and 50 to 60 convenience stores will close or be sold.

- Costs totalling GBP259 million have been recognised in the period in relation to the above and comprise impairment charges, property closure costs and redundancy costs.

Impairment charges:

- The Group has concluded that the combination of COVID-19 and the accelerated integration programme is an impairment indicator during the period.

- Additional impairment charges of GBP214 million have therefore been recognised over and above those recognised as part of the strategy review.

- Of this, GBP105 million has been recognised in relation to assets within the Financial Services Business, and GBP109 million in relation to Retail assets.

We estimate that we will incur one off costs from infrastructure, operating model and structure changes of GBP900 million to GBP1 billion in the period to March 2024 (approximately GBP300 million cash). We expect total non-underlying costs of around GBP625 million to be booked in the current financial year (around GBP100 million cash).

Other non-underlying items:

- Financial Services transition costs of GBP7 million (HY 2019/20: GBP15 million) were predominantly the previously announced costs incurred in transitioning to a new banking platform and write-downs of ATMs.

- ATM income of GBP42 million (HY 2019/20: GBPnil) arises following the Supreme Court's ruling that ATMs outside stores should not be assessed for additional business rates on top of normal store rates.

- IAS 19 Pension income of GBP8 million (HY 2019/20: GBP11 million) comprises pension finance income of GBP11 million and scheme expenses of GBP3 million.

- Property, Finance and Acquisition adjustments result in a cost of GBP8 million (HY 2019/20: GBP3 million income)

Taxation

The tax charge for the interim period was GBP42 million (2019/20 Interim tax charge: GBP47 million).

Despite the interim loss before tax, a tax charge rather than a tax credit was recognised in the first half of the year. This was mainly due to the derecognition of capital losses for deferred tax purposes reflecting a legislative change in the half resulting in GBP178 million gross costs, non-deductible one-off gross costs of GBP54 million and prior year adjustments with a tax effect of GBP12 million.

The resulting effective tax rate (ETR) in the 2020/21 interim accounts of negative 30.7 per cent (2019/20 interim: 522.2 per cent) differs significantly to the full year forecast ETR (297.9 per cent) because of the movement in profit (from a loss at interim) as well as the fact that the capital loss derecognition and most of the non-deductible one-off costs are recognised in full in first half of the year and thus reflected in the interim ETR.

The underlying tax rate (UTR) for the interim period was 27.6 per cent (2019/20 interim: 26.5 per cent). Sainsbury's expects an underlying tax rate for FY 2020/21 of around 26 per cent. As in prior years the most significant factor in the UTR being higher than the statutory rate (19.0 per cent) relates to adjustments in respect of non-qualifying property (4.9 per cent).

(Loss)/Earnings per share

Underlying basic earnings per share increased to 10.1 pence (HY 2019/20: 7.9 pence) driven by an increase in underlying earnings. Basic earnings per share decreased to negative 8.3 pence (HY 2019/20: negative 2.2 pence).

Dividends

In April the Board chose, due to limited visibility at the time on the potential impact of COVID-19 on the business, to defer dividend payment decisions and did not pay a final dividend for the 2019/20 financial year. In the light of improved visibility, strong trading and a strong balance sheet position, the Board has chosen to pay a special dividend in lieu of a final dividend for the 2019/20 financial year. The dividend of 7.3p is aligned to policy of 1.9x full year dividend cover by underlying earnings. This will be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.

The Board has approved an interim dividend of 3.2 pence per share (21 September 2019: 3.3 pence per share), in line with our policy of paying 30 per cent of prior full year dividend. This will be paid on 18 December 2020 to shareholders on the Register of Members at the close of business on 13 November 2020.

Net debt and retail cash flows

As at 19 September 2020, net debt was GBP6,168 million (21 September 2019: GBP6,778 million), a decrease of GBP610 million (2019/20: GBP367 million reduction). Excluding the impact of lease liabilities on net debt, Sainsbury's reduced non lease net debt by GBP912 million in the half (21 September 2019: GBP514 million in the half). We remains on track to meet our target of at least GBP750 million net debt reduction in the three years to March 2022 and generate average retail free cash flow of GBP500 million per year over the following three years.

Group net debt includes the impact of capital injections into Sainsbury's Bank, but excludes Financial Services' own net debt balances. Financial Services balances are excluded because they are part of the daily operating cycle of the Bank rather than for financing purposes. Net debt includes lease liabilities under IFRS 16 of GBP5,901 million (HY 2019/20: GBP5,770 million) and the perpetual securities of GBP248 million (HY 2019/20: GBP496 million). Lease liabilities are analysed in more detail in note 11. Although the perpetual securities are accounted for as equity in the financial statements, they have similarities to debt instruments due to the coupons, and are therefore included by management when assessing Group borrowings.

The presentation of the summary cash flow statement has been updated to provide useful additional information of the build from Retail Underlying Operating Profit to the movement in net debt. Working capital movements also now exclude any movements due to non-underlying items. Additional reconciliations are included on pages 65 to 69 to bridge to statutory measures, with prior year comparatives adjusted accordingly.

 
 Summary cash flow statement (1)                                                   Retail         Retail        Retail 
                                                                              28 weeks to    28 weeks to   52 weeks to 
                                                                             19 September   21 September       7 March 
                                                                                     2020           2019          2020 
                                                                                     GBPm           GBPm          GBPm 
 Retail underlying operating profit                                                   555            437           938 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 
 Adjustments for: 
 Retail underlying depreciation and amortisation                                      635            636         1,197 
 Share based payments and other                                                        15             17            34 
 Retail exceptional operating cash flows (excluding pensions)                           3           (18)          (49) 
 Adjusted retail operating cash flow before changes in working 
  capital(2,3)                                                                      1,208          1,072         2,120 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 Decrease/(increase) in working capital(3)                                            571            251          (97) 
 Net interest paid(3)                                                               (213)          (226)         (405) 
 Pension cash contributions                                                          (60)           (48)          (52) 
 Corporation tax paid                                                                (88)            (8)         (113) 
                                                                            -------------  -------------  ------------ 
 Net cash generated from operating activities                                       1,418          1,041         1,453 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 Cash capital expenditure before strategic capital                                  (290)          (248)         (599) 
 Repayments of obligations under leases                                             (223)          (230)         (419) 
 Initial direct costs on right-of-use assets                                          (3)            (2)          (13) 
 Proceeds from disposal of property, plant and equipment                               19             54            81 
 Bank capital injections                                                                -           (35)          (35) 
 Dividends and distributions received(3)                                               22            118           143 
 Retail free cash flow                                                                943            698           611 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 Dividends paid on ordinary shares                                                      -          (174)         (247) 
 Repayment of borrowings(3)                                                         (519)          (160)         (379) 
 Other(3)                                                                            (26)              1           (3) 
 Net increase/(decrease) in cash and cash equivalents                                 398            365          (18) 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 Decrease in Debt                                                                     742            390           798 
 Other non-cash and net interest movements(4)                                       (361)          (187)         (381) 
 Movement in net debt                                                                 779            568           399 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 
 Opening net debt                                                                 (6,947)        (7,346)       (7,346) 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 Closing net debt                                                                 (6,168)        (6,778)       (6,947) 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
       of which 
                     Lease Liabilities                                            (5,901)        (5,770)       (5,768) 
                     Net Debt Excluding Lease Liabilities                           (267)        (1,008)       (1,179) 
--------------------------------------------------------------------------  -------------  -------------  ------------ 
 
   1              See note 4b for a reconciliation between Retail and Group cash flow. 
   2              Excludes working capital and pension contributions. 
   3              Refer to the Alternative Performance Measures on pages 67 to 68 for reconciliation. 

4 Other non-cash includes new leases and lease modifications and fair value movements on derivatives used for hedging long term borrowings.

Adjusted retail operating cash flow before changes in working capital was GBP1,208 million (HY 2019/20: GBP1,072 million) and working capital decreased by GBP571 million since the year end. Working capital typically decreases between year end and half year, driven by seasonality and the phasing of payables. This impact is more pronounced this year as a result of the strong trading performance driving lower inventories and increased payables balances. In addition, challenges sourcing stock on certain product ranges have further reduced inventory, notably in our non-food business. This is partially offset by the impact of lower fuel sales. We expect most of the working capital benefit to reverse once trading and supply stabilises following the pandemic.

Cash capital expenditure was GBP290 million (HY 2019/20: GBP248 million). There were no capital injections into the Bank (HY 2019/20: GBP35 million). Dividends and distributions received declined to GBP22 million (HY 2019/20: GBP118 million), reflecting the sale of 12 British Land joint venture properties in the prior year.

Corporation tax of GBP88 million was paid (HY 2019/20: GBP8 million). This has increased with the change to the quarterly payment regime, whereby in this half year Sainsbury's has had to pay the first two quarterly instalments for 2020/21 based on early estimates for taxable profit for the year, as well as finalising quarterly payments for 2019/20.

Retail free cash flow increased by GBP245 million year-on-year to GBP943 million (HY 2019/20: GBP698 million).

As previously announced, Sainsbury's deferred the decision on the final dividend payment for 2019/20, and accordingly there was no dividend payment in the half (HY 2019/20: GBP174 million).

As at 19 September 2020 Sainsbury's has drawn debt facilities of GBP1.08 billion including the Perpetual securities (HY 2019/20 GBP1.82 billion). The Group holds undrawn committed credit facilities of GBP1.45 billion and undrawn uncommitted facilities of GBP195 million.

Compared to the 2018/19 year end net debt excluding lease liabilities of GBP1,522 million, Sainsbury's expects a reduction of at least GBP750 million over a three year period and to generate average retail free cash flow of GBP500 million per year over the following three years.

Capital expenditure

Core retail cash capital expenditure was GBP290 million (HY 2019/20: GBP248 million).

Sainsbury's expects core retail cash capital expenditure (excluding Financial Services) to be around GBP600 million in the 2020/21 financial year and for this to increase to around GBP700 million - GBP750 million in the 3 years to March 2024, reflecting investment in high-returning supply chain, logistics and infrastructure projects.

Financial ratios

 
 
 Key financial ratios                       52 weeks to         52 weeks to   52 weeks to 
                                      19 September 2020   21 September 2019       7 March 
                                                                                     2020 
 
 Return on capital employed (%)(1)                  7.9                 7.1           7.4 
 Net debt to EBITDAR(2)                       2.7 times           3.1 times     3.2 times 
 Fixed charge cover(3)                        2.8 times           2.6 times     2.7 times 
-----------------------------------  ------------------  ------------------  ------------ 
 

1 ROCE: Return is defined as a 52 week rolling underlying profit before interest and tax. Capital employed is defined as group net assets excluding the pension deficit/surplus and excluding net debt. The average is calculated on a 14 point basis.

2 Net debt of GBP6,168 million includes lease obligations under IFRS 16 and perpetual securities treated as debt, divided by Group underlying EBITDAR of GBP2,253 million, calculated for a 52-week period to 19 September 2020.

3 Group underlying EBITDAR divided by rent (both capital and interest) and net underlying finance costs, where interest on perpetual securities is treated as an underlying finance cost.

Property value

As at 19 September 2020, Sainsbury's estimated market value of properties was GBP9.9 billion (7 March 2020: GBP9.9 billion). This includes the Group's beneficial interest in a property investment pool.

Defined benefit pensions

The Pension Scheme is valued on different bases for different purposes. For the corporate annual accounts, the value of the retirement benefit is calculated under IAS19 while the funding of the Scheme is determined by the Trustee's triennial valuation.

At 19 September 2020, the net defined benefit surplus under IAS19 for the Group was GBP1,012 million (excluding deferred tax). The GBP107 million movement from 7 March 2020 was driven by an increase in the scheme liabilities due to changes in the financial assumptions, offset by favourable movements on plan assets, which are held at fair value. The discount rate has remained constant since year-end at 1.6 per cent.

As disclosed in April, the Scheme was subject to a triennial actuarial valuation, as at 30 September 2018, which was completed last year. As part of the agreement reached with the Trustee, we established a new asset backed contribution ('ABC') structure on 17 July 2019, replacing the existing property partnership.

The actuarial deficit reduced to GBP538 million, from GBP1,055 million in 2015.

Under the new ABC, properties with a value of GBP1.35 billion were transferred into a newly formed property holding company, a wholly owned subsidiary of the Group, and leased to other Group entities. Rental receipts facilitate payments of interest and capital on loan notes issued to a Scottish Limited Partnership, in which the Scheme holds an interest.

The Scheme's interest in the Partnership entitles it to annual distributions over up to 20 years. The distributions will be made through three payment streams:

   1)   Payments to the Sainsbury's section (approximately GBP15 million per year) 
   2)   Payments to the Argos section (approximately GBP20 million per year) 

3) Switching payment stream, paid to either the Sainsbury's section or Argos section (initially approximately GBP23 million per year, increasing to GBP33 million by 2038)

The payments to the Sainsbury's and Argos sections (streams 1 and 2) stop in 2030, or when the relevant section reaches its funding target if earlier.

The switching stream is initially paid to the Sainsbury's section. Once that funding target is achieved, payments switch to the Argos section. Payments continue until 2038 or until both sections have reached their funding targets if earlier.

The level of property in the Propco reduces as the Scheme reaches the funding targets.

Cash contributions and ABC distributions of GBP60 million have been paid in H1, with a further GBP42 million agreed in H2. Cash contributions and ABC distributions for 2021/22 are expected to be GBP76 million.

 
 Retirement benefit obligations 
                                           Sainsbury's          Argos          Group      Group 
                                                 as at          as at          as at      as at 
                                          19 September   19 September   19 September    7 March 
                                                  2020           2020           2020       2020 
 
                                                  GBPm           GBPm           GBPm       GBPm 
 Present value of funded 
  obligations                                  (9,043)        (1,457)       (10,500)   (10,335) 
 Fair value of plan assets                      10,072          1,478         11,550     11,491 
 Pension surplus/(deficit)                       1,029             21          1,050      1,156 
 Present value of unfunded 
  obligations                                     (21)           (17)           (38)       (37) 
---------------------------------------  -------------  -------------  -------------  --------- 
 Retirement benefit obligations                  1,008              4          1,012      1,119 
 Deferred income tax (liability)/asset           (191)            (1)          (192)      (214) 
---------------------------------------  -------------  -------------  -------------  --------- 
 Net retirement benefit 
  obligations                                      817              3            820        905 
---------------------------------------  -------------  -------------  -------------  --------- 
 

Group income statement (unaudited)

for the 28 weeks to 19 September 2020

 
                                     28 weeks to 19 September                     28 weeks to 21 September 
                                               2020                                         2019 
------------------  -----  -------------------------------------------  ------------------------------------------- 
                                    Before   Non-underlying      Total           Before   Non-underlying      Total 
                            non-underlying            items              non-underlying            items 
                                     items                                        items 
                     Note             GBPm             GBPm       GBPm             GBPm             GBPm       GBPm 
------------------  -----  ---------------  ---------------  ---------  ---------------  ---------------  --------- 
 Revenue              4a            14,934                -     14,934           15,097                -     15,097 
 Cost of sales                    (13,644)            (298)   (13,942)         (13,970)            (177)   (14,147) 
------------------  -----  ---------------  ---------------  ---------  ---------------  ---------------  --------- 
 Gross 
  profit/(loss)                      1,290            (298)        992            1,127            (177)        950 
 Administrative 
  expenses                           (801)            (154)      (955)            (694)             (86)      (780) 
 Other income                           11              (5)          6               24               44         68 
------------------  -----  ---------------  ---------------  ---------  ---------------  ---------------  --------- 
 Operating 
  profit/(loss)                        500            (457)         43              457            (219)        238 
 Finance income       6                  2               14         16                2               16         18 
 Finance costs        6              (201)                5      (196)            (221)                4      (217) 
 Share of post-tax 
  loss from joint 
  ventures and 
  associates                             -                -          -                -             (30)       (30) 
------------------  -----  ---------------  ---------------  ---------  ---------------  ---------------  --------- 
 Profit/(loss) 
  before 
  tax                                  301            (438)      (137)              238            (229)          9 
 Income tax 
  (expense)/credit    7               (83)               41       (42)             (63)               16       (47) 
------------------  -----  ---------------  ---------------  ---------  ---------------  ---------------  --------- 
 Profit/(loss) for the 
  financial period                     218            (397)      (179)              175            (213)       (38) 
-------------------------  ---------------  ---------------  ---------  ---------------  ---------------  --------- 
 
 Loss per share       8                                        pence                                        pence 
------------------  -----  --------------------------------             -------------------------------- 
 Basic loss                                                      (8.3)                                        (2.2) 
 Diluted loss                                                    (8.3)                                        (2.2) 
------------------  -----  --------------------------------  ---------  --------------------------------  --------- 
 
 
 
                                                       52 weeks to 7 March 2020 
-----------------------------  -----      -------------------------------------------------- 
                                           Before non-underlying   Non-underlying      Total 
                                                           items            items 
                                Note                        GBPm             GBPm       GBPm 
-----------------------------  -----      ----------------------  ---------------  --------- 
 Revenue                         4a                       28,993                -     28,993 
 Cost of sales                                          (26,699)            (278)   (26,977) 
-----------------------------  -----      ----------------------  ---------------  --------- 
 Gross profit/(loss)                                       2,294            (278)      2,016 
 Administrative 
  expenses                                               (1,345)            (114)    (1,459) 
 Other income                                                 37               56         93 
-----------------------------  -----      ----------------------  ---------------  --------- 
 Operating profit/(loss)                                     986            (336)        650 
 Finance income                  6                             4               28         32 
 Finance costs                   6                         (404)                6      (398) 
 Share of post-tax 
  loss from joint 
  ventures and associates                                      -             (29)       (29) 
-----------------------------  -----      ----------------------  ---------------  --------- 
 Profit/(loss) before 
  tax                                                        586            (331)        255 
 Income tax (expense)/credit     7                         (149)               46      (103) 
-----------------------------  -----      ----------------------  ---------------  --------- 
 Profit/(loss) for the 
  financial period                                           437            (285)        152 
------------------------------------      ----------------------  ---------------  --------- 
 
 Earnings per share              8                                                   pence 
-----------------------------  -----      --------------------------------------- 
 Basic earnings                                                                          5.8 
 Diluted earnings                                                                        5.8 
-----------------------------  -----      ---------------------------------------  --------- 
 
 

The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.

Group statement of comprehensive income (unaudited)

for the 28 weeks to 19 September 2020

 
                                                                                             52 
                                                               28 weeks     28 weeks      weeks 
                                                                  to 19        to 21         to 
                                                              September    September    7 March 
                                                                   2020         2019       2020 
                                                     -----  -----------  -----------  --------- 
                                                      Note         GBPm         GBPm       GBPm 
                                                     -----  -----------  -----------  --------- 
 (Loss)/profit for the financial year                             (179)         (38)        152 
---------------------------------------------------  -----  -----------  -----------  --------- 
 
 Items that will not be reclassified subsequently 
  to the income statement 
                                                     -----  -----------  -----------  --------- 
  Remeasurement on defined benefit pension schemes     18         (175)          364         89 
                                                     ----- 
  Movements on financial assets at fair value 
   through other comprehensive income                                28            -         17 
  Current tax relating to items not reclassified                     23            -          - 
  Deferred tax relating to items not reclassified                  (24)         (62)       (18) 
                                                                  (148)          302         88 
---------------------------------------------------  -----  -----------  -----------  --------- 
 Items that may be reclassified subsequently 
  to the income statement 
                                                     ----- 
  Currency translation differences                                    -            3          - 
                                                     ----- 
  Movements on financial assets at fair value 
   through other comprehensive income                                 1         (12)          4 
                                                     ----- 
  Cash flow hedges effective portion of fair 
   value movements                                                    6           58        (1) 
                                                     ----- 
  Items reclassified from cash flow hedge reserve                     -         (30)       (19) 
                                                     ----- 
  Deferred tax on items that may be reclassified                    (2)          (2)          3 
                                                     -----               -----------  --------- 
                                                                      5           17       (13) 
                                                     ----- 
 Total other comprehensive (loss)/income for 
  the year (net of tax)                                           (143)          319         75 
 Total comprehensive (loss)/income for the year                   (322)          281        227 
---------------------------------------------------  -----  -----------  -----------  --------- 
 

The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.

Group balance sheet (unaudited)

at 19 September 2020

 
                                                         19 September   21 September    7 March 
                                                                 2020           2019       2020 
                                                  Note           GBPm           GBPm       GBPm 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Non-current assets 
 Property, plant and equipment                     10           8,721          8,943      8,911 
 Right of use assets                               11           4,796          4,878      4,826 
 Intangible assets                                 12             896          1,008      1,012 
 Investments in joint ventures and associates                       5             56          9 
 Financial assets at fair value through 
  other comprehensive income                      14a             863            838        972 
 Trade and other receivables                                       52             50         43 
 Amounts due from Financial Services customers    14a           2,812          3,593      3,453 
 Derivative financial assets                      14c               4              8          6 
 Net retirement benefit surplus                    18           1,012          1,382      1,119 
-----------------------------------------------  -----  -------------  -------------  --------- 
                                                               19,161         20,756     20,351 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Current assets 
 Inventories                                                    1,635          1,953      1,732 
 Trade and other receivables                                      748            693        811 
 Amounts due from Financial Services customers    14a           3,380          3,808      3,951 
 Financial assets at fair value through 
  other comprehensive income                      14a              61            182         82 
 Derivative financial assets                      14c              28             41         12 
 Cash and cash equivalents                         17           1,453          1,468        994 
-----------------------------------------------  -----                 -------------  --------- 
                                                                7,305          8,145      7,582 
 Assets held for sale                                               2              5          4 
-----------------------------------------------  -----                 -------------  --------- 
                                                                7,307          8,150      7,586 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Total assets                                                  26,468         28,906     27,937 
-----------------------------------------------  -----  -------------  -------------  --------- 
 
 Current liabilities 
 Trade and other payables                                     (4,702)        (4,710)    (4,275) 
 Amounts due to Financial Services customers 
  and other deposits                              14a         (5,906)        (6,573)    (6,890) 
 Borrowings                                        16           (257)          (495)       (48) 
 Lease liabilities                                 11           (538)          (536)      (510) 
 Derivative financial liabilities                 14c            (38)           (12)       (53) 
 Taxes payable                                                   (29)          (185)      (163) 
 Provisions                                                     (136)          (127)      (108) 
-----------------------------------------------  -----                 -------------  --------- 
                                                             (11,606)       (12,638)   (12,047) 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Net current liabilities                                      (4,299)        (4,488)    (4,461) 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Non-current liabilities 
 Other payables                                                   (1)           (69)       (11) 
 Amounts due to Financial Services customers 
  and other deposits                              14a           (904)        (1,594)    (1,204) 
 Borrowings                                        16           (772)        (1,023)    (1,248) 
 Lease liabilities                                 11         (5,369)        (5,240)    (5,264) 
 Derivative financial liabilities                 14c            (60)           (41)       (36) 
 Deferred income tax liability                                  (328)          (291)      (265) 
 Provisions                                                     (241)          (104)       (89) 
                                                              (7,675)        (8,362)    (8,117) 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Total liabilities                                           (19,281)       (21,000)   (20,164) 
-----------------------------------------------  -----  -------------  -------------  --------- 
 
 Net assets                                                     7,187          7,906      7,773 
-----------------------------------------------  -----  -------------  -------------  --------- 
 
 Equity 
 Called up share capital                                          635            632        634 
 Share premium                                                  1,163          1,151      1,159 
 Merger reserve                                                   568            568        568 
 Capital redemption reserve                                       680            680        680 
 Other reserves                                                   194            184        168 
 Retained earnings                                              3,699          4,195      4,068 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Total equity before perpetual securities                       6,939          7,410      7,277 
 Perpetual capital securities                                       -            248        248 
 Perpetual convertible bonds                                      248            248        248 
-----------------------------------------------  -----  -------------  -------------  --------- 
 Total equity                                                   7,187          7,906      7,773 
-----------------------------------------------  -----  -------------  -------------  --------- 
 

The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.

Group cash flow statement (unaudited)

for the 28 weeks to 19 September 2020

 
                                                                     28 weeks       28 weeks   52 weeks 
                                                                           to             to         to 
                                                                 19 September   21 September    7 March 
                                                                         2020           2019       2020 
                                                        Note             GBPm           GBPm       GBPm 
---------------------------------------------------  ---------  -------------  -------------  --------- 
 
 Cash flows from operating activities 
 (Loss)/profit before tax                                               (137)              9        255 
 Net finance costs                                                        180            199        366 
 Share of post-tax loss from joint ventures                                 -             30         29 
 Operating profit                                                          43            238        650 
 Adjustments for: 
  Depreciation expense                                 10,11              596            597      1,127 
  Amortisation expense                                   12                65             70        129 
  Net impairment loss on property, plant 
   and equipment, right of use assets and 
   intangible assets                                  10,11,12            292            177        263 
  Non-cash adjustments arising from acquisitions                          (1)            (1)        (2) 
  Financial Services impairment losses on 
   loans and advances                                                      39             47         80 
  Loss/(profit) on sale of properties and 
   early termination of leases                                              7           (44)       (56) 
  Share-based payments expense                                             16             19         37 
  Non-cash defined benefit scheme expenses               18                 3              4          9 
  Cash contributions to benefit schemes                  18              (60)           (48)       (52) 
 Operating cash flows before changes in 
  working capital                                                       1,000          1,059      2,185 
 Changes in working capital 
  Decrease/(increase) in inventories                                       97           (24)        197 
  Decrease/(increase) in financial assets 
   at fair value through other comprehensive 
   income                                                                 159          (176)      (177) 
  Decrease/(increase) in trade and other 
   receivables                                                             58           (69)      (129) 
  Decrease/(increase) in amounts due from 
   Financial Services customers and other 
   deposits                                                             1,173          (461)      (499) 
  Increase/(decrease) in trade and other 
   payables                                                               409            316      (195) 
  (Decrease)/increase in amounts due to Financial 
   Services customers and other deposits                              (1,284)            566        492 
  Increase/(decrease) in provisions and other 
   liabilities                                                            180             27        (8) 
 Cash generated from operations                                         1,792          1,238      1,866 
 Interest paid                                           15             (193)          (208)      (384) 
 Corporation tax paid                                                    (88)            (6)      (110) 
 Net cash generated from operating activities                           1,511          1,024      1,372 
---------------------------------------------------  ---------  -------------  -------------  --------- 
 
 Cash flows from investing activities 
 Purchase of property, plant and equipment                              (257)          (213)      (519) 
 Initial direct costs on new leases                                       (3)            (2)       (13) 
 Purchase of intangible assets                                           (44)           (52)      (120) 
 Proceeds from disposal of property, plant 
  and equipment                                                            19             54         81 
 Interest received                                       15                 -              2          2 
 Dividends and distributions received                                      22            118        143 
 Net cash used in investing activities                                  (263)           (93)      (426) 
---------------------------------------------------  ---------  -------------  -------------  --------- 
 
 Cash flows from financing activities 
 Proceeds from issuance of ordinary shares                                  4              5         15 
 Proceeds from borrowings                                15                 -             80        250 
 Proceeds from short term borrowings                     15               660              -          - 
 Repayment of borrowings                                 15             (269)          (230)      (169) 
 Repayment of short term borrowings                      15             (660)              -          - 
 Repayment upon maturity of convertible 
  bonds                                                                     -              -      (450) 
 Repayment of perpetual capital securities               15             (250)              -          - 
 Purchase of own shares                                                  (30)            (4)       (18) 
 Repayment of capital element of lease obligations       15             (224)          (231)      (420) 
 Repayment of capital element of obligations 
  under hire purchase arrangements                       15                 -           (10)       (10) 
 Dividends paid on ordinary shares                       9                  -          (174)      (247) 
 Dividends paid on perpetual securities                                  (20)           (20)       (23) 
 Net cash used in financing activities                                  (789)          (584)    (1,072) 
---------------------------------------------------  ---------  -------------  -------------  --------- 
 
 Net increase/(decrease) in cash and cash 
  equivalents                                                             459            347      (126) 
 
 Opening cash and cash equivalents                                        994          1,120      1,120 
 
 Closing cash and cash equivalents                                      1,453          1,467        994 
---------------------------------------------------  ---------  -------------  -------------  --------- 
 

The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.

Group statement of changes in equity (unaudited)

for the 28 weeks to 19 September 2020

 
                                                    Capital                   Total 
                    Called                       redemption                  equity 
                        up     Share                    and                  before    Perpetual     Perpetual 
                     share   premium    Merger        other   Retained    perpetual      capital   convertible    Total 
                   capital   account   reserve     reserves   earnings   securities   securities         bonds   equity 
                      GBPm      GBPm      GBPm         GBPm       GBPm         GBPm         GBPm          GBPm     GBPm 
 At 8 March 2020       634     1,159       568          848      4,068        7,277          248           248    7,773 
                  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 Loss for the 
  period                 -         -         -            -      (183)        (183)            -             4    (179) 
 
 Other 
  comprehensive 
  income/(loss)          -         -         -           35      (175)        (140)            -             -    (140) 
 
 Tax relating to 
  other 
  comprehensive 
  income/(loss)          -         -         -          (9)          6          (3)            -             -      (3) 
 
 Total 
  comprehensive 
  income/(loss) 
  for the period 
  ended 19 
  September 
  2020                   -         -         -           26      (352)        (326)            -             4    (322) 
----------------  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 Transactions 
 with owners: 
 
  Distribution 
   to holders of 
   perpetual 
   securities            -         -         -            -          -            -            -           (4)      (4) 
 
  Share-based 
   payment               -         -         -            -         16           16            -             -       16 
 
  Purchase of 
   own shares            -         -         -            -       (30)         (30)            -             -     (30) 
 
  Allotted in 
   respect of 
   share 
   option 
   schemes               1         4         -            -        (1)            4            -             -        4 
 
  Redemption of 
   perpetual 
   capital 
   securities            -         -         -            -        (2)          (2)        (248)             -    (250) 
 
  Tax on items 
  charged to 
  equity                 -         -         -            -          -            -            -             -        - 
 
 At 19 September 
  2020                 635     1,163       568          874      3,699        6,939            -           248    7,187 
----------------  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 
 At 10 March 
  2019                 630     1,147       568          852      4,089        7,286          248           248    7,782 
                  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 Loss for the 
  period                 -         -         -            -       (40)         (40)            -             2     (38) 
 
 Other 
  comprehensive 
  income                 -         -         -           19        364          383            -             -      383 
 
 Tax relating to 
  other 
  comprehensive 
  income                 -         -         -          (2)       (62)         (64)            -             -     (64) 
 
 Total 
  comprehensive 
  income 
  for the period 
  ended 21 
  September 
  2019                   -         -         -           17        262          279            -             2      281 
----------------  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 Transactions 
 with owners: 
 
  Dividends paid         -         -         -            -      (174)        (174)            -             -    (174) 
 
  Distribution 
   to holders of 
   perpetual 
   convertible 
   bonds                 -         -         -            -          -            -            -           (4)      (4) 
 
  Amortisation 
   of 
   convertible 
   bond equity 
   component             -         -         -          (5)          5            -            -             -        - 
 
  Share-based 
   payment               -         -         -            -         19           19            -             -       19 
 
  Purchase of 
   own shares            -         -         -            -        (4)          (4)            -             -      (4) 
 
  Allotted in 
   respect of 
   share 
   option 
   schemes               2         4         -            -        (1)            5            -             -        5 
 
  Tax on items 
   charged to 
   equity                -         -         -            -        (1)          (1)            -             2        1 
 At 21 September 
  2019                 632     1,151       568          864      4,195        7,410          248           248    7,906 
                  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 
 
                                                    Capital                   Total 
                    Called                       redemption                  equity 
                        up     Share                    and                  before    Perpetual     Perpetual 
                     share   premium    Merger        other   Retained    perpetual      capital   convertible    Total 
                   capital   account   reserve     reserves   earnings   securities   securities         bonds   equity 
                      GBPm      GBPm      GBPm         GBPm       GBPm         GBPm         GBPm          GBPm     GBPm 
 At 10 March 
  2019                 630     1,147       568          852      4,089        7,286          248           248    7,782 
                  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 Profit for the 
  period                 -         -         -            -        129          129           16             7      152 
 
 Other 
  comprehensive 
  income                 -         -         -            1         89           90            -             -       90 
 
 Tax relating to 
  other 
  comprehensive 
  income                 -         -         -            -       (15)         (15)            -             -     (15) 
 
 Total 
  comprehensive 
  income 
  for the year 
  ended 7 March 
  2020                   -         -         -            1        203          204           16             7      227 
----------------  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 Transactions 
 with owners: 
 
  Dividends paid         -         -         -            -      (247)        (247)            -             -    (247) 
 
  Distribution 
   to holders 
   of perpetual 
   convertible 
   bonds                 -         -         -            -          -            -         (16)           (7)     (23) 
 
  Amortisation 
   of 
   convertible 
   bond equity 
   component             -         -         -          (5)          5            -            -             -        - 
 
  Share-based 
   payment               -         -         -            -         37           37            -             -       37 
 
  Purchase of 
   own shares            -         -         -            -       (18)         (18)            -             -     (18) 
 
  Allotted in 
   respect of 
   share 
   option 
   schemes               4        12         -            -        (1)           15            -             -       15 
 
  Tax on items 
  charged to 
  equity                 -         -         -            -          -            -            -             -        - 
 At 7 March 2020       634     1,159       568          848      4,068        7,277          248           248    7,773 
                  --------  --------  --------  -----------  ---------  -----------  -----------  ------------  ------- 
 

The notes on pages 27 to 61 form an integral part of these Condensed Consolidated Interim Financial Statements.

Notes to the Condensed Consolidated Interim Financial Statements (unaudited)

   1.           General information 

J Sainsbury plc is a public limited company (the 'Company') incorporated in the United Kingdom, whose shares are publicly traded on the London Stock Exchange. The Company is domiciled in the United Kingdom and its registered address is 33 Holborn, London EC1N 2HT, United Kingdom.

The Condensed Consolidated Interim Financial Statements are unaudited but have been reviewed by the auditors whose report is set out on page 64. The financial information presented herein does not amount to statutory accounts within the meaning of Section 434 of the Companies Act 2006. The Annual Report and Financial Statements 2020 have been filed with the Registrar of Companies. The Independent Auditors' report on the Annual Report and Financial Statements 2020 was unqualified and did not contain a statement under Section 498 of the Companies Act 2006.

The financial period represents the 28 weeks to 19 September 2020 (comparative financial period 28 weeks to 21 September 2019; prior financial year 52 weeks to 7 March 2020). The financial information comprises the results of the Company and its subsidiaries (the 'Group') and the Group's interests in joint ventures and associates.

The Group's principal activities are Food, General Merchandise & Clothing Retailing and Financial Services.

   2.           Basis of preparation and accounting policies 
   2.1         Basis of preparation 

The Interim Results, comprising the Condensed Consolidated Interim Financial Statements and the Interim Management Report, have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting' as adopted by the European Union.

The financial information contained in the Interim Results is presented in sterling, rounded to the nearest million (GBPm) unless otherwise stated.

The financial information contained in the Condensed Consolidated Interim Financial Statements should be read in conjunction with the Annual Report and Financial Statements 2020, which were prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union.

Sainsbury's Bank plc and its subsidiaries have been consolidated for the six months to 31 August 2020 (21 September 2019: six months to 31 August 2019; 7 March 2020: twelve months to 29 February 2020). Adjustments have been made for the effects of significant transactions or events that occurred between this date and the Group's balance sheet date.

   2.2         Going concern 

The Directors are satisfied that the Group has sufficient resources to continue in operation for a period of at least 12 months from the date of approval. Accordingly, they continue to adopt the going concern basis in preparing the financial statements. The assessment period for the purposes of considering going concern is the 16 months to 5 March 2022.

In assessing the Group's ability to continue as a going concern, the Directors have considered the Group's most recent corporate planning process. This includes an annual review which considers profitability, the Group's cash flows, committed funding and liquidity positions and forecasted future funding requirements over three years, with a further two years of indicative movements. The most recent corporate plan was prepared in October 2020 and was reviewed by the Operating Board and ultimately by the PLC Board with involvement throughout from both the Chief Financial Officer and Chief Executive.

The Group manages its financing by diversifying funding sources, structuring core borrowings with long-term maturities and maintaining sufficient levels of standby liquidity via the Revolving Credit Facility. This seeks to minimise liquidity risk by maintaining a suitable level of undrawn additional funding capacity.

In September 2019 the maturity of part of the GBP1,450 million Revolving Credit Facility was extended by one year. The Revolving Credit Facility is split into two Facilities, a GBP300 million Facility (A) and a GBP1,150 million Facility (B). Facility A has a final maturity of April 2025 and Facility B has a final maturity of October 2024. As at 19 September 2020, the Revolving Credit Facility was undrawn. In addition, the Group maintains uncommitted facilities of GBP195m to provide additional capacity to fund short term working capital requirements. The uncommitted facilities were undrawn at 19 September 2020.

In assessing going concern, scenarios in relation to the Group's principal risks have been considered in line with those disclosed at year-end by overlaying them into the corporate plan and assessing the impact on cash flows, net debt and funding headroom.

COVID-19 continues to be an area of uncertainty, developing rapidly in 2020 with significant impacts on customer behaviour, and a second national lockdown now being implemented in the UK. In particular, the Group is exposed to a number of areas as follows:

   --           Sales impact from the closure of certain stores, predominantly Argos 
   --           Changing customer behaviours during lockdown 

-- Operational cost increases, such as increased labour and other in-store costs, which are partly mitigated by business rates holiday until March 2021

   --           Supply chain disruptions 
   --           Exposure to credit risk within the Financial Services business 

At the year-end, the Group outlined details of the base case scenario that was used for modelling the potential impact of COVID-19. Since then, costs of around GBP290 million associated with protecting customers and colleagues from COVID-19 were partially offset by GBP230 million of business rates relief received to date. These are broadly in line with the base case, whilst sales during the first half have been stronger than the base case assumptions, particularly at Argos.

For the going concern period, the impact of COVID-19 on sales and costs continues to be uncertain. Therefore for the going concern assessment, scenarios have been modelled that apply GDP movements seen during the recession of FY2008/09 to forecast sales, however to differing extents per category, as well as increased cash outflows over and above those in the corporate plan. The scenarios are hypothetical and severe for the purpose of assessing the Group's ability to continue as a going concern.

In performing the above analysis, the Directors have made certain assumptions around the availability and effectiveness of the mitigating actions available to the Group. These include reducing any non-essential capital expenditure and operating expenditure on projects, bonuses and dividend payments.

As a consequence of the work performed, the Directors considered it appropriate to adopt the going concern basis in preparing the Condensed Consolidated Interim Financial Statements with no material uncertainties to disclose.

   2.3         Accounting judgements and estimates 

The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates.

In preparing these Condensed Consolidated Interim Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those that applied to the Consolidated Financial Statements for the year ended 7 March 2020 unless otherwise stated.

In light of the ongoing COVID-19 pandemic, the Group has provided more information in relation to its consideration of the following areas of estimation uncertainty.

   --    Note 3: Profit before non-underlying items 
   --    Note 13: Impairment of non-financial assets 
   --    Note 14: Financial instruments 
   --    Note 18: Retirement benefit obligations 

The Group has updated its assumptions over the exercising of breaks for a number of its leases. More information is included in note 11.

   2.4         New standards, interpretations and amendments adopted by the Group 

The Group has considered the following amendments to published standards that are effective for the Group for the financial year beginning 8 March 2020 and concluded that they are either not relevant to the Group or that they do not have a significant impact on the Group's financial statements other than disclosures. These standards and interpretations have been endorsed by the European Union.

- Amendments to References to Conceptual Framework in IFRS Standards

- Amendments to IFRS 3 'Business Combinations' on the definition of a business

- Amendments to IAS 1 'Presentation of Financial Statements' and IAS 8 'Accounting Policies, Changes in Accounting Estimates and Errors' on the definition of material

- Amendments to IFRS 9 'Financial Instruments', IAS 39 'Financial Instruments: Recognition and Measurement' and IFRS 7 'Financial Instruments: Disclosures' on the Interest Rate Benchmark Reform

The Group has noted the exemption granted in the 'COVID-19-related rent concessions' amendment to IFRS 16 'Leases'. This exemption applies for periods commencing on or after 1 June 2020, with an option to early adopt. The Group has elected not to apply the exemption granted as the Group has not received material COVID-19-related rent concessions as a lessee.

The accounting policies have remained unchanged from those disclosed in the Annual Report for the year ended 7 March 2020.

Interest Rate Benchmark Reform

During the period, the Group has adopted the 'Interest Rate Benchmark Reform' amendments to IFRS 9, as indicated above. A hedging relationship is affected by the reform if it gives rise to uncertainties about the timing and or amount of benchmark-based cash flows of the hedged item or the hedging instrument. The amendments allow the Group to continue hedge accounting for its benchmark interest rate exposures during the period of uncertainty arising from the reform. The Group will continue to apply these amendments until the uncertainty arising from the reform is no longer present with respect to the timing and amount of the interest rate benchmark cash flows.

Details of the hedging relationships for which the Group has applied the reform amendments are provided in note 14. These relate to the utilisation of derivatives to achieve the desired mix of fixed and floating debt.

   2.5       Alternative performance measures (APMs) 

In the reporting of financial information, the Directors use various APMs. These APMs should be considered in addition to, and are not intended to be a substitute for IFRS measurements. As they are not defined by International Financial Reporting Standards, they may not be directly comparable with other companies who use similar measures.

Purpose of APMs

The Directors believe that these APMs assist in providing additional useful information for understanding the financial performance and health of the Group. They are also used to enhance the comparability of information between reporting periods (such as like-for-like sales and underlying profit) by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid users in understanding the Group's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes.

Changes to APMs

The following APMs have been updated during the period:

-- Like-for-like sales: Previously temporary closures have been excluded from like-for-like sales. The impact on sales of stores which were temporarily closed due to COVID-19 have been included within like-for-like sales. During the current period due to temporary store closures as a result of the COVID-19 pandemic there has been a material increase in digital sales. It is not possible to calculate the exact transfer of sales from temporarily closed stores to online as a result of the pandemic therefore the like-for-like definition has been adjusted to include temporary store closures as a result of COVID-19. Only permanently closed sites and those temporarily closed for non COVID-19 related reasons are excluded from like-for-like sales.

-- Cash flow presentation in Financial Review: The presentation of the summary cash flow statement within the Financial Review has been updated to provide useful additional information of the build from Retail Underlying Operating Profit to the movement in net debt. Working capital movements also now exclude any movements due to non-underlying items. Additional reconciliations are included on pages 65 to 69 to bridge to statutory measures, with prior year comparatives adjusted accordingly.

   3.         Profit before non-underlying items 

In order to provide shareholders with additional insight into the underlying performance of the business, items recognised in reported profit or loss before tax which, by virtue of their size and/or nature do not reflect the Group's underlying performance, are excluded from the Group's underlying results.

Underlying profit is how the Group measures performance internally, but is not an IFRS measure and therefore not directly comparable to other companies.

The most significant non-underlying items in the current year relate to restructuring programmes, impairment charges and income relating to the Supreme Court ruling on ATM business rates. More details on each are included further below.

The Group has also chosen to exclude the following items from underlying profit:

-- Financial Services transition - multi-year costs incurred in transitioning to a new, more flexible banking platform as part of the previously announced New Bank Programme. These principally comprise contractor and service provider costs relating to the migration of data and other services to the Bank's new infrastructure and operating model.

-- Profit or loss on disposal of properties - such disposals are not part of the Group's underlying business.

-- Investment property fair value movements - these reflect the difference between the fair value of an investment property at the reporting date and its carrying amount at the previous reporting date and are held within the property JVs. The valuations are impacted by external market factors and can therefore vary significantly year-on-year.

-- Perpetual securities coupons - these are accounted for as equity in line with IAS 32 'Financial instruments: Presentation', however are accrued on a straight-line basis and included as an expense within underlying profit as they are included by management when assessing Group borrowings.

-- Non-underlying finance movements - these include fair value remeasurements on derivatives not in a hedging relationship. The fair value measurements are impacted by external market factors and can fluctuate significantly year-on-year. Lease interest on impaired non-trading sites, including site closures, is excluded from underlying profit as those sites do not contribute to the underlying business.

-- IAS 19 pension interest and expenses include the financing element and scheme expenses of the Group's defined benefit scheme. These are reported outside underlying profit as they no longer relate to the Group's on-going activities following closure of the scheme to future accrual.

-- Acquisition adjustments - these reflect the adjustments arising from acquisitions including the fair value unwind and amortisation of acquired intangibles.

The Group has not included any additional costs incurred or credits received directly in relation to the impacts of COVID-19 within non-underlying items. Whilst some items (such as business rates relief and additional expenses incurred protecting colleagues and customers) are discrete and can be separately quantified others, such as incremental food sales cannot be reliably disaggregated from the Group's underlying performance. The Group has therefore concluded that presenting some movements as underlying and others as non-underlying would give an imbalanced view that is not easily comparable to past and subsequent periods.

 
 28 weeks to 19 
 September 
 2020 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
                        Cost   Administrative     Other       Net finance   Share          Total    Tax          Total 
                          of         expenses    income    income/(costs)      of    adjustments           adjustments 
                       sales                                                 loss         before 
                                                                             from            tax 
                                                                              JVs 
                        GBPm             GBPm      GBPm              GBPm    GBPm           GBPm   GBPm           GBPm 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 Restructuring 
  programmes           (244)             (15)         -                 -       -          (259)     45          (214) 
 Impairment of 
  non-financial 
  assets                (96)            (118)         -                 -       -          (214)     37          (177) 
 Financial Services 
  transition               -              (7)         -                 -       -            (7)      -            (7) 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 Total 
  restructuring, 
  impairment 
  and integration      (340)            (140)         -                 -       -          (480)     82          (398) 
 
 Property, finance, 
 pension 
 and acquisition 
 adjustments 
 ATM business rates 
  reimbursement           42                -         -                 -       -             42    (8)             34 
 Loss on disposal 
  of properties            -                -       (5)                 -       -            (5)      1            (4) 
 Investment 
 property fair 
 value movements           -                -         -                 -       -              -      -              - 
 Perpetual 
  securities 
  coupons                  -                -         -                10       -             10      -             10 
 Non-underlying 
  finance movements        -                -         -               (2)       -            (2)      -            (2) 
 IAS 19 pension 
  interest 
  and expenses             -              (3)         -                11       -              8    (2)              6 
 Acquisition 
  adjustments              -             (11)         -                 -       -           (11)      2            (9) 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 Total property, 
  finance, 
  pension and 
  acquisition 
  adjustments             42             (14)       (5)                19       -             42    (7)             35 
 
 Tax adjustments 
 Under provision in 
 prior 
 years                     -                -         -                 -       -              -      -              - 
 Revaluation of 
  deferred 
  tax balances             -                -         -                 -       -              -   (34)           (34) 
 
 Total adjustments     (298)            (154)       (5)                19       -          (438)     41          (397) 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 

Restructuring programmes

During the financial period, it has been agreed to accelerate the structural integration of Sainsbury's and Argos and further simplify the Argos business model. As a result, around 420 Argos stores will be closed by March 2024, leaving the total number of UK standalone stores at around 100. To support this, a total of 32 Local Fulfilment Centres will be built across the UK that will operate the Group's fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country.

In addition, the Group is creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury's and Argos. As a result of this, a number of existing depots are closing.

Further opportunities to rationalise the Group's supermarkets and convenience estate have been identified, building on last year's property strategy programme that was announced at the Capital Markets Day in September 2019. At that time it was communicated that 10 to 15 supermarkets and 30 to 40 convenience stores would close. It is now expected that 15 to 20 supermarkets and 50 to 60 convenience stores will close or be sold.

Costs totalling GBP259 million have been recognised in the period in relation to the above and comprise the following:

 
                                                 GBPm 
----------------------------------------------  ----- 
 Write downs of property, plant and equipment       9 
 Write downs of leased assets                      66 
 Write downs of intangible assets                   3 
 Closure provisions                               151 
 Redundancy provisions                             30 
----------------------------------------------  ----- 
                                                  259 
----------------------------------------------  ----- 
 

Closure provisions relate to onerous contract costs, dilapidations and strip out costs.

Impairment of non-financial assets

In addition to the above, in line with IAS 36 'Impairment of non-financial assets', the Group is required to assess whether there is any indication that an asset (or CGU) may be impaired (i.e. its carrying amount may be higher than its recoverable amount).

The COVID-19 pandemic has resulted in changes to customer shopping habits, patterns and sources of finance. Despite this, the Group has proved resilient through the pandemic, with additional in-store costs mostly offset by the grocery sales growth and business rates relief. However the changes in customer behaviour have led to an acceleration of the Group's structural integration of Sainsbury's and Argos during the period and through this, a review of the economic performance of the Group's assets has been performed as a result of store rationalisation, changes in channel mix, and changes in customer borrowing and cash usage behaviour. This has been deemed an indicator of impairment and a full impairment review has therefore been performed covering both Retail and Financial Services non-financial assets.

An impairment charge of GBP214 million has been recognised in the period and comprises:

 
                                                GBPm 
---------------------------------------------  ----- 
 Impairment of property, plant and equipment      60 
 Impairment of leased assets                      62 
 Impairment of intangible assets                  92 
---------------------------------------------  ----- 
                                                 214 
---------------------------------------------  ----- 
 

Of the total charge of GBP214 million, GBP105 million is in relation to assets within the Financial Services segment, with the remaining GBP109 million within the Retail segment. Further details of the impairment charge are included within note 13.

With regards to the above restructuring and impairment charges, the costs incurred arise as a result of implementing changes for the future to evolve and reshape the business. They are therefore different in nature to the COVID-19-related income and costs that were incurred to maintain business as usual activity and which have been reported within underlying profit. In addition, they can be separately identified, are material in size / nature, and not related to the underlying operations of the business. This is consistent with the Group's existing accounting policy for non-underlying items and are therefore reported outside underlying profit.

Financial Services transition

These predominantly comprise Financial Services transition costs of GBP(7) million and were incurred in transitioning to new banking platforms as part of the previously announced New Bank Programme. These principally comprise contractor and service provider costs relating to the migration of data and other services to the Bank's new infrastructure and operating model. These also include circa GBP(1) million for the decommissioning of ATMs.

ATM business rates reimbursement

GBP42 million of income is due to be received from the Valuation Office following the Supreme Court's ruling that ATMs outside stores should not be assessed for additional business rates on top of normal store rates.

Property, finance, pension and acquisition adjustments

-- Loss on disposal of properties for the financial period comprised GBP(5) million for the Group and nil for the joint ventures.

-- The coupons on the perpetual subordinated capital securities and the perpetual subordinated convertible bonds are accounted for as equity in line with IAS 32 'Financial Instruments: Presentation', however are accrued on a straight-line basis and included as an expense within underlying profit before tax. During the year, the perpetual capital securities were redeemed.

-- Non-underlying finance movements for the financial year comprised GBP(2) million for the Group and nil for the joint ventures. These are presented separately in note 6.

-- Defined benefit pension interest and expenses comprises pension finance income of GBP11 million and scheme expenses of GBP(3) million (see note 18).

-- Acquisition adjustments of GBP(11) million reflect the unwind of non-cash fair value adjustments arising from Home Retail Group and Nectar UK acquisitions and are recognised as follows:

 
                             28 weeks to               28 weeks to               52 weeks to 
                            19 September              21 September              7 March 2020 
                                    2020                      2019 
--------------  ------------------------  ------------------------  ------------------------ 
                 Argos   Nectar    Total   Argos   Nectar    Total   Argos   Nectar    Total 
                                   Group                     Group                     Group 
                  GBPm     GBPm     GBPm    GBPm     GBPm     GBPm    GBPm     GBPm     GBPm 
--------------  ------  -------  -------  ------  -------  -------  ------  -------  ------- 
 Cost of 
  sales              1        -        1       1        -        1       2        -        2 
 Depreciation        1        -        1     (2)        -      (2)     (2)        -      (2) 
 Amortisation     (10)      (3)     (13)    (10)      (5)     (15)    (18)      (8)     (26) 
-------------- 
                   (8)      (3)     (11)    (11)      (5)     (16)    (18)      (8)     (26) 
--------------  ------  -------  -------  ------  -------  -------  ------  -------  ------- 
 

Comparative information

 
 28 weeks to 21 September 2019 
----------------------------------------------------  --------  ---------  ------  -------------  -----  ------------- 
                                    Cost       Admin     Other        Net   Share          Total    Tax          Total 
                                      of    expenses    income    finance      of    adjustments           adjustments 
                                   sales                          income/    loss         before 
                                                                             from            tax 
                                                                              JVs 
                                                                  (costs) 
                                    GBPm        GBPm      GBPm       GBPm    GBPm           GBPm   GBPm           GBPm 
-------------------------------  -------  ----------  --------  ---------  ------  -------------  -----  ------------- 
 Property strategy programme(1)    (176)        (27)         -          -       -          (203)     14          (189) 
 Retail restructuring 
  programme(1)                         -        (25)         -          -       -           (25)      5           (20) 
 Financial Services transition 
  and other                            -        (15)         -          -       -           (15)      -           (15) 
-------------------------------  -------  ----------  --------  ---------  ------  -------------  -----  ------------- 
 Total strategic programmes        (176)        (67)         -          -       -          (243)     19          (224) 
 
 Property, finance, pension 
  and acquisition adjustments 
 Profit/(loss) on disposal 
  of properties                        -           -        44          -    (21)             23    (1)             22 
 Investment property fair 
  value movements                      -           -         -          -     (4)            (4)      -            (4) 
 Perpetual securities coupons          -           -         -         13       -             13    (2)             11 
 Non-underlying finance 
  movements                            -           -         -        (8)     (5)           (13)      -           (13) 
 IAS 19 pension expenses               -         (4)         -         15       -             11      1             12 
 Acquisition adjustments             (1)        (15)         -          -       -           (16)      3           (13) 
-------------------------------  -------  ----------  --------  ---------  ------  -------------  -----  ------------- 
 Total property, finance, 
  pension and acquisition 
  adjustments                        (1)        (19)        44         20    (30)             14      1             15 
 
 Tax adjustments 
 Under provision in prior 
  years                                -           -         -          -       -              -    (7)            (7) 
 Revaluation of deferred 
  tax balances                         -           -         -          -       -              -      3              3 
 
 Total adjustments                 (177)        (86)        44         20    (30)          (229)     16          (213) 
-------------------------------  -------  ----------  --------  ---------  ------  -------------  -----  ------------- 
 
 
 52 weeks to 7 
 March 2020 
                        Cost   Administrative     Other       Net finance   Share          Total    Tax          Total 
                          of         expenses    income    income/(costs)      of    adjustments           adjustments 
                       sales                                                 loss         before 
                                                                             from            tax 
                                                                              JVs 
                        GBPm             GBPm      GBPm              GBPm    GBPm           GBPm   GBPm           GBPm 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 Property strategy 
  programme(1)         (255)             (41)         -                 -       -          (296)     28          (268) 
 Retail 
  restructuring 
  programme(1)          (21)             (11)         -                 -       -           (32)      6           (26) 
 Financial Services 
  transition 
  and other              (2)             (27)         -                 -       -           (29)      4           (25) 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 Total strategic 
  programmes           (278)             (79)         -                 -       -          (357)     38          (319) 
 
 Property, finance, 
 pension 
 and acquisition 
 adjustments 
 Profit/(loss) on 
  disposal 
  of properties            -                -        56                 -    (21)             35      3             38 
 Investment 
  property fair 
  value movements          -                -         -                 -     (3)            (3)      -            (3) 
 Perpetual 
  securities 
  coupons                  -                -         -                23       -             23    (4)             19 
 Non-underlying 
  finance 
  movements                -                -         -              (17)     (5)           (22)      3           (19) 
 IAS 19 pension 
  expenses                 -              (9)         -                28       -             19    (4)             15 
 Acquisition 
  adjustments              -             (26)         -                 -       -           (26)      5           (21) 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 Total property, 
  finance, 
  pension and 
  acquisition 
  adjustments              -             (35)        56                34    (29)             26      3             29 
 
 Tax adjustments 
 Over provision in 
  prior 
  years                    -                -         -                 -       -              -      8              8 
 Revaluation of 
  deferred 
  tax balances             -                -         -                 -       -              -    (3)            (3) 
 
 Total adjustments     (278)            (114)        56                34    (29)          (331)     46          (285) 
-------------------  -------  ---------------  --------  ----------------  ------  -------------  -----  ------------- 
 

Prior year property strategy programme

During the prior year, the Group identified an impairment indicator following an approved programme of store closures. This programme was initially announced at the Capital Markets Day in September. It was subsequently revisited during the second half of the year resulting in additional planned closures. Impairment charges and closure costs were therefore recognised in the prior year as follows:

 
                                      28 weeks to 21 September       52 weeks to 7 March 
                                                          2019                      2020 
                                        Property    Impairment     Property   Impairment 
                                        strategy        review     strategy       review 
                                       programme                  programme 
                                            GBPm          GBPm         GBPm         GBPm 
---------------------------------  -------------  ------------  -----------  ----------- 
 Impairment of property, plant 
  and equipment                               51            69           70           84 
 Impairment of leased assets                  24            15           51           29 
 Impairment of intangible assets               5            13            5           13 
 Store closure provisions                     23             -           41            - 
 Redundancy provisions                         3             -            3            - 
---------------------------------  -------------  ------------  -----------  ----------- 
                                             106            97          170          126 
---------------------------------  -------------  ------------  -----------  ----------- 
 

Prior year retail restructuring programme

Restructuring costs of GBP(32) million in the prior year mostly comprise redundancy payments following changes to the Group's store management structure, responding to changing customer shopping habits and reducing costs throughout the store estate, as well as the closure of one Argos distribution centre, prior to the wider store closure programme announced at the Capital Markets Day. Also included costs incurred following announced head-office restructures during the year.

Cash flow statement

The table below shows the impact of non-underlying items on the Group cash flow statement:

 
                                                      28 weeks       28 weeks   52 weeks 
                                                            to             to         to 
                                                  19 September   21 September    7 March 
                                                          2020           2019       2020 
                                                          GBPm           GBPm       GBPm 
 --------------------------------------------    -------------  -------------  --------- 
 
 Cash flows from operating activities 
 IAS 19 pension expenses                                   (3)            (4)        (9) 
 Financial Services transition                             (7)           (13)       (22) 
 Argos integration costs                                     -            (3)        (2) 
 Restructuring programmes                                  (9)            (4)       (34) 
 ATM Rates reimbursement                                    12              -          - 
 Transaction costs relating to the proposed 
  merger with Asda                                           -           (11)       (13) 
-----------------------------------------------  -------------  -------------  --------- 
 Cash used in operating activities                         (7)           (35)       (80) 
 
 Cash flows from investing activities 
 Proceeds from property disposals                           19             54         81 
-----------------------------------------------                 ------------- 
 Cash generated from investing activities                   19             54         81 
 
 Net cash flows                                             12             19          1 
---------------------------------------------    -------------  -------------  --------- 
 

The Property strategy and Retail restructuring programmes disclosed in prior years are included within Restructuring programmes in the current year.

   4.         Segment reporting 

The Group's businesses are organised into three operating segments:

   --     Retail - Food 
   --     Retail - General Merchandise & Clothing 
   --     Financial Services (Sainsbury's Bank plc and Argos Financial Services entities) 

Management has considered the economic characteristics, similarity of products, production processes, customers, sales methods and regulatory environment of its two Retail segments. In doing so, it has been concluded that they be aggregated into one 'Retail' segment in the financial statements. This aggregated information provides users the financial information needed to evaluate the business and the environment in which it operates.

Previously the Group has disclosed a Property Investment segment, relating to its joint ventures with The British Land Company PLC and Land Securities Group PLC. Following the sale of properties from the joint venture with British Land to Reality Income Corporation during the prior year, management reassessed this segment, and determined that it no longer meets the definition of an operating segment due to its results not being reviewed by the chief operating decision maker to make decisions about resource allocations. As a result, financial information relating to this component is now included in the Group's Retail segment. Comparative information has been restated.

The Operating Board assesses the performance of all segments on the basis of underlying profit before tax. All material operations and assets are in the UK.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.

   a.         Income statement and balance sheet 
 
                                         Retail   Financial      Group 
                                                   Services 
 28 weeks to 19 September 2020             GBPm        GBPm       GBPm 
------------------------------------  ---------  ----------  --------- 
 Segment revenue 
 Retail sales to external customers      14,715           -     14,715 
 Financial Services to external 
  customers(1)                                -         219        219 
------------------------------------  ---------  ----------  --------- 
 Underlying revenue                      14,715         219     14,934 
------------------------------------  ---------  ----------  --------- 
 Revenue                                 14,715         219     14,934 
------------------------------------  ---------  ----------  --------- 
 
 Underlying operating profit/(loss)         555        (55)        500 
 Underlying finance income                    2           -          2 
 Underlying finance costs                 (201)           -      (201) 
------------------------------------  ---------  ----------  --------- 
 Underlying profit/(loss) before 
  tax                                       356        (55)        301 
 Non-underlying expense (note 
  3)                                                             (438) 
------------------------------------  ---------  ----------  --------- 
 Loss before tax                                                 (137) 
 Income tax expense (note 7)                                      (42) 
------------------------------------  ---------  ----------  --------- 
 Loss for the financial period                                   (179) 
------------------------------------  ---------  ----------  --------- 
 
 Assets                                  18,412       8,051     26,463 
 Investment in joint ventures 
  and associates                              5           -          5 
------------------------------------  ---------  ----------  --------- 
 Segment assets                          18,417       8,051     26,468 
------------------------------------  ---------  ----------  --------- 
 Segment liabilities                   (12,133)     (7,148)   (19,281) 
------------------------------------  ---------  ----------  --------- 
 

(1) Financial Services income includes GBP176 million recognised using the effective interest rate method.

 
                                                           Financial 
                                                  Retail    Services      Group 
 28 weeks to 21 September 2019                      GBPm        GBPm       GBPm 
---------------------------------------------  ---------  ----------  --------- 
 Segment revenue 
 Retail sales to external customers               14,808           -     14,808 
 Financial Services to external customers(1)           -         289        289 
---------------------------------------------  ---------  ----------  --------- 
 Underlying revenue                               14,808         289     15,097 
---------------------------------------------  ---------  ----------  --------- 
 Revenue                                          14,808         289     15,097 
 
 Underlying operating profit                         437          20        457 
 Underlying finance income                             2           -          2 
 Underlying finance costs                          (221)           -      (221) 
 Underlying share of post-tax profit 
  from joint ventures and associates                   -           -          - 
---------------------------------------------  ---------  ----------  --------- 
 Underlying profit before tax                        218          20        238 
 Non-underlying expense (note 3)                                          (229) 
---------------------------------------------  ---------  ----------  --------- 
 Profit before tax                                                            9 
 Income tax expense (note 7)                                               (47) 
---------------------------------------------  ---------  ----------  --------- 
 Loss for the financial period                                             (38) 
 
 Assets                                           19,308       9,542     28,850 
 Investment in joint ventures and 
  associates                                          56           -         56 
---------------------------------------------  ---------  ----------  --------- 
 Segment assets                                   19,364       9,542     28,906 
 Segment liabilities                            (12,478)     (8,522)   (21,000) 
---------------------------------------------  ---------  ----------  --------- 
 
 

(1) Financial Services income includes GBP204 million recognised using the effective interest rate method.

 
                                                  Retail   Financial      Group 
                                                            Services 
 52 weeks to 7 March 2020                           GBPm        GBPm       GBPm 
---------------------------------------------  ---------  ----------  --------- 
 Segment revenue 
 Retail sales to external customers               28,424           -     28,424 
 Financial Services to external customers(1)           -         569        569 
---------------------------------------------  ---------  ----------  --------- 
 Underlying revenue                               28,424         569     28,993 
---------------------------------------------  ---------  ----------  --------- 
 Revenue                                          28,424         569     28,993 
---------------------------------------------  ---------  ----------  --------- 
 
 Underlying operating profit                         938          48        986 
 Underlying finance income                             4           -          4 
 Underlying finance costs                          (404)           -      (404) 
 Underlying share of post-tax profit                   -           -          - 
  from joint ventures and associates 
---------------------------------------------  ---------  ----------  --------- 
 Underlying profit before tax                        538          48        586 
 Non-underlying expense (note 3)                                          (331) 
---------------------------------------------  ---------  ----------  --------- 
 Profit before tax                                                          255 
 Income tax expense (note 7)                                              (103) 
---------------------------------------------  ---------  ----------  --------- 
 Profit for the financial period                                            152 
---------------------------------------------  ---------  ----------  --------- 
 
 Assets                                           18,463       9,465     27,928 
 Investment in joint ventures and 
  associates                                           9           -          9 
---------------------------------------------  ---------  ----------  --------- 
 Segment assets                                   18,472       9,465     27,937 
---------------------------------------------  ---------  ----------  --------- 
 Segment liabilities                            (11,738)     (8,426)   (20,164) 
---------------------------------------------  ---------  ----------  --------- 
 

(1) Financial Services income includes GBP405 million recognised using the effective interest rate method.

   b.         Segmented cash flow statement 
 
                                                             28 weeks to 19           28 weeks to 21 September 
                                                             September 2020                     2019 
                                             APM                Financial                      Financial 
                                          reference    Retail    Services   Group    Retail     Services   Group 
 
                                                         GBPm        GBPm    GBPm      GBPm         GBPm    GBPm 
 
 Profit/(loss) before tax                                  31       (168)   (137)         2            7       9 
----------------------------------------------------  -------  ----------  ------  --------  -----------  ------ 
 Net finance costs                                        180           -     180       196            3     199 
 Share of post-tax loss from 
  joint ventures                                            -           -       -        30            -      30 
 Operating profit/(loss)                                  211       (168)      43       228           10     238 
 Adjustments for: 
  Depreciation and amortisation 
   expense                                                647          14     661       653           14     667 
  Net impairment loss on property, 
   plant and equipment, right 
   of use assets and intangible 
   assets                                                 187         105     292       177            -     177 
  Non-cash adjustments arising 
   from acquisitions                                      (1)           -     (1)       (1)            -     (1) 
  Financial Services impairment 
   losses on loans and advances                             -          39      39         -           47      47 
  Loss/(profit) on sale of properties 
   and early termination of leases                          5           2       7      (44)            -    (44) 
  Share-based payments expense                             14           2      16        17            2      19 
  Non-cash defined benefit scheme 
   expenses                                                 3           -       3         4            -       4 
  Cash contributions to defined 
   benefit scheme                                        (60)           -    (60)      (48)            -    (48) 
 Operating cash flows before 
  changes in working capital                            1,006         (6)   1,000       986           73   1,059 
 Changes in working capital 
 Decrease/(increase) in working 
  capital                                                 713          79     792       289        (110)     179 
 Cash generated from/(used in) 
  operations                                            1,719          73   1,792     1,275         (37)   1,238 
 Interest paid                                a         (193)           -   (193)     (208)            -   (208) 
 Corporation tax paid                                    (88)           -    (88)       (8)            2     (6) 
 Net cash generated/(used) from 
  operating activities                                  1,438          73   1,511     1,059         (35)   1,024 
----------------------------------------------------  -------  ----------  ------  --------  -----------  ------ 
 
 Cash flows from investing activities 
 Purchase of property, plant 
  and equipment excluding strategic 
  capital expenditure                                   (257)           -   (257)     (213)            -   (213) 
 Initial direct costs on new 
  leases                                                  (3)           -     (3)       (2)            -     (2) 
 Purchase of intangible assets                           (33)        (11)    (44)      (35)         (17)    (52) 
 Proceeds from disposal of property, 
  plant and equipment                                      19           -      19        54            -      54 
 Interest received                            a             -           -       -         2            -       2 
 Dividends and distributions 
  received                                    e            22           -      22       118            -     118 
 Net cash used in investing 
  activities                                            (252)        (11)   (263)      (76)         (17)    (93) 
----------------------------------------------------  -------  ----------  ------  --------  -----------  ------ 
 
 Cash flows from financing activities 
 Proceeds from issuance of ordinary 
  shares                                      d             4           -       4         5            -       5 
 Proceeds from borrowings                     c             -           -       -        80            -      80 
 Proceeds from short term borrowings          c           660           -     660         -            -       - 
 Repayment of borrowings                      c         (269)           -   (269)     (230)            -   (230) 
 Repayment of short term borrowings           c         (660)           -   (660)         -            -       - 
 Repayment of perpetual capital 
  securities                                  c         (250)           -   (250)         -            -       - 
 Purchase of own shares                       d          (30)           -    (30)       (4)            -     (4) 
 Repayment of capital element 
  of obligations under lease 
  liabilities                                 b         (223)         (1)   (224)     (230)          (1)   (231) 
 Repayment of capital element 
  of obligations under hire purchase 
  agreements                                  c             -           -       -      (10)            -    (10) 
 Dividends paid on ordinary 
  shares                                                    -           -       -     (174)            -   (174) 
 Dividends paid on perpetual 
  securities                                  a          (20)           -    (20)      (20)            -    (20) 
 Net cash used in financing 
  activities                                            (788)         (1)   (789)     (583)          (1)   (584) 
----------------------------------------------------  -------  ----------  ------  --------  -----------  ------ 
 
 Intra group funding 
 Bank capital injections                                    -           -       -      (35)           35       - 
 Net cash (used in)/generated 
  from intra group funding                                  -           -       -      (35)           35       - 
----------------------------------------------------  -------  ----------  ------  --------  -----------  ------ 
 
 Net increase/(decrease) in 
  cash and cash equivalents                               398          61     459       365         (18)     347 
----------------------------------------------------  -------  ----------  ------  --------  -----------  ------ 
 
 
                                                      52 weeks to 7 March 2020 
                                          APM                 Financial 
                                       reference     Retail    Services     Group 
                                                       GBPm        GBPm      GBPm 
 
 Profit before tax                                      235          20       255 
-------------------------------------------------  --------  ----------  -------- 
 Net finance costs                                      363           3       366 
 Share of post-tax loss 
  from joint ventures and 
  associates                                             29           -        29 
 Operating profit                                       627          23       650 
 Adjustments for: 
 Depreciation and amortisation 
  expense                                             1,225          31     1,256 
 Net impairment charge on 
  property, plant and equipment, 
  right-of-use asset, investment 
  property and intangible 
  assets                                                257           6       263 
 Non-cash adjustments arising 
  from acquisitions                                     (2)           -       (2) 
 Financial Services impairment 
  losses on loans and advances                            -          80        80 
 (Profit)/loss on sale of 
  properties and early termination 
  of leases                                            (56)           -      (56) 
 Loss on disposal of intangibles                          -           -         - 
 Share-based payments expense                            34           3        37 
 Non-cash defined benefit 
  scheme expenses                                         9           -         9 
 Cash contributions to defined 
  benefit scheme                                       (52)           -      (52) 
 Operating cash flows before 
  changes in working capital                          2,042         143     2,185 
 Changes in working capital 
 Decrease/(increase) in 
  working capital                                      (71)       (248)     (319) 
 Cash generated from operations                       1,971       (105)     1,866 
 Interest paid                             a          (384)           -     (384) 
 Corporation tax paid                                 (113)           3     (110) 
 Net cash generated/(used) 
  from operating activities                           1,474       (102)     1,372 
-------------------------------------------------  --------  ----------  -------- 
 
 Cash flows from investing 
  activities 
 Purchase of property, plant 
  and equipment excluding 
  strategic capital expenditure                       (517)         (2)     (519) 
 Strategic capital expenditure                            -           -         - 
 Purchase of property, plant 
  and equipment                                       (517)         (2)     (519) 
 Initial direct costs on 
  new leases                                           (13)           -      (13) 
 Purchase of intangible 
  assets                                               (82)        (38)     (120) 
 Proceeds from disposal 
  of property, plant and 
  equipment                                              81           -        81 
 Interest received                         a              2           -         2 
 Dividends and distributions 
  received                                 e            143           -       143 
 Net cash used in investing 
  activities                                          (386)        (40)     (426) 
-------------------------------------------------  --------  ----------  -------- 
 
 Cash flows from financing 
  activities 
 Proceeds from issuance 
  of ordinary shares                       d             15           -        15 
 Proceeds from borrowings                  c            250           -       250 
 Repayment of borrowings                   c          (169)           -     (169) 
 Repayment upon maturity 
  of convertible bonds                     c          (450)           -     (450) 
 Purchase of own shares                    d           (18)           -      (18) 
 Repayment of capital element 
  of obligations under lease 
  liabilities                              b          (419)         (1)     (420) 
 Repayment of capital element 
  of obligations under hire 
  purchase agreements                      c           (10)           -      (10) 
 Dividends paid on ordinary 
  shares                                              (247)           -     (247) 
 Dividends paid on perpetual 
  securities                               a           (23)           -      (23) 
 Net cash used in financing 
  activities                                        (1,071)         (1)   (1,072) 
-------------------------------------------------  --------  ----------  -------- 
 
 Intra group funding 
 Bank capital injections                               (35)          35         - 
 Net cash (used in)/generated 
  from intra group funding                             (35)          35         - 
-------------------------------------------------  --------  ----------  -------- 
 
 Net decrease in cash and 
  cash equivalents                                     (18)       (108)     (126) 
-------------------------------------------------  --------  ----------  -------- 
 
   5.         Supplier arrangements 

Supplier incentives, rebates and discounts, collectively known as 'supplier arrangements', represent a material deduction to cost of sales and directly affect the Group's reported margin. The arrangements can be complex, with amounts spanning multiple products over different time periods, and there can be multiple triggers and discounts. The accrued value at the reporting date is included in trade receivables or trade payables, depending on the right of offset.

The types that involve a level of judgement and estimation are as follows:

-- 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 Group's financial year. The rebate amount is linked to pre-agreed targets such as sales volumes.

-- Marketing and advertising income - advertising income from suppliers through the Group's subsidiary Nectar 360 Services LLP.

The amounts recognised in the income statement for the above types of supplier arrangements are as follows (excluding non-judgemental discounts and supplier incentives outside the above categories):

 
                                  28 weeks to    28 weeks to   52 weeks 
                                                                     to 
                                 19 September   21 September    7 March 
                                         2020           2019       2020 
                                         GBPm           GBPm       GBPm 
-----------------------------   -------------  -------------  --------- 
 
 Fixed amounts                             89            108        278 
 Supplier rebates                          32             34         68 
 Marketing and advertising 
  income                                   34             58        105 
 Total supplier arrangements              155            200        451 
------------------------------  -------------  -------------  --------- 
 

Of the above amounts, the following was outstanding and held on the balance sheet at the period-end:

 
                                          28 weeks       28 weeks   52 weeks 
                                                to             to         to 
                                      19 September   21 September    7 March 
                                              2020           2019       2020 
                                              GBPm           GBPm       GBPm 
----------------------------------   -------------  -------------  --------- 
 Within inventory                              (7)            (7)        (7) 
 
 Within current trade receivables 
 Supplier arrangements due                      32             31         44 
 Accrued supplier arrangements                  45             53         38 
 
 Within current trade payables 
 Supplier arrangements due                       8             12         12 
 Accrued supplier arrangements                   3              2          - 
 Deferred income due                           (1)            (4)        (2) 
-----------------------------------  -------------  -------------  --------- 
 Total supplier arrangements                    80             87         85 
-----------------------------------  -------------  -------------  --------- 
 
   6.         Finance income and finance costs 
 
                            28 weeks to 19                        28 weeks to 21                         52 weeks to 7 
                             September 2020                        September 2019                          March 2020 
                  Underlying   Non-Underlying   Total   Underlying   Non-Underlying   Total   Underlying   Non-Underlying   Total 
                        GBPm             GBPm    GBPm         GBPm             GBPm    GBPm         GBPm             GBPm    GBPm 
---------------  -----------  ---------------  ------  -----------  ---------------  ------  -----------  ---------------  ------ 
 Interest on 
  bank deposits 
  and other 
  financial 
  assets                   1                -       1            1                -       1            2                -       2 
 Fair value 
  measurements             -                3       3            -                1       1            -                -       - 
 IAS 19 pension 
  financing 
  income                   -               11      11            -               15      15            -               28      28 
 Finance income 
  on net 
  investment in 
  leases                   1                -       1            1                -       1            2                -       2 
---------------  -----------  ---------------  ------  -----------  ---------------  ------  -----------  ---------------  ------ 
 Finance Income            2               14      16            2               16      18            4               28      32 
---------------  -----------  ---------------  ------  -----------  ---------------  ------  -----------  ---------------  ------ 
 
 Borrowing 
 costs: 
  Secured 
   borrowings           (29)                -    (29)         (26)                -    (26)         (50)                -    (50) 
  Unsecured 
   borrowings            (1)                -     (1)          (9)                -     (9)         (12)                -    (12) 
  Lease 
   liabilities         (163)              (5)   (168)        (175)              (5)   (180)        (323)              (9)   (332) 
  Fair value 
   measurements            -                -       -            -                -       -            -              (8)     (8) 
---------------  -----------  ---------------  ------  -----------  ---------------  ------  -----------  ---------------  ------ 
                       (193)              (5)   (198)        (210)              (5)   (215)        (385)             (17)   (402) 
 
 Other finance 
 costs: 
  Interest 
   capitalised 
   - qualifying 
   assets                  2                -       2            2                -       2            4                -       4 
  Fair value 
   measurements            -                -       -            -              (4)     (4)            -                -       - 
  Perpetual 
   securities 
   coupon               (10)               10       -         (13)               13       -         (23)               23       - 
---------------  -----------  ---------------  ------  -----------  ---------------  ------  -----------  ---------------  ------ 
                         (8)               10       2         (11)                9     (2)         (19)               23       4 
 
 Finance costs         (201)                5   (196)        (221)                4   (217)        (404)                6   (398) 
---------------  -----------  ---------------  ------  -----------  ---------------  ------  -----------  ---------------  ------ 
 

Fair value remeasurements relate to net fair value movements on derivative financial instruments not designated in a hedging relationship.

   7.         Income tax expense 
 
                                                                      52 weeks 
                                         28 weeks to    28 weeks to         to 
                                        19 September   21 September    7 March 
                                                2020           2019       2020 
                                                GBPm           GBPm       GBPm 
-------------------------------------  -------------  -------------  --------- 
 
 Current tax expense                               5             55         88 
 Deferred tax expense/(credit)                    37            (8)         15 
-------------------------------------  -------------  -------------  --------- 
 Total income tax expense in income 
  statement                                       42             47        103 
-------------------------------------  -------------  -------------  --------- 
 
 
 Underlying tax rate                           27.6%          26.5%      25.4% 
 Effective tax rate                          (30.7)%         522.2%      40.4% 
-------------------------------------  -------------  -------------  --------- 
 
                                                GBPm           GBPm       GBPm 
-------------------------------------  -------------  -------------  --------- 
 Income tax expense on underlying 
  profit                                          83             63        149 
 Income tax credit on non-underlying 
  items                                         (41)           (16)       (46) 
-------------------------------------  -------------  -------------  --------- 
 Total income tax expense in income 
  statement                                       42             47        103 
-------------------------------------  -------------  -------------  --------- 
 

The interim tax charge is calculated in accordance with IAS 34. The annual effective tax rate (excluding discrete items) is calculated and applied to the interim profit before tax. The tax effect of discrete items in the reporting period is then included to calculate the reported tax expense. Discrete items include non-underlying items (see note 3) and prior year deferred tax adjustments.

The effective tax rate of (30.7) per cent (28 weeks to 21 September 2019: 522.2 per cent) is lower than the standard rate of corporation tax in the UK of 19 per cent and results in a tax charge, rather than a tax credit, on the interim loss before tax. This is largely a result of the amount of non-deductible expenses, particularly in respect of non-underlying discrete items, the de-recognition of previously recognised deferred tax assets on capital losses, and prior year adjustments.

The main rate of UK corporation tax reduced from 20 per cent to 19 per cent from 1 April 2017. A further reduction in the corporation tax rate to 17 per cent, effective from 1 April 2020, was substantively enacted in a prior period, so its effect was reflected in the Group's balance sheet as at 7 March 2020. Deferred tax on temporary differences and tax losses as at the balance sheet date is calculated at the substantively enacted rates at which the temporary differences and tax losses are expected to reverse. A change to the corporation tax rate, so that it remains at 19 per cent rather than reducing to 17 per cent from 1 April 2020, was announced in the 2020 Budget and substantively enacted prior to 19 September 2020. Therefore, its effect is recognised in the current period.

Finance Act 2020 also includes legislation restricting the amount of chargeable gains that a company can relieve with its carried-forward capital losses from previous accounting periods. Broadly, from 1 April 2020 a company is only able to offset up to 50 per cent of chargeable gains using carried forward capital losses. The Group's carried forward capital losses were fully recognised at 7 March 2020. The Group has considered the expected impact of these changes in tax law in respect of the utilisation of carried-forward tax losses in future accounting periods. Accordingly approximately GBP178 million of the Group's carried forward capital losses have not been recognised as at 19 September 2020.

   8.         (Loss)/Earnings per share 

Basic earnings per share is calculated by dividing the earnings attributable to ordinary shareholders by the weighted average number of ordinary shares in issue during the year, excluding those held by the Employee Share Ownership Plan trusts, which are treated as cancelled.

For diluted earnings per share, the earnings attributable to the ordinary shareholders are adjusted by the coupons on the perpetual subordinated convertible bonds (net of tax), and prior to redemption, interest on the senior convertible bonds (net of tax). The weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares. These represent share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year and the number of shares that would be issued if all senior convertible bonds and perpetual subordinated convertible bonds are assumed to be converted.

Underlying earnings per share is provided by excluding the effect of any non-underlying items as defined in note 3. This alternative measure of earnings per share is presented to reflect the Group's underlying trading performance. All operations are continuing for the periods presented.

 
                                                             28 weeks       28 weeks    52 weeks 
                                                                   to             to          to 
                                                         19 September   21 September     7 March 
                                                                 2020           2019        2020 
                                                              million        million     million 
------------------------------------------------------  -------------  -------------  ---------- 
 Weighted average number of shares in issue(1)                2,211.7        2,207.4     2,207.6 
 Weighted average number of dilutive share options(1)            18.7           16.5        24.1 
 Weighted average number of dilutive senior 
  convertible bonds(1)                                              -          153.6       153.7 
 Weighted average number of dilutive subordinated 
  perpetual convertible bonds                                    86.7           83.8        84.6 
 Total number of shares for calculating diluted 
  (loss)/earnings per share                                   2,317.1        2,461.3     2,470.0 
------------------------------------------------------  -------------  -------------  ---------- 
 
                                                                 GBPm           GBPm        GBPm 
------------------------------------------------------  -------------  -------------  ---------- 
 (Loss)/profit for the financial period (net 
  of tax)                                                       (179)           (38)         152 
 Less profit attributable to: 
  Holders of perpetual capital securities                           -            (8)        (16) 
  Holders of perpetual convertible bonds                          (4)            (3)         (7) 
 (Loss)/profit for the financial period attributable 
  to ordinary shareholders                                      (183)           (49)         129 
------------------------------------------------------  -------------  -------------  ---------- 
 
                                                                 GBPm           GBPm        GBPm 
------------------------------------------------------  -------------  -------------  ---------- 
 (Loss)/profit for the financial period attributable 
  to ordinary shareholders                                      (183)           (49)         129 
 Add interest on senior convertible bonds (net 
  of tax)(1)                                                        -              -           9 
 Add coupon on subordinated perpetual convertible 
  bonds (net of tax)(1)                                             -              -           6 
 Diluted (loss)/earnings for calculating diluted 
  (loss)/earnings per share                                     (183)           (49)         144 
------------------------------------------------------  -------------  -------------  ---------- 
 
                                                                 GBPm           GBPm        GBPm 
------------------------------------------------------  -------------  -------------  ---------- 
 (Loss)/profit for the financial period attributable 
  to ordinary shareholders of the parent                        (183)           (49)         129 
 Adjusted for non-underlying items (note 3)                       438            229         331 
 Tax on non-underlying items                                     (41)           (16)        (46) 
 Add back perpetual securities coupons (net 
  of tax)(2)                                                       10             11          23 
------------------------------------------------------ 
 Underlying profit after tax attributable to 
  ordinary shareholders of the parent                             224            175         437 
 Add interest on convertible bonds (net of tax)                     -              6           9 
 Add coupon on subordinated perpetual convertible 
  bonds (net of tax)                                                3              3           6 
 Diluted underlying profit after tax attributable 
  to ordinary shareholders of the parent                          227            184         452 
------------------------------------------------------  -------------  -------------  ---------- 
 
                                                                Pence          Pence       Pence 
                                                            per share      per share   per share 
------------------------------------------------------  -------------  -------------  ---------- 
 Basic (loss)/earnings                                          (8.3)          (2.2)         5.8 
 Diluted (loss)/earnings                                        (8.3)          (2.2)         5.8 
 Underlying basic earnings                                       10.1            7.9        19.8 
 Underlying diluted earnings                                      9.8            7.5        18.3 
------------------------------------------------------  -------------  -------------  ---------- 
 

(1) In accordance with IAS 33, 'Earnings per share', dilutive share options and their respective earnings adjustments are excluded from the calculation of diluted earnings per share when the impact is anti-dilutive.

(2) Underlying earnings per share calculation is based on underlying profit after tax attributable to ordinary shareholders. Therefore the perpetual securities coupons are added back.

   9.         Dividends 
 
                                                    28 weeks      28 weeks  52 weeks 
                                                          to            to        to 
                                                19 September  21 September   7 March 
                                                        2020          2019      2020 
Amounts recognised as distributions to equity 
 holders in the period: 
  Dividend per share (pence)                               -           7.9      11.2 
  Total dividend charge (GBPm)                             -           174       247 
 

In April the Board chose, due to limited visibility at the time on the potential impact of COVID-19 on the business, to defer dividend payment decisions and did not pay a final dividend for the 2019/20 financial year. In the light of improved visibility, strong trading and a strong balance sheet position, the Board has chosen to pay a special dividend in lieu of a final dividend for the 2019/20 financial year. The dividend of 7.3p was approved by the Board of Directors on 4 November 2020.

An interim dividend of 3.2 pence per share (21 September 2019: 3.3 pence per share), has been approved by the Board of Directors for the financial year ending 6 March 2021, resulting in an interim dividend of GBP71 million (21 September 2019: GBP73 million). The interim dividend was approved by the Board on 4 November 2020 and as such has not been included as a liability at 19 September 2020.

   10.       Property, plant and equipment 
 
                                      28 weeks to    28 weeks to     52 weeks 
                                     19 September   21 September   to 7 March 
                                             2020           2019         2020 
                                             GBPm           GBPm         GBPm 
Net book value 
At the beginning of the period              8,911          9,193        9,193 
Additions                                     230            210          528 
Disposals                                    (20)            (6)         (17) 
Transfer to assets held for sale                -              -            1 
Depreciation charge                         (331)          (334)        (634) 
Impairment charge                            (69)          (120)        (160) 
At the end of the period                    8,721          8,943        8,911 
 

The net book value of property, plant and equipment comprises land & buildings of GBP6,937 million (21 September 2019: GBP7,108 million; 7 March 2020: GBP7,022 million) and fixtures & fittings of GBP1,784 million (21 September 2019: GBP1,835 million; 7 March 2020: GBP1,889 million).

At 19 September 2020, capital commitments contracted, but not provided for by the Group, amounted to GBP113 million (21 September 2019: GBP174 million; 7 March 2020: GBP112 million), and GBPnil for the property joint ventures (21 September 2019: GBP2 million; 7 March 2020: GBPnil).

   11.       Leases 

Set out below are the carrying amounts of right-of-use assets and the movements during the period:

 
                                   28 weeks to    28 weeks to     52 weeks 
                                  19 September   21 September   to 7 March 
                                          2020           2019         2020 
                                          GBPm           GBPm         GBPm 
Net book value 
At the beginning of the period           4,826          4,993        4,993 
New leases and modifications               363            187          406 
Depreciation charge                      (265)          (263)        (493) 
Impairment charge                        (128)           (39)         (80) 
At the end of the period                 4,796          4,878        4,826 
 
 

Included within the above are land and buildings with a net book value of GBP4,496 million (21 September 2019: GBP4,650 million; 7 March 2020: GBP4,536 million), and equipment with a net book value of GBP300 million (21 September 2019: GBP228 million; 7 March 2020: GBP290 million).

Set out below are the carrying amounts of lease liabilities and the movements during the period:

 
                                              28 weeks to    28 weeks to     52 weeks 
                                             19 September   21 September   to 7 March 
                                                     2020           2019         2020 
                                                     GBPm           GBPm         GBPm 
At the beginning of the period                      5,774          5,831        5,831 
New leases and modifications                          357            186          373 
Interest expense                                      168            180          332 
Payments                                            (392)          (421)        (762) 
At the end of the period                            5,907          5,776        5,774 
 
 
Current                                               538            536          510 
Non-current                                         5,369          5,240        5,264 
 
 

The Group presents additions to lease liabilities and right of use assets in line with the disclosure requirements of IFRS 16 'Leases'. In doing so, additions to right of use assets and lease liabilities above include the net impact of new leases, lease extensions, terminations and the exercise of lease breaks.

Right-of-use assets are measured at cost (which includes the amount of any corresponding lease liability), less any accumulated depreciation and impairment losses, and adjusted for any subsequent remeasurement of lease liabilities. Lease liabilities are measured at the present value of lease payments to be made over the lease term, discounted using the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date of the lease, the lease liability is subsequently measured at amortised cost using the effective interest rate method, increasing to reflect the accretion of interest and reducing for the lease payments made.

The Group determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised. The inclusion of a lease extension period or lease break period in the lease term is a key judgement for the Group and considers all relevant factors that create an economic incentive for it to exercise them. For leased properties, this includes the current and expected profitability of the respective site, as well as the length of time until the option can be exercised. Any changes to the Group's judgement over lease terms will impact both the right of use asset and lease liability.

The accelerated structural integration of Sainsbury's and Argos which commenced in the prior year has led to changes in the IFRS 16 right of use asset and lease liability balances.

The judgements applied in the exercising of lease breaks have changed. The store rationalisation programme is deemed a change in circumstances within the control of the Group and means that lease breaks will be exercised, whereas the judgement applied to these in FY 2020 was that the break would not be exercised. The Group has also revisited its assumptions about the way that lease breaks will be exercised across the portfolio and made it more specific for each part of the store estate. This acts to decrease the lease liability and right of use asset by circa GBP200m. With hindsight, the trigger for the recognition of this modification should have been the Capital Markets Day in September 2019.

In conjunction with store rationalisation, the Group has been actively pursuing lease extension opportunities across well-performing supermarket sites. This ensures key stores remain in the portfolio as the Group seeks to open more Argos store-in-stores, as well as increasing its online capacity through its in-store picking model. The extensions act to increase the lease liability and right of use asset as a result of committing to future additional rental payments, as well as reflecting updated discount rates which are typically lower than those previously used. Certain extensions agreed in the prior year were not reflected in lease modifications in the prior year. This acts to increase the lease liability and right of use asset by circa GBP375m.

The net impact of these items is an increase to lease liability and right of use assets of circa GBP175m. Since the impact on the 2020 income statement was less than GBP2m and considering a number of other qualitative factors, the Group has concluded this is not material and has therefore been reported within the GBP357m new leases and modifications in the current period above.

Income statement disclosures

The following are the amounts recognised in profit or loss:

 
                                                          28 weeks          28 weeks     52 weeks 
                                                   to 19 September   to 21 September   to 7 March 
                                                              2020              2019         2020 
                                                              GBPm              GBPm         GBPm 
Depreciation of right-of-use assets                          (265)             (263)        (493) 
Interest on lease liabilities                                (168)             (180)        (332) 
Variable lease payments not included 
 in the measurement of lease liabilities                       (1)               (1)          (1) 
Finance income from sub-leasing of right-of-use 
 assets                                                          1                 1            2 
Operating sublet income                                         17                23           47 
Expenses relating to short term leases                        (19)              (15)         (28) 
Expenses relating to leases of low value 
 assets                                                        (1)               (4)          (8) 
At the end of the period                                     (436)             (439)        (813) 
 
Total cash outflow for leases                                (412)             (439)        (798) 
 
   12.       Intangible assets 
 
                                                28 weeks to 
                              28 weeks to 19   21 September    52 weeks to 
                              September 2020           2019   7 March 2020 
                                        GBPm           GBPm           GBPm 
Net book value 
At beginning of the period             1,012          1,043          1,043 
Additions                                 64             54            124 
Disposals                               (20)            (1)            (3) 
Amortisation charge                     (65)           (70)          (129) 
Impairment charge                       (95)           (18)           (23) 
At the end of the period                 896          1,008          1,012 
 

The net book value of goodwill and intangible assets predominantly comprises goodwill of GBP367 million (21 September 2019: GBP378 million; 7 March 2020: GBP378 million), software assets of GBP412 million (21 September 2019: GBP494 million; 7 March 2020: GBP506 million) and acquired brands of GBP111 million (21 September 2019: GBP130 million; 7 March 2020: GBP122 million).

   13.       Impairment of non-financial assets 

Approach and identification of cash generating units

At each reporting date, the Group reviews the carrying amounts of its property, plant and equipment and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset, being the higher of its fair value less costs to dispose and its value in use, is estimated in order to determine the extent of the impairment loss.

Where the asset does not generate cash flows that are independent from other assets, the Group estimates the recoverable amount of the cash-generating unit (CGU) or groups of CGUs to which the asset belongs. For Retail property, plant and equipment, the CGU is deemed to be each trading store, store pipeline development site or in certain cases for Argos, a cluster of stores. For non-store assets, including depots and IT assets, the CGU represents all depot and IT assets, combined with either the population of Sainsbury's or Argos stores that they support as this is the lowest identifiable group of assets that generate cash inflows.

Previously Argos stores have been clustered together and tested as CGUs comprising a hub store (that holds and distributes inventory) and spoke stores (that hold smaller amounts of inventory). Argos clusters relate to its multi-channel network that enables customers to source the most convenient pick-up point for a product from a number of local stores. If unavailable at their chosen store, a customer can be directed to an alternative nearby store that holds the necessary inventory, or it can be delivered to their chosen store from another within the same catchment area. As a result, customers regularly switch between stores for their benefit and convenience. Clusters are created using store location, proximity to other stores and postcode catchment areas.

Typically, inventory would be moved between stores within a cluster, and hence they were assessed together. As a result of the Group's restructuring programme as detailed in note 3, this model has been re-assessed. In particular, to support the streamlined Argos infrastructure, a total of 32 Local Fulfilment Centres will be built across the UK that will operate the Group's fast track delivery operations, delivering to customers' homes and to Argos stores and collection points across the country. Consequently it has been concluded that spokes will now be considered based on their individual cash flows. The clustering approach is deemed appropriate for hubs only which will hold and transfer inventory to spokes as required.

For Financial Services, the CGU is deemed to be each respective product or product group that is capable of generating cash flows independent of other products. Non-product assets are reviewed separately as collective CGUs with the products that they support.

Any impairment loss is recognised in the income statement in the year in which it occurs. Where an impairment loss subsequently reverses due to a change in the original estimate, the carrying amount of the asset is increased to the revised estimate of its recoverable amount, or its original carrying value less notional accumulated depreciation if lower.

Identification of a triggering event

As detailed in note 3, the COVID-19 pandemic has resulted in changes to customer shopping habits, patterns and sources of finance. Despite this, the Group has proved resilient through the pandemic, with additional in-store costs mostly offset by the grocery sales growth and business rates relief. However the changes in customer behaviour have led to an acceleration of the Group's structural integration of Sainsbury's and Argos during the period and through this, a review of the economic performance of the Group's assets has been performed as a result of store rationalisation, changes in channel mix, and changes in customer borrowing and cash usage behaviour. This has been deemed an indicator of impairment and a full impairment review has therefore been performed covering both Retail and Financial Services non-financial assets.

Approach and assumptions

The recoverable amounts for CGUs have been determined using value in use calculations which are based on the cash flows expected to be generated, derived from the latest budget and forecast data which are reviewed by the Board. Budget and forecast data reflect both past experience and future expectation of market conditions. The key assumptions in the value in use calculation are as follows:

 
Assumption   Retail segment                                                     Financial Services segment 
Composition        Stores including Argos spokes 
 of CGU            / pipeline developments                                              *    Property, plant and equipment and intangible assets 
                    *    Property, plant and equipment and any goodwill                      attributable to each product (or group of products 
                         attributable to individual stores.                                  capable of generating independent cash flows). 
 
 
                    *    For leased assets, the CGU also includes right-of-use 
                         assets and corresponding lease liabilities as 
                         management has concluded that lease liabilities need 
                         to be considered when determining the recoverable 
                         amount of the CGU. 
 
 
 
                   Depots and IT and other assets 
                    *    Combined with the respective Sainsbury's or Argos 
                         stores that they support 
 
 
 
                   Argos hubs 
                    *    Combined with the cluster of local stores that they 
                         support 
Cash flow 
years /             *    Derived from Board approved cash flow projections for         *    Derived from Board approved cash flow projections for 
assumptions              five years and then extrapolated for a further 20                  five years and then extrapolated over the remaining 
                         years for supermarkets and 10 years for convenience                useful lives of the assets being tested for 
                         stores with no assumed growth rate, representing the               impairment. 
                         typical time between refits. 
 
 
                    *    Where lease terms are shorter than this, the 
                         remaining lease term has been used. 
 
 
                    *    In the case of properties identified for closure, 
                         cash flows years relate to the remaining period that 
                         the store will trade for. 
Terminal 
value               *    For owned sites, a terminal value is included in the           *    No terminal value is applied within the Financial 
                         final cash flow year, representing the net cash flows               Services segment, as cashflows are limited to the 
                         expected to be received for the disposal of the                     period of the remaining useful lives of the assets 
                         assets at the end of their useful life.                             being tested for impairment. 
 
 
                    *    It is calculated using an assumed market rent for the 
                         stores, with an investment yield based on similar 
                         properties in the area. 
Discount 
rate                *    A post-tax discount rate representing the Retail               *    A post-tax discount rate representing the Financial 
                         segment's weighted average cost of capital (WACC),                  Services segment's weighted average cost of capital 
                         subsequently grossed up to a pre-tax rate of 7.7 per                (WACC), subsequently grossed up to a pre-tax rate of 
                         cent.                                                               12.8 per cent. 
 
 
                    *    The post-tax WACC been calculated using the capital            *    The post-tax WACC has been calculated using a 
                         asset pricing model, the inputs of which include a                  combination of adjusted market analysis and the 
                         risk-free rate for the UK, a UK equity risk premium,                actual cost of debt on Tier 2 capital instruments. 
                         levered debt premium and a risk adjustment using a 10 
                         year average beta for the Group. 
 

For store pipeline development sites the carrying value of the asset is compared with its value in use using a methodology consistent with that described above for sites that will be developed. Future cash flows include the estimated costs to completion. For sites where there is no plan to develop a store, the recoverable amount is based on its fair value less costs to dispose.

Outputs and sensitivities

Impairment charges recognised in the Retail segment relate to both sites identified for closure as part of the restructuring programme, as well as other impairments on stores that will continue to trade, but for which the cash flows no longer support the carrying amount of assets. Impairment charges recognised in the Financial Services segment are a result of forecast cashflows reflecting the uncertain macro-economic environment and changes to customer behaviour no longer supporting the carrying amount of underlying IT systems and ATM assets. The overall charges are as follows:

 
                                              Restructuring 
                                                  programme  Other impairments   Total 
                                                       GBPm               GBPm    GBPm 
Impairment of property, plant and equipment               9                 60      69 
Impairment of leased assets                              66                 62     128 
Impairment of intangible assets                           3                 92      95 
                                                         78                214     292 
 

Of the total impairment charge of GBP(292) million, GBP(187) million is in relation to assets within the Retail segment, with the remaining GBP(105) million within the Financial Services segment.

Of the above assumptions, the value-in-use calculations are most sensitive to changes in the discount rate, cash flows and inputs underpinning the terminal value. The tables below set out the key sensitivities performed on the value-in-use models. The sensitivity analysis performed considers the reasonably possible changes in these assumptions, which incorporates increased uncertainty caused by the COVID-19 pandemic.

Retail segment

 
Sensitivity area        Sensitivity      Increase / (decrease) 
                                                 in impairment 
                                                          GBPm 
Discount rate           Increase of 1%                      15 
 Decrease of 1%                                            (3) 
Cash flows              Increase of 5%                     (3) 
 Decrease of 5%                                              6 
Rental yield (input 
 for terminal values)   Increase of 1%                       2 
 Decrease of 1%                                            (3) 
 

Financial Services segment

 
Sensitivity area   Sensitivity      Increase / (decrease) 
                                            in impairment 
                                                     GBPm 
Discount rate      Increase of 1%                      10 
 Decrease of 1%                                      (10) 
Cash flows         Increase of 5%                    (18) 
 Decrease of 5%                                        18 
 
   14.       Financial instruments 
   a.         Financial assets and liabilities by category 

Set out below are the accounting classification of each class of financial assets and liabilities:

 
                                                                         Fair value through 
                                                     Fair value through              profit 
                                     Amortised cost                 OCI             or loss    Total 
Group                                          GBPm                GBPm                GBPm     GBPm 
At 19 September 2020 
Cash and cash equivalents                     1,342                   -                 111    1,453 
Trade and other receivables                     453                   -                 190      643 
Amounts due from Financial 
 Services customers                           6,192                   -                   -    6,192 
Financial assets at fair 
 value through other comprehensive 
 income                                           -                 924                   -      924 
Trade and other payables                    (4,332)                   -                   -  (4,332) 
Current borrowings                            (257)                   -                   -    (257) 
Non-current borrowings                        (772)                   -                   -    (772) 
Amounts due to Financial 
 Services customers and 
 other deposits                             (6,810)                   -                   -  (6,810) 
Derivative financial 
 instruments                                      -                   -                (66)     (66) 
Lease liabilities                           (5,907)                   -                   -  (5,907) 
                                           (10,091)                 924                 235  (8,932) 
 
 
                                                                         Fair value 
                                                       Fair value    through profit 
                                     Amortised cost   through OCI           or loss    Total 
Group                                          GBPm          GBPm              GBPm     GBPm 
At 21 September 2019 
Cash and cash equivalents                     1,296             -               172    1,468 
Trade and other receivables                     375             -               182      557 
Amounts due from Financial 
 Services customers                           7,401             -                 -    7,401 
Financial assets at 
 fair value through other 
 comprehensive income                             -         1,020                 -    1,020 
Trade and other payables                    (4,437)             -                 -  (4,437) 
Current borrowings                            (495)             -                 -    (495) 
Non-current borrowings                      (1,023)             -                 -  (1,023) 
Amounts due to Financial 
 Services customers and 
 other deposits                             (8,167)             -                 -  (8,167) 
Derivative financial 
 instruments                                      -             -               (4)      (4) 
Lease liabilities                           (5,776)             -                 -  (5,776) 
                                           (10,826)         1,020               350  (9,456) 
 
                                                                         Fair value 
                                                       Fair value    through profit 
                                     Amortised cost   through OCI           or loss    Total 
Group                                          GBPm          GBPm              GBPm     GBPm 
At 7 March 2020 
Cash and cash equivalents                       841             -               153      994 
Trade and other receivables                     506             -               169      675 
Amounts due from Financial 
 Services customers                           7,404             -                 -    7,404 
Financial assets at fair 
 value through other comprehensive 
 income                                           -         1,054                 -    1,054 
Trade and other payables                    (3,835)             -                 -  (3,835) 
Current borrowings                             (48)             -                 -     (48) 
Non-current borrowings                      (1,248)             -                 -  (1,248) 
Amounts due to Financial 
 Services customers and other 
 deposits                                   (8,094)             -                 -  (8,094) 
Derivative financial instruments                  -             -              (71)     (71) 
Lease liabilities                           (5,774)             -                 -  (5,774) 
                                           (10,248)         1,054               251  (8,943) 
 
 
   b.   Carrying amount versus fair value 

Set out below is a comparison of the carrying amount and the fair value of financial instruments that are carried in the financial statements at a value other than fair value. The fair value of financial assets and liabilities are based on prices available from the market on which the instruments are traded. Where market values are not available, the fair values of financial assets and liabilities have been calculated by discounting expected future cash flows at prevailing interest rates. The fair values of short-term deposits, trade receivables, overdrafts and payables are assumed to approximate to their book values.

 
                                                Carrying  Fair value 
                                                  amount 
At 19 September 2020                                GBPm        GBPm 
Financial assets 
Amounts due from Financial Services 
 customers(1)                                      6,192       6,235 
 
Financial liabilities 
Loans due 2031                                     (649)       (791) 
Bank loans due 2021                                (200)       (200) 
Tier 2 Capital due 2023                            (180)       (179) 
Lease liabilities                                (5,907)     (5,907) 
Amounts due to Financial Services customers 
 and banks                                       (6,810)     (6,820) 
 

1 Includes GBP3,685 million of interest rate swaps in a portfolio fair value hedging relationship.

 
                                         Carrying  Fair value 
                                           amount 
At 21 September 2019                         GBPm        GBPm 
Financial assets 
Amounts due from Financial Services 
 customers(1)                               7,401       7,440 
 
Financial liabilities 
Loans due 2031                              (687)       (872) 
Bank overdrafts                               (1)         (1) 
Bank loans due 2019                         (200)       (200) 
Convertible bond due 2019                   (450)       (451) 
Tier 2 Capital due 2023                     (180)       (181) 
Lease liabilities                         (5,776)     (5,776) 
Amounts due to Financial Services 
 customers and banks                      (8,167)     (8,176) 
 

1 Includes GBP4,145 million of interest rate swaps in a portfolio fair value hedging relationship.

 
                                                           Carrying  Fair value 
                                                             amount 
At 7 March 2020                                                GBPm        GBPm 
Financial assets 
Amounts due from Financial Services customers(1)              7,405       7,455 
 
Financial liabilities 
Loans due 2031                                                (667)       (888) 
Bank loans due 2019                                           (199)       (199) 
Bank loans due 2024                                           (250)       (250) 
Tier 2 Capital due 2023                                       (180)       (177) 
Lease liabilities                                           (5,774)     (5,774) 
Amounts due to Financial Services customers and 
 banks                                                      (8,093)     (8,100) 
 
 

1 Includes GBP4,512 million of interest rate swaps in a portfolio fair value hedging relationship.

   c.         Fair value measurements recognised in the balance sheet 

The following table provides an analysis of financial instruments that are recognised at fair value, grouped into Levels 1 to 3 based on the degree to which the fair value is observable:

-- Level 1 fair value measurements are derived from quoted market prices (unadjusted) in active markets for identical assets or liabilities at the balance sheet date. This level includes listed equity securities and debt instrument on public exchanges;

-- Level 2 fair value measurements are derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). The fair value of financial instruments is determined by discounting expected cash flows at prevailing interest rates; and

-- Level 3 fair value measurements are derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

 
                                                        Level  Level  Level  Total 
                                                            1      2      3 
At 19 September 2020                                     GBPm   GBPm   GBPm   GBPm 
Cash & cash equivalents                                   111      -      -    111 
 
Trade & other receivables                                 190      -      -    190 
 
Financial instruments at fair value through other 
 comprehensive income 
Interest bearing financial assets                           -      1      -      1 
Other financial assets                                      -     14    265    279 
Investment securities                                     644      -      -    644 
 
Derivative financial assets                                 -     30      2     32 
 
Derivative financial liabilities                            -   (98)      -   (98) 
 
 
                                                    Level  Level  Level  Total 
                                                        1      2      3 
At 21 September 2019                                 GBPm   GBPm   GBPm   GBPm 
Cash & cash equivalents                               172      -      -    172 
 
Trade & other receivables                             182      -      -    182 
 
Financial instruments at fair value through other 
 comprehensive income 
Interest bearing financial assets                       -      1      -      1 
Other financial assets                                  -     14    206    220 
Investment Securities                                 799      -      -    799 
 
Derivative financial assets                             -     47      2     49 
 
Derivative financial liabilities                        -   (53)      -   (53) 
 
 
                                      Level 1  Level 2  Level 3  Total 
At 7 March 2020                          GBPm     GBPm     GBPm   GBPm 
Cash & cash equivalents                   153        -        -    153 
 
Trade & other receivables                 169        -        -    169 
 
Financial instruments at fair value 
 through other comprehensive income 
Interest bearing financial assets           -        1        -      1 
Other financial assets                      -       14      237    251 
Investment securities                     802        -        -    802 
 
Derivative financial assets                 -       18        -     18 
 
Derivative financial liabilities            -     (86)      (3)   (89) 
 

Level 3 Financial assets

Details of the determination of Level 3 fair value measurements are set out below:

 
                                                Financial 
                                              instruments     Commodity 
                                                 at FVOCI   derivatives    Total 
28 weeks to 19 September 2020                        GBPm          GBPm     GBPm 
Opening balance                                       237           (3)      234 
Included in finance income in the income 
 statement                                              -             5        5 
Included in other comprehensive income                 28             -       28 
Total Level 3 financial assets 
 and liabilities                                      265             2      267 
 
 
 
                                                Financial 
                                              instruments     Commodity 
                                                 at FVOCI   derivatives    Total 
28 weeks to 21 September 2019                        GBPm          GBPm     GBPm 
Opening balance                                       220             1      221 
Included in finance income in the income 
 statement                                              -             1        1 
Included in other comprehensive income               (14)             -     (14) 
Total Level 3 financial assets 
 and liabilities                                      206             2      208 
 
 
 
                                                Financial 
                                              instruments     Commodity 
                                                 at FVOCI   derivatives    Total 
52 weeks to 7 March 2020                             GBPm          GBPm     GBPm 
Opening balance                                       220             1      221 
Included in finance income in the income 
 statement                                              -           (4)      (4) 
Included in other comprehensive income                 17             -       17 
Total Level 3 financial assets 
 and liabilities                                      237           (3)      234 
 
 

Other financial assets relate to the Group's beneficial interest in a property investment pool. The net present value of the Group's interest in the various freehold reversions owned by the property investment pool has been derived by assuming a property growth rate of zero per cent per annum (21 September 2019: 0.6 per cent; 7 March 2020: 0.6 per cent) and a discount rate of 7.7 per cent (21 September 2019: nine per cent; 7 March 2020: nine per cent). The sensitivity of this balance to changes of one per cent in the assumed rate of property rental growth and one per cent in the discount rate holding other assumptions constant is shown below:

 
 
                               19 September 2020             21 September 2019 
                        Change in      Change in       Change in     Change in 
                    discount rate    growth rate   discount rate   growth rate 
                         +/- 1.0%       +/- 1.0%        +/- 1.0%      +/- 1.0% 
                             GBPm           GBPm            GBPm          GBPm 
Financial assets            (7)/7        10/(10)           (7)/7       11/(10) 
 
 
                                                                  7 March 2020 
                                                       Change in     Change in 
                                                   discount rate   growth rate 
                                                        +/- 1.0%      +/- 1.0% 
                                                            GBPm          GBPm 
Financial assets                                           (7)/7       11/(10) 
 
 

Level 3 derivative financial liabilities - power purchase agreement

The Group has entered into several long-term fixed-price power purchase agreements with independent producers. Included within derivative financial instruments is a net asset of GBP2 million relating to these agreements at 19 September 2020 (at 21 September 2019: GBP2 million; at 7 March 2020: GBP(4) million). The Group values its power purchase agreements as the net present value of the estimated future usage at the contracted fixed price less the market implied forward energy price discounted back at the prevailing swap rate. The Group also makes an assumption regarding expected energy output based on the historical performance and the producer's estimate of expected electricity output. The sensitivity of this balance to changes of 20 per cent in the assumed rate of energy output and 20 per cent in the implied forward energy prices holding other assumptions constant is shown below:

 
 
                                                  19 September 2020                  21 September 2019 
                                                          Change in                          Change in 
                                         Change in      electricity          Change in     electricity 
                                            volume    forward price             volume   forward price 
                                         +/- 20.0%        +/- 20.0%          +/- 20.0%       +/- 20.0% 
                                              GBPm             GBPm               GBPm            GBPm 
Derivative financial 
 instruments                                 0/(1)            6/(8)              0/(0)           9/(9) 
 
 
                                                                                          7 March 2020 
                                                                             Change in 
                                                          Change in        electricity 
                                                             volume      forward price 
                                                          +/- 20.0%          +/- 20.0% 
                                                               GBPm               GBPm 
Derivative financial 
 instruments                                                  (1)/1              6/(8) 
 
 
   d.         Financial risk management activities 

IBOR reform

The Group has adopted the 'Interest rate benchmark reform' amendments to IFRS 9 'Financial Instruments' in the current financial year. These allow the Group to continue hedge accounting for its benchmark interest rate exposures during the period of uncertainty arising from interest rate benchmark reforms. The Group will continue to apply these amendments until the uncertainty arising from interest rate benchmark reform is no longer present with respect to the timing and amount of the interest rate benchmark cash flows.

The Group initiated its London Interbank Offered Rate (LIBOR) transition plan in the prior financial year and, from August 2019, hedged balance sheet interest rate exposures within the Financial Services business using swaps referencing the Sterling Overnight Index Average (SONIA) index, being a risk-free rate. At 19 September 2020, the Group (within Financial Services) had remaining exposures to LIBOR impacted by the reform with a notional amount of GBP2,856 million, of which GBP2,847 million were designated in fair value hedge accounting relationships and GBP9 million not in a hedge relationship. Of these, GBP1,723 million are due to mature by December 2021. The Group expects to transition the remaining GBP1,133 million to SONIA by 31 December 2021. Further clarifications on hedge accounting implications for the financial statements are expected to be provided by IASB following endorsement of Phase 2 of the IASB IBOR Reform project.

Details of the hedging relationships for which the Group has applied the 'Interest rate benchmark reform'

amendments are given below. These relate to the utilisation of derivatives to achieve the desired mix of fixed and floating debt. The following table sets out the extent of the risk exposure associated with managing the fixed and floating debt mix as at 19 September 2020.

 
                           Carrying amount                                        Line item in 
                                                Interest                          financial statements 
                Notional   Asset  Liability   rate benchmark  Hedge relationship 
                    GBPm    GBPm       GBPm 
                                                                                  Amounts due 
Interest rate                                                                      from Financial 
 swaps             2,784       -       (39)       LIBOR           Fair Value       Services customers 
                                                                                  Financial assets 
Interest rate                                                                      at fair value 
 swaps                63       -        (2)       LIBOR           Fair Value       through OCI 
 

The Group's Retail cash flow hedge interest rate swaps, that are in a hedging relationship, mature prior to the transition, therefore the Group continues to apply hedge accounting for these.

   e.         Financial Services expected credit loss 

Loans and advances are initially recognised at fair value and subsequently held at amortised cost, using the effective interest method, less provision for impairment and recognised on the balance sheet when cash is advanced:

 
                                    19 September  21 September  7 March 
                                            2020          2019     2020 
                                            GBPm          GBPm     GBPm 
Non-current 
Loans and advances to customers            2,890         3,670    3,528 
Impairment of loans and advances            (78)          (77)     (75) 
                                           2,812         3,593    3,453 
 
Current 
Loans and advances to customers            3,608         4,004    4,143 
Impairment of loans and advances           (228)         (196)    (192) 
                                           3,380         3,808    3,951 
 
Loan commitment provisions                  (22)          (20)     (20) 
Total impairment provisions 
 for loans and advances to 
 customers and loan commitments            (328)         (293)    (287) 
Impairment provisions as a 
 percentage of loans and advances 
 to customers                              5.05%         3.82%    3.74% 
 

During the reporting period there has been a deterioration in the economic outlook in the UK as a consequence of the COVID-19 pandemic and the measures taken by the government to control the spread of the virus. A significant reduction in UK economic output has begun to be observed and is expected to continue over an uncertain period, with a subsequent rise in unemployment expected to be a key driver of increased expected credit losses.

The full impact of the COVID-19 pandemic is unlikely to be known until a vaccine is widely available and government support has been withdrawn. For instance, the effects of the initial rollback of the Coronavirus Job Retention Scheme and the ending of initial Emergency Payment Freezes were only beginning to be observed as at 19 September 2020, and it is too early to understand the impact of further social restrictions imposed in Autumn 2020.

Due to the unprecedented nature of the COVID-19 pandemic and the UK government actions to support businesses and employees, the decision was made to overlay the impact of COVID-19 on top of the existing modelled outputs. The modelled outputs apply multiple economic scenarios which include an assessment of downside risk reflective of economic uncertainty prior to COVID-19. When the latest economic scenarios were applied to existing models they did not respond appropriately due to the unique nature of the current economic environment.

In order to estimate the increased credit losses resulting from COVID-19, the Group has developed unemployment scenarios which have been risk-weighted to determine an overlay rate applied to the existing IFRS 9 models. In line with guidance from the Bank of England, these scenarios assume that there will be significant economic disruption while social distancing measures are in place, followed by an expected recovery when these are lifted and have been triangulated with third-party data.

During the period expectations of a potential increase in peak unemployment and additional uncertainty involved in the nature of the recovery has resulted in an increase of approximately 50 per cent to the provision uplift of GBP30 million reported in note 41 of the Annual Report and Financial Statements 2020. Including risks to the economic outlook driven by the United Kingdom's departure from the European Union, the total economic overlay as at 19 September 2020 was GBP50 million.

   15.       Analysis of net debt 

The Group's definition of net debt includes the capital injections to Sainsbury's Bank, but excludes the net debt of Sainsbury's Bank and its subsidiaries. Sainsbury's Bank's net debt balances are excluded because they are required for business as usual activities. The Group's definition of net debt includes lease liabilities as recognised under IFRS 16 and perpetual securities, and excludes derivatives that are not used to hedge borrowings.

A reconciliation of opening to closing net debt is included below. Balances and movements for the total Group and Financial Services are shown in addition to Retail to enable reconciliation between the Group balance sheet and Group cash flow statement.

Financial assets at fair value through other comprehensive income exclude equity related financial assets which predominantly relate to the Group's beneficial interest in a commercial property investment pool. Derivatives exclude those not used to hedge borrowings, and borrowings exclude bank overdrafts as they are disclosed separately.

 
                                                     Cash Movements             Non-Cash Movements 
                                                      Cash                                       Changes 
                                                     flows      Interest                  Other       in 
                                       8 March   excluding   (received)/    Accrued    non-cash     fair  19 September 
                                          2020    interest          paid   Interest   movements    value          2020 
                                          GBPm        GBPm          GBPm       GBPm        GBPm     GBPm          GBPm 
Retail 
Financial assets at fair value 
 through other comprehensive 
 income                                      1           -             -          -           -        -             1 
Net derivative financial instruments      (15)           -             3        (3)           2      (3)          (16) 
Cash and cash equivalents                  447         398             -          -           -        -           845 
Borrowings (excluding overdrafts)      (1,116)         269            22       (24)           -        -         (849) 
Lease liabilities                      (5,768)         223           168      (168)       (356)        -       (5,901) 
Retail net debt (excluding 
 perpetual securities)                 (6,451)         890           193      (195)       (354)      (3)       (5,920) 
 
Financial Services 
Financial assets at fair value 
 through other comprehensive 
 income                                    802       (159)             -          -           -        1           644 
Net derivative financial instruments         4           -             -          -           -      (6)           (2) 
Cash and cash equivalents                  547          61             -          -           -        -           608 
Borrowings (excluding overdrafts)        (180)           -             -          -           -        -         (180) 
Lease liabilities                          (6)           1             -          -         (1)        -           (6) 
Financial Services net debt              1,167        (97)             -          -         (1)      (5)         1,064 
 
Group 
Financial assets at fair value 
 through other comprehensive 
 income                                    803       (159)             -          -           -        1           645 
Net derivative financial instruments      (11)           -             3        (3)           2      (9)          (18) 
Cash and cash equivalents                  994         459             -          -           -        -         1,453 
Borrowings (excluding overdrafts)      (1,296)         269            22       (24)           -        -       (1,029) 
Lease liabilities                      (5,774)         224           168      (168)       (357)        -       (5,907) 
Group net debt (excluding perpetual 
 securities)                           (5,284)         793           193      (195)       (355)      (8)       (4,856) 
 
Retail net debt (excluding 
 perpetual securities)                 (6,451)         890           193      (195)       (354)      (3)       (5,920) 
Perpetual capital securities             (248)         250             -          -         (2)        -             - 
Perpetual convertible bonds              (248)           -             -          -           -        -         (248) 
Retail net debt (including 
 perpetual securities)                 (6,947)       1,140           193      (195)       (356)      (3)       (6,168) 
 
Of which: 
Leases                                 (5,768)                                                                 (5,901) 
Net debt excluding lease liabilities   (1,179)                                                                   (267) 
 

Other non-cash movements predominantly comprise new leases and lease modifications.

 
                                                     Cash Movements             Non-Cash Movements 
                                                      Cash           Net                         Changes 
                                                     flows      interest                  Other       in 
                                       9 March   excluding   (received)/    Accrued    non-cash     fair  21 September 
                                          2019    interest          paid   Interest   movements    value          2019 
                                          GBPm        GBPm          GBPm       GBPm        GBPm     GBPm          GBPm 
Retail 
Financial assets at fair value 
 through other comprehensive 
 income                                      1           -             -          -           -        -             1 
Net derivative financial instruments       (9)           -             1        (3)           -        5           (6) 
Cash and cash equivalents                  466         365             -          -           -        -           831 
Bank overdrafts                            (1)           -             -          -           -        -           (1) 
Borrowings (excluding overdrafts 
 and finance leases)                   (1,483)         150            25       (29)           -        -       (1,337) 
Lease liabilities and hire purchase 
 arrangements                          (5,824)         240           180      (180)       (186)        -       (5,770) 
Retail net debt (excluding perpetual 
 securities)                           (6,850)         755           206      (212)       (186)        5       (6,282) 
 
Financial Services 
Financial assets at fair value 
 through other comprehensive 
 income                                    622         176             -          -           -        1           799 
Net derivative financial instruments         -           -             -          -           -        2             2 
Cash and cash equivalents                  655        (18)             -          -           -        -           637 
Bank overdrafts                              -           -             -          -           -        -             - 
Borrowings (excluding overdrafts 
 and finance leases)                     (176)           -             -          -           -      (4)         (180) 
Lease liabilities and hire purchase 
 arrangements                              (7)           1             -          -           -        -           (6) 
Financial Services net debt              1,094         159             -          -           -      (1)         1,252 
 
Group 
Financial assets at fair value 
 through other comprehensive 
 income                                    623         176             -          -           -        1           800 
Net derivative financial instruments       (9)           -             1        (3)           -        7           (4) 
Cash and cash equivalents                1,121         347             -          -           -        -         1,468 
Bank overdrafts                            (1)           -             -          -           -        -           (1) 
Borrowings (excluding overdrafts 
 and finance leases)                   (1,659)         150            25       (29)           -      (4)       (1,517) 
Lease liabilities and hire purchase 
 arrangements                          (5,831)         241           180      (180)       (186)        -       (5,776) 
Group net debt (excluding perpetual 
 securities)                           (5,756)         914           206      (212)       (186)        4       (5,030) 
 
Retail net debt (excluding perpetual 
 securities)                           (6,850)         755           206      (212)       (186)        5       (6,282) 
Perpetual capital securities             (248)                                                                   (248) 
Perpetual convertible bonds              (248)                                                                   (248) 
Retail net debt (including perpetual 
 securities)                           (7,346)         755           206      (212)       (186)        5       (6,778) 
 
Of which: 
Leases                                 (5,824)                                                                 (5,770) 
Net debt excluding lease liabilities   (1,522)                                                                 (1,008) 
 
 
                                                    Cash Movements             Non-Cash Movements 
                                                      Cash          Net 
                                                     flows     interest                  Other   Changes 
                                       9 March   excluding   (received)    Accrued    non-cash   in fair  7 March 
                                          2019    interest       / paid   Interest   movements     value     2020 
                                          GBPm        GBPm         GBPm       GBPm        GBPm      GBPm     GBPm 
Retail 
Financial assets at fair value 
 through other comprehensive income          1           -            -          -           -         -        1 
Net derivative financial instruments       (9)           -            4        (5)           5      (10)     (15) 
Cash and cash equivalents                  466        (19)          (2)          2           -         -      447 
Bank overdrafts                            (1)           1            -          -           -         -        - 
Borrowings (excluding overdrafts 
 and finance leases)                   (1,483)         369           48       (50)           -         -  (1,116) 
Lease liabilities and hire purchase 
 arrangements                          (5,824)         429          332      (332)       (373)         -  (5,768) 
Retail net debt (excluding perpetual 
 securities)                           (6,850)         780          382      (385)       (368)      (10)  (6,451) 
 
Financial Services 
Financial assets at fair value 
 through other comprehensive income        622         177            -          -           -         3      802 
Net derivative financial instruments         -           -            -          -           -         4        4 
Cash and cash equivalents                  655       (108)            -          -           -         -      547 
Bank overdrafts                              -           -            -          -           -         -        - 
Borrowings (excluding overdrafts 
 and finance leases)                     (176)           -            -          -           -       (4)    (180) 
Lease liabilities and hire purchase 
 arrangements                              (7)           1            -          -           -         -      (6) 
Financial Services net debt              1,094          70            -          -           -         3    1,167 
 
Group 
Financial assets at fair value 
 through other comprehensive income        623         177            -          -           -         3      803 
Net derivative financial instruments       (9)           -            4        (5)           5       (6)     (11) 
Cash and cash equivalents                1,121       (127)          (2)          2           -         -      994 
Bank overdrafts                            (1)           1            -          -           -         -        - 
Borrowings (excluding overdrafts 
 and finance leases)                   (1,659)         369           48       (50)           -       (4)  (1,296) 
Lease liabilities and hire purchase 
 arrangements                          (5,831)         430          332      (332)       (373)         -  (5,774) 
Group net debt (excluding perpetual 
 securities)                           (5,756)         850          382      (385)       (368)       (7)  (5,284) 
 
Retail net debt (excluding perpetual 
 securities)                           (6,850)         780          382      (385)       (368)      (10)  (6,451) 
Perpetual capital securities             (248)                                                              (248) 
Perpetual convertible bonds              (248)                                                              (248) 
Retail net debt (including perpetual 
 securities)                           (7,346)         780          382      (385)       (368)      (10)  (6,947) 
 
Of which: 
Leases                                 (5,824)                                                            (5,768) 
Net debt excluding lease liabilities   (1,522)                                                            (1,179) 
 

Reconciliation of net cash flow to movement in net debt

 
                                               28 weeks to                          28 weeks to                            52 weeks to 
                                              19 September                         21 September                                7 March 
                                                      2020                                 2019                                   2020 
                                                      GBPm                                 GBPm                                   GBPm 
Opening net debt                                   (6,947)                              (7,346)                                (7,346) 
 
Cash flow movements 
Net 
 increase/(decrease) 
 in cash 
 and cash equivalents                                  459                                  347                                  (126) 
Elimination of 
 Financial Services 
 movement in cash and 
 cash equivalents                                     (61)                                   18                                    108 
Repayment of 
 perpetual capital 
 securities                                            250                                    -                                      - 
Decrease in Retail 
 borrowings 
 and overdrafts                                        269                                  150                                    369 
Decrease in Retail 
 lease obligations                                     223                                  240                                    429 
Net interest paid on 
 components 
 of Retail net debt                                    193                                  206                                    382 
Changes in net debt 
 resulting 
 from cash flow                                      1,333                                  961                                  1,162 
 
Non-cash movements 
Accrued interest                                     (195)                                (212)                                  (385) 
Retail fair value and 
 other 
 non-cash movements                                  (359)                                (181)                                  (378) 
Changes in net debt 
 resulting 
 from non-cash 
 movements                                           (554)                                (393)                                (763) 
 
Movement in net debt                                   779                                  568                                    399 
 
Closing net debt                                   (6,168)                              (6,778)                                (6,947) 
 
   16.       Borrowings 
 
                                28 weeks to 19 September      28 weeks to 21 September 
                                                    2020                          2019 
                             Current  Non-current  Total   Current  Non-current  Total 
                                GBPm         GBPm   GBPm      GBPm         GBPm   GBPm 
Loan due 2031                     53          596    649        44          643    687 
Bank overdrafts                    -            -      -         1            -      1 
Bank loans due 2021              200            -    200         -          200    200 
Bank loans due 2024                -            -      -         -            -      - 
Convertible bond due 2019          -            -      -       450            -    450 
Sainsbury's Bank Tier 2 
 Capital due 2023                  4          176    180         -          180    180 
Total borrowings                 257          772  1,029       495        1,023  1,518 
 
 
                                                     52 weeks to 7 March 
                                                                    2020 
                                           Current  Non-current  Total 
                                              GBPm         GBPm   GBPm 
Loan due 2031                                   45          622    667 
Bank loans due 2021                              -          199    199 
Bank loans due 2024                              -          250    250 
Sainsbury's Bank Tier 2 Capital due 2023         3          177    180 
Total borrowings                                48        1,248  1,296 
 
 

Available facilities

In September 2019 the maturity of part of the GBP1,450 million Revolving Credit Facility was extended by one year. The Revolving Credit Facility is split into two Facilities, a GBP300 million Facility (A) and a GBP1,150 million Facility (B). Facility A has a final maturity of April 2025 and Facility B has a final maturity of October 2024. As at 19 September 2020, the Revolving Facility was undrawn (21 September 2019: nil; 7 March 2020: nil).

The Revolving Credit Facility incurs commitment fees at market rates and drawdowns bear interest at a margin above LIBOR.

The Group maintains uncommitted facilities to provide additional capacity to fund short term working capital requirements. Drawdowns on these uncommitted facilities bear interest at a margin over LIBOR. The uncommitted facilities were undrawn at 19 September 2020 (21 September 2019: nil; 7 March 2020: nil).

In July 2020 the Group prepaid in full the secured GBP250m Bilateral Loan Facility due July 2024.

   17.       Cash and cash equivalents 

Cash and cash equivalents comprise the following:

 
                                   28 weeks to   28 weeks to  52 weeks to 
                                  19 September  21 September      7 March 
                                          2020          2019         2020 
                                          GBPm          GBPm         GBPm 
Cash in hand and bank balances             461           467          519 
Money market funds and deposits            580           639          202 
Deposits at central banks                  412           362          273 
Cash and bank balances                   1,453         1,468          994 
 
Bank overdrafts                              -           (1)            - 
Net cash and cash equivalents            1,453         1,467          994 
 

Of the above balance, GBP22 million (21 September 2019: GBP18 million; 7 March 2020: GBP21 million) was restricted at half-year.

   18.       Retirement benefit obligations 

All retirement benefit obligations relate to the Sainsbury's Pension Scheme plus two unfunded pension liabilities relating to former senior employees of Sainsbury's and Home Retail Group.

The Sainsbury's Pension Scheme has two segregated sections: the Sainsbury's Section and the Argos Section.

The unfunded pension liabilities are unwound when each employee reaches retirement and takes their pension from the Group payroll or is crystallised in the event of an employee retiring and choosing to take the provision as a one-off cash payment.

The amounts recognised in the balance sheet, based on valuations performed by Isio are as follows:

 
                                          19 September 2020              21 September 2019 
                             Sainsbury's    Argos     Group  Sainsbury's    Argos    Group 
                                    GBPm     GBPm      GBPm         GBPm     GBPm     GBPm 
Present value of funded 
 obligations                     (9,043)  (1,457)  (10,500)      (8,521)  (1,356)  (9,877) 
Fair value of plan assets         10,072    1,478    11,550        9,856    1,441   11,297 
Retirement benefit surplus         1,029       21     1,050        1,335       85    1,420 
Present value of unfunded 
 obligations                        (21)     (17)      (38)         (23)     (15)     (38) 
Retirement benefit surplus         1,008        4     1,012        1,312       70    1,382 
 
 
                                                             7 March 2020 
                                           Sainsbury's    Argos     Group 
                                                  GBPm     GBPm      GBPm 
Present value of funded obligations            (8,914)  (1,421)  (10,335) 
Fair value of plan assets                       10,025    1,466    11,491 
Retirement benefit surplus                       1,111       45     1,156 
Present value of unfunded obligations             (21)     (16)      (37) 
Retirement benefit surplus                       1,090       29     1,119 
 

The principal actuarial assumptions used at the balance sheet date are as follows:

 
                               19 September  21 September  7 March 
                                       2020          2019     2020 
                                          %             %        % 
Discount rate                          1.60          2.15     1.60 
Inflation rate - RPI                   2.90          3.10     2.70 
Inflation rate - CPI                   1.90          2.10     1.70 
                                                            1.65 - 
Future pension increases        1.80 - 2.85   1.90 - 3.00     2.70 
 

The amounts recognised in the income statement in respect of the IAS 19 charges for the defined benefit schemes are as follows:

 
                                             28 weeks to          28 weeks     52 weeks 
                                            19 September   to 21 September   to 7 March 
                                                    2020              2019         2020 
                                                    GBPm              GBPm         GBPm 
Excluded from underlying profit before 
 tax: 
  Interest cost on pension liabilities              (88)             (134)        (248) 
  Interest income on plan assets                      99               149          276 
Total included in finance income (note 
 6)                                                   11                15           28 
 
Defined benefit pension scheme expenses              (3)               (4)          (9) 
Total income statement credit                          8                11           19 
 

The movements in the net defined benefit obligations are as follows:

 
                                        28 weeks to    28 weeks to     52 weeks 
                                       19 September   21 September   to 7 March 
                                               2020           2019         2020 
                                               GBPm           GBPm         GBPm 
As at the beginning of the period             1,119            959          959 
Interest cost                                    11             15           28 
Remeasurement (loss)/gains                    (175)            364           89 
Pension scheme expenses                         (3)            (4)          (9) 
Contributions by employer                        60             48           52 
As at the end of the period                   1,012          1,382        1,119 
 

Cash contributions

Cash contributions for the full-year are expected to be approximately GBP102 million.

Valuation of pension assets

The Pension Scheme has circa GBP2 billion of private market assets, split between private debt, private equity and property. These assets are held as they are expected to deliver a greater risk/return profile vs public market equivalents over the long term. The assets are illiquid (likely to be realised over 5+ years) but the Pension Scheme holds sufficient liquid assets (cash, gilts and other liquid securities) to be confident that it can meet its pension and collateral obligations over time.

The valuation of these assets is based on the audited accounts of the funds, where available, and net asset value statements from the investment managers where recent accounts are not available. For many of the investments the valuations provided are at 30 June. To reflect the high level of market volatility caused by the COVID-19 crisis, the Group has performed a roll-forward for these valuations using relevant liquid indices as follows:

 
Asset Class                                    Return 
Global equity USD return                        7.9% 
Global High Yield Debt GBP return               1.0% 
US loans GBP return                            0. 2 % 
Global High Yield Debt local currency return    5.6% 
US loans USD return                             4.8% 
UK REITS return                                 0.3% 
 

This has increased the asset valuations by GBP36 million.

Sensitivities

The following sensitivities are based on management's best estimate of a reasonably anticipated change. The sensitivities are calculated using the same methodology used to calculate the retirement benefit obligation, by considering the change in the retirement benefit obligation for a given change in assumption. The net retirement benefit obligation is the difference between the retirement benefit obligation and the fair value of plan assets. Changes in the assumptions may occur at the same time as changes in the fair value of plan assets. There has been no change in the calculation methodology since the prior period.

 
                                                           Sainsbury's  Argos  Total 
                                                              GBPm      GBPm   GBPm 
An increase of 0.5% in the discount rate would decrease 
 the present value of funded obligations by                    841       145    986 
A decrease of 0.5% in the discount rate would increase 
 the present value of funded obligations by                    968       168   1,136 
An increase of 0.5% in the inflation rate would increase 
 the present value of funded obligations by                    642       146    788 
A decrease of 0.5% in the inflation rate would decrease 
 the present value of funded obligations by                    579       130    709 
An increase of one year to the life expectancy would 
 increase the present value of funded obligations 
 by                                                            399       49     448 
 
   19.       Related party transactions 

The Group's related parties are its joint ventures as disclosed in its Annual Report and Financial Statements 2020.

Transactions with joint ventures and associates

For the 28 weeks to 19 September 2020, the Group entered into various transactions with joint ventures and associates as set out below:

 
                                           28 weeks      28 weeks  52 weeks 
                                                 to            to        to 
                                       19 September  21 September   7 March 
                                               2020          2019      2020 
                                               GBPm          GBPm      GBPm 
Services and loans provided to joint 
 ventures 
Dividends and distributions received              4           118       141 
Disposal of joint ventures                        -             -      (21) 
Rental expenses paid                            (3)           (4)      (14) 
 

Balances arising from transactions with joint ventures and associates

 
                    19 September  21 September  7 March 
                            2020          2019     2020 
                            GBPm          GBPm     GBPm 
Receivables 
Other Receivables              -             -       18 
 
Payables 
Other Payables               (1)           (1)        - 
 

GBP18 million of dividends have been included within dividends and distributions in the cash flow statement in the current period for dividends which relate to the prior period but were received after 7 March 2020.

   20.       Contingent liabilities 

The Group has a number of contingent liabilities in respect of historic guarantees, particularly in relation to disposed assets, which if the current tenant and their ultimate parents become insolvent, may expose the Group to a material liability. This is not expected to materialise.

Along with other retailers, the Group is currently subject to approximately 8,100 claims from current and ex-employees in the Employment Tribunal for equal pay under the Equality Act 2010 and/or the Equal Pay Act 1970. Typically, claims of this nature can take many years to be determined. Given that the claims against the Group are still at a relatively early stage and the outcome of such claims is highly uncertain at this stage, the Group considers the likelihood of a material pay-out to be remote.

   21.       Post balance sheet events 

On 31 October 2020, the UK Government announced a four-week national lockdown, commencing 5th November. As this is after the Group's interim reporting date of 19 September 2020, it has been concluded that no adjustments are required to the Group's interim financial statements.

Further details of the Group's judgements and estimates in relation to COVID-19 are included in note 2 of the financial statements. As these already include COVID-related estimates, it is not expected that the additional lockdown will have a material effect on the Group's reported balances. Additionally, sensitivity analysis on the identified impairments during the period have been disclosed in note 13, and the COVID-19 impacts considered as part of the Group's going concern assessment are detailed in note 2.

Principal risks and uncertainties

Risk is an inherent part of doing business. The J Sainsbury plc Board has overall responsibility for the identification and management of the principal risks, emerging risks and internal control of the Company. The Board has identified the following principal potential risks to the successful operation of the business. These risks, along with the events in the financial markets and their potential impacts on the wider economy, remain those most likely to affect the Group in the second half of the year.

   --    Brand perception 
   --    Brexit 
   --    Business continuity, operational resilience and major incidents response 
   --    Business strategy and change 
   --    Colleague engagement, attraction, retention and capability 
   --    Data security 
   --    Environment and sustainability 
   --    Financial and treasury 
   --    Health and safety - people and product 
   --    Political and regulatory environment 
   --    Sainsbury's Bank 
   --    Trading environment and competitive landscape 

The impact of COVID-19 on our customers, colleagues, business operations and supply chain continues to be actively monitored as the situation evolves, allowing ways of working and other mitigations to be flexed so that risks are managed.

The above Principal Risks remain unchanged from those reported in the Group's Annual Report and Financial Statements 2020. For more information on these risks, please refer to pages 36 to 45 of the J Sainsbury plc Annual Report and Financial Statements 2020, a copy of which is available on the Group's corporate website www.j-sainsbury.co.uk .

Statement of Directors' responsibilities

The Directors confirm that this set of Condensed Consolidated Interim Financial Statements has been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union, and that the Interim Management Report herein includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

The Directors of J Sainsbury plc are listed in the J Sainsbury plc Annual Report and Financial Statements 2020.

A list of current directors is maintained on the Group's website: www.about.sainsburys.co.uk/about-us/our-management .

By order of the Board

Simon Roberts

Chief Executive

4 November 2020

Kevin O'Byrne

Chief Financial Officer

4 November 2020

INDEPENT REVIEW REPORT TO J SAINSBURY PLC

Introduction

We have been engaged by J Sainsbury plc (the company) to review the condensed consolidated set of financial statements in the interim financial report for the 28 weeks ended 19 September 2020 which comprises the Group income statement, the Group statement of comprehensive income, the Group balance sheet, the Group cash flow statement and the Group statement of changes in equity and the related explanatory notes. We have read the other information contained in the interim financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated set of interim financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The interim financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the interim financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 2, the annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards as adopted by the European Union. The condensed set of financial statements included in this interim financial report has been prepared in accordance with International Accounting Standard 34, "Interim Financial Reporting", as adopted by the European Union.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed consolidated set of financial statements in the interim financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of financial statements in the interim financial report for the 28 weeks ended 19 September 2020 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

London

4 November 2020

Alternative performance measures (APMs)

In the reporting of financial information, the Directors use various APMs which they believe provide additional useful information for understanding the financial performance and financial health of the Group. These APMs should be considered in addition to, and are not intended to be a substitute for, IFRS measurements. As they are not defined by International Financial Reporting Standards, they may not be directly comparable with other companies who use similar measures.

All of the following APMs relate the current period's results and comparative periods where provided.

 
 APM            Closest      Definition/ Purpose                                            Reconciliation 
                equivalent 
                IFRS 
                measure 
-------------- 
Income statement 
 - Revenue 
 Underlying     Revenue                                                                     A reconciliation of the measure is 
  Group                         *    Total sales less acquisition fair value unwinds on      provided in note 4 of the financial 
  sales                              Argos Financial Services.                               statements. 
-------------- 
 
     *    This is the headline measure of revenue for the 
          Group. It shows the annual rate of growth in the 
          Group's sales and is considered a good indicator of 
          how rapidly the Group's core business is growing. 
 
Underlying      Revenue                                                                     A reconciliation of the measure is 
 Retail                         *    Underlying Group sales as above, less underlying        provided in note 4 of the financial 
 sales                               Financial Services revenue.                             statements. 
 
                                *    Shows the annual rate of growth in the Group's Retail 
                                     business sales. 
 
Like-for-like   No direct                                                                   The reported                                           28 weeks                                       28 weeks 
 sales           equivalent                                                                 retail                                                    to 19                                          to 21 
                                                                                            like-for-like                                         September                                      September 
                                                                                            sales growth of                                            2020                                           2019 
                                                                                            6.9 per 
                                                                                            cent is based on 
                                                                                            a combination 
                                                                                            of Sainsbury's 
                                                                                            like-for-like 
                                                                                            sales and Argos 
                                                                                            like-for-like 
                                                                                            sales for the 28 
                                                                                            weeks 
                                                                                            to 19 September 
                                                                                            2020. 
                                                                                            See movements 
                                                                                            below: 
   Underlying retail 
    like-for-like 
    (exc. fuel)                                                                                                                                        6.9%                                         (1.0)% 
   Underlying net new 
    space 
    impact                                                                                                                                             0.2%                                           0.4% 
   Underlying total 
    retail 
    sales growth (exc. 
    fuel)                                                                                                                                              7.1%                                         (0.6)% 
   Fuel Impact                                                                                                                                       (8.5)%                                           0.3% 
   Underlying total 
    retail 
    sales growth (inc. 
    fuel)                                                                                                                                            (1.4)%                                         (0.3)% 
    *    Year-on-year growth in sales including VAT, excluding 
          fuel, excluding Financial Services, for stores that 
          have been open for more than one year. 
 
 
     *    The relocation of Argos stores into Sainsbury's 
          supermarkets are classified as new space, while the 
          host supermarket is classified like-for-like. 
 
 
     *    The impact on sales of stores which were temporarily 
          closed due to COVID-19 have been included within LFL 
          sales. Only permanently closed sites and those 
          temporarily closed for non COVID-19 related reasons 
          are treated as non LFL. 
 
 
     *    The measure is used widely in the retail industry as 
          an indicator of current trading performance and is 
          useful when comparing growth between retailers that 
          have different profiles of expansion, disposals and 
          closures. 
 
Income statement - Profit 
Retail          Profit                                                                                                      28 weeks      28 weeks  52 weeks 
 underlying      before         *    Underlying earnings before interest, tax, Financial                                           to            to        to 
 operating       tax                 Services operating profit and Sainsbury's underlying                                19 September  21 September   7 March 
 profit                              share of post-tax profit from joint ventures and                                            2020          2019      2020 
                                     associates.                                                                                 GBPm          GBPm      GBPm 
                                                                                              Group PBT (note 
                                                                                               4a)                              (137)             9       255 
                                                                                              Add back Group 
                                                                                               non-underlying 
                                                                                               items (note 
                                                                                               3)                                 438           229       331 
                                                                                              Group UPBT (note 
                                                                                               4a)                                301           238       586 
 
                                                                                              Less: Bank underlying 
                                                                                               operating loss/(profit) 
                                                                                               (note 4a)                           55          (20)      (48) 
 
                                                                                              Retail underlying 
                                                                                               operating profit 
                                                                                               (note 4a)                          356           218       538 
                                                                                              Net underlying 
                                                                                               finance costs 
                                                                                               (note 6)                           199           219       400 
                                                                                              Retail underlying 
                                                                                               operating profit 
                                                                                               (note 4a)                          555           437       938 
 
 
 
APM         Closest     Definition/ Purpose                                           Reconciliation 
            equivalent 
            IFRS 
            measure 
Underlying  Profit                                                                          Underlying profit before tax is bridged 
 profit      before       *    Profit or loss before tax before any items recognised        to statutory profit before tax in the 
 before      tax               which, by virtue of their size and/or nature, do not         income statement and note 3 of the financial 
 tax                           reflect the Group's underlying performance.                  statements. 
 
                                                                                            The adjusted items are as follows: 
 
                                                                                             *    Financial Services transition - multi-year costs 
                                                                                                  incurred in transitioning to a new, more flexible 
                                                                                                  banking platform as part of the previously announced 
                                                                                                  New Bank Programme. These principally comprise 
                                                                                                  contractor and service provider costs relating to the 
                                                                                                  migration of data and other services to the Bank's 
                                                                                                  new infrastructure and operating model. 
 
 
                                                                                             *    Profit/(loss) on disposal of properties - such 
                                                                                                  disposals are not part of the Group's underlying 
                                                                                                  business. 
 
 
                                                                                             *    Investment property fair value movements - these 
                                                                                                  reflect the difference between the fair value of an 
                                                                                                  investment property at the reporting date and its 
                                                                                                  carrying amount at the previous reporting date and 
                                                                                                  are held within the property JVs. The valuations are 
                                                                                                  impacted by external market factors and can therefore 
                                                                                                  vary significantly year-on-year. 
 
 
                                                                                             *    Perpetual securities coupons - these are accounted 
                                                                                                  for as equity in line with IAS 32 'Financial 
                                                                                                  instruments: Presentation', however are accrued on a 
                                                                                                  straight-line basis and included as an expense within 
                                                                                                  underlying profit as they are included by management 
                                                                                                  when assessing Group borrowing. 
 
 
                                                                                             *    Non-underlying finance movements - these include fair 
                                                                                                  value remeasurements on derivatives not in a hedging 
                                                                                                  relationship. The fair value measurements are 
                                                                                                  impacted by external market factors and can fluctuate 
                                                                                                  significantly year-on-year. Lease interest on 
                                                                                                  impaired non-trading sites, including site closures, 
                                                                                                  is excluded from underlying profit as those sites do 
                                                                                                  not contribute to the underlying business. 
 
 
                                                                                             *    IAS 19 pension interest and expenses include the 
                                                                                                  financing element and scheme expenses of the Group's 
                                                                                                  defined benefit scheme. These are reported outside 
                                                                                                  underlying profit as they no longer relate to the 
                                                                                                  Group's on-going activities following closure of the 
                                                                                                  scheme to future accrual. 
 
 
                                                                                             *    Acquisition adjustments - these reflect the 
                                                                                                  adjustments arising from acquisitions including the 
                                                                                                  fair value unwind and amortisation of acquired 
                                                                                                  intangibles. 
 
 
                                                                                             *    Other - these are items which are material and 
                                                                                                  infrequent in nature and do not relate to the Group's 
                                                                                                  underlying performance and in the current year 
                                                                                                  include restructuring programmes, impairment of 
                                                                                                  non-financial assets and ATM business rates 
                                                                                                  reimbursement. 
Underlying  Basic                                                                     A reconciliation of the measure is provided 
 basic       earnings     *    Earnings per share using underlying profit as           in note 8 of the financial statements. 
 earnings    per share         described above. This is a key measure to evaluate 
 per share                     the performance of the business and returns generated 
                               for investors. 
Retail      No direct                                                                                                       28 weeks      28 weeks 
underlying  equivalent     *    Retail underlying operating profit as above, before                                                to            to 
EBITDAR                         rent, depreciation, and amortisation.                                                    19 September  21 September 
                                                                                                                                 2020          2019 
                                                                                                                                 GBPm          GBPm 
                                                                                        Retail underlying 
                                                                                         operating profit (note 
                                                                                         4a)                                      555           437 
                                                                                        Add: Retail depreciation 
                                                                                         and amortisation expense 
                                                                                         (note 4b)                                647           653 
                                                                                        Less: Non underlying 
                                                                                         depreciation and amortisation 
                                                                                         (note 3)                                (12)          (17) 
                                                                                        Add/Less: Net rental 
                                                                                         expense/(income) (note 
                                                                                         11)                                        4           (3) 
                                                                                        Other                                       -           (3) 
                                                                                                                                1,194         1,067 
Underlying  Finance                                                                         A reconciliation of this measure is included 
net         income         *    Net finance costs before any non-underlying items as        in note 6 of the financial statements. 
finance     less                defined above that are recognised within finance 
costs       finance             income / expenses.                                          The adjusted items are as follows: 
            costs 
                                                                                             *    Fair value remeasurement on derivatives not in a 
                                                                                                  hedging relationship. The fair value measurements are 
                                                                                                  impacted by external market factors and can fluctuate 
                                                                                                  significantly year-on-year. 
 
 
                                                                                             *    Lease interest on impaired non-trading sites, 
                                                                                                  including site closures, is excluded from underlying 
                                                                                                  profit as those sites do not contribute to the 
                                                                                                  underlying business. 
 
 
                                                                                             *    The financing element of the Group's defined benefit 
                                                                                                  scheme. These are reported outside underlying profit 
                                                                                                  as they no longer relate to the Group's ongoing 
                                                                                                  activities following closure of the scheme to future 
                                                                                                  accrual. 
 
 
                                                                                             *    Perpetual securities coupons - these are accounted 
                                                                                                  for as equity in line with IAS 32 'Financial 
                                                                                                  instruments: Presentation', however are accrued on a 
                                                                                                  straight-line basis and included as an expense within 
                                                                                                  underlying profit as they are included by management 
                                                                                                  when assessing Group borrowing. 
Underlying  Effective                                                                 The tax on non-underlying items is included 
 tax rate    tax rate     *    Tax on underlying items, divided by underlying profit   in note 3 of the financial statements 
                               before tax. 
 
 
                          *    Provides an indication of the tax rate across the 
                               Group before the impact of non-underlying items. 
 
 
APM  Closest       Definition/Purpose  Reconciliation 
      equivalent 
      IFRS 
      measure 
 
 
Cash flows and 
 net debt 
Retail      No direct 
cash flow    equivalent 
items 
in                                                                                                                                     52 
Financial                                                                                                      28 weeks   28 weeks  weeks 
Review                                                                                                               to         to     to 
                                                                                                                     19         21      7 
                                                                                                              September  September  March 
                                                                                                                   2020       2019   2020 
 
                                                                                                        Ref        GBPm       GBPm   GBPm 
   Net interest 
    paid                                                       a                                                  (213)      (226)  (405) 
   Repayment 
    of lease 
    liabilities                                                b                                                  (223)      (230)  (419) 
   Repayment 
    of 
    borrowings                                                 c                                                  (519)      (160)  (379) 
   Other                                                       d                                                   (26)          1    (3) 
   *    To help the reader understand cash flows of the 
         business a summarised cash flow statement is included 
         within the Financial Review. 
 
 
    *    As part of this a number of line items have been       Dividends 
         combined. The cash flow in note 4 of the financial      and 
         statements includes a reference to show what has been   distributions 
         combined in these line items.                           received                    e                       22        118    143 
 
Retail      Net cash 
 free cash   generated 
 flow        from                                                                      Reconciliation of                               52 
             operating                                                                  retail free cash       28 weeks   28 weeks  weeks 
             activities                                                                 flow                         to         to     to 
                                                                                                                     19         21      7 
                                                                                                              September  September  March 
                                                                                                                   2020       2019   2020 
 
                                                                                                                   GBPm       GBPm   GBPm 
   Cash generated from 
    retail operations                                                                                             1,719      1,275  1,971 
 
   Net interest paid 
    (ref (a) above)                                                                                               (213)      (226)  (405) 
   Corporation 
    tax                                                                                                            (88)        (8)  (113) 
   Retail purchase 
    of property, plant 
    and equipment                                                                                                 (257)      (213)  (517) 
   Retail purchase 
    of intangible assets                                                                                           (33)       (35)   (82) 
   Retail proceeds 
    from disposal of 
    property, plant 
    and equipment                                                                                                    19         54     81 
   Initial direct costs 
    on right-of-use 
    assets                                                                                                          (3)        (2)   (13) 
   Repayments of 
    obligations 
    under leases                                                                                                  (223)      (230)  (419) 
   Dividends and 
    distributions 
    received                                                                                                         22        118    143 
   Bank capital 
    injections                                                                                                        -       (35)   (35) 
   *    Net cash generated from retail operations, after 
         perpetual security coupons and cash capital 
         expenditure but before strategic capital expenditure, 
         and including payments of lease obligations, cash 
         flows from joint ventures and associates and 
         Sainsbury's Bank capital injections. 
 
 
    *    This measures cash generation, working capital 
         efficiency and capital expenditure of the retail       Retail free 
         business.                                               cash flow                                          943        698    611 
 
 
 
APM  Closest      Definition/Purpose  Reconciliation 
      equivalent 
      IFRS 
      measure 
 
 
Underlying   No direct 
 working      equivalent                                                                                                          52 
 capital                                                                                                  28 weeks   28 weeks  weeks 
 movements                                                                                                      to         to     to 
                                                                                                                19         21      7 
                                                                                                         September  September  March 
                                                                                                              2020       2019   2020 
                                                                                                              GBPm       GBPm   GBPm 
   Retail working 
    capital 
    movements per 
    cash 
    flow (note 4b)                                                                                             713        289   (71) 
 
 
                                                                                       Adjustments for: 
   Retail 
    non-underlying 
    impairment 
    charges 
    (per note 4b)                                                                                              187        177    257 
   Non-underlying 
    restructuring 
    and impairment 
    charges 
    (per note 3)                                                                                             (473)      (228)  (328) 
   Less Bank 
    impairment 
    charges (per 
    note 
    3)                                                                                                         105          -      - 
   ATM income (per 
    note 
    3)                                                                                                          42          -      - 
   Other                                                                                                         -        (3)    (3) 
   Non-underlying 
    working 
    capital 
    movements 
    before cash 
    movements                                                                                                (139)       (54)   (74) 
 
                                                                                       Non-underlying 
                                                                                       cash 
                                                                                       movements: 
   Restructuring 
    (per 
    note 3)                                                                                                      9          4     34 
   ATM income (per 
    note 
    3)                                                                                                        (12)          -      - 
   Argos 
    integration 
    costs (per note 
    3)                                                                                                           -          3      2 
   Transaction 
    costs 
    relating to the 
    proposed 
    merger with 
    Asda (per 
    note 3)                                                                                                      -         11     13 
   Other                                                                                                         -        (2)    (1) 
                                                                                                               (3)         16     48 
 
   Total 
    adjustments 
    for 
    non-underlying 
    working capital                                                                                          (142)       (38)   (26) 
 
   *    To provide a reconciliation of the working capital 
         movement in the Financial statements to the 
         underlying working capital movement in the Financial 
         review. 
                                                               Underlying 
                                                                working 
    *    Removes working capital and cash movements relating    capital 
         to non-underlying items.                               movements                                      571        251   (97) 
 
 
 
Net cash         Cash                                                                                                       28 weeks      28 weeks  52 weeks 
 generated        generated      *    This enables management to assess the cash generated                                         to            to        to 
 from retail      from                from its core retail operations.                                                   19 September  21 September   7 March 
 operations       operations                                                                                                     2020          2019      2020 
 (per Financial 
 Review)                         *    A reconciliation between this and cash generated from                                      GBPm          GBPm      GBPm 
                                      operations per the accounts is shown here:              Retail cash generated 
                                                                                               from operating 
                                                                                               activities (per 
                                                                                               note 4b)                         1,438         1,059     1,474 
                                                                                              Perpetual security 
                                                                                               coupons                           (20)          (20)      (23) 
                                                                                              Interest received                     -             2       (2) 
                                                                                              Net retail cash 
                                                                                               generated from 
                                                                                               operations in Financial 
                                                                                               Review                           1,418         1,041     1,453 
Core retail      No direct 
 capital          equivalent                                                                                                                              28 weeks 
 expenditure                                                                                                                    28 weeks to                     to 
                                                                                                                               19 September           21 September 
                                                                                                                                       2020                   2019 
                                                                                                                                       GBPm                   GBPm 
 
   Purchase of property, 
    plant and equipment                                                                                                               (257)                  (213) 
   Purchase of intangibles                                                                                                             (33)                   (35) 
   Cash capital expenditure 
    before strategic 
    capital 
    expenditure (note 4b)                                                                                                             (290)                  (248) 
    *    Capital expenditure excludes Sainsbury's Bank, after 
          proceeds on disposals and before strategic capital 
          expenditure. 
 
 
     *    This allows management to assess core retail capital 
          expenditure in the period in order to review the 
          strategic business performance. 
 
 
     *    The reconciliation from the cash flow statement is 
          included here. 
 
 
APM            Closest        Definition/ Purpose                                          Reconciliation 
                equivalent 
                IFRS 
                measure 
Net debt       Borrowings,                                                                 A reconciliation of the measure is provided 
                cash,            *    Net debt includes the capital injections into         in note 15 of the financial statements. 
                derivatives,          Sainsbury's Bank, but excludes the net debt of        In addition, to aid comparison to the balance 
                financial             Sainsbury's Bank and its subsidiaries.                sheet, reconciliations between financial 
                assets                                                                      assets at FVTOCI and derivatives per the 
                at FVTOCI,                                                                  balance sheet and Group net debt (i.e. including 
                lease                                                                       Financial Services) is included below: 
                liabilities                                                                                              28 weeks      28 weeks  52 weeks 
                                                                                                                               to            to        to 
                                                                                                                     19 September  21 September   7 March 
                                                                                                                             2020          2019      2020 
                                                                                                                             GBPm          GBPm      GBPm 
                                                                                            Financial instruments 
                                                                                             at FVTOCI per balance 
                                                                                             sheet                            924         1,020     1,054 
                                                                                            Less equity-related 
                                                                                             securities                     (279)         (220)     (251) 
                                                                                            Financial instruments 
                                                                                             at FVTOCI included 
                                                                                             in Group net debt                645           800       803 
 
 
                                                                                            Net derivatives 
                                                                                             per balance sheet               (66)           (4)      (71) 
                                                                                            Less derivatives 
                                                                                             not used to hedge 
                                                                                             borrowings                        48             -        60 
                                                                                            Derivatives included 
                                                                                             in Group net debt               (18)           (4)      (11) 
 
                                *    It is calculated as: financial assets at fair value 
                                     through other comprehensive income (excluding equity 
                                     investments) + net derivatives to hedge borrowings + 
                                     net cash and cash equivalents + loans + lease 
                                     obligations + perpetual securities. 
 
 
                                *    This shows the overall strength of the balance sheet 
                                     alongside the liquidity and its indebtedness and 
                                     whether the Group can cover its debt commitments. 
Other 
Net debt/      No direct                                                                   Net debt as provided in note 15. Group 
 underlying     equivalent       *    Net debt divided by Group underlying EBITDAR.         underlying EBITDAR is reconciled within 
 EBITDAR                                                                                    the fixed charge cover analysis below. 
 
                                 *    This helps management measure the ratio of the 
                                      business's debt to operational cash flow. 
Return         No direct                                                                   An explanation of the calculation is provided 
 on capital     equivalent       *    Return on capital employed is calculated as return    in the Financial Review on page 18. 
 employed                             divided by average capital employed. 
 
                                 *    Return is defined as 52 week rolling underlying 
                                      profit before interest and tax. 
 
                                 *    Capital employed is defined as Group net assets 
                                      excluding pension deficit/surplus, less net debt 
                                      (excluding perpetual securities). The average is 
                                      calculated on a 14 point basis. 
 
                                *    This represents the total capital that the Group has 
                                     utilised in order to generate profits. Management us 
                               e 
                                     this to assess the performance of the business. 
Fixed        No direct                                                                                                24 weeks      28 weeks      52 weeks  52 weeks 
 charge      equivalent        *    Group underlying EBITDAR divided by rent                                                to            to            to        to 
 cover                              (representing capital and interest repayments on                                   7 March  19 September  19 September   7 March 
                                    leases) and underlying net finance costs, where                                       2020          2020          2020      2020 
                                    interest on perpetual securities is treated as an                                     GBPm          GBPm          GBPm      GBPm 
                                    underlying finance cost. All items are calculated on   Group underlying 
                                    a 52 week rolling basis.                                operating profit 
                                                                                            (note 4a)                      529           500         1,029       986 
                                                                                           Add: Group 
                               *    This helps assess the Group's ability to satisfy        depreciation 
                                    fixed financing expenses from performance of the        and amortisation 
                                    business.                                               expense (note 
                                                                                            4b)                            589           661         1,250     1,256 
                                                                                           Less: Non underlying 
                                                                                            depreciation 
                                                                                            and amortisation 
                                                                                            (note 3)                      (11)          (12)          (23)      (28) 
                                                                                           Add/Less: Net 
                                                                                            rental expense/(income) 
                                                                                            (note 11)                      (7)             4           (3)      (10) 
                                                                                           Other                             -             -             -       (1) 
                                                                                           Group underlying 
                                                                                            EBITDAR                                                  2,253     2,203 
 
                                                                                           Repayment of 
                                                                                            capital element 
                                                                                            of lease obligations 
                                                                                            (note 4b)                    (189)         (224)         (413)     (420) 
                                                                                           Underlying 
                                                                                            finance income 
                                                                                            (note 6)                         2             2             4         4 
                                                                                           Underlying 
                                                                                            finance costs 
                                                                                            (note 6)                     (183)         (201)         (384)     (404) 
                                                                                           Fixed charges                                             (793)     (820) 
 
                                                                                           Fixed charge 
                                                                                            cover                                                      2.8       2.7 
 
 
 

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