Final Results

RNS Number : 8162M

Sainsbury(J) PLC

02 May 2018

2 May 2018

Preliminary Results for the 52 weeks to 10 March 2018

Delivering at pace across the Group

Proposed combination with Asda

On 30 April 2018, Sainsbury's separately announced a proposed combination with Asda to create a dynamic new player in UK retail

Financial highlights

· Underlying profit before tax £589 million, a return to growth; H2 profit increase of 11 per cent

· Strong cash generation with free cash flow of £432 million, up £113 million in the year

· Net debt reduced by £113 million to £1,364 million. Targeting to reduce net debt by a further £100 million in 2018/19

· Delivery of £185 million cost savings in the year, bringing the total to £540 million over three years, exceeding our original £500 million three year target. We will deliver further cost savings of at least £500 million over the next three years to 2020/21, starting with £200 million of savings this year

· Underlying earnings per share decreased six per cent to 20.4 pence per share, primarily reflecting the impact of a full year's consolidation of the additional shares issued at the HRG acquisition

· In line with our policy of paying a dividend that is covered 2.0 times by underlying earnings, we propose to pay a final dividend of 7.1 pence per share, an increase of eight per cent, bringing our full year dividend to 10.2 pence per share. The dividend is also covered 2.0 times by free cash flow

· Sainsbury's Bank profits of £69 million; expected to reduce to around £30 million next year

· Profit expectation for 2018/19 is in line with current market consensus of £629 million¹

Strategic highlights

· Good food performance: transactions growing ahead of the market and an improving margin trend

· Convenience and Groceries Online sales up nearly eight per cent and nearly seven per cent respectively

· In the biggest retail change programme we have ever undertaken, we are transforming the way we work in our stores. We propose to simplify our structures and our operations and invest in technology to be more efficient and to improve customer service

· General Merchandise and Clothing, including Argos, continue to outperform a challenging market²

· 191 Argos stores open in Sainsbury's supermarkets; resulting in around 280 by the end of 2018/19, ahead of our plan to open 250 by March 2019. We will also deliver £160 million EBITDA synergies by March 2019, six months ahead of plan

· Nectar acquisition supports our strategy of knowing our customers better than anyone else

	2017/18	2016/17	Variance
	2017/18	2016/17	Variance
Business Performance
Group sales (inc VAT)	£31,735m	£29,112m	9.0%
Group like-for-like sales (inc VAT, ex fuel)			1.3%
Underlying profit before tax⁽³⁾	£589m	£581m	1.4%
Underlying basic earnings per share⁽³⁾	20.4p	21.8p	(6.4)%
Proposed final dividend	7.1p	6.6p	7.6%
Proposed full year dividend	10.2p	10.2p	-
Net debt (including perpetual securities)	£1,858m	£1,971m	£113m
Net debt (excluding perpetual securities)	£1,364m	£1,477m	£113m
Return on capital employed⁽³⁾	8.4%	8.8%

	2017/18	2016/17
	2017/18	2016/17
Statutory Reporting
Group revenue (ex VAT, inc fuel)	£28,456m	£26,224m
Items excluded from underlying results	£(180)m	£(78)m
Profit before tax	£409m	£503m
Basic earnings per share	13.3p	17.5p

Mike Coupe, Group Chief Executive of J Sainsbury plc, said: "We have accelerated the rate of change and innovation across the Group and more customers are choosing to shop with us than ever before as a result. I am pleased to announce an increase in underlying profits before tax to £589 million, driven by delivery of Argos synergies, efficiency savings across the Group and improving food margin trends.

"We are focused on making Sainsbury's a destination of choice. We are clearly differentiated by the quality of our food and we have recently invested a further £150 million to lower prices. General Merchandise and Clothing are both performing ahead of the market and, in response to great customer feedback and financial returns, we are opening Argos stores in our supermarkets faster than we originally planned. We will also deliver £160 million EBITDA synergies by March 2019, six months ahead of plan.

"Sainsbury's Bank profits grew as we fully consolidated Argos Financial Services during the year. Looking to the year ahead, we expect lending margins to remain under pressure in a competitive market. Combined with new accounting standards and interest payments on the external capital we raised in November, we expect Bank profits to reduce significantly next year. We have decided to limit capital injections in the Bank to £110 million in 2018/19. We will take a cautious approach to unsecured lending while maintaining focus on mortgage growth.

"Our acquisition of Nectar supports our strategy of knowing our customers better than anyone else and I was pleased to welcome our Nectar colleagues to the Group in February.

"We continue to find ways to simplify our business and reduce costs. We have exceeded our original three year £500 million target and delivered a total of £540 million in savings. In addition, we will deliver at least £500 million of cost savings over the next three years to 2020/21. Net debt has reduced by £113 million to £1,364 million and we are targeting to reduce net debt by a further £100 million in 2018/19. I am optimistic about the year ahead."

Change of Directorate

Now that David Tyler has been Chairman for more than eight years, a search process has begun, led by Dame Susan Rice and the Nomination Committee, to find his successor as Non-Executive Chairman.

Dividend

In line with our policy of paying a dividend that is covered 2.0 times by underlying earnings, we propose to pay a final dividend of 7.1 pence per share, an increase of eight per cent, bringing our full year dividend to 10.2 pence per share.

Outlook

The market remains competitive. However, we are well placed to navigate the external environment and we remain focused on delivering our strategy. Despite the reduction in profits at Sainsbury's Bank, we are comfortable with current market consensus for 2018/19 UPBT of £629 million¹.

Fourth Quarter Trading Statement data for the 9 weeks to 10 March 2018

Like-for-like sales growth (including Argos in the base)	2016/17		2017/18
	Q3	Q4	Q1	Q2	H1	Q3	Q4	H2	FY
Like-for-like sales (excl. fuel)	1.0%	0.3%	2.3%	0.6%	1.6%	1.1%	0.9%	1.1%	1.3%
Like-for-like sales (inc. fuel)	2.2%	0.9%	1.6%	0.9%	1.3%	1.2%	1.8%	1.4%	1.4%

Total sales growth (including Argos in base)	2016/17		2017/18
	Q3	Q4	Q1	Q2	H1	Q3	Q4	H2	FY
Grocery	0.3%	0.3%	3.0%	1.4%	2.3%	2.3%	2.1%	2.3%	2.3%
General Merchandise	3.7%	1.5%	1.0%	(1.6)%	(0.1)%	(1.4)%	(1.2)%	(1.4)%	(0.8)%
Clothing	9.4%	5.2%	7.2%	6.3%	6.8%	1.0%	0.4%	0.8%	3.8%
Total Retail (excl. fuel and excl. impact of sale of Pharmacy)	1.6%	0.7%	2.7%	0.9%	1.9%	1.2%	1.3%	1.2%	1.6%

Total sales growth	2016/17		2017/18
	Q3	Q4	Q1	Q2	H1	Q3	Q4	H2	FY
Total Retail (excl. fuel and excl. impact of sale of Pharmacy)	33.1%	20.7%	24.4%	17.0%	21.2%	1.2%	1.3%	1.2%	10.6%
Total Retail (excl. fuel)	31.6%	18.9%	22.9%	16.0%	19.9%	1.2%	1.3%	1.2%	10.0%
Total Retail (inc. fuel and excl. impact of sale of Pharmacy)	29.8%	18.2%	20.1%	14.8%	17.8%	1.4%	2.3%	1.7%	9.4%
Total Retail (inc. fuel)	28.6%	16.7%	18.9%	14.0%	16.8%	1.4%	2.3%	1.7%	8.9%

Notes

A. All sales figures contained in this trading statement are stated including VAT and in accordance with IFRIC 13

B. The sale of our Pharmacy business to LloydsPharmacy completed on 31 August 2016. The impact of this disposal is excluded from like-for-like sales for a period of one year from this date

C. Full year total retail sales growth is higher than the statutory accounts by 0.1 per cent due to the re-phasing of 2016/17 post-acquisition Argos sales into pre-acquisition quarters on a comparable basis

Strategic report

We are delivering the strategy we set out in November 2014. The market is competitive and the way customers shop continues to evolve. Our strategy is based on five pillars: knowing our customers better than anyone else; great products and services at fair prices; being there for our customers whenever and wherever; colleagues making the difference and our values making us different. To deliver this strategy we have prioritised four key areas of our business where we can differentiate ourselves, grow and create value:

Four key priorities

1. Further enhance our differentiated food proposition

· We are committed to offering competitive prices and recently invested a further £150 million to lower the price of 930 essential items

· Our share of transactions increased, with more customers choosing to shop at Sainsbury's than ever before

· Convenience and Online remain strong drivers of growth, with sales up nearly eight per cent and nearly seven per cent respectively

· We continue to invest in the quality of our food. We have re-launched 128 food ranges this year, covering 60 per cent of food sales

· Our Slow Cook range offers customers restaurant quality food. Our share of this growing market has increased from four per cent to 17 per cent and we are now the market leader

· Our gourmet Supper Club ready meal range, which launched in February, is a great example of the innovation in high quality food that differentiates us. It is performing well and growing share

· We are focused on making our stores attractive retail destinations. Innovative and exclusive partnerships enhance our food offer and give customers more choice. These include Godiva chocolates which are available exclusively to Sainsbury's customers in 500 stores and Patisserie Valerie handmade cakes and pastries which are available in 44 stores, including Click & Collect

· We have 59 Sushi Gourmet and Sushi Daily counters and we continue to work with selected concession partners such as Explore Learning, Specsavers, Timpsons and Crussh fit food and juice bars to maximise the use of space in our stores

· Customers value saving time and having more control over how much they spend. Our Smart Shop 'scan as you shop' technology is now in 60 supermarkets

· Our Same Day Groceries Online delivery option is now available to 40 per cent of the UK population

· We are transforming the way we work in our stores. We propose to simplify our structures and our operations and invest in technology to be more efficient and to improve customer service

· Our Nectar acquisition gives us the flexibility to trial and adapt our customer loyalty offer

· Our colleagues continue to deliver market-leading customer service and product availability. We have won the Grocer Gold Awards for Service and Availability for the past five years

2. Grow General Merchandise and Clothing and deliver synergies

· General Merchandise sales declined 0.8 per cent, outperforming the market and gaining market share⁴

· Clothing grew sales by nearly four per cent, with online growth of 45 per cent and outperformed the market⁵. Tu clothing can now be ordered from the Argos website for home delivery or to collect from over 1,000 Argos stores and collection points across the UK

· Strong Argos performance in key categories of Audio, Mobile and Video Games

· Argos Fast Track is a key point of difference and our unique Hub and Spoke model enables us to deliver customer orders quickly and conveniently. Argos is the only retailer in the UK that can deliver to 90 per cent of postcodes within four hours. Fast Track home deliveries increased by 28 per cent and Fast Track in-store collections by 45 per cent in the year

· Digital sales continue to grow and 60 per cent of sales now start online. Of those, 70 per cent are from mobile devices

· Customers can pick up their Argos and Tu clothing from 192 collection points in our supermarkets. 155 of these are in supermarkets where customers can also collect eBay and DPD parcels. We also have 37 collection points in Sainsbury's Local stores

3. Diversify and grow Sainsbury's Bank

· Sainsbury's Bank delivered £69 million profit, up 11 per cent, primarily reflecting the full consolidation of Argos Financial Services. Good sales growth across the product range was offset by a reduction in margins in the competitive unsecured lending market and a modest increase in bad debt charges, as expected

· While we remain confident in the Bank's potential to generate growth and healthy returns in the medium term, we expect Sainsbury's Bank profits to reduce significantly in the short term. We believe the banking market will remain competitive, with unsecured lending margins further impacted by cheap funding from the Bank of England's Term Funding Scheme. This year we are taking a cautious approach to unsecured lending and focusing on growing our mortgage book and our commission products. Together with the impacts of new accounting standards driving an additional £11 million impairment as a result of IFRS 9 adoption and the interest relating to the external capital we raised in November 2017, we expect this to result in profit of around £30 million in 2018/19

· Sainsbury's Bank Mortgages, launched in April 2017, have performed well. We have eight new broker partners and lending in excess of £275 million

· We have 1.9 million active Bank customers, up eight per cent

· Credit Cards performed strongly, with 40 per cent year-on-year growth in new card sales; the Argos Card saw a 12 per cent increase in sales

· Following the launch of the new banking platform, we grew savings by 41 per cent

· Our insurance broker panel model, introduced in February 2017, has been popular with customers. Car Insurance new policy sales grew by 42 per cent and Home Insurance sales grew by 39 per cent

· Travel Money grew 26 per cent, increasing market share

4. Continue cost savings and maintain balance sheet strength

· Responding to changing customer shopping habits we are making transformational changes to our in-store operating model, and reducing costs throughout our store estate

· We have achieved cost savings of £540 million over the past three years, exceeding our original target of £500 million. We will deliver at least a further £500 million of cost savings over the next three years to 2020/21

· We achieved £185 million of these cost savings in 2017/18 across a number of areas including logistics, energy efficiency, store operations, procurement and marketing

· We have well-developed plans in place to deliver at least £500 million of cost savings over the next three years with £200 million of these savings to be achieved in 2018/19 as we continue to drive efficiencies and simplify the business

· Our balance sheet remains strong. We have reduced net debt by £113 million to £1,364 million (excluding perpetual securities) and we are targeting to reduce net debt by a further £100 million in 2018/19

· We continue to maintain high levels of liquidity, with facilities of £4.1 billion, of which only £2.5 billion was drawn down at the year end. We refinanced our revolving credit facility in October 2017, increasing it to £1.5 billion and extending its maturity. The ratio of lease adjusted net debt to earnings before interest, tax, depreciation and rent (EBITDAR) has improved to 3.2 times from 3.7 times a year ago

· We achieved strong underlying cash generation, with free cash flow of £432 million in 2017/18 compared to £319 million in 2016/17

Our values

Our values are integral to how we do business and enable us to drive lasting positive change in communities across the UK and overseas.

· Living healthier lives: 33,350 schools and clubs took part in our Active Kids scheme in 2017/18

· Sourcing with integrity: Through Sainsbury's Dairy Development Group's ten year partnership with over 260 dairy farmers we have achieved higher milk yields, improved animal welfare, and a price guarantee

· Respect for our environment: We have reduced packaging by 35 per cent since 2005 and we are working with WRAP to make plastic packaging recyclable

· Making a positive difference in the community: We generated £35 million in 2017/18 for charities, communities and good causes

· Great place to work: We were awarded Disability Confident Leader status by the Department for Work and Pensions for our work on disability and inclusivity - the largest retailer in the UK to achieve this status

Notes

1 Analyst consensus is available on our corporate website www.j-sainsbury.co.uk

2 General Merchandise grew ahead of the market (BRC non-food non-clothing market, consistently gaining share. Clothing grew ahead of the market (Kantar Worldpanel, 52 weeks ending 18 March 2018)

3 Defined in Alternative Performance Measures on page 48

4 BRC non-food non-clothing market, 52 weeks to 10 March 2018

5 Kantar Worldpanel, 52 weeks ending 18 March 2018

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 results presentation for analysts and investors was held on 30 April 2018 at 9.30am.

To view the slides of the results presentation and the webcast please visit www.j-sainsbury.co.uk Results, Reports and Presentations section and follow the on-screen instructions.

Sainsbury's will report its 2018/19 First Quarter Trading Statement at 07:00 (BST) on 4 July 2018.

Enquiries

Investor Relations	Media
James Collins	Rebecca Reilly
+44 (0) 7392 105 164	+44 (0) 20 7695 7295

MARKET CONTEXT

The Market

Economic conditions became more challenging for UK consumers during the last year. The devaluation of Sterling and higher commodity prices fed through to food and non-food prices from the start of our financial year, with the consequence that wage growth fell behind inflation for the first time in over three years.

Higher inflation benefited food retail market growth, but the impact on disposable income of higher inflation saw non-food retail sales growth weaken over the course of the year. Combined with the impacts of wage inflation, online channel shift and other structural pressures on traditional non-food retailers, this is accelerating the process of consolidation in the non-food market.

Shopping habits and retail trends

Shopping habits continue to evolve as the UK consumer expects far greater choice and flexibility in how, when and where they shop for food, general merchandise and clothing, accessing a variety of channels.

In line with our expectations, consumers continue to shop more frequently across different channels and store formats, with convenience stores and online both showing strong growth. Discount and bargain retailers continue to open significant numbers of new stores and gain market share. These trends continue to place pressure on volumes through the core supermarket format. However, we anticipate that supermarkets will remain an important channel for groceries.

Consumers continue to move their general merchandise and clothing purchases online, accessing a wide choice of delivery and pick-up options. Click & Collect accounts for a significant proportion of UK online general merchandise and clothing sales, as the speed and ease of options continue to expand. Traditional store formats, particularly on the high street, are seeing footfall and sales decline as online participation grows.

In the future, retailers will need to offer a consistent and seamless experience to consumers and be able to rapidly fulfil their orders in a location and at a time that is most convenient to them.

Sainsbury's response to a changing market place

Our strategy reflects the changing marketplace and our business is well set to continue adapting to these changes. A strategy of being there for our customers whenever and wherever they choose to shop with us allows us to be flexible in adapting to these changing customer needs. We have accelerated the rate of change and innovation across the Group and we are focused on satisfying more customer missions. We remain competitive on price across food, clothing and general merchandise and are focused on providing great value across a wide range of products, making targeted investments to lower prices so that consumers can make choices to suit their budgets.

We are clearly differentiated by the quality of our food and we are adapting our supermarkets to serve a wider variety of shopping missions. This includes the opening of Argos stores within Sainsbury's supermarkets, along with other quality third party offers such as Sushi Gourmet, Sushi Daily and Explore Learning.

Our General Merchandise and Clothing business is performing ahead of the market and we are opening Argos stores in our supermarkets faster than we originally anticipated. Argos has a unique Hub and Spoke distribution model that enables fulfilment of customer orders for collection or home delivery quickly, conveniently and efficiently.

Our combination of a strong online proposition with a wide availability of delivery and pick-up options continues to be popular with consumers. Our convenience store estate is made up of over 800 stores and is outperforming the market as we continue to review the range we offer our customers to ensure it is reflective of their changing needs and shopping missions.

We have delivered £540 million of cost savings over the last three years and we have targeted at least another £500 million of cost savings for the business for the next three years. Together with a targeted £160 million EBITDA (£142 million EBIT) of synergies from the acquisition of Argos and a focus on maintaining balance sheet strength, we are confident that we have the resources to remain highly competitive and to trade well through tougher market conditions.

STRATEGIC REPORT

Further enhance our differentiated food offer

Food has been the core of our business since 1869 and our customers trust in the quality and value of our offer. More people are shopping with us than ever before and our share of customer transactions increased.

Our strategic focus is to help our customers to live well for less, putting quality first and investing in our ranges. This year we improved 128 food ranges, covering 60 per cent of our food sales.

We are particularly strong in ranges where we offer customers quality and convenience as well as great value, such as Taste the Difference, Deliciously FreeFrom and On the Go. The strong trend towards gourmet quality ready meals led us to launch our Supper Club range in February and our restaurant quality Slow Cook range has become the market leader since its launch two years ago. The growth of these new food innovations shows customers trust both our high quality standards and our commitment to using the best ingredients while offering low prices.

We are using space innovatively in our larger supermarkets by partnering, often exclusively, with premium brands such as Godiva Belgian chocolates, available in 500 stores, and Patisserie Valerie, whose gateaux and pastries are popular with customers. Customers can buy the cakes over the counter in 31 stores, or order ahead for collection in an additional 13 stores. We work with selected concession partners to maximise our use of space and help make Sainsbury's an attractive retail destination. We have 59 Sushi Gourmet and Sushi Daily counters, as well as two Crussh fresh food and juice bars. Across our supermarket estate we are improving the layouts of our stores so that customers can shop quickly and conveniently. We are taking a disciplined approach to investing in stores, focusing on areas which matter most to customers.

We have been reducing cost from our end-to-end supply chain, working collaboratively with our suppliers to buy better for less. This has enabled us to invest a further £150 million in the price of 930 essential items so customers can be confident that they are getting great prices as well as great quality.

We are proposing to change the way we operate in stores and online. Improved systems are making us faster and more efficient with a simpler store management structure that will empower colleagues and improve service.

Convenience and Groceries Online continue to be strong drivers of growth, with sales up nearly eight per cent and nearly seven per cent respectively. Around 70 per cent of sales through our Convenience channel have been improved by ranging and merchandising activity. Sales through Convenience stores stand at around £2.7 billion. Groceries Online now offers Same Day delivery to 40 per cent of the UK population out of 102 stores and our Chop Chop one hour delivery service operates from seven stores in central London. Online Grocery orders can also be collected from over 100 stores. A new picking system, handsets and software have driven a 15 per cent improvement in pick-rate and we are achieving delivery punctuality of 97 per cent. Our popular Groceries Online app now accounts for around 20 per cent of food orders.

Our acquisition of Nectar allows us to explore innovative new ways to reward customer loyalty and supports our strategy of knowing our customers better than anyone else. We were pleased to welcome our Nectar colleagues to the Group in February.

Our colleagues continue to deliver excellent customer service and we have won the Grocer Gold Awards for Service and Availability for the past five years. We are proposing to invest £100 million to award store colleagues a market-leading rate of pay of £9.20 from September 2018, along with revised terms and conditions which will ensure consistency and fairness in contracts. We recognise that a small minority of colleagues will be adversely impacted by these proposals and have committed to additional payments for a period of 18 months for all those affected.

Grow General Merchandise and Clothing and deliver synergies

General Merchandise sales, including Argos, declined by 0.8 per cent and outperformed a challenging market.^{^[1]} General Merchandise performed strongly in key areas such as Audio, Mobiles and Video Games.

Offering high street style at supermarket prices has made Tu clothing very popular with our customers. Sales grew nearly four per cent, outperforming the market, and Clothing now contributes close to £1 billion of annual sales to the Group. Over eight million customers regularly buy the range, making us the sixth largest clothing retailer in the UK by volume. We are strongly positioned in womenswear and childrenswear, with opportunities for growth in menswear, which now accounts for 15 per cent of clothing sales and is our fastest growing clothing category. Sales of clothing online have increased by 45 per cent. We are now making the Tu ranges easily accessible to Argos customers through the Argos website, available for home delivery or collection from over 1,000 Argos and Sainsbury's stores across the UK.

In the 18 months since we acquired Argos we have been rapidly integrating our two businesses. Joint range planning has enabled us to rationalise our product offer and give customers better overall choice and value. We have opened 191 Argos stores in Sainsbury's supermarkets and we expect to open around 90 more in the next financial year, bringing the total to around 280, ahead of our original schedule to open 250 Argos stores by March 2019. We are seeing strong like-for-like sales, with an uplift in grocery sales in supermarkets that have an Argos store.

Customers can pick up their Argos and Tu clothing from 192 collection points in our supermarkets. 155 of these are in supermarkets where customers can also collect eBay and DPD parcels. We also have 37 collection points in Sainsbury's Local stores.

We will deliver £160m EBITDA synergies by March 2019, six months ahead of plan. A key part of our strategy is to make it quick and convenient for customers to shop with us whenever and wherever they want. The Argos website is the third most visited retail website in the UK and online sales continue to grow, with 60 per cent of Argos sales originating online, over 70 per cent of which are generated through mobile devices.

Fast Track is a key point of difference for us, enabling us to leverage our unique Hub and Spoke model to deliver Argos orders quickly and conveniently. Customers have the choice of same day or next day Fast Track delivery or collection and this year Fast Track delivery increased by 28 per cent and Fast Track collection by 45 per cent. In November, we opened regional fulfilment centres in Reading and Birmingham.

Diversify and grow Sainsbury's Bank

Sainsbury's Bank profits increased by 11 per cent to £69 million, primarily due to the full year consolidation impact of Argos Financial Services. Good sales growth across the product range was offset by a reduction in margins in a competitive unsecured lending market and a modest increase in bad debt charges, as expected.

We have over 1.9 million active customers, an increase of eight per cent year on year. Over 81 per cent of insurance customers and 75 per cent of banking customers have, or are linked to, a Nectar card.

Credit Cards performed strongly, with 40 per cent growth in new Sainsbury's Bank card sales. The Argos Card saw a 12 per cent increase in sales and can now be used in both Argos and Sainsbury's, providing greater choice and convenience for customers. We launched our new, enhanced personal loan platform and around 70 per cent of all new personal lending goes to active Nectar card holders. New Savings account growth is up 41 per cent this year with growth in deposits up 21 per cent, which includes 32 per cent growth in ISA and Fixed Term deposits.

Since introducing our insurance broker panel model in February 2017, new policy sales in Car Insurance increased by 42 per cent and Home Insurance grew by 39 per cent. By working with a broader base of underwriting partners and looking at our data we have been able to offer more quotes to more Sainsbury's customers and give better discounts.

Our ATM estate grew by over five per cent to over 1,820 and we introduced 36 ATMs in high footfall Argos stores. £1 of every £11 dispensed from a LINK ATM transaction is from Sainsbury's Bank.

Travel Money grew 26 per cent in a competitive market. This year we opened a further nine Travel Money bureaux, taking the total to 241 across the estate. As well as an in store service in convenient locations across the UK, we also offer an online home delivery service.

We expect the banking market to remain competitive and will take a cautious approach to unsecured lending in favour of a greater focus on growing our commission products and mortgage book. Together with the impact of new accounting standards and the interest related to the external capital we raised in November 2017, this will impact Sainsbury's Bank profits in the short term, but we are confident that this is the right decision for the business and remain confident in the potential of the Bank to generate growth and healthy returns in the medium term.

Continue cost savings and maintain balance sheet strength

We have made fundamental changes to our operations to be more efficient and customer-focused. Technology and digital innovations are also helping us to improve systems across our business, increasing efficiency and improving productivity. Through these operational efficiencies, we have exceeded our three year cost saving target and saved £540 million. We delivered cost savings of £185 million in 2017/18, £40 million above our target. Over the next three years to 2020/21 we will deliver a minimum of £500 million of cost savings. We plan to deliver £200 million of these savings in 2018/19 by simplifying our store management structures and operations and creating efficiencies to improve service for our customers.

We continue to maintain a strong balance sheet. We have reduced net debt by £113 million to £1,364 million and we are targeting to reduce net debt by a further £100 million in 2018/19. The reduction is a result of continued strong cash generation from retail operations, further working capital improvements and the acquisition of Nectar. This was partly offset by capital expenditure, capital injections into Sainsbury's Bank, adverse movements on US dollar derivatives and continued dividend payments. Group core retail capital expenditure at £495 million was lower than last year even with the addition of a full year of Argos core retail capital expenditure. It remains significantly lower than the average capital expenditure in the previous five years of £793 million. Our pension deficit has reduced by £589 million from £850 million last year to £261 million at the year end.

In the medium term our increased focus on cash will deliver adjusted net debt to adjusted EBITDAR (treating perpetual securities as debt) of less than three times and fixed charge above three times.

The Group has financing facilities of £4.1 billion, of which only £2.5 billion was drawn down at year end. The Group refinanced its syndicated committed revolving credit facility. The revised facility of £1.45 billion has three, four and five year tranches, with an initial final maturity for the longer dated tranche of April 2023. The refinancing is expected to drive annual interest savings of approximately £20 million.

We expect net finance costs of around £100 million in 2018/19 following final repayment of the secured loan due in 2018.

Financial Review of the full year results for the 52 weeks to 10 March 2018

Dear Shareholder, 2017/18 has been another year of significant change, with continued progress in delivering our strategic priorities, strong cash generation, cost saving and synergy outperformance, the consolidation of a full year of Argos, the acquisition of Nectar, and the return to like-for-like sales growth, all delivered in the context of a rapidly changing and competitive retail environment.

Sainsbury's underlying Group sales (including VAT) were up 9.0 per cent to £31,735 million mainly as a result of the impact of consolidating a full year of Argos. On a 52-week rolling basis Sainsbury's market share (as measured by Kantar) declined 27 basis points, due to further price investment and the continuing new store expansion from discounters, whose combined market share increased by 132 basis points. By contrast the 'big four' declined by 96 basis points. Our General Merchandise sales continued to outperform the market with strong growth in many of our key categories, as we maintained market share (as measured by the British Retail Consortium, 'BRC') despite challenging market conditions.

During the year, we worked hard to protect our customers from the impact of cost price inflation and rising commodity prices by continuing to partner with our suppliers in looking at ways to reduce our sourcing and end-to-end supply chain costs. Against this backdrop we were pleased to record an improving food margin trend whilst General Merchandise margin remains under pressure in challenging market conditions. In 2017/18, retail underlying EBITDAR margin increased 4 basis points to 7.44 per cent and retail underlying operating margin declined 18 basis points to 2.24 per cent primarily as a result of the consolidation of a full year of Argos' results. Underlying profit before tax ('UPBT') increased by 1.4 per cent to £589 million (2016/17: £581 million). Profit before tax of £409 million (2016/17: £503 million) was down 18.7 per cent as a result of a £180 million charge recognised outside underlying results. This charge includes the proposed changes to our store operations that we have announced this year, Argos integration costs and Sainsbury's Bank transition costs. Cost savings of £185 million were delivered during the year resulting in a cumulative three-year total of £540 million, £40 million ahead of the target we set in 2014/15. We have well developed plans to deliver a further three-year cost saving target of £500 million by 2020/21 as we continue to simplify the business and we expect to achieve savings of around £200 million in 2018/19.

Sainsbury's Bank profits increased by 11 per cent to £69 million, primarily due to a full-year consolidation of Argos Financial Services results. Good sales growth across the product range was offset by a reduction in margins in the competitive unsecured lending market and an increase in bad debt charges, as expected. Next year, we expect lending margins to remain under pressure. Accordingly, we have decided to take a more cautious approach to unsecured lending and will focus on growing our mortgage book and our commission products. Together with the impacts of new accounting standards and the cost of the external capital we raised in November 2017, we expect Bank profits to reduce to around £30 million in 2018/19.

The balance sheet remains strong with a further reduction in net debt. Net debt was £1,364 million as at 10 March 2018 (11 March 2017: £1,477 million), a decrease of £113 million in the year, mainly as a result of continuing strong cash generation from our retail operations and further working capital improvements, offset by pension payments, capital expenditure and dividends paid. The Group has facilities of £4.1 billion with only £2.5 billion drawn at the end of the year.

The discount rate applied to the Group's pension schemes has been increased this year to use a revised approach that we believe better reflects expected yields on high quality corporate bonds over the duration of the Group's pension schemes. In addition, future mortality assumptions have been updated from CMI 2015 projections at 2017 year end to CMI 2017 projections. These changes have contributed to the reduction in our Group pension scheme IAS 19 accounting deficit (net of deferred tax) to £261 million (2016/17: £850 million deficit) as at 10 March 2018.

Underlying basic earnings per share decreased 6.4 per cent to 20.4 pence (2016/17: 21.8 pence), reflecting the full-year impact of the additional shares issued as a result of the Home Retail Group ('HRG') acquisition. Basic earnings per share decreased 24.0 per cent to 13.3 pence (2016/17: 17.5 pence), lower than the underlying earnings per share due to the £180 million charge recognised outside of underlying results.

The Board has recommended a final dividend of 7.1 pence (2016/17: 6.6 pence), resulting in an unchanged full-year dividend of 10.2 pence per share (2016/17: 10.2 pence per share).

Summary income statement	52 weeks to	52 weeks to
	10 March 2018	11 March 2017	Change
	£m	£m	%

Underlying group sales (including VAT)	31,735	29,112	9.0
Underlying retail sales (including VAT)	31,220	28,705	8.8

Underlying group sales (excluding VAT)¹	28,453	26,231	8.5
Underlying retail sales (excluding VAT)²	27,938	25,824	8.2


Underlying operating profit
Retail	625	626	(0.2)
Financial services	69	62	11.3
Total underlying operating profit	694	688	0.9

Underlying net finance costs³	(119)	(119)	-
Underlying share of post-tax profit from JVs⁴	14	12	16.7
Underlying profit before tax	589	581	1.4
Items excluded from underlying results	(180)	(78)	130.8
Profit before tax	409	503	(18.7)
Income tax expense	(100)	(126)	20.6
Profit for the financial period	309	377	(18.0)

Underlying basic earnings per share	20.4p	21.8p	(6.4)
Basic earnings per share	13.3p	17.5p	(24.0)
Dividend per share	10.2p	10.2p	-

1. Underlying group revenue of £28,459 million, disclosed in note 4 of the accounts, includes £6 million of revenue consolidated post the acquisition of Nectar that is excluded from underlying group sales.

2. Underlying retail revenue of £27,944 million, disclosed in note 4 of the accounts, includes £6 million of revenue consolidated post the acquisition of Nectar that is excluded from underlying retail sales.

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

4. The underlying share of post-tax profit from joint ventures and associates ('JVs') is stated before investment property fair value movements, non-underlying finance movements and profit on disposal of properties.

Group sales

Underlying group sales (including VAT, including fuel) increased by 9.0 per cent year-on-year, mainly as a result of the impact of consolidating a full year of Argos (2016/17: 27 weeks). Underlying retail sales (including VAT, including fuel) increased by 8.8 per cent. Including Argos in the base, retail sales (including VAT, excluding fuel) increased by 1.6 per cent due to an improved like-for-like performance. Fuel sales grew 2.6 per cent, largely driven by retail price inflation.

Total sales performance by category	52 weeks to
inc. Argos in base	10 March 2018
Grocery (exc. Pharmacy)	2.3%
General Merchandise	(0.8)%
Clothing	3.8%
Retail (exc. fuel and impact of sale of Pharmacy business)	1.6%
Fuel sales	2.6%
Retail (inc. fuel, exc. impact of sale of Pharmacy business)	1.7%

Grocery sales grew by 2.3 per cent driven by inflationary pressure across all food categories. A challenging General Merchandise market resulted in a sales decline of 0.8 per cent year-on-year. However, Clothing continued to perform well with sales growth of nearly four per cent year-on-year. We are the sixth biggest clothing retailer by volume.

Convenience growth was nearly eight per cent and Groceries Online sales growth was nearly seven per cent driven by order and basket size growth, supporting our ambition of becoming a multi-product, multi-channel retailer. There was sales growth across all Sainsbury's channels - Supermarkets, Convenience and Groceries Online.

Total sales performance by channel	52 weeks to	52 weeks to
	10 March 2018	11 March 2017
Supermarkets	0.5%	(1.8)%
Convenience	7.5%	6.5%
Groceries Online	6.8%	8.2%

Retail like-for-like sales, excluding fuel, increased by 1.3 per cent in the year (2016/17: flat) mainly as a result of continued inflation.

Retail like-for-like sales performance	52 weeks to	52 weeks to
inc. Argos in base	10 March 2018	11 March 2017
Like-for-like sales (exc. fuel)	1.3%	0.0%
Like-for-like sales (inc. fuel)	1.4%	0.5%

On a 52-week rolling basis, Sainsbury's market share (as measured by Kantar for the 52 weeks to 25 February 2018) declined 27 basis points due to continued price investment and the continuing store expansion from the discounters whose combined market share increased by 132 basis points. By contrast the 'big four' combined market share declined by 96 basis points.

Space

In 2017/18, Sainsbury's opened three new supermarkets (2016/17: six new supermarkets). Convenience continued to grow, with 24 new stores opened in 2017/18, including two Euro Garages stores, and 15 stores closed (2016/17: 41 stores opened and eight stores closed). Net of replacements, closures and disposals, closing Sainsbury's space was 23,209,000 sq. ft. (11 March 2017: 23,397,000 sq. ft.).

As at 10 March 2018, Argos had 844 stores and 192 collection points. Habitat had 16 stores.

Store numbers and retailing space
	As at	New stores	Disposals / closures	Extensions / refurbishments / downsizes	As at
	11 March				10 March
	2017				2018

Supermarkets	605	3	-	-	608
Supermarkets area '000 sq. ft.¹	21,512	80	-	(296)	21,296

Convenience²	806	24	(15)	-	815
Convenience area '000 sq. ft.	1,885	59	(32)	1	1,913
JS total store numbers	1,411	27	(15)	-	1,423

Argos stores³	715	1	(77)	-	639
Argos stores in Sainsbury's³	39	152	-	-	191
Argos in Homebase	57	-	(43)	-	14
Temporary stores	2	-	(2)	-	-
Argos total store numbers	813	153	(122)	-	844
Argos collection points⁴	37	194	(39)	-	192
Habitat	8	8	-	-	16

1 The net 296,000 sq. ft. reduction in Sainsbury's supermarket space is driven by 336,000 sq. ft. now belonging to Argos stores in Sainsbury's offset by 40,000 sq.ft. of other space initiatives.

2 Includes Euro Garages stores.

3 Two Argos store openings have been reclassified as Argos stores in Sainsbury's to reflect their utilisation of the Sainsbury's store portfolio.

4 2016/17 included one Habitat collection point.

In 2018/19, Sainsbury's expects to open two new supermarkets and around 15 new convenience stores.

In 2018/19, Sainsbury's expects to open around 90 Argos stores in supermarkets (of which around 50 are relocations) resulting in around 280 Argos stores in supermarkets.

In 2018/19, Sainsbury's expects to close the remaining Argos stores within Homebase.

Retail underlying operating profit

Retail underlying operating profit decreased by 0.2 per cent to £625 million (2016/17: £626 million), reflecting continued investment in the customer offer, cost inflation and the consolidation of the Argos first half operating loss, partly offset by cost savings of £185 million and cumulative EBITDA synergies of £87 million (EBIT of £82 million).

Retail underlying operating margin declined by 18 basis points year-on-year to 2.24 per cent (2016/17: 2.42 per cent), equivalent to a 17 basis point decline at constant fuel prices, as a result of the consolidation of Argos sales.

Retail underlying operating profit
	52 weeks to	52 weeks to		Change at
	10 March	11 March		constant fuel
	2018	2017	Change	prices
Retail underlying operating profit (£m)¹	625	626	(0.2)%
Retail underlying operating margin (%)²	2.24	2.42	(18)bps	(17)bps

Retail underlying EBITDAR (£m)³	2,078	1,912	8.7%
Retail underlying EBITDAR margin (%)⁴	7.44	7.40	4bps	8bps

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 rent of £740 million and underlying depreciation and amortisation of £713 million.

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

In 2018/19, Sainsbury's expects cost inflation of around three per cent. We have well-developed plans to deliver at least £500 million of cost savings over the next three years with £200 million of these savings to be achieved in 2018/19 as we continue to drive efficiencies and simplify the business.

In 2018/19, Sainsbury's expects a depreciation and amortisation cost of around £700 million.

Our 2018/19 full-year underlying profit expectation for the combined Group remains in line with current market consensus (2018/19 UPBT consensus estimate of £629 million, as published on 5 March 2018 on www.j-sainsbury.co.uk/investors/analyst-consensus).

Acquisition of Nectar

On 1 February 2018, Sainsbury's acquired all Nectar businesses and related assets required for the full and independent operation of the Nectar Loyalty programme, including the remaining 50 per cent share of its joint venture with Aimia Inc., Insight 2 Communication LLP. The consideration of £39 million generated goodwill of £147 million. The transaction supports Sainsbury's strategy of knowing its customers better than anyone else.

Synergies arising from the acquisition of Argos

In 2017/18, Sainsbury's achieved £87 million of cumulative EBITDA synergies (£82 million EBIT), of which £80 million were incremental to the 2016/17 full year. As part of the transaction to acquire Home Retail Group ('HRG'), Sainsbury's initially announced that the Group expected to achieve a cumulative £160 million of EBITDA synergies (£142 million EBIT) by the end of the first half of 2019/20. Due to the acceleration of some of this activity, we later announced that we expect to deliver these in 2018/19 (six months early).

In order to achieve these synergies, a total of £130 million of exceptional integration costs and £140 million of exceptional integration capital expenditure will be required. Exceptional costs will include the relocation of property, dilapidations, lease break costs and redundancy costs. Exceptional capital expenditure is required to reformat supermarket space and for fitting out the new Argos stores. The updated expected phasing of the synergies, exceptional costs and exceptional capital expenditure is shown below:

£m	FY	FY	FY
	2016/17	2017/18	2018/19e	Total
EBITDA synergies (incremental year-on-year)	7	80	73	160
EBIT synergies (incremental year-on-year)	6	76	60	142
Exceptional costs	(27)	(75)	(28)	(130)
Exceptional capital expenditure	(18)	(80)	(42)	(140)

In 2018/19, we expect incremental EBITDA synergies of £73 million (£60 million EBIT), resulting in total EBITDA synergies of £160 million (£142 million EBIT) since acquisition (six months early). Argos integration costs are expected to be around £30 million; integration capital expenditure is expected to be around £40 million in 2018/19.

Homebase separation

HRG announced on 18 January 2016 that the sale of Homebase would give rise to £75 million of additional exceptional costs in relation to the transaction, separation and restructuring. Up to the date of the acquisition, HRG had incurred £30 million of these costs; a further £4 million was incurred to 11 March 2017 and £10 million in 2017/18.

It is currently anticipated that the total exceptional costs will now only be £45 million, a reduction of £30 million from the original estimate.

Sainsbury's Bank

Sainsbury's Bank results
12 months to 28 February
	2018	2017	Change

Underlying revenue (£m)	515	407	27%
Interest payable (£m)	(64)	(60)	7%
Total income (£m)	451	347	30%
Underlying operating profit (£m)	69	62	11%

Cost:income ratio (%)	70	72	200bps
Active customers (m) - Bank	1.92	1.77	8%
Active customers (m) - AFS	1.95	1.84	6%
Net interest margin (%)¹	4.9	4.4	50bps
Bad debt as a percentage of lending (%)²	1.3	0.8	(50)bps
CET 1 capital ratio (%)³	14.1	13.3	80bps
Customer lending (£m)⁴	5,691	4,599	24%

1 Net interest receivable divided by average interest-bearing assets. Excluding AFS, net interest margin was 3.6 per cent (2016/17: 3.9 per cent).

2 Bad debt expense divided by gross lending. Excluding AFS, bad debt as a percentage of lending was 0.9 per cent (2016/17: 0.6 per cent).

3 Common equity tier 1 capital divided by risk-weighted assets.

4 Amounts due from customers at the Balance Sheet date in respect of loans, mortgages, credit cards and store cards net of provisions.

Sainsbury's Bank total income increased by 30 per cent year-on-year to £451 million mainly as a result of the full-year consolidation impact of Argos Financial Services ('AFS'). The consolidation also contributed to the 11 per cent increase year-on-year in Sainsbury's Bank underlying operating profit to £69 million.

Sainsbury's Bank cost:income ratio has improved by 200 basis points driven by sales growth across all products partially offset by an increase in administrative expenses. The number of Sainsbury's Bank active customers increased by eight per cent year-on-year to 1.92 million (2016/17: 1.77 million).

Net interest margin increased by 50 basis points year-on-year to 4.9 per cent (2016/17: 4.4 per cent) reflecting the acquisition of AFS that operates a higher risk and return operating model. Excluding AFS, net interest margin was 3.6 per cent, a decrease of 30 basis points year-on-year reflecting the increasingly competitive unsecured lending market. The acquisition also contributed towards the adverse movement in bad debt levels as a percentage of lending to 1.3 per cent (2016/17: 0.8 per cent). Excluding AFS, bad debt as a percentage of lending was in line with expectations at 0.9 per cent.

The CET 1 capital ratio increased by 80 basis points year-on-year to 14.1 per cent (2016/17: 13.3 per cent), reflecting the additional funds contributed during the year from the Parent. Loan balances increased by 24 per cent to £5,691 million, mainly due to growth across personal loans, credit cards and mortgages.

In November 2017, Sainsbury's Bank further diversified its funding through the issue of £175 million of fixed rate reset callable subordinated Tier 2 notes.

We have decided to take a more cautious approach to unsecured lending next year and margins will reduce in a competitive market. Combined with new accounting standards and interest payments on the external capital we raised in November, we expect Sainsbury's Bank profits to reduce to around £30 million in 2018/19.

Capital injections into the Bank are expected to be £110 million in 2018/19 and are expected to average £100 million per year from 2019/20 onwards. This is to cover card and loan platforms, regulatory capital and growth in loan, card and mortgage balances.

Sainsbury's Bank transition costs are expected to be around £55 million and transition capital costs are expected to be around £5 million.

Underlying net finance costs

Underlying net finance costs remained flat year-on-year at £119 million (2016/17: £119 million), as the impact of loan refinancing costs was offset by lower average net debt.

Sainsbury's expects net finance costs of around £100 million in 2018/19 following final repayment of the secured loan due in 2018.

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	52 weeks to	52 weeks to
	10 March 2018	11 March 2017
	£m	£m
Property related	12	36
Argos integration and Homebase separation	(85)	(53)
Sainsbury's Bank transition	(38)	(60)
Impact of the acquisition of Nectar UK	2	-
Divestments	-	15
Restructuring costs	(85)	(33)
Other	14	17
Items excluded from underlying results	(180)	(78)

· Property-related items for the year comprise profit on disposal of properties and investment property fair value movements.

· Argos integration costs for the year of £75 million were part of the previously announced £130 million required over three years in order to achieve the EBITDA synergies of £160 million. Homebase separation and restructuring costs were £10 million.

· Sainsbury's Bank transition costs of £38 million (2016/17: £60 million) were part of the previously announced costs incurred in transitioning to a new, more flexible banking platform.

· Restructuring costs in the year of £85 million relate to changes to our store colleague structures and working practices.

Taxation

The income tax charge was £100 million (2016/17: £126 million), with an underlying tax rate of 24.1 per cent (2016/17: 23.2 per cent) and an effective tax rate of 24.4 per cent (2016/17: 25.0 per cent).

The underlying tax rate was higher year-on-year, despite the statutory corporation tax rate being lower than the prior year. However, in the prior year there was the benefit of a one per cent revaluation of underlying deferred tax balances, whereas there was no such revaluation in 2017/18. The effective tax rate in 2017/18 was increased by the tax impact of property disposals and some non-tax deductible exceptional costs. In 2017/18 there was no benefit of a revaluation of non-underlying deferred tax balances.

In 2018/19, Sainsbury's expects the full-year underlying tax rate to be between 23 and 24 per cent.

Earnings per share

Underlying basic earnings per share decreased to 20.4 pence (2016/17: 21.8 pence) reflecting the full-year impact of the additional shares issued as a result of the HRG acquisition and a slightly higher underlying tax rate. Basic earnings per share decreased to 13.3 pence (2016/17: 17.5 pence), more than the fall in underlying basic earnings per share, mainly as a result of the £180 million charge for items excluded from underlying results (2016/17: £78 million charge).

Dividends

The Board has recommended a final dividend of 7.1 pence per share (2016/17: 6.6 pence). This will be paid on 13 July 2018 to shareholders on the Register of Members at the close of business on 8 June 2018, subject to approval by shareholders at the AGM. In line with the Group's policy to keep the dividend covered two times by underlying earnings, this will result in an unchanged full-year dividend of 10.2 pence (2016/17: 10.2 pence).

Sainsbury's plans to maintain a full-year dividend covered two times by our full-year underlying earnings.

Net debt and retail cash flows

Group net debt includes the capital injections into Sainsbury's Bank, but excludes Sainsbury's Bank's own net debt balances. Sainsbury's Bank balances are excluded because they are required for business as usual activities. As at 10 March 2018, net debt was £1,364 million (11 March 2017: £1,477 million), a decrease of £113 million.

Summary cash flow statement¹	Retail	Retail
	52 weeks to	52 weeks to
	10 March	11 March
	2018	2017
	£m	£m
Adjusted retail operating cash flow before changes in working capital^2,3	1,214	1,179
Decrease in working capital³	196	61
Cash generated from retail operations⁴	1,410	1,240
Retirement benefit obligations	(151)	(112)
Net interest paid⁵	(105)	(108)
Corporation tax paid	(72)	(87)
Net cash generated from retail operating activities⁶	1,082	933
Cash capital expenditure before strategic capital expenditure⁷	(542)	(588)
Proceeds from disposal of property, plant and equipment	54	55
Bank capital injections	(190)	(130)
Dividends and distributions received from JVs net of capital injections	28	49
Retail free cash flow⁸	432	319
Dividends paid on ordinary shares	(212)	(230)
Exceptional pension contributions	-	(199)
Strategic capital expenditure⁵	(80)	(92)
Acquisition of subsidiaries⁵	135	457
Repayment of borrowings including finance leases⁵	(174)	(211)
Other⁵	(2)	6
Net increase in cash and cash equivalents	99	50
Decrease in borrowings including finance leases	174	211
Acquisition movements	(15)	39
Fair value, other non-cash and net interest movements⁹	(145)	49
Movement in net debt	113	349

Opening net debt	(1,477)	(1,826)
Closing net debt	(1,364)	(1,477)
Closing net debt (inc. perpetual securities as debt)	(1,858)	(1,971)

1 See note 4 for a reconciliation between the Retail and Group cash flows.

2 Excludes working capital, pension contributions and exceptional pension contributions.

3 The Group cash flow statement comparatives have been reclassified, refer to note 4 for further details.

4 Excludes pension contributions and exceptional pension contributions.

5 Refer to the Alternative Performance Measures on page 48 for reconciliation.

6 Excludes exceptional pension contributions.

7 Excludes Argos integration capital expenditure.

8 Retail free cash flow restated to reflect capital injections made to Sainsbury's Bank and dividends and distributions received from joint ventures net of capital injections.

9 Net interest excluding dividends paid on perpetual securities

Adjusted operating cash flow before changes in working capital increased by £35 million year-on-year to £1,214 million (2016/17: £1,179 million) and working capital improved by £196 million. Capital expenditure before strategic capital expenditure was £542 million (2016/17: £588 million) driven by a reduction in Sainsbury's core retail capital expenditure partially offset by a full year's Argos core retail capital expenditure. Bank capital injections of £190 million were made in the year (2016/17: £130 million).

Free cash flow increased by £113 million in the year to £432 million (2016/17: £319 million). Free cash flow was used to fund dividends and repay debt. Dividends of £212 million were paid in the year, which are covered 2.0 times by free cash flow (2016/17: 1.4 times). Strategic capital expenditure was £12 million favourable year-on-year as no freehold purchases were made in the current year (2016/17: £74 million purchase of Chiswick), partly offset by Argos integration capital expenditure.

Fair value, other non-cash and interest movements of £145 million were primarily driven by a reduction in the value of US Dollar foreign exchange derivatives held to mitigate the Group's exposure to fluctuations in US Dollar denominated purchases. The weighted average hedge rate ('WAHR') at 10 March 2018 was below the spot rate, generating an unrealised fair value loss (2016/17: unrealised profit as the WAHR at 11 March 2017 was above the spot rate).

As at 10 March 2018, Sainsbury's had drawn debt facilities of £2.5 billion (including the perpetual securities) and undrawn committed credit facilities of £1.45 billion. The Group also held £85 million of uncommitted facilities, which was undrawn as at 10 March 2018.

On 17 October 2017 the Group refinanced its syndicated committed revolving credit facility. The revised facility of £1.45 billion has three, four and five-year tranches with an initial final maturity for the longer dated tranche of April 2023.

Sainsbury's expects 2018/19 year-end net debt to reduce by around £100 million. We expect net debt to reduce over the medium term.

Sainsbury's expects adjusted net debt to EBITDAR (treating the perpetual securities as debt) to reduce below three times in the medium term.

Sainsbury's expects fixed charge cover of over three times in the medium term.

Capital expenditure

Core retail capital expenditure was £495 million (2016/17: £547 million). Retail capital expenditure (including Argos integration capital expenditure) was £575 million (2016/17: £639 million).

In 2018/19, Sainsbury's expects core retail capital expenditure including business as usual Argos capital expenditure (excluding Sainsbury's Bank and Argos integration capital expenditure) to be around £550 million. Core retail capital expenditure is expected to be around £550 million per annum over the medium term.

We expect Argos integration capital expenditure to be around £40 million.

Financial ratios

Key financial ratios	As at	As at
	10 March	11 March
	2018	2017
Return on capital employed (%)¹	8.4	8.8
Return on capital employed (exc. pension deficit) (%)¹	7.7	8.0
Adjusted net debt to EBITDAR²	3.2 times	3.7 times
Interest cover³	5.9 times	5.9 times
Fixed charge cover⁴	2.5 times	2.6 times
Gearing⁵	18.4%	21.5%
Gearing (exc. pension deficit)⁶	17.8%	19.1%

Key financial ratios
(with perpetual securities treated as debt)⁷
Adjusted net debt to EBITDAR	3.5 times	4.0 times
Gearing	26.9%	30.9%
Gearing (exc. pension deficit)	25.9%	27.3%

Key financial ratios
(with perpetual securities coupons excluded from net underlying finance costs)
Interest cover⁸	7.4 times	7.3 times
Fixed charge cover⁹	2.6 times	2.7 times

1 The 14 point period includes the opening capital employed as at 11 March 2017 and the closing capital employed for each of the 13 individual four-week periods to 10 March 2018.

2 Net debt of £1,364 million plus capitalised lease obligations of £5,683 million, divided by Group underlying EBITDAR of £2,181 million, calculated for a 52-week period to 10 March 2018. Perpetual securities treated as equity.

3 Underlying profit before interest and tax divided by underlying net finance costs, where interest on perpetual securities is included in underlying finance costs.

4 Group underlying EBITDAR divided by net rent and underlying net finance costs, where interest on perpetual securities is included in underlying finance costs.

5 Net debt divided by net assets. Perpetual securities treated as equity.

6 Net debt divided by net assets, excluding pension deficit. Perpetual securities treated as equity.

7 On a statutory basis, the perpetual securities are accounted for as equity on the Balance Sheet. Treating the perpetual securities, net of transaction fees, as debt increases net debt to £1,858 million, and reduces net assets to £6,917 million.

8 Underlying profit before interest and tax divided by underlying net finance costs, where interest on perpetual securities is excluded from underlying finance costs.

9 Group underlying EBITDAR divided by net rent and underlying net finance costs, where interest on perpetual securities is excluded from underlying finance costs.

Property value

As at 10 March 2018, Sainsbury's estimated market value of properties, including our 50 per cent share of properties held within property joint ventures, was £10.5 billion (11 March 2017: £10.3 billion). The £0.2 billion increase was a result of a small yield movement.

Defined benefit pensions

At 10 March 2018, the retirement benefit obligation for the Group was £261 million (including Argos, the unfunded obligation and adjusting for associated deferred tax). The £589 million decrease in the deficit from 11 March 2017 was driven by a rise in the discount rate from 2.70 per cent to 2.80 per cent, and updates to future mortality assumptions. The discount rate has been increased this year to use a revised approach that the Group believes better reflects expected yields on high quality corporate bonds over the duration of the Group's pension schemes. Mortality assumptions have been updated from CMI 2015 projections at the 2017 year end to CMI 2017 projections.

Following agreement of the valuation of both schemes, the Group is committed to make annual contributions of £124 million to the schemes (Sainsbury's scheme: £84 million; Argos scheme: £40 million). The next triennial valuations are for the March 2018 year-ends for both schemes and will need to be completed by June 2019.

Retirement benefit obligations
	Sainsbury's	Argos	Group	Group
	As at	As at	As at	As at
	10 March 2018	10 March 2018	10 March 2018	11 March 2017
	£m	£m	£m	£m
Present value of funded obligations	(8,744)	(1,284)	(10,028)	(10,854)
Fair value of plan assets	8,669	1,215	9,884	9,920
Additional liability due to minimum funding requirements (IFRIC 14)	-	(78)	(78)	-
Pension deficit	(75)	(147)	(222)	(934)
Present value of unfunded obligations	(21)	(14)	(35)	(40)
Retirement benefit obligations	(96)	(161)	(257)	(974)
Deferred income tax (liability)/asset	(38)	34	(4)	124
Net retirement benefit obligations	(134)	(127)	(261)	(850)

Consolidated income statement

for the 52 weeks to 10 March 2018 and 11 March 2017

		2018	2017
	Note	£m	£m

Revenue	4	28,456	26,224
Cost of sales		(26,574)	(24,590)
Gross profit		1,882	1,634
Administrative expenses		(1,415)	(1,207)
Other income		51	215
Operating profit		518	642
Finance income	5	19	34
Finance costs	5	(140)	(136)
Share of post-tax profit/(loss) from joint ventures and associates		12	(37)
Profit before tax		409	503

Analysed as:
Underlying profit before tax	3	589	581
Non-underlying items	3	(180)	(78)
		409	503

Income tax expense	6	(100)	(126)

Profit for the financial year		309	377

Earnings per share	7	Pence	Pence
Basic earnings		13.3	17.5
Diluted earnings		12.7	16.5
Underlying basic earnings		20.4	21.8
Underlying diluted earnings		19.1	20.4

Consolidated statement of comprehensive income

for the 52 weeks to 10 March 2018 and 11 March 2017

		2018	2017
	Note	£m	£m
Profit for the financial year		309	377

Items that will not be reclassified subsequently to the income statement
Remeasurement on defined benefit pension schemes	11	592	(407)
Current tax relating to items not reclassified		19	41
Deferred tax relating to items not reclassified		(118)	28
		493	(338)
Items that may be reclassified subsequently to the income statement
Currency translation differences		(4)	5
Available-for-sale financial assets fair value movements		14	10
Items reclassified from available-for-sale assets reserve		2	(1)
Cash flow hedges effective portion of fair value movements		(139)	115
Items reclassified from cash flow hedge reserve		50	(87)
Current tax on items that may be reclassified		-	(1)
Deferred tax relating to items that may be reclassified		13	5
		(64)	46
Total other comprehensive income/(expense) for the year (net of tax)		429	(292)
Total comprehensive income for the year		738	85

Consolidated balance sheet

At 10 March 2018 and 11 March 2017

		2018	2017
			Restated
	Note	£m	£m
Non-current assets

Property, plant and equipment		9,898	10,006
Intangible assets		1,072	803
Investments in joint ventures and associates		232	237
Available-for-sale financial assets		540	435
Other receivables		44	69
Amounts due from Financial Services customers		2,332	1,916
Derivative financial instruments		17	10
		14,135	13,476
Current assets

Inventories		1,810	1,775
Trade and other receivables		744	574
Amounts due from Financial Services customers		3,360	2,686
Available-for-sale financial assets		203	100
Derivative financial instruments		10	94
Cash and cash equivalents	9	1,730	1,083
		7,857	6,312
Assets held for sale		9	10
		7,866	6,322
Total assets		22,001	19,798
Current liabilities

Trade and other payables		(4,322)	(3,741)
Amounts due to Financial Services customers and other deposits		(4,841)	(4,284)
Borrowings		(638)	(172)
Derivative financial instruments		(53)	(22)
Taxes payable		(247)	(219)
Provisions		(201)	(148)
		(10,302)	(8,586)
Net current liabilities		(2,436)	(2,264)

Non-current liabilities

Other payables		(313)	(304)
Amounts due to Financial Services customers and other deposits		(1,683)	(637)
Borrowings		(1,602)	(2,039)
Derivative financial instruments		(26)	(38)
Deferred income tax liability		(241)	(162)
Provisions		(166)	(186)
Net retirement benefit obligations	11	(257)	(974)
		(4,288)	(4,340)
Net assets		7,411	6,872

Equity

Called up share capital		627	625
Share premium account		1,130	1,120
Capital redemption reserve		680	680
Merger reserve		568	568
Other reserves		121	193
Retained earnings		3,789	3,190
Total equity before perpetual securities		6,915	6,376
Perpetual capital securities		248	248
Perpetual convertible bonds		248	248
Total equity		7,411	6,872

The prior year restatements relate to hindsight adjustments to the acquired Home Retail Group plc balance sheet as required under IFRS 3 'Business Combinations'. See note 12 for more information.

Consolidated Cash flow statement

for the 52 weeks to 10 March 2018 and to 11 March 2017

		2018	2017
	Note	£m	£m

Cash flows from operating activities
Profit before tax		409	503
Net finance costs		121	102
Share of post-tax (profit)/loss from joint ventures associates		(12)	37
Operating profit		518	642
Adjustments for:
Depreciation expense		659	600
Amortisation expense		72	28
Non-cash adjustments arising from acquisitions		1	12
Financial Services impairment losses on loans and advances		68	33
Profit on sale of properties		(11)	(101)
Loss on disposal of intangibles		2	36
Profit on disposal of joint ventures		(4)	-
Profit on disposal of Pharmacy business		-	(98)
Impairment charge of property, plant and equipment		-	55
Share-based payments expense		33	32
Retirement benefit obligations		(151)	(311)
Operating cash flows before changes in working capital		1,187	928
Changes in working capital
Increase in inventories		(36)	(6)
Increase in current available-for-sale financial assets		(192)	(126)
(Increase)/decrease in trade and other receivables		(44)	37
Increase in amounts due from Financial Services customers and other deposits		(1,161)	(681)
Increase in trade and other payables		142	29
Increase in amounts due to Financial Services customers and other deposits		1,602	1,166
Increase/(decrease) in provisions and other liabilities		28	(24)
Cash generated from operations		1,526	1,323
Interest paid		(89)	(95)
Corporation tax paid		(72)	(75)
Net cash generated from operating activities		1,365	1,153

Cash flows from investing activities
Purchase of property, plant and equipment		(561)	(634)
Purchase of intangible assets		(140)	(110)
Proceeds from disposal of property, plant and equipment		54	55
Acquisition of subsidiaries, net of cash acquired		135	101
Capital return to Home Retail Group plc shareholders		-	(226)
Share issuance costs on acquisition of Home Retail Group plc		-	(3)
Investment in joint ventures		(9)	(16)
Interest received		14	18
Dividends and distributions received		37	65
Net cash used in investing activities		(470)	(750)

Cash flows from financing activities
Proceeds from issuance of ordinary shares		12	6
Drawdown of short-term borrowings		-	448
Repayment of borrowings		(148)	(622)
Proceeds from borrowings		174	-
Purchase of own shares		(14)	-
Repayment of capital element of obligations under finance lease borrowings		(26)	(37)
Interest elements of obligations under finance lease payments		(7)	(8)
Dividends paid on ordinary shares	8	(212)	(230)
Dividends paid on perpetual securities		(23)	(23)
Net cash used in financing activities		(244)	(466)

Net increase/(decrease) in cash and cash equivalents		651	(63)

Opening cash and cash equivalents		1,077	1,140
Closing cash and cash equivalents	9	1,728	1,077

Consolidated statement of changes in equity

for the 52 weeks to 10 March 2018 and to 11 March 2017

		Called up share capital	Share premium account	Capital redemption and other reserves	Merger reserve	Retained earnings	Total equity before perpetual securities	Perpetual capital securities	Perpetual convertible bonds	Total equity
	Note	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 12 March 2017		625	1,120	873	568	3,190	6,376	248	248	6,872
Profit for the year		-	-	-	-	291	291	12	6	309
Other comprehensive (expense)/income		-	-	(64)	-	493	429	-	-	429
Total comprehensive (expense)/income for the year ended 10 March 2018		-	-	(64)	-	784	720	12	6	738
Transactions with owners:
Dividends	8	-	-	-	-	(212)	(212)	-	-	(212)
Distribution to holders of perpetual securities (net of tax)		-	-	-	-	-	-	(12)	(6)	(18)
Amortisation of convertible bond equity component		-	-	(8)	-	8	-	-	-	-
Share-based payment (net of tax)		-	-	-	-	33	33	-	-	33
Purchase of own shares		-	-	-	-	(14)	(14)	-	-	(14)
Allotted in respect of share option schemes		2	10	-	-	-	12	-	-	12
At 10 March 2018		627	1,130	801	568	3,789	6,915	248	248	7,411

At 13 March 2016		550	1,114	835	-	3,370	5,869	248	248	6,365
Profit for the year		-	-	-	-	359	359	12	6	377
Other comprehensive income		-	-	46	-	(338)	(292)	-	-	(292)
Total comprehensive income for the year ended 11 March 2017		-	-	46	-	21	67	12	6	85
Transactions with owners:
Dividends	8	-	-	-	-	(232)	(232)	-	-	(232)
Acquisition of subsidiaries	12	75	-	-	568	(3)	640	-	-	640
Adjustment to consideration in respect of share options		-	-	-	-	3	3	-	-	3
Distribution to holders of perpetual securities (net of tax)		-	-	-	-	-	-	(12)	(6)	(18)
Amortisation of convertible bond equity component		-	-	(8)	-	8	-	-	-	-
Share-based payment (net of tax)		-	-	-	-	32	32	-	-	32
Purchase of own shares		-	-	-	-	(9)	(9)	-	-	(9)
Allotted in respect of share option schemes		-	6	-	-	-	6	-	-	6
At 11 March 2017		625	1,120	873	568	3,190	6,376	248	248	6,872

1 Status of financial information

The financial information, which comprises the Group income statement, Group statement of comprehensive income, Group balance sheet, Group cash flow statement, Group statement of changes in equity and related notes, is derived from the full Group financial statements for the 52 weeks to 10 March 2018 and does not constitute full accounts within the meaning of section 435 (1) and (2) of the Companies Act 2006.

The Group Annual Report and Financial Statements 2018 on which the auditors have given an unqualified report and which does not contain a statement under section 498(2) or (3) of the Companies Act 2006, will be delivered to the Registrar of Companies in due course, and made available to shareholders in June 2018.

The financial year represents the 52 weeks to 10 March 2018 (prior financial year 52 weeks to 11 March 2017). The consolidated financial statements for the 52 weeks to 10 March 2018 comprise the financial statements of the Company and its subsidiaries (the 'Group') and the Group's share of the post-tax results of its joint ventures and associates.

Sainsbury's Bank and its subsidiaries have been consolidated for the twelve months to 28 February 2018 (28 February 2017). Adjustments have been made for the effects of significant transactions or events that occurred between this date and the Group's balance sheet date.

Nectar Loyalty Holding Limited and its subsidiaries have been consolidated for the four weeks from acquisition on 1 February 2018 to 28 February 2018. Adjustments have been made for the effects of significant transactions or events that occurred between this date and the Group's balance sheet date.

The year ended 10 March 2018 includes 52 weeks of Home Retail Group results (11 March 2017: 27 weeks).

The prior year balance sheet has been restated this year. The restatements relate to hindsight adjustments to the acquired Home Retail Group plc balance sheet as required under IFRS 3 'Business Combinations'. See note 12 for more information.

2 Basis of preparation

The Group's financial statements have been prepared in accordance with International Financial Reporting Standards ('IFRSs') as adopted by the European Union and International Financial Reporting Interpretations Committee ('IFRICs') and with those parts of the Companies Act 2006 applicable to companies reporting under IFRSs.

The financial statements are presented in sterling, rounded to the nearest million ('£m') unless otherwise stated. They have been prepared on a going concern basis under the historical cost convention, except for derivative financial instruments, defined benefit scheme assets, investment properties and available-for-sale financial assets that have been measured at fair value.

The Directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the financial statements.

Amendments to published standards

Effective for the Group and Company in these financial statements:

The Group has considered the following amendments to published standards that are effective for the Group for the financial year beginning 12 March 2017 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 IAS 7 'Statement of cash flows' on the disclosures in financial statements

- Annual Improvements Cycle - 2014-2016

- Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12

Standards and revisions effective for future periods:

The following standards and revisions will be effective for future periods:

- IFRS 9, 'Financial instruments', effective for the financial year commencing 11 March 2018

- IFRS 15, 'Revenue from contracts with customers', effective for the financial year commencing 11 March 2018

- IFRS 16, 'Leases', effective for the financial year commencing 10 March 2019

IFRS 9 'Financial Instruments'

In July 2014, the IASB issued the complete version of IFRS 9, which brings together the classification and measurement, impairment and hedge accounting phases of the IASB's project to replace IAS 39 'Financial Instruments: Recognition and Measurement'. The main changes the new standard introduces are:

• new requirements for the classification and measurement of financial assets and financial liabilities;

• a new model for recognising impairments of financial assets; and

• changes to hedge accounting by aligning hedge accounting more closely to an entity's risk management objectives.

The changes will be applied by adjusting the Group balance sheet on 11 March 2018, the date of initial application, with no restatement of comparative information.

a. Classification and measurement

IFRS 9 introduces a principles-based approach to the classification of financial assets. Financial assets are measured at fair value through profit or loss (FVTPL), fair value through other comprehensive income (FVOCI) or amortised cost. Classification is determined by the nature of the cash flows of the assets and the business model in which they are held. These categories replace the existing IAS 39 classifications. For financial liabilities, most of the pre-existing requirements for classification and measurement previously included in IAS 39 were carried forward unchanged into IFRS 9.

The Group does not expect any material changes in relation to the classification and measurement of financial assets and liabilities, and the associated accounting policies as detailed in the notes to the financial statements.

b. Impairment

IFRS 9 introduces an expected credit loss impairment model that differs significantly from the incurred loss model under IAS 39 and is expected to result in earlier recognition of credit losses. Additional details on the key elements of the new expected credit loss model are described below. The most significant impact will be on Sainsbury's Bank's unsecured lending portfolios.

Expected credit loss (ECL) impairment model

Under IFRS 9, credit loss allowances will be measured on each reporting date according to a three-stage expected credit loss impairment model. As soon as a financial instrument is originated or purchased, 12-month expected credit losses must be recognised in profit and loss and an impairment allowance will be established (Stage 1). If the credit risk increases significantly (and the resulting credit quality is not considered to be low credit risk) full lifetime expected credit losses will be provided for (Stage 2). Under both Stage 1 and Stage 2, interest income is recognised on the gross carrying value of the financial asset. Financial assets will move into Stage 3 when they are considered to be credit impaired, i.e. when one or more events have occurred that have a detrimental impact on the estimated future cash flows of the asset. Stage 3 assets will continue to recognise lifetime expected impairment losses and interest income will be recognised on the net carrying amount (i.e. gross amount less impairment allowance) - as under IAS 39.

The expected impact is an increase in impairment provisions held within the Financial Services business as at 11 March 2018 of approximately £80 million, with a corresponding reduction to retained earnings of approximately £66 million, net of deferred tax.

Post-Day 1 movements in the ECL provisions reported through the income statement are expected to reduce profits at the Bank next year and be more volatile than under IAS 39 due to the forward-looking nature of the new approach and the need to take account of future macro-economic conditions in the ECL modelling, which will be sensitive to management judgement and estimates.

c. Hedge accounting

When initially applying IFRS 9, the Group expects to exercise the accounting policy choice to continue to apply the hedge accounting requirements of IAS 39 for its macro hedging relationships (applicable to the Financial Services business) and will adopt IFRS 9 in respect of its micro hedge accounting. Although the micro hedge accounting requirements under IFRS 9 are generally less restrictive, this is not expected to have a material impact on the Group.

IFRS 15 'Revenue from Contracts with Customers'

IFRS 15 was issued in May 2014, and amended in April 2016, and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognised at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer.

The new revenue standard will supersede all current revenue recognition requirements of IFRS. Either a full retrospective application or modified retrospective application is required for annual periods beginning on or after 1 January 2018. The Group plans to adopt IFRS 15 on 11 March 2018 using the full retrospective method. During the year-ended 11 March 2017, the Group performed a preliminary assessment of IFRS 15, which was continued with a more detailed analysis in the year-ended 10 March 2018.

The majority of sales transactions are for goods sold in store and online, where the sale (and delivery in the case of online sales) of these items is the only performance obligation. Revenue recognition occurs at a point in time when control of the asset is transferred to the customer. This is generally when the goods are purchased in store, or delivered to the customer. IFRS 15 therefore is not expected to have a material impact on the Group's consolidated financial statements.

The assessment also included areas that required additional specific consideration, including rights of return, principal vs agent considerations and Financial Services income. No material impact is expected to the Group's current revenue recognition policies which are disclosed in the notes to the financial statements.

Nectar loyalty programme

On 1 February 2018, the Group acquired the shares of Aimia Inc's UK business, enabling the full and independent operation of the Nectar loyalty programme in the UK. Refer to note 12 for further information.

Prior to acquisition, the Group's accounting policy for Nectar points was to recognise sales net of the cost of Nectar points issued and redeemed, based on agreed rates with Nectar UK. Since acquisition, any points issued and redeemed in Sainsbury's and Argos are accounted for in line with IFRIC 13 'Customer loyalty programmes'. Under IFRIC 13, on issuance of Nectar points within the Group, a portion of the transaction price is allocated to the loyalty programme using the fair value of points issued and a corresponding deferred revenue recognised in relation to points issued but not yet redeemed.

Under IFRS 15, the Group will need to allocate a portion of the transaction price to the loyalty programme based on relative standalone selling price instead of the allocation using the fair value of points issued, i.e. residual approach, as it did under IFRIC 13. Due to only consolidating four weeks of Nectar UK results during the year-ended 10 March 2018, the adjustment to current year revenue is not expected to be material. A more detailed assessment of the impact of IFRS 15 to the Group's consolidation of the Nectar scheme is currently underway.

IFRS 16 'Leases'

IFRS 16 was issued in January 2016 and introduces a comprehensive model for the identification of lease arrangements and accounting treatments for both lessors and lessees and will supersede the current lease guidance including IAS 17 'Leases' and the related interpretations. The standard is effective for annual periods beginning on or after 1 January 2019 and the Group plans to adopt IFRS 16 on 10 March 2019.

IFRS 16 distinguishes leases and service contracts on the basis of whether an identified asset is controlled by a customer. Distinctions of operating leases (off balance sheet) and finance leases (on balance sheet) are removed for lessee accounting and are replaced by a model where a right-of-use asset and a corresponding liability have to be recognised for all leases by lessees except for short-term leases and leases of low value assets.

The right-of-use asset is initially measured at cost and subsequently measured at cost less accumulated depreciation and impairment losses, adjusted for any remeasurement of the lease liability. The lease liability is initially measured at the present value of the lease payments that are not paid at that date. Subsequently, the lease liability is adjusted for interest and lease payments, as well as the impact of lease modifications.

Furthermore, the classification of cash flows will also be affected as operating lease payments under IAS 17 are presented as operating cash flows; whereas under the IFRS 16 model, the lease payments will be split into a principal and an interest portion which will be presented as financing and operating cash flows respectively.

In contrast to lessee accounting, IFRS 16 substantially carries forward the lessor accounting requirements in IAS 17, and continues to require a lessor to classify a lease either as an operating lease or a finance lease.

A preliminary assessment indicates that the Group's current operating lease arrangements will meet the definition of a lease under IFRS 16, and hence the Group will recognise a right-of-use asset and a corresponding liability in respect of all these leases unless they qualify as low value or short-term leases upon the application of IFRS 16. The Group is also currently assessing service type arrangements to determine whether any of those are deemed to include an embedded lease which would fall under the scope of IFRS 16.

IFRS 16 allows a choice of transitional approaches, either:

i. The full retrospective approach where IFRS 16 is applied to each prior reporting period presented and an adjustment is made to the opening retained earnings of the earliest comparative period presented; or

ii. The modified retrospective approach where the cumulative effect of initially applying IFRS 16 is recognised at the date of initial application.

The new requirement to recognise a right-of-use asset and a related lease liability is expected to have a significant impact on reported assets, liabilities and the income statement of the Group.

The Group has a comprehensive project underway to assess the impact to the Group of the transitional approaches available, determine the preferred transitional approach and to assess the overall impact to the Group's financial position of adopting IFRS 16. The project has also assessed the data required under each of the transitional approaches and is currently addressing these comprehensive data requirements.

IFRS 16 is expected to have the largest impact on the Group's property portfolio and will impact the leases of the Sainsbury's supermarkets the most due to the size of their passing rentals and their generally longer-term leases. The Argos property portfolio are generally shorter term and of lower value and will be impacted less.

In contrast, for finance leases where the Group is a lessee, as the Group has already recognised an asset and a related finance lease liability for the lease arrangement, and in cases where the Group is a lessor (for both operating and finance leases), the Directors of the Company do not anticipate that the application of IFRS 16 will have a significant impact on the amounts recognised in the Group's consolidated financial statements.

IFRS 16 requires the use of judgements in certain key areas which will directly affect the impact to the Group on adoption. These include:

· The assessment of how reasonably certain it is considered to be that a lease option (extension, termination or purchase) will be exercised;

· The determination of an appropriate discount rate used to present value the lease liability and to initially measure the right of use asset; and

· When a lease is deemed to be embedded in a service type arrangement.

As part of the Group's implementation project, the Directors are evaluating what they believe to be appropriate judgements and policies to address the above.

3 Non-GAAP performance measures

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.

These adjusted items are as follows:

	2018	2017
	£m	£m
Underlying profit before tax	589	581

Property related
Profit on disposal of properties	5	98
Joint venture investment property fair value movements	7	(25)
Net impairment and onerous contract charge	-	(37)

Argos
Transaction costs relating to the acquisition of Home Retail Group	-	(22)
Argos integration costs	(75)	(27)
Homebase separation	(10)	(4)

Sainsbury's Bank transition	(38)	(60)

Nectar UK
Transaction costs relating to the acquisition of Nectar UK	(2)	-
Revaluation of previously held equity interest in Insight 2 Communication LLP	4	-

Divestments
Business rationalisation	-	72
IT write-offs	-	(57)

Restructuring costs	(85)	(33)

Other
Perpetual securities coupons	23	23
Non-underlying finance movements	(2)	10
Acquisition adjustments	(2)	8
IAS 19 pension expenses	(5)	(24)

Total adjustments	(180)	(78)
Profit before tax	409	503

Property related

- Profit on disposal of properties for the financial year comprised £11 million for the Group (2017: £101 million) included within other income and £(6) million for the property joint ventures (2017: £(3) million) included within share of post-tax profit from joint ventures and associates.

- Net impairment and onerous contract charge in the prior year comprised £(19) million within property, plant and equipment and £(18) million onerous lease provisions. There were no impairment charges nor reversals during the current financial year.

Argos

- Argos integration costs for the year of £(75) million were part of the previously announced £(130) million required over the three years in order to achieve the synergies of £160 million. These costs include the reallocation of property, dilapidations, lease break costs and people costs.

- The Homebase separation and restructuring costs for the year of £(10) million were part of the revised anticipated total exceptional costs of £45 million.

Sainsbury's Bank transition

- Sainsbury's Bank transition costs of £(38) million (2017: £(60) million) were incurred in transitioning to a new, more flexible banking platform as part of the previously announced New Bank Programme.

Nectar UK

- Acquisition-related costs (included in administrative expenses and recognised outside of underlying profit) amount to £(2) million in the year (see note 12). In addition, an acquisition fair value gain of £4 million on the previously held equity interest in Insight 2 Communication LLP has been recorded in other income (and excluded from underlying profit before tax).

Divestments

- Divestments in the prior year include £98 million profit on disposal of the Pharmacy business (included within other income), offset by £(26) million of costs incurred closing non-core businesses to enable the Group to focus on its strategy. This included the closure of Netto, Sainsbury's Entertainment and Phoneshops.

- The Group incurred £(57) million in the prior year in relation to the cessation of non-core IT projects. This includes £(36) million in property, plant and equipment, £(19) million in intangibles and £(2) million other directly attributable costs.

Restructuring costs

- Restructuring costs in the year have been recognised following transformational changes to the Group's in-store operating model, responding to changing customer shopping habits and reducing costs throughout the store estate. These costs mainly consist of people costs.

Other

- 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.

- Non-underlying finance movements for the financial year comprised £1 million for the Group (2017: £12 million) and £(3) million for the joint ventures (2017: £(2) million).

- Acquisition adjustments of £(2) million (2017: £8 million) reflect the unwind of fair value adjustments arising from the Sainsbury's Bank, Home Retail Group and Nectar UK acquisitions and are split as follows:

				2018				2017
	Financial Services	Argos	Nectar	Total Group	Financial Services	Argos	Nectar	Total Group
	£m	£m	£m	£m	£m	£m	£m	£m
Revenue	(3)	-	-	(3)	(7)	-	-	(7)
Cost of sales	-	2	-	2	-	(5)	-	(5)
Depreciation	-	(18)	-	(18)	-	(6)	-	(6)
Amortisation	(3)	22	(2)	17	(6)	32	-	26
	(6)	6	(2)	(2)	(13)	21	-	8

- IAS 19 pension expenses comprise of the pension financing charge of £(26) million (2017: £(16) million) and scheme expenses of £(10) million (2017: £(8) million). These are offset this year by a £31 million past service credit in relation to a Pension Increase Exchange (PIE) at retirement option introduced from 1 April 2018, following a deed of amendment signed during the financial year. Refer to note 11 for more information.

Cash flow statement

The table below shows the impact of non-underlying items on the Group cash flow statement where not already separately presented in the cash flow statement:


	2018	2017
	£m	£m
IAS 19 pension expenses	(10)	(8)
Sainsbury's Bank transition	(38)	(47)
Divestments	(1)	(5)
Argos integration costs	(32)	(12)
Transaction costs relating to acquisition of Home Retail Group	-	(22)
Homebase separation	(14)	(2)
Restructuring costs	(28)	(19)
Cash used in operating activities	(123)	(115)

Profit on disposal of properties	54	55
Divestments (sale of Pharmacy business)	-	(4)
Cash generated from investing activities	54	51

Net cash flows	(69)	(64)

4 Segment reporting

Background

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

· Retail - Food;

· Retail - General Merchandise & Clothing;

· Financial Services (Sainsbury's Bank plc and Argos Financial Services entities);

· Property Investments (The British Land Company PLC joint venture and Land Securities Group PLC joint venture).

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.

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. The year ended 10 March 2018 includes 52 weeks of Home Retail Group results (11 March 2017: 27 weeks) and four weeks of Nectar UK results.

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis. Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more than one period.

Income statement and balance sheet

	Retail	Financial services	Property investment	Group
52 weeks to 10 March 2018	£m	£m	£m	£m
Segment revenue
Retail sales to external customers	27,944	-	-	27,944
Financial Services to external customers	-	515	-	515
Underlying revenue	27,944	515	-	28,459
Acquisition adjustment fair value unwind¹	-	(3)	-	(3)
Revenue	27,944	512	-	28,456

Underlying operating profit	625	69	-	694
Underlying finance income	14	-	-	14
Underlying finance costs²	(133)	-	-	(133)
Underlying share of post-tax profit from joint ventures and associates	4	-	10	14
Underlying profit before tax	510	69	10	589
Non-underlying expense (note 3)				(180)
Profit before tax				409
Income tax expense (note 6)				(100)
Profit for the financial period				309

Assets	13,897	7,872	-	21,769
Investment in joint ventures and associates	1	-	231	232
Segment assets	13,898	7,872	231	22,001
Segment liabilities	(7,694)	(6,896)	-	(14,590)

Other segment items
Capital expenditure³	640	77	-	717
Depreciation expense⁴	651	8	-	659
Amortisation expense⁵	59	13	-	72
Net impairment and onerous contract charge	-	-	-	-
Share based payments	30	3	-	33

1 Represents fair value unwind on loans and advances to customers resulting from the Sainsbury's Bank and Home Retail Group Financial Services acquisitions.

2 The coupons on the perpetual capital securities and the perpetual 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 finance costs, as detailed in note 3.

3 Retail capital expenditure consists of property, plant and equipment additions of £570 million and intangible asset additions of £70 million. Financial Services capital expenditure consists of property, plant and equipment additions of £8 million and intangible asset additions of £69 million.

4 Depreciation within the Retail segment includes an £18 million charge in relation to the unwind of fair value adjustments recognised on acquisition of HRG and Nectar UK.

5 Amortisation expense within the Retail segment includes £20 million income in relation to the unwind of fair value adjustments recognised on acquisition of HRG and Nectar UK. Amortisation expense within the Financial Services segment includes a £(3) million charge in relation to the unwind of fair value adjustments recognised on acquisition of Sainsbury's Bank.

	Retail	Financial services	Property investment	Group
52 weeks to 11 March 2017	£m	£m	£m	£m
Segment revenue
Retail sales to external customers	25,824	-	-	25,824
Financial Services to external customers	-	407	-	407
Underlying revenue	25,824	407	-	26,231
Acquisition adjustment fair value unwind¹	-	(7)	-	(7)
Revenue	25,824	400	-	26,224

Underlying operating profit	626	62	-	688
Underlying finance income	18	-	-	18
Underlying finance costs²	(137)	-	-	(137)
Underlying share of post-tax profit from joint ventures and associates	-	-	12	12
Underlying profit before tax	507	62	12	581
Non-underlying expense (note 3)				(78)
Profit before tax				503
Income tax expense (note 6)				(126)
Profit for the financial period				377

Assets	13,637	5,924	-	19,561
Investment in joint ventures and associates	4	-	233	237
Segment assets (restated)	13,641	5,924	233	19,798
Segment liabilities (restated)	(7,762)	(5,164)	-	(12,926)

Other segment items
Capital expenditure³	741	58	-	799
Depreciation expense	593	7	-	600
Amortisation expense⁴	18	10	-	28
Net impairment and onerous contract charge⁵	37	-	-	37
Share based payments	30	2	-	32

1 Represents fair value unwind on loans and advances to customers resulting from the Sainsbury's Bank and Home Retail Group Financial Services acquisitions.

3 Retail capital expenditure consists of property, plant and equipment additions of £683 million and intangible asset additions of £58 million. Financial Services capital expenditure consists of property, plant and equipment additions of £12 million and intangible asset additions of £46 million.

4 Depreciation within the Retail segment includes a £6 million charge in relation to the unwind of fair value adjustments recognised on acquisition of HRG.

5 Amortisation expense within the Retail segment includes £32 million income in relation to the unwind of fair value adjustments recognised on acquisition of HRG. Amortisation expense within the Financial Services segment includes £6 million charge in relation to the unwind of fair value adjustments recognised on acquisition of Sainsbury's Bank.

Segmented Cash flow statement

		52 weeks to 10 March 2018			52 weeks to 11 March 2017
	APM reference	Retail	Financial Services	Group	Retail	Financial Services	Group
		£m	£m	£m	£m	£m	£m

Profit before tax¹		382	27	409	516	(13)	503
Net finance costs		121	-	121	102	-	102
Share of post-tax (profit)/loss from joint ventures and associates¹		(12)	-	(12)	37	-	37
Operating profit		491	27	518	655	(13)	642
Adjustments for:
Depreciation/amortisation		710	21	731	611	17	628
Non-cash adjustments arising from acquisitions²		(2)	3	1	5	7	12
Financial Services impairment losses on loans and advances		-	68	68	-	33	33
Profit on sale of properties		(11)	-	(11)	(101)	-	(101)
Loss on disposal of intangibles		-	2	2	22	14	36
Profit on disposal of joint ventures		(4)	-	(4)	-	-	-
Profit on disposal of Pharmacy business		-	-	-	(98)	-	(98)
Impairment charge of property, plant and equipment		-	-	-	55	-	55
Share-based payments expense		30	3	33	30	2	32
Retirement benefit obligations		(151)	-	(151)	(112)	-	(112)
Exceptional pension contributions		-	-	-	(199)	-	(199)
Operating cash flows before changes in working capital		1,063	124	1,187	868	60	928
Changes in working capital
Decrease in working capital		196	143	339	61	334	395
Cash generated from operations		1,259	267	1,526	929	394	1,323
Interest paid	a	(89)	-	(89)	(95)	-	(95)
Corporation tax paid		(72)	-	(72)	(87)	12	(75)
Net cash generated from operating activities		1,098	267	1,365	747	406	1,153

Cash flows from investing activities
Purchase of property, plant and equipment excluding strategic capital expenditure		(473)	(8)	(481)	(530)	(12)	(542)
Strategic capital expenditure	b	(80)	-	(80)	(92)	-	(92)
Purchase of property, plant and equipment		(553)	(8)	(561)	(622)	(12)	(634)
Purchase of intangible assets		(69)	(71)	(140)	(58)	(52)	(110)
Proceeds from disposal of property, plant and equipment		54	-	54	55	-	55
Acquisition of subsidiaries	c	(33)	-	(33)	(447)	-	(447)
Cash acquired upon acquisition of subsidiaries	c	168	-	168	548	-	548
Capital return to Home Retail Group plc shareholders	c	-	-	-	(226)	-	(226)
Share issuance costs on acquisition of Home Retail Group plc	c	-	-	-	(3)	-	(3)
Investment in joint ventures		(9)	-	(9)	(16)	-	(16)
Interest received	a	14	-	14	18	-	18
Dividends and distributions received³		37	-	37	65	-	65
Net cash used in investing activities		(391)	(79)	(470)	(686)	(64)	(750)

Cash flows from financing activities
Proceeds from issuance of ordinary shares	e	12	-	12	6	-	6
Drawdown of short-term borrowings	d	-	-	-	448	-	448
Repayment of borrowings	d	(148)	-	(148)	(622)	-	(622)
Proceeds from long-term borrowings	d	-	174	174	-	-	-
Purchase of own shares	e	(14)	-	(14)	-	-	-
Repayment of capital element of obligations under finance lease payments	d	(26)	-	(26)	(37)	-	(37)
Interest elements of obligations under finance lease payments	a	(7)	-	(7)	(8)	-	(8)
Dividends paid on ordinary shares		(212)	-	(212)	(230)	-	(230)
Dividends paid on perpetual securities	a	(23)	-	(23)	(23)	-	(23)
Net cash used in financing activities		(418)	174	(244)	(466)	-	(466)

Intra group funding
Bank capital injections		(190)	190	-	(130)	130	-
HRG acquisition and AFS loan book refinancing	c	-	-	-	585	(585)	-
Net cash (used in)/generated from intra group funding		(190)	190	-	455	(455)	-

Net increase/(decrease) in cash and cash equivalents		99	552	651	50	(113)	(63)

1 Includes £8 million (2017: £(18) million) relating to the Property Investment segment.

2 The total Group balance excludes a £1 million (2017: £20 million income) acquisition adjustment unwind expense already included in depreciation and amortisation in this note.

3 Included within dividends and distributions received is £30 million (2017: £55 million) of dividends received from property investment joint ventures.

5 Finance income and finance costs

		2018			2017
	Underlying	Non- underlying	Total	Underlying	Non- underlying	Total
	£m	£m	£m	£m	£m	£m

Interest on bank deposits and other financial assets	14	-	14	18	-	18
Non-underlying finance movements	-	5	5	-	16	16
Finance income	14	5	19	18	16	34

Borrowing costs:
Secured borrowings	(79)	-	(79)	(81)	-	(81)
Unsecured borrowings	(30)	-	(30)	(30)	-	(30)
Obligations under finance leases	(7)	-	(7)	(8)	-	(8)
Provisions - amortisation of discount	(1)	(4)	(5)	(2)	(4)	(6)
	(117)	(4)	(121)	(121)	(4)	(125)

Other finance costs:
Interest capitalised - qualifying assets	7	-	7	7	-	7
IAS 19 pension financing charge (note 11)	-	(26)	(26)	-	(16)	(16)
Interest expense on Pharmacy sale advance proceeds	-	-	-	-	(2)	(2)
Perpetual securities coupon	(23)	23	-	(23)	23	-
	(16)	(3)	(19)	(16)	5	(11)

Finance costs	(133)	(7)	(140)	(137)	1	(136)

Non-underlying finance movements relate to net fair value movements on derivative financial instruments not designated in a hedging relationship.

Following the refinancing of the Group's revolving credit facility, £3 million of capitalised fees in relation to the previous facility have been recognised within borrowing costs this year.

6 Income tax expense

	2018	2017
	£m	£m
Current tax expense	107	113
Deferred tax (credit)/charge	(7)	13
Total income tax expense in income statement	100	126
Analysed as:
Underlying tax	142	135
Non-underlying tax	(42)	(9)
Total income tax expense in income statement	100	126

Underlying tax rate	24.1%	23.2%
Effective tax rate	24.4%	25.0%

7 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 interest on the senior convertible bonds (net of tax) and by the coupons on the perpetual subordinated 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.

	2018	2017
	million	million
Weighted average number of shares in issue	2,186.2	2,049.0
Weighted average number of dilutive share options	21.8	18.2
Weighted average number of dilutive senior convertible bonds	143.5	137.7
Weighted average number of dilutive subordinated perpetual convertible bonds	78.3	75.1
Total number of shares for calculating diluted earnings per share	2,429.8	2,280.0

	£m	£m
Profit for the financial year (net of tax)	309	377
Less profit attributable to:
Holders of perpetual capital securities	(12)	(12)
Holders of perpetual convertible bonds	(6)	(6)
Profit for the financial year attributable to ordinary shareholders	291	359

	£m	£m
Profit for the financial year attributable to ordinary shareholders	291	359
Add interest on senior convertible bonds (net of tax)¹	12	12
Add coupon on subordinated perpetual convertible bonds (net of tax)	6	6
Diluted earnings for calculating diluted earnings per share	309	377

	£m	£m
Profit/(loss)for the financial year attributable to ordinary shareholders of the parent	291	359
Adjusted for non-underlying items (note 3)	180	78
Tax on non-underlying items	(42)	(9)
Add back coupons on perpetual securities (net of tax)¹	18	18
Underlying profit after tax attributable to ordinary shareholders of the parent	447	446
Add interest on convertible bonds (net of tax)	12	12
Add coupon on subordinated perpetual convertible bonds (net of tax)	6	6
Diluted underlying profit after tax attributable to ordinary shareholders of the parent	465	464

	Pence	Pence
	per share	per share
Basic earnings	13.3	17.5
Diluted earnings	12.7	16.5
Underlying basic earnings	20.4	21.8
Underlying diluted earnings	19.1	20.4

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

8 Dividend

	2018	2017	2018	2017
	Pence per share	Pence per share	£m	£m
Amounts recognised as distributions to ordinary
shareholders in the year:
Final dividend of prior financial year	6.6	8.1	144	155
Interim dividend of current financial year	3.1	3.6	68	77
	9.7	11.7	212	232

After the balance sheet date on 30 April 2018 a final dividend of 7.1 pence per share (2017: 6.6 pence per share) was proposed by the Directors in respect of the 52 weeks to 10 March 2018. This results in a total final proposed dividend of £156 million (2017: £144 million), an increase of 8.3 per cent on the previous year. Subject to shareholders' approval at the Annual General Meeting, the dividend will be paid on 13 July 2018 to the shareholders on the register at 8 June 2018. The proposed final dividend has not been included as a liability at 10 March 2018.

9 Cash and cash equivalents

Cash and cash equivalents comprise the following:

	2018	2017
	£m	£m
Cash in hand and bank balances	585	439
Money market funds and deposits	462	403
Deposits at central banks	683	241
Cash and bank balances	1,730	1,083

Bank overdrafts	(2)	(6)
Net cash and cash equivalents	1,728	1,077

10 Analysis of net debt

		Cash changes		Non-cash changes
	11 March 2017	Cash flows excluding interest	Net interest (received) / paid	Acquisition movements	Other non-cash movements	Changes in fair value	10 March 2018
	£m	£m	£m	£m	£m	£m	£m
Retail
Available-for-sale assets¹	39	-	(1)	-	1	1	40
Derivative assets	103	-	(20)	-	19	(93)	9
Derivative liabilities	(38)	-	17	-	(15)	(36)	(72)
Cash and cash equivalents	630	95	-	-	-	-	725
Bank overdrafts	(6)	4	-	-	-	-	(2)
Borrowings²	(2,067)	148	79	(15)	(87)	5	(1,937)
Finance leases	(138)	26	7	-	(22)	-	(127)
Retail net debt	(1,477)	273	82	(15)	(104)	(123)	(1,364)

Financial Services
Available-for-sale assets¹	333	192	-	-	-	1	526
Derivative assets	1	-	-	-	-	17	18
Derivative liabilities	(22)	-	-	-	-	15	(7)
Cash and cash equivalents	453	552	-	-	-	-	1,005
Borrowings	-	(174)	-	-	-	-	(174)
Financial Services net debt	765	570	-	-	-	33	1,368

Group
Available-for-sale assets¹	372	192	(1)	-	1	2	566
Derivative assets	104	-	(20)	-	19	(76)	27
Derivative liabilities	(60)	-	17	-	(15)	(21)	(79)
Cash and cash equivalents	1,083	647	-	-	-	-	1,730
Bank overdrafts	(6)	4	-	-	-	-	(2)
Borrowings²	(2,067)	(26)	79	(15)	(87)	5	(2,111)
Finance leases	(138)	26	7	-	(22)	-	(127)
Group net debt	(712)	843	82	(15)	(104)	(90)	4

1 The perpetual capital securities and perpetual convertible bonds are accounted for as equity in accordance with IAS 32 'Financial instruments: Presentation' and therefore are not included within net debt.

2 Borrowings exclude bank overdrafts and finance leases as they are disclosed separately.

		Cash changes		Non-cash changes
	12 March 2016	Cash flows excluding interest	Net interest (received) / paid	Acquisition movements	Other non-cash movements	Changes in fair value	11 March 2017
	£m	£m	£m	£m	£m	£m	£m
Retail
Available-for-sale assets¹	35	-	(1)	-	-	5	39
Derivative assets	64	-	(23)	39	23	-	103
Derivative liabilities	(89)	-	23	-	(23)	51	(38)
Cash and cash equivalents	577	53	-	-	-	-	630
Bank overdrafts	(3)	(3)	-	-	-	-	(6)
Borrowings²	(2,235)	174	78	-	(84)	-	(2,067)
Finance leases	(175)	37	8	-	(8)	-	(138)
Retail net debt	(1,826)	261	85	39	(92)	56	(1,477)

Financial Services
Available-for-sale assets¹	204	126	-	-	1	2	333
Derivative assets	4	-	-	-	-	(3)	1
Derivative liabilities	(23)	-	-	-	-	1	(22)
Cash and cash equivalents	566	(113)	-	-	-	-	453
Financial Services net debt	751	13	-	-	1	-	765

Group
Available-for-sale assets¹	239	126	(1)	-	1	7	372
Derivative assets	68	-	(23)	39	23	(3)	104
Derivative liabilities	(112)	-	23	-	(23)	52	(60)
Cash and cash equivalents	1,143	(60)	-	-	-	-	1,083
Bank overdrafts	(3)	(3)	-	-	-	-	(6)
Borrowings²	(2,235)	174	78	-	(84)	-	(2,067)
Finance leases	(175)	37	8	-	(8)	-	(138)
Group net debt	(1,075)	274	85	39	(91)	56	(712)

1 Available-for-sale assets exclude other financial assets which predominately relate to the Group's beneficial interest in a commercial property investment pool.
2 Borrowings exclude bank overdrafts and finance leases as they are disclosed separately.

11 Retirement benefit obligations

At 10 March 2018, retirement benefit obligations relate to two defined benefit schemes, the Sainsbury's Pension Scheme and from 2 September 2016, the Home Retail Group Pension Scheme (the 'Schemes') as well as two unfunded pension liabilities relating to senior former employees of Sainsbury's and Home Retail Group. The schemes are both closed to new entrants and future accruals.

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

	Sainsbury's	Home Retail Group	Group	Sainsbury's	Home Retail Group	Group
	2018	2018	2018	2017	2017	2017
	£m	£m	£m	£m	£m	£m
Present value of funded obligations	(8,744)	(1,284)	(10,028)	(9,441)	(1,413)	(10,854)
Fair value of plan assets	8,669	1,215	9,884	8,708	1,212	9,920
	(75)	(69)	(144)	(733)	(201)	(934)
Additional liability due to minimum funding requirements (IFRIC 14)	-	(78)	(78)	-	-	-
Retirement benefit deficit	(75)	(147)	(222)	(733)	(201)	(934)
Present value of unfunded obligations	(21)	(14)	(35)	(23)	(17)	(40)
Retirement benefit obligations	(96)	(161)	(257)	(756)	(218)	(974)
Deferred income tax (liability)/asset	(38)	34	(4)	77	47	124
Net retirement benefit obligations	(134)	(127)	(261)	(679)	(171)	(850)

The retirement benefit obligation and the associated deferred income tax balance are shown within different line items on the face of the balance sheet.

The movements in the Group's net defined benefit obligation are as follows:

	2018	2017
	£m	£m
As at the beginning of the year	(974)	(408)
Acquisition of Home Retail Group plc (note 12)	-	(454)
Interest cost	(26)	(16)
Remeasurement gains/(losses)	592	(407)
Pension scheme expenses	(10)	(8)
Contributions by employer	130	319
Past service credit	31	-
As at the end of the year	(257)	(974)

The past service credit of £31 million is in relation to a Pension Increase Exchange (PIE) option introduced in the Sainsbury's Pension Scheme from 1 April 2018, following a deed of amendment signed during the current financial year.

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

	2018	2017
	%	%
Discount rate	2.80	2.70
Inflation rate - RPI	3.15	3.30
Inflation rate - CPI	2.15	2.30
Future pension increases	1.90 - 3.00	2.00 - 3.15

During the financial year the Group has changed the model used for deriving the discount rate assumption for valuing the Schemes' liabilities under IAS 19 to use an approach that the Group believes better reflects expected yields on high quality corporate bonds over the duration of the Group's pension schemes.

For long duration liabilities there exists limited data. Under the old model the extrapolation for long duration liabilities projected in line with a risk free curve, whereas the new method extrapolates the available corporate bond data at a credit spread above gilt rates. In addition, in order to broaden the corporate bond dataset, we have assumed that 'high quality' corporate bonds are those for which at least one of the main ratings agencies considers to be at least AA (or equivalent), whereas in previous years we required that the majority of the rating agencies rated a bond as AA. The discount rate used under the updated approach is 2.8 per cent.

The base mortality assumptions are based on the SAPS S2 tables, with adjustments to reflect the Scheme's population. Future mortality improvements have been updated from CMI 2015 projections at 2017 year-end to CMI 2017 projections with a long-term rate of improvement of 1.25 per cent p.a. at 10 March 2018.

IFRIC 14

IFRIC 14 is the interpretation that details when a company can recognise any pension surplus that exists. Furthermore, if the company has a funding commitment in excess of the IAS 19 deficit, then IFRIC 14 requires recognition of this excess in those circumstances when the surplus that would result on fulfilling that commitment cannot be recognised. A surplus may be recognised either because of an unconditional right to a refund to the company, or on grounds of a future contribution reduction where schemes are still open to future accrual.

For the Sainsbury's Pension Scheme, management is of the view that it has an unconditional right to a refund of surplus under IFRIC 14. As such no adjustment has been made for potential additional liabilities.

Based on the net deficit of the Home Retail Group Pension Scheme as at 10 March 2018 and the committed payments under the Schedule of Contributions signed on 2 September 2016, there is a notional surplus of £78 million. Management is of the view that, based on the scheme rules, it does not have an unconditional right to a refund of surplus under IFRIC 14, and therefore an additional balance sheet liability in respect of a 'minimum funding requirement' of £78 million has been recognised.

12 Acquisition of subsidiaries

a. Acquisition of Nectar Loyalty scheme

On 1 February 2018, the Group acquired 100 per cent of the share capital of Nectar Loyalty Holding Limited, a United Kingdom registered private company which owns the Nectar UK loyalty scheme as well as the remaining 50 per cent share of the Group's joint venture Insight 2 Communication LLP. The acquisition enables the full and independent operation of the Nectar Loyalty Programme in the UK.

Form of consideration	Consideration fair value at acquisition date £m
Cash	33
Acquisition-date fair value of the previously held equity interest	6
Total	39

None of the goodwill recognised of £147 million is expected to be deductible for income tax purposes. This was calculated as the difference between the fair value of consideration paid and the fair value of net assets acquired as set out in the following table.

The provisional assets and liabilities recognised as a result of the acquisition are as follows:

Fair value of net assets acquired (provisional)	£m

Fixed assets	3
Intangible assets	57
Trade and other receivables	141
Deferred tax assets	19
Cash and cash equivalents	168
Total assets acquired	388

Trade and other payables	(228)
Deferred revenue	(268)
Total liabilities acquired	(496)
Net identifiable assets acquired at fair value	(108)

Goodwill arising on acquisition	147
Purchase consideration transferred	39

In accordance with IFRS 3 'Business Combinations', the acquisition accounting will be finalised within 12 months of the acquisition date of 1 February 2018.

Intangible assets

Intangible assets of £57 million relate to the Nectar Brand, customer relationships and reacquired rights in relation to existing contractual relationships with Sainsbury's, as well as acquired software assets.

Trade and other receivables

Trade and other receivables of £141 million includes £nil of provisions for doubtful debts.

Cash and cash equivalents

Cash acquired included cash left in the business to settle accounts payable balances owed to the Group.

Deferred revenue

£265 million of the deferred revenue relates to points issued by issuance partners (including Sainsbury's) but not yet redeemed and have been included within trade and other payables within the Group balance sheet.

Revenue and profit contribution

Prior to acquisition, the Group's accounting policy for Nectar points was to recognise sales net of the cost of Nectar points issued and redeemed, based on agreed rates with Aimia UK. Since acquisition, any points issued and redeemed in Sainsbury's and Argos are accounted for in line with IFRIC 13 'Customer loyalty programmes'. Under IFRIC 13, on issuance of Nectar points within the Group, a portion of the transaction price is allocated to the loyalty programme using the fair value of points issued and corresponding deferred revenue recognised in relation to points issued but not yet redeemed or expired. Deferred revenue is then recognised as points are redeemed.

Nectar revenue earned from non-Sainsbury's redemption partners is included within other income and recognised once points have been redeemed.

Cash impact of acquisition

	£m
Cash consideration	(33)
Cash acquired	168
Acquisition of subsidiaries, net of cash acquired (included in cash flow statement)	135

Acquisition-related costs

Acquisition-related costs (included in administrative expenses and recognised outside of underlying profit) amount to £2 million in the year (see note 3). In addition, an acquisition fair value gain of £4 million on the previously held equity interest in Insight 2 Communication LLP has been recorded in other income (and excluded from underlying profit before tax).

b. Acquisition of Home Retail Group plc

On 2 September 2016, the Group acquired 100 per cent of the issued share capital of Home Retail Group plc (HRG), a listed company based in the United Kingdom, by means of a Scheme of Arrangement under Part 26 of the Act for a consideration of £1,093 million. The full analysis of the consideration is shown below:

Form of consideration	Consideration fair value at acquisition date £m
Cash of £447 million (being 55p per existing share); fair value is based on Home Retail Group plc's share capital of 813,445,001 shares in existence as at the acquisition date		447
£3 million in relation to the contractual requirement to settle certain existing HRG share scheme awards and options		3
261 million new J Sainsbury plc shares of 28⁴⁄₇p nominal value each were issued (being 0.321 new J Sainsbury plc shares per existing Home Retail Group plc share); fair value of the consideration is based on a J Sainsbury plc share price of £2.4610 as of 2 September 2016		643
Total		1,093

Home Retail Group's activities mainly comprise General Merchandise retail. The acquisition is expected to accelerate Sainsbury's growth strategy in General Merchandise & Clothing retail as well as its online presence. The combination brings together two of the UK's leading retail businesses with complementary product offers through an integrated, multi-channel proposition.

None of the goodwill recognised of £119 million is expected to be deductible for income tax purposes. This was calculated as the difference between the fair value of consideration paid and the fair value of net assets acquired as set out in the following table.

The assets and liabilities recognised as a result of the acquisition were finalised in September 2017 and are as follows:

Fair value of net assets acquired	As consolidated at 10 March 2018 £m	As consolidated at 11 March 2017 £m
Fixed assets	262	262
Intangible assets	322	322
Inventories	810	810
Trade and other receivables	146	146
Deferred tax assets	55	45
Amounts due from Financial Services customers (the 'loan book')	615	615
Other financial assets¹	59	59
Cash and cash equivalents²	548	548
Total assets acquired	2,817	2,807

Trade and other payables²	(1,214)	(1,214)
Provisions	(175)	(104)
Defined benefit obligation	(454)	(454)
Total liabilities acquired	(1,843)	(1,772)
Net identifiable assets acquired at fair value	974	1,035

Goodwill arising on acquisition	119	58
Purchase consideration transferred	1,093	1,093

1 Other financial assets includes £9 million of J Sainsbury plc shares (converted from Home Retail Group plc own shares at the point of acquisition). On consolidation these become J Sainsbury plc own shares in the consolidated statement of changes in equity.

2 Cash and cash equivalents and trade and other payables acquired are both presented gross of the capital return of £226 million.

Intangible assets

Intangible assets include a brand of £179 million relating to the Argos brand name. This reflects its fair value at the acquisition date and is estimated to have a useful economic life of ten years.

Trade and other receivables

Trade and other receivables include £40 million of trade receivables, against which a bad debt provision of £(1) million was held. Also included are prepayments and accrued income of £29 million, and other debtors of £78 million.

Amounts due from Financial Services customers (the 'loan book')

The loan book fair value of £615 million includes a fair value increase of £20 million and a provision for impairment of £(66) million.

Acquisition-related costs

Acquisition-related costs (included in administrative expenses and recognised outside of underlying profit) amounted to £22 million in the prior year (see note 3). In addition £3 million of costs relating to the issuance of J Sainsbury plc shares were recognised directly within equity in the prior year.

Cash impact of acquisition

	£m
Cash consideration	(447)
Cash acquired	548
Acquisition of subsidiaries, net of cash acquired (included in prior year cash flow statement)	101

Capital return to shareholders of Home Retail Group plc (see below)	(226)
Net cash impact of acquisition	(125)

Capital return

Prior to the acquisition of Home Retail Group plc, it was announced that Home Retail Group plc shareholders would be entitled to a £226 million capital return comprising the following:

· 25.0 pence per share, reflecting the £200 million return to shareholders in respect of the sale of Homebase by Home Retail Group plc on 29 February 2016; and

· 2.8 pence per share (totalling £26 million) in lieu of a final dividend in respect of Home Retail Group plc's financial year ended 27 February 2016.

This was recorded as a liability in the net assets acquired above within trade and other payables. The full amount was paid on 12 September 2016.

Finalisation of acquisition balance sheet

The final acquisition balance sheet as consolidated as follows:

	Restated	Prior period adjustment	As previously reported
	£m	£m	£m
Balance sheet at 11 March 2017
Intangibles	803	61	742
Current provisions	(148)	(13)	(135)
Deferred income tax liability	(162)	10	(172)
Non-current provisions	(186)	(58)	(128)

There has been no impact on the previously reported income statement, statement of other comprehensive income, statement of changes in equity or cash flow statement.

Since the year-end date of 11 March 2017, movements in the acquisition balance sheet relate to the following:

Provisions

An in-depth review of provisions within HRG has been performed since the acquisition, resulting in changes to the estimates and assumptions applied.

Deferred income tax liability

Relates to deferred tax on the above adjustments.

Intangible assets

Movement to goodwill of £61 million since year-end is as a result of the above adjustments.

13 Supplier arrangements

Supplier incentives, rebates and discounts, collectively known as 'supplier arrangements', represent a material deduction to cost of sales and administrative expenses 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 four key types are as follows:

· Discounts and supplier incentives - these represent the majority of all supplier arrangements and are linked to individual unit sales. The incentive is typically based on an agreed sum per item sold on promotion for a period and therefore is considered part of the purchase price for that product.

· Fixed amounts - these are agreed with suppliers primarily to support in-store activity including promotions, such as utilising specific space. These involve a degree of judgement and estimation in ensuring the appropriate cut-off of arrangements for fixed amounts which span period-end. These require judgement to determine when the terms of the arrangement are satisfied and that amounts are recognised in the correct period.

· 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 and requires estimates of the amount earned up to the balance sheet date, for each relevant supplier contract. Where agreements span a financial period-end, estimations are required of projected turnover and judgement may also need to be applied to determine the rebate level earned as agreements may involve multiple tiers. In order to minimise any risk arising from estimation, supplier confirmations are obtained to agree the value to be recognised at year-end, prior to it being invoiced. Rebates represent the smallest element of the Group's supplier arrangements and by aligning the agreements to the Group's financial year, where possible, the judgements required are minimised.

· Marketing and advertising income - income which is directly linked to the cost of producing the Argos catalogue is recognised once agreed with the supplier and when the catalogue is made available to the Group which is the point at which the catalogue costs are recognised.

Of the above categories, fixed amounts, supplier rebates and marketing and advertising income involve a level of judgement and estimation. The amounts recognised in the income statement for these three categories in the financial year are as follows:

	2018	2017
	£m	£m
Within cost of sales
Fixed amounts	261	204
Supplier rebates	97	87
Marketing and advertising income	92	52
Total supplier arrangements	450	343

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

	2018	2017
	£m	£m
Within inventory	(7)	(9)

Within current trade receivables
Supplier arrangements due	23	29

Within current trade payables
Supplier arrangements due	23	25
Accrued supplier arrangements	14	13
Total supplier arrangements	53	58

The above amounts exclude supplier income in relation to discounts and supplier incentives which do not involve any level of judgement or estimation.

14 Post balance sheet events

On 20 March 2018, subsequent to year-end, the HRG Pension Scheme was merged into the Sainsbury's Pension Scheme. The merger is on a segregated basis with two sections - the Argos section and the Sainsbury's section. There is no change to members' benefits and each section's assets are ring-fenced for the benefit of the members of that section.

On 19 April 2018, a fixed rate amortising loan from Eddystone Finance plc with a final principle balance of £568 million, was repaid in full.

On 30 April 2018, Sainsbury's announced a proposed combination with Asda Group Limited, a wholly owned subsidiary of Walmart Inc (Walmart). In exchange for the entire issued share capital of Asda, Sainsbury's will issue to Walmart cash of £2.975 billion and £4.3 billion of shares, based on the closing share price of Sainsbury's on 27 April 2018 of 269.8 pence.

The shares will comprise ordinary voting shares representing 29.9 per cent of Sainsbury's enlarged ordinary voting share capital and ordinary non-voting shares, which are convertible into ordinary voting shares such that Walmart will hold 42 per cent of the issued equity share capital of the Combined Business.

Completion of the Combination is expected in the second half of calendar year 2019. The Combination is conditional upon, amongst other things, Sainsbury's shareholder approval, Competition and Markets Authority approval, approvals in connection with the Asda defined benefit pension scheme and other regulatory approvals.

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 equivalent IFRS measure

Definition /Purpose

Reconciliation

Income statement

Like-for-like sales

No direct equivalent

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 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.

The reported retail like-for-like sales growth of 1.3 per cent is based on a combination of Sainsbury's like-for-like sales and Argos like-for-like sales for the 52 weeks to 10 March 2018, i.e. assuming that Argos sales are in the base. Additionally, the impact of the disposal of Pharmacy is not treated as like-for-like. See movements below:

2018

2017

Underlying retail like-for-like (exc. Fuel, inc. Argos in base)

1.3%

Underlying net new space impact (exc. Pharmacy, inc. Argos in base)

0.3%

0.8%

Underlying total retail sales growth (exc. fuel, exc. Pharmacy, inc. Argos in Base)

1.6%

0.8%

Argos consolidation & Pharmacy impact

8.4%

13.3%

Underlying total retail sales growth (exc. fuel, inc. Pharmacy impact, exc. Argos in base)

10.0%

14.1%

Fuel Impact

(1.2)%

(1.5)%

Underlying total retail sales growth (inc. fuel)

8.8%

12.6%

Bank impact

0.2%

0.1%

Underlying Group sales inc VAT

9.0%

12.7%

Underlying Group sales

Revenue

Total sales less acquisition fair value unwinds on Argos Financial Services.

A reconciliation of the measure is provided in note 4.

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 profit before tax

Profit before tax

Profit or loss before tax before any items recognised which, by virtue of their size and/or nature, do not reflect the Group's underlying performance.

A reconciliation of underlying profit before tax is provided in note 3.

Retail underlying operating profit

Profit before tax

Underlying earnings before interest, tax, Financial Services operating profit and Sainsbury's underlying share of post-tax profit from joint ventures and associates.

A reconciliation of the measure is provided in note 4.

Underlying basic earnings per share

Basic earnings per share

Earnings per share using underlying profit as described above.

A reconciliation of the measure is provided in note 7.

This is a key measure to evaluate the performance of the business and returns generated for investors.

Retail underlying EBITDAR

No direct equivalent/Profit before tax

Retail underlying operating profit as above, before rent, depreciation and amortisation.

A reconciliation of the measure is provided on page 14 of the Financial Review.

Retail rent excludes £2m relating to Sainsbury's Bank.

APM

Closest equivalent IFRS measure

Definition /Purpose

Reconciliation

Cash flows and net debt
Cash flow items in Financial Review	No direct equivalent	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 combined. The cash flow in note 4 includes a reference to show what has been combined in these line items.			2018	2017
				Ref	£m	£m
			Net interest paid	a	(105)	(108)
			Strategic capital expenditure	b	(80)	(92)
			Acquisition of subsidiaries	c	135	(128)
			Repayment of borrowings	d	(174)	(211)
			Other	e	(2)	6

Retail free cash flow¹	Net cash generated from operating activities	Net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure but before strategic capital expenditure and after investments in joint ventures and associates and Sainsbury's Bank capital injections. This measures cash generation, working capital efficiency and capital expenditure of the retail business.	Reconciliation of retail free cash flow		2018	2017
			Reconciliation of retail free cash flow		£m	£m
			Cash generated from retail operations		1,259	929
			Add back: Exceptional pension contribution		-	199
			Net interest paid (ref (a) above)		(105)	(108)
			Corporation tax		(72)	(87)
			Retail purchase of property, plant and equipment		(553)	(622)
			Retail purchase of intangible assets		(69)	(58)
			Retail proceeds from disposal of property, plant and equipment		54	55
			Add back: Strategic capital expenditure		80	92
			Dividends and distributions received		37	65
			Investment in joint ventures and associates		(9)	(16)
			Bank capital injections		(190)	(130)
			Free cash flow		432	319

1. The definition of retail free cash flow has changed in the financial year from 'net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure but before strategic capital expenditure' to 'net cash generated from retail operations, adjusted for exceptional pension contributions, after cash capital expenditure but before strategic capital expenditure & after investments in joint ventures & associates and Sainsbury's Bank capital injections'.

APM

Closest equivalent IFRS measure

Definition /Purpose

Reconciliation

Retail Net Debt	Borrowings, cash, derivatives and available-for-sale financial assets, finance leases	Net debt includes the capital injections in 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.	A reconciliation of the measure is provided in note 10.
		It is calculated as: available-for-sale assets (excluding equity investments) + net derivatives + net cash and cash equivalents + loans + finance lease obligations. This shows the overall strength of the balance sheet alongside the liquidity and its indebtedness and whether the Group can cover its debt commitments.
Gearing	No direct equivalent	Retail net debt divided by Group net assets.	Retail net debt as per above and net assets as per the Group balance sheet.
		Gearing measures the Group's proportion of borrowed funds to its equity.

Cash generated from retail operations (per Financial Review)	Cash generated from operations	Retail cash generated from operations after changes in working capital but before pension contributions and exceptional pension contributions.	The reconciliation between retail and Group cash generated from operations is provided in note 4.
	Cash generated from operations	This enables management to assess the cash generated from its core retail operations.
Core retail capital expenditure	No direct equivalent	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.			2018	2017
					£m	£m
				Purchase of property, plant and equipment	(473)	(530)
				Purchase of intangibles	(69)	(58)
				Cash capital expenditure before strategic capital expenditure (note 4)	(542)	(588)
				Strategic capital expenditure (ref (b) above)	(80)	(92)
				Proceeds on disposal	54	55
				Cash capital expenditure including strategic capital expenditure	(568)	(625)
				Capitalised interest	(7)	(7)
				Other (including strategic capital expenditure)	80	85
				Total net retail core capital expenditure	(495)	(547)

Other
Lease adjusted net debt/underlying EBITDAR	No direct equivalent	Net debt plus capitalised lease obligations divided by Group underlying EBITDAR.	A reconciliation of this is provided in the Financial Review on page 20.
		This helps management measure the ratio of the business's debt to operational cash flow.
Return on capital employed	No direct equivalent	Return on capital employed is calculated as return divided by average capital employed.	An explanation of the calculation is provided in the Financial Review on page 20.
		Return is defined as underlying profit before interest and tax.
		Capital employed is defined as net assets excluding net debt. 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 use this to assess the performance of the business.

APM	Closest equivalent IFRS measure	Definition /Purpose	Reconciliation
Interest cover	No direct equivalent	Underlying operating profit, plus underlying share of post-tax profit from joint ventures and associates, divided by underlying net finance costs, where interest on perpetual securities is included in underlying finance costs.	Underlying operating profit as per note 4.
		This measures the ability of the Group to pay the interest on its outstanding debt. This measurement is used by creditors, lenders and investors to determine the risk of lending funds to the Group.	Underlying share of post-tax profit from joint ventures and associates as per note 4.
			Underlying net finance costs as per note 5.
Fixed charge cover	No direct equivalent	Group underlying EBITDAR divided by net rent and underlying net finance costs, where interest on perpetual securities is included in underlying finance costs.	Group underlying EBITDAR is disclosed in the Financial Review on page 20.
		This helps assess the Group's ability to satisfy fixed financing expenses from performance of the business.	Underlying net finance costs as per note 5.

[1] General Merchandise grew ahead of the market (BRC non-food non-clothing market, consistently gaining share. Clothing beat the market (Kantar worldpanel, 52 weeks ending 18 March 2018)

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The company news service from the London Stock Exchange

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