Sainsbury(J) PLC (SBRY)

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Annual reports

Thursday 05 November, 2020

Sainsbury(J) PLC

Half-year Report

RNS Number : 3152E

Sainsbury(J) PLC

05 November 2020

J Sainsbury plc

5 November 2020

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

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

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

· Digital sales up 117 per cent to £5.8 billion, nearly 40 per cent of total sales. Groceries Online sales up 102 per cent

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

· Loss before tax £(137) million, reflecting £438 million of one-off costs associated with Argos store closures and other strategic and market changes

· Underlying profit before tax £301 million

· Retail costs of approximately £290 million to protect customers and colleagues from COVID-19, partially offset by £230 million business rates relief

· Free cash flow £943 million

· Non-lease net debt down by £912 million to £267 million

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

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

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

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

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

· Lower food prices, focusing on offering customers consistently good value

· Accelerate food innovation, tripling the number of new products we launch each year

· Profitably grow Groceries Online sales to meet further demand

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

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

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

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

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

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

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

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

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

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

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

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

· This will create at least £600 million of annual additional funding by March 2024 to reinvest in the customer offer and deliver improved financial returns. This will be after driving efficiencies to cover inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries

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

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

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

· We will continue our track record of strong cash generation, meeting our target of at least £750 million net debt reduction in the three years to March 2022 and generating average retail free cash flow of £500 million per year over the following three years to March 2025

· Capital expenditure will increase to between £700 million and £750 million per year in the three years to March 2024 to support high returning infrastructure transformation investments before returning to around £600 million per year

· We will incur one off costs from infrastructure, operating model and structure changes of £900 million to £1 billion in the period to March 2024 (approximately £300 million cash). We expect total non-underlying costs of around £625 million to be booked in the current financial year (around £100 million cash)

Simon Roberts, Chief Executive of J Sainsbury plc said :

"As we go into lockdown in England for the second time this year and restrictions are in place across the UK, we know our customers and colleagues are feeling anxious and we will do all we can to support them. Our colleagues have done an exceptional job going above and beyond for our customers every day which is why we are giving our frontline colleagues a second 10 per cent thank you payment. Above all else today, I want to express my heartfelt thanks to every one of my colleagues in our stores, in our depots, and across our store support centres for all your hard work and for your outstanding team effort. We also want to support our communities and those in need and are creating a £5 million community fund for local charities and good causes, in addition to the £7 million we donated to Fareshare and Comic Relief earlier this year. We want to do our bit to ensure that no one goes hungry at Christmas and to support those most in need.

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

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

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

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

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

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

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

Tables

	28 weeks to 19 September 2020	28 weeks to 21 September 2019
	28 weeks to 19 September 2020	28 weeks to 21 September 2019
Statutory Reporting
Group sales (exc. VAT, inc. fuel)	£14,934m	£15,097m
Items excluded from underlying results	£(438)m	£(229)m
(Loss)/profit before tax	£(137)m	£9m
(Loss) for the financial period	£(179)m	£(38)m
Basic loss per share	(8.3)p	(2.2)p

	28 weeks to 19 September 2020	28 weeks to 21 September 2019
	28 weeks to 19 September 2020	28 weeks to 21 September 2019
Business Performance
Underlying group sales (inc. VAT)	£16,557m	£16,856m
Underlying profit before tax	£301m	£238m
Underlying basic earnings per share	10.1p	7.9p
Net debt	£(6,168)m	£(6,778)m
Non-lease net debt	£(267)m	£(1,008)m
Interim dividend	3.2p	3.3p
Special dividend	7.3p	-

Like-for-like sales growth	2019/20				2020/21
	Q1	Q2	Q3	Q4	Q1	Q2	H1
Like-for-like sales (exc. fuel)	(1.6)%	(0.2)%	(0.7)%	1.3%	8.2%	5.1%	6.9%
Like-for-like sales (inc. fuel)	(1.0)%	(0.4)%	(1.1)%	1.3%	(2.3)%	(0.5)%	(1.6)%

	2019/20				2020/21
Total sales growth	Q1	Q2	Q3	Q4	Q1	Q2	H1
Grocery	(0.5)%	0.6%	0.4%	2.0%	10.5%	5.1%	8.2%
Total General Merchandise	(3.1)%	(2.0)%	(3.9)%	(1.3)%	7.2%	7.6%	7.4%
GM (Argos)				0.4%	10.7%	10.9%	10.8%
GM(Sainsbury's Supermarkets)				(8.1)%	(9.3)%	(6.9)%	(8.2)%
Clothing	(4.5)%	3.3%	4.4%	2.5%	(26.7)%	(7.5)%	(18.3)%
Total Retail (excl. fuel)	(1.2)%	0.1%	(0.7)%	1.3%	8.5%	5.2%	7.1%
Fuel				4.9%	(56.1)%	(29.3)%	(44.6)%
Total Retail (inc. fuel)	(0.6)%	0.1%	(0.9)%	1.9%	(2.1)%	(0.4)%	(1.4)%

Outlook

Sales during the first half were stronger than the base case assumptions we outlined in April, particularly at Argos, driving a strong underlying profit increase against a soft comparative base. Retail costs of around £290 million associated with protecting customers and colleagues from COVID-19 were partially offset by £230 million of business rates relief.

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

Looking beyond this financial year, we will invest significantly to accelerate innovation, improve the quality of our food, lower our prices and meet the growing demand for online groceries. We will fund these investments through simplifying our business and accelerating our cost savings plans and expect underlying profits in the year to March 2021/22 to be higher than those reported in the year to March 2019/20¹ (which were not impacted by COVID-19).

Capital expenditure will increase over the next three years to fund high-returning logistics and Argos transformation plans. We expect these projects to generate working capital improvements and expect cash generation to remain strong. We will meet our target of reducing net debt by at least £750 million in the three years to March 2022 while maintaining our dividend policy. In outer years we expect to continue our track record of strong cash generation, with average retail free cash flow of £500 million per annum over the three years to March 2025.

Dividend

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

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

Notes

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

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

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

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

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

ENDS

1 2019/20 UPBT £586 million

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

Enquiries

Investor Relations

Media

James Collins

Rebecca Reilly

+44 ( 0) 7801 813 074

+44 (0) 20 7695 7295

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

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

Food First

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

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

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

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

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

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

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

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

Brands that Deliver

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

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

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

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

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

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

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

· Tu Clothing has delivered very strong online sales growth and the range is growing both value and volume market share¹

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

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

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

Colleague impact

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

Save to Invest

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

· We will simplify our business and lower the overall cost base in our operations. We will deliver a step change reduction in our retail operating costs to sales ratio of at least two percentage points by March 2024, creating around £600 million of annualised additional capacity to invest in the customer offer and deliver improved financial returns. The money we save will enable us to reinvest in our food business to give our customers better products, improved service and lower prices

· This will require total cost savings significantly higher than £600 million given the need to additionally address inflationary cost pressures, volume-related cost increases and the cost of meeting increasing customer demand for online groceries. We have extensive plans in place to deliver these cost savings across the business. Some key examples are:

o Creating a new supply chain and logistics operating model, moving to a single integrated supply chain and logistics network across Sainsbury's and Argos. This will structurally reduce our costs by £150 million by March 2024

o Moving 150 Argos standalone stores into Sainsbury's and reducing the number of Argos standalone stores to 100 over the next three years will reduce our operating costs by £105 million by March 2024

o Reducing significantly our costs by further adapting our store operating model to better reflect customer demand and the way customers shop in our stores now and in the future. The closure of our meat, fish and delicatessen counters will save at least £60 million in operating costs and will reduce food waste and energy consumption in our stores

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

Strategy Update - Key Financials

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

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

· We expect to meet our target of reducing net debt by at least £750 million in the three years to March 2022 while maintaining a policy of paying a dividend covered 1.9x by underlying earnings and to generate average retail free cash flow of £500 million per year over the following three years

· Capital expenditure will increase to around £700-750 million per year in the three years to March 2024 to support high returning investments in the transformation of our logistics platform and accelerated restructuring of the Argos store estate, before returning to around £600 million per year

· The changes required to our physical infrastructure, store operating models and central structures will incur one-off costs of £900 million to £1 billion in the period to March 2024, of which around £300 million will be cash costs. We expect total non-underlying costs of around £625 million to be booked in the current financial year, of which around £100 million will be cash costs

Targets and metrics

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

· Customer Satisfaction

· Grocery market share

· Colleague engagement

· Movement in operating costs as a percentage of sales

· Underlying Profit Before Tax

· Retail Free Cash Flow

· Net Zero by 2040 in our own operations

Financial Review for the 28 weeks to 19 September 2020

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

In the 28 weeks to 19 September 2020, the Group generated a loss before tax of £137 million (HY 2019/20: profit before tax of £9 million) and an underlying profit before tax of £301 million (HY 2019/20: £238 million).

Summary income statement
	28 weeks to 19 September	28 weeks to 21 September	Change	52 weeks to 7 March
	2020	2019		2020
	£m	£m	%	£m

Underlying Group sales (including VAT)	16,557	16,856	(1.8)	32,394
Underlying Retail sales (including VAT)	16,338	16,567	(1.4)	31,825

Underlying Group sales (excluding VAT)	14,934	15,097	(1.1)	28,993
Underlying Retail sales (excluding VAT)	14,715	14,808	(0.6)	28,424


Underlying operating profit/(loss)
Retail	555	437	27	938
Financial services	(55)	20	N/A	48
Total underlying operating profit	500	457	9	986

Underlying net finance costs¹	(199)	(219)	9	(400)
Underlying profit before tax	301	238	26	586
Items excluded from underlying results	(438)	(229)	(91)	(331)
(Loss)/profit before tax	(137)	9	N/A	255
Income tax expense	(42)	(47)	11	(103)
(Loss)/profit for the financial period	(179)	(38)	(372)	152

Underlying basic earnings per share	10.1p	7.9p	28	19.8p
Basic (loss)/earnings per share	(8.3)p	(2.2)p	(277)	5.8p
Interim dividend per share	3.2p	3.3p	(3)	3.3p
Special dividend per share	7.3p	N/A	N/A	N/A

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

Group sales

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Space

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

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

Store numbers and retailing space
	As at	New stores	Disposals / closures^1,2	Extensions / refurbishments / downsizes	As at
	7 March				19 September
	2020				2020

Supermarkets	608	-	-	-	608
Supermarkets area '000 sq. ft.	21,167	-	-	(1)	21,166

Convenience	807	5	(2)	-	810
Convenience area '000 sq. ft.	1,898	14	(5)	6	1,913
Sainsbury's total store numbers	1,415	5	(2)	-	1,418

Argos stores	570	-	(14)	-	556
Argos stores in Sainsbury's	306	4	-	-	310
Argos in Homebase	6	-	-	-	6
Argos total store numbers	882	4	(14)	-	872
Argos collection points	281	31	(4)	-	308
Habitat	16	-	-	-	16

1 Disposals/closures exclude those stores temporarily closed during the half.

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

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

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

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

Retail underlying operating profit

Retail underlying operating profit increased by 27 per cent to £555 million (HY 2019/20: £437 million). Retail underlying operating margin increased by 82 basis points year-on-year to 3.77 per cent (HY 2019/20: 2.95 per cent).

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

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

Retail underlying operating profit
	28 weeks to	28 weeks to		Change at
	19 September	21 September		constant fuel
	2020	2019	Change	prices
Retail underlying operating profit (£m)¹	555	437	27.0%
Retail underlying operating margin (%)²	3.77	2.95	82bps	78bps

Retail underlying EBITDAR (£m)³	1,194	1,067	11.9%
Retail underlying EBITDAR margin (%)⁴	8.11	7.20	91bps	82bps

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

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

3 Retail underlying operating profit before net rental expense of £4 million and underlying depreciation and amortisation of £635 million.

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

In 2020/21, Sainsbury's expects a depreciation and amortisation charge of around £1.2 billion, including around £500 million right of use asset depreciation.

Financial Services

Financial Services results
6 months to 31 Aug 2020
	2020	2019	Change

Underlying revenue (£m)	219	289	(24)%
Interest and fees payable (£m)	(54)	(62)	(13)%
Total income (£m)	165	227	(27)%
Underlying operating (loss)/profit (£m)	(55)	20	N/A

Cost:income ratio (%)	77	70	700bps
Active customers (m) - Bank	2.0	2.1	(5)%
Active customers (m) - AFS	2.3	2.2	5%
Net interest margin (%)¹	3.1	3.5	(40)bps
Bad debt as a percentage of lending (%)²	2.7	1.3	140bps
Tier 1 capital ratio (%)³	14.9	13.7	120bps
Total capital ratio (%)⁴	17.8	16.7	110bps
Customer lending (£bn)⁵	6.2	7.4	(16)%
Customer deposits (£bn)⁵	(5.4)	(6.3)	(14)%

1 Net interest receivable divided by average interest-bearing assets.

2 Bad debt expense divided by average net lending.

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

4 Total capital divided by risk-weighted assets.

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

Financial Services underlying operating loss of £55 million reflects the changed economic environment driven by COVID-19. We have seen significantly reduced demand across consumer credit, and less activity in our fee based products, particularly Travel Money and ATMs. We have also made a significant provision in anticipation of future credit losses, largely reflective of predictions for unemployment, partially offset by management actions on funding and costs.

Financial Services total income of £165 million has declined year-on-year (HY 2019/20: £227 million). The fall in interest income reflects a significant contraction in balances due to lower consumer demand and a tightening of credit appetite. Fee income has dropped markedly due to the closure of Travel Money Bureaux, and a decline in ATM income due to lower cash usage, particularly during lockdown.

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

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

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

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

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

The capital position is strong with the CET 1 capital ratio increasing by 120 basis points since August 2019 to 14.9 per cent (HY 2019/20: 13.7 per cent) with the capital released as a result of the contraction in balances more than offsetting the loss. Customer lending decreased by 16 per cent to £6.2 billion, driven by management actions to tighten credit and a decline in demand for loans, credit cards and store cards. Customer deposits decreased by 14 per cent to £5.4 billion, reflecting the reduced funding required due to the decline in lending.

We have made good progress with our Financial Services transformation plan and streamlined our product offering. We still expect to double profit and returns in our Financial Services business within 5 years, despite the challenges of the current environment. The Group's exposure to Financial Services has reduced in the half driven by lower demand and customers deleveraging. The level of credit provisions held against lending balances increased by 1.2% to 5.0%. This largely reflects an additional overlay of £43 million we booked in relation to COVID-19, reflecting our best estimate of future losses. We expect Financial Services will return to profit in the second half. Given our very strong capital and liquidity positions, together with effective cost management we remain confident that Financial Services will not require capital injections from the Group.

Underlying net finance costs

Underlying net finance costs reduced by nine per cent to £199 million (HY 2019/20: £219 million). These costs include £37 million of net non-lease interest (HY 2019/20: £45 million). The reduction of net non-lease interest is driven by the repayment of the £450 million Convertible Bond in November 2019 and redemption of the £250 million Hybrid Bond at the first call date in July 2020. Net Interest costs on lease liabilities have reduced to £162 million (HY 2019/20: £174 million), mainly due to lower interest rates on new leases.

Sainsbury's expects underlying net finance costs in 2020/21 of around £360 million, including around £300 million lease interest in 2020/21.

Items excluded from underlying results

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

Items excluded from underlying results	28 weeks to	28 weeks to
	19 September	21 September
	2020	2019
	£m	£m
Restructuring programmes	(259)	(131)
Impairment charges	(214)	(97)
Financial Services transition	(7)	(15)
Restructuring, impairment and integration	(480)	(243)

ATM business rates reimbursement	42	-
IAS 19 pension interest and expenses	8	11
Property, finance and acquisition adjustments	(8)	3
Items excluded from underlying results	(438)	(229)

Restructuring programmes:

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

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

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

- Costs totalling £259 million have been recognised in the period in relation to the above and comprise impairment charges, property closure costs and redundancy costs.

Impairment charges:

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

- Additional impairment charges of £214 million have therefore been recognised over and above those recognised as part of the strategy review.

- Of this, £105 million has been recognised in relation to assets within the Financial Services Business, and £109 million in relation to Retail assets.

We estimate that we will incur one off costs from infrastructure, operating model and structure changes of £900 million to £1 billion in the period to March 2024 (approximately £300 million cash). We expect total non-underlying costs of around £625 million to be booked in the current financial year (around £100 million cash).

Other non-underlying items:

- Financial Services transition costs of £7 million (HY 2019/20: £15 million) were predominantly the previously announced costs incurred in transitioning to a new banking platform and write-downs of ATMs.

- ATM income of £42 million (HY 2019/20: £nil) arises following the Supreme Court's ruling that ATMs outside stores should not be assessed for additional business rates on top of normal store rates.

- IAS 19 Pension income of £8 million (HY 2019/20: £11 million) comprises pension finance income of £11 million and scheme expenses of £3 million.

- Property, Finance and Acquisition adjustments result in a cost of £8 million (HY 2019/20: £3 million income)

Taxation

The tax charge for the interim period was £42 million (2019/20 Interim tax charge: £47 million).

Despite the interim loss before tax, a tax charge rather than a tax credit was recognised in the first half of the year. This was mainly due to the derecognition of capital losses for deferred tax purposes reflecting a legislative change in the half resulting in £178 million gross costs, non-deductible one-off gross costs of £54 million and prior year adjustments with a tax effect of 12 million.

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

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

(Loss)/Earnings per share

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

Dividends

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

Net debt and retail cash flows

As at 19 September 2020, net debt was £6,168 million (21 September 2019: £6,778 million), a decrease of £610 million (2019/20: £367 million reduction). Excluding the impact of lease liabilities on net debt, Sainsbury's reduced non lease net debt by £912 million in the half (21 September 2019: £514 million in the half). We remains on track to meet our target of at least £750 million net debt reduction in the three years to March 2022 and generate average retail free cash flow of £500 million per year over the following three years.

Group net debt includes the impact of capital injections into Sainsbury's Bank, but excludes Financial Services' own net debt balances. Financial Services balances are excluded because they are part of the daily operating cycle of the Bank rather than for financing purposes. Net debt includes lease liabilities under IFRS 16 of £5,901 million (HY 2019/20: £5,770 million) and the perpetual securities of £248 million (HY 2019/20: £496 million). Lease liabilities are analysed in more detail in note 11. Although the perpetual securities are accounted for as equity in the financial statements, they have similarities to debt instruments due to the coupons, and are therefore included by management when assessing Group borrowings.

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

Summary cash flow statement ¹	Retail	Retail	Retail
	28 weeks to	28 weeks to	52 weeks to
	19 September	21 September	7 March
	2020	2019	2020
	£m	£m	£m
Retail underlying operating profit	555	437	938

Adjustments for:
Retail underlying depreciation and amortisation	635	636	1,197
Share based payments and other	15	17	34
Retail exceptional operating cash flows (excluding pensions)	3	(18)	(49)
Adjusted retail operating cash flow before changes in working capital^2,3	1,208	1,072	2,120
Decrease/(increase) in working capital³	571	251	(97)
Net interest paid³	(213)	(226)	(405)
Pension cash contributions	(60)	(48)	(52)
Corporation tax paid	(88)	(8)	(113)
Net cash generated from operating activities	1,418	1,041	1,453
Cash capital expenditure before strategic capital	(290)	(248)	(599)
Repayments of obligations under leases	(223)	(230)	(419)
Initial direct costs on right-of-use assets	(3)	(2)	(13)
Proceeds from disposal of property, plant and equipment	19	54	81
Bank capital injections	-	(35)	(35)
Dividends and distributions received³	22	118	143
Retail free cash flow	943	698	611
Dividends paid on ordinary shares	-	(174)	(247)
Repayment of borrowings³	(519)	(160)	(379)
Other³	(26)	1	(3)
Net increase/(decrease) in cash and cash equivalents	398	365	(18)
Decrease in Debt	742	390	798
Other non-cash and net interest movements⁴	(361)	(187)	(381)
Movement in net debt	779	568	399

Opening net debt	(6,947)	(7,346)	(7,346)
Closing net debt	(6,168)	(6,778)	(6,947)
of which
Lease Liabilities	(5,901)	(5,770)	(5,768)
Net Debt Excluding Lease Liabilities	(267)	(1,008)	(1,179)

1 See note 4b for a reconciliation between Retail and Group cash flow.

2 Excludes working capital and pension contributions.

3 Refer to the Alternative Performance Measures on pages 67 to 68 for reconciliation.

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

Adjusted retail operating cash flow before changes in working capital was £1,208 million (HY 2019/20: £1,072 million) and working capital decreased by £571 million since the year end. Working capital typically decreases between year end and half year, driven by seasonality and the phasing of payables. This impact is more pronounced this year as a result of the strong trading performance driving lower inventories and increased payables balances. In addition, challenges sourcing stock on certain product ranges have further reduced inventory, notably in our non-food business. This is partially offset by the impact of lower fuel sales. We expect most of the working capital benefit to reverse once trading and supply stabilises following the pandemic.

Cash capital expenditure was £290 million (HY 2019/20: £248 million). There were no capital injections into the Bank (HY 2019/20: £35 million). Dividends and distributions received declined to £22 million (HY 2019/20: £118 million), reflecting the sale of 12 British Land joint venture properties in the prior year.

Corporation tax of £88 million was paid (HY 2019/20: £8 million). This has increased with the change to the quarterly payment regime, whereby in this half year Sainsbury's has had to pay the first two quarterly instalments for 2020/21 based on early estimates for taxable profit for the year, as well as finalising quarterly payments for 2019/20.

Retail free cash flow increased by £245 million year-on-year to £943 million (HY 2019/20: £698 million).

As previously announced, Sainsbury's deferred the decision on the final dividend payment for 2019/20, and accordingly there was no dividend payment in the half (HY 2019/20: £174 million).

As at 19 September 2020 Sainsbury's has drawn debt facilities of £1.08 billion including the Perpetual securities (HY 2019/20 £1.82 billion). The Group holds undrawn committed credit facilities of £1.45 billion and undrawn uncommitted facilities of £195 million.

Compared to the 2018/19 year end net debt excluding lease liabilities of £1,522 million, Sainsbury's expects a reduction of at least £750 million over a three year period and to generate average retail free cash flow of £500 million per year over the following three years.

Capital expenditure

Core retail cash capital expenditure was £290 million (HY 2019/20: £248 million).

Sainsbury's expects core retail cash capital expenditure (excluding Financial Services) to be around £600 million in the 2020/21 financial year and for this to increase to around £700 million - £750 million in the 3 years to March 2024, reflecting investment in high-returning supply chain, logistics and infrastructure projects.

Financial ratios


Key financial ratios	52 weeks to	52 weeks to	52 weeks to
	19 September 2020	21 September 2019	7 March 2020

Return on capital employed (%)¹	7.9	7.1	7.4
Net debt to EBITDAR²	2.7 times	3.1 times	3.2 times
Fixed charge cover³	2.8 times	2.6 times	2.7 times

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

2 Net debt of £6,168 million includes lease obligations under IFRS 16 and perpetual securities treated as debt, divided by Group underlying EBITDAR of £2,253 million, calculated for a 52-week period to 19 September 2020.

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

Property value

As at 19 September 2020, Sainsbury's estimated market value of properties was £9.9 billion (7 March 2020: £9.9 billion). This includes the Group's beneficial interest in a property investment pool.

Defined benefit pensions

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

At 19 September 2020, the net defined benefit surplus under IAS19 for the Group was £1,012 million (excluding deferred tax). The £107 million movement from 7 March 2020 was driven by an increase in the scheme liabilities due to changes in the financial assumptions, offset by favourable movements on plan assets, which are held at fair value. The discount rate has remained constant since year-end at 1.6 per cent.

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

The actuarial deficit reduced to £538 million, from £1,055 million in 2015.

Under the new ABC, properties with a value of £1.35 billion were transferred into a newly formed property holding company, a wholly owned subsidiary of the Group, and leased to other Group entities. Rental receipts facilitate payments of interest and capital on loan notes issued to a Scottish Limited Partnership, in which the Scheme holds an interest.

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

1) Payments to the Sainsbury's section (approximately £15 million per year)

2) Payments to the Argos section (approximately £20 million per year)

3) Switching payment stream, paid to either the Sainsbury's section or Argos section (initially approximately £23 million per year, increasing to £33 million by 2038)

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

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

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

Cash contributions and ABC distributions of £60 million have been paid in H1, with a further £42 million agreed in H2. Cash contributions and ABC distributions for 2021/22 are expected to be £76 million.

Retirement benefit obligations
	Sainsbury's	Argos	Group	Group
	as at	as at	as at	as at
	19 September 2020	19 September 2020	19 September 2020	7 March 2020

	£m	£m	£m	£m
Present value of funded obligations	(9,043)	(1,457)	(10,500)	(10,335)
Fair value of plan assets	10,072	1,478	11,550	11,491
Pension surplus/(deficit)	1,029	21	1,050	1,156
Present value of unfunded obligations	(21)	(17)	(38)	(37)
Retirement benefit obligations	1,008	4	1,012	1,119
Deferred income tax (liability)/asset	(191)	(1)	(192)	(214)
Net retirement benefit obligations	817	3	820	905

Group income statement (unaudited)

for the 28 weeks to 19 September 2020

		28 weeks to 19 September 2020			28 weeks to 21 September 2019
		Before non-underlying items	Non-underlying items	Total	Before non-underlying items	Non-underlying items	Total
	Note	£m	£m	£m	£m	£m	£m
Revenue	4a	14,934	-	14,934	15,097	-	15,097
Cost of sales		(13,644)	(298)	(13,942)	(13,970)	(177)	(14,147)
Gross profit/(loss)		1,290	(298)	992	1,127	(177)	950
Administrative expenses		(801)	(154)	(955)	(694)	(86)	(780)
Other income		11	(5)	6	24	44	68
Operating profit/(loss)		500	(457)	43	457	(219)	238
Finance income	6	2	14	16	2	16	18
Finance costs	6	(201)	5	(196)	(221)	4	(217)
Share of post-tax loss from joint ventures and associates		-	-	-	-	(30)	(30)
Profit/(loss) before tax		301	(438)	(137)	238	(229)	9
Income tax (expense)/credit	7	(83)	41	(42)	(63)	16	(47)
Profit/(loss) for the financial period		218	(397)	(179)	175	(213)	(38)

Loss per share	8			pence			pence
Basic loss				(8.3)			(2.2)
Diluted loss				(8.3)			(2.2)

		52 weeks to 7 March 2020
		Before non-underlying items	Non-underlying items	Total
	Note	£m	£m	£m
Revenue	4a	28,993	-	28,993
Cost of sales		(26,699)	(278)	(26,977)
Gross profit/(loss)		2,294	(278)	2,016
Administrative expenses		(1,345)	(114)	(1,459)
Other income		37	56	93
Operating profit/(loss)		986	(336)	650
Finance income	6	4	28	32
Finance costs	6	(404)	6	(398)
Share of post-tax loss from joint ventures and associates		-	(29)	(29)
Profit/(loss) before tax		586	(331)	255
Income tax (expense)/credit	7	(149)	46	(103)
Profit/(loss) for the financial period		437	(285)	152

Earnings per share	8			pence
Basic earnings				5.8
Diluted earnings				5.8

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

Group statement of comprehensive income (unaudited)

for the 28 weeks to 19 September 2020

		28 weeks to 19 September 2020	28 weeks to 21 September 2019	52 weeks to 7 March 2020
	Note	£m	£m	£m
(Loss)/profit for the financial year		(179)	(38)	152

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

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

Group balance sheet (unaudited)

at 19 September 2020

		19 September 2020	21 September 2019	7 March 2020
	Note	£m	£m	£m
Non-current assets
Property, plant and equipment	10	8,721	8,943	8,911
Right of use assets	11	4,796	4,878	4,826
Intangible assets	12	896	1,008	1,012
Investments in joint ventures and associates		5	56	9
Financial assets at fair value through other comprehensive income	14a	863	838	972
Trade and other receivables		52	50	43
Amounts due from Financial Services customers	14a	2,812	3,593	3,453
Derivative financial assets	14c	4	8	6
Net retirement benefit surplus	18	1,012	1,382	1,119
		19,161	20,756	20,351
Current assets
Inventories		1,635	1,953	1,732
Trade and other receivables		748	693	811
Amounts due from Financial Services customers	14a	3,380	3,808	3,951
Financial assets at fair value through other comprehensive income	14a	61	182	82
Derivative financial assets	14c	28	41	12
Cash and cash equivalents	17	1,453	1,468	994
		7,305	8,145	7,582
Assets held for sale		2	5	4
		7,307	8,150	7,586
Total assets		26,468	28,906	27,937

Current liabilities
Trade and other payables		(4,702)	(4,710)	(4,275)
Amounts due to Financial Services customers and other deposits	14a	(5,906)	(6,573)	(6,890)
Borrowings	16	(257)	(495)	(48)
Lease liabilities	11	(538)	(536)	(510)
Derivative financial liabilities	14c	(38)	(12)	(53)
Taxes payable		(29)	(185)	(163)
Provisions		(136)	(127)	(108)
		(11,606)	(12,638)	(12,047)
Net current liabilities		(4,299)	(4,488)	(4,461)
Non-current liabilities
Other payables		(1)	(69)	(11)
Amounts due to Financial Services customers and other deposits	14a	(904)	(1,594)	(1,204)
Borrowings	16	(772)	(1,023)	(1,248)
Lease liabilities	11	(5,369)	(5,240)	(5,264)
Derivative financial liabilities	14c	(60)	(41)	(36)
Deferred income tax liability		(328)	(291)	(265)
Provisions		(241)	(104)	(89)
		(7,675)	(8,362)	(8,117)
Total liabilities		(19,281)	(21,000)	(20,164)

Net assets		7,187	7,906	7,773

Equity
Called up share capital		635	632	634
Share premium		1,163	1,151	1,159
Merger reserve		568	568	568
Capital redemption reserve		680	680	680
Other reserves		194	184	168
Retained earnings		3,699	4,195	4,068
Total equity before perpetual securities		6,939	7,410	7,277
Perpetual capital securities		-	248	248
Perpetual convertible bonds		248	248	248
Total equity		7,187	7,906	7,773

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

Group cash flow statement (unaudited)

for the 28 weeks to 19 September 2020

		28 weeks to	28 weeks to	52 weeks to
		19 September	21 September	7 March
		2020	2019	2020
	Note	£m	£m	£m

Cash flows from operating activities
(Loss)/profit before tax		(137)	9	255
Net finance costs		180	199	366
Share of post-tax loss from joint ventures		-	30	29
Operating profit		43	238	650
Adjustments for:
Depreciation expense	10,11	596	597	1,127
Amortisation expense	12	65	70	129
Net impairment loss on property, plant and equipment, right of use assets and intangible assets	10,11,12	292	177	263
Non-cash adjustments arising from acquisitions		(1)	(1)	(2)
Financial Services impairment losses on loans and advances		39	47	80
Loss/(profit) on sale of properties and early termination of leases		7	(44)	(56)
Share-based payments expense		16	19	37
Non-cash defined benefit scheme expenses	18	3	4	9
Cash contributions to benefit schemes	18	(60)	(48)	(52)
Operating cash flows before changes in working capital		1,000	1,059	2,185
Changes in working capital
Decrease/(increase) in inventories		97	(24)	197
Decrease/(increase) in financial assets at fair value through other comprehensive income		159	(176)	(177)
Decrease/(increase) in trade and other receivables		58	(69)	(129)
Decrease/(increase) in amounts due from Financial Services customers and other deposits		1,173	(461)	(499)
Increase/(decrease) in trade and other payables		409	316	(195)
(Decrease)/increase in amounts due to Financial Services customers and other deposits		(1,284)	566	492
Increase/(decrease) in provisions and other liabilities		180	27	(8)
Cash generated from operations		1,792	1,238	1,866
Interest paid	15	(193)	(208)	(384)
Corporation tax paid		(88)	(6)	(110)
Net cash generated from operating activities		1,511	1,024	1,372

Cash flows from investing activities
Purchase of property, plant and equipment		(257)	(213)	(519)
Initial direct costs on new leases		(3)	(2)	(13)
Purchase of intangible assets		(44)	(52)	(120)
Proceeds from disposal of property, plant and equipment		19	54	81
Interest received	15	-	2	2
Dividends and distributions received		22	118	143
Net cash used in investing activities		(263)	(93)	(426)

Cash flows from financing activities
Proceeds from issuance of ordinary shares		4	5	15
Proceeds from borrowings	15	-	80	250
Proceeds from short term borrowings	15	660	-	-
Repayment of borrowings	15	(269)	(230)	(169)
Repayment of short term borrowings	15	(660)	-	-
Repayment upon maturity of convertible bonds		-	-	(450)
Repayment of perpetual capital securities	15	(250)	-	-
Purchase of own shares		(30)	(4)	(18)
Repayment of capital element of lease obligations	15	(224)	(231)	(420)
Repayment of capital element of obligations under hire purchase arrangements	15	-	(10)	(10)
Dividends paid on ordinary shares	9	-	(174)	(247)
Dividends paid on perpetual securities		(20)	(20)	(23)
Net cash used in financing activities		(789)	(584)	(1,072)

Net increase/(decrease) in cash and cash equivalents		459	347	(126)

Opening cash and cash equivalents		994	1,120	1,120

Closing cash and cash equivalents		1,453	1,467	994

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

Group statement of changes in equity (unaudited)

for the 28 weeks to 19 September 2020

	Called up share capital	Share premium account	Merger reserve	Capital redemption and other reserves	Retained earnings	Total equity before perpetual securities	Perpetual capital securities	Perpetual convertible bonds	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 8 March 2020	634	1,159	568	848	4,068	7,277	248	248	7,773
Loss for the period	-	-	-	-	(183)	(183)	-	4	(179)
Other comprehensive income/(loss)	-	-	-	35	(175)	(140)	-	-	(140)
Tax relating to other comprehensive income/(loss)	-	-	-	(9)	6	(3)	-	-	(3)
Total comprehensive income/(loss) for the period ended 19 September 2020	-	-	-	26	(352)	(326)	-	4	(322)
Transactions with owners:
Distribution to holders of perpetual securities	-	-	-	-	-	-	-	(4)	(4)
Share-based payment	-	-	-	-	16	16	-	-	16
Purchase of own shares	-	-	-	-	(30)	(30)	-	-	(30)
Allotted in respect of share option schemes	1	4	-	-	(1)	4	-	-	4
Redemption of perpetual capital securities	-	-	-	-	(2)	(2)	(248)	-	(250)
Tax on items charged to equity	-	-	-	-	-	-	-	-	-
At 19 September 2020	635	1,163	568	874	3,699	6,939	-	248	7,187

At 10 March 2019	630	1,147	568	852	4,089	7,286	248	248	7,782
Loss for the period	-	-	-	-	(40)	(40)	-	2	(38)
Other comprehensive income	-	-	-	19	364	383	-	-	383
Tax relating to other comprehensive income	-	-	-	(2)	(62)	(64)	-	-	(64)
Total comprehensive income for the period ended 21 September 2019	-	-	-	17	262	279	-	2	281
Transactions with owners:
Dividends paid	-	-	-	-	(174)	(174)	-	-	(174)
Distribution to holders of perpetual convertible bonds	-	-	-	-	-	-	-	(4)	(4)
Amortisation of convertible bond equity component	-	-	-	(5)	5	-	-	-	-
Share-based payment	-	-	-	-	19	19	-	-	19
Purchase of own shares	-	-	-	-	(4)	(4)	-	-	(4)
Allotted in respect of share option schemes	2	4	-	-	(1)	5	-	-	5
Tax on items charged to equity	-	-	-	-	(1)	(1)	-	2	1
At 21 September 2019	632	1,151	568	864	4,195	7,410	248	248	7,906

	Called up share capital	Share premium account	Merger reserve	Capital redemption and other reserves	Retained earnings	Total equity before perpetual securities	Perpetual capital securities	Perpetual convertible bonds	Total equity
	£m	£m	£m	£m	£m	£m	£m	£m	£m
At 10 March 2019	630	1,147	568	852	4,089	7,286	248	248	7,782
Profit for the period	-	-	-	-	129	129	16	7	152
Other comprehensive income	-	-	-	1	89	90	-	-	90
Tax relating to other comprehensive income	-	-	-	-	(15)	(15)	-	-	(15)
Total comprehensive income for the year ended 7 March 2020	-	-	-	1	203	204	16	7	227
Transactions with owners:
Dividends paid	-	-	-	-	(247)	(247)	-	-	(247)
Distribution to holders of perpetual convertible bonds	-	-	-	-	-	-	(16)	(7)	(23)
Amortisation of convertible bond equity component	-	-	-	(5)	5	-	-	-	-
Share-based payment	-	-	-	-	37	37	-	-	37
Purchase of own shares	-	-	-	-	(18)	(18)	-	-	(18)
Allotted in respect of share option schemes	4	12	-	-	(1)	15	-	-	15
Tax on items charged to equity	-	-	-	-	-	-	-	-	-
At 7 March 2020	634	1,159	568	848	4,068	7,277	248	248	7,773

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

Notes to the Condensed Consolidated Interim Financial Statements (unaudited)

1. General information

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

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

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

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

2. Basis of preparation and accounting policies

2.1 Basis of preparation

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

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

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

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

2.2 Going concern

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

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

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

In September 2019 the maturity of part of the £1,450 million Revolving Credit Facility was extended by one year. The Revolving Credit Facility is split into two Facilities, a £300 million Facility (A) and a £1,150 million Facility (B). Facility A has a final maturity of April 2025 and Facility B has a final maturity of October 2024. As at 19 September 2020, the Revolving Credit Facility was undrawn. In addition, the Group maintains uncommitted facilities of £195m to provide additional capacity to fund short term working capital requirements. The uncommitted facilities were undrawn at 19 September 2020.

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

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

• Sales impact from the closure of certain stores, predominantly Argos

• Changing customer behaviours during lockdown

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

• Supply chain disruptions

• Exposure to credit risk within the Financial Services business

At the year-end, the Group outlined details of the base case scenario that was used for modelling the potential impact of COVID-19. Since then, costs of around £290 million associated with protecting customers and colleagues from COVID-19 were partially offset by £230 million of business rates relief received to date. These are broadly in line with the base case, whilst sales during the first half have been stronger than the base case assumptions, particularly at Argos.

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

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

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

2.3 Accounting judgements and estimates

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

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

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

· Note 3: Profit before non-underlying items

· Note 13: Impairment of non-financial assets

· Note 14: Financial instruments

· Note 18: Retirement benefit obligations

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

2.4 New standards, interpretations and amendments adopted by the Group

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

- Amendments to References to Conceptual Framework in IFRS Standards

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

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

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

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

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

Interest Rate Benchmark Reform

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

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

2.5 Alternative performance measures (APMs)

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

Purpose of APMs

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

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

Changes to APMs

The following APMs have been updated during the period:

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

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

3. Profit before non-underlying items

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

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

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

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

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

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

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

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

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

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

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

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

28 weeks to 19 September 2020
	Cost of sales	Administrative expenses	Other income	Net finance income/(costs)	Share of loss from JVs	Total adjustments before tax	Tax	Total adjustments
	£m	£m	£m	£m	£m	£m	£m	£m
Restructuring programmes	(244)	(15)	-	-	-	(259)	45	(214)
Impairment of non-financial assets	(96)	(118)	-	-	-	(214)	37	(177)
Financial Services transition	-	(7)	-	-	-	(7)	-	(7)
Total restructuring, impairment and integration	(340)	(140)	-	-	-	(480)	82	(398)

Property, finance, pension and acquisition adjustments
ATM business rates reimbursement	42	-	-	-	-	42	(8)	34
Loss on disposal of properties	-	-	(5)	-	-	(5)	1	(4)
Investment property fair value movements	-	-	-	-	-	-	-	-
Perpetual securities coupons	-	-	-	10	-	10	-	10
Non-underlying finance movements	-	-	-	(2)	-	(2)	-	(2)
IAS 19 pension interest and expenses	-	(3)	-	11	-	8	(2)	6
Acquisition adjustments	-	(11)	-	-	-	(11)	2	(9)
Total property, finance, pension and acquisition adjustments	42	(14)	(5)	19	-	42	(7)	35

Tax adjustments
Under provision in prior years	-	-	-	-	-	-	-	-
Revaluation of deferred tax balances	-	-	-	-	-	-	(34)	(34)

Total adjustments	(298)	(154)	(5)	19	-	(438)	41	(397)

Restructuring programmes

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

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

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

Costs totalling £259 million have been recognised in the period in relation to the above and comprise the following:

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

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

Impairment of non-financial assets

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

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

An impairment charge of £214 million has been recognised in the period and comprises:

	£m
Impairment of property, plant and equipment	60
Impairment of leased assets	62
Impairment of intangible assets	92
	214

Of the total charge of £214 million, £105 million is in relation to assets within the Financial Services segment, with the remaining £109 million within the Retail segment. Further details of the impairment charge are included within note 13.

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

Financial Services transition

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

ATM business rates reimbursement

£42 million of income is due to be received from the Valuation Office following the Supreme Court's ruling that ATMs outside stores should not be assessed for additional business rates on top of normal store rates.

Property, finance, pension and acquisition adjustments

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

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

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

· Defined benefit pension interest and expenses comprises pension finance income of £11 million and scheme expenses of £(3) million (see note 18).

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

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

Comparative information

28 weeks to 21 September 2019
	Cost of sales	Admin expenses	Other income	Net finance income/	Share of loss from JVs	Total adjustments before tax	Tax	Total adjustments
	Cost of sales	Admin expenses	Other income	(costs)	Share of loss from JVs	Total adjustments before tax	Tax	Total adjustments
	£m	£m	£m	£m	£m	£m	£m	£m
Property strategy programme¹	(176)	(27)	-	-	-	(203)	14	(189)
Retail restructuring programme¹	-	(25)	-	-	-	(25)	5	(20)
Financial Services transition and other	-	(15)	-	-	-	(15)	-	(15)
Total strategic programmes	(176)	(67)	-	-	-	(243)	19	(224)

Property, finance, pension and acquisition adjustments
Profit/(loss) on disposal of properties	-	-	44	-	(21)	23	(1)	22
Investment property fair value movements	-	-	-	-	(4)	(4)	-	(4)
Perpetual securities coupons	-	-	-	13	-	13	(2)	11
Non-underlying finance movements	-	-	-	(8)	(5)	(13)	-	(13)
IAS 19 pension expenses	-	(4)	-	15	-	11	1	12
Acquisition adjustments	(1)	(15)	-	-	-	(16)	3	(13)
Total property, finance, pension and acquisition adjustments	(1)	(19)	44	20	(30)	14	1	15

Tax adjustments
Under provision in prior years	-	-	-	-	-	-	(7)	(7)
Revaluation of deferred tax balances	-	-	-	-	-	-	3	3

Total adjustments	(177)	(86)	44	20	(30)	(229)	16	(213)

52 weeks to 7 March 2020
	Cost of sales	Administrative expenses	Other income	Net finance income/(costs)	Share of loss from JVs	Total adjustments before tax	Tax	Total adjustments
	£m	£m	£m	£m	£m	£m	£m	£m
Property strategy programme¹	(255)	(41)	-	-	-	(296)	28	(268)
Retail restructuring programme¹	(21)	(11)	-	-	-	(32)	6	(26)
Financial Services transition and other	(2)	(27)	-	-	-	(29)	4	(25)
Total strategic programmes	(278)	(79)	-	-	-	(357)	38	(319)

Property, finance, pension and acquisition adjustments
Profit/(loss) on disposal of properties	-	-	56	-	(21)	35	3	38
Investment property fair value movements	-	-	-	-	(3)	(3)	-	(3)
Perpetual securities coupons	-	-	-	23	-	23	(4)	19
Non-underlying finance movements	-	-	-	(17)	(5)	(22)	3	(19)
IAS 19 pension expenses	-	(9)	-	28	-	19	(4)	15
Acquisition adjustments	-	(26)	-	-	-	(26)	5	(21)
Total property, finance, pension and acquisition adjustments	-	(35)	56	34	(29)	26	3	29

Tax adjustments
Over provision in prior years	-	-	-	-	-	-	8	8
Revaluation of deferred tax balances	-	-	-	-	-	-	(3)	(3)

Total adjustments	(278)	(114)	56	34	(29)	(331)	46	(285)

Prior year property strategy programme

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

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

Prior year retail restructuring programme

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

Cash flow statement

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

	28 weeks to	28 weeks to	52 weeks to
	19 September	21 September	7 March
	2020	2019	2020
	£m	£m	£m

Cash flows from operating activities
IAS 19 pension expenses	(3)	(4)	(9)
Financial Services transition	(7)	(13)	(22)
Argos integration costs	-	(3)	(2)
Restructuring programmes	(9)	(4)	(34)
ATM Rates reimbursement	12	-	-
Transaction costs relating to the proposed merger with Asda	-	(11)	(13)
Cash used in operating activities	(7)	(35)	(80)

Cash flows from investing activities
Proceeds from property disposals	19	54	81
Cash generated from investing activities	19	54	81

Net cash flows	12	19	1

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

4. Segment reporting

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

• Retail - Food

• Retail - General Merchandise & Clothing

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

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

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

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

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

a. Income statement and balance sheet

	Retail	Financial	Group
	Retail	Services	Group
28 weeks to 19 September 2020	£m	£m	£m
Segment revenue
Retail sales to external customers	14,715	-	14,715
Financial Services to external customers¹	-	219	219
Underlying revenue	14,715	219	14,934
Revenue	14,715	219	14,934

Underlying operating profit/(loss)	555	(55)	500
Underlying finance income	2	-	2
Underlying finance costs	(201)	-	(201)
Underlying profit/(loss) before tax	356	(55)	301
Non-underlying expense (note 3)			(438)
Loss before tax			(137)
Income tax expense (note 7)			(42)
Loss for the financial period			(179)

Assets	18,412	8,051	26,463
Investment in joint ventures and associates	5	-	5
Segment assets	18,417	8,051	26,468
Segment liabilities	(12,133)	(7,148)	(19,281)

¹ Financial Services income includes £176 million recognised using the effective interest rate method.

	Retail	Financial Services	Group
28 weeks to 21 September 2019	£m	£m	£m
Segment revenue
Retail sales to external customers	14,808	-	14,808
Financial Services to external customers¹	-	289	289
Underlying revenue	14,808	289	15,097
Revenue	14,808	289	15,097

Underlying operating profit	437	20	457
Underlying finance income	2	-	2
Underlying finance costs	(221)	-	(221)
Underlying share of post-tax profit from joint ventures and associates	-	-	-
Underlying profit before tax	218	20	238
Non-underlying expense (note 3)			(229)
Profit before tax			9
Income tax expense (note 7)			(47)
Loss for the financial period			(38)

Assets	19,308	9,542	28,850
Investment in joint ventures and associates	56	-	56
Segment assets	19,364	9,542	28,906
Segment liabilities	(12,478)	(8,522)	(21,000)

¹ Financial Services income includes £204 million recognised using the effective interest rate method.

	Retail	Financial	Group
	Retail	Services	Group
52 weeks to 7 March 2020	£m	£m	£m
Segment revenue
Retail sales to external customers	28,424	-	28,424
Financial Services to external customers¹	-	569	569
Underlying revenue	28,424	569	28,993
Revenue	28,424	569	28,993

Underlying operating profit	938	48	986
Underlying finance income	4	-	4
Underlying finance costs	(404)	-	(404)
Underlying share of post-tax profit from joint ventures and associates	-	-	-
Underlying profit before tax	538	48	586
Non-underlying expense (note 3)			(331)
Profit before tax			255
Income tax expense (note 7)			(103)
Profit for the financial period			152

Assets	18,463	9,465	27,928
Investment in joint ventures and associates	9	-	9
Segment assets	18,472	9,465	27,937
Segment liabilities	(11,738)	(8,426)	(20,164)

¹ Financial Services income includes £405 million recognised using the effective interest rate method.

b. Segmented cash flow statement

		28 weeks to 19 September 2020			28 weeks to 21 September 2019
	APM reference	Retail	Financial Services	Group	Retail	Financial Services	Group

		£m	£m	£m	£m	£m	£m

Profit/(loss) before tax		31	(168)	(137)	2	7	9
Net finance costs		180	-	180	196	3	199
Share of post-tax loss from joint ventures		-	-	-	30	-	30
Operating profit/(loss)		211	(168)	43	228	10	238
Adjustments for:
Depreciation and amortisation expense		647	14	661	653	14	667
Net impairment loss on property, plant and equipment, right of use assets and intangible assets		187	105	292	177	-	177
Non-cash adjustments arising from acquisitions		(1)	-	(1)	(1)	-	(1)
Financial Services impairment losses on loans and advances		-	39	39	-	47	47
Loss/(profit) on sale of properties and early termination of leases		5	2	7	(44)	-	(44)
Share-based payments expense		14	2	16	17	2	19
Non-cash defined benefit scheme expenses		3	-	3	4	-	4
Cash contributions to defined benefit scheme		(60)	-	(60)	(48)	-	(48)
Operating cash flows before changes in working capital		1,006	(6)	1,000	986	73	1,059
Changes in working capital
Decrease/(increase) in working capital		713	79	792	289	(110)	179
Cash generated from/(used in) operations		1,719	73	1,792	1,275	(37)	1,238
Interest paid	a	(193)	-	(193)	(208)	-	(208)
Corporation tax paid		(88)	-	(88)	(8)	2	(6)
Net cash generated/(used) from operating activities		1,438	73	1,511	1,059	(35)	1,024

Cash flows from investing activities
Purchase of property, plant and equipment excluding strategic capital expenditure		(257)	-	(257)	(213)	-	(213)
Initial direct costs on new leases		(3)	-	(3)	(2)	-	(2)
Purchase of intangible assets		(33)	(11)	(44)	(35)	(17)	(52)
Proceeds from disposal of property, plant and equipment		19	-	19	54	-	54
Interest received	a	-	-	-	2	-	2
Dividends and distributions received	e	22	-	22	118	-	118
Net cash used in investing activities		(252)	(11)	(263)	(76)	(17)	(93)

Cash flows from financing activities
Proceeds from issuance of ordinary shares	d	4	-	4	5	-	5
Proceeds from borrowings	c	-	-	-	80	-	80
Proceeds from short term borrowings	c	660	-	660	-	-	-
Repayment of borrowings	c	(269)	-	(269)	(230)	-	(230)
Repayment of short term borrowings	c	(660)	-	(660)	-	-	-
Repayment of perpetual capital securities	c	(250)	-	(250)	-	-	-
Purchase of own shares	d	(30)	-	(30)	(4)	-	(4)
Repayment of capital element of obligations under lease liabilities	b	(223)	(1)	(224)	(230)	(1)	(231)
Repayment of capital element of obligations under hire purchase agreements	c	-	-	-	(10)	-	(10)
Dividends paid on ordinary shares		-	-	-	(174)	-	(174)
Dividends paid on perpetual securities	a	(20)	-	(20)	(20)	-	(20)
Net cash used in financing activities		(788)	(1)	(789)	(583)	(1)	(584)

Intra group funding
Bank capital injections		-	-	-	(35)	35	-
Net cash (used in)/generated from intra group funding		-	-	-	(35)	35	-

Net increase/(decrease) in cash and cash equivalents		398	61	459	365	(18)	347

		52 weeks to 7 March 2020
	APM reference	Retail	Financial Services	Group
		£m	£m	£m

Profit before tax		235	20	255
Net finance costs		363	3	366