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PASSION, PEOPLE, PRODUCT PRODUCT AND PRICE BEST AT FRESH
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This financial year has seen a great deal of change in our business. Driven by a new trading strategy that is increasingly bringing significant numbers of new clients to our stores, we are now building the kind of sales momentum which we need to drive pro fit growth. It is against this background that I will guide you through our financial performance. Group Sales Total sales for the year grew by 5.1%, after adjusting for the 53rd week in the 1998/99 financial year. Comparable sales growth (adjusting for the different timing of Easter) in like-for-like stores was 3.3%, with a further 2.4% contributed by net new space.
These actions led to an immediate increase in both customer numbers and sales, with second quarter like-for-like sales growth increasing to 2.4%. Total sales for the first half as a whole were up 3.0% (excluding the impact of Easter), including like-for-like growth of 1.0% and zero inflation.
Sales from our joint venture stores in Northern Ireland totalled £164 million with double digit like-for-like growth. Our 50% share of sales from our Safeway/ BP convenience store chain contributed a further £88 million to total group sales. Group Operating Profit Rolling out the first stage of the new trading strategy, while at the same time discontinuing the old one, required significant investment during the year. The cost of our new promotional programme, increased staffing levels in stores, additional distribution resources, and the non-recurring costs related to the Millennium (£8 million) and central support redundancies (£12 million), all contributed to a 23.2% fall (on a 52-week basis) in operating profit to £317 million.
Net Margin The group's net margin fell by 1.5% for the full year as shown below:
All of the above were offset by efficiency savings, which continued to gather pace during the year and which will contribute further to our anticipated profit growth in the current year. Northern Ireland Our stores in Northern Ireland produced an operating loss of £4.9 million, a significant improvement on last year (£9.4 million). With sales in the fully refitted store portfolio continuing to grow strongly, we expect to move into profit in the current year. Over 52 weeks, profit before taxation and net property losses declined by 30% to £245 million.
BP joint venture
Interest On a 52-week basis, the net interest charge increased by £9 million to £72 million. This includes £8 million due to the share repurchase programme completed in the first half. Interest cover (the number of times operating profit is greater than the net interest charge before adjusting for capitalised interest) reduced to 3.9 times, from 5.9 times last year. Property There was a net property loss on disposals of £9 million (last year £17 million). This included £18 million (last year £4 million) of additional provisions for loss on disposal of short life stores and development sites, which offset a £13 million surplus on the disposal of two freehold superstores at Brent Cross and Enfield.
We have provided £76 million for corporation tax at a rate of 31% on our profit after interest (compared with 30% last year). A similar tax rate is expected to be charged this year. Corporation tax actually paid in the year amounted to £135 million, and included a one off advance in payment of £25 million as a result of the transition to the current year basis of collection by the Inland Revenue under corporation tax self assessment. Minority Interest In accordance with applicable accounting standards, our Northern Ireland joint venture is accounted for as a subsidiary since we have management control. However, as we own only 50% of the shares, there is a minority interest credit on our Profit and Loss Account to reflect our partner's, Fitzwilton, share of the post tax loss. This was £7 million compared with nearly £10 million last year. Earnings and Dividends
Dividend The Board is recommending a fin a l dividend of 6.0p per share, giving a full year dividend of 8.64p. This is a decrease of 40% versus last year's 14.4p per share. Dividend cover has increased to 2.0 times (last year 1.5 times) which is in line with sector norms and provides a base for future dividend growth. Store Development During the year, 12 new Safeway stores were opened. This year we are reducing the scale of our new store development programme in order to concentrate our resources on existing stores, and expect to open only two stores during the year.
Return on average capital employed after taxation (ROCE), fell to 8.0% from 11.8% last year. The group generated £35 million of cash from operations, ie. before dividends and new share issues and repurchases. The net cash outflow of £252 million included cash dividends paid of £131 million and the £162 million cash cost of our share buy-back programme during the first half.
Capital expenditure additions of £287 million (cash spend £319 million) included £161 million on new store openings, £82 million on extensions and refits in existing stores, together with £6 million in completing our conversion programme in Northern Ireland. With the scaling down of our new store development programme in order to concentrate our resources on existing stores, we expect our capital expenditure in the current year to fall to below £200 million. Net Debt Including the £162 million share repurchase and £131 million paid in dividends, the group used £252 million of cash during the year, increasing net debt by year end to £1,221 million. As a result, gearing (net debt as a percentage of capital employed) rose from 46% to 60%. The overall objective of our treasury function is to provide sufficient liquidity to meet operational cash flows whilst maximising shareholder value within a tightly defined and controlled risk management framework. The department does not operate as a profit centre. Financial instruments, including derivatives, are used to manage the main financial risks that arise in the course of our business. These risks are liquidity (funding) risk, interest rate risk, and foreign exchange risk, and are discussed further below. Over many years the group has established prudent, conservative treasury policies which are reviewed on a regular basis by the Board to ensure that they remain relevant to our business as it evolves. Tr e a s u ry activity is monitored on an ongoing basis via a combination of both internal and external reviews and audits, together with regular reports to the Board. It also operates within approved investment limits and is subject to dealing mandates issued to all financial institutions with which deals are authorised.
It is our policy to ensure that the maturity of our debt is spread in order to avoid significant refinancing risk. During the year, the maturity profile of our borrowings was extended, resulting primarily from the issue of a £150 million 15 year bond during the summer of 1999 and the repayment of another £150 million bond in March 2000. As detailed in Note 15, only 25% of the group's total loan finance at the year end will mature in the next 12 months, 49% will mature in one year but less than five, and 26% will mature in more than five years. (ii) Interest rate risk Details of the interest rate profile of our borrowings is provided in Note 15. (iii) Foreign exchange risk Following the establishment of our Euro Medium Term Note Programme in July 1999, loan notes have been issued in various currencies other than Sterling. In order to avoid any exposure to subsequent fluctuations in foreign exchange rates, the proceeds of all such medium term notes are swapped into floating rate Sterling on issue using cross currency interest rate swaps. Year 2000 Following the establishment of a comprehensive contingency plan, which included working with suppliers to minimise the risk of disruption to supply and service to customers, we are pleased to report that we have to date experienced no significant problems with regard to Year 2000 compliance. Accounting Standards The group's accounting policies reflect the current requirements of the UK Accounting Standards Board including the new standards which came into effect during the year, namely: FRS 15 - Tangible Fixed Assets; Full details of directors' remuneration and pension entitlements are shown in the Directors' Report on pages 49 to 53 and in Note 7.3 on page 40. We remain committed to the adoption of best practice in our communications with investors following guidelines originally issued by the London Stock Exchange. Market updates on current trading are issued quarterly. The Future The group is committed to enhancing shareholder value. We only invest where the return is expected to be higher than our cost of capital. Although we have no current plans to restart our share buy-back programme, we will continue to actively manage our capital structure (ie. the mix between debt, property and equity funding) as we believe this plays an important role in reducing our cost of capital and so delivering value to our shareholders. We firmly believe that, during the last eight months, we have built a base from which the group can enjoy sustained, profitable sales growth. 750,000 more customers are shopping in Safeway stores every week, and they will be the foundation from which we will deliver profit recovery. Coupled with our ongoing drive to improve business effectiveness and our commitment to generate cash through reduced capital expenditure, taxation and dividend payments we expect to resume profit growth in the current year.
Capital expenditure additions of £287 million (cash spend £319 million) included £161 million on new store openings, £82 million on extensions and refits in existing stores, together with £6 million in completing our conversion programme in Northern Ireland. With the scaling down of our new store development programme in order to concentrate our resources on existing stores, we expect our capital expenditure in the current year to fall to below £200 million. Net Debt Including the £162 million share repurchase and £131 million paid in dividends, the group used £252 million of cash during the year, increasing net debt by year end to £1,221 million. As a result, gearing (net debt as a percentage of capital employed) rose from 46% to 60%. Treasury Policies The overall objective of our treasury function is to provide sufficient liquidity to meet operational cash flows whilst maximising shareholder value within a tightly defined and controlled risk management framework. The department does not operate as a profit centre. Financial instruments, including derivatives, are used to manage the main financial risks that arise in the course of our business. These risks are liquidity (funding) risk, interest rate risk, and foreign exchange risk, and are discussed further below. Over many years the group has established prudent, conservative treasury policies which are reviewed on a regular basis by the Board to ensure that they remain relevant to our business as it evolves. Tr e a s u ry activity is monitored on an ongoing basis via a combination of both internal and external reviews and audits, together with regular reports to the Board. It also operates within approved investment limits and is subject to dealing mandates issued to all financial institutions with which deals are authorised. (i) Liquidity risk It is our policy to ensure that the maturity of our debt is spread in order to avoid significant refinancing risk. During the year, the maturity profile of our borrowings was extended, resulting primarily from the issue of a £150 million 15 year bond during the summer of 1999 and the repayment of another £150 million bond in March 2000. As detailed in Note 15, only 25% of the group's total loan finance at the year end will mature in the next 12 months, 49% will mature in one year but less than five, and 26% will mature in more than five years. (ii) Interest rate risk Details of the interest rate profile of our borrowings is provided in Note 15. (iii) Foreign exchange risk Following the establishment of our Euro Medium Term Note Programme in July 1999, loan notes have been issued in various currencies other than Sterling. In order to avoid any exposure to subsequent fluctuations in foreign exchange rates, the proceeds of all such medium term notes are swapped into floating rate Sterling on issue using cross currency interest rate swaps. Year 2000 Following the establishment of a comprehensive contingency plan, which included working with suppliers to minimise the risk of disruption to supply and service to customers, we are pleased to report that we have to date experienced no significant problems with regard to Year 2000 compliance. Accounting Standards The group's accounting policies reflect the current requirements of the UK Accounting Standards Board including the new standards which came into effect during the year, namely: FRS 15 - Tangible Fixed Assets; Full details of directors' remuneration and pension entitlements are shown in the Directors' Report on pages 49 to 53 and in Note 7.3 on page 40. We remain committed to the adoption of best practice in our communications with investors following guidelines originally issued by the London Stock Exchange. Market updates on current trading are issued quarterly. The Future The group is committed to enhancing shareholder value. We only invest where the return is expected to be higher than our cost of capital. Although we have no current plans to restart our share buy-back programme, we will continue to actively manage our capital structure (ie. the mix between debt, property and equity funding) as we believe this plays an important role in reducing our cost of capital and so delivering value to our shareholders. We firmly believe that, during the last eight months, we have built a base from which the group can enjoy sustained, profitable sales growth. 750,000 more customers are shopping in Safeway stores every week, and they will be the foundation from which we will deliver profit recovery. Coupled with our ongoing drive to improve business effectiveness and our commitment to generate cash through reduced capital expenditure, taxation and dividend payments we expect to resume profit growth in the current year.
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Finance Director Simon Laffin explains how new customers are the key to Safeway's current sales growth and future profit recovery.
Our sales started the year slowly, with a like-for-like fall in the first quarter of 0.3%. During the second quarter, we introduced our new trading strategy and increased our investment in a number of key areas to drive sales growth:
In the second half, despite a significant increase in sales disinflation, we achieved much stronger sales growth driven by our new strategy. Total second half sales rose by 8.2% (on a 52-week basis) with like-for-like volumes growing by 9.6%. We have outperformed the industry for the last eight consecutive months.
Our gross margin reduced by 0.6% during the year as a whole, reflecting the continued tough price competition in the sector and our own repositioning in terms of pricing and promotional strategy. Our investment in store staffing levels and improved availability to support the new strategy, and the sales volume growth which followed, resulted in wages as a % of sales increasing by 0.3% and distribution costs by 0.2%. We also invested significantly in local marketing and leafleting.
The BP joint venture made £0.2 million of profit, of which our share is £0.1 million. With 44 stores now trading successfully we remain on track with our plan to open 100 joint venture sites.
Taxation
Earnings per share before net property losses reduced by 26.9% to 17.1p. Diluted earnings per share (which reflect the impact of outstanding share options) were 16.2p compared with 21.9p on a comparable basis last year.
Return on Capital Employed
Capital Expenditure
Treasury Policies
(i) Liquidity risk
