Sbry

Sainsbury Plc
Assessment of suitability for structures allowing increased leverage

whilst maintaining a low level likelihood of equity holder impairment

6
th
August 2014
1

Executive summary
In a sector undergoing structural shifts, Sainsburys positioning is arguably the strongest of the big four UK supermarket
groups. With the customer perception of its proposition being of more premium quality, Sainsbury is more protected
against the growth of the discounters and also has a growing online and convenience business. Additionally, Sainsburys has
executed well, being the only big box food retailer to have gained market share over the last 5 years and grown margins.
Although base case forecasts assume limited top line growth, this is combined with stable margins and cashflow.
Sainsburys 5.9bn market capitalisation and 7.6bn EV (YE 04/2015) both appear undemanding relative to its 12bn real
estate valuation and c. 650m of annual income. However, Sainsburys pension trustees have historically acted to block
highly leveraged structures and the Sainsbury family have also indicated they believe a primary factor for Sainsburys success
has been its strong balance sheet.
A deal that would theoretically be acceptable to the various Sainsburys control groups, however, is a mild sale & leaseback
and re-leverage proposal. Such a proposal which would increase debt to 2.0x EBITDA, move the ratio of owned property
from the current 61% ratio to 51%, and offer equity holders 33% upside assuming a post-deal target PE ratio of 10.0x. A
non-recourse sale and leaseback on the selected stores at Sainsburys at highest risk of increased structural challenges can
also be viewed as strengthening, rather than weakening, the companys balance sheet. Any such plan proposed to the
company would likely need the support of Qatar and Sainsbury family to gain traction.

Sainsbury summary financials

Share price 3.00 Market cap (m) 5,905.5 EV (m) 7,578.7
Summary company financials (m)
Year end March FY2012 FY2013 FY2014 FY2015
Revenue by segment
Supermarkets 20,194.0 20,762.7 20,968.4 20,926.5
Revenue growth 4.5% 2.8% 1.0% -0.2%
Space growth 6.2% 3.8% 3.4% 1.7%
Convenience stores 1,300.0 1,575.0 1,850.0 2,127.5
Revenue growth 16.7% 21.2% 17.5% 15.0%
Space growth 13.0% 17.7% 17.1% 14.5%
Online 800.0 965.3 1,081.1 1,259.2
Revenue growth 20.8% 20.7% 12.0% 16.5%
Hard discount 0.0 0.0 0.0 76.1
Total revenue 22,294.0 23,303.0 23,949.0 24,389.2
Like for like growth 2.1% 1.8% 0.2% -0.6%
5.6% 4.5% 2.8% 1.8%
Food retail market growth 3.9% 3.7% 4.1% 2.1%
EBITDA 1,286.0 1,385.0 1,460.0 1,478.7
5.77% 5.94% 6.10% 6.06%
Net income 511.0 588.0 616.0 644.9
Net debt (cash) 2,028.0 2,667.0 2,375.0 1,673.2
Shares outstanding 1,929.5 1,948.0 1,968.5 1,968.5
EV/Sales 0.41 0.45 0.39 0.34
EV/EBITDA 7.12 7.52 6.41 5.62
PE 13.0 12.1 10.1 9.2
Fixed charge cover 3.13 3.04 3.06 3.16
Net debt / EBITDA 1.58 1.93 1.63 1.13
Market value of property 11,200.0 11,500.0 12,000.0 12,385.0
Net debt / property value 18% 23% 20% 14%
Return on equity 9.1% 10.1% 10.3% 10.2%
Revenue growth
EBITDA margin
2

Contents

1. UK food retail sector overview

2. Overview of Sainsburys performance as a predominantly big box operator

3. Forecasts for Sainsburys revenue, margins and cashflow

4. The market value of Sainsburys real estate

5. Cost of debt capital to Sainsburys

6. Sainsburys operating strategy

7. Sainsburys shareholder register analysis

8. Sainsburys pension deficit

9. Attractiveness of sale & leaseback and re-leverage, and LBO, deals on Sainsbury

10. Conclusions

11. Appendix

3

1. The UK food retail sector is characterised by slowing big box supermarket
transaction volumes, offset by growth in niche discount, online and convenience

1.1 Niche food retailers focused on premium, online and discount are growing at the expense of the
four big box market leaders which trade at low P/E ratings relative to their historical earnings
Sainsbury is the second largest food retail group in the UK. Excluding convenience store revenues, Sainsbury has a 16.8%
market share, which compares to Tesco at 26.7%, Asda at 16.4%, Morrison at 12.4%, Waitrose at 4.0% and Aldi at 3.6%.

Figure 1.1.1 Niche food retailers focused on premium, online and discount are growing at the expense of the four big box
market leaders

The revenue growth performance of market participants is weighted toward smaller niche players taking share from the
big four big box retailers. Waitrose and Ocado, appealing to a more affluent customer base, are growing at 6.2% and
16.7% per annum respectively, and at the other end of the scale, the hard discount models of Aldi and Lidl are growing at
33.5% and 10.1% respectively. Each of these niche operators is achieving their growth from a relatively low base - in all
cases their revenues are below 6bn (or c. 4% market share).
By contrast, the big four big box retailers, each with revenue in excess of 17.5bn, and representing a combined 72%
market share, have broadly comparable retail propositions and a lack of growth in excess of market rates. The five year
market share performances of the big four have been led by Sainsbury (+0.2% market share increase) and Asda (+0.0%) and
these two retailers also have the most differentiated offers of the group Sainsbury closer to the premium end and Asda
closer to a discount strategy. The less differentiated offers of Tesco and Morrison have led to market share losses of -0.8%
and -0.5% respectively, representing, as a percentage of their sales bases, respective declines of -3.4% and -4.0%.
The stock market valuations of the three listed big box food retailers Sainsbury, Tesco and Morrison trade at 9.6x, 7.6x
and 6.0x peak earnings respectively, in all three cases suggesting investors are sceptical that future earnings can match
historic. The low valuation ratings are in contrast for example to the P/E rating of the well regarded, but similar business
model, Belgian leading food retailer Colruyt, trading at 16.7x P/E, albeit with its more competitive food price levels is
deemed not to face the threats challenging the big four in the UK.

Ret ailer Segment UK revenue (m) Market share Revenue growt h
Share price /
peak earnings
Wait rose Premium 5,754.0 4.0% 6.2%
Ocado Premium/ online 792.1 0.6% 16.7%
Sainsbury Premium/ mainst ream 23,899.6 16.8% 2.8% 9.6
Tesco Mainst ream 38,022.4 26.7% 1.8% 7.6
Morrison Mainst ream/ discount 17,680.0 12.4% -1.6% 6.0
Asda Discount 23,301.4 16.3% 1.8%
Aldi Discount / hard discount 5,073.0 3.6% 33.5%
Lidl Hard discount 3,304.3 2.3% 10.1%
4

Figure 1.1.2 UK food retailers by market share, detail view

12 m UK f ood pri ce i nf l at i on 6 . 6 % 9 . 9 % 1. 7% 6 . 4 % 3 . 9 % 4 . 1% 2 . 1% - 0 . 2 %
Y ear ends Jan- Apr, al l GBP FY 2 0 0 8 FY 2 0 0 9 FY 2 0 10 FY 2 0 11 FY 2 0 12 FY 2 0 13 FY 2 0 14 FY 2 0 15E FY 2 0 16 E
UK t radi t i onal bi g box supermarket
Tesco 29,272.3 32,026.8 33,046.8 34,939.2 36,689.7 37,350.1 38,022.4 36,881.7
Growt h 6.7% 9.4% 3.2% 5.7% 5.0% 1.8% 1.8% -3.0%
LFL growt h 2.6% 1.0% 0.0% -0.3% -1.4% -3.7% Q1LFL
Market share big box 36.1% 36.5% 36.1% 36.3% 36.4% 36.1% 36.2% 35.6%
Sainsbury 16,483.6 17,476.1 18,449.2 19,325.6 20,194.0 20,762.7 20,968.4 21,353.9
Growt h 4.0% 6.0% 5.6% 4.8% 4.5% 2.8% 1.0% 1.8%
LFL growt h 3.9% 4.5% 4.3% 2.3% 2.1% 1.8% 0.2% -1.1% Q1LFL
Asda 18,604.0 19,862.0 20,300.0 20,850.0 21,100.0 21,950.0 22,341.4 22,564.8
Growt h 10.1% 6.8% 2.2% 2.7% 1.2% 4.0% 1.8% 1.0%
Morrison 12,969.0 14,528.0 15,410.0 16,479.0 17,663.0 18,116.0 17,831.4 16,743.7
Growt h 4.1% 12.0% 6.1% 6.9% 7.2% 2.6% -1.6% -6.1%
LFL growt h 0.9% 1.8% -2.1% -2.8% -7.1% Q1LFL
Wait rose 3,737.0 3,940.0 4,317.0 4,699.0 5,072.0 5,416.0 5,754.0 6,049.8
Growt h 6.9% 5.4% 9.6% 8.8% 7.9% 6.8% 6.2% 5.1%
LFL growt h 0.4% 3.6% 4.0% 3.0% 3.4% 5.1% 4.0%
Tot al big box 81,065.9 87,833.0 91,523.0 96,292.8 100,718.7 103,594.8 104,917.6 103,593.8
Growt h 6 . 5% 8 . 3 % 4 . 2 % 5. 2 % 4 . 6 % 2 . 9 % 1. 3 % - 1. 3 %
UK conveni ence f ood ret ai l
Tesco 9,747.6 ESTIMATED
Market share convenience 26.1%
Co-operat ive St ores 7,344.5 7,440.0 7,240.0
Growt h 1.3% -2.7%
Market share convenience 21.1% 19.4%
Sainsbury 942.5 856.8 989.8 1,113.9 1,300.0 1,575.0 1,850.0
Growt h 7.0% -9.1% 15.5% 12.5% 16.7% 21.2% 17.5%
Market share convenience 4.5% 4.9%
Tot al convenience 34,200.0 35,216.6 37,400.0 39,270.0 41,233.5
Growt h 3.0% 6.2% 5.0% 5.0%
UK - onl i ne f ood ret ai l ers
Tesco online 2,750.0 2,900.0 3,700.0 4,200.0 5,000.0
Growt h 5.5% 27.6% 13.5% [ TARGET]
%online market share 48% 58% 60% 60%
Sainsburys Online 437.5 525.0 662.5 800.0 965.3 1,081.1
Growt h 20.0% 26.2% 20.8% 20.7% 12.0%
Asda Online 700.0 850.0 960.0
Growt h 21.4% 12.9%
%online market share 14% 14% 14%
Ocado 272.9 321.3 402.0 515.7 598.3 678.6 792.1
Growt h 17.8% 25.1% 28.3% 16.0% 13.4% 16.7%
Tot al online 3,928.2 4,998.3 6,193.9 7,033.2 8,250.0 9,250.0
Growt h 27.2% 23.9% 13.6% 17.3% 12.1%
%of t ot al market 3.8% 4.5% 4.9% 5.7% 6.3%
UK - di scount / f rozen f ood ret ai l ers
Aldi 2,700.0 3,800.0 5,073.0
Growt h 40.7% 33.5%
Lidl 2,697.8 3,000.0 3,304.3
Growt h 11.2% 10.1%
Iceland 2,600.0 2,674.2 2,831.5
Growt h 2.9% 5.9%
Farm Foods 569.0 721.4 889.5
Growt h 26.8% 23.3%
Tot al discount / f rozen f ood 8,566.8 10,195.6 12,098.3 13,913.1 16,000.0
Growt h 19.0% 18.7% 15.0% 15.0%
Tot al market 127,003.0 132,008.7 136,893.0 142,553.6 145,404.6 147,585.7
Growt h 3.9% 3.7% 4.1% 2.0% 1.5%
5

1.2 Discount food retail growth to continue, however, food retailers with a higher quality perception
have a greater ability to defend their market position

Aldi leads discounter growth with a proposition comparable to that of Tesco in the 1970s
The UK discount food retail segment is achieving the highest revenue growth rate of any segment on a trailing basis with
Aldi, the UK market leader in discount, achieving 33.5% growth in its last financial year.
That a well-executed discounter strategy can effectively take share in UK food retail was illustrated by Tesco in the 1970s, as
illustrated by Figure 1.2.1 below.

Figure 1.2.1 Tesco 1970s proposition bears similarities with that of Aldi today
Tescos 1970s Pile em high, sell em cheap approach has been closely matched by Aldi today:

Sainsburys defence through the 1980s was to advertise
and emphasise its quality at good value credentials:
Our own brand products provide quality that is
comparable or superior to proprietary brands at highly
competitive prices. This commitment to quality and value
has resulted in brand products accounting for two thirds
of all we sell in our supermarkets. Typically the prices of
these products are now more than 20% below those of
the best proprietary alternatives as sold by other
operators. Sainsbury 1988 Annual Report.

Tesco 1970s:

Aldi 2014:

6

During Tescos shift from discounter to middle market, Sainsburys emphasised its quality credentials
and remained cashflow positive
The rise of the discounters today may be analogous to the rise of Tesco through the 70s to 90s, ultimately overtaking
displacing Sainsbury from its then number 1 position in the UK food retail market in 1996. The rise of Tesco led to the
disappearance of many names in UK food retail including Safeway, Kwik Save, and Gateway.
Sainsburys, however, despite losing its dominance, remained cashflow positive throughout Tescos growth, as detailed in
Figure 1.2.2 below. In fact, it was Sainsburys Savacentre which was sacrificed, Savacentre being aimed precisely at the
lower middle market where Tesco was able to dominate from its discounter roots. Sainsburys core, at the upper of the
middle market, had greater defensibility thanks to customer loyalty to its higher quality focus.

Figure 1.2.2 Sainsburys remained cashflow positive throughout the growth and ultimate dominance of Tesco

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Sainsburys: loss of market share to Tesco did not lead to
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Sainsburys FcF post maintennance capex / sales
Sainsburys UK revenue
Tescos UK revenue

The discounter retail strategy itself has not been without its own
failures. Most recently that of Netto, the assets of which were sold to
Asda in 2010 after failing to win over customers to its 193 stores.
Whilst investors in the big four UK supermarkets may rightfully be
concerned at the threat from Aldi, Aldi themselves may also see
equal growth opportunity to gaining customers from competitor Lidl,
much as they did from Netto, rather than accelerating at this stage a
further premiumisation of their retail offer to draw customers from
higher quality perception retailers.
As a footnote, in June 2014 Netto announced a return to the UK
but this time in a joint venture with Sainsbury. 15 discount stores are
planned by the JV by year end 2015.
7

Figure 1.2.3 The rise in discounter market shares has begun to impact big box (referred to in figure as full-line main
grocery) market shares. Meanwhile, Somerfield, Kwik Save, Safeway, Netto whose broadly undifferentiated business
models struggled during the last two decades market share grab by Tesco - no longer exist as independent entities

8

Sainsburys retains its quality perception amongst consumers today as Aldi grows its proposition from
hard discount to lower middle market
The challenge for a discount food retailer such as Aldi will be its gradual shift upwards in quality perception as it moves its
model from hard discount to quality at a low price in order to increase share from the middle market. Figure 1.2.4,
shows the success that Aldi has already achieved in this regard, as consumers have begun to view it on a quality par close to
Asda and Tesco. Note also however from the figure that consumers still view the quality of produce at Sainsburys some way
above the other market participants featured in the graphics below.
Figure 1.2.4 Discounter quality perception closing gap with Tesco, Asda, but less so with Sainsburys. Top graphic represents
percentage of people asked agreeing with the statement has great quality food. Bottom graphic illustrates Sainsburys
quality perception amongst consumers relative to the more mainstream Tesco.

Sources: Morrisons FY2014 results statement presentation, Kantar Affinity
Sainsburys proposition at the higher end of the middle market may be the best defence against the rise of the discounters.
Aldis strategy to gradually emphasise its quality credentials to gain share from the middle market whilst still remaining
true to its hard discounter core customer base, allows it to effectively take share from the lower-middle market customers
of retailers such as Asda, Morrisons and Tesco. But gaining customers from Sainsbury will theoretically be more difficult for
Aldi as these customers have already chosen to pay a slight premium at a retailer emphasising its quality credentials as its
core proposition.
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Consumers however choose Sainsbury for
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Sainsbury
9

Discounter growth has so far targeted regions where Sainsburys has lower market share
It is also notable that the strategic approach selected by the discounters has been to establish strong market positions in
the periphery UK regions, where Sainsbury typically has low market shares, rather than in London and the South East,
Sainsburys heartland where it derives more than 50% of its revenue and has a 24.5% market share.
The regional market share data, presented by Figure 1.2.5, supports the hypothesis that Sainsburys has some defensibility
from the discounters with a customer set at the upper end of the middle market (such a customer set a greater proportion
of the population in London & the South East), and also that the discounters are most likely to initially gain further share
from the lower income segment of the middle market (which represents a greater proportion of the population outside of
London). Also supporting the thesis that the opportunity for the discounter food retail model is currently greater outside of
London and the South East is Sainsburys JV with Netto, which, as a discounter, has elected to open its first stores in the
North of England, according to Sainsbury.
Figure 1.2.5 Sainsburys achieves more than 50% of its revenue where Aldi and Lidls penetrations are the lowest

Sources: Sainsbury store location data disclosed by Sainsbury IR. Aldi, Lidl locations extracted from Tom Tom UK database.
Google Maps algorithm sourced distance data. Sainsbury revenue by region estimated based on regional market shares,
regional GDP and food retail spend as percentage of GDP.
10

Asdas price points are in line with Aldi. Aldis growth, therefore, is not explained by price point
architecture alone
Figure 1.2.6 below contrasts the cost of a basket of basic food items at Aldi with the same basket at Asda, Sainsbury, Tesco,
Morrison and Waitrose. Interestingly, there is little pricing difference between Aldi and Asda.
Sainsbury and Tesco have pricing on par with each other, both c. 16% above Aldi. The pricing of Morrison meanwhile looks
uncompetitive at an 11% premium to other big four operators, whilst Waitrose sits in a dimension of its own at a 66%
premium to Aldi and a 40% premium to Sainsbury and Tesco.

Figure 1.2.6 Aldis pricing is not dissimilar to Asda. Aldi and Asda undercut Sainsbury and Tesco by 13-16%

Source: Mysupermarket.com, analysis carried out on 31/7/14

Despite its price competitiveness to Aldi, Asda has not gained market share over the last 3 years whilst Aldi has more than
doubled its revenues. Aldis success, therefore, cannot be explained by price point architecture alone. Aldi is likely also to
benefit from a superior property strategy, as well access to capital from its global parent company.

Totals 26.73 27.53 31.09 31.05 33.82 44.48
Premium to Aldi 0% 3% 16% 16% 27% 66%
Aldi Asda Sainsbury Tesco Morrison Waitrose
6x Vine tomatoes 250g 0.69 0.69 0.69 1.00 0.69 0.86
Tin plum tomatoes 400g 0.31 0.37 0.55 0.34 0.31 0.55
Baked beans 400g, value range 0.24 0.24 0.30 0.24 0.24 0.45
Mushrooms 150g 0.59 0.65 0.40 0.40 0.65 0.50
Cola 2L, value range 0.39 0.42 0.57 0.89 0.50 0.89
Digestives 400g 0.31 0.44 0.35 0.31 0.55 0.60
Iceberg lettuce 0.45 0.49 0.60 0.49 0.49 0.69
Lard 250g 0.39 0.39 0.45 0.39 0.39 0.54
Kidney beans 400g 0.23 0.23 0.30 0.30 0.23 0.55
White onion / kg 0.59 0.69 0.80 0.78 0.69 0.69
Greek yoghurt 500g 0.85 1.00 1.10 1.10 0.85 1.10
Penne pasta 500g 0.29 0.50 0.95 0.29 0.95 0.95
2 x naan breads 0.49 0.38 0.90 1.00 0.64 1.54
Peeled prawns 200g 1.99 2.10 1.53 2.25 1.50 2.99
Beef burgers, 4x, 454g 1.99 2.00 1.50 1.82 2.00 2.69
Unsmoked bacon 250g 1.25 1.25 1.50 1.25 2.00 2.99
BBQ sauce 480g 0.79 1.33 0.96 1.35 1.00 1.55
Oven chips 1.5kg 0.89 0.82 1.00 1.50 1.67 1.49
Chunky oven chips 1.5kg 1.79 1.75 2.50 2.07 2.50 2.50
Salted peanuts 200g 0.48 0.48 0.70 0.48 1.30 1.00
Lemon curd 411g 0.55 0.22 0.25 0.22 0.59 1.79
Baking potatoes 2.5kg 1.89 3.02 3.12 2.88 3.12 2.00
Tea bags 80's 1.29 0.27 0.40 0.40 0.27 1.40
Eggs f ree range 6 0.89 0.97 1.00 1.00 1.39 1.50
Scotch Eggs 227g 0.62 0.62 0.80 0.93 0.85 1.00
Vanilla Ice Cream 2L 0.89 0.89 1.05 1.19 1.30 1.80
Cof f ee granules 200g 1.59 0.94 1.20 1.00 2.34 2.20
Paracetamol 500mg 0.19 0.21 0.25 0.23 0.23 0.25
Tuna in brine 185g 0.49 0.75 1.00 0.49 0.58 0.98
Strawberries 400g 1.39 1.50 2.00 2.00 2.00 3.00
Ardennes Pate 175g 0.59 0.59 1.03 1.14 0.69 1.64
Honey 454g 1.35 1.32 1.34 1.32 1.32 1.80
11

Discounters UK market shares, including Asda, are already above European market averages
Defining Asda as a discounter rather than a traditional big box supermarket retailer akin to Sainsbury, Tesco or Morrison
leads to the following observations:
1) Sainsbury has gained market share whilst trading alongside a discounter with a 16% market share for some time.
2) Discounters UK market shares are only below European averages if Asda is not treated as a discounter, as per
Figure 1.2.7 below:

Figure 1.2.7 Discounters UK market shares are below European averages

Source: Kantar Worldpanel

0%
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UK
excluding
Asda
France Spain Ireland Belguim Netherlands Poland UK
including
Asda
Germany
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Discounters UK market shares are only below
European averages if we exclude Asda
12

1.3 The online food retail market is led by Tesco, however, the online activities of Sainsbury & Asda
have reported higher average growth. Meanwhile, Ocados dark store model is being replicated
by others in population-dense areas, whilst Ocado has no model for lower density areas

Sainsburys market share of online is 16%, comparable to its total market share of 16.8%. The
continued growth of online can an opportunity for Sainsbury assuming ongoing above market growth
Whilst Tesco dominates in online food, Sainsburys and Asdas revenue growth rates lead the market on a three year basis.
Figure 1.3.1 Online revenue growth rates of big box retailers are equal or in excess of Ocado

Tesco gained a first mover advantage in online food, having launched online ordering in 1995 relative to the launch dates of
Sainsburys online (1998), Asda online (1998) and Ocado (2002).Tescos estimated online revenue for the year to February
2014, at 4.2bn, is still 45% higher than the 2.9bn online food revenue of Sainsbury, Asda and Ocado combined.

Figure 1.3.2 Tesco leads in online food, with an estimated 4.2bn of revenues - 45% more than Sainsburys, Asda and Ocado
online combined

UK - onl i ne f ood ret ai l ers
Tesco online 2,900.0 3,700.0 4,200.0 5,000.0
Growt h 5.5% 27.6% 13.5% [ TARGET]
Sainsburys Online 800.0 965.3 1,081.1
Growt h 20.8% 20.7% 12.0%
Asda Online 700.0 850.0 960.0
Growt h 21.4% 12.9%
Ocado 598.3 678.6 792.1
Growt h 16.0% 13.4% 16.7%
Tot al online 4,998.3 6,193.9 7,033.2 8,250.0 9,250.0
Growt h 27.2% 23.9% 13.6% 17.3% 12.1%
%of t ot al market 3.8% 4.5% 4.9% 5.7% 6.3%
0
500
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1,500
2,000
2,500
3,000
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Tesco dominates in online food, with an estimated 4.2bn of revenues -
45% more than Sainsburys, Asda and Ocado online combined
Tesco online
Sainsburys Online
Asda Online
Ocado
13

The integrated online business models of the big box retailers theoretically hold certain advantages
over the dark store only model of Ocado
Two broad business model propositions exist in online food retail 1) the dark store model and 2) the in-store fulfilment
model.
The dark store model, pioneered by Ocado, dispatches online food orders from a specialist customer fulfilment centre or
dark store whose sole purpose is the dispatch of customer online food orders. The model theoretically is superior for high
volume online food dispatches (although financial disclosures are yet to demonstrate this) as it is a specialised site
designed exclusively for that purpose. However, with a low volume of orders, the dark store model fails, as its minimum
fixed cost base will not be covered by a low order density.

Figure 1.3.3 The dark store model requires a minimum order density to reach profitability

The in-store fulfilment model by contrast can operate at low sales densities, as staff are simply allocated from in-store staff
as and when online orders occur. The model will be less efficient than the dark store model at high sales densities, but
allows online revenue to be generated profitably from areas which do not have the order volume to support a full dark
store investment.

Figure 1.3.4 Food retailers that can operate both dark stores and in-store fulfilment of online orders have the ability to
operate profitably at the full range of sales densities, whereas retailers such as Ocado that solely use the dark store model
are only profitable at high sales densities

-12.0%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
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4.0%
6.0%
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FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013
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Ocado's dark store model indicative of threshold online delivery
density requirement before profitability realised
Deliveries per van per week
Ocado EBIT margin
Online order density Dark store profitability In-store fulfillment profitability
VERY HIGH HIGH MEDIUM
HIGH MEDIUM MEDIUM
UPPER MEDIUM LOW MEDIUM
MEDIUM LOSS MAKING MEDIUM
LOWER MEDIUM LOSS MAKING LOW
LOW LOSS MAKING LOW
14

Whist the online revenue growth rates of the big box retailers have kept pace with Ocado, the big box
operators have also begun to replicate Ocados dark store model in population dense areas
The growth rates in revenue being achieved by the online operations of Tesco (+15% average per annum growth over the
last three years), Sainsbury (+18% average over three years), Asda (+17% average over two years) question whether Ocado
(+15% average over three years) has a business model which will ultimately disrupt them.
The big box operators can fulfil their online orders through both in-store fulfilment in less population dense areas and the
dark store model in population dense areas such as London. This gives them greater coverage potential and ultimately a
larger theoretical (and existing) online business than Ocados dark store only model. The big box operators can and have
promoted their online activities to their in-store customer base, giving them free promotion of their online offer, an
advantage Ocado lacks.
Tesco, Sainsbury, Asda and Waitrose are also building dark stores to directly challenge Ocados model, and assuming these
operators are competent over time in integrating the correct technology, it is not clear that Ocados model will hold long
term advantages that cannot be duplicated or that Ocados model is ultimately, therefore, disruptive to the big box
operators.

Figure 1.3.5 Tesco,
Sainsbury, Asda and Waitrose
are all building dark stores to
directly challenge Ocado

15

Morrisons deal with Ocado, by shifting online orders to a third party rather than in-store fulfilment,
will reduce the sales densities in its supermarkets, potentially leading to a higher rate of closures
In May 2013, Morrisons announced it would outsource its online activities to Ocado. Morrisons had been late to embrace
the online proposition as noted Tesco, Asda and Sainsbury all launched online ordering in the 1990s and the deal was
described by Morrisons CEO Dalton Philips as taking the companys online activities from a standing start to the fast lane
in the blink of an eye.
The Morrisons deal is the opposite of the strategy undertaken by Waitrose which sold its stake in Ocado and invested to
grow its own online operations independently and will, presumably, exit the Ocado relationship either at the 2017 break
clause stage or at the end of the contract in 2020. The Morrisons deal is also the opposite strategy of the other UK food
retailers, who have also all opted so far to invest and develop their own online operations.
The Morrisons deal also puts Morrisons network of bricks and mortar stores at a potential volume disadvantage, because
none of the growing online orders will be put through the stores using an in-store fulfilment model, in comparison to big
box competitor stores, where in-store online fulfilment orders can represent up to 5% of total store sales. This may lead to
a higher level of store closures at Morrison than would otherwise be the case, as the impact of potentially declining bricks
and mortar customers is felt more directly.

16

2. Sainsburys, facing declining sales densities from being a predominantly big box
retailer, has so far reduced space growth, introduced ancillary services, and
delivered labour and energy productivity gains to drive EBITDAR margin growth

2.1 Sainsburys faces slowing sales densities due to deriving a high proportion of its revenue from big
box stores, as well as slowing food price inflation and high historic big box space expansion

Sainsbury is exposed to slowing sales densities in the big box food retail sector
Figure 2.1.1 In FY2014 Sainsbury derived 88% of its revenue from big box stores

Slowing food price inflation and high historic space growth are also temporary factors set to negatively
impact Sainsburys sales growth outlook
Sainsburys like for like revenue has historic correlation to food price inflation, food price inflation has recently slowed.
Figure 2.1.2 Low food price inflation has contributed to falling like for like sales at Sainsbury

10
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FY2012 FY2013 FY2014
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Sainsbury still derives 88% of its revenue from big
box stores
Sainsbury big box revenue Sainsbury convenience store revenue Sainsbury online revenue
-4.0%
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Sainsburys: like-for-like sales show correlation to
food price inflation
Food price inflation
Sainsburys like-for-like sales (incl. VAT, ex fuel)
17

Sainsburys like for like revenues have also historically undershot inflation after periods of high space growth.
Sainsburysspace growth reached 15 year highs of 6-8% a year 2010-2012, as per Figure 2.1.3 below.

Figure 2.1.3 Sainsburys like for like revenues have undershot inflation following periods of high space growth

Online growth is adding c. 0.7% per annum growth to Sainsburys like for like sales
Sainsburys big box sales densities are somewhat assisted from the growth of in-store fulfilment of online food orders,
representing 5.1% of big box revenues in financial year 2014.
Figure 2.1.4 Online growth is adding c. 0.7% per annum growth to Sainsburys like for like sales

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Space growth
Sainsburys LFLs less food inflation (3 yr average)
Space growth > 6% pa, LFLs underperform
Space growth > 4% pa, LFLs underperform
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Sainsburys: online revenue growth is adding c. 0.7% per
annum to group like for like sales
Online grocery sales
Online growth contribution to group LFL
18

Slowing sales densities are at the core of the big box revenue outlook
The big box model has historically thrived despite decreasing average customer spend as per Figure 2.1.5 below, average
spend per customer declined at Sainsbury from c. 27 in 2000 to 19 in 2014. The declining customer spend has been more
than offset by increased footfall volumes customer transactions per square foot increased from c. 38 per year in 2000 to c.
57 in 2011. However, it is now the slowing levels of footfall which has decreased customer transactions per square foot
from 57 to 55 in the last four years, combined with a continuing lack of revenue growth per customer, which are combining
to give the weaker big box sales density outlook.

Figure 2.1.5 The long term trend of declining average transaction value at big box supermarkets is now compounded by
number of customer transactions per square foot beginning to decline

30
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Sainsburys: declining average transaction value per customer now
compounded by stagnating transaction densities per sq ft
Average customer transaction value
Customer # transactions per sq ft
19

2.2 Sainsburys has responded to slowing big box densities by reducing space growth, introducing
ancillary services, and delivering labour and energy productivity gains all of which have driven
EBITDAR margin growth

Sainsburys has signalled reduced space expansion by lower capex guidance
Figure 2.2.1 Sainsburys capex plans indicate a 15 year low in guided capex as a percentage of revenues

Looking at the capex guidance of the three listed big box retailers combined, the same trends are apparent.

Figure 2.2.2 Tesco, Sainsbury and Morrisons combined capex guidance are also at 15 year low relative to revenues

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Sainsbury space additions to slow
Sainsbury - capex/sales Sainsbury - disposals/sales
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Total Tesco, Sainsbury, Morrison - market share adj capex / sales
Total Tesco, Sainsbury, Morrison - market share adj disposals / sales
Exceptional property divestments by
Morrison post Safeway acquisition
20

Sainsburys has introduced pharmacies, GP surgeries and dentists into its big box stores to help offset
food sales density shrinkage
As at April 2014, Sainsburys operates:
275 in-store pharmacies (a pharmacy in more than 55% of Sainsburys supermarkets).
35 GP surgeries (7% of supermarkets).
24 dental surgeries (5% of supermarkets).
Such services reduce food retail square footage helping to increase sales density in remaining retail footage. Additionally,
services such as these draw additional customers into Sainsburys stores, who may also undertake grocery shopping whilst
carrying out the pharmacy, GP or dental visit.

Figure 2.2.3 Sainsburys has introduced pharmacies, GP surgeries and dentists into its big box format stores

21

2.3 Sainsburys has delivered labour and energy productivity gains

Since 2001, Sainsburys staff productivity has increased, leading to reduced labour costs from 12% of
revenue to 10% of revenue
Figure 2.3.1 Automated checkouts have built on other productivity improvements to more than double customer
transactions per staff hour worked 2000-2014

Figure 2.3.2 Sainsburys employs less staff per square foot today than historically, allowing staff costs to drop from 12% of
revenue in 2001 to 10% of revenue in 2014

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Staff hours worked / sq ft
Wage costs / revenue generated
22

Energy costs have been reduced by 20% since 2008 driven by the installation of solar panels on 210
Sainsburys supermarkets
Sainsbury in 2013 became the operator of the largest multi-array solar panel system in Europe with installations on 210 of
its 490 supermarkets.
Figure 2.3.3 Sainsburys rooftop
installations of solar panels today make it
Europes largest operator of multi-array
solar panels

Using Sainsburys disclosed energy consumption data, electricity costs can be backed out, and as detailed in Figure 2.3.4
below, energy costs at Sainsbury are estimated to have declined by 20% since 2008, from 1.27% to 1.02% of revenue.
Figure 2.3.4 Solar panel installations have reduced Sainsburys estimated electricity costs

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FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
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Sainsburys: solar panel installations have reduced
electricity costs / revenue by 20% since 2008
Sainsbury electricity cost as % of revenue
23

2.4 Sainsburys cost base improvements have driven EBITDAR margin gains

Figure 2.4.1 Sainsburys EBITDAR margins have risen against a backdrop of limited revenue growth

The success of Sainsbury so far in growing margins as a big box retailer contrasts with a more
pessimistic view espoused by Tim Steiner of Ocado
In every one of the UK supermarkets costs are rising faster than inflation in terms of labour, taxes, and energy is rising at
close to inflation. They have basically got increasing costs and decreasing sales. Thats not a recipe for a successful business.
I think were going to see much more significant change than people think.
Tim Steiner, Ocado CEO, in interview with the Telegraph, December 2013

0.0%
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Sainsburys cost base improvements have driven
EBITDAR margin gains
Sainsburys EBITDAR Margin
Staff cost as % of revenue
Sainsbury electricity cost as % of revenue
24

3. Base case forecast for Sainsburys revenue - to marginally undershoot food retail
market growth. Base case Sainsbury margins and cashflow to show stability

3.1 Sainsbury base case revenue forecast convenience, online growth to offset big box decline to
drive total top line growth at 2.0% in 2015 to 3.1% to 2017

Year end April FY2014A FY2015E FY2016E FY2017E Notes
Sainsburys revenue by segment
Supermarkets
Sainsburys 20,968.4 20,926.5 21,031.1 21,241.4 Assume mild outperf ormance of estimated market growth, albeit market
Sainsburys growth -0.2% 0.5% 1.0% growth is downgraded f rom IGD estimates due to weak Q1 trading updates.
Estimated market growth -1.3% 0.0% 0.5% For f inancial year 2015, Q1 trading updates have disappointed, IGD estimates
IGD market growth 1.9% 1.9% 1.9% were published Dec 2013 and likely to be too high.
Convenience stores
Sainsburys 1,850.0 2,127.5 2,425.4 2,740.6 Sainsburys has been growing convenience revenues at 15-20% per annum.
Sainsburys growth 15.0% 14.0% 13.0% Assume mild slowdown but still segment outperf ormance.
Estimated market growth 5.0% 5.0% 5.0%
IGD market growth 5.0% 5.0% 5.0%
Online f ood
Sainsburys 1,081.1 1,259.2 1,466.5 1,708.0 Sainsburys' online growth at 20% per annum has exceeded segment growth.
Sainsburys growth 16.5% 16.5% 16.5% Assume Sainsbury can hold market share as online continues to grow.
Discount f ood
Sainsburys 0.0 76.1 86.5 98.4 Sainsburys Netto JV plans 15 stores by YE2015. Assume 10m revenue per
Sainsburys growth NM 13.7% 13.7% store. Assume sector growth rate post 2015.
Total revenue 23,899.6 24,389.2 25,009.5 25,788.4
Sainsburys growth 2.0% 2.5% 3.1%
Sainsburys vs market 0.0% -0.6% -0.6%
Sainsburys market share 16.8% 16.8% 16.7% 16.6% 20 basis points of market share lost as discounters gain
Estimated total market 142,553.6 145,529.8 150,127.0 155,693.1
IGD estimated total market 142,553.6 148,491.0 154,915.3 161,852.9
25

3.2 Sainsbury base case margin forecast limited gross margin decline moderated by continuing cost
base improvements to drive EBITDAR margin moderation from 8.21% in 2014 to 8.09% in 2017

3.3 Sainsburys free cashflow, post capex but pre interest, tax and dividends base case forecast to
remain above 1bn per annum 2015-2017

Cost base assumptions
Cost of goods sold (implied) -18,813.8 -19,223.6 -19,737.5 -20,378.0
Gross prof it (implied) 5,085.8 5,165.6 5,272.0 5,410.4
Gross margin (implied) 21.3% 21.2% 21.1% 21.0% Assume some gross margin compression as pricing environment intensif ies
Administative costs -444.0 -448.4 -452.9 -457.5 Administrative costs dropped f rom 2013, assume Sainsbury can limit inf lation
Admin costs / sales 1.9% 1.8% 1.8% 1.8% rate to 1% per annum. Company has moved head of f ice divisions to Coventry.
Staf f costs -2,435.0 -2,484.9 -2,548.1 -2,627.4 Continued productivity improvements allow Sainsburys to hold staf f costs at
Staf f costs / sales 10.2% 10.2% 10.2% 10.2% constant ratio relative to revenue.
Electricity costs -243.8 -241.3 -240.0 -240.1 Electricity costs / revenue have reduced by 3% per annum as solar panel
Electricity costs / sales 1.02% 0.99% 0.96% 0.93% installations have been completed, assume continuing reductions possible
EBITDAR 1,963.0 1,991.0 2,030.9 2,085.4
EBITDAR margin 8.21% 8.16% 8.12% 8.09%
EBIT margin 3.8% 3.8% 3.7% 3.7%
Consensus EBIT margin 3.3% 3.2% 3.2%
Cashflow assumptions
EBITDA 1,560.0 1,478.7 1,505.6 1,543.8
Pension contribution -86.0 -86.0 -86.0 -86.0
Prof it on disposals -51.0 -50.0 -50.0 -50.0
Change in working capital -29.0 0.0 0.0 0.0 On average there should be a benef it f rom the change in working capital as
Sainsburys has a negative working capital overall position on its balance sheet.
So it is a conservative assumption to assume zero benef it here.
Operating f ree cashf low 1,394.0 1,342.7 1,369.6 1,407.8
Maintennance capex -333.0 -339.1 -347.7 -358.6
Free cashf low 1,061.0 1,003.6 1,021.9 1,049.2
Expansion capex -583.0 -581.9 -481.3 -481.4
Note: theref ore total capex is -916.0 -921.0 -829.0 -840.0 Reduction in capex in line with company guidance
Total capex / sales 3.8% 3.8% 3.3% 3.3%
Interest -128.0 -118.8 -83.7 -48.1
Free cashf low / interest 8.3 8.5 12.2 21.8
Tax -140.0 -181.9 -192.4 -204.7
Post tax cashf low 210.0 121.1 264.6 314.9
Dividends -320.0 -333.0 -378.0 -390.0
Dividend cover 0.66 0.36 0.70 0.81
Property disposals 335.0 150.0 150.0 150.0 Sainsburys disposes of properties to keep its rented / owned ratio constant
Net cashf low 225.0 -61.9 36.6 74.9
26

A 280m sustainably higher free cashflow at Sainsbury can be achieved by maintaining constant ratios
relating to trade payables, debt to property and maintenance disposals as a proportion of new capex.
These ratios, if maintained at constant levels, would increase post maintenance capex cashflow from the 1.0bn annualised
level in the forecasts to c. 1.30bn annualised as detailed in Figure 3.4.1.
The actions that would need to be taken by management to achieved the increased cashflow would be:
Trade payables maintained at constant 9.9% of sales: If trade payables are maintained at a constant 9.9% of sales,
as per 2007, the cashflow benefit for FY2015E (assuming trade payables were also at 9.9% of sales for FY2014A),
would be 50m.
Debt capacity held at constant ratio to with regard to new property additions: The above forecasts assume c.
850m a year capex investments, but no increased leverage is achieved despite the higher fixed asset base. By
assuming a leverage ratio at a constant 32% of book value of assets, the cashflow benefit for FY2015E (assuming
the same ratio existed in FY2014A), would be 160m
Maintenance disposals adjustment: Sainsbury has a property sale and leaseback program in which it disposes of
property and then leases back such that the ratio of owned to leased property remains constant. As property is
added via maintenance capex, a certain portion of other properties will then be sold and leaseback such that the
ratios remain constant. Assuming this occurs in our forecast cashflows adds a further 70m per annum.
Adding the above three items together increases the operating free cashflow forecast by c. 280m per annum.

Figure 3.3.1 Sainsburys operating free cashflow can be sustainably increased by maintaining constant operating ratios
relating to trade payables, debt to property ratio and maintenance disposals as a proportion of new capex

300.0
400.0
500.0
600.0
700.0
800.0
900.0
1,000.0
1,100.0
1,200.0
1,300.0
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Sainsburys: Operating free cashflow to Realisable free cashflow
27

A decline in like for like sales at Sainsburys has not historically always resulted in a decline in cashflow
The execution at Sainsbury and the cost base improvements undertaken are key to maintaining margins and therefore free
cashflow:
Sainsburys posted negative like for like sales in 2000 of -2.2%, post maintenance capex cashflow held at 700m
Despite 6% like for like sales growth in 2002, post maintenance capex cashflow reached just 550m
Like for like sales dropped to -0.5% 2004-5, post maintenance capex cashflow dropped to 500m
2011-2014 has seen Sainsburys like for like sales slow from 2.3% to 0.2%, whilst post maintenance capex cashflow
has risen from 800m to above 1bn

Figure 3.3.2 Sainsburys post maintenance capex cashflow has not shown a 1:1 relationship with like-for-like sales

-3.0%
-2.0%
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Sainsburys: operating free cashflow has ranged 0.5-
1.2bn through historic periods of negative LFL sales
Free cashflow Sainsburys like-for-like sales (incl. VAT, ex fuel)
28

4. The market value of Sainsburys real estate appears well supported at c. 11bn.
Sainsburys 2014 annual report states a market value for the portfolio of 12bn

4.1 The uplifts achieved on real estate disposals 2009-2014 suggest a 10.8bn valuation for
Sainsburys remaining real estate
In Sainsburys annual report to April 2014, the company guided the market value of its real estate at 12bn, a 52% premium
to the net book value of real estate at 7.9bn and a 24% premium to the book value at cost of real estate at 9.7bn.
Sainsburys property disposal data, however, implies a marginally less flattering value for its real estate. As part of ongoing
sale and leaseback activities, Sainsburys has from 2009-2014 sold an average of 285m of properties per annum (equivalent
to c. 45% of annual capital expenditures). The disposals have achieved valuations of an average of a 33% premium to net
book value, which represents a 10% discount to the market value valuations provided by Sainsbury over the same period.
The data, as detailed in Figure 4.1.1 below, suggest a piecemeal disposal-derived valuation for Sainsburys real estate would
be c. 10% less than the market valuations provided by the company, which may represent more of a portfolio valuation.
In other words, a disposal-based valuation for Sainsburyss real estate for the year to April 2014 would be c. 10.8bn.
Figure 4.1.1 Sainsburys has not quite achieved the same uplift on real estate disposals as its market valuations imply

Figure 4.1.2 Disposal data does, however, over both the long and short term, clearly support a higher value for Sainsburys
real estate than book value

Year to April 2009 2010 2011 2012 2013 2014
Sainsburys' stated market value of real estate has averaged a 44%premium to net book value
Sainsbury real estate at cost 7,454.0 7,927.0 8,460.0 8,918.0 9,422.0 9,652.0
Less: accumulated depreciation 1,206.0 1,309.0 1,398.0 1,468.0 1,591.0 1,774.0
Net book value of Sainsbury real estate 6,248.0 6,618.0 7,062.0 7,450.0 7,831.0 7,878.0
Annual report stated "market value" of real estate 7,500.0 9,800.0 10,500.0 11,200.0 11,500.0 12,000.0
Premium of stated market value to net book value 20% 48% 49% 50% 47% 52%
Sainsburys' profits on disposal of real estate have averaged a 33%premium to net book value
Proceeds from Sainsbury real estate disposals 390.0 139.0 282.0 354.0 205.0 335.0
Book value of real estate disposed 333.0 112.0 174.0 271.0 139.0 283.0
Profit on disposal 57.0 27.0 108.0 83.0 66.0 52.0
Premium of disposal value to net book value 17% 24% 62% 31% 47% 18%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
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Sainsburys profits on disposals support a real
estate value at a premium to book
Stated "market value" of real estate in Sainsbury accounts
Implied value of real estate based on % uplift achieved on property disposals
Book value of real estate
DTZ valued Sainsburys' property portfolio at
7.5bn in 2007 relating to the CVC bid
29

4.2 Modelling a fully-rented Sainsburys with its remaining real estate sold at the 12bn market
value and rent charged at a 4.7% yield, indicates rent payments would be 2.1-2.2x covered
based on pre-rent EBIT and pre-rent free cashflow
Whilst such modelling does not explicitly place a value on Sainsburys real estate, it does provide some sanity-check that the
rent on a 12bn valuation would be serviceable in theory with coverage ratios of 2.1-2.2x as detailed in Figure 4.2.1
below.

Figure 4.2.1 Sainsburys pre-rent EBIT and cashflow would 2.1-2.2x cover the rental payments that would be sought by an
acquirer who paid the 12bn valuation for its property portfolio

FY2014A Notes
Property valuation based on affordability
Property valuation as guided by Sainsbury (m) 12,000.0
Assumed rental yield if owned by third party 4.70% As guided by Sainsbury management
Rent which would be charged to Sainsbury 564.0
Add: existing property rents already paid by Sainsbury 485.0
Less: property rents received by Sainsbury -41.0
Rental burden of f ully rented Sainsbury 1,008.0
P&L af f ordability
Sainsbury EBIT 909.0
Add: real estate depreciation 168.0 Non cash depreciation of real estate should be added back f or af f ordability
Add: rental payments 1,008.0 calculations.
Sainsbury EBITR 2,085.0
Rent cover assuming 12bn valuation 2.07
Cashf low af f ordability
Sainsbury cashf low post maintennance capex 1,191.0
Add: rental payments 1,008.0
Sainsbury pre-rent maintennance cashf low 2,199.0
30

4.3 Sainsburys undisclosed real estate profits 2007-2014 provide more than a 200% uplift to
accounting profits; Sainsbury trades at a discount to listed UK real estate companies

Sainsburys accounting profits are uplifted by more than 200% if we include real estate profits
Due to Sainsburys core business being considered the retailing of food, rather than strategic property ownership, the
increases in market value of the companys property portfolio are not included in its profit and loss statement, as they
would be if the core activity of the company was considered to be real estate. Sainsburys profit and loss statements also
include an annual real estate depreciation charge, despite the fact that well maintained real estate such as that owned by
Sainsbury typically appreciates over time, as its own market value disclosures indicate.
Taking Sainsburys profit and loss statement as disclosed, Sainsburys cumulative profits 2007-2014 sum to 3.56bn.
However, if we add together the real estate depreciation that has been charged to Sainsburys P&L, together with the profit
on upward movement value of real estate as indicated by Sainsburys market value disclosures, an additional profit of
7.53bn, more than 2x the accounting profit, has been achieved over the period.

Figure 4.3.1 Sainsburys real estate profits have been up to 2x accounting profits

Considered as a real estate company, Sainsburys trades at a discount to UK peers
Whilst most UK property companies, as detailed in Figure 4.3.2 below, trade at, or at a slight premium to, their net property
value, Sainsburys trades at just 63% of its net property value assuming its property valuation is the 12bn market value
disclosed in the 2014 annual report.
Figure 4.3.2 Sainsburys trades at just 63% of its net property valuation

Year to April 2007 2008 2009 2010 2011 2012 2013 2014
Sainsburys accounting profits
Accounting net income 227.0 338.0 342.0 462.0 478.0 511.0 588.0 616.0
Sub-total 2007-2014 3,562.0
Sainsburys undisclosed real estate profits
Real estate depreciation charge deducted f rom net income 92.0 89.0 113.0 125.0 138.0 137.0 149.0 168.0
Movement in value of market value of real estate 577.7 103.7 1,337.1 2,300.0 700.0 700.0 300.0 500.0
Total real estate prof its 669.7 192.7 1,450.1 2,425.0 838.0 837.0 449.0 668.0
Sub-total 2007-2014 7,529.6
Total prof its 2007-2014 11,091.6
Uplif t to accounting prof its 211%
Enterprise
value
Real estate
value
EV / Real estate
value
SAINSBURY VS UK REAL ESTATE COS
Sainsburys assuming 12bn real estate value 7,578.7 12,000.0 63%
Sainsburys assuming 11bn real estate value 7,578.7 11,000.0 69%
British Land 10,136.4 10,500.0 97%
Land Securities 11,500.9 11,450.0 100%
Intu Properties 7,838.3 7,624.0 103%
Hammerson 6,576.9 5,900.0 111%
Capital & Counties Properties 2,745.2 2,282.0 120%
31

Relative to its property value, Sainsburys also trades at a discount to other supermarket groups

Figure 4.3.3 Sainsburys equity trades at a larger discount to its property value than other supermarket groups. Note, for
the benefit of comparability, all figures in Figure 4.3.3 are in USD.

All figures US$ Enterprise
value
% op real
estate owned
Real estate
value
EV / Real estate
book value
LTM EBITDAR
margin
Net rental
charge
LTM EBIT
margin
Fwd EBIT
margin
EV /
Revenue
SAINSBURY VS GLOBAL SUPERMARKETS
UK
Tesco 46,781.1 65% 35,349.2 132% 9.1% -1,322.0 4.7% 5.1% 38%
Sainsburys 12,845.2 61% 20,339.0 63% 8.1% -852.5 3.8% 3.6% 33%
Morrison Supermarkets 12,442.5 101% 15,254.2 82% 6.7% 11.9 5.2% 4.5% 42%
Average 7.7% Average 4.4%
Continental Europe
Carref our 12,701.8 47% 16,710.6 76% 3.9% -1,330.2 1.0% 3.2% 12%
Delhaize 8,775.4 51% 5,522.5 159% 7.1% -373.9 3.5% 3.4% 30%
Colruyt 6,741.7 83% 1,722.2 391% 9.0% -24.6 6.3% 5.8% 63%
US, Canada, Australia
Wal-Mart 290,968.4 74% 115,364.0 252% 8.3% -2,800.0 5.9% 5.9% 61%
Costco 49,859.7 86% 15,965.0 312% 4.0% -189.0 2.9% 2.9% 47%
Kroger 36,356.2 57% 11,486.0 317% 5.3% -613.0 2.9% 2.8% 38%
Target 50,149.1 92% 31,378.0 160% 10.5% -182.0 7.4% 5.4% 68%
Woolworths Ltd 45,103.8 12% 3,295.0 1369% 10.8% -1,700.0 6.1% 6.3% 84%
Supervalu 5,100.7 11% 1,497.0 341% 3.6% -129.0 0.8% 2.8% 30%
Whole Foods Market 13,217.2 32% 2,428.0 544% 12.4% -359.0 6.9% 6.8% 102%
Deals / pre-deal lows
Albertsons (Supervalu/Cerberus 2006 deal) 15,900.0 64% 9,900.0 161% 7.0% -385.0 3.2% NA 40%
Saf eway Inc (Cerberus 2014 deal) 7,600.0 59% 7,537.0 101% 5.5% -368.3 1.8% 1.5% 21%
Saf eway Plc (at trough valuation 2003) 7,191.1 89% 10,508.5 68% 6.9% -95.1 4.0% NA 45%
32

5. Loan market data points suggest Sainsbury has access to secured loan finance at
rates of between 250-550 basis points over base

5.1 Morrison Plc has bonds outstanding paying holders between 2.25% to 6.50%
Figure 5.1.1 Morrisons debt structure and rates paid

5.2 Sainsburys secured debt pays 5.41%, unsecured debt 5.8%
Figure 5.2.1 Sainsburys debt structure and rates paid

Sainsburys annual report states that the loans are secured on 125 (2013: 128) supermarket properties, suggesting a
remaining 275 supermarket properties are unencumbered.

M orri son
Gross debt Int erest rat e Spread over base Int erest charge
Bank debt
Bank overdraf t 3.0
Short t erm borrowings 400.0
403.0 2.98% 2.48% 12.0
Bonds
150m St erling bonds 6.50%August 2014 0.0
150m St erling bonds 6.50%August 2014 150.0
200m St erling bonds 6.00%January 2017 201.0
200m St erling bonds 6.12%December 2018 203.0
400m St erling bonds 4.625%December 2023 397.0
400m St erling bonds 3.50%July 2026 390.0
$250m US privat e placement loan not es (USPP) 4.4%November 2026 149.0
EUR700m Euro bond 2.25%June 2020 568.0
Float ing credit f acilit y 1.3%(2013: 1.4%) 572.0
Term loan 0.9% 0.0
2,630.0 3.27% 2.77% 86.0
Book value of propert ies at cost 9,677.0
Loan t o value 31.3%
Sai nsbury
Gross debt Int erest rat e Spread over base Int erest charge
Secured loans
Loan due 2018 956.0
Loan due 2031 855.0
1,811.0 5.41% 4.91% 98.0
Unsecured loans
Bank overdraf t s 13.0
Revolving credit f acilit y 200.0
Bank loan due 2014 69.0
Bank loans due 2015 188.0
Convert ible bond due 2014 189.0
Ot her loans due 2015 24.0
Finance leases 188.0
943.0 5.83% 5.33% 55.0
Market value of propert ies 12,000.0
Loan t o value 23.0%
33

5.3 The BL Sainsbury Ltd securitisation trades at yields to maturity of 3.87% to 4.66%
Figure 5.3.1 The BL (British Land) Sainsbury Joint Venture securitisation bonds outstanding and rates paid

BL Sainsbury securitisations BL Sainsburys BL Sainsburys Loan EBITDA /
Ranking Description Outstanding Coupon Price Yield to maturity Rental income Property value to value Interest
A2 258,000,000 Class A2 4.482 per cent. Bonds due 2030 240.9 4.482% 107.3 3.871% 30.0 1,209.0 19.9% 2.6
M1 83,000,000 Class M1 Floating Rate Bonds due 2030 41.1 0.884% 97.7 1.042% 30.0 1,209.0 23.3% 2.4
B2 240,000,000 Class B2 5.270 per cent. Bonds due 2030 227.8 5.270% 108.9 4.491% 30.0 1,209.0 42.2% 1.2
B3 49,000,000 Class B3 5.578 per cent. Bonds due 2030 49.0 5.578% 110.4 4.660% 30.0 1,209.0 46.2% 1.1
C1 70,000,000 Class C1 Floating Rate Bonds due 2030 1.5 1.404% NM 30.0 1,209.0
D1 53,000,000 Class D1 Floating Rate Bonds due 2030 3.6 2.117% NM 30.0 1,209.0
563.9
34

6. Sainsburys strategy is to focus on achieving growth from its online and
convenience channels
Sainsburys 16.8% UK market share is split as follows:
20% market share in big box/supermarket food retail
5% market share in convenience food retail
16% market share in online food retail
Sainsburys positioning at the premium end looks reasonable in terms of a defence against the discounters growth.
However, given the structural uncertainties facing the food retail sector as online and convenience grow share relative to
the big box sector, it would seem prudent for Sainsbury to re-weight its portfolio to a by expanding its convenience
operations to at least a 16% market share. That way, the group could be more structurally neutral in terms of the
outcomes of share gains of the various market segments in the UK.
In terms of the conclusions being reached by this analysis, perhaps it should be added that non-recourse sale and
leasebacks at Sainsbury on selected big box stores in the core estate can be argued to strengthen, rather than weaken, the
company. Assuming big box stores are selected with the highest perceived risk of structural challenge, then such sale and
leasebacks would not only generate cash, but also provide Sainsburys with a means to exit certain stores should the
structural shift to online and convenience intensify.

35

7. Sainsburys shareholder structure is dominated by Qatar Investment Authority and
the Sainsbury family. Whilst QIAs $170bn portfolio includes leveraged equity, the
Sainsbury family has stated a preference for a strong balance sheet

7.1 Sainsburys share register is dominated by the Qatar Investment Authority (26% of shares) and
Sainsbury family (who own between 10.2% and 26% of shares, depending of the undisclosed
beneficial ownership of selected private client accounts)
Observations relating to the share register, detailed in Figure 7.1.1 on the following page, include:
The Sainsbury family may still control up to 26% of the shares
o Brokers on behalf of high net worth private clients feature heavily in the top 20 shareholders, and
combined control 15.8% of the shares. This, combined with the 10.2% publicly disclosed Sainsbury family
stake, theoretically may take their holding to 26%.
o As a group, private client accounts have increased their ownership of Sainsburys shares from 3.7% in
2008, to 8.7% in 2011, to 15.8% today. The increase in private client disclosures relating to holdings in
Sainsburys shares exactly matches the disclosures from the Sainsbury family reducing holdings, and the
sum of private clients + Sainsbury family disclosures has remained constant at 26%.
o Many of the brokers are Swiss registered.
o If the family have simply switched holdings to private client accounts, possibly for inheritance purposes,
then the family holding is still at 26%. If not, the family holding is at a minimum 10.2%.

Value investment funds, such as Brandes Investment Partners, who historically have held large stakes in UK-listed
retail companies and been instrumental in change of control processes, have limited combined representation of
just 3.2% of the shares held by the top 20 shareholders. Brandes alone owned 9% of Sainsbury in 2007.

Short sellers include Lansdowne Partners (short 1.9% of shares outstanding), Pelham Capital Management (1.1%),
Lone Pine Capital (1.0%), Marshall Wace (0.8%), Odey Asset Management (0.8%) and Eton Park Capital
Management (0.7%).

Figure 7.1.1, detailing Sainsburys share register, follows this page.

36

Figure 7.1.1 Sainsburys share register is dominated by the Qatar Investment Authority (26% of shares) and the Sainsbury
family (who own between 10.2% and 26% of shares, depending of the undisclosed beneficial ownership of selected private
client accounts)

Current Stake Stake
Shareholder % stake 3 years prior 6 years prior Buyer / holder / sellerNotes
Qatar Investment Authority 25.96 25.78 22.31 Holder Government of Qatar Sovereign Wealth Fund. Stated strategy to minimize risk f rom
Qatar's reliance on energy prices. Stake in Sainsbury purchased in 2007 at 575p
Sainsbury f amily
Sainsbury, David J. 4.98 5.00 5.92
Portrait, Judith 2.94 3.93 4.14
Innotech Advisors Ltd 1.90 4.78 5.33 Innotech Advisors is David Sainsbury's charitable vehicle
Sainsbury Family Trust 0.40 3.96 7.04
Total Sainsbury f amily 10.22 17.66 22.43 Holder Family sold down stake f rom16% in at 500p 2007 "to f und charitable activities"
Stakes held by private clients
Schroder & Co, Zurich 8.99 4.91 0.03 Buyer Has increased stake f rom5.5% in last 12 months, average price c. 350p.
Stake is disclosed by Schroder & Co, Zurich (private banking division)
rather than Schroder Investment Management.
Brewin Dolphin Limited 1.57 0.89 0.38 Holder 75% of the stake is disclosed as held on behalf of Brewin Dolphin private client(s)
Majority purchased 2010-2011, 280-380p
Barclays PLC Private Banking 1.23 0.85 0.99 Buyer Disclosed as held by Barclays private clients
Majority purchased over last 2 years, 300-350p
BNPParibas, Private & Investment Banking Investments 0.91 0.47 1.79 Buyer Held on behalf of BNPprivate client(s), has increased stake in 2014
Hargreaves Lansdown Asset Management Limited 0.86 0.23 0.03 Buyer Hargreaves Lansdown private client(s), has increased stake in 2014
Toronto-Dominion Bank, Banking Investments 0.80 0.40 0.15 Buyer TD Direct Investing private client(s), has increased stake 2010-2014
UBS Private Banking 0.71 0.93 0.34 Seller Held by UBS AG Zurich private banking, has reduced stake 2013-14
DZ Bank AG, Asset Management Arm 0.70 0.04 0.00 Buyer DZ Privat Bank, stake held by private client(s), has increased stake in 2014
15.76 8.71 3.71
Private clients + Sainsbury family 25.99 26.37 26.14
Proprietary investors
Norges Bank Investment Management 2.35 0.88 0.74 Holder Stake is held on behalf of the Government of Norway
M1 Beta Capital Limited 1.70 0.00 0.00 Seller M1 is the investment vehicle of Najib Miktai. Lebanese businessman and politician
Miktai is worth $3.4bn according to Forbes. Has reduced stake f rom4% in 2012.
Last sold shares in October 2013, at 400p
Credit Suisse, Inv Banking and Securities 0.69 1.39 0.07 Seller Held by Credit Suisse Securities (Europe) Ltd, has halved stake in last 12 months
4.74 2.27 0.81
Index f unds
Legal & General Investment Management 2.24 3.75 4.78 Holder Legal & General UK Index Fund
The Vanguard Group, Inc. 1.12 0.57 0.45 Holder Held by Vanguard's UK and International Index Funds
State Street Global Advisors, Inc. 0.71 1.13 0.78 Holder Held by State Street's UK and International Index Funds
4.07 5.46 6.01
Value investment f unds
Sanderson Asset Management 1.59 1.45 0.93 Holder International value investment f und, built stake 2008-2010, @ c. 350p
LSV Asset Management 0.94 0.02 0.00 Buyer International value investment f und, has been adding to stake in 2014
Brandes Investment Partners 0.67 2.41 0.82 Buyer International value investment f und, re-built stake in last 12 months, @ c. 300-400p
3.20 3.88 1.75
Total shares held, % of outstanding, top 20 63.95 63.75 57.02
37

7.2 Qatar Investment Authority pursues a diversified investment approach and their $170bn
portfolio includes leveraged investments with firms such as Carlyle. The Sainsbury family by
contrast state a bias for a strong balance sheet, as well as against sale and leasebacks

Qatar Investment Authoritys (QIA) stated strategy is to diversify Qatars finances into new asset
classes with a long term time horizon. QIAs $170bn portfolio includes leveraged investments with
firms such as The Carlyle Group
The chief executive and chairman of the QIA is Ahmad Al Sayed, 38 years old.
The Qatar Investment Authority is an integral part of Qatar's strategy to diversify its finances into new asset classes, so
strengthening and broadening the country's fast-growing economy which is rooted in the natural resources sector. The QIA
fulfills its mission of building this global investment portfolio by pursuing financially sound investments across various asset
classes, industries and geographies. The QIA's ability to take the long view in its investment strategy offers the benefits of
stability to all the stakeholders. QIA website http://www.qia.qa/about.html
QIA is estimated to hold in excess of $170 billion of assets. Fund rankings SWF Institute
Qatar have invested with in leveraged structures with groups such as Carlyle: Carlyles list of investors featured the Qatar
Investment Authority (which invested at least $150m) as well as other local funds in the Gulf. Financial Times, Dec 2009
A well sourced 2013 Financial Times article on the QIA is here: http://www.ft.com/cms/s/2/dc99ef1e-de45-11e2-9b47-
00144feab7de.html%23slide0

The Sainsbury family in 2007 indicated a bias against the sale of freehold assets and against excessive
debt levels. The family also refused to open Sainsburys books to suitors at prices below 600p
Both the Sainsbury family and management oppose selling off Sainsbury freehold assets. Financial Times, July 22, 2007
Lord John Sainsbury, a former chief executive of the retailer and the groups life president, said he opposed the proposed
offer because the amount of debt involved would weaken the company in the long term. I do not, and never have, objected
to any bid in principle, but emphasise I would only support one that I believe would make the business better and stronger,
he said. Sainsburys success has been based on a strong balance sheet and a largely freehold property base. Eroding these
attributes will make the company more vulnerable to competitive pressures which is not in the best long term interests of
the company, its customers, its staff, its shareholders or its pensioners. Financial Times April 12, 2007
Lord David Sainsbury of Turville has made it clear all along that he will not even consider selling his 7.75 per cent stake for
less than 600p. Financial Times, April 10, 2007

38

8. Sainsburys pension deficit has risen to 679m. Pension trustees in 2007 asked
prospective suitors for upfront payments of 1.75bn

8.1 As discount rates have fallen, Sainsburys pension deficit has risen to 679m
Figure 7.1.1 Sainsburys pension deficit has increased to 679m on the back of falling discount rates

Figure 7.1.2 The increase in Sainsburys pension deficit has been driven by the increase in its gross pension liability

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39

8.2 The 2007 bid approaches to Sainsburys revealed the pension trustees power and the Sainsbury
familys support of the pension trustees

Pension trustees in 2007 asked prospective suitors for upfront payments of 1.75bn
Delta Two [] is thought to have offered to inject another 1.46bn into the pension scheme, after originally suggesting
about 1bn, in order to win the support of pension fund trustees. Financial Times, October 28, 2007
It is thought that Delta Two has put forward a cash proposal of about 1bn for the pension fund, but the trustees are asking
for closer to 1.75bn. Financial Times October 8, 2007
The pension issue is not a deal-breaker but it is a difficult issue and it is not easy to resolve unless there is a lot of money put
on the table, a person close to the negotiations said. Financial Times, March 23
rd
2007
The Sainsbury trustees, who include two independent representatives of professional trustee firms, are said to be
contemplating several structures to protect members benefits. Among these is a request to rank the scheme ahead of senior
lenders in the event of insolvency, a level of security that so far has not been sought by other trustees. Under UK law,
pension scheme members rank as unsecured creditors in the event of insolvency. Neither the Sainsbury scheme trustees nor
its advisers, Penfida, would comment. Financial Times, March 23
rd
2007

The Sainsbury family in 2007 supported the position of the pension trustees
The principal Sainsbury family members said in a statement on Monday: We have consistently made clear the principles by
which we would address any offer. Importantly, these include ensuring the pension scheme is properly looked after.
Financial Times October 8, 2007

40

9. A mild level of sale & leaseback and re-leverage at Sainsbury should be supported
by the companys various control groups. Theoretical LBO structure and returns
appear unattractive after pension funding costs

9.1 A mild level of sale & leasebacks and re-leverage would appear the scenario most likely to
achieve support from all of Sainsburys control groups Qatar, Sainsbury family, Pension trustees,
and potential activist shareholders

Figure 9.1.1 A deal on Sainsbury would have to satisfy control groups with varied interests

As detailed in Figure 9.1.1 above, for a deal on Sainsbury to have any credible chance of success, it would have to satisfy the
four main control groups Qatar, Sainsbury family, pension trustees, and potential activist shareholder whose interests
are not fully aligned.

1) Mild sale & leasebacks and re-leverage likely to be accepted by all control groups
Logic for the deal: Whilst the Sainsbury family have spoken out in favour of a strong balance sheet and a
largely freehold base, this does not mean increases in debt and moderate sale and leasebacks would not be
supported by the family, so long as the return to the family, by way of capital return, compensated them for
what they might see as any increase in the risk to Sainsburys business from an increase in its leverage.
Likewise, Qatar is likely to support value-creating leverage. Qatar appears comfortable in leveraged structures
having invested in such transactions with private equity counterparties including The Carlyle Group.
The pension trustees support should also be achieved so long as the increases in leverage are deemed mild
enough not to raise a red flag; there is no reason pension trustees should object to leverage levels appropriate
to allow a reasonable shareholder return.

2) Debt-funded, accelerated acquisition of convenience stores opacity of future returns may lead to lack of support from
an activist shareholder seeking clarity of investment outcomes
Logic for the deal: Various opportunities exist to increase scale in Sainsburys convenience store estate from its
level of 5% market share currently, including purchases from Co-op (who have announced intended disposals),
and an acceleration of open market purchases of sites suitable for convenience store retail.
Qatar, Sainsbury family and pension trustees, all likely to support the deal. Qatar and Sainsbury family as the
deal is simply an acceleration of the companys existing strategy to grow its convenience operations, and
would not necessarily lead to the balance sheet weakening that the Sainsbury family would reject. A lack of
such leverage would also prevent concern from Sainsburys pension fund trustees.
Qatar Sainsbury family Pension trustees Activist shareholder
Mild sale & leasebacks and/or
releverage

Debt-fund acquisition of
convenience stores
?
Qatar & Sainsbury family
conduct LBO
? assuming 2.0bn upf ront payment
Significant sale & leasebacks
and/or releverage
?
41

3) Qatar and Sainsbury family conduct LBO Sainsbury family stance on participating in an LBO unclear; pension fund
trustees would only support if they received large upfront payments into the fund
Logic for the deal: Whilst Qatars 2007 attempt at an LBO of Sainsburys might be argued to indicate their
willingness to consider such a move again, the stance that the Sainsbury family would adopt if they were
offered participation in an LBO is unclear. Publicly, family members have spoken out in favour of a strong
balance sheet. However, the family has also been diluted down significantly from the 85% stake they held in
the company following its 1973 IPO and participating in an LBO would allow them to increase their ownership
percentage.
The deal would require a large upfront payment to the pension fund in comparable magnitude to the 1.75bn
that was requested in 2007.

4) Significant sale and leasebacks and/or releverage Deal likely to be blocked by Sainsbury family and pension fund
trustees
Logic for the deal: On paper, Sainsburys 12bn of real estate could offer security to allow a significant increase
in the companys YE April 2015 net debt of 1.7bn. It is not hard to see that amount of additional debt finance
could even exceed Sainsburys 6.2bn market capitalisation.
Whilst an activist shareholder and Qatar may be willing to embrace such a deal, the Sainsbury family have
however spoken out in favour of a strong balance sheet and the pension trustees in such a leverage scenario
would make demands for upfront payments of similar magnitude to a leveraged buyout scenario.

42

9.2 A mild level of sale & leasebacks and re-leverage at Sainsburys can create shareholder upside of
33%, combined with a higher return on equity post-deal Sainsburys capital structure

Figure 9.2.1 Pre- and post deal financials for sale & leasebacks & re-leverage at Sainsbury to take debt to 2.0x EBITDA

Notes regarding mild sale & leaseback and releverage proposal
Sale and leaseback:
Proposed sale and leasebacks takes Sainsburys real estate ownership down to 51%, still leaving it as a largely
freehold property base food retailer in line with the preference by John Sainsbury to the Financial Times in
April 2007.
Real estate ownership ratio at Sainsburys remains at a premium or equal to Carrefour (47% real estate
owned), Delhaize (51% real estate owned) and Whole Foods Market (32% real estate owned).
Real estate disposal proceeds sum to 1.77bn, assume disposals take place at a 10% discount to market
value of real estate in line with historic disposal realisations.
Real estate sales & leasebacks should be strategically concentrated in most structurally challenged stores
and through vehicles which do not give landlords recourse to Sainsburys Plc similar to the BL Sainsbury joint
venture. Structured like this the sale and leasebacks strengthen Sainsburys Plc from its most structurally weak
big box stores
Capital gains tax on disposals of 165m, net disposal proceeds 1.6bn

FY2014A FY2015E FY2016E FY2017E FY2014A FY2015E FY2016E FY2017E
Revenue 23,949.0 24,389.2 25,009.5 25,788.4 23,949.0 24,389.2 25,009.5 25,788.4
EBITDAR 1,963.0 1,991.0 2,030.9 2,085.4 1,963.0 1,991.0 2,030.9 2,085.4
Rent -503.0 -512.2 -525.3 -541.6 -503.0 -609.7 -625.2 -644.7
Rent / sales 2.1% 2.1% 2.1% 2.1% 2.1% 2.5% 2.5% 2.5%
EBITDA 1,460.0 1,478.7 1,505.6 1,543.8 1,460.0 1,381.2 1,405.7 1,440.7
D&A -551.0 -561.1 -575.4 -593.3 -551.0 -561.1 -575.4 -593.3
EBIT 909.0 917.6 930.2 950.4 909.0 820.1 830.3 847.3
JVs and associates 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0
Interest -139.0 -118.8 -83.7 -48.1 -139.0 -162.0 -164.1 -132.3
Tax -182.0 -181.9 -192.4 -204.7 -182.0 -150.9 -152.7 -163.5
Net income 616.0 644.9 682.2 725.6 616.0 535.1 541.5 579.6
Market value of property assets 12,000.0 12,339.1 12,686.9 13,045.4 12,000.0 10,371.9 10,719.7 11,078.2
Book value of property assets 7,878.0 8,217.1 8,564.9 8,923.4 7,878.0 6,249.9 6,597.7 6,956.2
Net debt 2,375.0 1,673.2 962.9 201.9 2,375.0 2,734.5 2,204.6 1,630.8
Equity metrics
EV/Sales 0.39 0.34 0.30 0.27 0.39 0.31 0.28 0.25
EV/EBITDA 6.41 5.62 5.05 4.43 6.4 5.4 4.9 4.4
P/E 10.1 9.2 8.7 8.1 10.1 7.5 7.4 6.9
Debt metrics
EBITDAR (Int + rent) 3.06 3.16 3.34 3.54 3.06 2.58 2.57 2.68
Net debt / EBITDA 1.63 1.13 0.64 0.13 1.63 1.98 1.57 1.13
EBITDA / Interest 10.5 12.5 18.0 32.1 10.5 8.5 8.6 10.9
Net debt / market value of property 20% 14% 8% 2% 20% 26% 21% 15%
Other
Return on equity 10.3% 10.2% 11.3% 11.1% 10.3% 13.5% 13.1% 13.5%
Pre-deal Post 1.8bn property s&lb, & 2.7bn new debt
funding, 2.25bn capital return
43

Net debt
Immediately post sale and leaseback, Sainsburys has a nil debt position
New loans secured to increase new debt to 2.0x EBITDA, same ratio of debt/EBITDA as YE April 2013
New net debt rises to 2.7bn
EBITDA / interest 8.5x covered at 6% interest rate
Fixed charge cover now 2.6x
Capital return
Capital return to shareholders is 2.25bn, via special dividend or B share scheme
Assume market cap reduction pro-rata with capital return, Sainsburys trades post-deal 7.5x PE
Upside created by deal
Assume post-deal rating for Sainsburys is 10x PE, deal creates value of 33% upside, plus post deal entity return
on equity rises from 10.2% to 13.5%, offering a higher earnings growth compounding rate

44

9.3 An LBO buying out 48% of minorities at 400p, however, appears unattractive, primarily due to
the assumption of a 2.0bn payment required to fund Sainsburys pension scheme

Figure 9.3.1 The returns from an LBO buying out 48% of minorities at a 26% premium look unattractive, primarily due to
the assumption of a 2.0bn payment into Sainsburys underfunded pension scheme

Notes regarding LBO proposal
Deal terms:
Offer made at 400p, a 26% premium to current share price
This is below the 600p level that the Sainsbury family indicated in 2007 they would open the books at, and also
below the 575p levels that Qatar purchased their stake in Sainsbury at in 2007. Therefore, the deal would rely
on the Sainsbury family and Qatar rolling in their stakes to the leveraged entity.
Cost to buy out minorities assume all shareholders ex Qatar and Sainsbury represent 48% of share capital
at 400p - 3.8bn
Sainsbury family stake rises from 26% to 50%, Qatar stake also rises to 50%. The buyout is effectively a 50:50
JV between them
Pension:
Assuming pension funding required is 2.0bn, 15% premium to the 1.75bn funding the pension trustees
asked for in 2007.
Future contributions into pension fund are ceased
FY2014A FY2015E FY2016E FY2017E FY2014A FY2015E FY2016E FY2017E
Revenue 23,949.0 24,389.2 25,009.5 25,788.4 23,949.0 24,389.2 25,009.5 25,788.4
EBITDAR 1,963.0 1,991.0 2,030.9 2,085.4 1,963.0 1,991.0 2,030.9 2,085.4
Rent -503.0 -512.2 -525.3 -541.6 -503.0 -512.2 -525.3 -541.6
Rent / sales 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1% 2.1%
EBITDA 1,460.0 1,478.7 1,505.6 1,543.8 1,460.0 1,478.7 1,505.6 1,543.8
D&A -551.0 -561.1 -575.4 -593.3 -551.0 -561.1 -575.4 -593.3
EBIT 909.0 917.6 930.2 950.4 909.0 917.6 930.2 950.4
JVs and associates 28.0 28.0 28.0 28.0 28.0 28.0 28.0 28.0
Interest -139.0 -118.8 -83.7 -48.1 -139.0 -504.1 -483.6 -455.9
Tax -182.0 -181.9 -192.4 -204.7 -182.0 -97.1 -104.4 -115.0
Net income 616.0 644.9 682.2 725.6 616.0 344.3 370.2 407.6
Market value of property assets 12,000.0 12,339.1 12,686.9 13,045.4 12,000.0 12,339.1 12,686.9 13,045.4
Book value of property assets 7,878.0 8,217.1 8,564.9 8,923.4 7,878.0 8,217.1 8,564.9 8,923.4
Net debt 2,375.0 1,673.2 962.9 201.9 2,375.0 6,909.2 6,512.9 6,073.6
Equity metrics
EV/Sales 0.39 0.34 0.30 0.27 0.39 0.64 0.60 0.57
EV/EBITDA 6.41 5.62 5.05 4.43 6.4 10.5 10.0 9.5
P/E 10.1 9.2 8.7 8.1 10.1 22.9 21.3 19.3
Debt metrics
EBITDAR (Int + rent) 3.06 3.16 3.34 3.54 3.06 1.96 2.01 2.09
Net debt / EBITDA 1.63 1.13 0.64 0.13 1.63 4.67 4.33 3.93
EBITDA / Interest 10.5 12.5 18.0 32.1 10.5 2.9 3.1 3.4
Net debt / market value of property 20% 14% 8% 2% 20% 56% 51% 47%
Other
Return on equity 10.3% 10.2% 11.3% 11.1% 10.3% 5.7% 6.8% 7.2%
Pre-deal Post-deal buying out 48% of minorities at
400p, 2.0bn payment to pension fund
45

Net debt:
Debt rises to 5.0x EBITDA, compares to debt level proposed in 2007 by Delta Three / Qatar of 6.5x EBITDA
Debt / property value rises to 60%
Cash generation:
Post deal suppliers stretched trade payables moved to 10% of sales, generates 590m of cash
Brings post deal net debt down to 4.6x EBITDA, debt / property 57%
LBO partners:
Should an LBO equity partner be required - if not all of the Sainsbury family roll in, or if their stake is not as
high as 26%, then the private equity named by the press in 2007 as working on Sainsbury at various points
included:
o CVC, Kohlberg Kravis Roberts, Blackstone, Texas Pacific Group, Bain Capital, Apollo Management,
Goldman Sachs Private Equity.
Lack of deal attractiveness:
For FY2017 the post-deal entity, at acquisition price, would be priced at 19x PE, a high rating for a company
where investors may still have structural concerns.

46

10. Some conclusions

In a sector undergoing structural shifts, Sainsburys positioning is possibly the strongest of the big four.
With a premium customer perception of its proposition, Sainsbury is more protected against
the growth of the discounters than other big four operators.
Sainsburys has a low exposure to the worst performing big box stores large out of town
stores with more than 80,000 square feet.
Sainsburys has growing online and convenience store businesses.
o Albeit Sainsbury still faces challenges.
Sainsbury has no significant exposure to the growing discount sector.
There is a lack of clarity as to how the structural shifts in big box food retail play out over a
10-20 year view.

Operationally, Sainsburys has executed well.
o It is the only big box food retailer to have gained market share over the last 5 years and grown
margins.
Innovative use of big box space (for example GP surgeries, dentists, and on the rooftops
solar panels).
Increasing staff productivity KPIs.

Base case forecasts show stable margins and cashflow.
o Big box revenue shrinkage offset by convenience and online growth.
o Cost saving benefits to continue.

Sainsburys 6.2bn market capitalisation and 7.9bn EV both appear undemanding relative to a 12bn real
estate valuation and c. 650m of annual net income.
o Income statement accounting understates profitability property profits are excluded.
o 12bn real estate valuation backed up by c. 10.8bn valuation indicated by premiums on disposal,
12bn is portfolio valuation.
Sainsburys also trades at an EV/ real estate value discount to both other supermarket
companies and UK property companies.
o Sainsburys has access to low cost debt finance.

However, Sainsburys pension trustees are likely to prevent highly leveraged structures.
o Pension gross liability is equal to Sainsburys market capitalisation, pension deficit is 679m.
o The Sainsbury family have also indicated a preference for a strong balance sheet.

A deal that would not only create shareholder value but also be theoretically acceptable to the various
Sainsburys control groups, however, is a mild sale & leaseback and re-leverage proposal.
o Such a proposal which would increase debt to 2.0x EBITDA, would offer equity holders 33% upside
assuming a post-deal target PE ratio of 10.0x.
o Selected non-recourse sale and leasebacks can also be argued to strengthen, rather than weaken, the
company to the extent they target real estate were perceived structural challenge is likely to increase.
o Any such plan proposed to the company would likely also require the support of Qatar and Sainsbury
family to gain traction.

47

11. Appendix selected management comments from conference calls

11.1 The food retail market is changing, online, convenience and discounters taking share
The rate of change has taken the industry by surprise
I don't think any of us, I don't think you would have predicted 6 months ago some of the dynamics that are going on in the
industry. So it is clearly volatile in terms of the changes in behaviour and what that's doing to the overall channels. Justin
King, Sainsburys Q1 earnings conference call, June 11, 2014
Online, convenience and discounters are taking share
I think if we look at the structure of the market, it's important that we do touch on and I comment on the wide conversation
that's taking place about the changing structure, the growth of online, the growth of convenience and in the last 12 months,
and a much larger conversation about discounters, too. Much of my view of discounters and the waxing and waning of
discounters over any number of years is on the record. It's very clear that they're in a vibrant phase between the 2 main
German discounters growing in the 20s percent between the 2 of them, but I think it's important that 2 or 3 points are made.
Firstly, this total market is still a growth market and is expected -- these are IGD figures, but ones that I would happily align
us with over the next 5 years too, so the market has grown, the best part of GBP 30 billion in the last 5 years, and they're
predicting similarly, so that's roughly 3 and change percent a year, a bit more than inflation, not a lot of volume growth in
there, but the U.K. population, as you know, is growing of the order of 0.5% to 0.75%. And the big bit of the market remains
groceries and that's expected to grow, too. Albeit if you look at this data and cast forward the central forecast of inflation,
that would represent volume decline within the supermarket sector.
And then, we're seeing strong growth most notably in convenience because in absolute terms, it's by far the biggest other
part of the market growing strongly. As we'll see our convenience business is now 1/3 of the growth in that marketplace.
Online remains relatively small, less than 5% of the market, broadly speaking, if you look at that data, expected to increase
of the order of 60% to 70% over the next 5 years, and difficult, obviously, because of the scale, to see what's going on with
discounters there, but close to doubling at the market share if one casts forward over the next 5 years. But I think important
to be realistic and factual about the shape of the market and where the growth opportunities lie. Justin King, Sainsburys
CEO, May 7, 2014

11.2 Sainsburys accepts Aldis growth has weakened Sainsburys sales densities, however
Sainsburys aims to compete with Aldi by remaining differentiated from them
Sainsburys response when an Aldi opens in an existing Sainsbury store catchment area
Clive Black, Shore Capital: I noticed your sales densities went down over the last year. And I just wondered in terms of
competitor action, whether you've seen a step-up in any switching from yourselves to Aldi, for example, which may have not
been there before.
Justin King: Well, of course, it's increased because there are a lot more Aldi shops. And if you look at the track of their
business over the last 5 years, they've been adding something north of 20% to their space each year. Last year, though, they
added more supermarket space than we did last year. So of course, their impact on our business has stepped up. If an Aldi
opens on the roundabout, which is their strategy, nearest to your store, there will be an impact. One of the things that we've
worked on, though, is how to make the net impact positive because there's lots of things that we do a lot better than they
do. And if they pull people to outside of town, whilst we might sell a little bit less of things, which they have a reputation for
being cheap and cheerful on, there's lots of things they don't do well that we do fabulously well, and we can parasite their
footfall. And we've got a number of good examples where we've managed to do that too, because that's the nature of
competitive markets. But yes, there's a lot more of them, and so they're bigger part of the competitive mix. And that's true
of Lidl as well, of course. May 7, 2014
48

Sainsburys aims to compete with Aldi by remaining differentiated from them
And just to emphasize the point, we are winning the future by being a better us, not being a poor version of them [Aldi]. And
so if we start stripping out ranges, if we start stripping out service, if we start undermining our store standards, we won't be
able to compete with the discounters. We can compete with the discounters by differentiating -- clearly differentiating our
offer. Mike Coupe, Sainsburys CEO-elect, May 7, 2014
Aldis growth is conceded as factor in Sainsburys sales density declines
Dave McCarthy, Evolution Securities: There's no question you are doing best out of the, certainly, the quoted 3, as I prefer to
call them. But can your business -- what's the long-term implications for your business and cost structures if you've got
ongoing declines in the core estate? And you talked about the delta -- and I'm 100% behind you on that, the delta's the
important thing not the absolute sales. But you've got the likes of Aldi who've driven their sales densities up by over 50% in
the last 2 years. The profit delta -- given operational gearing, and profit delta, now massive, is funding big improvements in
quality and funding lower pricing. So you've got that as a dynamic and you've got the dynamic of ongoing underlying
declines in your core estate. Where is that going to take us over the next couple of years?
Justin King: To some extent, I'm going to treat the question as rhetorical, Dave, because I think you've articulated your view
of where that takes us. I think we've many times articulated ours, which is we believe that we demonstrated not just of the
quoted 3, but if you look at the big retailers more widely, consistent levels of outperformance over the long-term, you clearly
-- a core estate with sales density declines is an extra challenge for us but it's one that we think we've addressed better than
most. Of course, a lot of these things depend on the length of time that you take. As far as discounters are concerned, Aldi
massively restructured their business 3 or 4 years ago and changed the focus of where they're investing. They're running a
higher margin business today than they were 5 years ago, focused on a very different format than pure limited line
discounting. You mentioned that they've increased their sales densities by 50% in the last 2 years. They've increased their
stocking points by 100% in the last 2 years, too. So I think there are lots of things going on. You've discussed them at great
length as have we. It's a trading statement today. I think what we've demonstrated is our further outperformance, and it's
been part of a consistent and long-term story for our business. Justin King, Sainsburys CEO, March 18, 2014
Impact of Aldi opening more stores in the South
Frank Walding, Goldman Sachs: It was just really a follow-up to the conversation on the back of Dave's question. And you
mentioned, Justin, that the discounters have changed their business model profoundly, and I suggest that we're going to see
a reasonably big shift from a geographic perspective, certainly, Aldi, over the next couple of years, as they move towards
London in the southeast. So in that context, how have you found now at the better part of a year and the Christmas trading
period, competing against them in, I guess, in Kilburn, specifically, and what were the key learnings from sort of going head-
to-head in the London convenience market?
Justin King: Yes, there's sort of an urban myth in the question, Frank, because if you look at the data, we are as -- we bump
up against the discounters proportionately as much as Tesco do, and have done for as long as we've been looking at that
metric. It's true that Asda and Morrisons proportionately bumped up against them a notch more than that, but actually
we're not underexposed to the discounters and never have been. The specific point about London in the southeast, raises up
a slightly wider question about real estate costs, and one of the reasons they've profoundly changed their business model is
to put their stores where all customers can reach them as opposed to just sticking them where the most hard-pressed of
customers can reach them. But that brings with it incremental costs that meant they've have to adjust their gross margin
model. Of course, by degree, as you move into the southeast, property costs get much more expensive still. So in a way, the
question that you asked is a question for them, which is whether they have a gross margin model that can sustain the
property costs they'll need to incur to operate in the southeast. Now, clearly, what Kilburn is for them in 1 or 2 other
locations too, is to see whether they can find a smaller footprint model that has higher sales density so they can make sense
of maintaining a single price file, and therefore, their national gross margin approach. And that's why I say it's essentially a
question for them because that is yet unproven. But if your question is, what are you going to do to compete with them
when they arrive on your turf? The answer is they already are, and always have been, and we've been competing with them
pretty well, we think. Justin King, Sainsburys CEO, March 18, 2014
49

Big box market share losses are unprecedented; comments on Aldi margin structure
It's clear, the central point of your question, which is that we're losing market share, the big retailers in aggregate to the
smaller players is true. And as I think, as Clive earlier said, that's unprecedented in the history of our industry. I also
commented in the answer to the earlier question, pointed towards the fact that Aldi, in particular, little -- increasingly have
reinvented their businesses to a larger growth margin business model. And they liberated themselves to do that, particularly
in the case of Aldi, with a massive restructuring 3 or 4 years ago. And so I think it's wrong, if you like to characterize it, that
here are these discounters with a fixed gross margin idea, and we're somehow drifting away from it. I think if you were to --
making a general comment, which is the whole industry has had to have either better growth margin or tighter cost control
to cope with a sustained period of underlying top line growth being behind underlying cost growth, that's true for everybody
in the industry. And it comes, therefore, full circle back to relative sales performance. Clearly, the relative sales performance
of the discounters and others means that they have good gearing in their P&Ls at the moment, but I think Aldi recorded a
loss 4 years ago.
So they're coming back from quite a low base. But the ability to spend money effectively, which Mike touched on earlier, in a
world where -- if you look down the schedule of targeted marketing investment, what we're able to do with Nectar data,
combined with our coupon-at-till technology, is by far the most precise investment available to anybody. At the other end of
the spectrum, you've got untargeted branded promotions and all points in between. The key to success, we believe, is
spending more and more of the money you invest in helping customers live well for less in a targeted way. And if you're able
to do that, you don't have to widen gross margins away from the industry, and therefore, reduce the competitiveness of your
underlying offer. And we believe the competitiveness of our underlying offer before we start spending the discretionary
money that's available to us is better than it's ever been, and then we have the benefit of -- the ability to spend that
discretionary money better than others. Justin King, Sainsburys CEO, March 18, 2014

11.3 Sainsburys sees opportunity in convenience, claims industry leading KPIs
Sainsburys positive trends in convenience and online
Channels delivering strongly, continuing their contribution to our growth story. Online and convenience now around 15% of
our sales, double what they were 5 years ago. Convenience grew at 18% to the quarter, and we've now opened our 200th
convenience store in London, 1 of the 27 we opened in the quarter. And online, post the change of our improved web and
mobile platforms, growing at 10% in the quarter. An announcement there that we're moving towards Click & Collect trial
with Transport for London in London. Justin King, Sainsburys CEO, Sainsburys Q1 earnings conference call, June 11, 2014
90% of the UK population have no Sainsbury convenience store within a 10 minute walk
Three quarters of the turnover of your average convenience store comes from within a 10-minute walk, a half-mile
circumference. And basically, 90% of the U.K. population aren't yet that close to a Sainsbury's convenience store. So I'm not
saying we're ever going to get to 100%, or you can have an aspiration to. But there's clearly a load more potential there yet.
Justin King, Sainsburys CEO, May 7, 2014
Sainsburys aims to open 2 new convenience stores a week; claims industry leading sales densities
On the convenience, and I'll hand it to John, we're talking about 2 a week, and I would expect that will be the kind of
guidance we'll give for a good while for the simple reason that kind of everyone is coming to this space, and we're not
prepared to compromise on quality just to be able to say we did 10 more stores than last year. We believe that our average
sales per store are industry-leading. We believe our knowledge of sites and what works and what doesn't is industry-leading
and proprietary. We don't think anybody has quite the level of knowledge. We know, therefore, what to bid for sites. If that
means we lose them because there are other people, we think, overbidding for sites, we'll lose a few. Justin King, Sainsburys
CEO, May 7, 2014

50

11.4 Sainsburys expects online food to grow in mid-teens for as far forward as we can see
John Kershaw, BAML: I suppose there's a 5-year view and there's a 20-year view. I can understand Online isn't going to be
that big on a 5-year view. But arguably, stores on the 20-year view shouldn't be built. So why build 3 whole stores at all on
that basis unless you think Online is only going to reach a certain level of penetration in Grocery?
Justin King: Well, come back to me in 20 years. Give me a figure that you think it's going to be in 20 years' time, and then
we'll discuss it in 20 years. I think where we are at the moment is that Online is between 4% and 5% of the market, growing
strongly in the mid-teens, and we expect it to do that as far forward as we can see. If you take yourself out to 20 on that
basis, Online would still be less than 10% of the market. And as John said, we have 2 of the most vibrant growth businesses
in Online and Convenience. Between them today, they're 12% of our business and likely to make up as they have been in
recent years 30% to 50% of all of the growth in our business. Justin King, Sainsburys CEO, March 18, 2014

11.5 Sainsbury claims a low exposure to the most structurally challenged big box out of town
stores, and to have already written down the asset value of its stores in this category
The area of the market under the most pressure is the very, very large out of town superstore.
Sainsbury claims low exposure to this store type
I would emphasize is we are not invested in the parts of the market which is most under pressure, which is very, very large
out-of-town superstores. They are subject to lots of pressures, not least from the Internet, in non-food product areas. And
secondly, we've got optionality around our store estate. So we will continue to invest in convenience stores, online and shops
which are more in the sweet spot of where customers will be in the future, and we have the ability to move our investments
as the market dynamics change, if they do change. Justin King, Sainsburys Q1 earnings conference call, June 11, 2014
The conversation about large stores is essentially an issue for other food retail operators, not us. Our centre of gravity is in
stores that remain strongly performing and supported by consumers. We've never opened a shop with a greater amount of
space dedicated to non-food than food. We never have and we've been consistent for the last 10 years that we didn't believe
that, that was the right format for Sainsbury's, as a -- for instance of that. Justin King, Sainsburys Q1 earnings conference
call, June 11, 2014
I wanted to touch on this idea of, do we have a space problem? Too many, too big stores? We have very, very little space
above 80,000 square feet. Those are in exceptional locations. Less than 1 million square feet. We're talking about 100,000
square feet stores, so you can kind of do the maths of store numbers for yourselves. And in those stores, still, even our very
biggest stores, food is the dominant feature. So we don't have a single store where food is not more than 50% of the space.
But our center of gravity, 40,000 to 60,000 square feet stores and as you can see, proportionately very much dominated
by food. It would be typically 40,000/20,000, there or thereabouts in the mix. That's the center of gravity of strong
performance still. That's still the sweet spot of supermarket retailing. Those are, we would say, the markets best stores. In
the 40,000-50,000 square feet range, we've now got more square feet than Tesco. Justin King, Sainsburys CEO, May 7, 2014
Sainsburys claims to have written down non-performing out-of-town stores
The other point I'd add is the implication question is that we haven't done anything. Well, at the half year, we announced a
significant write-down on a good number of sites that we -- to use that parlance, we're absolutely exposed to that collective
madness because they were essentially edge-of-town sites, exposed by virtue of the planning environment changing such
that we could no longer be as confident as we once were in the cash flows of those sites, and we took a write-down. So I
think you can see in that announcement at the half year absolutely us clearly demonstrating that we're not blind on this
issue. Justin King, Sainsburys CEO, March 18, 2014

51

Sainsburys claims its store estate is well invested relative to competitor set
We believe that our store estate today is better invested than any of our major grocery competitors. The average length of
time since the store last received an investment is shorter in Sainsbury's than any of our grocery competitors. Justin King,
Sainsburys Q1 earnings conference call, June 11, 2014
We also have the significantly least aged estate of our grocery competitors. Of course, a number of them made
announcements about how they're going to address that in years to come, but we've been keeping that investment going for
many years. Justin King, Sainsburys CEO, May 7, 2014

11.6 Sainsburys guides a reduced big box store capex, capex focus has shifted to convenience
Some competitors are withdrawing from new store capex completely, according to Sainsbury
The industry is opening too much space, opening space faster than the market is growing. [Looking forward] net to the
marketplace in total, the impact of some retailers withdrawing, what we've seen from the headlines, apparently
withdrawing almost completely from new space, will add less pressure clearly. But in truth, that's a town by town question.
Justin King, Sainsburys CEO, May 7, 2014
Sainsburys guides its own reduced capex pipeline, with increasing allocation to new convenience stores
Going forward, reflecting the reduced pipeline [], beyond '14/'15, so '15/'16 and beyond, we expect our CapEx to sales ratio
to drop below 3%. John Rogers, Sainsburys CFO, May 7, 2014
So if we look at '13/'14 versus '14/'15, so this new financial year, you will see that there's a changing shape to the [capex]
spend. So supermarket -- new supermarkets spend is going backwards year-on-year and reflecting the step back in the new
space opening program. You'll see that investments in our store estates, so refurbishments and retail FM clearly stepping on
year-on-year, again, reflecting the investment that we are making in our existing core estate. John Rogers, Sainsburys CFO,
May 7, 2014
I mean, the reality is, as you all know, we have come off quite significantly from the heady heights of a few years back when
we were adding 1.4 million, 1.5 million square feet of space. And as we've said many times in the past, we are comfortable
for the foreseeable future, adding between 900,000 and 1 million square feet per annum. What's really important to
highlight is, of course, of the mix of that space that will change over time. The proportion of convenience space that we add
will increase, and as we've demonstrated, and as shown indeed by the growth figures that we've announced today, the
Convenience sector is doing exceptionally well. Equally, we will also, of course, add extensions. So the majority of that
900,000 to 1 million square feet will come from convenience and extensions, and as we know, extensions predominantly are
non-food and we -- I just told you that the growth in our Non-food sales was at 9%. The like-for-like was 36%. So again, a
fantastically performing part of our business, and one that we're prepared to invest behind. So just as we're very
comfortable with where we are, all the investments that we make on a standalone basis deliver the returns that we're
expecting. And for the foreseeable future, 900,000 to 1 million square feet is where we'll stick. John Rogers, Sainsburys CFO,
March 18, 2014
I think that's an important point to make. In terms of our property pipeline, if you look at our property pipeline today
compared to where it was 3 or 4 years ago, we significantly streamlined that pipeline. We've got the order of 40 or so, 40, 50
schemes in that pipeline. 2, 3 years ago, that number would've almost been double that. So we have significantly
streamlined our pipeline, but that still gives us sufficient space to add 900,000 to 1 million over the foreseeable future, and
we think that's the right thing to do. One thing we've also done in streamlining that pipeline is to make our investments
hurdle returns higher. We've increased so progressively year-on-year-on-year to make it tougher and tougher for stores to
pass that test. Justin King, Sainsburys CEO, March 18, 2014
We plan to open broadly 100-or-so convenience stores per year, 8-or-so supermarkets and 5 or 6 extensions, that would be
broadly where we'd expect to be going forward. Justin King, Sainsburys CEO, May 7, 2014
52

11.7 UK food retailers have become more focused on price; Sainsbury claims this may help
consumers see its proposition as differentiated
Sainsburys concedes the food retail market players are becoming more focused on price
The market has changed significantly over the last 12 months. And indeed, all 3 of our largest competitors have, in their
different ways, adopted a price-based approach to the market. We are very aware of this, and we'll never allow ourselves to
be uncompetitive. But our fundamental trading stance will not change. It will continue to be based around a differentiated
quality proposition. David Tyler, Sainsburys Chairman, May 7, 2014
Sainsburys claims to price match on brands against Adsa
I don't think there's any dispute that the sharpest prices amongst the grocers and the grocer that is looking most carefully at
its relative price position versus the discounters is Asda. [And our] Brand Match compares our pricing versus Asda on brands,
and we continue to win 50%. Sainsburys Q1 earnings conference call, June 11, 2014
Sainsburys argues it may benefit as other retailers move down their price points; Sainsburys offer will
be increasingly differentiated
If everybody chases single mindedly on price, when our understanding is that value is much more complex than that, the gap
we will enjoy will widen, and that is a good thing. Justin King, Sainsburys CEO, May 7, 2014
In terms of the sort of focus in the future, Mike [Coupe, the CEO-elect] should comment, but I would just go back to 2007,
'08. A lot of the conversation that we're hearing today is very similar to conversation back in 2007, '08, the assumption that
a consumer downturn would expose Sainsbury's offer in a unique way because of our quality and values credentials. And yet,
it's turned out that during that consumer downturn, consumers have become more, not less, concerned about these [quality]
issues. And our differentiation on so many dimensions has actually widened as others have focused on, frankly, removing
quality and differentiation from their offer. We've invested in it, and the gap's opened wider, and that's led to our sustained
outperformance over many, many years. Justin King, Sainsburys Q1 earnings conference call, June 11, 2014
On the point about pricing, it gets very heavily emphasized. But if you go back to the key drivers, by far and away, the
biggest coping mechanism that customers have used during the last 5 years is to shop more frequently, buy less when they
shop, throw less away, use shopping lists, take money out of cash point machines to control their expenditures. So the big
dynamic in the market is the move toward little and often shopping and shopping more locally and more conveniently, and
that, by far and away, is the biggest consumer trend. And to the point Justin's already made, in the end, we know -- I mean,
we can put colour on it, we know when our competitors emphasize their supposedly price credentials, our customers will
actually come across the road to us for that very reason, because they want a quality shopping experience. They don't want
things to be taken out of the value, and value is part of the mix. And we will continue to emphasize our points of
differentiation: the quality of the product that we sell; the values that underpin them; the standards that we maintain in our
shops. And again, we won the Grocer 33, which we've talked about a number of times, for service and availability, last night.
All of these things are important to the proposition going forward, and there's no evidence to suggest that customers don't
want that. Mike Coupe, Sainsburys CEO-elect, Sainsburys Q1 earnings conference call, June 11, 2014

11.8 Whilst Sainsburys claims not to be able to predict near term market revenue growth, they
guided 2014/15 LFLs in line with 2013/14 and believe they can continue market outperformance
Sainsburys cannot predict near term market revenue growth
On a three year view, I'm not sure it [revenue growth expectations] is predictable. Mike Coupe, Sainsburys CEO-elect,
Sainsburys Q1 earnings conference call, June 11, 2014

53

Although they have guided 2014/15 LFLs to match 2013/14, and that they will outperform the market
In terms with guidance for '14/'15, it's clearly a challenging market, it's an uncertain market, but we're guiding for '14/'15,
for similar like-for-like sales to that we delivered in '13/'14, and again, the contribution from net new space of around 2% or
so for the year. John Rogers, Sainsburys CFO, May 7, 2014
Just on the guidance [for 201415], What we're very confident of is our ability to absolutely outperform, absolutely
outperform on the sales line. And because we will outperform on -- sorry, relatively outperform on the sales line and
therefore, relatively outperform in terms of the profitability that will flow from that. But anybody that ties themselves to a
specific margin number in the middle of the current uncertainty would come to rue it, if they want to stay true to the second
half of our guidance. And the second half of our guidance has always been, we'll do what we have to do to stay competitive
on price. And the second half of the guidance is still there. Justin King, Sainsburys CEO, May 7, 2014
Sainsburys argues long term food retail volume growth should match population growth
David McCarthy, HSBC: Do you think we have now entered a period where flat to negative like-for-likes are going to be the
norm for the industry over the next several years?
Justin King: In terms of the longer picture, I think I was always clear that I felt that, at some point in time, the market would
return to volume growth because our population is growing. And I think all -- pretty much all economic forecasts point
towards that being a continuing state of affairs. The grocery market, in total, will return to a small underlying volume
growth, reflecting that population growth. Justin King, Sainsburys Q1 earnings conference call, June 11, 2014
On a 25 year view the market will go back to a trend which looks like growth roughly in line with the economy because the
facts are very straightforward, which is there's only so much economising that customers can do. There's only so much waste
that they can save, so you'd have to expect, at some point, the market will go back to an underlying growth based on
population growth, which is, broadly speaking, the volume growth plus inflation. Whether that happens in 3 years' time, 5
years' time, next year or 10 years' time, I think that is pretty unpredictable as we stand today. Mike Coupe, Sainsburys Q1
earnings conference call, June 11, 2014
In terms with guidance for '14/'15, it's clearly a challenging market, it's an uncertain market, but we're guiding for '14/'15,
for similar like-for-like sales to that we delivered in '13/'14, and again, the contribution from net new space of around 2% or
so for the year. John Rogers, Sainsburys CFO, May 7, 2014
Just on the guidance [for 201415], What we're very confident of is our ability to absolutely outperform, absolutely
outperform on the sales line. And because we will outperform on -- sorry, relatively outperform on the sales line and
therefore, relatively outperform in terms of the profitability that will flow from that. But anybody that ties themselves to a
specific margin number in the middle of the current uncertainty would come to rue it, if they want to stay true to the second
half of our guidance. And the second half of our guidance has always been, we'll do what we have to do to stay competitive
on price. And the second half of the guidance is still there. Justin King, Sainsburys CEO, May 7, 2014

11.9 On the reductions to Sainsburys cost base, margin outlook
Sainsburys claims high payback from solar panel installations
You'll notice that before, we're the biggest multi-site operator of photovoltaic, the vast majority of work that we've done in
this area. We have an internal project. It's a significant part of that expanding wedge of the CapEx that John talked to
earlier. It has some of the best paybacks of any projects that we do, often right up there with convenience stores in terms of
the returns that we achieve. Justin King, Sainsburys CEO, May 7, 2014

54

Sainsburys says EBITDAR margin growth has come from cost base savings
James Tracey, Redburn Partners: Can you explain the big increase in EBITDAR margin that we've seen? I think it's plus 18
basis points, the biggest increase in the past 5 years, yet the like-for-like sales growth is slower than in the past 5 years. So
how do you solve that?
In relation to the EBITDAR growth, I think the place you need to look to is the operating cost savings that we've delivered
year-on-year, again a step-up in what we expected, the GBP 120 million of savings. Again, that's across the board of things
like our real-time supply chain initiative, which has helped us reduce our waste in stores. It's our energy saving initiatives. It's
our investment in our depot picking systems that have improved our pick accuracy and reduced shrinkage in our stores. It's
through a number of these different initiatives that we've delivered these cost savings, all of which have helped translate
into a growing EBITDAR margin. John Rogers, Sainsburys CFO, May 7, 2014
We believe that Great Place to Work is a cashable point of difference, too. The productivity that we achieve from engaged
and motivated colleagues marks us out versus our grocery competition, we would argue. Justin King, Sainsburys CEO, May 7,
2014
Sainsburys say no reason why cost base savings will not continue going forward
In relation to cost savings, I won't say anything on this call today other than what we've already said, other than to highlight
the fact that we've had a great track record of delivering cost savings over the last 5 years, and there's no reason to see why
we can't continue that track record. John Rogers, Sainsburys CFO, March 18, 2014

11.10 Sainsburys says it owns 61% of its properties, long term target is 60-65%. Current property
valuation is based a 4.7% yield
Coming on now to space and property value. Property value has increased to GBP 12 billion from GBP 11.5 billion the same
time last year, driven by an improvement in yields. But of course, that's partly offset by the sale and leasebacks and then
added to based on the new stores that we've built for this year. But net-net, an increase of GBP 0.5 billion, mainly explained
away by that improvement in the yield. The freehold/leasehold mix coming out at 61%, again, in line with the longer-term
guidance that we give of a range between 60% and 65%. John Rogers, Sainsburys CFO, May 7, 2014
On the yield, on the GBP 12 billion valuation, that's 4.7%. So that's -- previously, it was about 4.95%, so a dip of about 25
bps, 27 bps or so, which has led to the increase base in the property value. John Rogers, Sainsburys CFO, May 7, 2014

11.11 Sainsburys Tu clothing brand has grown revenues from zero to 750m in 10 years
And probably the thing we're most proud of is, celebrating its 10th year this year, Tu clothing, at GBP 750 million, from a
standing start in 10 years. The #7 volume brand in the U.K. We just -- you will have seen -- Gok has done -- Roger, I think, 12
collections now. So -- and we just signed to do another 12. It's been fantastic for us in terms of broadening the appeal of the
brand. Justin King, Sainsburys CEO, May 7, 2014

11.12 Sainsburys pension fund is now closed to new members and also to future accrual
The closure of the DB scheme to future accrual is quite a challenging activity, and we would argue, quite a major result for
management. This significantly derisks the balance sheet going forward, and indeed, you see that reflected in the guidance
because, of course, going forwards for '14/'15, for this year, this financial year, we have no further Defined Benefit service
cost, reflecting the fact that the scheme is now closed to future accrual. And then, of course, there's an element of that,
that's being replaced by defined contribution costs, but those are clearly a lot more predictable than they would be within a
Defined Benefit scheme. John Rogers, Sainsburys CFO, May 7, 2014
55

11.13 Mike Coupe says his strategy will be consistent with that conducted by Justin King
We have a consistent strategy
John Kershaw, Exane: . Just a point of clarification, Mike, do you sign off on what's been said today? Or do you reserve the
right in 6 months' time to say, "Justin was a load of nonsense and here is what I'm going to do?"
To what we've said already, we have a consistent strategy. I've been part of that consistent strategy, and we've executed it
over the last 10 years. And I would argue that one of the great strengths of this business is being very clear about what it is
that we're trying to do. Having said that, if -- I don't anticipate the 5 segments of the strategy diagram changing. But as has
been the case throughout the last 10 years, there are times when we move the slider up a little bit on some things and
sometimes when we might move the sliders down on some things. And take convenience as an example, 3 or 4 years ago,
we were talking about 50 convenience stores a year rather than 100 convenience stores a year. This year, we're talking
about refurbishing more of our convenience stores as we're getting through the life cycle. So as you might expect, at some
point in time, we may move the sliders up and down a little bit. Mike Coupe, Sainsburys CEO-elect, May 7, 2014
Justin King adds that the management team at Sainsbury is the best in the industry, he will remain a
shareholder
As you know, I'm retaining a very large shareholding as part of my severance. That's because I have a lot of confidence in the
future of the business, and nothing would make me more proud than seeing this business go from strength to strength after
I leave. Because it would prove, which is what I've always asserted, which is the best retail team in the industry is assembled
here. Justin King, Sainsburys CEO, May 7, 2014

56

12. Appendix selected financial extracts

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014
Breakdown of st ores by size - UK
Over 55k sq f t sales area 16 15 20 24 34 45 64 81 94 101
40-55k sq f t sales area 142 116 124 130 130 125 124 123 123 127
25-40k sq f t sales area 176 177 167 161 153 156 155 152 147 146
15-25k sq f t sales area 79 92 98 100 108 115 113 115 118 116
under 15k sq f t sales area 314 352 379 408 367 431 478 541 624 713
727 752 788 823 792 872 934 1,012 1,106 1,203
Cust omer KPIs - UK biz
Cust omer # t ransact ions per week 14,500,000 16,000,000 16,250,000 16,500,000 18,000,000 19,250,000 21,000,000 22,000,000 23,000,000 23,590,000
Cust omer # t ransact ions per sq f t 50.63 54.86 53.77 52.99 56.04 56.39 57.15 56.22 56.24 55.36
Cust omer # t ransact ions / st af f hours worked 3.72 4.16 4.25 4.18 4.62 4.95 5.29 5.40 5.48 5.51
Average cust omer t ransact ion value 20.16 19.30 20.30 20.79 20.20 19.94 19.32 19.49 19.48 19.52
Average st af f hourly wage 8.65 8.96 8.99 9.54 9.90 10.25 10.26 10.25 10.62 10.94
Av cust omer t ransact ion value / st af f hrly wage 2.33 2.15 2.26 2.18 2.04 1.95 1.88 1.90 1.83 1.78
Revenue per hour worked 75.0 80.3 86.3 87.0 93.4 98.6 102.2 105.2 106.7 107.6
Wage cost s / revenue generat ed 11.5% 11.2% 10.4% 11.0% 10.6% 10.4% 10.0% 9.7% 10.0% 10.2%
Food price inf lat ion 1.5% -0.4% 5.0% 5.9% 8.5% 1.7% 5.2% 4.7% 3.5% 2.0%
Growt h in cust omer t rans. / sq f t 2.9% 8.3% -2.0% -1.4% 5.7% 0.6% 1.3% -1.6% 0.0% -1.6%
Sainsburys like-f or-like sales (incl. VAT, ex f uel) -0.4% 3.7% 5.9% 3.9% 4.5% 4.3% 2.3% 2.1% 1.8% 0.2%
Net new space (excl. ext ensions) 1.4% 1.9% 0.2% 2.4% 2.6% 2.4% 2.5% 2.5%
Tot al sales growt h 7.3% 5.8% 4.7% 6.7% 4.9% 4.5% 4.3% 2.7%
Sainsburys LFLs less f ood inf lat ion (3 yr average) -0.4% 0.1% 1.0% 1.0% -1.7% -1.1% -1.4% -1.0% -2.4% -2.0%
Market share 14.7% 14.8% 14.8% 15.9% 16.1% 16.8%
Tot al sales space (sq f t ) - UK 14,891,000 15,166,000 15,715,000 16,191,000 16,703,000 17,750,000 19,108,000 20,347,000 21,265,000 22,160,000
Space growt h 0.61% 1.85% 3.62% 3.03% 3.16% 6.27% 7.65% 6.48% 4.51% 4.21%
Supermarket s
Revenue 14,048.5 14,842.4 15,849.7 16,483.6 17,476.1 18,449.2 19,325.6 20,194.0 20,762.7 20,968.4
Number of supermarket s 490 496 502 537 557 572 582 592
Number of t ransact ions per week (m) 17.4
Number of supermarket s w/ pharmacies 275
Number of supermarket s w/ NHS surgeries 35
Number of supermarket s w/ dent al surgeries 24
Supermarket sales space (sq f t ) 15,092,356 15,495,000 15,974,000 16,909,000 18,199,000 19,320,000 20,056,000 20,744,000
Sales / sq f t per week 19.44
Convenience st ores
Convenience st ore revenue 880.5 942.5 856.8 989.8 1,113.9 1,300.0 1,575.0 1,850.0
Number of st ores 298 319 290 335 377 440 523 611
Number of t ransact ions per week (m) 6.0
Implied revenue per st ore 3.03
Convenience sales space (sq f t ) 613,485 696,000 729,000 841,000 909,000 1,027,000 1,209,000 1,416,000
Sales / sq f t per week 25.12
Online
Online grocery sales 437.5 525.0 662.5 800.0 965.3 1,081.1
Online growt h cont ribut ion t o group LFL 0.44% 0.65% 0.62% 0.71% 0.48%
Deliveries per week 190,000
Ocado revenue / delivery 114.4
Implied Sainsbury online revenue 1,130.6
Own brand penet rat ion
Sainsburys 50.7%
Tot al grocery market 47.3%
Sainsburys bank
Act ive cust omer account s (m) 1.6
Ot her KPIs
Sales / sq f t per week 17.99 18.40 19.30 19.69 20.01 20.42 20.04 19.47 19.27 18.93
St af f cost / sq f t 117.72 118.22 113.59 120.87 119.92 116.90 110.90 106.80 109.10 109.88
St af f hours worked / sq f t 13.60 13.19 12.64 12.67 12.12 11.40 10.81 10.42 10.27 10.04
Hours worked ef f iciency gains -3.0% 3.0% 4.2% -0.2% 4.3% 5.9% 5.2% 3.6% 1.4% 2.2%
Implied value of real est at e based on %uplif t achieved on propert y disposals 5,767.3 5,481.4 6,059.1 6,162.9 7,317.5 8,213.4 11,445.3 9,731.7 11,549.3 9,325.5
St at ed " market value" of real est at e in Sainsbury account s 7,500.0 7,500.0 9,800.0 10,500.0 11,200.0 11,500.0 12,000.0
Book value of real est at e 5,312.0 5,448.0 5,659.0 5,945.0 6,248.0 6,618.0 7,062.0 7,450.0 7,831.0 7,878.0
Average disposal t o book 17% 24% 62% 31% 47% 18%
Average st at ed market value t o book 20% 48% 49% 50% 47% 52%
Revenue / employee 0.156 0.167 0.180 0.181 0.194 0.205 0.213 0.219 0.222 0.224
Sainsburys bank
Tot al income 239.0 229.0
Underlying operat ing prof it 59.0 53.0
Recognised as a JV 22.0 18.0
Consolidat ed as a subsidiary 6.0
Impact on Group underlying operat ing prof it 22.0 24.0
Net int erest margin 2.7% 3.1%
Bad debt as a %of lending 1.3% 1.1%
Tier one capit al rat io 12.6% 13.6%
57

Sainsburys P&L statements

FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
UK revenue 15,202.0 16,061.0 17,151.0 17,837.0 18,911.0 19,964.0 21,102.0 22,294.0 23,303.0 23,949.0
Tot al revenue 15, 2 0 2 . 0 16 , 0 6 1. 0 17, 151. 0 17, 8 3 7. 0 18 , 9 11. 0 19 , 9 6 4 . 0 2 1, 10 2 . 0 2 2 , 2 9 4 . 0 2 3 , 3 0 3 . 0 2 3 , 9 4 9 . 0 2 4 , 3 8 9 . 2 2 5, 0 0 9 . 5 2 5, 78 8 . 4
Average 5.2%, 2.5% -11.3% 5.7% 6.8% 4.0% 6.0% 5.6% 5.7% 5.6% 4.5% 2.8% 1.8% 2.5% 3.1%
Average 5.9%, 6.5% -9.7% 17.4% 6.8% 3.7% 5.5% 2.1% 5.5% 5.5% 4.3% 2.5% 13.8% 2.5% 3.1%
Cost of goods sold -14,544.0 -14,994.0 -15,979.0 -16,835.0 -17,875.0 -18,882.0 -19,942.0 -21,083.0 -22,026.0 -22,562.0
Gross prof i t 6 58 . 0 1, 0 6 7. 0 1, 172 . 0 1, 0 0 2 . 0 1, 0 3 6 . 0 1, 0 8 2 . 0 1, 16 0 . 0 1, 2 11. 0 1, 2 77. 0 1, 3 8 7. 0
Gross margin 4.3% 6.6% 6.8% 5.6% 5.5% 5.4% 5.5% 5.4% 5.5% 5.8%
Administ rat ive expenses -830.0 -839.0 -669.0 -502.0 -420.0 -399.0 -462.0 -444.0
Ot her income 21.0 1.0 17.0 30.0 57.0 27.0 67.0 66.0
EBI TDAR margi n pre st af f cost s 18.4% 18.2% 17.5% 18.5% 18.8% 17.8% 17.6% 17.5% 18.0% 18.4%
Tot al st af f cost s
St af f cost - 1, 753 . 0 - 1, 79 3 . 0 - 1, 78 5. 0 - 1, 9 57. 0 - 2 , 0 0 3 . 0 - 2 , 0 75. 0 - 2 , 119 . 0 - 2 , 173 . 0 - 2 , 3 2 0 . 0 - 2 , 4 3 5. 0
St af f cost as %of sales 11.5% 11.2% 10.4% 11.0% 10.6% 10.4% 10.0% 9.7% 10.0% 10.2%
Average # FTE employees 97,400 96,200 95,500 98,600 97,300 97,300 99,300 101,900 105,000 107,000
Wages / employee 17,998 18,638 18,691 19,848 20,586 21,326 21,339 21,325 22,095 22,757
Wage growt h 2.23% 3.56% 0.28% 6.19% 3.72% 3.59% 0.06% -0.07% 3.61% 3.00%
UK st af f cost s
St af f cost as %of revenue
as %of sales
Average # FTE employees
Wages / employee
Wage growt h
St at ed EBITDAR margin 7.79% 7.81% 7.80% 7.84% 8.05%
Elect ricit y
GHG emissions CO2 (m) 1,354.4
GHG / KwH 1.8 1.8 1.8 1.8 1.8 1.8 1.8
KwHused 2,706.1 2,650.0 2,600.0 2,572.0 2,500.0 2,450.0 2,437.9
Elect ricit y price / KwH() 0.08 0.09 0.09 0.09 0.09 0.10 0.10
Sainsbury elect ricit y cost as %of revenue -226.6 -228.6 -231.0 -235.4 -235.6 -237.9 -243.8
as %of revenue 1.27% 1.21% 1.16% 1.12% 1.06% 1.02% 1.02% 80.1%
FCC 3.13 3.04 3.06 3.16
EBI TDAR 1, 0 4 8 . 0 1, 13 1. 0 1, 2 2 5. 0 1, 3 4 0 . 0 1, 551. 0 1, 4 71. 0 1, 6 0 0 . 0 1, 73 8 . 0 1, 8 6 3 . 0 1, 9 6 3 . 0 1, 9 9 1. 0 2 , 0 3 0 . 9 2 , 0 8 5. 4
Sainsburys EBITDAR Margin 6.89% 7.04% 7.14% 7.51% 8.20% 7.37% 7.58% 7.80% 7.99% 8.20% 8.00% 7.900% 7.800%
Rent s - land and buildings -269.0 -262.0 -287.0 -304.0 -344.0 -388.0 -405.0 -426.0 -457.0 -485.0
Rent s / sales 1.77% 1.63% 1.67% 1.70% 1.82% 1.94% 1.92% 1.91% 1.96% 2.03%
Rent s / EBITDAR 25.67% 23.17% 23.43% 22.69% 22.18% 26.38% 25.31% 24.51% 24.53% 24.71%
Rent s - ot her leases -21.0 -31.0 -45.0 -51.0 -52.0 -54.0 -57.0 -55.0 -55.0 -59.0
Rent s - rent al payment s received 32.0 24.0 30.0 35.0 39.0 37.0 33.0 29.0 34.0 41.0
0.21% 0.15% 0.17% 0.20% 0.21% 0.19% 0.16% 0.13% 0.15% 0.17%
Rent s payable -258.0 -269.0 -302.0 -320.0 -357.0 -405.0 -429.0 -452.0 -478.0 -503.0 -512.2 -525.3 -541.6
EBI TDA 79 0 . 0 8 6 2 . 0 9 2 3 . 0 1, 0 2 0 . 0 1, 19 4 . 0 1, 0 6 6 . 0 1, 171. 0 1, 2 8 6 . 0 1, 3 8 5. 0 1, 4 6 0 . 0 1, 4 78 . 7 1, 50 5. 6 1, 54 3 . 8
EBITDA / share 0.45 0.51 0.54 0.58 0.68 0.57 0.61 0.67 0.71 0.74
Av grwt h 10.2%, 1.9% -32.2% 9.1% 7.1% 10.5% 17.1% -10.7% 9.8% 9.8% 7.7% 5.4% 1.3% 1.8% 2.5%
EBITDA Margin 5.2% 5.4% 5.4% 5.7% 6.3% 5.3% 5.5% 5.8% 5.9% 6.1% 6.1% 6.0% 6.0%
Depreciat ion -439.0 -449.0 -479.0 -463.0 -453.0 -466.0 -468.0 -486.0 -504.0 -536.0
Amort isat ion -26.0 -21.0 -21.0 -18.0 -15.0 -13.0 -14.0 -13.0 -13.0 -15.0
D&A -465.0 -470.0 -500.0 -481.0 -468.0 -479.0 -482.0 -499.0 -517.0 -551.0 -561.1 -575.4 -593.3
EBI T 3 2 5. 0 3 9 2 . 0 4 2 3 . 0 53 9 . 0 72 6 . 0 58 7. 0 6 8 9 . 0 78 7. 0 8 6 8 . 0 9 0 9 . 0 9 17. 6 9 3 0 . 2 9 50 . 4
EBIT Margin 2.1% 2.4% 2.5% 3.0% 3.8% 2.9% 3.3% 3.5% 3.7% 3.8% 3.8% 3.7% 3.7%
Finance income 44.0 30.0 64.0 83.0 52.0 33.0 19.0 20.0
Finance cost s -132.0 -155.0 -107.0 -132.0 -148.0 -148.0 -153.0 -159.0
Net int erest -88.0 -125.0 -43.0 -49.0 -96.0 -115.0 -84.0 -103.0 -134.0 -139.0 -118.8 -83.7 -48.1
Int erest rat e 6.1% 8.8% 3.2% 3.3% 5.5% 7.2% 4.4% 5.1% 5.0% 5.9% 5.0% 5.0% 5.0%
Income f romJV and associat es 1.0 0.0 0.0 -2.0 -111.0 138.0 60.0 28.0 24.0 28.0 28.0 28.0 28.0
Underl yi ng PBT 2 3 8 . 0 2 6 7. 0 3 8 0 . 0 4 8 8 . 0 519 . 0 6 10 . 0 6 6 5. 0 712 . 0 758 . 0 79 8 . 0 8 2 6 . 8 8 74 . 6 9 3 0 . 3
Taxat ion 51.0 -46.0 -153.0 -150.0 -177.0 -148.0 -187.0 -201.0 -170.0 -182.0 -181.9 -192.4 -204.7
Tax Rat e -21.4% 17.2% 40.3% 30.7% 34.1% 24.3% 28.1% 28.2% 22.4% 22.8% 22.0% 22.0% 22.0%
Minorit ies 4.0 -6.0 -1.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net I ncome 2 8 9 . 0 2 2 1. 0 2 2 7. 0 3 3 8 . 0 3 4 2 . 0 4 6 2 . 0 4 78 . 0 511. 0 58 8 . 0 6 16 . 0 6 4 4 . 9 6 8 2 . 2 72 5. 6
Real est at e appreci at i on prof i t s 577. 7 10 3 . 7 1, 3 3 7. 1 2 , 3 0 0 . 0 70 0 . 0 70 0 . 0 3 0 0 . 0 50 0 . 0
Net income growt h -37.7% -23.5% 2.7% 48.9% 1.2% 35.1% 3.5% 6.9% 15.1% 4.8% 4.7% 5.8% 6.4%
Net margin 1.9% 1.4% 1.3% 1.9% 1.8% 2.3% 2.3% 2.3% 2.5% 2.6% 2.6% 2.7% 2.8%
IQ_EPS_EST EPS 0 . 16 0 . 13 0 . 13 0 . 19 0 . 19 0 . 2 5 0 . 2 5 0 . 2 6 0 . 3 0 0 . 3 1 0 . 3 3 0 . 3 5 0 . 3 7
EPS growt h -32.0% -20.6% 1.1% 44.9% 1.4% 27.2% 0.9% 6.4% 14.0% 3.7% 4.7% 5.8% 6.4%
Except ionals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
Dividend current DPS -0.08 -0.08 -0.10 -0.12 -0.13 -0.14 -0.15 -0.16 -0.17 -0.17 -0.17 0.00 0.00
Payout Rat io 47.4% 61.3% 73.9% 62.7% 68.1% 57.6% 60.7% 60.8% 55.3% 55.3% 0.0% 0.0% 0.0%
Div yield 2.5% 2.0% 1.8% 3.7% 4.1% 3.8% 5.0% 4.7% 4.6% 5.5% 5.5% 0.0% 0.0%
58

Sainsburys Balance Sheets

Balance Sheet FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
Goodwill
Ot her int angibles 203.0 191.0 175.0 165.0 160.0 144.0 151.0 160.0 171.0 286.0
Invest ment s in JVs and associat es 110.0 10.0 98.0 148.0 288.0 449.0 502.0 566.0 532.0 404.0
Available f or sale f inancial asset s 87.0 190.0 137.0 106.0 97.0 150.0 176.0 178.0 189.0 255.0
Ot her receivables 50.0 55.0 45.0 36.0 36.0 38.0 38.0 26.0
Amount s due f romSainsburys bank cust omers 2,558.0 3,361.0 2,575.0
Derivat ive f inancial inst rument s 90.0 63.0 81.0 106.0 47.0 28.0
Land and buildings at cost 6,234.0 6,418.0 6,719.0 7,068.0 7,454.0 7,927.0 8,460.0 8,918.0 9,422.0 9,652.0
Accumulat ed depreciat ion -922.0 -970.0 -1,060.0 -1,123.0 -1,206.0 -1,309.0 -1,398.0 -1,468.0 -1,591.0 -1,774.0
Book value of real est at e 5,312.0 5,448.0 5,659.0 5,945.0 6,248.0 6,618.0 7,062.0 7,450.0 7,831.0 7,878.0
Fit t ings & equipment 1,764.0 1,612.0 1,517.0 1,479.0 1,573.0 1,585.0 1,722.0 1,879.0 1,973.0 2,002.0
Tot al f ixed asset s 7,076.0 7,060.0 7,176.0 7,424.0 7,821.0 8,203.0 8,784.0 9,329.0 9,804.0 9,880.0
Ot her 55.0 25.0 611.0 21.0 56.0 13.0 104.0 56.0
Tot al f i xed asset s 10 , 0 3 4 . 0 10 , 8 6 7. 0 7, 6 6 1. 0 8 , 50 9 . 0 8 , 52 2 . 0 9 , 10 1. 0 9 , 74 3 . 0 10 , 3 77. 0 10 , 8 8 5. 0 13 , 510 . 0 13 , 2 8 8 . 0 13 , 0 6 0 . 3 12 , 8 2 5. 6
Invent ories 559.0 576.0 590.0 681.0 689.0 702.0 812.0 938.0 987.0 1,005.0 138.5 142.0 146.4
as %sales 3.7% 3.6% 3.4% 3.8% 3.6% 3.5% 3.8% 4.2% 4.2% 4.2% 0.6% 0.6% 0.6%
Receivables 319.0 276.0 197.0 206.0 195.0 215.0 343.0 286.0 306.0 433.0 138.5 142.0 146.4
%sales 2.1% 1.7% 1.1% 1.2% 1.0% 1.1% 1.6% 1.3% 1.3% 1.8% 0.6% 0.6% 0.6%
Ot her current asset s 0.0 0.0 0.0
Invest ment s 0.0 0.0 0.0
Breakdown of cash
Cash in hand and bank balances 706.0 1,028.0 1,128.0 719.0 599.0 834.0 501.0 739.0 115.0 409.0 1,110.8 1,821.1 2,582.1
Money market f unds 402.0 656.0
Treasury bills 527.0
Cash & equivalent s 706.0 1,028.0 1,128.0 719.0 599.0 834.0 501.0 739.0 517.0 1,592.0 1,110.8 1,821.1 2,582.1
Current asset s 1, 58 4 . 0 1, 8 8 0 . 0 1, 9 15. 0 1, 6 0 6 . 0 1, 4 8 3 . 0 1, 751. 0 1, 6 56 . 0 1, 9 6 3 . 0 1, 8 10 . 0 3 , 0 3 0 . 0 1, 3 8 7. 8 2 , 10 5. 1 2 , 8 75. 0
Secured loans:
Loan due 2018 1,087.0 1,069.0 1,039.0 956.0
Loan due 2031 870.0 874.0 868.0 855.0
Unsecured loans:
Bank overdraf t s 1.0 0.0 13.0 13.0
Revolving credit f acilit y 0.0 200.0
Bank loan due 2012 50.0 50.0
Bank loan due 2014 0.0 25.0 25.0 69.0
Bank loans due 2015 172.0 253.0 291.0 188.0
Bank loans due 2016 0.0 43.0 43.0 42.0
Bank loans due 2017 0.0 108.0 111.0 60.0
Bank loans due 2018 23.0 0.0
Convert ible bond due 2014 176.0 179.0 184.0 189.0
Ot her loans due 2015 23.0 25.0 24.0
Finance lease obligat ions 57.0 143.0 160.0 188.0
(Debt ) 2,147.0 2,443.0 2,463.0 2,202.0 2,331.0 2,430.0 2,413.0 2,767.0 2,782.0 2,784.0 2,784.0 2,784.0 2,784.0
Breakdown of payables 536.2
Trade payables 1,393.0 1,419.0 1,706.0 1,703.0 1,728.0 1,782.0 1,836.0 1,903.0 1,908.0 1,846.0
as %sales 9.2% 8.8% 9.9% 9.5% 9.1% 8.9% 8.7% 8.5% 8.2% 7.7%
Ot her payables 700.0 675.0 561.0 577.0 760.0 684.0 881.0 974.0 991.0 1,050.0
as %sales 4.6% 4.2% 3.3% 3.2% 4.0% 3.4% 4.2% 4.4% 4.3% 4.4%
(Tot al payables) 2,093.0 2,094.0 2,267.0 2,280.0 2,488.0 2,466.0 2,717.0 2,877.0 2,899.0 2,896.0 692.5 710.1 732.2
as %sales 13.8% 13.0% 13.2% 12.8% 13.2% 12.4% 12.9% 12.9% 12.4% 12.1% 2.8% 2.8% 2.8%
(Pension provisions) 536.0 658.0 103.0 0.0 309.0 421.0 340.0 471.0 632.0 737.0 737.0 737.0 737.0
(Amount s due t o Sainsbury' s Bank cust omers) 1,790.0 2,178.0 3,547.0
(Ot her liabilit ies) 244.0 291.0 394.0 698.0 529.0 572.0 505.0 596.0 544.0 571.0 4,884.4 4,884.4 4,884.4
( Tot al Li abi l i t i es) 6 , 8 10 . 0 7, 6 6 4 . 0 5, 2 2 7. 0 5, 18 0 . 0 5, 6 57. 0 5, 8 8 9 . 0 5, 9 75. 0 6 , 711. 0 6 , 8 57. 0 10 , 53 5. 0 9 , 0 9 7. 9 9 , 115. 5 9 , 13 7. 6
Minorit ies 0.0 0.0 0.0 0.0 1.0 2.0
Sharehol ders Funds 4 , 0 2 7. 0 3 , 8 8 6 . 0 4 , 3 4 9 . 0 4 , 9 3 6 . 0 4 , 3 76 . 0 4 , 9 6 6 . 0 5, 4 2 4 . 0 5, 6 2 9 . 0 5, 8 3 7. 0 6 , 0 0 3 . 0 6 , 3 14 . 9 6 , 0 4 9 . 9 6 , 56 3 . 0
8.3% Growt h in NAV+div -3.2% 0.0% 15.5% 17.6% -6.9% 19.0% 14.6% 9.0% 9.2% 8.3%
Balance t est 4,808.0 5,083.0 4,349.0 4,935.0 4,348.0 4,963.0 5,424.0 5,629.0 5,837.0 6,003.0 5,577.9 6,049.9 6,563.0
Net book value adj market val propert ies 4,482.3 3,919.4 4,749.1 5,153.9 5,628.0 8,148.0 8,862.0 9,379.0 9,506.0 10,125.0
12.8% Growt h in NAV+div -7.6% -9.4% 24.7% 12.3% 13.4% 49.1% 12.1% 9.0% 4.6% 9.9%
Net debt 1, 4 4 1. 0 1, 4 15. 0 1, 3 3 5. 0 1, 4 8 3 . 0 1, 73 2 . 0 1, 59 6 . 0 1, 9 12 . 0 2 , 0 2 8 . 0 2 , 6 6 7. 0 2 , 3 75. 0 1, 6 73 . 2 9 6 2 . 9 2 0 1. 9
59

Sainsburys Cash Flow statements

Cashf low FY2005 FY2006 FY2007 FY2008 FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 FY2015E FY2016E FY2017E
EBI TDA 79 0 . 0 8 6 2 . 0 9 2 3 . 0 1, 0 2 0 . 0 1, 19 4 . 0 1, 0 6 6 . 0 1, 171. 0 1, 2 8 6 . 0 1, 3 9 9 . 0 1, 56 0 . 0 1, 4 78 . 7 1, 50 5. 6 1, 54 3 . 8
(Gain) loss f romsale of asset s -7.0 -29.0
Ot her non cash -193.0 -163.0 97.0 -9.0 -53.0 123.0
Non-cash acquisit ion adjust ment s -10.0 1.0 295.0 39.0 -19.0
Sainsburys bank imparment losses 2.0
Prof it on disposal of propert ies -57.0 -27.0 -108.0 -82.0 -67.0 -51.0 -50.0 -50.0 -50.0
Impairment of asset s 93.0
Nect ar VAT recovery -14.0
Foreign exchange dif f erences 6.0 -2.0 -10.0 -6.0 5.0 -6.0 6.0
Share-based payment s expense 8.0 23.0 38.0 53.0 40.0 42.0 35.0 27.0 33.0 33.0
Breakdown of ret irement benef it expenses
Service charge (included in P&L) 59.0 34.0
Scheme expenses 7.0 7.0
Cash cont ribut ions -137.0 -127.0
Tot al ret irement benef it expenses -75.0 -85.0 -49.0 -74.0 -71.0 -86.0 -86.0 -86.0 -86.0
as %of P&L t ax # DIV/ 0! -50.0% -21.2% 41.8% 106.7% 50.3% 106.8% 151.9% 342.9% 314.6% 100.0% 100.0% 100.0%
Breakdown of working capit al movement
Invent ories 38.0 -17.0 -12.0 -94.0 -8.0 -13.0 -110.0 -126.0 -57.0 -19.0
Receivables 17.0 7.0 -50.0 -26.0 23.0 1.0 -64.0 0.0 -34.0 13.0
Payables 275.0 83.0 314.0 96.0 148.0 101.0 105.0 182.0 0.0 -23.0
Sainsburys bank - due f romcust omers -423.0 -805.0 188.0 87.0 -118.0
Sainsburys bank - due t o cust omers 286.0 819.0 -198.0 0.0 6.0
Provisions 169.0 -28.0 -459.0 11.0 4.0 3.0 -9.0 -3.0 -22.0 2.0
Change in Working Capit al 362.0 59.0 -217.0 -13.0 167.0 92.0 -78.0 53.0 -26.0 -139.0
Operat i ng f ree cashf l ow 6 0 5. 0 72 2 . 0 1, 0 4 7. 0 1, 0 3 3 . 0 1, 0 3 9 . 0 1, 114 . 0 1, 3 4 9 . 0 1, 19 0 . 0 1, 2 9 4 . 0 1, 52 4 . 0 1, 3 4 2 . 7 1, 3 6 9 . 6 1, 4 0 7. 8
Breakdown of core ret ail capex
New st ore development -244.0 -308.0 -547.0 -599.0 -593.0 -418.0
Ext ensions and ref urbishment s -368.0 -424.0 -470.0 -478.0 -271.0 -274.0
Ot her - including supply chain and IT -57.0 -118.0 -121.0 -163.0 -176.0 -196.0
Tot al: " core ret ail capex" -669.0 -850.0 -886.0 -1,138.0 -1,240.0 -1,040.0 -888.0
Acquisit ion of f reehold and t rading propert ies -64.0 -168.0 17.0 25.0 37.0 41.0
Proceeds f rompropert y t ransact ions -106.0 -219.0 -275.0 -303.0 -202.0 -301.0
Maint ennance capex -234.3 -181.2 -241.0 -330.0 -318.8 -341.9 -356.0 -402.0 -311.5 -333.0 -339.1 -347.7 -358.6
Capex / Depreciat ion 50.4% 38.5% 48.2% 68.6% 68.1% 71.4% 73.9% 80.6% 60.3% 60.4% 133.0% 133.0% 133.0%
Tot al capex / Sales 4.7% 3.4% 4.5% 5.5% 5.1% 5.2% 5.4% 5.5% 4.6% 3.8% 3.8% 3.3% 3.3%
M capex / t ot al capex 33.0% 33.0% 31.0% 33.9% 33.0% 33.0% 31.3% 32.8% 29.2% 36.4%
Free cashf l ow 50 7. 7 54 0 . 8 8 0 6 . 0 70 3 . 0 72 0 . 2 772 . 1 9 9 3 . 0 78 8 . 0 9 8 2 . 5 1, 19 1. 0 1, 0 0 3 . 6 1, 0 2 1. 9 1, 0 4 9 . 2
Op FcF / sales 3.3% 3.4% 4.7% 3.9% 3.8% 3.9% 4.7% 3.5% 4.2% 5.0%
as %of EV 7.3% 6.5% 7.7% 9.6% 9.7% 8.9% 12.8% 9.1% 10.0% 13.8%
as %market value of propert ies 8.8% 9.9% 13.3% 11.4% 9.6% 7.9% 9.5% 7.0% 8.5% 9.9%
Expansion capex 16.8% -475.7 -367.8 -537.0 -643.0 -647.2 -694.1 -780.0 -825.0 -755.5 -583.0 -581.9 -481.3 -481.4
Int erest -75.0 -153.0 -80.0 -94.0 -115.0 -93.0 -107.0 -124.0 -124.0 -128.0 -118.8 -83.7 -48.1
Free cashf low / int erest 6.8 3.5 10.1 7.5 6.3 8.3 9.3 6.4 7.9 9.3 8.5 12.2 21.8
Except ional / Ext raordinary It ems -158.0
Tax -71.0 3.0 9.0 -64.0 -160.0 -89.0 -158.0 -82.0 -144.0 -140.0 -181.9 -192.4 -204.7
Dividends -367.0 -131.0 -140.0 -178.0 -218.0 -241.0 -269.0 -285.0 -308.0 -320.0 -333.0 -378.0 -390.0
Dividend cover -0.31 0.18 1.41 -0.55 -0.93 -0.43 -0.19 -0.85 -0.13 1.06
Dividend cover ex expansion capex 0.99 2.98 5.25 3.06 2.04 2.45 2.71 2.04 2.32 2.88
Divest ment s
Sale (purchase) of real est at e propert ies 266.0 164.0 106.0 198.0 390.0 139.0 282.0 354.0 205.0 335.0 150.0 150.0 150.0
as %of revenue 1.7% 1.0% 0.6% 1.1% 2.1% 0.7% 1.3% 1.6% 0.9% 1.4%
Prof it on disposal of propert ies 21.0 1.0 7.0 7.0 57.0 27.0 108.0 83.0 66.0 52.0
%uplif t t o book value 8.6% 0.6% 7.1% 3.7% 17.1% 24.1% 62.1% 30.6% 47.5% 18.4%
St at ed market val props vs book 20.0% 48.1% 48.7% 50.3% 46.9% 52.3%
Ot her invest ment act ivit ies -22.0 -3.0 -7.0 -17.0 -9.0 -51.0 -2.0 2.0 -29.0
266.0 142.0 103.0 191.0 373.0 130.0 231.0 352.0 207.0 306.0 150.0 150.0 150.0
Acquisit ions
Tot al acquisit ions or disposals 1,004.0 1.0 -20.0 -38.0 -299.0 -12.0 -16.0 -26.0 -21.0 1,016.0
Share issuance (repurchases)
IQ_COMMON_ISSUED 5.0 22.0 81.0 43.0 15.0 250.0 17.0 14.0 17.0 19.0
IQ_COMMON_REP -549.0 -9.0
-544.0 13.0 81.0 43.0 15.0 250.0 17.0 14.0 17.0 19.0 0.0 0.0 0.0
Change i n Net Debt 1, 153 . 7 4 71. 8 53 3 . 0 6 14 . 0 6 4 3 . 2 8 9 8 . 1 771. 0 772 . 0 72 7. 5 1, 78 7. 0 70 1. 8 710 . 2 76 1. 0

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Assessment of suitability for structures allowing increased leverage

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