Annual report and financial statements 2009
Report tools
Financial review
The Group’s results for 2008/09 have been strong once again, building on long term growth and strong cash flow generation.
Cash generated by our operations continue to fund capital expenditure, reduce the pension deficit and reward our shareholders by surplus capital returns and dividends.
The Operating review of the year in the Chief Executive’s review provides commentary on the performance of the Group over the past year. The volatility in the financial markets impacted the economy as a whole and we are pleased that our results remained strong during this time. We have improved operating cash flows during the year and continue to have a strong balance sheet supported by long term financing.
Underlying earnings
Underlying earnings is a measure we use to assess normal underlying business performance and trends. The Group’s earnings are adjusted to remove highly volatile or one-off costs. A reconciliation of underlying earnings is provided in note 1 of the Group financial statements.
Underlying earnings before tax increased by £73m to £636m, driven primarily by the strong like-for-like sales performance. The Chief Executive’s review contains further information on turnover, customer numbers and retail space.
Savings from Phase 2 of the Optimisation Plan have helped to mitigate input price inflation pressures and energy cost increases.
Earnings per share (EPS)
Underlying earnings per share is the EPS measure we use to remove the potentially volatile impact of property gains and net pension interest income and consequently underlying EPS provides a better measure of the normal underlying business.
Basic underlying earnings per share increased from 14.38p to 16.67p.
The share buyback contributed 0.14p (6%) to the increase (see below) but the primary reason was the year-on-year underlying profit growth.
Summary cash flow
| 2009 £m |
2008 £m |
|
|---|---|---|
| Cash generated from operations* | 1,064 | 856 |
| Interest and tax | (145) | (127) |
| Capital expenditure | (678) | (402) |
| Disposal and divestment proceeds | 22 | 94 |
| Pension deficit funding | (100) | (100) |
| Share buyback and issues | (143) | 17 |
| Dividend | (131) | (108) |
| Long term cash on deposit movement | 74 | (74) |
| Financing | 246 | (269) |
| Net cash inflow/(outflow) | 209 | (113) |
Net debt |
642 | 543 |
* Before pension deficit funding.
Cash generated from operations
Cash from operating activities increased by £208m (24%) reflecting the strong profit generation of the Group from increased turnover and good profit conversion, combined with cost control throughout the business and improved working capital management.
Interest and tax
Interest received fell £21m from last year as the continuing fall in bank interest rates during the year adversely impacted our interest receivable on cash on deposit.
Interest paid remained at £70m for the year. The revolving credit facility was utilised for the first time in October 2008, resulting in a small increase in floating-rate bank interest payable. Interest paid to bondholders is at fixed rates, and this cost reduced by £8m this year following the maturity of a £250m bond in August 2007.
Corporation tax payable in the year was £104m. This cash outflow represented 50% of the tax bill for the year to 3 February 2008, and 50% of the tax for the year to 1 February 2009, as well as repayments received for prior years.
The effective rate of tax for the year was 30% which is 2% above the prevailing corporate tax rate of 28%. The higher rate is mainly a result of non-qualifying depreciation and expenses where the Group is unable to obtain tax deductions.
The principal objective of the in-house tax department continues to be to pay the appropriate level of tax at the right time. We actively engage with the UK tax authorities and aim to be transparent in all of our activities. The Group is predominantly UK-based, operates a simple business model, and does not engage in sophisticated tax planning structures.
Capital expenditure
Capital expenditure cash outflow was £678m, an increase from £402m last year, reflecting additional focus on growing the estate and supporting the Optimisation Plan as well as taking advantage of opportunities arising from the weakening of the commercial property market.
Normal planned capital expenditure
We opened nine new stores and extended a further 18 stores, as well as a number of projects strengthening the retail estate and the supply chain.
Optimisation Plan investment
The rebranding programme was completed throughout the estate, at an average cost per store of £0.5m. A new abattoir was developed and opened in the year, and a vegetable packhouse extended in order to increase capacity. A Group-wide programme to replace our IT systems entered the design phase and we began work on our new distribution centre in the South East of England. Total Optimisation Plan investment in the year was £182m.
Unplanned investments
During the year, we took advantage of the weakness of the commercial property market by acquiring the freehold of four stores that were previously leaseholds, as well as the freehold of our planned new distribution centre at Sittingbourne in Kent. The total cost of these investments in the year was £120m. As a result, the proportion of freehold to leasehold properties in the estate grew to 95%, and we regard this as a key strength of the Group’s balance sheet.