Annual report and financial statements 2011/12. Making great food affordable. Wm Morrison Supermarkets PLC

Transcription

1 Annual report and financial statements /12 Making great food affordable Wm Morrison Supermarkets PLC

2 Business and strategy review Wm Morrison Supermarkets PLC Introduction What matters to us About us We are the UK s fourth largest food retailer by sales, with an annual turnover in excess of 17bn. We have 475 stores across Britain, ranging in size from 3,000 to over 40,000 square feet. Over 11 million customers visit our stores each week, served by more than 131,000 employees. Our business We are proud of what makes us different a distinctive offer to customers centred around fresh food, craft skills and food production through our manufacturing business; the way we lead and support our colleagues; and our unique heritage. It is our vision to be Different and Better than Ever, being different means building on these advantages; and being better than ever is about improving the way we do business. Chief Executive s business and strategy review page 4 Financial performance Group turnover 17.7bn up 7 % Like-for-like sales (ex-fuel, ex-vat) 1.8 % Profit before tax 947m up 8 % Basic earnings per share 26.7p up 11 % Net debt 1,471m Total dividend per share 10.7p up 11 % Note: Throughout the Directors report and business review (1) Unless otherwise stated, /12 refers to the 52 week period ended 29 January and 2010/11 refers to the 52 week period ended 30 January. and refer to calendar years. (2) Underlying profit is defined as profit before one off costs and credits, property transactions and IAS19 pension interest, as reconciled in note 1 of the Group financial statements. Our strategy We have developed a strategy based on our view of how the market will evolve, what will be most appealing to our customers and how we make best use of our internal capabilities. Our strategy is based on six convictions (outlined on page 7), and we have a clearly defined set of initiatives that will deliver our strategy grouped by our objectives of driving topline, increasing efficiency and capturing growth. Our strategic objectives page 12 Our financial performance Our financial performance in /12 was strong in what remains a challenging environment for the consumer. We continued to invest in the long term growth of the business and to deliver increasing returns to shareholders, whilst maintaining a strong balance sheet. The business is well placed to deliver sustainable long term growth. Group Finance Director s financial review page 8

3 Annual report and financial statements /12 1 What s in our report Features Directors report and business review Sir Ian Gibson We are committed to making food shopping fresh, friendly and affordable. Page 2 Dalton Philips A clear strategy is in place that is delivering our objectives. Page 4 Introduction 2 Chairman s statement Business and strategy review 4 Chief Executive s business and strategy review 8 Group Finance Director s financial review 12 Our strategic objectives Performance review 26 Key performance indicators 28 Risks and uncertainties 30 Corporate responsibility 33 Our people Richard Pennycook Our strong financial performance positions us well for sustainable long term growth. Page 8 Johanna Waterous A strong performance culture, long term shareholder value and competitive positioning remain key principles. Page 46 Governance 36 Board of Directors and Management Board 40 Corporate governance report 46 Directors remuneration report 56 General information 59 Statement of Directors responsibilities Also see... Corporate responsibility review /12 Investor relations website Annual review /12 Financial statements 60 Group financial statements 60 Independent auditor s report 61 Consolidated statement of comprehensive income 62 Consolidated balance sheet 63 Consolidated cash flow statement 64 Consolidated statement of changes in equity 65 Group accounting policies 70 Notes to the Group financial statements 95 Company financial statements 95 Company balance sheet 96 Company accounting policies 99 Notes to the Company financial statements Investor information 108 Five year summary of results 109 Supplementary information 110 Investor relations and financial calendar

4 2 Business and strategy review Wm Morrison Supermarkets PLC Chairman s statement Introduction from the Chairman Sir Ian Gibson Chairman See our report visit: Group highlights Underlying profit before tax 935m Underlying earnings per share 25.6p Final dividend per share 7.53p Profit share pool for colleagues 49m Raised for Save the Children charity 2.3m Against the backdrop of a very challenging environment for the consumer, where value, freshness and quality are key, I am pleased to report another year of good progress for Morrisons. Record numbers of customers visited our stores, demonstrating that Morrisons unique offer is in tune with the needs of consumers in these uncertain times. The delivery of good earnings growth and the resultant increase in the dividend demonstrates resilience of our business model in a tough economic environment.

5 Annual report and financial statements /12 3 At the start of the year, we outlined a range of initiatives to grow our sales profitability, make our business more efficient and develop further growth opportunities that would deliver enhanced value to shareholders. The management team has made good progress in all these areas and we are on track to deliver our vision to make Morrisons Different and Better than Ever. Results Profit before tax was 947m, an increase of 73m (8%) when compared with 874m last year. Underlying profit before tax, which we regard as the true measure of business performance, was up 8% to 935m. Statutory basic earnings per share increased by 11% over the previous year to 26.7p, with underlying basic earnings per share up by 11% to 25.6p. Our policy is to increase the dividend in line with underlying earnings growth subject to a minimum increase of 10% in each of the three years to 2013/14. In line with this policy, the Board is therefore recommending a final dividend of 7.53p per share, to bring the total dividend for the year to 10.7p, an increase of 11% on 2010/11. The dividend is covered 2.4 times by underlying earnings. Cash flow from operations of 1,264m was up by 123m (11%), when compared to the previous year. Capital expenditure and investments of 901m was 306m higher than the previous year. This was the result of a planned acceleration in our store opening programme, the addition of a new regional distribution centre at Willow Green, Bridgwater, and investments to support our expansion ambitions for online shopping and vertical integration. We expect capital expenditure to be higher in /13 as we continue to invest for future growth. 368m was invested into our equity retirement programme, and we are on track to meet our objective of returning 1bn to shareholders over the two years to March 2013, in addition to normal dividends. These investments, together with an increased dividend payment, resulted in a rise in net debt to 1,471m (2010/11: 817m), to leave gearing at 27%. At this level it remains low for the sector. At the year end the Group had undrawn, committed facilities of 725m and a credit rating of A3 from Moody s. This is a strong investment grade which is only held by two other European retailers. Community and the environment Our customers expect us to trade responsibly, and we are committed to managing resources carefully, maintaining ethical standards and working with the communities in which we operate. During the year, we have continued to undertake research projects through the Morrisons Farming Programme, have been enthusiastic supporters of the Government s Public Health Responsibility Deal and have made good progress towards our long term energy reduction targets. Our Let s Grow programme, now in its fifth year, continues to help school children throughout the UK to get out of the classroom and learn about the food cycle first hand. It is a source of pride that our colleagues and customers always go out of their way to support our charitable activities, and I am delighted that Save the Children was selected by our colleagues, for the second successive year, as our charity partner. Specifically, we have helped fund its award-winning Families and Schools Together (FAST) programme across the UK, which is designed to give the most disadvantaged children a chance of a better future. With an array of fundraising activities, we have raised 2.3m for FAST this year, successfully funding 24 programmes, as well as Save the Children s emergency appeals in Japan and East Africa. Industry recognition Morrisons commitment to providing customers with an outstanding shopping experience and making it a great place to work for colleagues has again been recognised with numerous industry awards. These included nine The Grocer Own Label Food and Drink Awards, Fresh Produce Retailer of The Year (multiple category) at the Retail Industry Awards and Employer of the Year from both Retail Week and The Grocer Gold Awards. Our colleagues These awards are testimony to the passion and hard work of our 131,000 colleagues, who are making Morrisons Different and Better than Ever for our customers every day. I am delighted that our growth during the year will provide a profit share pool for them of 49m, an increase of 8% over last year. We continue to invest in training and skills. Our award-winning Morrisons Academy provides specialist training to help colleagues develop new skills or work towards a nationally recognised qualification such as QCF. Over 100,000 colleagues were successfully accredited during the year and, at the time of rising youth unemployment, I am pleased that 40,000 of our colleagues are aged 16 to 24. On behalf of the Board, I want to express our thanks to every one of our colleagues for their dedication, professionalism and service throughout the year. We are committed to making food shopping fresh, friendly and affordable Business and strategy review Performance review Governance Financial statements Investor information It underpins our unique promise to every single household in the UK the best service and the freshest food for less.

6 4 Business and strategy review Wm Morrison Supermarkets PLC Chief Executive s business and strategy review Dalton Philips Chief Executive Our strategic objectives Page 12 How our KPIs link to our strategy Page 26 See our report visit: Operational highlights Customer numbers up 0.4m per week Market share 12.8 %* Stores opened (including one replacement) 37 Gross profit 1,217m up 6 % Average basket spend This has been Morrisons best year yet, with another good financial performance and growth ahead of the market. Customers were having a tough time, but we responded with a new M savers brand for budget conscious shoppers, promotions that customers understood, and industry leading service. We know that will be tough, and we will be working hard to deliver even better value for our customers. At the same time, we have ambitious plans for the long term development of the business, through new supermarkets, convenience stores and the development of our multi-channel capabilities. *Source: Kantar Worldpanel Source: ONS/Economic & Fiscal Outlook, OBR, November

7 Annual report and financial statements /12 5 Turnover analysis Like-for-like stores Other sales /12 Total 2010/11 Total In-store () 13, ,436 12,937 Fuel () 4, ,039 3,426 Other sales () Total turnover (ex-vat) () 17, ,663 16,479 In-store sales Sales per square foot ( ) Customer numbers per week (m) Customer spend ( ) Business and strategy review /12 was another good year for Morrisons. Against the backdrop of a difficult environment for the consumer, our unique fresh, quality and value offer made Morrisons a natural destination and more customers visited our stores than ever before. We continued to improve our financial performance whilst investing for future growth. Turnover growth Total turnover was 17.7bn, an increase of 1.2bn (7%). Our store sales (excluding fuel) grew by 3.9% to 13.4bn, with a record 11.4m customers coming into our stores each week. Sales from new stores contributed 2.1% of our total growth. Like-for-like sales grew by 1.8%, customer numbers were up by 1.3% and average basket spend up 0.6%. Whilst sales growth was strongest in London and the South East, we were pleased with our sales performance in all regions of the country. For the second year in a row, consumers were faced with increases in the price of oil, exacerbated by ongoing Sterling weaknesses. With unleaded prices at the pump up by 15.4p per litre and diesel increasing by 18.5p, motorists were paying an average of 15% more per litre at the pump than they did last year. The demand for fuel is relatively inelastic and, whilst motorists continue to use their cars in times of austerity, they take time to shop around for the best deals, such as our Fuel Brittania programmes. As a result, our volume sales increased by 4.8%. Overall, like-for-like fuel sales were up 18% in the year. Inflationary effects took their toll on disposable incomes during the year, with the unwelcome impact of high oil prices feeding through, not just at the petrol pumps, but also throughout the supply chain. Other core commodities increased in price too, adding to the pressure. Market prices for beef and lamb rose by 15% and 11% respectively over the year, and average wheat prices were up by 32%. The increase in fuel prices alone reduced our customers disposable income by some 600m, income that could otherwise have been spent in our stores. In this environment, consumers looked around for value and found it at Morrisons, where our sharp pricing, supported by innovative promotions, was welcomed by customers. We maintain a prudent approach to adding new space to our estate and only approve investments that meet the required financial hurdle rate. As a result, our space opening programme, whilst being ahead of our published targets, was less, in relative terms, than our major competitors. Despite this, with good like-for-like sales, we maintained our market share.* Throughout the year, we noted the rise of the professional shopper, with customers taking time to shop around and look very carefully at pricing and offers in order to search out value. This trend played to Morrisons strengths. Our value proposition of everyday low prices, coupled with industry leading offers, and the flexibility of our vertical integration enabled us to meet our customers need for great fresh food at affordable prices. Offers such as our 49p produce deal and our two loaves of bread for 1 promotion helped our customers manage on tight budgets. The market remained highly promotional, and our innovative promotions such as Pay Day Price Crunch and Morrisons Millions really caught the mood of the nation. A clear strategy is in place that is delivering our objectives Business and strategy review Performance review Governance Financial statements Investor information The strategy we have pursued, and the investment choices we have made, have set our business up to produce sustainable rates of growth.

8 6 Business and strategy review Wm Morrison Supermarkets PLC Chief Executive s business and strategy review continued Operating results Summary income statement / /11 Change % Turnover 17,663 16,479 7 Gross profit 1,217 1,148 6 Gross profit margin 6.9% 7.0% (0.1) Other operating income Administrative expenses (329) (323) 2 Underlying operating profit Property transactions (1) (1) Operating profit Operating profit margin 5.5% 5.5% Net finance charges (26) (30) (13) Taxation (257) (242) 6 Profit for the period Gross profit grew by 6% to 1,217m during the year. The gross profit margin was 6.9%, a fall of 10bps against last year due to the increased proportion of low margin fuel sales in the mix this year. After cost of goods sold, the Group s two largest cost areas are store wages and distribution costs. We continued to manage costs and improve efficiency in both areas whilst maintaining excellent standards and customer service levels. As a result, we again improved our store labour costs relative to sales, with in-store labour productivity up by 2.9%. Distribution productivity improved by 4.3%, reflecting the benefits of the investment we have made in systems improvement. Other operating income grew by 8% to 86m, primarily because of increased recycling credits. Administrative expenses increased by 2%, well below the rate of profit and sales growth in the year. This reflects the strong cost control culture that exists throughout the business. Although the operating margin of 5.5% was in line with the prior year s, the underlying result was an improvement of 20bps, after adjusting for the increased proportion of low margin fuel sales. Market overview The UK grocery market continues to operate in a very tough economic climate, with consumer confidence close to record lows during the year. In, the market was worth 97bn, up by 4.2% on the previous year.* Whilst this appears to be solid growth, it should be noted that space growth was approximately 4%, a historically high figure. Within these figures, online grocery grew disproportionately, with 17% of UK adults buying food or groceries online, up from 10% three years ago. The convenience market, which is measured separately, grew 4.6% to 34bn in, and is expected to continue growing at a faster rate than the traditional grocery market for some time to come. Retail grocery volumes were flat in the year and it was inflation, averaging 5.5% through the year, which drove growth. CPI food inflation, as measured by the Office of National Statistics, was above 6% for much of the year but started to come down through the last quarter, reaching 3.4% in January. Categories that saw particularly high inflation include oils and fats (10%), coffee and tea (10%), and meat (6%). Value at the forefront of shoppers minds Household incomes were squeezed throughout, due to the previously mentioned commodity and energy price pressures, and also as a result of the Government s fiscal measures, particularly the rise in VAT to 20%. Cost pressures ran well ahead of wage settlements, with the result that disposable incomes overall fell 2.3% in. A general unease about current and future expectations for the economy and for personal finances also saw shoppers managing more closely to a budget. As a result, pricing and overall value have become increasingly important factors in purchasing decisions. More shoppers now regard price as their first consideration when choosing between products, compared with a year ago, with almost seven out of ten now saying they make the majority of their grocery shopping decisions before they get to store. This is an increase of 40% since Promotions are increasingly important when shoppers are deciding which stores to shop at and what products to buy. 70% of shoppers say promotions play a very important role in determining which stores they shop in, compared to 64% of shoppers in December The grocery retail market has responded to these customer needs through an increased weight of promotional activity on branded goods. Additionally, retailer own brand sales, which carry a lower average unit price, have been performing more strongly than branded products as shoppers look for ways to manage their expenditure. Source: IGD Source: IGD ShopperVista *Source: Kantar Worldpanel Source: ONS/Economic & Fiscal Outlook, OBR, November

9 Annual report and financial statements /12 7 Strategy In 2010, we outlined our vision to make Morrisons Different and Better than Ever. We are proud of what makes us different a distinctive offer to customers centred around fresh food, craft skills and vertical integration through our manufacturing business; the way we lead and support our colleagues; and our unique heritage. Being different means building on these advantages, which set us apart from all our competitors and position us to win. Being better than ever is about improving the way we do business doing more of the things that matter for our customers making great food, offering outstanding service and being more efficient so we can pass on the best savings possible. It also means seizing opportunities to grow the business profitably through new formats, channels and categories, to meet more of our existing customers needs and to reach new customers. Above Fresh food with exceptional customer service is helping us be better than ever. We have developed a clear set of strategic objectives to deliver our vision and strategy, these along with our /12 initiatives are set out on page 12. KPIs and the risks to achieving our vision are set out on pages 26 to 29. Our strategy reflects our view of how the market will evolve, what will be most appealing to our customers and how we make best use of our internal capabilities. It is based on six convictions about the type of business that our customers want us to be. 1 Food focused not generalist We want to be the number one destination in the UK for fresh food at outstanding value for money. Fresh food is at the heart of the supermarket shopping experience and customers are seeking freshness, quality and provenance at great value as well as becoming more conscious about healthy eating. Our manufacturing capabilities, unique craft skills, in-store food preparation, flexible supply chain and farming links all give us competitive advantage. We will continue to build on these to create a unique shopping experience offering customers the best fresh food in the UK, unrivalled value for money and fantastic service. 2 Experiential over purely functional Customers are seeking a deeper engagement with food and food shopping and moving away from a purely functional experience. They want to see, touch and smell the food. We want it to look different and feel different when customers shop at Morrisons. 3 Value is forever The world is changing but some things are for ever value is one of them. This means offering an experience which is fun and frugal through a combination of great range, quality and service, combined with great prices on everyday products and industry leading deals. We are already well known for delivering great value and we will keep this at the heart of our offer. 4 Skills not just drills Our great store colleagues are a competitive advantage we can build on. Customer experience is driven by friendly, knowledgeable service delivered through a skilled and engaged workforce who are all committed to offering customers a fantastic shopping experience. 5 General merchandise clicks not bricks General merchandise is increasingly migrating online, and always from big box supermarkets and the traditional high street. We believe therefore that the future for general merchandise is in clicks not bricks. 6 Multi-format, multi-channel We will serve the evolving needs of our customers by expanding into new channels and formats, tailoring our offer to suit the needs of different customers. Better technology and busy lifestyles are changing the way customers shop. Different customers in different locations want different products. They shop using different channels, going online, via kiosks and on their smartphones, and also visit different formats, doing their weekly shop in larger stores, topping up in convenience stores and seeking out specific products or expertise in speciality stores. To serve more customers, more of the time, we need to be multi-format and multi-channel, tailoring our offer to suit the needs of different customers. Business and strategy review Performance review Governance Financial statements Investor information

10 8 Business and strategy review Wm Morrison Supermarkets PLC Financial review Richard Pennycook Group Finance Director Our risks and uncertainties Page 28 Our Group financial statements Page 61 See our report visit: Group highlights Cash generated from operations 1,264m Gearing 27 % Capital investment, including capital expenditure, investments and acquisitions 901m Our credit rating A3 Investment in equity retirement programme 368m Morrisons financial performance was strong, in what remains a challenging environment for the consumer. We continued to invest in the long term growth of the business and to deliver increasing returns to shareholders, whilst maintaining a strong balance sheet. The business is well placed to deliver sustainable long term growth. The Group s financial strategy continues to be to deliver improved margins, whilst positioning for long term growth. Financial strategy The underlying principles behind this strategy are: growing sales ahead of market; delivering earnings that meet the expectations of shareholders; and maintaining a strong investment grade balance sheet. We are meeting these principles by: increasing our customer appeal and growing sales organically and opening new stores; converting sales growth into profitable growth; and investing to yield an appropriate rate of return.

11 Annual report and financial statements /12 9 Our performance against this financial strategy was: sales growth ahead of the market in the year of 0.5% * ; underlying EPS of 25.6p, an increase over the prior year of 11%; and the Group s balance sheet continues to reflect our strong financial position: 90% of our estate is freehold; we maintain low levels of gearing; we use prudent assumptions to value our defined benefit pension schemes; and adequate and balanced long term financing facilities are in place to cover our planned investments. The Business and strategy review on page 4 contains information about the Group s financial performance for the year, in particular turnover growth, like-for-like sales growth and operating profit. The review also contains information on selling space increases and our future space expansion programme. Underlying profit is the measure we use to assess normal underlying business performance and trends. Earnings are adjusted to remove volatile or one-off costs and credits. A reconciliation of underlying profit is provided in note 1 of the Group financial statements. Summary cash flow / /11 Cash generated from operations 1,264 1,141 Tax, interest and servicing of finance (330) (238) Capital expenditure (796) (592) Proceeds from sale of plant, property 4 8 and equipment Acquisitions (74) (7) (including debt acquired) Investments (31) Dividends paid (301) (220) Equity (retirement)/issues (368) 16 Net cash (outflow)/inflow (632) 108 Non-cash movements (22) (1) Opening net debt (817) (924) Closing net debt (1,471) (817) In line with our planning assumptions, we saw a net cash outflow during the period. Cash generated from operations Cash from operating activities increased by 123m as a result of the overall increase in profits, which was partly offset by an increase in working capital. During the year, stocks increased by 117m, reflecting our overall sales growth, as well as the acquisition of Kiddicare and the addition of our new regional distribtuion centre (RDC) at Willow Green, Bridgwater. Interest and tax Interest Net interest paid of 49m was slightly higher than prior year (2010/11: 47m), reflecting a higher average level of net debt during the year. The Group s effective interest rate of 4.0% was in line with prior year. Interest was covered 37 times (2010/11: 30 times). Excluding net pension interest income, interest was covered 25 times (2010/11: 25 times). Tax Corporation tax paid in the year was 281m. This cash outflow represented 50% of the total tax bill for the year to 30 January, and 50% of the tax for the year to 29 January. The effective tax rate for the year was 27.1% (2010/11: 27.7%), which is slightly above the prevailing corporation tax rate of 26%. A combination of non-qualifying depreciation, and expenses for which the Group is unable to obtain a tax deduction for, increases our tax rate above the prevailing rate. Offsetting this, the change in corporation tax rate to 26% from 28% had the effect of reducing the rate compared to the prior year. Our in-house tax department s primary focus is on ensuring that the Group continues to pay the appropriate level of tax at the right time. The Group, which is predominantly UK based, operates a simple business model. We aim to be transparent in all our activities, and we do not engage in sophisticated tax planning structures. Capital expenditure The Group continues to invest in the infrastructure to support our long term growth. This includes building new stores, the ongoing replacement of our IT systems and the strengthening of our supply chain. Total capital expenditure of 796m during the period included 330m for the planned acceleration of our new store space and the enhancement of our existing estate, 54m for the ongoing development of our IT infrastructure and 59m for the completion of a new RDC for the South West, at Bridgwater. During the period, we opened a further 37 new stores, of which one was a replacement and three were our new M local convenience format. We also improved our estate through the acquisition of new sites to support our planned future growth, the extension of 15 stores and the refurbishment of the first seven stores to incorporate our new fresh foods concepts. Overall, our net selling space increased by 5.2% during the year. Number of core stores Number of convenience stores Total number of stores Total area in square feet ( 000) Number of petrol filling stations At 30 Jan New stores 1 Store extensions At 29 Jan , , Net of replacements. 2 Number of store extensions is included in total number of stores. Business and strategy review Performance review Governance Financial statements Investor information *Source: Kantar Worldpanel

12 10 Business and strategy review Wm Morrison Supermarkets PLC Financial review continued The Group reviews its capital expenditure programme rigorously and all potential investments are required to meet prescribed hurdle rates. A post expenditure review programme is in place and appraisals of all major expenditure projects are carried out by independent review teams. The findings of these appraisals are reviewed by the Board regularly. During the year, as part of this routine process, a retrospective study of all new store openings since 2006 was undertaken. This confirmed that our new store opening programme over that period delivered above the required rate of return, giving us confidence that our process for review and approval of new space is robust. New store investments review of five year opening programme Year of trading Outperformance vs internal hurdle rates 2nd 2.5% 3rd 0.9% 4th 1.7% 5th 3.1% Average 2.0% Acquisitions The total cost of acquisitions during the period was 74m. In support of our strategy of expanding our multi-channel capability, the Group acquired the trade and assets of kiddicare.com Limited, a leading baby and infant merchandising retailer, for 70m in February. In June, we also made a further investment to broaden the scope of our manufacturing capabilities through the acquisition of Flower World Limited, a leading independent flower importer, for 6m, including 2m of deferred consideration. As a result of this transaction, we are now able to handle all our flower requirements in-house. For accounting purposes, both of these acquisitions are classified as 100% subsidiaries, creating 27m of goodwill. Further information on the nature of the acquisitions can be found in note 27 of the Group financial statements. Investments In March, we invested 31m in acquiring a minority stake in Fresh Direct Inc, a leading internet grocer in the USA, which will help us assess our own potential strategy for delivering food online in the UK. Net debt At the end of the financial year, net debt was 1,471m, an increase of 654m from the prior year end and in line with guidance previously given. The increase is due to a combination of increased capital expenditure, strategic investments in growth opportunities in online and manufacturing, increased dividend payments and the initiation of an equity retirement programme. This was partially offset by an improvement in cash from operating activities. During the year, we have taken steps to increase the funds available to the Group and sought to do this in a way which extends and balances the maturity profile of our borrowings. In March, we completed a new revolving credit facility at competitive margins with our banks, providing 1,200m of committed facilities for five years. At the balance sheet date, 725m of those facilities remained undrawn. In November, we concluded a US private placement with Metropolitan Life Insurance of America Inc. This provided the Group with $250m of committed funding through to November 2026, and was swapped into Sterling at a fixed interest rate for the duration of the term. In December, the Group issued a 12 year Sterling bond to institutional investors, which provided 400m of funding through to December The Group ended the year with a well diversified and mature funding base. Gearing As anticipated, our gearing ratio increased slightly during the year, but at 27% (2010/11: 15%), it is still well below our sector average. The continuing strength of our balance sheet has been recognised by Moody s, a leading credit ratings agency, who has confirmed an investment grade A3 rating. We continue to be one of only three European retailers to have this strong rating. Pensions The Group sponsors two defined benefit pension arrangements and both of these pension schemes are managed externally to, and independently of, the Group s operations. Our approach to valuing our defined benefit pension obligations remains prudent. At 29 January, the schemes had a deficit of 11m. The movement, from the surplus of 38m at 30 January, is summarised in the table below. Pension bridge Net pension surplus at 30 January 38 Actual vs expected return on scheme assets 148 Actuarial loss due to changes in financial (213) assumptions Funding above annual service cost 3 Net pension interest 13 Net pension deficit (11) at 29 January IAS19 Employee benefits requires the Group to assess the liabilities with reference to the market conditions at the balance sheet date and the Directors best estimate of the experience expected from the schemes. The movement in the year has been influenced by changes in assumptions due to changes in market conditions. Scheme assets performed better than assumed returns; however, the scheme liabilities increased to a greater extent due to a combination of financial and demographic changes in assumptions. Over the year, market conditions fluctuated significantly, with corporate bond yield returns and inflationary expectations decreasing. There has been no further update to longevity this year, following the triennial valuation completed in April 2010.

13 Annual report and financial statements /12 11 Returns to shareholders Dividends At our preliminary results announcement in March, we set out a policy of maintaining a progressive dividend, whereby dividend growth would be in line with underlying EPS growth. Additionally, we confirmed that, in each of the three years to 2013/14, the year-on-year increase would be at least 10%. We also announced that we would rebalance the split between the interim and final dividend payments on 30:70. In line with this policy, the Board has recommended a final dividend of 7.53p per share, making the total dividend for the year 10.7p per share, an increase of 11%. As a result of increasing the interim percentage of the full year dividend, which was applied for the first time at our interim results in September, the recommended final dividend is 10% lower than last year. Dividend cover was 2.4 times (2010/11: 2.4 times). Payment of the final dividend will be made on 20 June for shareholders registered on 18 May. / /11 Change Interim dividend paid 3.17p 1.23p +158% Final dividend proposed 7.53p 8.37p -10% Total dividend for the year 10.70p 9.60p 11% In the five year period to /12, the Group has increased its dividend by 168%. This compares with increases of 54% for the food and drug retail sector and 16% for the FTSE over the same period. Equity retirement In March, we announced an equity retirement plan to purchase 1bn of ordinary shares in the market over the coming two years, for subsequent cancellation. During the year, 368m was invested in this ongoing programme and 125.7m shares were repurchased and cancelled. Basic underlying EPS for the year was 25.6p, an increase of 11% over the prior year. On a pro-forma basis, and applying the actual average purchase price of the shares acquired in the year and the average interest rate on that investment, had the full 1bn equity retirement programme been in place from the beginning of this financial year, underlying EPS would have been 27.4p, an increase of 19% over the prior year and 7% over the actual /12 position. Shareholder investment and returns On 29 January, the Company s share price had risen to 293p, an increase of 27p (10%) from the start of the year. This compares to falls of 4% and 16% in the FSTE 100 and sector indices, respectively, over the same period. Total shareholder return measures the value of 100 invested over time. In the five years from January 2007, Morrisons shareholders have seen a return of 15%, compared to a rise in the same period of 10% for the FTSE 100 and a fall of 4% for the FTSE food and drugs sector. Return on capital employed (ROCE) The Group is committed to delivering improving returns to shareholders. ROCE is the key metric behind our investment strategy and in driving management performance. In order to monitor the progress of our capital efficiency measures, we will publish a ROCE performance figure with our interim and preliminary results. The measure of ROCE that we have selected is calculated as: Underlying profit before interest and rent paid less tax ROCE = Net assets + net debt + 20 times rent payable Over the past five years, we have delivered progressive improvements in returns, which stand well above the Group s weighted average cost of capital. Adjusted 2007/ / / /11 /12 Adjusted underlying profit after tax () Capital 5,581 5,762 6,553 6,997 7,628 employed () ROCE (%) Key judgements and assumptions Judgements and assumptions made in these financial statements are reviewed each reporting period. Whilst some outcomes have been affected by the volatility in the financial markets, all judgements and assumptions in the accounting policies remain consistent with previous years. Consideration of impairment to the carrying value of assets has been made and we have concluded that the individual carrying values of stores and other operating assets are supportable either by value in use or by market values. The impact of the current economic conditions on the assessment of going concern has been considered in the general information section of the Directors report. Business and strategy review Performance review Governance Financial statements Investor information

14 12 Business and strategy review Wm Morrison Supermarkets PLC Our strategy is in place Our strategic objectives Our vision for the business, to be Different and Better then Ever, is anchored by our convictions, and we have a clearly defined set of strategic initiatives that will deliver it. We have grouped these initiatives under the three strategic objectives of driving the topline, increasing our efficiency and capturing growth. 1 2 Driving the topline Strengthening our brand Moving further ahead on fresh Optimising space Enhancing our service culture Completing National to Nationwide See pages 14 to 17 for further information Increasing our efficiency Revamping our systems Tackling indirect procurement Increasing network efficiency Driving in-store productivity See pages 18 to 21 for further information 3 Capturing growth The convictions which underpin our objectives are set out on page 7. Exploring convenience Vertical integration Moving online See pages 22 to 25 for further information

15 Annual report and financial statements /12 13 Strengthening our brand Page 14 Having a strong brand can be a real point of difference; we have set out to give customers an own brand range worth switching supermarkets for. We have made great progress in /12, including the launch of our acclaimed M Kitchen range. Revamping our systems Page 18 We are upgrading our core IT systems through our Evolve initiative, a major six year programme of work. This will unlock efficiency savings and give us the solid platform we need to grow our existing business and seize new opportunities. Exploring convenience Page 22 The convenience sector is a significant opportunity for Morrisons, accounting for over 30bn sales and growing at twice the rate of the rest of the UK retail market. We entered this market in /12 with our first M local stores. Moving further ahead on fresh We aim to be the number one destination for fresh food in the UK at outstanding value for money. Optimising space We aim to get the best use out of every square foot in our store. We have been testing how we free up ambient space to give more space to fresh food and allow us to introduce new categories such as children s clothing. Enhancing our service culture We are enhancing our service culture and ensuring that our customers always get a warm and friendly experience in our stores. Completing National to Nationwide We aim to enable more customers across the country to be able to shop at Morrisons and have set out ambitious plans to increase our space. Tackling indirect procurement Indirect procurement is an area where we have been working hard to strip out unnecessary cost. Increasing network efficiency The opening of our new regional distribution centre at Willow Green, Bridgwater, completes our network efficiency initiative. Driving in-store productivity We are continually working to improve our in-store processes to drive productivity whilst improving customer service. Vertical integration Food production is a key differentiator and central to our ability to provide fresh food at affordable prices. We have increased our capabilities further in the year. Moving online The way customers shop is changing they are becoming more and more accustomed to buying online. We have an exciting online agenda, building on the acquisition of Kiddicare and our stake in Fresh Direct. Business and strategy review Performance review Governance Financial statements Investor information

16 14 Business and strategy review Wm Morrison Supermarkets PLC 1 Driving the topline Strengthening our brand We believe that having great own brand products can give consumers a reason to switch supermarkets, and we are ambitious to create an industry leading range. Much work was done during the year, starting with a detailed benchmarking of existing Morrisons products against competitors. In blind taste testing, we found that our quality was already high, and overall was better than the average of our direct competitors. As always, there was room for improvement, particularly in going beyond just having a set of good own label products, to having a family of great relevant brands that influence consumer behaviour. /12 saw the start of a three year programme of new product development, and we made good progress. Informed by research and customer insight, we built a plan, created a talented team and began the execution that will see 5,000 new products introduced this year and more than 10,000 products relaunched by Christmas Our own brand is a major pillar in delivering our brand promise of Friendly People Making Great Food Affordable for Everyone. M Kitchen launch We commenced the rollout with our M Kitchen range in October, launching over 600 products in a category where we knew that we were performing below the market. Traditional beef We also launched our traditional beef breeds programme. This is a longer term programme, working in partnership with over 100 farmers to bring an exclusive range to our customers. The range will be available all year round at guaranteed quality and at an affordable price. M savers In January, we launched M savers, our new entry pricepoint range, which is designed to be a clear proposition of good quality at the best price, in strong support of our conviction that value is forever. We have increased our range to over 500 lines, competing with the broadest offer in the market and enabling customers to do a full value-led shop, should they choose to do so. Coming up In /13, we will begin to deliver solutions across home and leisure, and other general merchandise categories. We will continue to leverage the expertise of our team of chefs to ensure our products and brands are consistently delivering quality, value and relevant innovation. In /13, we aim to further increase own brand participation. By the end of the journey, we will have a market-leading own brand, which customers trust to bring them everything from the best value, to unrivalled produce, to fabulous restaurant-quality meals at Morrisons prices. Customers will also be much more aware of the products we make and prepare in-store as well as those we manufacture ourselves in our own factories. Our new proposition will give us the relevant points of difference in every part of our store to support our positioning as a great food retailer, reaffirm our fresh credentials and offer unbeatable value to our customers. Product quality is exceptional. Through close co-operation with suppliers and inspiration from great chefs including Pierre Koffman and Aldo Zilli, we have developed an innovative and exciting range with exceptional product quality. The response from customers has been extremely positive and M Kitchen sales have increased 40% over the same categories last year. In addition to the M Kitchen launch, we also relaunched our bread range, introducing new products, improving quality and finding ways to show our customers that we make our own bread. This has been really successful and we have seen own brand participation increase by 10%. Evolving the Morrisons experience We are building on what we do best to be the number one destination for fresh food.

17 Annual report and financial statements /12 15 An own brand range worth switching supermarkets for The new M Kitchen range means I have a fantastic home cooked style meal with minimal effort, in no time at all. Perfect! Lindsey Scahill Morrisons customer, Leeds Own brand facts Below Headchef, Neil Nugent (right) and in-house chef, Robert Craggs (left) creating new recipes. Sales increase in categories where M Kitchen was launched 40 % Number of M savers lines launched 500 M Kitchen partners Nigel Haworth, Atul Kochhar, Pierre Koffmann, Bryn Williams and Aldo Zilli Business and strategy review Performance review Governance Financial statements Investor information

18 16 Business and strategy review Wm Morrison Supermarkets PLC Driving the topline continued Moving further ahead on fresh, optimising space and enhancing our service culture These initiatives combine in our Fresh Formats, focused on offering customers the best fresh food in the UK, unrivalled value for money and fantastic service from an environment that really feels different. This initiative is a key part of our strategy and is underpinned by our core convictions that customers want fresh food, great value and a more experiential and engaging shopping environment. We have brought together a number of separate strands of work to create a new shopping experience for our customers. Our Space Lab, where we have found ways to work our space harder and eliminate duplicated items. The Lab has shown that we can liberate up to 750,000 square feet of our existing store space, which will be available for an expanded fresh food offer and new ranges such as restaurant quality ready meals and children s clothing. HOT service is an initiative to enhance our service culture and ensure that our customers always get a warm and friendly experience in our stores. Over 110,000 store colleagues have received service skills coaching the largest training programme of its kind in the UK (read more in Our people, page 33). Our Fresh Lab, where we have created a fantastic fresh food environment, transforming our produce and flowers sections, introducing new ranges and revitalising our counters. During the year, we transformed 12 of our stores using this new thinking. We knocked down walls so that customers could see our craft skills in practice, introduced 350 more fruit and vegetable products, moved complementary products next to each other and rationalised the space given over to ambient grocery items. The results to date have been strong, with produce sales up 14% and sales in the delicatessen up over 40%. Where we rationalised ambient space, we successfully maintained sales and margin. The work done in the Lab stores has enabled us to create a series of modules capable of being applied to our existing estate and to our new stores. In /13, we will tailor the core concept to different locations and store sizes, ensuring that we provide customers with the elements they really want while maximising the benefits from our investment. This continuing evaluation will see around 15% of our space operating all or most of the new concept by the end of the first half of the year, with total capital expenditure per store of c. 1.7m. This is contained within our /13 capital expenditure targets.

19 Annual report and financial statements /12 17 Value of Value hypothetical of hypothetical 100 holding 100 holding Below Opening our Wrexham PBT versus store in total November remuneration. (base salary + cash bonus) for Chief Executive and Group Finance Director during PBT versus total remuneration (base salary + cash bonus) the period 2007/08 to /12 for Chief Executive and Group Finance Director during the period 2007/08 to /12 PBT () PBT () Completing National to Nationwide We aim to offer customers throughout Great Britain easy access to a Morrisons store. Currently, there are still approximately 6.6m households which do not have a Morrisons store in close proximity. This gives us significant headroom for growth, particularly in the South, where we are less well represented. During the year, we opened a total of 37 new stores, including one replacement and three in our new convenience format. 19 of the new stores were previously operated by Netto. They have an average size of 8,000 square feet and are therefore much smaller than the majority of the Morrisons estate, which averages 27,100 square feet. Their success under the Morrisons brand, and the performance of our new convenience format, reinforce our confidence that we can operate effectively in smaller store sizes, where previously we had very few stores below 10,000 square feet. Total shareholder Our net selling return space increased by 643,000 square feet (5.2%) during the year, slightly ahead of our previously announced 120 Total shareholder target of 600,000 returnsquare feet, through a combination of new stores, acquisitions and extensions. Of this, 107,000 square feet came from extending 15 stores in our existing estate We ended the year with 12.9m square feet of net retail space and an estate of 475 stores. In March, we announced an accelerated space opening programme of 2.5m square feet of new space over the next three years to 2013/14. This year, we exceeded our first year target. In /13, we expect to add a further 700,000 square feet and we are on track to meet our three year Feb 3 Feb 1 Feb 31 Jan expansion objective Feb Wm Morrison 3 Feb Supermarkets 1 PLC Feb FTSE Jan FTSE all share food and drug retailers index Source: Wm Morrison Thompson Supermarkets Reuters PLC FTSE 100 FTSE all share food and drug retailers index Source: Thompson Reuters 30 Jan 30 Jan 29 Jan 29 Jan 1,000 5, ,500 1, ,000 4,000 4,500 3,500 4,000 3,000 3,500 2, ,000 (2)(3) 3, (1) 2,500 1, ,000 1, (2)(3) 300 (1) 1, , / / / /11 / PBT Base salary + cash bonus / / / /11 /12 PBT Base salary + cash bonus Base salary Base + salary cash + bonus cash ( 000) bonus ( 000) Market overview Own label growth Retailer own brand sales have been performing more strongly than branded products as consumers look for ways to manage their budget. This is a positive trend for our business as we continue with the relaunch of our own brand range over the next two years. Throughout, retailer own brand value ranges have seen an increase in growth levels, outperforming other tiers. Coming into, premium ranges have seen resurgence in growth. 12 weeks 12 weeks sales growth sales growth vs last year vs last % year % GFK Consumer GFK Consumer Confidence Confidence Jan 20 Mar 15 May Jan Premium20 MarValue15 May Source: Kantar Worldpanel Premium Value Source: Kantar Worldpanel Jul 10 Jul Jan Mar May Jul -40 Source: Jan GFK NOP Mar Consumer MayConfidenceJul Source: GFK NOP Consumer Confidence 4 Sep 4 Sep Sep Sep 27 Nov 27 Nov Consumer confidence Consumer confidence remained fragile in. The end of the year saw confidence close to an all-time low. is expected to continue to be challenging. Nov Nov 22 Jan 22 Jan Jan Jan Business and strategy review Performance review Governance Financial statements Investor information Share price performance over the last three years rice (p) Share price performance over the last three years Dalton Philips Target Dalton Philips Target Maximum

20 18 Business and strategy review Wm Morrison Supermarkets PLC 2 Increasing our efficiency Revamping our systems Our Evolve programme started in 2008 and is now approximately halfway to completion. Evolve is all about making sure we have the right systems in place to support our business processes, increase sales and efficiency, and compete strongly in today s retail market as well as creating flexibility for the future. In short, making a well run business run better. With a team of over 700 people, the programme has already delivered: a new central accounting system and a single payroll system for colleagues; 12,500 new touchscreens on tills; a solution for simplifying cash reconciliations in-store; and voice picking in our distribution centres to increase the accuracy of deliveries. A key focus in /12 has been the introduction of a new produce manufacturing solution to our five manufacturing produce sites to improve efficiency. Produce manufacturing solution Produce manufacturing is central to the Morrisons commitment to quality from field to fork. Employing 2,700 people, our produce sites produce 29m packs of fresh fruit and vegetables every week for sale in our stores. Until 2010/11, each site was planning independently against daily orders and managing stock levels accordingly using manual systems. Visibility of inventory levels and yields was limited. With two years in planning and 16 months in rollout, all the produce sites have invested in a huge collaborative process. The three month readiness programme before each go-live covered everything from leadership through to infrastructure. This, along with the commitment shown by colleagues, was the key success factor. The new produce solution: provides advanced, centralised planning and scheduling; orders from the sales management system; checks raw material inventory and creates a demand for manufacturing and replenishment stocks from suppliers; and sets hourly schedules for production lines. We have automated the processes for bringing raw materials to site, receipt of orders and marrying up our resources. We now have consistent methods for planning and scheduling, and standard reporting. The dispatch process is also more efficient, with produce allocation and picking lists generated automatically, meaning stock visibility has improved across the business. We can produce a report at any time to show exactly what is in every area of the business, and in what state, replacing the need for continual counts. The new solution supports our drive for quality in fresh produce. It allows us to monitor the ongoing quality of all products, enabling better supplier management. Better visibility of stock also increases the focus on reducing inventory in the supply chain, which helps to ensure freshness. In /13, we aim to deliver benefits of 1.3m through improved labour efficiency and yield. The major benefit, however, is derived from improving sales order fulfilment against quantity and time. This will lead to improved availability in our stores for customers. The overall benefit is estimated at 2.7m a year. Next up meat Our meat manufacturing solution is going live to our first abattoir in the second half of /13, with rollout to the other two sites by early 2013/14. The meat solution is necessarily more complex than produce, yet builds on the same model. Productivity and efficiency savings are expected, with an overall benefit of 2.2m year-on-year once the system is complete. The Evolve programme means more than just new systems. With over 75% of the workforce set to use the new solution, skill levels across the entire division were raised. We had to change the way people operate and their mindset, says Andy Joynson, Manufacturing Director for Produce, we introduced more robust processes, structure and organisation driven by better solutions. Innovative systems to realise efficiencies We have been looking at every aspect of our business, from field to fork, to see where we can increase efficiency.