J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Good morning, and welcome to your preliminary results 2019/'20 analyst call with your host, Mike Coupe. Mike, please go ahead.

Good morning, everyone, and as I hope you're already aware, we are running things a bit differently this morning. So we prerecorded a results presentation yesterday, which you can find on our website. So this morning is just a Q&A session relating to the preliminary results and the COVID-19 update we published this morning. So I won't make any introductory remarks, Kevin and I are together but suitably distanced, ready to take any questions you have. So I'll hand to the operator.

[Operator Instructions] Your first question then is from James Anstead from Barclays.

A couple if that's okay. The first one would just be about the -- well, a couple about the bank. One is you clearly mentioned you were expecting a loss for the bank in the year ahead. I just wondered, and it's maybe a bit unfair and a bit premature, but can you finesse the wording on that a little bit? Would you expect it to be millions, low tens of millions, potentially 100 million? Any kind of extra finesse in that would clearly be helpful. And I wondered as well, I mean, it sounds like you're being quite clear you're not expecting to make capital injections. I presume that bad debt assumptions are key kind of variables there. I wondered if you can shed any light on how cautious your assumptions are for how bad debts might get and how much worse they may have to get to make injections necessary. So a couple of questions on the bank. And then one more, just if you ultimately decide you aren't going to pay a dividend for the year that's just finished, presumably you'd move up your net debt reduction target in line with the dividend cash you would save by doing that.

Yes. I mean maybe if I just start with a general observation, James, and then Kevin will talk more specifically about the questions you've asked. I mean we've given probably the highest level of disclosure we've ever given. And we've been as transparent as we possibly can and indeed put to you a base case accepting that there's a high degree of variability of outcome for any number of reasons. And I'm sure you can understand why that is the case. So it's certainly not guidance. It's a base case. And we think we've given you enough background to be able to draw your own conclusions and, indeed, make different cases if you think our base case isn't appropriate. We haven't deliberately broken out the components, but by implication you can get some way towards them. And so therefore, we're being slightly circumspect in being any more detailed than we've been in the announcement. But as I say, I think most of the information you need is actually in the announcement. And if you -- if it's not directly in the announcements, you can probably infer it. But maybe if, Kevin, you want to talk more specifically about the question you asked on the bank.

Good morning, James. First of all, on the bank, we've run a number of scenarios that we said. And as Mike said, we're not breaking those out between the different business units. But clearly, one of the drags in the GBP 500 million-plus number we've talked that is offsetting the rates and the food performance is financial services. But equally, there's impact on general merchandise, there's impact on clothing, there's impact on a number of areas, as you'd expect, and you can see the assumptions that we've put in the RNS. Specifically on the bank, the bank in all the scenarios we've run and we've run some scenarios worse than the main scenario that you see and we've run some better than the scenarios you've seen, in all the scenarios, we see the bank in the current year under those scenarios being an earnings challenge not a cash challenge. So we don't see in the scenarios we've run that we need to inject capital in the bank. And maybe just to give you some context there, the bank currently has roughly GBP 300 million of excess regulatory capital. And that includes -- there's an element of buffer capital, as you're probably aware, that we're allowed to use in times of stress. And so the total there, it's about GBP 120 million of normal capital in normal times and about GBP 200 million of capital that we could dig into in times of stress. So a total of GBP 300 million. In simple terms, that means the bank would have to lose more than GBP 300 million before we'd have to inject. And in the scenarios we're running, we don't see a scenario where that would happen. And then even if it did happen, the bank has a range of other options we could look at. We could look at selling assets. We could look at reducing credit balances and things like credit cards. We could be more cautious about future lending, which would absorb regulatory capital, et cetera. So there's other things we could do. And clearly, if we did eat into that capital buffer, we'd have to replenish the stress element of that buffer in time, but given a number of years to do that. So we don't see a scenario at the moment where we would have to inject capital in the bank. And if you look at Note 21 to the accounts, which is post balance sheet events, we have run a model post year-end given the COVID-19 crisis. We've used 3 employment scenarios, you can see in there: a 6% unemployment, an 8% unemployment and a 10% unemployment. And using a weighted average of those, we'd estimate that we'd need to book about GBP 30 million of impairment in the bank's books this year to allow for that. So you'd see that coming through in the first half. The base scenario is a bit more prudent than that, but it's that sort of order of magnitude. So we're very comfortable with the position right now from that point of view. Moving on to the dividend question, would we repay debt if we didn't pay dividend, we don't know at this stage, James. You can see our focus the last number of years has been very clear. Focus on generating strong free cash flow and then use that roughly 50/50 to pay down debt to make the business more robust, more financially robust on behalf of shareholders and pay the other 50% to shareholders as dividend. So that's our -- that would remain our focus once we can see -- have a greater visibility of what's going to unfold in front of us and we take the right decision at the right time. But it's too early to say right now.

The next question is from Bruno Monteyne from Bernstein.

My first question is, at the Capital Markets Day, you quite clearly explained how your somewhat more premium products or unique products, higher-margin but a little more premium customers, really put you at a much better stead in the U.K. industry. I know I'm paraphrasing, those wouldn't be your exact words. And now given that we're probably going to go in quite a deep and long recession, would you not think that these more premium customers, more premium products, is going to actually be the reverse and actually quite a drag to how you will trade in the next 1 or 2 years? The second question is, so the dividend saves about GBP 150 million of cash. If you take an extra 500 million out of your revolving credit line, that's GBP 650 million of extra cash. Would it be fair [ enough ] that it would be about the size of what you'd think a worst-case scenario would be, so a cash outflow of that order of magnitude? And last but not least, while I was a little bit surprised within your profit guidance, which seems pretty good being flat year-on-year, was that general merchandising wasn't a bigger drag given that you're sort of expecting double-digit declines? Is that because of the operating leverage in Argos not being so bad anymore like it was in the past because you can reallocate staff in the Argos units to your Sainsbury's stores?

Thanks, Bruno. Well, perhaps if I take #1 and #3, and then Kevin can talk specifically about the cash calculation. Again, going back to the scenario that we've painted as our sort of base case, we are making an assumption that the grocery business in the second half will return to 'normality'. Clearly, there are lots of scenarios, and if we enter a recession as you've described, history would say customers, first of all, will trade out of eating out into eating in. That generally speaking is good for food retailers. And if anything, during the COVID crisis, we're seeing that at large. That's, broadly speaking, a trend that is kind of dominating the industry as we are currently trading. But clearly, there are scenarios. If you go back to 2008, where customers will also go beyond that and start trading down. I don't think any of us know at this stage exactly how that looks. And of course, you can make your own assumptions from the information we've given you. What we have assumed is that we have returned to some form of 'normality' in our grocery business in the second half. But there are many scenarios I'm sure that you could paint as we could. And we've had a go at modeling that. We've given you sort of a base case. But hopefully, we've given you enough information to be able to make your own assumptions, and therefore, model your own cases. We've also been very clear about the GM business in that context. So actually, the Argos business, as you would have seen from the trading statement, has traded incredibly well despite the fact we've closed all of the stand-alone shops, 9% up in the first 7 weeks. We're making an assumption that, that will come down. And that if we took the second half that our GM and clothing businesses will be trading down sort of around the 10%, 11% mark year-on-year. Again, you may not believe that. You may think that that's overly optimistic. You may believe it's overly pessimistic, but that's the assumption that we've made. And clearly, that has a consequential impact in terms of the profitability of both the Argos business, the clothing business/and of course, the other one that you haven't mentioned is the fuel business, which is equally a drag on the P&L in the current scenario. And again, depending on where we get with lockdown, we've made an assumption and that assumption may not be right. On the cash, Kevin, perhaps you can talk especially about that.

Yes, Bruno, just a couple of things on the cash. The first one on the GBP 500 million drawdown, we're not actually using that at the moment. We just felt it was the prudent thing to do is to draw down that money. So we still have GBP 4.45 billion of unused revolving credit facility and that we're not using it, but we have the money rather in the banks, which we felt was the prudent thing to do in the current environment. The plan will be, on the base case, that would get repaid during the year. So that wouldn't be in the business later in the year and wouldn't be required. We clearly have some upfront working capital demands, for example, paying our 1,500 smaller suppliers immediately. That's about GBP 100 million, so there's a number of working capital requirements right now. The base case doesn't assume -- if the base case played out, it doesn't require -- we don't require the GBP 150 million from the dividend. The dividend decision is being made not on the base case, the dividend decision is being made because we're 7 weeks into a crisis and there's just lots we don't know. We just -- there isn't -- we haven't sufficient visibility. And we think the right thing in behalf of the shareholders -- and it wasn't an easy decision, it was a very difficult decision, but the right thing in behalf of the shareholders is defer any decision at this point until we have more visibility. And that's why we've made that decision. And then if you talk -- you mentioned about what's the worst case. And frankly, the worst-case is a lot worse than the base case, as you can imagine. As part of the year-end sign-off, we do a very rigorous viability review for the next 3 years and we have stress-tested all sorts of scenarios here and it could -- and some of these get an awful lot worse where you say country's in a recession for the next 3 years, et cetera. And they're done purposely just to see if the business is financially robust. And the answer is yes, it is. And even in a very persistent high unemployment, very negative situation over the next 3 years, which we don't expect to happen, but we've stress-tested that and we're adequately funded and able to manage through that.

But to come back to the central point, Bruno, which is we've given you a very high level of transparency. And if you don't agree with our estimated base case, then clearly, you can model your own scenarios and come to different conclusions. But we've given you our best view of where we stand today and the assumptions on which we base that.

Mike, can I just come back on that 1 second. When you say the base case is for grocery to return to some form of normality in the second half, your sense of normality, does that include recession in the U.K. or not in the second half?

Oh, just an underlying assumption on sales. Clearly, there are some mix effects within that. The bigger impact in our view would be on the GM and clothing businesses in a recession, and we've been clear again on what assumptions we made in terms of the impact on sales and that clearly has a consequential impact on profitability. But in a recession, depending on the depth of the recession, as I say, in the short term at least, that can be beneficial to a grocery business and to the mix. In a more deep recession, as you say, there could be an element you're trading down. But we've given you pretty clear transparency and you can draw your own conclusions.

Also, Bruno, what we saw in the last -- after the financial crisis, we saw the grocery business was robust, and it was general merchandise and clothing that were subdued. And then clearly, we had a worse case -- a worse scenario, a number of worse scenarios. And the one that we've shared with you, that's the base case which would see that the grocery business might be impacted in a recession we've played. There's positives and negatives on this. And as Mike said, you can model your own because you know the broad gross margins of the different parts of the business. And clearly, the biggest impact on any scenario running is what happens to the top line, which I guess is no surprise.

I could also make a very strong case -- the fact that sort of eating out of home won't return to any form of normality during the course of not just the first half but the second half of the year. So as I say, we've given you our sort of best estimate of what we think would happen. That's our base case. But we'd also accept that there's a high degree of volatility both ways.

The next question is from Rob Joyce from Goldman Sachs.

I've got 3 sort of areas I'd like to look at. Just firstly, on the dividend. Just, I guess, in your base case scenario, if the base case is achieved, would you feel comfortable paying the final dividend for FY '20 alongside a normalized dividend around 50% of EPS for FY '21 assuming you achieve the base case you've laid out? Second and third, just squaring a couple of points you made. I guess on the Argos, whether -- the question from people, is Argos going into double-digit decline in the second half, or for the rest of the year even, even with the -- first 2 months been pretty strong, still implies, as far as I can see, the worst-ever trading year for Argos, which probably has pretty broad implications for the economy. I'm just wondering, are you seeing anything yet in your underlying business? So either the sort of the measures you might look at apart from the headlines that we're seeing from the government, et cetera. But anything in your own business that would indicate you're going to get to that level of difficulties. And then finally, on the point about eating out of home, I think that's a very valid point. What's interesting, I just note, in the April data, if we exclude the week post lockdown, it looks like your grocery business is trading around plus 4%. Is that a good read then for the rest of the lockdown period? And wouldn't we expect that to be higher given there's no eating out of home at the moment?

Yes, just to reiterate the point on the final dividend, we have deferred the decision to pay a dividend, and the Board will review in the light of the prevailing circumstances in October whether or not it would pay a dividend or what level of dividend it will pay in November. So you can't imply anything, and we're certainly not making any assumptions that under any scenarios, we would pay the money in July. And the next time to review that is when the Board reviews the dividend decision at the interims. So just so we're crystal clear, there is no implication that we would pay anything. And indeed, if we did pay something, what that something would be. In terms of eating out of home, again, we've tried to be transparent. We've shown you this, probably for the first and last time, week-by-week data. Clearly, as we see the scenario unfold, we'll have more clarity as to the level of eating out, so all the impact that not eating out has on eating in. And clearly, I think we're still in a period of time when people are -- our customers are getting used to what the new world looks like and where that settles down. Your guess is as good as mine, but we've painted a scenario that we think is not an unreasonable base case. But you'll get the market data in the same way that it's normally published, so that over time, I'm sure that you can adjust your models accordingly. And again, we've been, I think, sensibly prudent in terms of our view of the economy. I don't think any of us know exactly how it's going to play out. We've assumed as we said in the trading statement, the second half will effectively be down 10% plus in our clothing and general merchandise businesses. And you're right, I mean, that will be a pretty difficult set of economic circumstances, but these times are unprecedented. And I think anybody with a realistic outlook will be pretty prudent at this stage and like all of these things, you're better off planning for the worst and hoping that it will be better. But you're right. I mean in the end, it's a fairly serious set of circumstances, but I think that's reflective of where the economy will be. I don't know if there's anything you'd add to that, Kevin.

Well, Rob, the other thing to add is the Argos business has been remarkably robust. I mean the fact that it's a digital business that we've seen, as you saw in the presentation on the slides Mike talked to, on Slide 34, the massive growth in home delivery, massive growth in Click & Collect, and where sales are ahead while the stores are closed is remarkable really. So it's a business that's well set up for difficult times and has a broad range of products and a broad customer appeal. But we're assuming this consumer demand will be subdued, and I think everyone would assume that right now. And hence, the base case that we've forecast.

Okay. And just that -- and that is broadly right. Grocery, just doing a straight average of those numbers, is trending around 4% it looks like in April. You're right.

I haven't done that number, but...

Yes. No, you've got that quicker than I have. To be quite honest, it gets slightly confusing because of the phasing of Easter, which is the other thing. So in our presentation, we've effectively seasonally adjusted Easter and Mother's Day. In the RNS, you've got a week-by-week tracker, which again bounces around all over the place. Of course, the last trading week was also a selling week, which generally speaking helps the business just to make it doubly confusing. But yes, if that's the arithmetic you arrive at, then I'll just take it as read.

Rob, I think you'd have to also build in the fact that in week 1 and week 2 of the year with those massive growth numbers, there's going to be a certain amount of stuff in people's kitchens already and they'll be using some of that, so it's hard. Frankly, right now, it's pretty hard to forecast next week. But...

Yes. All I can say is welcome to our world, Rob. This is what we have to deal with on a week-to-week, day-to-day basis. And again, as I say, we've given a high level of transparency in terms of what's happened already, a high level of transparency over the base assumptions that we've used. But it would equally recognize that there's also a high degree of volatility. And there's are a whole bunch of other scenarios that you could play out that would either improve the profitability or detract from profitability in the balance of the year.

The next question then is from Maria-Laura Adurno from the -- from Morgan Stanley.

I have 2 questions. The first one is with respect to the incremental costs that you have announced. If the lockdown was to go beyond your base case, what percentage of those costs would actually not be one-off and you would actually have to again respend on top of what you've already announced? And the second question, coming back to your base case around declines in the general merchandise and clothing business, how much inventory management flexibility do you have, i.e., for instance, if you do have an assumption of subdued demand in the second half, like where you already have all the orders confirmed and you're not able to actually move away from those? So any qualitative comments around inventory management would also be very helpful.

Yes. Maybe if I just talk a little bit -- well, I'll talk a little bit about first and second, but I'm sure Kevin would also have something to add. I mean broadly speaking, as a matter of principle, we are acting as good corporate citizens and therefore, honoring any of the contracts that we already have in our clothing and general merchandise business and taking in any products that have been made for us. There are sort of various aspects of the business. Some of the parts of the business are basically like the grocery business, you buy and sell on a relatively short cycle. But on the long lead time products, typically, we're talking about a 6-month lead time between ordering and delivery. And therefore, the actions that we can take to amend our stock requirements will come through into the autumn and into the winter. And obviously, the teams are thinking quite carefully about the planning assumptions and [ thought a lot ] about our base case. Effectively, in our base case scenario, there is a reasonably high cost of writing down or selling at a lower price stock in both our general merchandise and particularly, our clothing business. So you can imagine we've had a wave of stock coming into the business. And if that business is trading down, let's say, roughly 50%, then that stock has to be sold obviously [ overtime ]. And certainly, that's one of the costs that we've borne in the scenario that we've played out. Again, we've modeled the scenario in terms of lockdown. We've described, at a headline level, the scenario that we expect to play out, which is effectively lockdown until the end of the first quarter and then some release of the shackles between June and September. And that has an inherent assumption in terms of the costs. I'm afraid I don't think we're going to go any further than that. And if we took our asset levels as an example at the peak there at 25%, clearly, that has a big cost for the business. That's now down to 15%, and we don't really have line of sight as to whether or not that will stay at 15% or drop over the next period of time. So you can kind of see the assumptions inherent in the base case. But afraid I don't think we'll go any further on the costs. I'm just looking at Kevin.

No. I mean the other thing to add, Maria, is the cost -- very clearly, there's big store labor costs and logistic labor costs, absence, paying vulnerable colleagues who are off either because they're vulnerable themselves or they're looking after vulnerable relatives, all the extra guarding, cleaning. So the longer this goes on or if there was a second lockdown, then there'll be more of those costs coming into the business. There is a sort of a direct sort of correlation between them. But the scenarios we've run that are worse than the base case would assume more of those costs coming into the business should there be an extended lockdown or a second lockdown, et cetera.

And the only other thing to add is that there is an inherent assumption that our cost-saving program will have some elements [ relating ] to it in the balance of this year. And of course, again, if lockdown continues for longer, there may be some elements of the delivery, of the cost savings program that might come under pressure. But at this point in time we just don't have line of sight on that.

The next question is from Tom Davies from Berenberg.

Yes, 3 questions from me. Firstly, with the loss absorption, will we be able to operate a lower CET1 ratio in the longer term? And given the financial services division pre-COVID generating little earnings, in a more challenging environment, what does that mean that you've struggle to improve your CET1 fast enough organically so you may need to put cash in? The second question, just a clarification point from you, Kevin, where you said you're adequately funded in a worst-case scenario. Is that [ at a group level or for the bank ]? And then just...

Tom, sorry, your line broke just on the second question.

So just -- it's a clarification for you, Kevin, where you said that you're adequately funded in a worst-case scenario. Is that at a group level or for the bank? And then third question is in terms of wholesale, you announced a wholesale agreement with Aussie grocer, Coles, and you're supplying [ Simply Fresh ] Coles in the U.K. on a wholesale basis. Does this represent an entrance into the wholesale industry? And if so, should we factor in some start-up costs associated with this?

Yes. I mean maybe if I take the third question and then perhaps Kevin can reiterate the point we've already made about the no need to inject cash into the bank, Tom, just so you're clear. On wholesale, yes, I mean, we've said for a long time now that we think there are opportunities in wholesaling in the U.K. It's a relatively low-cost and margin-enhancing thing from pretty much day 1. So we wouldn't expect any start-up costs associated with that because effectively we're riding on the back of existing supply agreements with our suppliers and similarly with the trade that we do overseas. So we already have relationships, as you say with Coles, with Dairy Farm in Hong Kong, with RedMart in Singapore. So it's certainly part of the business we look to develop. It's not a massive earnings benefit in the short term, although over the long term, you could imagine it could become a bigger part of the business and it is pretty straightforward to do. We've already built the systems and distribution infrastructure right on the back of that within our organization. So there isn't a significant overhead other than a few people in the center of the organization associated with supplying wholesale either [ inside ] or outside the U.K. So Kevin, perhaps you could just reiterate the points on the bank.

Yes. Tom, just on the bank, just to be clear, the -- we have about GBP 320 million buffer, over GBP 300 million, as I said, and that's as measured under the PRA's ICAAP process where we look at capital adequacy. And of that, GBP 120 million we wouldn't need to rebuild. We could absorb that and not rebuild this if we chose not to. The balance of GBP 200 million, we'd have to rebuild over time and that would just be an agreement with the regulator. And as you can see, someone like the Co-op Bank, they've eaten into the buffer and they haven't rebuilt it over a number of years. So given time to rebuild that buffer. So you're right, we'd have to rebuild it in time. But as I say, we'd have to get to a point when we're rebuilding it, the bank has to lose substantial amounts of money. And in the scenarios we've run, we don't see that happening. That's not to say it couldn't happen, but we've run some very stressed scenarios of high levels of unemployment for extended periods of time, and we don't see that. And as I say, I'd refer you to Note 21 as well in the accounts just to give you more color on that. On the -- you talked about worst-case scenario, that's on a group level. We run the viability statement at a group level over 3 years. And I think everyone can take comfort from -- you can imagine if there was 2 big discussions around the Board table, on the Audit Committee table this year, there was viability and there was dividend. And the viability statement got a huge amount of review, as it always does, but it got a particular amount of review this year and then signed off by EY. And again, you can imagine the audit firms are very concerned about signing off on viability at the moment. So we ran a number of stress tests based on previous recessions going on for the 3-year period. And then we came out of the other way and said what would it take to stress the business on both scenarios. We got comfortable as a Board that we have no -- we have sufficient resources to manage the business.

The next question is from Nick Coulter from Citi.

Three, if I may. Firstly, if I could come back on Argos and Sainsbury's general merchandise and clothing, more with a view, I guess, to the year to March '22. So year 2 of your year 3 sign-off review. I mean all else being equal, how should we view the generic operating leverage in those businesses? And what do you think you can do to mitigate any medium-term weakness given that you have not a decent line of sight, but certainly time to adapt to the scenario with regard to buying practices or cost ratios or the like? Secondly, just on the bank, is it possible to get a little color on current trading? So the bank's fee income and its interest income, just to get a sense to help us with the kind of the moving parts in addition to the provisioning. And then also, in absolute terms, maybe what you can do on costs, I guess, there's a couple of moving parts within the cost/income ratio. And then lastly, if I may, on the dividend, it sounds to me like it's entirely prudent on your part, but I guess there's a very real prospect that the uncertainty or lack of visibility will be just as murky when we get to November. So is there a realistic prospect that you also defer any decision, very justifiably, when you get to November as well for the interims?

Yes. So Nick, perhaps if I take the first and third, and then Kevin can talk specifically about the bank. I mean on the dividend, I think we've been as clear as we can be. We won't pay a dividend in July and the next decision point for a dividend will be in October. And clearly, at that point, the Board will review the prevailing circumstances and make a decision that's appropriate and communicate it in the right way. And I think at this point, we can go no further than that, and you can speculate one way or the other. But clearly, that's a decision that will be made in the light of what hopefully will be clearer circumstances. But you're also right that I suspect even at that stage, there's going to be a degree of uncertainty. But the Board will make the appropriate decisions and communicate that to shareholders at the interim. As far as the scenario planning is concerned, you can imagine that the leadership team has been pretty much 100% on getting the day-to-day sorted out in the last few weeks for hopefully understandable reasons. But as I hand over to Simon, I'm sure he and the team will be thinking about the very issues that you raised. And I'm sure if you go through the potential scenarios, there are lots of things that could play out. And indeed, there's been a whole series of fairly real-time experimenting in and of themselves, each one would probably be quite a significant challenge. But the fact that we've been doing them all at the same time obviously gives lots of learning about what the future could look like. If you take SmartShop in our stores, moving to 30-odd percent of transactions that will sell, that will be a classic example of something that might have taken 3 or 4 years to get to, and it happened in the space of less than 6 weeks. So without being specific about Argos closing or the business more generally, there are -- there is starting to be a lot of head scratching going on to understand both the short-term choices that are available to the organization, and indeed the long-term planning horizon and what you may or may not do differently in the light of that. But I don't think it's for me to opine on any of those particular issues. I'm sure in the fullness of time Simon will come to the right choices, and we'll communicate those for the market.

Presumably, as part of your sign-off review, you kind of have to consider those scenarios.

Yes. I mean as we've said, we've laid out a base case. We think we've given you a pretty high level of transparency and we've given you the assumptions on which we've made that base case. So you can apply your version of what you think might happen and the scenarios that might play out. But it goes without saying that there's a wide degree of variability in terms of the potential outcomes. And that's why we're not issuing guidance, we are just giving you a base of -- a set of basic assumptions on which you can build your models, and high -- probably the highest level of transparency we've [ ever given ] in any set of results. Perhaps if Kevin could talk specifically about the bank costs and [ trading ].

Nick, none of what I'm going to say would surprise you about the bank. We've clearly seen decreased demand for ATMs for the cash coming out of ATMs where we get a commission as people don't use cash and move to contactless because for hygiene reasons. Travel money, we've shut off the bureaus and we would expect that business to be impacted right through the summer, which is the peak time for that business. So there's commission income there. We're seeing reduced demand, as again you might expect, for new credit cards, personal loans. And Argos Financial Services, sort of the Argos store card, some of that will be driven by the fact that stores are closed because a lot of credit is transacted in the stores. And actually online, there's less credit contracted in the online journey. So that will be the fact that those 570-odd stores are closed. But all that is exactly what you'd expect given the current uncertainty. And that's built into our base case scenario, and we've got more negative ones and slightly more positive ones. On the bank cuts, we started the plan that we talked to you about after the Capital Markets Day in September when Jim joined and put together his new team. Clearly, there's big plans around headcount, digitizing the customer journey, which removes a lot of costs for us internally as customers support themselves. And I think this whole COVID-19 situation will, I think, speed that up, if anything. And customers, I think, value being able to do things on a digital platform rather than having to speak to people now and the time that's involved in that. And then things like selling to loyal Sainsbury's and Argos customers rather than going through aggregators where there's a cost involved in that. But a number of other initiatives. And that work has started. You saw in the presentation on Slide 11, headcount is down 12% by February '20. We're seeing people adapting and using the mobile apps as we introduce them. So all those plans are in place and will continue. Inevitably, there'll be some delay as there will be in the retail business and some of the cost actions just because of the COVID-19 disruption. But it's all still to be delivered and will be delivered, but the timing may be affected.

The next question then is from Victoria Petrova from Crédit Suisse.

I have 2 left. One is on discounters. During Capital Markets Day, you pretty clearly said that your focus is maintaining market share within the big 4, while discounters are likely to continue gaining market share in the U.K. Recent Kantar data shows that your growth is significantly above the one of Aldi and actually Lidl as well. Can you give any of your view on that? Are you winning the customers within COVID environment? Is it location? Is it assortment? Is it anything else? And is there anything to stick? And my second question is related to any color on your online grocery sales profitability versus your average grocery profitability, any color. I know you wouldn't give the exact numbers, but maybe something relative, how much less profitabilities, what the trend is, is it becoming more profitable than before, is mix changing in the current environment.

Yes. And you're right. In terms of our sort of stark point at the Capital Markets Day would be to maintain our volume share of the grocery market ex the discounters. And actually, if you took our performance in quarter 4, we did better than that. We actually grew our market share, volume share in that reported statement. But of course, that is now ancient history. And what we're seeing, as you've described, is a marked change in customers' behavior. Where in effect they are choosing to shop on a needs basis, our transaction levels have effectively were not far as halved. But of course, that means by implication they're spending more than double what they'd spend on every shopping trip because they're trying to get everything they possibly can in one go. And of course, that mitigates towards coming to larger sheds rather than to the discounters, which is what you can see very clearly in the data. And indeed shopping locally. I mean there's quite a big step-up, as you'd expect, in convenient shops and also local traders, which have seen a bit of a bonanza. I think it was 50% up if you look at the sort of local stores data. I have no idea whether that's going to stick, if I'm honest. I mean your guess is as good as mine. But most of these behavioral changes, if they last for a long period of time -- sorry, if people -- yes, if the sort of lockdown lasts for a period of time, then they start becoming embedded behaviors. So who knows whether it will go back to where it was, but I suspect it will be some and some, if I was trying to predict the future. As far as the grocery online business is concerned, the broad metrics are the actual number of slots is up roughly 50% and will continue to grow. The basket size is up roughly 50%. So overall, that business has almost doubled as the participation of our grocery business. So accounts are not far off, 15% of our total sales in the last week we traded, and that's likely to grow because there's still far more demand than there is supply. It's helpful in terms of, first of all, basket size, the picking efficiency has increased. Clearly, more orders means higher drop densities. That's also helpful. And a proportion of the growth of the business is in Click & Collect, which means we're not driving to people's homes, we're only driving into our own car park, which means that the same distances are a lot shorter and therefore a lot more efficient. So in the round, that means the business is more profitable. It's not as profitable as customers coming to the stores and buying their groceries, particularly in the way that they're choosing currently to buy their groceries. So we still, on balance, prefer people to come to the shops. But clearly, in the world that we're in, people are obviously taking the opportunity when they can to shop online in their droves. And we'll continue to do everything we can to increase our capacity and to satisfy that demand, which, by virtue of that virtuous circle that I've described, is helpful on balance to the profitability of the online grocery business. If that helps to give you the color that you need.

The next question is from Andrew Gwynn from Exane.

I think it's your last event, Mike, so...

It is.

I'm not -- yes, I'm not sure how much you're going to miss us, but I think many of us will miss you.

Thank you, Andrew.

Yes, we're going to miss your transparency, ambition, your passion for the business, your coffee drinking, I'm sure, humor, and maybe even a bit of your singing. But anyway, I wish all the best.

That was going pretty well until the last bit. But anyway...

Yes, so 3 questions seems to be the way. So firstly, just on that online shift. I was just wondering to what extent you would anticipate those supply changes sticking around. Obviously, demand is pretty exceptional at the moment. As you mentioned you'd rather people go to the stores. But would you anticipate -- postcrisis, do you leave a lot of that kind of store picking process in place? Second question is just on the rates release. I'm just wondering if there's any scenarios where you wouldn't take the rates release. We see some of the sales scenarios, I think, they are pretty bearish, particularly around Argos. Are there any circumstances that maybe you think it was the right thing to do? And then the last one and perhaps quite complex is gross margin. I think it's been described as a magic that we miss. There's obviously a lot of moving parts within what people are buying in the stores at present. So -- and promotional intensity perhaps down a touch, a bit more scratch cooking, a bit less food to go and so forth. So just a little bit of help around those moving parts?

Yes. I'll have a go, and I'm sure Kevin might want to follow-up on all 3. Yes, I mean who knows? I mean I go back to the point I made about discounters, there's clearly a marked change in behavior. And if that was to stick around for any length of time, it would be hugely beneficial to our organization, whether it's a shift away from the discounters, larger basket sizes or indeed the way that the mix has worked out in terms of online shopping. Our experience would say that online shopping and indeed using things like SmartShop and digital shopping becomes habit if you do it for long enough. And clearly, the longer the lockdown goes on, the more people get used to shopping for their groceries online, the more likely that is to stick. So whether it sticks at the kind of 15% plus level that we're currently seeing, I have no idea. But I suspect it will certainly be higher than the 7%, 8% levels that we were seeing precrisis. So who knows, but it's going to be at least somewhere between the 2, but it may well stick at the higher level as people get more and more used to the convenience of online shopping. On rates relief, clearly, we are appreciative of what government has done. We would certainly anticipate taking that rates relief because we'd also make the point that we would remain one of the largest taxpayers in the U.K. even with that rates relief. And indeed, we would pay higher rates than, for instance, Amazon would because we still pay rates from our office space and our distribution warehouses. It's only on our stores and in England, Northern Ireland and Scotland we get the rates relief. The Welsh has decided to continue to charge rates. So I can't think of any scenarios where we would forgo that opportunity. And just to reiterate the point about being good corporate citizens, we've also foregone any opportunity to get recompensed for furthering our colleagues. We're paying very generously if our colleagues are ill. And we haven't taken the opportunity to defer VAT payments. So we continue to act, we believe, in the right way. As you are no doubt aware, we don't comment on gross margin and won't comment on gross margin other than to say that you can make some assumptions around the scenarios that we've painted. And clearly, the scenarios we painted, the mix effect, you could argue other than the obvious mix effect between the various big chunks of the business is broadly neutral. It's the sales impact which is the thing that drives the profitability. So inherent in our assumption is let's assume a flat gross margin for the various chunks of the business. Clearly, in clothing, there's a huge amount of markdown going through at the moment, which is one of the costs certainly in the short term. And we've already talked about the potential mix impact of a prolonged recession, which I would argue has the potential to be helpful rather than unhelpful in terms of the mix impact, but your guess is as good as mine. And you can build that into your model if you think our base assumptions are wrong. I don't know if there's anything you'd add.

Andrew, the only thing I'd add to what Mike has said on rates, rates, it's not optional and -- whereas the VAT and job potential are optional, and we've chosen not to take them, the rates wasn't optional. I'd echo everything Mike said about it being a tax that unfairly burdens our sector and we'd welcome the government's, as we've talked about for many years, revisiting this after the crisis. And then the other final point is we have closed over 570 stores that are sitting empty and not trading.

The next question is from Xavier Le Mené from BofA.

Only one actually. You had a Capital Markets Day last year and you had a long presentation of your strategy. So I was thinking, in the current environment where the consumers is changing a lot, as you said, and it's difficult to predict, of course, what would be the outcome of the longer-term change of behavior, but is there anything in the strategy that you think you need to potentially accelerate today? And are there other parts that you potentially believe are less strategic today?

Yes. I think I've already made reference to the fact that at this moment in time managing the last 7, 8 weeks has been a hell of a thing for the organization and that's what's been the short-term focus of me and the leadership team. But it's also a time to be -- a good time to be handing over because I'm sure Simon and the leadership team will be looking at exactly and addressing exactly the question that you raised. And clearly, on the back of what we are seeing, there are some choices that can be made to accelerate certain things and, as you say, decelerate certain other things. I don't think it would be right for me to opine on that today. And I'm sure that when Simon has got his feet under the table and has the time to think about it both for the short term and the long term, he will be talking to you probably at the pre -- sorry, the interims in November about the kind of choices that the business has made in the light of the scenario that's been playing out. So clearly, broadly speaking, the direction of travel we set at the Capital Markets Day, the digitization of the business, the various cost-saving initiatives, the need to continuing to invest in the product propositions, et cetera, et cetera, will all hold true to some extent. But clearly, there could be a change of emphasis as the new leadership team look forward. So it would be wrong of me to, say, opine any further than to say that, clearly, Simon would be reviewing that over the next period of time. And no doubt, we'll talk to you about it at an appropriate moment.

The next question is from Clive Black from Shore Capital.

I think as the oldest analyst on planet Earth, just very much wishing you a very long and happy and healthy retirement, Mike, to be fair to you.

Thank you very much, Clive. I appreciate it.

Just 2 or 3 questions, please. Mike, in your distinguished career, how would you characterize the present economic challenges of retailing? You've been through some big ups and downturns over the years, just how do you see this coronavirus crisis for Sainsbury's? Secondly, in that respect, how significant do you think the online activity recently and how much of a strategic shift does that represent, both grocery and nonfood? But -- and in that respect, the scope for a lot of stores to close in the U.K. after this crisis. And then just lastly, one more for Kevin perhaps. Just to maybe give a little bit more color about how robust you think the net debt target in 2022 remains given all the current uncertainty.

Yes. I mean I think on the first point, Clive, it goes without saying that this is unprecedented and not just in my working lifetime but in my lifetime. I think the only thing that gets anywhere near is the 3-day week which if you're old enough, you remember not having electricity for 8 hours at a time, which is probably, as I say, the only scenario that I can think in my lifetime, and that goes back to the mid-1970s, where we've got anywhere near the kind of situation that we're currently in. And I don't -- one of the reasons why we're deferring the dividend decision is that I don't think any of us can genuinely currently fully understand the economic impact and the subsequent knock-ons. And therefore, we think it's absolutely right to be prudent. And as I said throughout, we've given you a base case but we could give you plenty of cases that have significant downsides and plenty of cases that have significant upsides. And on your point about what does that mean for retail, again, I've said it and I'll repeat it, I think it accelerates many of the trends that were already there. So what might have been happening over a 3- to 5-year period, digitization, move to online, et cetera, et cetera, I suspect is going to be quite significantly accelerated. As will indeed the consolidation of certain types of the market, with businesses that might have struggled on for a few more months or years are going bust and no longer existing very sadly. So to that extent, your guess is as good as mine. But I would say, if we look back in, let's say, a year or 2's time, we'd have seen an acceleration of many of the trends that were there anyway. In that sense, I'd like to think it's vindicated many of the choices that we made over the last 5 or 6 years. You look at things like SmartShop now accounting for over 30% of sales. That wouldn't have been possible even a year ago. And that's just a testament to the sort of the investments that we've made in our digital online business. But as I say, you can -- you're as experienced as I am and so you can model many of the scenarios. But inevitably, that's going to increase pressure on high streets as an example, if the trends that we've seen rapidly changing over the last 5, 6, 7, 8 weeks continue for the foreseeable future and beyond. On debt, maybe Kevin can speak.

Yes. Clive, as we've said many times, the key financial targets for the business is delivering a strong free cash flow. And we use that for 2 purposes, clearly distributing to shareholders by the dividend and deleveraging the business. The deleveraging is important for us as the management team. It gives us greater financial flexibility. All the more important in the current crisis, as you can imagine. And we're very pleased that net debt decreased by 23% this year and over GBP 900 million in the last 4 years. And as we decrease debt, clearly, the equity value in the business goes up. So it's good all around. So we're committed to the target. The issue is timing on the target. And clearly, we see how things play out. And as we get greater visibility, then we can come back, and the logical time to update you would be the interims again. And just the timing of the target has changed, but we're committed to the targets.

Sorry, Kevin, to come back. Just in terms of your base case scenario, for example, is it still feasible to hit that GBP 750 million reduction in 2022? Or is it something that is very much more likely to be extended out?

It's a tricky one to answer because with the base case, we could stay on track, but it all depends on what happens the following year. Because clearly, it's a 3-year target. So if we had the base case, we could achieve broadly what we would like to do this year, but it's difficult to be clear because we don't know what next year would be, Clive, if that helps.

Yes. Okay. Well, for someone who remembers cooking toast in front of the coal fire in the early 1970s, Mike, I hope your retirement doesn't take you back to that. All the best.

I hope, too, as well. But at least, you remember that. And I hope you agree, that's probably the only economic scenario I can think of that gets anywhere near what we're going through at the moment.

The next question then is from Andrew Porteous from HSBC.

Congratulations on a good [ growth in like ] a long time, and I wish you very best for the future. Three questions, if I may. First of all, around promotions. We're sort of seeing at the moment, I think Nielsen was talking about 10 percentage points lower promotional participation at an industry level. I was just wondering, at an industry level, are we seeing a lot of inflation effectively from the lower promotional giveaway at the moment? And also, what's sort of happening with suppliers around the funding budgets for that? Are they on hold at the moment? Are they likely to come back later in the year? Sort of wondering what discussions you're having there. Second question was around the supply chain and any signs of stress in that. I mean I'm thinking particularly of the fresh supply chain here, we sort of see some articles around labor shortages, et cetera. Are you seeing any signs of distress? And does that point to maybe inflation picking up through the summer as we become more reliant on that supply chain? And then the last one was really around Argos and thinking about peak ordering. And if you could just talk to us, I appreciate it's probably a huge challenge at the moment, but how do you have to think about ordering ahead of peak in Argos? And is that happening over the next few weeks? And is there a risk that sort of supply becomes sort of self-fulfilling in that if you don't order enough a peak and demand's there? How are you thinking about scenarios around that?

Yes. I mean on the first point, I mean, it's self-evident that the #1 priority that we had was to focus all of our resources on making sure that we can supply all of the basic commodities to our customers as quickly as we possibly can. And in that scenario, it would be absolutely nuts to carry on promoting in the way that you were previously. Clearly, as we come out the other side and we start to see some kind of normality, I suspect you'll start to see the sort of cut and thrust. In fact, I think we've already seen some of the cut and trust as a sort of normal day-to-day activity within grocery businesses starting to increase. We haven't seen much change in inflation, if I'm honest, in terms of the headline rates. The business is -- we look at inflation effectively at the average item price level. So there's lots of different ways that you can measure inflation. But if you think about the categories that have performed particularly well, they've been broadly speaking in the dry goods areas. And therefore, in terms of value per item sold, that would tend to be on the lower side compared with some of the added value, fresh foods as an example. So we're selling lots of cans of tomatoes, not many packets of ready meals. And clearly, the ticket price for each one of those items is markedly different. It's like a 10x difference. So we haven't seen a significant spike in inflation, and none of us really know what's going to happen to commodity prices over the next weeks and months. So at this stage, I'm not sure I could do anything more than stick with that as an answer. In terms of supply chain, in the end, the U.K. relies on 80,000 migrant workers to pick crops, which are now starting to ripen in fields throughout the country. We think the industry, as we see it, has done a reasonable job of mitigating that, either through bringing migrant labor in, help from the government, also looking to labor within the U.K. economy to help. It's probably not quite where it needs to be, but it doesn't feel like it was quite as significant as it might have felt a few weeks ago as we were potentially phasing down those 80,000 people not being available to pick the crops and all inherent risks associated with that. So I'm not saying for a moment it won't be [ some changes ]. There are certain elements of our supply chain, flowers being one that's come up continuously which are under pressure. But equally, we think -- and we think more broadly, the industry is in a position to mitigate those supply chain stresses. There were gaps on the shelf in certain categories at certain times, but broadly speaking, we're returning to whatever normality will look like over the next period of time. And clearly, for the Argos peak, as you could imagine, not just within Argos but all of our long lead time businesses, we are reviewing our demand. We are looking at the various planning scenarios and we're making sure that we're making the right decisions in terms of stock for the autumn and winter peaks, which, broadly speaking, we've still got to place orders for and therefore we've got a degree of flexibility. But it wouldn't be a bad scenario to take our base case, the case on which we're planning the business, as a start point, plus or minus a few bits here and there. So I mean we've given you a base case, that's our planning scenario we're working to. If it was [ stressier than the marked ] 10% in general merchandising and clothing, that will give us a stock overhang. But equally, the other way we'd run out of stock if the market was more buoyant than that. So that's the planning scenario.

And your next question comes from the line of James Anstead from Barclays.

I just wanted to add to the various comments about this being your last appearance on one of these results calls. I think I have to say your timing haven't been great. There can't be many more difficult periods in which to leave the big U.K. food market given the growth of the discounters, the growth of online and now we're at a global pandemic to finish off with. But I think all the analysts, I'm sure, would agree with me in saying 3 things. One, I think you deserve a lot of praise for always looking ahead strategically and not shying away from the big decisions. Also, you've always been very keen to engage and debate with the investment community, which has been very much appreciated. And I'm sure we all wish you success with whatever you turn your attention to next. It would be nice to think you'll have a relaxing final month to wind downward, but I suspect it's going to be one of the busier months in your time at Sainsbury. But the very best of luck with whatever comes next.

Thank you very much, James. That's very kind of you.

James, I might add as well because I think we probably -- I gather we're probably at the end of the questions. I'd like to add, on behalf of the whole business, our thanks as well to Mike. Mike's knowledge and experience in the industry is unparalleled, and many of you would talk about that. But what you often don't see or what you wouldn't see day to day is just his commercial judgment, his management style and action, and consistently setting the right tone here at Sainsbury's. And Sains is a business with a really strong heritage for doing the right things, and Mike has been an amazing guardian of that heritage. But also at the same time, invested hugely in our digital capabilities and set us up really well to the future, which we're very grateful for and it's been very evident during the COVID-19 crisis. So Mike, thank you very much for setting that tone, for looking after the heritage, setting us up well for the future. And we will all miss you, and wish you all the very best.

Thank you. I mean we haven't always seen eye to eye with everybody and we've had many robust debates over the years. Hopefully, you've seen that I've always tried to set out to do the right thing and I've put the interest of the company in front of any personal interest, and I've tried to do that consistently. And at the center of this organization, of course, are a set of values where we set out to do the right thing in what is an incredibly challenging set of circumstances, and in some cases, quite ambiguous demands. So that's certainly been my personal stance. As I say, I appreciate the feedback and I've enjoyed our interactions no matter how difficult they have been sometimes. And I respect the fact that all of you guys have a job to do and that we all have a part to play in this very challenging industry, but nevertheless, very exciting industry. So I thank you very much for the kind words. And actually, it's not quite the last time I'll do this with you because I think we've got the fireside chat. So I think I get to be all -- with you all again on Friday, but it certainly would be the last time that we do this kind of -- or I do this kind of results discussion. So thank you very much for the very kind words. And at that point, I think we're going to call it a day. So thank you very much, everybody.

Thanks, everyone.

That concludes your conference call for today. You may now disconnect. Thank you for joining, and have a very good day.