J Sainsbury plc (SBRY) Earnings Call Transcript & Summary

Good day and welcome to the Sainsbury's preliminary results analyst Q&A call, hosted by Simon Roberts. Simon, Please go ahead.

Thank you. Well, Good morning, everybody. And thanks for joining us on our preliminary results call this morning. I know it's a busy morning, so we really appreciate your time. I'm joined here this morning by Kevin O'Byrne, our CFO, and I hope you've had a chance to read both the statement, and see our presentation that we posted on our website earlier today. We've had a year of unprecedented change. And as a business, we've really responded to this. And we're a stronger and more agile business as a result. And this has only been possible through the outstanding efforts of everyone working across Sainsbury's, our entire team, and I want to register a huge thank you to all of my colleagues for their unwavering commitment and resilience throughout the last year. Looking to the year ahead, there will be further significant external challenges that will impact our business, our colleagues, and our customers. But we are well placed to deal with these. 1 year into our 3 year plan to put food back at the heart of Sainsbury's, we've delivered significant improvements in grocery value, innovation, and customer service. And we are determined to continue this momentum, building in particular, on the far stronger value we are now delivering to customers. We'll do this the same way we've delivered the progress we've made so far, consistently putting customers and colleagues first, listening to what they want and need, and making bold decisions to fund and prioritize these. And this has shown through in our customer satisfaction and strong volume market share performance. We expect this to continue as we know we have more resources than many of our competitors to continue to improve our relative value position at a time when value matters more than ever to our customers. What I hope you will have taken away from this morning's statement and presentation is that we are confident that we can maintain our strong competitive momentum. And that confidence is reflected in our commitment to our shareholders. We've delivered strong cash flows, we've reduced leverage, and we're confident we can continue to generate strong sustainable cash flows. In turn, as we set out in our capital allocation framework today, this means we can now commit to returning a higher proportion of our underlying profits to shareholders. Okay. So now turn over to the operator, and take your questions. Thank you.

[Operator Instructions]. And the first question is coming from Andrew Gwynn, BNP Paribas Exane.

So just coming back to the statement around the consumer, obviously, really beginning to see the worst of the energy increases coming through. What would you call that? Is there any sort of pronounced change in consumer behavior so far? And then just thinking about the 2 business lines, obviously within the General Merchandise business, there's been some very significant availability challenges. Maybe over the year, they'd started to improve, but do you think that would be a significant tailwind to offset some of the macro pressures?

Andrew, thank you. So in terms of the customer, what are we seeing, well, I think there's really 3 areas I'd call out. I mean the first is and to say that clearly we're seeing a continued normalization post pandemic, which is characterized by more customers coming back into store, online, stabilizing around 15% of total sales, albeit still twice the number of online orders that we saw pre-pandemic and clearly more customers getting back to the office, traveling more, which is driving more food out of homes. That's the first theme. I think in terms of the impact of prices and inflation what are we seeing? Well, I think it's early days yet. Clearly, this month's the first real impact were the impact of the energy costs, and clearly we're staying very close to it. But I think early to see any significant change in customer behavior, but customers clearly are watching every penny and every pound. And that's why, as you've seen in our strategy that we laid out in 2020, we've been really determined over the last 18 months to get out value in the position it's now in, which means that we can demonstrate that we're growing share, but also that we're in placing behind all our key competitors, on the key products customers shop for. So in the anticipation that the impact of inflation will be increasingly on customers' minds, we think we're really well positioned to be able to continue to present good value. And then the third thing we're seeing in terms of customer behavior I would say is that, at certain points customers are looking to trade in and trade up. We've had a good Easter relative to the market. The same was true of Mother's Day. We think about the events in the year coming up, we see those as opportunities where customers would trade in, so that's on the food side. On General Merchandise, to your specific question on availability. Yes, absolutely, we had some real challenges into the peak period over Christmas, particularly in consumer electronics, particularly in toys. That situation has been recovering and we look at our availability stats now compared to even 3 months ago, we've seen quite a substantial improvement, and one, clearly, we're continuing to push hard for. I think the outlook on availability, clearly, we're watching the situation in China closely. Teams working really closely with our suppliers. I think it's hard to call yet what will happen there. But we've learned a lot over the last 18 months clearly and we'll be staying very close to it.

The next one is coming from James Anstead, from Barclays.

Perhaps a question for you each if that's okay. You've talked about the investment. You're really focusing on your top 100 lines and that certainly seems to be working if we look at the volumes that you showed us. How different would the price of investments on the average selling price kind of chart look if we saw the overall offer? I mean, again, the results seem positive. I'm interested just to know how different the pricing might trend on the back book as it were. And then perhaps a question for Kevin, which I'm sure a lot of people are trying to do the maths like me. In terms of profit bridge between the GBP 730 million you've just delivered, the PBT, and the GBP 630 million to GBP 690 million you're guiding to for the year ahead, I just wondered if you can talk about some of the moving parts? Which are the bigger elements to be aware of? And 2 particular bits. I think you mentioned effectively, there's GBP 100 million profit benefits in the base year from elevated grocery sales. Are you expecting that to completely disappear in the year ahead or just step backwards? And just to be completely clear on General Merchandise, clearly, you've got these cost savings to offset the challenges that Argos is likely to face. But you're expecting Argos nets to have a down year in terms of profitability. Accepting that anything you say at this stage is subject to lots of potential changes in the following 12 months.

James, thanks. Okay. Why don't I take your question in terms of overall value position and then Kevin can take us through some of the outlook that we're thinking. In terms of value, look, as we -- I hope we've laid out on the presentation kind of 2 key proof points. First, as you say, that what the deflating on the 100 product customers buy most often, more broadly. The reason we think our volume share has responded as it has, is that our value is improved against all of our competitors in terms of BI on the overall basket. And that we've been able to do that, because we've deployed really 3 key platforms on value. One, thanks for Quality, Aldi Price Match products that customers buy most frequently. Fresh products, 150 new products last week with a real focus on fruit, vegetables, salads, dairy, meat, the products we buy week in, week out. Second, our Price Lock program, the most extensive in the market, up to 2,000 products, everyday staples, dishwasher, tablets, tinned tomatoes, pasta, rice, where we lock down prices for 8 weeks. And then thirdly, the growing impact actually of Nectar Prices where we are serving customers -- now over 1 million customers are benefiting from this on the SmartShop platform, unique prices just for you. So when we think about all of that together that's -- it's a combination of the 3 value platforms that we think is the driver between more secondary customers come back into Sainsbury's and our overall value position improving. And I would just reiterate again, we've been on this for 18 months. We continue to refine our approach clearly. We're targeting the value investment where customers notice and value most, so our algorithms and our insight tools are working very hard to continue to pinpoint this value investment, which is what gives us the real focus to make sure that we keep executing against this plan. So, overall, of course, it's funded by improving volumes, but also our cost saving program and that's something that we think we've still got unique savings to go out, which gives us the firepower to invest back in price. And as you'll see in today's statement, we are absolutely determined to make sure we hold on to the value position that we've put out there. In terms of us against the market, if it's helpful, we were inflating 1% to 2% behind the market. So we're slower in putting prices up and that kind of level behind where market inflation is. Kevin, do you want to pick up the outlook?

And as you said it is a very early in the year and as you can imagine, we were running a number of scenarios. But if you think of those going from the GBP 730 million to let's say the midpoint of the range we've given you, there is probably 4 things, key things that we'll be thinking about. One is the level of unwind of COVID benefits in the year. And how much of that -- you mentioned the GBP 100 million, how much of that will we keep some of that increased food volume to operating cost pressures. And then the final 2, which are the bigger elements is the input inflation in food and our ability to pass that through to customers, and the General Merchandise demand, which probably is the most difficult to forecast among, particularly as we look into quarter 4 and increased fuel prices, energy prices for consumers as we as we come into Christmas. So and then if we look at our sort of base assumptions, we're assuming significant volume decline in General Merchandise, and that will be offset by transformation cost savings and some price increases. So we're being cautious there. On the food side, we're assuming perhaps small volume decline offset by small price increase, but the real sort of critical factor in food is the food margin. And we, obviously, have made a key commitment to sustain our relative value position. So we're assuming that food margin will be down slightly and then the range of forecasts will depend at which -- at the sort of pace at which we're able to pass on that inflation. But we are assuming that we're passing it on more slowly and therefore that's in our sort of base assumption. So sort of 2, if you're just going straight from your set of GBP 730 million to let's say, GBP 660 million, the midpoint, the 2 big building blocks, lots of ups and downs, most of it playing a draw. But the 2 big building blocks is gross margin on food and volume on General Merchandise.

That's very helpful. One very, very quick follow up on a slightly different topic, but the bank paying this GBP 50 million dividend. I'm presuming that it would be a bit much to assume that the bank can afford to do that every year going forward. Should -- you wouldn't be encouraging us to take that in the model every year from now one?

Yes, we're on a journey, and obviously it really, really pleased that we've gone from being putting cash into the bank, the bank being self-sufficient from a cash point of view. The bank now distributing excess capital, and we would like to get to the point where there's a regular dividend from the bank. But I think we need to see a couple of years of sustained growth, then I think we could assumed that. But you're right, I wouldn't be putting it in your models for this year.

The next question is coming from Rob Joyce from Goldman Sachs.

I'm afraid they're kind of just a little bit more sharpening, some of the -- previous from James. But -- so the first one, just -- I'm pretty clear on the moving parts in the guidance. So typically in terms of the General Merchandise are we looking at -- sort of to go back historically, you can see I think, in the '11-'12 real income squeeze, Argos like for like was down about 9% and EBIT was down GBP 100 million or so. These are obviously excluding the cost savings benefit, which I know you have, but is that the kind of thinking we're looking at for this year is that the basis for how we look at this year on the GM side of things? And then the second one is, again, on the other part of the guidance, the input inflation. Am I right in assuming, I mean all the external data tells us that you guys are maintaining, if not improving your price, does that fit your price position, and the market seems to be broadly passing through inflation? Is the guidance embedding a change in that, and that you have to start absorbing more of that input cost inflation than you currently are? And then the final one -- again, all coming off from James', on the bank. I mean, paying a dividend and then guidance that bank profits go up, but the guidance seems a little bit more bearish in the rest of the business. I'm just wondering how you reconcile the 2 -- those 2 messages?

Rob, thanks. Well, maybe if I pick up your GM and answer your question, and then Kevin on the bank. So look, I mean, as you've just done, of course, we've looked at the history. So within the discussion that Kevin just shared with us, high single digits impact on GM. GM is what we've looked at on our model. Obviously, it's early in the year. I think we are particularly thinking about the quarter 3 October period onwards, when the impact of fuel and energy comes again. So in answer to your question, that's the way we're thinking about the GM at this stage. And I would just say that you've seen what's happened in the exit point of this year and improvement in the trends, more encouraging sales, obviously, availability improves. So we'll see what it looks like, but without doubt, more challenging, and therefore that would be our assumption. And --

Simon, is that the kind of operating leverage, though? Do you do you think there's still similar operating leverage in the business. But then, is that the right analogy --?

Yes, and I think we should -- let's just remind ourselves of what we're doing in terms of transforming the operating model in Argos. So we are about halfway through delivering the value benefits of our Argos Transformation Program. GBP 105 million, you remember of cost out in the changes in our store model. Clearly, all of the change in logistics as we bring that together as part of a much bigger cost saving program. And then of course, as more customers are shopping digitally in Argos, now 80% of the sales in Argos happening digitally that's enabling us to keep driving efficiency. So I take us back to the kind of core elements of our strategy which is to reduce cost, improve margin discipline, make sure that we get the fundamentals of availability, really optimized digital and conversion really optimized. And obviously as we take those costs out, holding on to the sales. That's the way we're thinking about how that will play through on clearly a more challenging outlook on the top line. And then on food, I think, looking our first principle, we will maintain our relative position on price. We've worked hard to get to where we've got to. You can see what that's meaning in terms of our volume position. As you say, you can see that we're inflating behind others. As I said earlier to James's question, 1% to 2% behind market inflation is where we are today and putting the value where customers really notice it. But we were, of course, looking at what others are doing. The food market, we think so far has been rational. We're being prudent in our outlook on food. Obviously, we want to make sure maintain our volume momentum, make sure that the value is really clear in the offer. And now I would say again, that the cost saving program that we've built and we're now 18 months into, is driving, one, a lot of momentum, and two, a lot of unique benefits in costs that we think we have that others don't have. So whilst the outlook is clearly more challenging to make sure we can deliver value, we think we've got a lot of tools in our armory to deploy as the year unfolds. On the bank, Kevin?

Yes. Rob, I'm not sure if I fully understood your question, but I think there's 2 separate things here -- the dividend and the profit. Profit, we think will increase this year for a couple of factors. We think we'll have some disciplined increase in lending and credit cards and under loan book. And in areas Travel Money we have a much better year, not back to pre-COVID, but much improved. So those will contribute and we're not assuming -- we're assuming a fairly balanced sort of back that environment in that forecast. And they're not up enormously, but there'll be up year-on-year. And on the dividend discussion, it was always our plan and our ambition to improve returns and pay a dividend. And that's something that bank Board had been very focused on. And the conclusion was reached that the future plans for next years can be delivered, looking for lending in a disciplined way and at the same time distributed capital to the parent, which is what they've done. And of course, it's important milestone both for the bank Board and for us that we've seen that. So that's kind of if you like, connected but disconnected. Future dividends will be linked to sort of future plan profit growth as we see how things evolve as we come out of the COVID period.

Yes, maybe just the only other point to add, Rob, just in terms of the Financial Services proposition itself, clearly, within the environment that we're in, and your question on General Merchandise. The teams have been working really hard end-to-end to make sure that we're improving the products proposition -- Financial Services products to support things with Argos customer, so within the context of a more challenging GM outlook. And for example, the launch of our new monthly payment plan is a really key element of serving the GM customer base more effectively in the way they want to shop, but also taking advantage of our Financial Services platform to grow its performance as the consumer outlook changes.

The next question is coming from James Grzinic, Jefferies International.

I had a couple. I guess, mostly for Kevin regarding financial side of things. Can you perhaps talk us through why you decided to increase the payout ratio rather than going for -- stepping up the rate of deleverage and then redeploying that optionality on exceptional cash distributions? Should we think that you are just -- it's a signal of sustainably higher level of recapture that you see in the business? And second one is, can you perhaps go again through the details of the GBP 800 million lease liability recapitalization, that will unwind in 2 years' time. I'm trying to understand the mechanics of that, because obviously it make some big difference in terms of the 3.1 is already 2.7 underlying on the leverage side?

No problem, James. Yes, you've kind of answered the question. The first one, you said. You're right. We felt that shareholders would appreciate a predictable improved dividend. And if you think of the last number of years I mean, we've made substantial progress in deleveraging the group. But of the GBP 2.8 billion of free cash flow that we've generated in the last 5 years, we've paid about 60% of it to pay down debt. We're fast approaching a situation -- and we don't need to pay that money out to pay down debt. So clearly, we have access free cash flow, and we felt the first protocol will be to increase the proportion of profits that we gave to shareholders. It just I think demonstrates our confidence in the sustainability of the cash flow and the predictability and shareholders can rely on that. The other point I'd probably make, if you look at our allocation framework that we laid out on slide 24, we said first and foremost, invest in supporting our strategy and accelerating our strategy, then a solid investment grade, because we think that's really important. That gives us great financial flexibility to take advantage of opportunities as they arise and protect the business. And then thirdly, would be the payout ratio. Both this year, we've said we will actually do it this year, even though we haven't technically hit the solid investment grade target. And that's just I think, again, a sign of our kind of confidence in the ability of the groups to continue to generate strong cash flow. So hopefully that helps on that front. And on the GBP 800 million, yes, there's, we've got these 2 structures called Highbury and Dragon that were entered into many, many years ago. Leasing is about 26 stores were in these structure. The way -- and we're a joint venture. We have about 50% of the shareholding and that was the second -- another party. The way it was structured was, if we stayed in the venture, we had 2 choices, we could either leave a store and just exit the lease at the end. Or we could lease the store back. But we could only lease it on passing rent and on a 20 year lease. And we looked at some of those stores and we thought we don't think the passing rent is necessary the right rent and some of those stores we don't necessarily want a 20 year lease on them. And because of the strength of the balance sheet now and the position we're in, we've exercised the option to actually acquire 21 of those stores. So we're going to leave some of the stores that we don't want. And then with those 21 stores, as we acquire them, we will retain a small handful, because they're commercially interesting. It gives us some flexibility commercially or there's a mixed-use development opportunity. So those are number of those that we'll hold on to. And we will sell and leaseback the majority, but we'll do them on leases that we want, the right length, the right rent, et cetera, and the right terms on the lease. That will take -- the leases we can exercise and take action during '23. But potentially, the process could take through till FY '24, because there's going to be some arbitration, negotiation with the joint venture party on the price of some of these stores. So we think the whole process will be completed by FY '24. And then you'll see our leverage come down because a chunk of that GBP $800 million will be removed.

And can I just ask -- thank you for that, Kevin, very, very clear. But can I just ask what the net cash flow impact of buying to the freehold relative to just surrendering leases would be? So what would be the net aside from the GBP 800 million removals?

James, I can't give you that at this stage. There's going to be some cash inflow from this process, but it all depend on -- it just depends on the number that we retain and the sale of the margin between the sale and the leaseback. And clearly, we're balancing -- we're not trying to maximize property profit here. We're balancing property profits and having the right lease structures for, if you like, the next generation in 10 years' time. So clearly, we could maximize cash to-date by putting 20-year leases at RPI on all of these stores. We're not going to do that. So we're just going to get the right balance. So we'll have to come back to you as we go through those negotiations and give you greater color. But there's no cash out. There'll be a small amount of cash in, but it will just depend ultimately on the final lease structures.

Can I just ask a super quick one follow-up on actually Argos. And perhaps if you can clarify what the rental line would be for Argos this year compared to a period that Rob was referencing that when we had big squeeze on top line, because I presume it's very different now.

It is very different. I don't have that number right now, but it's rates as well. I mean rates inflation has been higher than rent inflation for number of years in Argos stores. So James can come back with that later. But it's clearly very material, because we've put 400 stores inside Sainsbury's stores where we're -- we don't have additional rent on that.

And James, I mean if it's helpful on 55 of our presentation, you can see the key cost saving programs laid out and specifically with reference to the Argos transformation, both the store rationalization and fulfillment centers. But also as you can see, the big program in logistics bringing together both Sainsbury's and Argos logistics. If we contrast that with the operating platform we have before, you can see -- back to Rob's earlier question, just how much operating leverage is coming through as that cost program flows. And as I say, still half of that to come.

And James, maybe just building on Simon's point, we take out the rent and rates at the stores. We got into our stores where we don't have any additional rent and rates, but we do put in a small amount of rent and rates in local fulfillment centers. But we're replacing retail rent in number of stores with one local fulfillment center on logistics sort of shared rent.

The next question is coming from William Woods, from Bernstein.

A couple of questions just on pricing. Obviously, you're showing volume growth above the market, but from Kantar, your value market share is down. Are you seeing any changes in kind of customer behavior in terms of net switching gains -- winning net switching gains from your peers? And I suppose, secondly, on the hearts and minds of pricing, how is price perception changing for Sainsbury's as a result [indiscernible] things like that? And then just a final point on price, are you able to quantify the investment on price? Is it as simple as you're not passing on 1% to 2% below the market, and therefore, it's 1% to 2% of sales?

William, thank you. So on your first question on what's happening on the share, I mean, we were very clear at the outset of our plan. We judge our performance on market share on volume, because that's the absolutely clearly read of how much food people are buying, and it's also reflecting the value we're putting into the offer. So that's why you can see our volume market share is growing where it is. And because we are inflating slower than others, in fact, on the 100 biggest SKUs as you can see in our pack on 35 behind our direct competitors. Again, that's a key enabler of the volume market share growth versus value. In terms of what we're seeing from customer behavior, I mean, I think as I hope stressed earlier, this isn't something that we started to do in recent days or weeks. It is something we've been working on for 18 months. We were really clear at the start of our feed first planned. We would be more competitive. And really, the culmination of all the work over the last 18 months is meaning that more secondary customers are coming back into Sainsbury's both from the other big 4, but also from the discounters to shop into those products, they can now be sure of the value of Sainsbury's. And that's been something we've seen through the last year. We saw it further pick up over peak. And that's why we're absolutely determined that we will hold on to our relative value position and why the cost saving program is so key in doing that. So the one thing I would say is that we are being very focused where we place the investment. I think there's a lot of noise in the market at the moment. We're deploying our value where we hear from our customers, they really want to see it. And as I said, that's in fruit and vegetables, that's in meat, that's in dairy products. In the items that go into the basket every week -- breads, potatoes and so on. So I think it's the real focus of the investment that's getting the cut through, which means we can balance how much it's costing us and the return that we're getting on it. In terms of the overall position against the market, like I've said before, we are holding back inflation helped by our scale, helped by their relationships with suppliers, helped by the volume driver put in place, as I say, fundamentally underpinned by the cost saving program. And in terms of what we're seeing on perception, just pointing to our pack for a minute, you'll see that one of the things we wanted to pull out for you is just what's happening in terms of customer feedback. And when you look on 33 in the pack, what you can see there is that we are seeing value perception shift for the first time in a long while. These things, as you know take a long time to move, but value perceptions are up on 2 years ago. And interesting also in areas like net to pricing, when we give customers personalized value, the value perception shift even more substantially. So all the focus on maintaining what we're doing, all the focus on maintaining strengthen our value offer and continuing to execute against what we're learning.

The next question is coming from Xavier Le Mene from Bank of America Securities.

2 questions. First on inflation, so I want to understand exactly what you're doing for this year. But how do you see inflation going forward, so more mid to long-term? So do you expect food inflation to stay for the long-term? And linked to that, what do you make about as to Morrisons announcement, so recent announcement. Would you expect the competition to get potentially tougher? And is it part of your guidance? So you said the market has been rational, but do you expect in your guidance the market to become potentially less rational? And last one, if I may. On the cost selling target that you've got, 200 basis points for SG&A cost reductions, given the labor cost inflation, the energy cost inflation, do you think that the target is still achievable? And what do you expect potentially for this year in terms of reduction?

Okay. Xavier, thank you. Well, if I take the questions on outlook on inflation and competitor, and then I'll hand over to Kevin. Look, I think -- I mean, a couple of things to say. Clearly, at the macro level, we can all see some of the drivers of inflation into food, not least being amplified by the geopolitical events at the moment. So increased cost of production, fertilizer, fuel, I think these factors clearly are on everyone's mind. And so the impact of inflation, I think we would expect to be over a longer period than we would have certainly seen 2 or 3 months ago. I think clearly, within that, as we have been working, we're doing everything we can to hold back the impact of inflation to the consumer through the combination of, clearly, working very hard with suppliers. And I have to say through the pandemic our supply base have done a fantastic job, and we're working day in and day out very closely within the commercial team are doing a great job working really closely to make sure we can find the right balance on value, but also support what we need to. And I would just say in certain areas, we're really living into support. So for example, on pork, the U.K. pig industry, it's a challenging time at the moment. We've looked at our model. We've changed it. We've invested further to support farmers there. The same in milk, the same in eggs. So in the parts of the industry that are challenged, we're also doing what we need to be doing and doing the right thing to support against the context of this inflation environment more broadly. So I think what it means when we look ahead is that it will last a bit longer, but our job is to continue to do what we're doing, which is to, as far as possible, ensure that we are passing less on to our customers than our competitors are and to do that funded by our efficiencies and cost saving and scale. In terms of what that means for the competitors, look, as you'd expect, I'm not going to speak about individual competitors and what they're doing. But I think, as I say, there's a lot of noise in the market on price and promotion. We can see some retailers using a lot more promotions. We can see lots of prices moving around. In the end, I think customers are really savvy about these things, and they can see all of that. So our strategy and our plan is to make sure at the shelf edge, you can absolutely see consistently a trusted position on value that customers believe in. And that doesn't mean it changes in January compared to the autumn, it means that throughout the year on the products you want to buy that matter most to you, you can trust our value. And that's one of the reasons why I think our volume share and our switch of secondary customers has been happening. Kevin, do you want to pick up the second point?

Yes, Xavier, I mean, yes, we're very, very focused on taking cost out so we can invest in the offer, and we've got detailed plans to do that. And you're right in saying that the environment has changed. We didn't anticipate this level of inflation when we laid out the plan, that's for sure. In the current year, we will make further progress, but less than we would have originally thought, because of the inflation. So our cost saving plans are very clear, but the inflation is higher than we anticipated. But you'll see on Slide 54, we still expect to make progress and we're very confident in our cost out plans. And then when we talk about the outer years, there's more to do, obviously, we're focused on delivering '22-'23 at the moment. The only thing I'd point out is, obviously, a basis point movement -- there's 2 factors in there, as we all know, what happens to the sales line and what happens to the cost line. And while there'll be inflation in the cost line, we'd expect some inflation in the outer years in the sales line as well, which will come in the mix. So we'll obviously talk in more detail as we get out of this year into next year.

The next question is coming from Clive Black from Shore Capital.

So I'd like to just ask about online, which hasn't really been talked upon today, going to a backdrop of [ online ] in recent times. First of all, where do you see Sainsbury's online gross participation going? And then how does the evolution of the business involve your stores online in terms of business model for fulfillment so going forward? And in that respect, do you think online could be particularly vulnerable or otherwise in the general merchandising side of what's coming down the line, you mentioned being concerned from October, in particular. And then just as an adjunct to that, can you give us an indication of what proportion of your Clothing sales are online, please, that would be great.

Thanks, Clive. Yes, sure. So let's talk online. It's the first one on the grocery side. And if it's helpful, just as everyone is looking at the results this morning on 41 and 42, we've just tried to lay out in our pack what's been happening. So to your question, Clive, specifically on participation. You can see when we got to a peak of north of 800,000 orders a week. That was north of 20% participation. And you can see through FY '22, where that's got to a more stable position. So we exit the year around 15% and compared to just ahead of 20% at the same point last year. And what we would see here is a real return into store. So a lot of the customers that were shopping online are coming back into stores as shopping trends normalize. And so 15% there or thereabouts for the -- for this year is, I think, a decent planning assumption. Of course, over the longer term -- to your second question, we'd expect this to increase. But we think this is a good resting point for us because it means that we can continue to drive 42, the benefits of our in-store model. And whether that be an item pick rate per hour or drops per hour, van utilization or indeed on our ability to pick the basket size that customers are shopping into, you can see the efficiency benefits we're getting. So I think a more stable picture in terms of participation and a longer trajectory to grocery online participation increasing again, which I think to your second question then says, look, 2 key objectives here for us. One, how do we optimize, as I say, the store model. And our teams has doing a fantastic job in this space to make sure we give improving service and good service and improve our productivity. And also at the same time, really think about what's next. And I think what it would say is that, of course, we've got to look at new fulfillment solutions. And as you'd expect, we're looking at that all the time. But I don't think the rush is on as much as it may have been 12 or 15 months ago. I mean that's a good thing, because we can really drive our in-store model. We can take our time to work out the most efficient long-term solutions. And at its heart, we've got 600 supermarkets here, just under 300 that we fulfill online in, and we can optimize the use of those great locations to do a better job front of store and also back of store, too. So hopefully that gives you a picture on the online situation. In GM, I think that, clearly, the outlook is more challenging for all the reasons we've discussed. And in that context, and I guess, again, coming back to the situation in 2011, '12, I think it's an advantage we've got such a developed online platform in Argos and in GM because it means that customers can get access much more readily than last time to where products are available and also can see value as well. So in many ways, I think we've got a play back to our advantage. That's why we're so focused on availability right now and really focused on value, too. And so how do we use 80% plus of the sales in Argos coming digitally to our advantage, particularly in the context of customers wanting to pick up and get convenience quickly, and that's what we'll be doing in that space. And then on Clothing, hopefully, in the pack, we've given some sense of what's happening on our Clothing business. And just if you look at 50, you can see how much the online sales have grown. Online Clothing sales of 13% of the total sales now. They were 9% in '19-'20. And you can see the size of the growth that we're getting. But we're encouraged with our Clothing performance. We've got a really strong offer too. You can see how much the full price mix has continued to grow and the team are really focused on how -- as customers come back into store, we continue to strengthen our Clothing offer.

The next question is coming from Andrew Porteous from HSBC.

A couple from me. Firstly, can you just talk a little bit about CapEx. I think you talked in the statement about GBP 750 million going forward. I know that was the plan for a few years, but I think your original guidance was for beyond 2024 for CapEx to drop back to GBP 600 million. Is that still the plan? Or are we likely to see higher CapEx going beyond that? And then a second question really, I guess, related to Clive. Just when you're seeing that transfer of sales back into store from online, is that a net positive from a profit perspective for your business or not?

Yes. Thanks. Why doesn't Kevin pick up your first question, and then we'll come back and talk about online, Kevin?

Yes. Andrew, that's right. We have raised the CapEx in our assumptions and our plans going forward. We've kept it at the GBP 700 million to GBP 750 million level. And at the moment, the sort of a base level is around the GBP 600 million and the additional CapEx is going on the Argos transformation, and the logistics transformation largely. What we've assumed is -- and I think for planning purposes and for cash flow planning purposes that we maintain that level a couple of factors there. One, is just we would imagine that there'll be other areas of investing in the future as we digitize the business that we'd want to focus on. 2, there's going to be some element of inflation in the underlying CapEx costs. And hence, we think it's the right sort of level to ensure that we're maintaining both the physical and the digital infrastructure of the business and investing in the right areas, and we can still deliver the GBP $500 million plus per year while doing that.

Thanks, Kevin. And I think just in short to your second question, clearly, customers fulfilling in-store versus online is a positive outcome in terms of our ability to fulfill at lower costs. So that's why we think the 15% gives us access to a whole lot of new customers shopping with us online, but also as they come back into store that improves the operating efficiency team.

The next one is coming from Nick Coulter from Citi.

Congratulations on the bank. I think cash out rather than cash in is indeed a watershed moment. So good to hear. 3, if I may, I'll pick up on the outlook comment around continuing your volume market share performance. And to what extent you'd expect to lose a greater level of switching to the discounters in this sort of environment? I appreciate the line space. That's the first one.

Yes, sure, Nick. Thank you. So let me take that one. So look, I think -- I mean, the first and most obvious thing to say is there's no room for complacency on anything right now for all the obvious reasons, very competitive markets, and everyone is looking at their share and what they need to do to make sure it's where they want it to be. So I guess, my comments would be that our volume share gains have been the result of being bolder in our price investment decisions and where we've deployed them and we would expect to be able to reinvest more than our competitors through the size of our cost-saving program. We think we've got substantial cost out still to go out, and that's very much in our plan this year. I should say that we would expect our cost savings in our plan this year to be at a higher level of inflation. So we'll take out more cost than the cost of inflation, which is a key measure of our ability to deliver on cost. And the only thing I would say is that we intend and are committed to be very consistent so that customers can see week in, week out where there is value in the Sainsbury shop. So absolutely no complacency against others. I'm sure there'll be lots happening in the market on price there already is. But we're just going to absolutely stick to our plan and make sure our relative value continues to be really clear to customers.

You broadly expect the same shape of switching as you're seeing at the moment, a kind of a net win or hold, but obviously, mix versus competitors?

Yes. I think in terms of my key point, which is we're going to invest value in the parts of the shopping trip that ensure that customers continue to see the strength of the value in our offer. I think, of course, there'll be moves backwards and forwards as the offer moves in others, but that's our absolute objective. And we built a plan and a forecast this year that underpins our ability to do that.

That's helpful. Then secondly, very broadly, what sort of price elasticity do you expect to see in your General Merchandise categories and, I guess, the Clothing category as well. Simply I'd be interested to hear how you're thinking about this. And then I guess to follow on, how have you factored the results and volume considerations into the buying cycle and also into your assortment, I guess, as you try to preserve price points. And I would assume that people planning is probably front and center at this point in time?

Yes. I mean I think as you say, there's lots of factors here that we're obviously looking at, looking at the history, looking at the trends we're seeing from customers, obviously, particularly in the market you mentioned in Clothing, we've seen a lot of customers come back into store. And obviously, given the size of our Clothing offer that comes from our physical footprint, we're learning a lot about how customers are shopping that. I think, look, it's very early to say in terms of elasticity at this point in time. As I said recently, obviously, lots of factors are driving particularly General Merchandise. Obviously, discretionary spending is a factor. Obviously, the weather and Clothing is a factor, a big seasonal period ahead. So we're looking at all these factors as we plan the outlook for the year. We think we've got a strong offer and at a time when customers are watching every penny and every pound in their purses and wallets, having a strong Clothing offer that's based on good value is a good place to be, and it's one that we'll be deploying against. And as we look towards the second half of the year, we'll learn a lot over the next 2 or 3 months, and we'll be making our choices for quarter 3 and peak as we see how the customer behavior changes.

But have you built any additional flexibility into your buying patterns for the year given the lead-times involved in going down the track?

We have a pretty flexible model actually, and again in the way that we do this. Obviously, our supply base we've developed over a long period of time. I mean I would point you to how we've managed this through the COVID period. Clearly, we're placing our commitments, a decent time out, but we are also being flexible and working closely with them to manage the situations that happen. So at this point in time, I would say the key principles here are staying very close to customer behavior, making sure values in the offer rate needs to be. Most importantly, of all, making sure we've got the right ranges and the right products that customers want to buy, and we'll stay closely linked to how the demand curve moves and make sure we're responding accordingly.

The next question is coming from Sreedhar Mahamkali, from UBS.

Maybe just a couple of super quick questions, please. You've talked about volume outperformance, fairly large volume of outperformance versus the big 4. And maybe expand a little bit on that in terms of what does that do to your negotiations and leverage with suppliers? That's the first one. Secondly, how do you build from there? What's the path to value share gain? Like what's the lead-times? And when do you start to see value share gain. The path that will be super helpful to talk through. Secondly, a very quick follow-up on GM. We've talked quite a lot about sales and costs. But I think in the year gone, you also talked about gross margin being up in the segment. Can you give us a sense in terms of how you're thinking about the drivers for gross margin for the year ahead in GM specifically, please?

Okay. Sure. Why don't I take the volume question and then maybe Kevin take the GM gross margin question? So I think without repeating myself, I think maybe just 2 points to state. I mean the reason we're so focused on volume market share is -- clearly, that's also a reflection of our relative value compared to others. And so clearly, you wouldn't expect me to say that we would want to grow our value share ahead of our volume share because we're so focused on getting our volume share as our point of difference, more customers shopping with us. So when we look to what's happening here with suppliers, a couple of things to say. We've a long-standing and trusted relationship with our supply base. It's one of the things that I think makes Sainsbury's unique in the way we have built this over a long period of time. And our team, our commercial teams spending a huge amount of time with our suppliers. I've spent a lot of time on our suppliers to this year, really understanding what they're trying to achieve, what we're trying to achieve. And I think in the middle of that is really where our collaboration and partnership is really driving strategic value because as we make the Sainsbury's brand in food, more resonant with customers, so we grow volume. And so we are able to also create value for our suppliers. And so clearly, as inflation is in mid-single digit in the industry, there's more still to come through the pipe because we're working so closely with our suppliers. And because of our cost saving program, that's why we can make sure we're holding our prices back 1% to 2% from that position. So I think in terms of your outlook question here, Sreedhar, we intend to keep doing that. And as I say, absolutely no complacency in our position, but a real determination to continue to leverage our scale our supplier relationships, our commitment to value and the delivery of our cost-saving program so that customers can keep being confident in the value they're going to get when they shop with us. Kevin, do you want to pick up the gross margin point?

Yes, Sreedhar, our working assumption on gross margin in General Merchandise is that across the range, it will be down slightly in the year as we sort of focus on affordability in 1 or 2 categories. However, it's small in the scheme of the volume is the big lever that we're more concerned about and is causing the sort of -- is behind the sort of range of outcomes that we're talking about.

Thank you. This was the last question for today.

Okay. So if there aren't any more questions, look, just to say thank you, everyone, for your time this morning. I know I just say it's a busy morning for you. Look, I hope you can see, we're very focused on the consumer, very focused on our strategy, 18 months in. I would just stress again, only 1 year into a 3-year plan. So the whole team are really, really focused on how do we deliver the plan this year and what's going to be a different outlook to last year. But I hope what you can see is we're focused on customers, and we're very focused on our shareholders, too, and make sure that we can deliver for both of those key stakeholders this year with a team already behind that. So we'll see you soon. Thanks for joining us this morning, and thanks for your questions.

Thank you, Simon.