J Sainsbury PLC

LSE:SBRY

Earnings Call Transcript 2021-Q1

[Operator]

Good day, and welcome to your Sainsbury's Q1 Trading Statement Analyst Call with your host, Kevin O'Byrne. Kevin, please go ahead.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Thanks, Nigel. Good morning, everyone, and welcome to our call for the Q1 Trading Statement covering the 16 weeks to June 27. I'm joined this morning by James Collins, our Head of Investor Relations.Clearly, this has been an exceptional period for the whole of our business with some huge challenges and the way our teams have responded to those challenges has been nothing short of amazing, adapting and executing absolutely brilliantly. From the outset, we worked really hard to do the right thing, keep customers and colleagues safe, prioritizing food supply chains and vulnerable customers and supporting the communities that we trade in. It's taken a huge amount of hard work and flexibility from colleagues right across the business. So a huge thank you to all of them.Turning to the key highlights of the quarter. We delivered a strong first quarter performance in both our core Grocery business and in Argos in exceptional circumstances and with the help, of course, of some good weather. For the group, total sales were up 8.5% and like-for-like sales were up 8.2%, both excluding fuel.Just to be clear, we included all the roughly 600 stores that were temporarily closed in that like-for-like calculation. Normally, we would exclude a closed store. If we'd excluded them, like-for-like growth would have been nearly 19%, and that perhaps best catches what the business has delivered in the quarter.The investments we have made in our digital platforms played a huge part in this, with total digital sales growth of 123%, including Groceries Online growth of 87%. Argos traded on an online-only basis for most of the quarter with headline sales growth of nearly 11%, representing 83% growth in online sales.Grocery sales were up 10.5%, continuing to outperform the markets. We saw switching gains from both of the discounters and all of our big 4 competitors. And we've now outperformed the grocery market as a whole over the last 4-, 12- and 52-week periods reported by Kantar. This reflects the continued investments we've made in our customer offer and our stores, something that customers are recognizing with customer satisfaction scores at record levels for both supermarkets and convenience stores.SmartShop has come into its own during the crisis, offering a contact-free shop and rapid checkout, accounting for 37% of sales on average in handset stores and over 50% in some stores. We've also reduced prices during the quarter, improving our value position relative to our key competitors.Our Groceries Online performance was outstanding, with sales growth over 125% in May and 135% in June as we moved beyond the 650,000 orders per week that we were targeting, exceeding -- actually, our original target was even 600,000, up from 370,000 before the crisis. This was despite the fact that we took a clear decision very early on to prioritize elderly, disabled and vulnerable customers rather than to maximize sales.Sales in our supermarkets were up as customers shopped less frequently but with much bigger baskets while convenience was a mixed picture, with strong growth in the majority of our stores with very significant declines in our city center, food on the move and railway station stores. These normally represent about 20% of our convenience sales.Our General Merchandise performance was exceptional in every sense of the word, with great execution in the Argos business, where we switched the business overnight to online only and still delivered nearly 11% growth. Demand was helped by very good weather against quite poor weather last year, and we were in a great place to deliver what customers wanted for their homes, gardens and home office needs quickly and conveniently through Click & Collect and delivery. We've seen nearly 2 million customers who have not shopped with Argos for more than a year reengage with the brand over this period. General Merchandise sales in supermarkets fell heavily in the early weeks of the lockdown as customers focused on their grocery needs, but recovered towards the end of the quarter and delivered a strong seasonal performance.Clothing sales in supermarkets again suffered significantly early on in the quarter, but improved in recent weeks, helped by successful clearance activity and the weather. Throughout the quarter, our online Clothing business has been strong with sales up 87%.So overall, clearly, a very strong sales performance and one that is ahead of the base case assumptions that we outlined in April. However, there were some exceptional drivers to this growth, not only in terms of COVID, but also very good weather, which resulted in sales of seasonal items being pulled forward. We additionally think that it's right to be cautious about consumer spending. To date, whether through furlough support or mortgage holidays, disposable incomes have been relatively well protected and consumers have not been able to freely spend elsewhere. Hence, we continue to think it's right to expect significant weaker sales trends for the remainder of the year.We reiterated today that our base case scenario is broadly flat Group UPBT year-on-year, reflecting the very high cost of trading through this period while protecting customers and colleagues. In particular, we've supported colleagues who've been unable to work through COVID and pay bonuses to those who have. We've recruited more than 25,000 new colleagues, and we've paid to protect our colleagues with masks, gloves and Perspex screens. We've protected our customers through installing social distancing measured in stores, and we've invested in our delivery and Click & Collect capacity to help as many customers as we can to shop online. We've also been impacted by reduced concession income and clothing stock clearance.We welcome the government's support through business rates relief, which will only partially offset the incremental impact of COVID on the business. As you know, we've lobbied for some time for changes to the business rates system, which we believe is a tax that unfairly burdens retail store operators. We have chosen not to take any of the optional forms of government support available. We have not deferred VAT payments or furloughed any colleagues despite closing over 600 stores and all our Travel Money bureaux and despite very high colleague absence levels.The impact of COVID on channel shift in grocery is growing sales in online grocery, our least profitable channel. I know you'll ask about how much of the channel shift will be sustained and the answer is we don't know yet. But the great thing is we can flex that capacity very easily and efficiently whilst giving us room for further growth. What we do know is that nearly 50% of new grocery online customers are not only new to grocery online but also new to Sainsbury's.We also expect a few questions today about our Financial Services business, where we need to -- and whether we need to revisit the assumptions that sit behind our profit guidance. In short, we are comfortable with the profit guidance that we gave at the prelims. The GBP 30 million IFRS 9 charge we booked in quarter 1 was based on an unemployment level of around 7.6%, but our base case profitability assumption was always built on what we think is a more realistic assumption of just over 9%. Our experience to date relative to the market on factors such as payment arrears on credit cards also reaffirms our belief in the relative quality of our lending book. We've realized that the visibility on this is quite difficult, but I'd suggest, if you want to, you could look at some of the Sainsbury's bank report and accounts disclosures on elements such as nonperforming loans and compare those side-by-side with some of our competitors and you'll be able to get a picture of this.Additionally, as we have detailed in the statement, both liquidity and our capital position are improving versus the year-end, driven by rapid change in the shape of the lending book, despite having booked some impairment charges in the first quarter.Now that has been a slightly longer introduction than usual. Hopefully, the extra color has been helpful. James and I now will be very happy to take any of your questions.So I'll now hand you back to Nigel. Thank you.

[Operator]

[Operator Instructions] So the first question then is from Andrew Gwynn from Exane BNP Paribas.

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

I'm going for a short-term and a long-term question. So just on the short term, you mentioned actually the one about the sales outlook, but supply within Argos, I guess, has been compromised in a few places. Are things sort of a little bit closer back to normal and would that impact trading through the rest of the year?And then just on the longer-term question, you've mentioned a couple of points around SmartShop. Argos, obviously, performing very well despite the fact it's mostly closed. Would we expect to see sort of very, very significant supply changes going forward?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Sorry, Andrew, what was the end of that question? It just broke up. What do we expect to see?

[Andrew Philip Gwynn, Senior Food Researcher & Analyst of Food Retail]

The significant supply changes. If you're thinking about how you provide, I guess, particularly Argos, would you close materially more of the stand-alone Argos stores? Is Click & Collect, within the Grocery business, likely to be a much bigger feature of the business going forward?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Well, let me take the first, and James just jump in when you want. On the sales side, yes, there's definitely been some supply challenges and will -- because of the demand because we clearly weren't forecasting. And when we spoke to you at the year-end, we weren't forecasting that level of demand in Argos. There's a couple of factors in some areas like home grooming, home office, et cetera, so as soon as the stock comes in, it's selling. So that's -- there's new stock coming in all the time, but it's selling through quickly.Gaming and toys, absolutely gaming which has been a category we spoke to you about a number of times being down. We've had strong gaming sales through the time as people have been in lockdown. And again, as products come through, we're selling it through. So that stock just keeps replenishing.When we come to seasonal stock, it's very different, Andrew, because we won't replenish the seasonal stock. So when it's gone, it's gone for this season, as you'd imagine. So hence, we will definitely have some quarter 2 sales pulled forward into quarter 1 because of the weather, and we won't see those repeating in quarter 2.And on the long-term question, we have to wait and see. Clearly, if you take grocery online, we've gone from about a 7% penetration to 17% in the most recent week. Is that going to stay at 17%? We don't know. Is it going to go back to 7%? We don't think so at all. So we have -- the great thing about the grocery online model, as you can see, is we can flex it very materially, very low capital involved, and we can turn it up and down depending on what the customers demand. So we're able to do that.And likewise, in Argos, the only thing about Argos, we have to be really careful drawing too many conclusions from the last few weeks. We had exceptional weather. People could pick up their Argos products in over 650 Sainsbury's either convenience or Sainsbury's supermarket stores while they were doing the shopping. We had perfect ranges for the lockdown and consumer demand was robust, given this -- all the government protection for employment, et cetera. So we need to be careful not to draw too many conclusions from that.But of course, we'll watch it and we'll flex. And the nice thing again is that we can flex the model to suit consumer demand. The average lease in an Argos store is about 3.5 years. So it gives us flexibility.

[Operator]

The next question then is from James Anstead from Barclays.

[James Robert Anstead, Director]

Two for me, if that's okay. Firstly, I wondered if you can say whether you've had further discussions on the deferred dividend decision or whether that was only ever going to be something to be discussed ahead of the first half results later in the year.And secondly, and you've addressed this question to some degree, but you gave us quite a detailed prognosis kind of category by category back at the end of April for the remainder of this year. Does that still stand? Or would you kind of finesse those comments after what's obviously been a stronger quarter than you'd expected?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

James, on the decision, very straightforward, we discuss it twice a year with the Board. So we've deferred any discussion, decision. We would review it at the first half, as you suggest. And on the remainder of the year, we remain cautious. You saw we were cautious on General Merchandise, cautious on Clothing and sort of back to normal, should we say, on Grocery. It would be the same, but a little bit more cautious on General Merchandise at some degree Clothing because of the pull forward and weather effect. It had -- the weather effect was material, particularly in the Argos business. We had a very hot May versus a very average or poor May for previous year. So all retailers will have benefited from that. So I'd expect to see that impacting the Q2 numbers.

[James Robert Anstead, Director]

Okay. That was very helpful since they were very short and comprehensive answers. One more to throw into there, which is just, clearly, in the last couple of weeks, a lot of -- well, partly competing retailers have reopened their doors. Have you noticed any obvious changes, I guess, particularly in Argos to trading since those stores are reopened? Or do you think it's too early to tell?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

I think it's too early to tell, James. We haven't seen any discernable sort of changes. Those stores that we've opened have performed well. But likewise, we've seen continued demand for home delivery and Click & Collect across the grocery and convenience chains. So I think the weather effect, again, we've had reasonably good weather in the last few weeks. So I think, again, we need a longer period of time to draw any sort of sensible conclusions.

[Operator]

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

[Clive W. Black, Head of Research]

You've clearly not been to the Merseyside in the last few weeks, Kevin. A few operating questions, if I may, please. First of all, in terms of SmartShop, are you noticing any notable shrink issue in relation to the big step-up in that participation?Secondly, just questions around working capital and operational gearing. Firstly, a big concern at the time of the results understandably was the positive working capital around fuel. Maybe give us an indication how that market is going for you?And secondly, I just wondered whether the mix of higher costs was totally negating operational gearing benefits with the strong sales within the stores. And additionally, given the strength of sales, whether you do have a notable working capital headwind in-store -- sorry, tailwind in-store, please?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Right. And again, James may jump in on some of these, Clive. SmartShop, when we modeled SmartShop, when we tested SmartShop, there clearly is some element of shrink risk either through customer error or choice. We have systems and processes and spot checks, et cetera, to manage that. But the net effect of SmartShop is more positive on the P&L because the benefit of customers getting in and out of the store fast and not using one of our tills, even in normal times, is economically -- the equation works very well because one of our big costs is obviously manning of our tills. And in the time of this crisis, it was absolutely critical. So we're very comfortable with that.Working capital, you're absolutely right. We had sort of 2 drags in working capital. One was fuel, the other was the fact that we chose to support our small suppliers, paying about 1,500 suppliers pretty well. As soon as that -- we received the invoice, we processed it, so that we help them through the crisis. And so in the period to date, there will be a drag on working capital relative clearly from a cash point of view. The very strong cash generation, but working capital, a slight drag, not hugely material to the group, but a slight drag in working capital.And then as far as the operational gearing, grocery online is growing materially. As you know, it's a profitable business, but it's less profitable than if customers walk into the store and shop for themselves. So there's a couple of factors that are helping there. One is the mix of Click & Collect. We've gone from about 3% mix within the online business of Click & Collect to about 23%. So that's obviously better for the economics because people drive to the car park and pick it up themselves. We've had some drags the other way where we've employed thousands more people into the grocery online business. And of course, there's productivity issues as people start and you train them and picking in a socially distancing environment is also less productive than in our normal environment. So there's some drags there. Those will work their way through. And as people settle in and we go back to more normal at some point and that would work through.But the really positive thing on the grocery online would be that many of these customers were not customers of Sainsbury's before. So we're not taking the growth in the customers, almost 50% of customers that we have -- didn't see in Sainsbury's before this. So clearly, they are profitable customers coming into the business. But we definitely have some work to do on the grocery online productivity over the coming months as we see where the volumes settle.

[Clive W. Black, Head of Research]

Okay. No, well done. Really good quarter for you and keep it up.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Thanks, Clive.

[Operator]

The next question then is from Fabienne Caron from Kepler.

[Fabienne Caron, Head of Food Retail Sector]

Yes. Two questions for me. The first one, on the store level, did you see any negative gross margin from the fact that you had closed the counters? And when do you expect the reopening to take place?And the second one is more general regarding discounters. I mean in Europe where -- in Continental Europe where the lockdown is earlier, we saw very strong recovery of discounters. I'm just wondering what you see in the U.K. and if you expect them to fight back to gain back market share.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

First of all, Fabienne, on gross margin, you're absolutely right. The order counters, the prepared foods like pizzas, et cetera, the cafés which we had to close because we needed to move the colleagues focused on filling the shelves. And frankly, the consumer demand in those areas went down as people focused on getting their core shopping. That absolutely is a higher gross margin part of the store. But overall, the negative effect of that gross margin would have been offset by some reduction in promotions as we had to reduce some of the promotions because it's focusing again on getting product on the shelves and focusing on the supply chain rather than promotions. So it would -- in the period, we're talking about, sort of play a draw.As far as the discounters, I mean, in the period, if you look at the last 12 weeks, Nielsen switching data, we have gained from Lidl and Aldi. Clearly, again, unusual circumstances. People are focusing on -- they're either shopping very, very local and their local grocer or local bakery or something, or they're going -- choosing to go to a big store with much larger baskets, less frequent shop because of the focus on safety and wanting to be in a large store, where they can be social distanced, et cetera.We've also spent a lot of time and effort in the last -- the previous sort of 6, 9 months before the crisis in investing in values, you know, launching our value ranges, et cetera. So we've done a lot of work to improve our position relative to all our competitors and the discounters.That said, you would expect the discounters -- obviously, a very professional operation, you'd expect them to react, and we're alive to that. And hence, we're cautious about the second half. We think in the General Merchandise and Clothing business, it's largely around consumers' -- consumer confidence. In the food business, which is generally resilient in any downturn, consumers will be focused on value. They will be focused on feeding their family for less, and we're very alive to that and have plans to meet that.

[Operator]

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

[Victoria Petrova, Research Analyst]

Congratulations on the results. My question is focused on online. Obviously, you have a very impressive online growth. You mentioned that 50% of your customers are new. Can you translate it into revenues? Is it a fair assumption to assume that on average, it is a similar trading per customer. So I should just calculate 50% in utilization, 50% incremental?My second question is on my estimates, a greater margin for online business should be around 2% -- 1.5% to 2%. Is it [indiscernible] or can you provide any comments around that?Thirdly, Click & Collect, how much more profitability versus delivery?And the last question, as far as I understand, your fulfillment is mostly manual as of now, are you reconsidering some other automation options? Are you planning to invest in any fulfillment centers? And are you considering any fulfillment model as a priority? And do you see any trajectory from online business being significantly lower margin than in-store sales to sort of getting there? Could you maybe elaborate on that a little bit?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Victoria, I do apologize. The line wasn't great on some of those questions, but I'll answer the ones I think I've heard very clearly, and I'll have to come back to you on 1 or 2 just to clarify the question.If I just start at the back, the automation. And our model, our focus is on pick from store for grocery online. We think that's the most efficient model. It's proven to be highly flexible in the current crisis, as you can see, and that will be where we'll be focusing our investments, so we're using -- there's a real -- the economics of online, that last-mile delivery being close to the customer, it's all about having decent basket size, good truck utilization and very good pick efficiency in-store and then finally, the last mile and how long the truck is on the road. And so we find that is absolutely the most efficient model, and we'll continue to focus on that model. And of course, there's work to be done because it is less profitable than a customer walking into our store. So once we see where the volumes settle, then we'll need to do some work on the efficiency and productivity of the grocery online. But it's a profitable business, and we'll continue to focus on pick from store.And Click -- is Click & Collect more profitable than delivery at home? Yes, it is. How much more profitable? We don't disclose that, Victoria, but yes, I guess you could do some math yourself, but it's definitely more profitable because we just don't need to have a truck on the road. So you can imagine that has a reasonably positive effect.Now I think I was struggling a bit on the first 2 questions because it was breaking up. And James, I don't know if you heard them better or do we -- would it be helpful if Victoria just repeated them.

[James Collins, Head of Investor Relations]

Yes. So Victoria, I think there was one around incrementality, so the number that we quoted on 50%, can you repeat that one?

[Victoria Petrova, Research Analyst]

Yes, I'm trying to reconcile it into revenues from the number of customers. Should we assume that average revenue per customer is similar to the one you have in-store?

[James Collins, Head of Investor Relations]

So the average revenue. So -- yes, so it's actually much more nuanced than that. So I think it's fair to say that with the elderly, disabled and vulnerable customers, who clearly form a good proportion of our increased customers because that is something we prioritized, they are not as big an average basket as a typical online customer. So that's one of the challenges on profitability that we've had.And so that's one element. However, offsetting factors, which is why you can't quite just work it through from 50%, is that outside of that 50% are customers who are already Sainsbury's customers who have switched to online as part of this and then existing online customers who are shopping differently. So overall, the average basket has gone up because, for example, more people are spending time with all of their family at home and not at school or in the office, et cetera. So overall, the basket size in online is up despite some dilution from elderly, disabled and vulnerable customers.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Victoria, I didn't catch your -- the margin question. I broke up as well. Again, I don't know, James, if you've heard it.

[Victoria Petrova, Research Analyst]

Yes, I tried to figure out how much lower online profitability. Is it around 1.5% to 2%? Probably you wouldn't answer it.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

No, we don't, Victoria.

[Victoria Petrova, Research Analyst]

But can we at least assume that recent online sales are more profitable than the ones before COVID?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

No, it wouldn't be fair to assume that because of the learning curve that we have to go up because over the last number of years, we've shared with you the great work we've done in the grocery online business, where we've done tremendous work improving the pick productivity in store, truck utilization, et cetera. So truck utilization will be very good. The basket size was very good. As James said, the mix -- there were some smaller baskets, but that was offset by much larger baskets. We put no limits on what people could order, so we had some very big baskets going through. That's good for the profitability.Where the challenges would have been in this period that's unique to the crisis would be, one, we recruited literally almost 20,000 people into the grocery online business, and so we had lots of new pickers in the stores. So there's a learning curve. And secondly, we're picking in a socially distancing environment, which meant we couldn't pick with the same productivity efficiency that we would normally do because we have to keep our colleagues safe, our pickers safe and keep a distance when they're in aisle. That, of course, will pass, and both of those things will improve.

[Operator]

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

[Robert Joyce, Equity Analyst]

Three from me. So first one, I think on the previous call, Mike mentioned that the demand for online grocery was still outstripping the level of -- you could supply. I think you said you could have done 20%, 25% of your sales online in the previous period. I'm wondering if you could say if that's still the case.The second one, also on online, have there been any changes to the kind of customer service metrics? [ Have your audience -- for example, what are ] substitution rates running out now versus prior to the crisis?And then the third one is just on the costs. You obviously reiterated the sort of PBT or the profit guidance for the year. A lot of costs in there. Would you be able to sort of, at this stage, give an idea of the business shape in terms of online Argos openings stays the same as what we're at now? What percentage of those costs would be a sort of recurring cost versus the sort of one-off cost related to the current crisis?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Well, Rob, I'll maybe start with -- work backwards, start with the cost question. The -- all of the costs, the big costs here are all related to the crisis. Our biggest cost, by far, is the labor impact and a lot of absence cost there. There will clearly be some elements of that which will be the switch to grocery online and having to bring in more colleagues. And as I said, we'd expect that would go in line with the business and the productivity would improve. But the big element of this was the temporary labor that we needed to bring in support absence and paying for people who were isolating, who were vulnerable, et cetera, was very large.Second sort of big chunk of cost was all around running the stores in this environment, extra guarding, extra cleaning. All of the -- this cost of manning the front doors, manning queues, et cetera, which will obviously disappear. We've been impacted by the fuel business, you'd see that coming back, obviously. Again, yes, right across other areas like thank-you payments to colleagues, that will go away.So if I think of all the other costs that we are incurring and expect to incur for the rest of this year, the vast, vast majority will just -- are all totally related to the crisis and will go after the crisis. The only area that you could imagine we will have additional colleagues will be -- in the mix will be in the grocery online business, but then you'd see an adjustment elsewhere as colleagues move from focused on working in stores to focused on working online.The substitution rates sort of service levels in grocery online, clearly right in the eye of the storm. There was high substitution rates, and people were getting very often a product, a pasta product or a tinned tomato product, but not necessarily the brand that they ordered, and then we had the difficulty where you couldn't actually return those products because we didn't -- because of the fear of virus and products being handled. So -- and we saw that in our customer feedback scores. We get very detailed weekly feedback. I think many customers understood this, but clearly, it was frustration for some customers. That's improved in the recent weeks. Still a bit more to do on that, but it's improving all the time, so we're very pleased with the progress that we're making there.And then the first question was demand -- sorry, what was your first one, Robert?

[Robert Joyce, Equity Analyst]

Just I think Mike had said demand was outstripping the supply quite materially, is that still the case?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Yes. We don't know where -- I think the most recent week, we've gone from a, as I said, penetration of around 7% to 17%. The sales have been up very, very strongly all the way through over 135% in the month of June. We think that we -- there would still be additional demand if we could open up more slots, and we're working on opening up more all the time. It will be interesting just to see where it settles.

[Operator]

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

[Maria-Laura R Adurno]

Just one question on my end that goes back to what you were saying. With respect to 2Q, perhaps if you have any qualitative comment at this level because you were talking about the good weather [ impact in Q-on-Q ]. But just wondering, particularly when we see the momentum seen in the business, particularly on the General Merchandise front, if you have any comments?And then the second one, just going back to some of the comments we made with respect to the trajectory into the second half and clearly being cautious. Just wondering, with respect to your Grocery business, if you have any thoughts in terms of how we were positioning the business on that front, particularly in -- on the -- if we have a backdrop with low levels of consumer confidence and maybe more aggressive discounters coming back into the [ scene ]?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Thanks, Maria. Yes, as far as the Q2 momentum, we've clearly had a very positive impact from the weather in General Merchandise and more recently in Clothing, particularly over the month of May. But across the quarter, the weather has, on average, been better than you would expect and better than the prior year. So that would have a big -- if you look at the total sales, it's up 10.7%. A good portion of that, less than half but would have benefited from the weather impact. So where we've sold those products, we will not sell them in the second half. We tend to sell the same number of lawnmowers every year. It just depends what margin you get. And it's much better if you sell them early in the season. So that -- hence our caution on quarter 2.On the second half and thinking about the food business, yes, we're very clear that consumers will be looking for value. Consumers will be feeling more cautious. The economic backdrop is not going to be great in the second half, one would expect. And we're focused on that. We're focused on it already. I mean we've currently locked down. We've got about 1,000 SKUs. Where we've locked down lower prices. We added 200 just the other day. We're doing more work on our value ranges that we launched last year that you saw in-store, and we're very focused on what consumers will be looking for in the second half. They'll be looking for value. They will be looking for online, we think, in addition. And we're focusing on flexing -- continuing to flex the online availability and all the service metrics and online. And they'll be looking for safe, clean stores where they can social distance and feel secure when they're shopping. So it's a whole package of measures, and we think we're well positioned to support customers through the second half, albeit against a tough backdrop.

[Operator]

The next question then is from Demetris Demetriou from Schroders.

[Demetris Demetriou;Schroders;Analyst]

Congratulations on a definitely very strong set of results. Just very 2 quick questions from my side. My first question is, are you able to confirm or comment whether online is profitable as a stand-alone business?And my second question is about Sainsbury's Bank. I wanted to ask if you have any further comments on overall year-on-year profit expectations. I think we -- I think you mentioned when you presented the full year results a few weeks ago that you expect an operational loss. I was just wondering if you can comment on the magnitude of that. Yes, that's my questions.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Demetris, the first question, the grocery online business, if that's what the focus of the question was, it's profitable. It has been profitable for some time, and then we've made it more profitable over the number -- the last few years. The teams have done a phenomenal job on improving the productivity of our pick, in particular, in-store, but also truck utilization, van utilization, et cetera. So it's a profitable business. It is less profitable than if you walk into the store and shop for yourself, but it's a profitable business, and it will continue to be profitable.And the Sainsbury's Bank, year-on-year loss, we -- you could estimate that. And yes, we would expect the bank would make a loss this year. We're not giving exact figures. And the reason, Demetris, we're not is on balance, we think that the -- we can see a -- if you look at our base case that we discussed back at the year-end, we said that on balance between the very material impact of COVID on the business with growth in grocery, the combination of both of those plus the rates refund, we thought the best view at that stage was that the UPBT would be broadly flat with last year. We don't want to break that out into each individual bit of the business because inevitably each bit of it is almost definitely wrong. But we think on balance, when we look at the -- all of the areas of the business, we think a flat position looks sensible. Some will be up from what we -- our forecast, some will be down from our forecast.The good thing about the Sainsbury's Bank in the numbers we've said to you today, our view on the bank hasn't changed. I think we had a correct view on unemployment in our base case of around 9%. And actually, our capital position -- and there were some concerns, would we have to inject cash into the bank? And while one can never be sure what the future will bring, our capital position has actually improved since we spoke to you at the half year. So the bank is more robust, should we say, despite a very tough backdrop.

[Demetris Demetriou;Schroders;Analyst]

Okay. And if I may, just one clarifying question. On the online business, when you say it's currently profitable, is this including central overheads or just on gross profit basis?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

No, it includes all the overheads related to the online business. So we charge all the pickers, the vans, the marketing, et cetera, et cetera.

[James Collins, Head of Investor Relations]

And so, Demetris, just on that point around bank profitability, so we pulled consensus on a pretty detailed level and we've done that just in the last week. And the consensus on the bank is for a loss of GBP 23 million this year. If we thought that the number was going to be dramatically different to that, then we would flag that.

[Operator]

The next question then is from Nick Coulter from Citi.

[Nick Coulter, Director]

Just a couple of quick ones on Argos, if I may. Firstly, would it be possible to talk about the early customer behavior that you've seen since you've opened up the first tranche of Argos stores? Have people migrated back to in-store? Are they using those stores predominantly as pickup points? I guess it would be interesting to know what the earlier behavior is. I'm sure you're watching it like hawks and that's informing the second tranche and how you move thereafter.And then secondly, again, on Argos, can I ask about your planning assumptions for the peak trading season for Argos? Are those based on double-digit down? Do you think the lead times that you have in the business gives you sufficient time to get the inventory in the right place? And then I might have a supplementary?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Nick, early -- customer behavior. I mean, first of all, the Argos -- first of all, it is very early, as we've said. For the Argos stores, you can reserve and collect or you can return. So it's still not sort of, if you like, back to normal sort of where people are just coming in off the streets unannounced. Customers are behaving very, very well. I think people are very well briefed in the need for social distancing, the queuing. People trying to use cards rather than any cash, et cetera. So -- and the stores are trading in line with our expectation. And as I say, the online side of the business is still performing well, albeit we've had a very short period of time and we had weather impacts, positive weather impacts. It's hard to draw a lot of conclusions.It won't impact our thinking about the second tranche. That's in the planning because a lot of planning goes into opening up the stores again because it's making sure customers and colleagues are safe and training, et cetera. So the second tranche is well underway. It will more impact our tranches beyond that as we see. And the focus has been -- we're focusing on the stores where consumers/customers have got the poorest access to an existing pickup point in a supermarket. So we're just trying to address the areas where we think there's most need from a customer point of view in the short term.And another point to remember, of course, is that the colleagues, the Argos colleagues are largely employed in the Sainsbury's supermarket at the moment. So we haven't got a lot of people sitting around. Those who aren't either isolating or vulnerable are operating for the most part in the supermarket at the moment.And Argos planning, yes, we are cautious in our planning for the second half. In some areas, we can be reasonably flexible because -- and the branded manufacturers will hold stock and we can flex stock reasonably quickly because they will have stock in the markets or certainly in Europe if not already in the U.K. And so we can flex clearly when it comes to own-branded. We're having to make longer-term calls and won't have the flex in the short term, as you'll understand. And we're being cautious as far as that outlook in line with the expectation that we shared with you in the -- at the year-end.

[Nick Coulter, Director]

And just on inventory positions more broadly. I guess you've seen very strong trends in GM. But as you say, it's been driven by seasonal and it's probably quite subcategory specific. On your overall inventory position, where are you with GM? Is there still an overhang? Have you managed to clear through? Do you think you can over winter? And then also, just on Clothing, it sounds like you've done the clearance that you need, but it would be great to get confirmation of that.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Yes. I mean Clothing would be the one that we would have been concerned about. We were concerned about all of it, I guess, before the -- as we've started in the crisis, Nick, but very quickly, we got less concern about GM because of the sales patterns we were seeing. So there's no issues as far as stock in the General Merchandise business. We're very comfortable with the levels.Clothing would have been a concern, both stock in the country, stock on route and raw materials that we had already acquired in the supply chain. And again, we've done a lot of work and working with our suppliers and having sales activity in stores, et cetera, to manage that down, and we feel comfortable. There will be an element of stock that would be still stored until next year, but we're very cautious about that, as you can imagine, and we'll ensure that we're comfortable with the cost at which that's stored.

[James Collins, Head of Investor Relations]

And just we've got 3 more people who started to ask questions and we're a bit tight on time. So can I just ask with the last people if you could just limit itself to one question, that will mean that everyone manages to get their opportunity.

[Operator]

The next question then is from Sreedhar Mahamkali from UBS.

[Sreedhar Mahamkali]

One question then, that's for James. You referred to improving value relative to your competitors. Can you flesh that out a little bit, please? Are you referring to big 4? Are you referring to Aldi, Lidl? Is there anything you can talk a little bit more on that, your improving price positioning?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Just very quickly, we measure our value index every week on a basket of -- a typical basket of products. Our value index has improved during this period. We've inflated less than our core peer group in the period. And we're taking action on things like, as I said, lockdown where we've got about 1,000 SKUs in lockdown. We added 200 the other day. So our value position has improved during the period across the piece, so we're pleased with that.

[Operator]

The next question then is from Thomas Davies from Berenberg.

[Thomas Davies, Analyst]

Just one question for me on the bank. So while you're in the segment, since you're reducing the loans, which will obviously help the impairments, how are you then going to address the fixed costs on the bank?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Well, we'll continue -- the costs were down in the quarter. Behind your questions, honestly, you're absolutely right. As loans decrease and customers either pay off their loans more quickly or we -- and we don't issue new loans in line with our original plan, and that will have an impact on future income for the bank, and we need to just work through the full impact of that as we think about the numbers beyond this year.But our focus right now isn't just -- more on managing the risk in the balance sheet than the future income. The -- you'll see that the costs are down in the quarter. The bank team are very focused on mitigating actions to reduce costs. Some of those will fall out just because they're volume related. But clearly, other actions have been taken, and we continue to focus on that. It is not possible to totally compensate for it, of course, in the short term, but it is an area of focus.

[Operator]

The next question then is from Xavier Le Mené from BofA.

[Xavier Le Mené]

So a quick one. Can you tell us what was your promotion level in Q1 versus last year? And do you share your -- one of your competitor's comment that promotion level should remain low going forward? It is something that you expect, too?

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

Well, Xavier, we've always had lower promotions than our core competitors for some time anyway, and we've been focused on giving customers everyday value and not having the ups and downs of promotions and particularly multi-buys. We think that's the right thing. It's what our customers want, and I'm not surprised that others are thinking about that. Our promotional level was, again, the lowest of our peers. It was lower than we would have expected in normal circumstances because the focus is on supply chain and getting food onto the shelves and managing promotional volumes and having colleagues in-store, setting up promotional ends, et cetera, was not something that would have been at all appropriate in the middle of this crisis.And I don't know, James, that we issue a number on our promotional mix for the quarter. I don't have it. Do you?

[James Collins, Head of Investor Relations]

No. So we -- it's not a number that we typically share. I think I can look at it and come back to you, Xavier.

[Kevin O'Byrne, CFO, Member of the Operating Board & Director]

It's lower than normal, Xavier, but it's -- this is -- the lower promotional stance, giving customers everyday value is exactly what we've been doing for a number of years and we'll continue to do. And you'll see more of that as we prepare for what will be a more challenging second half.Look, apologies for rushing the last few questions there, but we were just a bit tight on time. Really appreciate you all calling in to cover off the quarterly statement. If you've got any further questions, feel free to e-mail James, and we'll help you off-line. And look forward to hopefully seeing you all and -- face-to-face at the next results, but we shall see.Thanks very much. Bye now.

[Operator]

Thank you. That does conclude then the call for today. You may now disconnect. Thanks for joining, and have a very good day.