J Sainsbury PLC

LSE:SBRY

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, and welcome to the Sainsbury's Q1 Trading Statement 2021/'22 Analyst Q&A Call hosted by Simon Roberts. I will now hand over to your host, Simon. Please go ahead.

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Thank you. Well, good morning, everybody, and I want to thank you for joining us this morning to talk through our quarter 1 trading statement, which covers the 16 weeks to June 26. I'm joined this morning with Kevin, Kevin O'Byrne, our CFO. I'm going to give a brief summary first, then of course, we'll be happy to take all your questions.The webcast will show the slides I'm going to refer to over the next few minutes. But just in case you've dialed in by phone, we've also sent those around by e-mail this morning, and they're also available on the website. So I hope everyone's got the slides at hand. Okay, so turning to the slides then. So to begin with, of course, I want to thank my colleagues for the brilliant job they continue to do in delivering for our customers. As we said in the statement, sales have been significantly ahead of our expectations across Grocery, General Merchandise and Clothing. And we've put more Grocery volumes through our business this year than we did last year when we were dealing with panic buying and, of course, the first lockdown.Now this has taken a huge effort throughout the business, particularly in the light of some of the well-known challenges through the supply chain. And so as well as thanking all of my colleagues, I'd also like to recognize the great support we continue to receive from our suppliers in keeping products available for customers despite the demand and logistics challenges that are out there. So turning to Slide 2. Whilst the strength of our Grocery sales is in part due to a stronger market, it is also a reflection of the work we've done to improve all aspects of our customer offer and the very high standard of customer service we're now delivering both in stores and online, which, alongside the improvements in value and product innovation, is really driving some encouraging market share gains for us.The result of this was a retail sales growth, as you can see, of 1.6% or 10.3% on a 2-year basis, which was ahead of our expectations. Grocery sales were up 0.8% year-on-year and up more than 11% on 2 years ago. And we've been seeing a really good response, really good customer response to the investments we've been making, particularly in value, in innovation and, as I say, in customer service.And so I'm really encouraged that we will be able to use some of that quarter 1 sales outperformance to accelerate investment in the customer offer and bring forward investments we'd originally planned for next year. And in particular, as you have seen, we announced yesterday an additional GBP 50 million of price investment, which is focused on the center of the plate and on the everyday essentials that really matter to our customers this summer. Now in addition, we stated today that we expect underlying profit before tax this year to be at least GBP 660 million, having previously signaled our comfort with prior consensus at around GBP 620 million. So overall, I think we have a good balance between flowing through some of that revenue benefit to the bottom line and clearly reinvesting to keep on improving the customer offer in line with our Food First strategy we laid out in November. So turning to the next slide to Slide 3. So looking at this slide, on sales growth and working across the chart, you can see here that Grocery growth is up on the year despite the very challenging comparative period, which does reflect the ongoing strength, I think, of both the grocery market and, of course, of our market share gains. Argos sales were down against the extraordinary period, of course, last year, driven by the first national lockdown and the very good weather we had this time last year. But we're ahead of our guidance of sales being in line with 2019/'20 as a base. Now beneath that headline number, we've seen some very encouraging growth in areas like Home and Furniture, offset by declines in some categories that performed exceptionally well during the first lockdown last year, such as laptops, office furniture and outdoor products.And as you can see, sales of General Merchandise and Clothing have also bounced back strongly in Sainsbury's stores as transaction numbers have recovered. And we're also, particularly pleased with the Clothing growth, as you can see, against the relatively strong performance last year and again winning market share here even as some of the competitors have reopened stores fully for the first time. So turning to the next slide, you can really see here some context as to what's changing in the Grocery business. And when we look at this slide, it shows a very gradual but clear normalization of in-store transaction and basket spend levels. Now this is something that we expect to continue as restrictions ease further and customers spend more time eating, working, socializing and having holidays outside homes and inside and outside the U.K. So we're not expecting the exceptional benefit we've seen to Grocery sales to continue into the second half or into our next financial year. Now turning to the next slide in continued growth in digital sales. This really shows the shift to digital sales has -- what that's been versus 2 years ago, even as we've been able to open and reopen Argos stores and more customers are returning to supermarkets, with online grocery participation slightly down on peak levels, but still, as you can see, significantly higher than in Q1 last year. Again, we would expect some further gradual change as customer habits normalize. But we are adapting really well and delivering, as I say, strong customer service online and in stores, and we're making sure, too, that we deliver that efficiently. So turning to Slide 6. We committed that we would consistently show you the same market share metrics every time we report. And I'm really encouraged by Slide 6 because what it shows is that our volume growth versus the rest of the market over the first quarter. And it's, I think, a clear demonstration of the progress we're making with our food strategy, showing that in quarter 1, our volume growth on both a 1-year and 2-year basis was not only ahead of our superstore competitors, but also ahead of the market in total. And this demonstrates how well customers have responded to the better value, the innovation and the customer service that we've been delivering. It's early progress, of course, as we execute against our Food First plan, and we still have much to do. But we are encouraged by the strong momentum we're already seeing across fresh foods and across grocery, too. Now turning to the next slide, looking at customer satisfaction. You'll be familiar with the format of what we're showing here when it really highlights the customer satisfaction against our superstore competitors. And for us, this is really fundamental because as we've come through COVID, we've seen that the core service attributes of availability, colleague friendliness and speed of service are even more important to customers. In supermarkets, we've improved quarter-on-quarter and grown our lead at the same time versus our key competitors.Now in April, I said that we have more to do to improve the online customer experience. And again, as you can see, we've made a good step on here as order numbers have normalized, and we've moved back to further improve our position at the top of the pack. And we, of course, too, have been very focused on safety throughout, and we continue to lead the industry on safety, too. So turning to Slide 8. And Slide 8 really is an update on what we showed you in April, demonstrating the further progress we've made on our pricing position versus Aldi. And we are very focused, as you know, on the center of the plate products that we know really matter to our customers and where we know we're generating particularly strong and good halo spend elsewhere in the basket.So we've made this week's announcement of GBP 50 million worth of price investment in key products like seasonal soft fruit and meat, fish and poultry lines against the backdrop of the strong customer response we've seen from this initial price investment activity. Now versus Tesco, we're flat on the quarter and continuing to make progress over the longer term. And just to be clear, we're comparing ourselves here with a Tesco basket that assumes 100% Clubcard prices penetration. Turning to Slide 9. I know there will be, of course, a lot of focus on what the new normal looks like for online grocery. So as the chart on the left shows, customers are beginning to return to more normal shopping patterns as restrictions ease and with online demand reducing gradually from peak levels and transaction numbers increasing in stores. Now we are really well placed to serve customers whatever the balance might settle out. And we're encouraged by the number of customers who shopped online with Sainsbury's for the first time during the pandemic and who've now got on to become loyal customers shopping online and in store. Now looking at the chart on the right-hand side of this slide, we've been clear that there will be some online cost headwinds as order numbers reduce. But we've also said that we expect store pick rates to improve, and that's clear from the top right-hand chart with item pick rate per hour up 42% year-on-year and up 11% on 2 years ago. And this, of course, has a significant benefit to online operating costs. Turning to the next slide, this really demonstrates the fundamental transformation of the Argos business. Argos stores were reopened early in the quarter, but the shift to online ordering has endured with 90% of sales starting online. We've made further progress, too, with the Argos estate with the stand-alone store count now down to 387 stores from around 600 at the start of the pandemic. We actually opened our first local fulfillment center in Bristol last week. And this is the first part of a network that will transform the economics of rapid fulfillment and improve the speed and breadth of product availability for customers. So turning to the next slide on our key priorities. Well, we're only 4 months into the financial year and, of course, expect a lot of change in the months ahead. But we do feel we're making good, early progress on the priorities that we set out in November. With food customers noticing and responding well to the progress we've made on value and innovation, we're well underway with the Argos transformation plan, and the bank is in good shape. We've also got better visibility and confidence on the cost savings that are helping fuel improvements to our customer proposition. And so finally, on Slide 12, what I committed to come back to you every time we speak on our key metrics. And on the operational metrics first, well, I'm encouraged -- we're encouraged by our grocery market share performance on both a 1- and 2-year basis. And one of the drivers of that has been our customer satisfaction where we're improving year-on-year and, importantly, extending our lead versus key competitors.As you know, we outlined our plan for better commitments last month. And with the launch of Helping Everyone Eat Better, we've now fully integrated that into our customer plan and our customer communications. We'll, of course, update more on the financial metrics with our interim results in November, but I'm pleased that we've been able to upgrade our guidance today. But really more than that, I'm delighted that we've been able to use the benefits of our sales strength to reinvest faster in the customer offer than we'd originally planned. And just finally to say, our team right across the business are very focused on the important summer months ahead and ensuring that we continue to deliver the best grocery experience for all our customers. Of course, it's still early days in the execution, as I say, on our Food First plans, but we're in good shape and there's great energy, focus and momentum in the business behind what we think we can deliver next.So thank you for listening as I've shared those slides, and we'll now open up the call for your questions.

[Operator]

[Operator Instructions] Your first telephone question comes from the line of Andrew Gwynn, Exane.

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

So one question, actually, but covering a few areas, but really around disruption. Obviously, you flagged in the statement some of the disruption we've seen in nonfood. I'm wondering if you could also cover off the HGV shortage we've been reading a lot about. And then secondly, the Brexit and Northern Ireland, just where we are in terms of the latest there.

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Thanks, Andrew. I'll try and give you some context on that. So I mean I think a couple of important things to say. I mean, clearly, there's a number of factors at play here, which is making supply challenging some areas for retailers. And I think the key point is that our team are working really hard both upwards in the supply chain with our suppliers, with our key partners to make sure we keep flow of goods moving really well in the circumstances so we can get products on shelf for our customers. And you can see in our results today that our availability performance, particularly, we're really encouraged by it. It's challenging. We've got a high level of demand. But the team across supply chain, logistics, retail, every part of the business and all of our relationships with our suppliers are working really hard keep to driving that. And I think the industry stepped up a lot, hasn't it, over the last 18 months. And we've learned a lot and achieved a lot, and we've all really come together on these challenges, and that's exactly what's happening right now. Of course, there are issues well documented in terms of HGV drivers. And as I say, the team are working really hard to secure the best support we can. We have in-house logistics in Sainsbury's, which is important in terms of being able to be sure between depot and store of our capacity, but the supply chain issues further upstream are ones that we're focused on. And then on Northern Ireland, to your second point, well, look, I would say 2 things here. The first thing is that we continue to work closely with the government and industry to find solutions. And we would urge the government to find solutions that, of course, can help simplify the border requirements, particularly in terms of the cost and complexity there. We're working really closely with our suppliers to make sure that customers can get the products that they need.You'll be aware that we set up a partnership, a local partnership in Northern Ireland with Henderson. That's going well. And so across our 13 stores in Northern Ireland, the combination of what we're doing with our suppliers, how we're moving goods into Northern Ireland and the support we've got from our local partner there means that, and to the largest extent, we can still provide good availability. But it's -- we're working hard on this. The teams are working very hard to maintain availability. It's not straightforward. And as I say, lots of focus on making sure we can simplify the border requirements when and if that's possible.

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

Okay. That's all very clear. Do you think we're sort of past point of peak disruptions, say, in nonfood or in the Northern Island situation?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Yes. I mean maybe just -- thanks, Andrew. Just maybe a little bit on the nonfood side, giving you some context there on food. I mean I think on the nonfood side, clearly, there are some challenges, particularly given, from a global perspective, supply chains are under a lot of pressure. That's the impact of lockdowns in India, particularly, a lot of challenge on container availability, raw material challenges. So I think these issues on the General Merchandise and Clothing side will continue. We've described that through the remainder of the year.The combination of the supply chain challenges alongside the level of demand we're seeing means that every stage of the supply chain is under pressure. But again, the team are working really hard to improve availability as far as we can. And I think as far as we can see, everyone is on a kind of level playing field with this. So everyone is working hard improve it. It's challenging on the nonfood side, and we're working through it. In terms of Northern Ireland, I think, as I say, we're working hard, industry- and government-wise, to effect sort of positive momentum that we need, and we'll continue to do that over the weeks and months ahead.

[Operator]

Next question, Clive Black, Shore Capital.

[Clive W. Black, Head of Research]

Gentlemen, very well done. A star at the end of the first quarter. One question from me, it follows on from Andrew's actually. When one speaks to people in the supply chain, they are seeing enormous inflationary pressures across the board really. And I just wondered how you're managing and potentially mitigating that in grocery and nonfood, please?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Thanks, Clive. I mean, yes, I mean just to speak a bit on some of the inflationary pressures, as you say. I mean I think -- I'll think come back to our price position in a minute. I think overall, absolutely, there are pressures particularly on freight, particularly on logistics, containers. That's definitely the kind of key point of challenge in terms of where we're seeing inflation come through. Actually, in some of the product categories, we've seen a bit of deflation in the quarter, particularly on the fresh side. But exactly as you say, high demand for movement of goods. That situation is continuing to intensify as demand is higher. And that's why our trading teams, our supply chain teams, our procurement teams are really close to this issue.As we've seen this elevated level of demand come through the first quarter, ahead clearly of what we expected, it's one of the things we're having to adapt and move fast on, particularly when we look at over the summer months with the combination of all the sporting events happening, high levels of demand, staycation in the U.K. There's more challenge ahead here we're going to have to work through, Clive.

[Clive W. Black, Head of Research]

And is there a productivity you can -- productivity initiatives you can go above and beyond that you've talked about to date? Because as I say, we're waiting for inflationary pressures to come through on the shelf side [ essentially ].

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Yes. I mean if we talk more broadly beyond freight and logistics impacts, as we've talked, I mean I think when we look at what are we seeing on inflation in the first quarter, I mean the first thing to say and as you've heard in my comments, we're absolutely committed to strengthening our price position relative to our competitors, and we're really seeing the benefit of that. So we enter this period with our relative competitiveness at some of the best levels we've seen, and that's clearly an important part of our customer offer as we go into a potentially higher inflationary environment.That being said, in the first quarter, we've seen some inflation in some categories. We've talked about some of the commodity areas that are driving that. But as I say, too, in some of the fresh categories and actually the areas where we are investing more of our price investment, we've seen some deflation. That's quarter 1. As you say, I think it's pretty well trailed. The inflation pressures are building. That's why we are very focused on our cost-saving program.When I think about all of the activity we're driving through, we're encouraged by that progress, Clive. We've committed, as you know, to reduce our cost of sales by 200 basis points over the cost of our plan. And the team are really focused on the key programs in year 1. That's about the Argos transformation, and that's about the work that's happening in our supply chain logistics area. And all of this is about making sure we can mitigate cost headwinds and continue to invest in the offer.I think if I was to sort of pull this back up to the key point, our first quarter trading results show that COVID impacted the market -- the demand clearly. But they also show that we've grown market share because we've improved our value and we've improved our offer in food, and that's one of the things we're determined to keep finding the feel so we can continue.

[Operator]

Next question, Victoria Petrova, Crédit Suisse.

[Victoria Petrova, Research Analyst]

Congratulations on good results. I have 2 short questions. First is obviously, there is a lot of discussion around potential sale and leaseback schemes and overall interest of retail real estate in the industry. You own around 50% of your real estate and land. Could you please remind when was your last sale and leaseback deal and what yield was implied in it? And what is your view on your real estate overall, just in the context of an increased overall interest?And my second question is there is probably an ongoing sort of privatization in the sector. Do you see any additional challenges assuming you stay as a listed, independent from private equity company? Do you see any challenges if 1 or now 2 of the big 4 are private and are put under less pressure in terms of immediate results outlook and then potentially pricing, et cetera? What's your view on that?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Victoria, thank you. Look, Kevin, do you want to take the first question? And I'll come back to the second one. Kevin?

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

Victoria, well, our property, if you look at our supermarkets, if you look at the percent of space, we own about 57% of the space. It's about 53% of the stores, 57% of the square footage. We have no plans to do any sale and leasebacks. And our focus on free cash flow and cash generation is focused on underlying cash generation from the business, not sort of, if you like, financial engineering to generate cash. I can't remember when we last did. We certainly haven't done a sale and leaseback in my time in the business, and we have no current plans to do them.

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Thanks, Kevin. And then -- and to your second question, I think, as you say, a lot of interest in the sector, of course, and a lot of moving parts. I mean I'm just going to focus on where we are in our business. As you know, we set out a really clear plan in November, which was focused on the core value-creation priorities of Food First, Brands that Deliver and Save to Invest, underpinned by being really connected with our customers and our Plan for Better. And Victoria, we're really focused on delivering this plan.While the context of the market is clearly focused on an industry that's been undervalued over a period of time, supermarkets, strong assets, a lot of strong cash generation, I think our job is to deliver that plan. And now I hope the results that we're sharing with you today show the momentum we have in the business by focusing on the execution of these key priorities. And we committed to improve what we can do for customers and what we can deliver for our shareholders. And whilst there's a lot of speculation going on, I'm not going to comment on today. The team and I are really focused on delivering our plan so we can drive the value and do an even better job for customers, and that's where we are on it.

[Operator]

Next question, Nick Coulter, Citi.

[Nick Coulter, Director]

I have 2 questions, please. I'll go one by one, if I may. Firstly, on Argos, could you talk about the growth rates of the categories that weren't in supernormal growth in Q1 last year? I'm interested to get a sense of whether year-over-year underlying market share is building or falling now that everyone's stores are open, please?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Sure, Nick. So let me just try and give you some color on that. I think overall, you'll have seen in our statement, the Argos sales were up 6.7% over 2 years. So the first thing to say at the headline level is, clearly, we're encouraged by that, and that's a bit ahead of what we have expected. You'll remember in our guidance that we've planned for flat sales through the year on '19/'20. As you said, the shape of the performance by categories varies a lot given the impact of last year's lockdown. So the area that we're seeing particular growth in is in the Home and Furniture category. Furniture is up against last year, strong by the -- driven by strong performance in all of the subcategories of furniture. We're also seeing strong performance as we further roll out the Habitat brand and the products that go with it. So Home and Furniture would be a strength. On the other side, we saw really strong sales in the seasonal areas last year. And 2 factors there, really: one, just the fact that clearly, in lockdown last year, that elevated demand; secondly, I think we had 6 or 7 weeks of just brilliant weather through this period last year, which clearly, let's say, is going to change soon, but hasn't anniversary-ed this year. So there's a compound impact on some of the seasonal areas that just have been impacted by those things.And then in the consumer electronics space, again, a lot of demand last year driven by all of the obvious customer behavior that really resonated through the first period of the lockdown. So they are the kind of key moving parts of the Argos performance. I've come back to the headline guidance here, which is we plan for flat sales in the year. We were 6.7% up on the 2 years. And as we talked earlier, there's a bold and big transformation plan in the Argos business this year. And actually, profit delivery is primarily driven by that cost transformation program and by the tighter promotional stance we're taking in the Argos business. That's where we are.

[Nick Coulter, Director]

But do you think underlying market share is sticking? Or are you kind of gradually seeding some of the gains from last year? So obviously, the scenario is way better than you initially anticipated. If you go to get a sense of your best guess as to how that goes forward, it doesn't feel like everything is just going to drop off a cliff into H2 for you.

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

I think as we've said a number of times over, we're prudent about the second half in Argos because, of course, we did have a particularly strong Christmas and we had a very strong quarter 4. You'll remember the quarter 4 performance that will anniversary with strong [ team ]. I mean I think just the sort of 2 key points I would make here is, the first thing is the reopening phase, we're still relatively early into that. So I think the customer behavior is still normalizing, and it's quite a gradual normalization effect. So we're not seeing the full kind work through of that yet.And the second issue is, as we've talked, there are some challenges on the supply side which is impacting our availability in Argos at this point in time. And so whilst we've grown 6.7% on 2 years, whilst we're seeing growth in Home and Furniture, there are areas of the product offer in Argos where the availability isn't where we'd want it to be at the moment is challenging, and that's holding back some of the sales. And we see that situation continuing through the remainder of the year, but beginning to improve as we get further out.The one other point I would just make on this which is, I think, is just worth adding is that we do think customer spending will be more cautious as we get into the second half, too. And that's one of the reasons why we factored in this flat assumption on '19/'20 sales. Kevin, I think you wanted to add?

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

Yes. Nick, the only build would be if we looked across the share over the 2 years, we're happy with consumer electronics, and that's obviously an important part of the business; lost a little bit of share in some of the large domestic appliances, but very, very small. We've intentionally reduced our focus on toys, so that's a conscious decision. We're gaining share in things like sports, leisure, et cetera. And we're very pleased with the share we're gaining in furniture and home.

[Nick Coulter, Director]

Then perhaps I'd just ask a question, I'll come back to the issue of leverage. I guess events away from you, both with Asda and Morrisons, suggest that some folks think that the U.K. grocery sector has evolved a little perhaps to be more predictable and perhaps suitable for a higher level of leverage or directionally higher. It will be kind of great to get your kind of nascent thoughts here, both on the predictability and then directionally on leverage. Do you, seeing events away from you, think incrementally, you need to pay down more or pay down less before you start returning cash?

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

Well, Nick, I'd probably start by saying this is a trading statement, so we'll probably give you some more considered thoughts at another time. But look, we're clear -- we've got clear net debt leverage targets, as you know, and net debt-to-EBITDA less than 3x. And we feel this gives us the right level of financial flexibility in a changing market. We have a responsibility to manage this business for the medium term for all our stakeholders, that's shareholders, it's our pensioners, it's our colleagues, et cetera. And we want to ensure the business is resilient not just for now, but for decades to come.So I mean maybe the other point I'd make is we're also very disciplined about our free cash flow generation. We think this business should generate at least GBP 500 million a year of free cash flow, enough free cash flows for shareholders. We're very clear about that. We're pleased with the progress we're making. And I think the appropriate time to probably update on the targets is -- or the next steps is when those targets are met, and we'll talk more about it at the right time.

[Operator]

Next question, Rob Joyce, Goldman Sachs.

[Robert Joyce, Equity Analyst]

Just 2 from me. Just in terms of the GBP 660 million, you sort of said that's at least GBP 660 million, 2-year stack on Grocery, around 11% in that first quarter. What kind of 2-year stack number do we expect -- have to see for you to hit the GBP 660 million? And can we think about how that might flex? And the second one, sorry to harp on about inflation, but I guess 2 things. The industry data suggests that, as you say, we're in deflation and maybe some of that input cost hasn't been fully passed to the consumer. Outside of your own investment programs, do you think there -- is there any sense that inflation, the consumer isn't willing to accept inflation if it's passed to them? And do you see this -- anticipate there's been more of a concern if inflationary prices build in the second half of the year?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Rob, thanks. Maybe Kevin talks to the first question, and I'll come back on inflation in a minute. Kevin?

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

Rob, one thing we'd say is we can't assume that the demand would remain as strong as this. We think this is a first half effect. I have to say, in all my years in retail, the only thing I can remember at the time when it's been more challenging to forecast, what's going to happen in the coming months for a number of reasons, whether it's consumer demand, availability for all the supply chain issues that various people are talking about, do we have further lockdowns, what measure or reactions there might be. So it remains very challenging. So our best and balanced view at the moment is for at least GBP 660 million. We're budgeting cautiously for the second half for some of the reasons I've said. And I think that's probably all we can really say on the outlook.

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Thanks, Kevin. And then just trying to pick up a couple of other points you made there, Rob, on inflation. I think 2 things. I mean I think, as you've said, the level of impact in the first quarter has been broadly flat. We've talked about the areas where it's been a bit up and a bit down. And as you say, I think it's pretty clear that inflationary pressures will flow through. I think 2 things to say. I mean as we've talked this before, I would expect the industry to respond rationally to that. And because we start in a stronger value position relatively than we've been before, our intention here is absolutely to be committed to strengthening our price position as and if inflation builds a bit, and so to be able to relatively improve our price position as we do that. And as we've said, we've got a strong cost program, and we're working hard with our suppliers to mitigate that impact as far as we possibly can.So whilst it's clear that inflation prices will likely build, to your question, in the second half, I think as we look at our Save to Invest plans, if we look at the work we're doing with our suppliers, we're doing a lot to make sure we can mitigate those headwinds. And the last thing to say, I think at end of the day, my job -- our job as a team is to make sure we give our customers what they expect of us, and they're asking us to improve our price perception. We're working hard to do that. Actually, our price perception measures are 4% up on a year ago. So we're starting to see the benefit of that coming through. And despite these headwinds, we'll continue to work really hard to continue to build that.

[Robert Joyce, Equity Analyst]

Okay. Simon, so where you are seeing inflation and choosing to pass it to the consumer, you're not seeing any indication they're trading down or trading into different products?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Yes. I mean just to be as clear as I can be, in quarter 1, the pass-through has been relatively limited. And as I say, if you looked across the business in fresh, in the fresh categories, we're seeing some deflation, in some of the grocery categories impacted by some of the commodities that we said there's a bit of inflation there in freight. But overall, I would describe the inflationary pressures in the first quarter as being broadly flat overall, some ups, some downs. As we look ahead, as I say, the combination of the cost programs and the work with suppliers, we'll look to mitigate it as far as we can.

[Operator]

Next question comes from Demetris Demetriou, Schroders.

[Demetris Demetriou]

Congratulations on a very strong set of results. Most of my questions have actually been answered. I just wanted to quickly get a bit more clarity on the topic of cost inflation, specifically on the topic of freight and container availability. We are looking at ways to mitigate those impacts. I just wanted to understand a bit more how [indiscernible] adjusting to these challenges in terms of like sourcing or finding alternative suppliers. Are you potentially looking to relocating some of your Asian supply base? How does it work?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Demetris, thank you. I think I got most of your question, which I think just trying to give you some more color on the impact of some of the challenges, particularly in logistics and supply chains and the potential impact in terms of cost and inflation there. So I mean a couple of things to say and 1 or 2 points to reiterate from the earlier questions. As we've said, there's a number of factors at play here: clearly, a higher level of demand, which is really the sort of first -- the first driver of this; and then supply chains around the world, particularly on the General Merchandise and Clothing side where the combination of the lockdowns, India, for example, shipping container shortage, raw material challenges, even in some of our key categories such as consumer electronics, shortages of memory chips and then all of the associated kind of impact on freight around the world to get products here.So I think a couple of things going on. The first thing is we've done, actually through the pandemic, a lot of work to buy ahead on freight and buy container capacity ahead. And our teams in supply chain and procurement have been working really hard to buy as much capacity for the demand at the best price we can, and we continue to do that. And then secondly, this is all about day-to-day, hour-to-hour conversations with our key partners. And the team are working around the clock actually to make sure that, in the challenges that we have, we continue to do that.I think the second point I would make is that we do see the situation continuing on the GM&C side for a period of time for obvious reasons. Global supply chains will take an extended period to get back into some sense of normality, particularly given the demand curve that we've seen. And then on the food side, as I've said, again, wouldn't want to underplay, there are some significant issues upstream. That's impacting the ability to get product through the supply chain, particularly in the areas that are peaking at this time of the year. But again, the teams are working really, really hard to make sure we protect availability for customers. And the conversation we're having will mitigate the cost impact as far as we possibly can. And so far, we're doing a solid job doing that.I think that's answered your question, Demetris. I couldn't hear all of it, but I hope I've given you some sort of further sense on what you were looking for there.

[Demetris Demetriou]

It does answer my question.

[Operator]

Next question comes from James Grzinic, Jefferies.

[James Robert Grzinic, Equity Analyst]

I had 2 questions, really. The first one, for you, Simon. Can you perhaps clarify, now that we're shifting back to the new normal, what changing customer behavior you think is going to be most helpful for your earnings model?

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Sure. Yes, no problem. So I mean I think a couple of key points I would pull out here, and hopefully, the presentation this morning gave you some sense of it. I think as we've seen through the pandemic, there was, as we know, a very dramatic shift to online. And I think one of the first normalization effects we're seeing actually is that we're clearly maintaining a significantly elevated level of online performance where we are so significantly up on 2 years. But some of that online volume over the last quarter has come back into store. And so customers that shopped online are now returning to the physical store.And one of the sort of key manifestations of that, if you think at the peak, we were serving around 860,000 customers online. That was in quarter 4. That number at the exit point of quarter 1 is about 710,000. So we've seen a lessening of the online volume, but that's coming back into store. And actually, that works for us because customers are shopping in the way that they want to shop, but also we can pick more efficiently at that order volume than we can at 860,000. 860,000, we're right at the top of the capacity. Whereas the 710,000, we're seeing our item pick rates, for example, up 40% just over on a year ago and up 11% on 2 years. So the movement in the online channel, we think, is helpful, led by customers. But I would make the point, we're still serving 710,000 customers a week online compared to 340,000 before the pandemic. The second big change in how customers are shopping has clearly been eating, preparing and enjoying more food at home. And that trend that started in the first lockdown, we see a good chunk of that enduring. I think, clearly, when you've been doing that for a year, there are elements of that, that customers are enjoying. And we can see in this elevated level of grocery demand with more home working, with more desire to cook and prepare food at home, that, that trend is likely to continue. And then the third thing, I think, underpinning all of that is the actions that we're taking. And we said we would put food first. We've committed to help our customers to eat better. And I think when you think about the big changes in the trends around food, improving our value, improving our innovation, improving our customer service is all about making sure that we really give our customers what they want. And so as this change happens through the summer and the autumn, of course, we're setting, of course, to try and maintain as much of the share that we've captured as possible by being there for what customers want. So the headlines are changing goal, changing the level of home consumption, more home cooking and improving our value, innovation and service so we hold on to the share that we've seen come through.

[James Robert Grzinic, Equity Analyst]

Very clear. And I had a follow-up for Kevin and just really a follow-on from what Victoria and Nick were asking. I mean I take your point on leverage, but do you think the right leverage is not an absolute sort of level, and it can be shifted according to how more broadly the industry has leveraged that? How do you think about that, Kevin?

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

Again, probably a conversation for another day, James. But I think it's something as a Board that we talk about reasonably regularly. And as a Board, we're comfortable given our responsibility to manage the business in the medium to long term, to manage it on behalf of all our stakeholders, as I say, the shareholders, the pensioners, our colleagues, et cetera. I think the net debt-to-EBITDA of less than 3x gives us that level of financial flexibility that we think is appropriate at this stage.

[James Robert Grzinic, Equity Analyst]

Understood. And just one clarification question. You mentioned the level of freehold ownership that applied -- obviously, that the convenience channel is fully leased for you guys. Like the...

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

Yes. We own about 3% of our convenience stores, which is a very small percentage. It doesn't even register in square footage because they're tiny stores. So it's the supers where we have our freeholds.

[Operator]

[Operator Instructions] Next question comes from the line of Sreedhar Mahamkali, UBS.

[Sreedhar Mahamkali]

A couple of them on price sort of value reality and perception and one on online, please. So firstly, in terms of value reality, the slides you've shown improving versus Aldi. Aldi Price Match itself is running around 270, 280 items. Is that the right level for you to run this at? Or do you see room to extend it further now that you understand the impact, clearly, a significant impact on value perception? And that's the first one versus Aldi. Secondly, when you're measuring prices versus Tesco, you actually referred to it, Simon, you were including Clubcard prices. But at Sainsbury, do you think there's any merit to go down the route of sort of personalized pricing, promotion, sort of leveraging Nectar? That's the second one. And third one, online economics, overall economics. So I think last year, you talked about improving overall operating costs by 4 percentage points or even more. And I think in the release today, you've talked about 2-year pick rate up 11%, which I think is pretty impressive. But broader operating cost in online, can you talk to it? Are you continuing to improve it this year, especially now that the demand is sort of slightly easing? So those are the 3 questions.

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Sreedhar, okay, thanks. Well, let's try and give you some perspective on value and Sainsbury's Quality, Aldi Price Match. And then maybe with Kevin's help, we'll come, too, on economics in just a second. So I mean I think going back to the first point here, when we laid out our strategy in November, we committed to bring better value for our customers. And I have to say, we're really encouraged actually by what we're seeing on Sainsbury's Quality, Aldi Price Match, which we launched, as you'll remember, back in quarter 4.The key objective of this plan is to win a bigger basket with our secondary customers, and that's what we're seeing is happening. And it was specifically about investing in those products in the basket, as you say, around the mid-200, 250 products where it really matters to customers on value, meat, fish, poultry, produce, dairy. And you remember we've talked before that compared to some of our competitors, we have a higher proportion of our product range in the fresh categories. And actually, the further investment we've made this week, we've put some further products into Sainsbury's Quality, Aldi Price Match. And again, the weighting of those are very much towards our fresh categories.So just to give you some examples of that, if you looked at some of the reductions we've done this week, I encourage you to go and have a look in store, high-volume SKUs, Sainsbury's strawberries this week down from GBP 1.75 to GBP 1.59. Lots of investment in the meat, fish and poultry categories, in key areas like chicken breast, chicken portions, bacon. So key products at the heart of the shopping trip where we're getting our value even sharper against Aldi, and we're encouraged by what we're seeing there.And really, I would say that in terms of what we're doing on Sainsbury's Quality, Aldi Price Match, it's the halo benefit we're seeing not only in the secondary customer but across the wider basket. So as we get our value sharper here, we're seeing customers spend more across the rest of the store, which is exactly what we set out to do. And that's why we put more products in, particularly focused, as I say, on fresh food, fresh vegetables. And that's why our BI has improved again in the quarter, as you can see. So in the center of the plate categories, as you can see, we've improved against last year by 380 bps and quarter 1 on quarter 4 by 170.So that's the position on value. And as we execute our Food First plan, the team are really focused on driving this through because it's giving us some good benefits. More broadly, on pricing, I mean I think as you saw us talk about in our prelims, we're really encouraged by the number of customers that are both buying into Sainsbury's Quality, Aldi Price Match, also Price Lock, which is a key part of our value commitment on over 2,300 products. And again, some of our investment this week has gone into those products, too. And then on Nectar, to your point, you'll remember that we updated that we are now over 7 million digital app users. We think that gives us a really important access point to customers that shop Sainsbury's and Argos digitally. And of course, as you would expect, we're looking at all the opportunities that we see in terms of reaching our customers more personally with a higher personalized offer, and the team are very much on with that. And having that number of customers means we can speak relatively more than any of our competitors in that space. And we'll talk more about the Nectar plans later in the year. Sreedhar, we're going to have an Nectar event, as we've talked about, and we'll give you a good sense of the plans that are developing there on personalization, particularly when we reconnect on that. So that's where we are on value. Maybe just to hand to Kevin on online?

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

Yes. Sreedhar, yes, just on online economics, I mean you saw the material improvement last year where we had a four-fold increase in profit contribution and a two-fold increase in the margin percentage. And we're happy with the progress that we've made in quarter 1. The 4 elements of pick rates, van utilization, the basket size and the stem mileage and/or if you look at year on 2 years, and we've given some examples this morning, pick rates up 11% on 2 years, basket size up 5%. So all that works well.And as we [indiscernible] on Slide 9 today, that allows us to be more efficient, actually, that sort of level of volume. And of course, if you look at the overall box economics, as many of those customers go back to shopping in store, that helps the overall economics of the business. So we're pleased with the online economics, and the overall box economics improved as some of those customers and many of those customers come back into store.

[Operator]

Thank you all for attending. That concludes your conference call for today. You may now all disconnect. Thank you for joining, and enjoy the rest of the day.

[Simon John Roberts, CEO, Director & Chairman of Operating Board]

Thank you, everybody. Thanks for joining us this morning.