22 April 2015

·     £1.4bn Group trading profit, in line with expectations

·     UK like-for-like sales volumes up for first time in over four years,  driven by better availability, service and pricing;  like-for-like sales performance improved to (1.0)% in Q4

·     Significant reduction in UK trading profit, as previously announced

·     Tough trading conditions overseas, especially in Korea; disappointing performance in Europe

·     Transformation programme outlined in January progressing well; portfolio review ongoing

·     £(7.0)bn one-off charges, predominantly non-cash; includes £(4.7)bn fixed asset impairment, reflecting challenging industry conditions and profit decline

·     Pension deficit funding plan agreed with Trustee, comprising cash contributions of £270m per annum

·     No final dividend, as previously announced

·     Enhanced disclosure, including property valuation/ownership and commercial income

·     Reiterating commitment to reinvest any savings or outperformance into further improvements for customers

"It has been a very difficult year for Tesco.  The results we have published today reflect a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years.  We have faced into this reality, sought to draw a line under the past and begun to rebuild, and already we are beginning to see early encouraging signs from what we've done so far.

Over the last six months we have put customers back at the centre of everything we do.  By focusing on the fundamentals of availability, service and targeted price reductions, we have seen a steady increase in footfall, transactions and, most significantly, volumes.  More customers are buying more things at Tesco.

We are making deep changes to the way we organise and run our business, with a simpler, more agile office team, more colleagues serving customers and a new approach to the way we work with suppliers.  I do not underestimate how difficult some of these changes have been for the team and I thank everyone for their professionalism and contribution at this time of great change.

The market is still challenging and we are not expecting any let up in the months ahead.  When you add to this the fundamental changes we are making to our business and our offer, it is likely to lead to an increased level of volatility in short-term performance.  Our clear priority - and the one that will deliver sustainable value for our shareholders - is to improve consistently for customers.  The changes we have made and will continue to make put us in a stronger position to do this."

^*      Group sales (inc. VAT) exclude the accounting impact of IFRIC 13 (Customer Loyalty Programmes). 

^**     52 week growth rates exclude week 53 (the 7 days ended 28 February 2015) for the UK and Republic of Ireland.

^***   Trading profit and underlying profit before tax are defined in Note 1 on page 16.

^**** Net debt excludes the net debt of Tesco Bank.

Our performance in the first half of the year was not competitive enough in the face of challenging market and trading conditions.  On 23 October 2014, we set out three key priorities.  The progress we have made against these priorities includes:

1.   Regaining competitiveness in core UK business:

·      4,652 net additional customer-facing roles in stores since September

·      more space for the top 1,000 lines in each store, increasing availability, particularly in peak trading

·      improved pricing on hundreds of branded products in January, with further price cuts on essential products such as butter, bread and ham in March

·      a new commercial approach, with a planned review of each of our product ranges over an 18-month period, to simplify, further improve availability and set lower, more stable prices

·      met with over 100 suppliers, creating new business plans to drive volume growth through a more focused range and create cost efficiencies throughout the whole supply chain

·      restructuring of UK office and store management largely complete

·      majority of initial annual cost savings of £250m available for reinvestment in 2015/16; further £150m savings identified across the Group

·      on track to close Cheshunt and move head office to Welwyn Garden City in 2016

·      closure of 43 unprofitable stores completed earlier this month

·      Matt Davies takes up role as UK CEO on 11 May 2015, earlier than originally anticipated

2.   Protecting and strengthening the balance sheet:

·      decision not to pay a final dividend for 2014/15

·      capital expenditure budget for 2015/16 confirmed as no more than £1bn

·      funding plan agreed with pension trustees to close actuarial deficit

·      consultation launched with colleagues to replace the defined benefit pension scheme with a defined contribution scheme

·      all three Blinkbox businesses (movies, music and books) and Tesco Broadband sold or closed

·      review of strategic options for dunnhumby business well-advanced; portfolio review ongoing

·      exited plans to build out 49 stores; significant reduction to our store building programme

·      thorough review of Group's property portfolio, with impairment charge of £(4.7)bn ensuring impact of challenging industry conditions and profit decline are reflected on balance sheet

·      asset swap completed in March with British Land to regain sole ownership of 21 superstores

3.   Rebuilding trust and transparency:

·      progress towards re-establishing trust in our pricing policy

·      simpler performance measures launched - sharp reduction in the number of targets

·      new Code of Conduct launched in February, with comprehensive training for 30,000 colleagues; 'Protector Line' in place across all markets

·      increased focus on building longer-term, mutually beneficial partnerships with our suppliers; 'Supplier Helpline' launched last month

·      simplification of commercial income underway; new guidelines launched

·      improved stock routines in place and a comprehensive review of our property portfolio

·      increased disclosure, including additional detail on property valuation and ownership

·      new national charity partnership launched with Diabetes UK  and the British Heart Foundation

·      extended 'Eat Happy Project' to work with The Scout Association and The Children's Food Trust

Outlook:

The market is still challenging and we don't expect this to change in the immediate future.  Over the next 12 months we will continue to focus on our three priorities: regaining competitiveness in our UK business; protecting and strengthening the balance sheet; and rebuilding trust and transparency in the business and the brand.

We are already making good progress on our initiatives and on the basis of actions already undertaken they will deliver significant cost savings in 2015/16. The immediate priority for these and any other savings delivered is reinvestment in the customer offer in order to further restore UK competitiveness.

Group Sales:

^*    The UK segment excludes Tesco Bank, which is reported separately in accordance with IFRS 8 'Operating Segments'.

^**    Asia consists of Malaysia, South Korea and Thailand, and the results of our business in India, prior to the formation of our JV with Trent
     Hypermarkets Ltd.

^***   Europe consists of Czech Republic, Hungary, Poland, Slovakia, Turkey and Republic of Ireland.

^**** Sales (inc. VAT) and Revenue (exc. VAT) exclude the accounting impact of IFRIC 13.

On a 52 week basis, Group sales, including fuel, declined by (1.3)% at constant rates and by (3.0)% at actual rates.  Further information on sales performance is included in Appendices 1 to 4 starting on page 37 of this statement.  

The UK grocery market remains highly competitive with macro-economic deflationary pressure and significant price investment across the industry.  For the year as a whole, UK like-for-like sales excluding fuel declined by (3.6)% but we saw an improving trend into the second half driven by investments across the offer.  Customer transactions, having been in decline since the beginning of 2012, increased by 1.5% in the fourth quarter, with like-for-like sales performance improving to (1.0)%.  Our online grocery business continued to grow ahead of the market, driven by an increase of nearly 20% in the number of orders year-on-year.

Market conditions were tough across the Asia region.  In South Korea, DIDA regulations continued to have a significant impact due to a higher number of enforced Sunday closures and increased restrictions on morning trading hours.  After the stabilisation of the political situation in Thailand, the recovery in consumer spending has been slower to materialise than initially anticipated.  Trading performance in Malaysia has been impacted by protests against some Western-owned businesses and a challenging economic environment.

Overall, our trading results in Europe were behind our expectations.  Whilst we saw some improvement in the fourth quarter, the like-for-like sales performance was mixed over the course of the year.  We have seen strong competition from discount retailers and this held back our sales performance, particularly in Ireland which saw a like-for-like sales decline of (6.3)%.  Whilst the majority of our markets have seen negative currency impacts, this has been particularly marked in Europe as the Euro fell to seven-year lows against Sterling by year-end.

Group Trading Profit:

Group trading profit was in line with expectations at £1,390m, and was impacted by a challenging year for the UK business.

In the UK, our profit performance mainly reflects the combination of the deterioration in like-for-like sales - which was at its most marked at the end of the first half - and the impact of previous initiatives.  The fundamental change to the way we do business with our suppliers, with significantly less focus on commercial income, further impacted profitability.  The investments we have made in service, availability and, selectively in price in the second half - which have resulted in an improving like-for-like sales performance - are also a contributing factor.

In Asia, trading profit was £565m, (15.3)% lower year-on-year at constant rates, principally due to the operational gearing effect from the impact of a negative like-for-like sales performance in all three markets.

In Europe, the profitability of our Central European businesses continued to be under pressure.  This was compounded by a £(30)m charge relating to the write-off of a fuel debtor in Turkey.  Recent legislative changes in Hungary, including mandated store closures on Sundays and, in particular, the introduction of a 'food supervision fee' from 1 January 2015, will have a material impact to ongoing market profitability.

Consultation started last month on a significant restructure of the leadership team for Czech Republic, Hungary, Poland and Slovakia to move from operating as individual country teams to one regional team.  This restructure will create substantial buying and operational synergies and will support us to unlock more opportunities to invest in the customer offer.

One-off items:

^* Last year's number is before a £(540)m write-down of goodwill relating to discontinued operations

In total, we have recognised £(7.0)bn of one-off charges within these results.  Of this amount, £(0.6)bn will result in a direct cash outflow, with the remaining amounts being non-cash adjustments to balance sheet carrying values.

Each year we review the carrying value of our stores to ensure that they are supported by their value in use or their fair value less the costs of disposal.  Challenging industry conditions and the decline in profit over the last year have resulted in an impairment charge of £(3.8)bn against our trading stores.  We have also written down the value of work-in-progress by £(925)m, primarily reflecting the decision we announced in January 2015 not to proceed with 49 sites in our property pipeline.  Further detail can be found in Note 12 on page 30 of this statement.

After reviewing performance across our businesses, we have booked further goodwill and other impairments totalling £(878)m.  These include an impairment of £(630)m relating to our investment with China Resources Enterprise Ltd (CRE), £(116)m relating to Dobbies and other UK businesses, and an impairment of £(82)m in our investment in joint ventures which principally relates to the strategic decision to slow the roll out of Harris+Hoole and Euphorium sites.

There is a one-off increase of £(570)m in stock-related charges, which follows the adoption of a forward-looking provisioning methodology.  The charge also includes a £(168)m impact of a reduction in the level of in-store costs capitalised to inventories.  Further detail can be found in Note 4 on page 24 of this statement.

In January, we described a restructuring of central overheads, simplification of store management structures and increased working-hour flexibility, in order to deliver ongoing savings in the region of £250m per year.  The associated one-off cost of c.£(300)m has been recognised in full within these results.  The remaining balance includes a further £(41)m relating to restructuring in the first half and a £(20)m one-off cost relating to the UK store closures announced in January this year.

The commercial income adjustment refers to the impact on prior years of the commercial income issues that we announced last September.  At the time of the interim results, the impacts on prior years were estimated as resulting in the profit before tax for the year ended 22 February 2014 being overstated by £70m, and for the years prior to this being overstated by £75m - a combined total of £145m relating to prior years.  Subsequent to October 2014, we continued to focus on this area and identified some further amounts, bringing the total one-off adjustment to £208m for our UK and Irish businesses.

'Other' one-off items of £(223)m include £(81)m loss on disposal and associated costs relating to Blinkbox, £(41)m backdated charge relating to the assessment of rates for ATM sites in Tesco stores, and £(27)m provision for customer redress within Tesco Bank.  The two latter amounts were included as one-off items within our interim results.

Other property-related items:

Losses arising on other property-related items were £(60)m.  There were no sale and leaseback transactions in the second half of the year and minimal profits from transactions in the first half were offset by property-related costs and provisions. 

After these items, the operating loss for the Group was £(5,792)m.  A reconciliation of trading profit to operating loss can be found in Note 3 on page 19 of this statement.

Joint ventures and associates:

The most significant year-on-year change in joint ventures and associates was the inclusion of our partnership with China Resources Enterprise Ltd (CRE) which was formed in May 2014 and which was loss-making for the period.  UK property joint ventures also generated a lower level of profit.

Finance costs:

Underlying net finance costs increased to £(409)m from £(315)m last year.  Capitalised interest reduced by £35m to £44m, in line with reduced levels of work-in-progress.  The remaining increase in underlying net finance costs was due to set up costs relating to new credit facilities as well as a lower level of finance income.  Further details can be found in Note 6 on page 26 of this statement.

Group statutory losses before tax were £(6,376)m.

Dividend.  As announced in January, the Board has taken the decision not to pay a final dividend, with the full year dividend solely reflecting the interim dividend of 1.16p paid on 19 December 2014.  Future dividends will be considered within the context of the performance of the Group, free cash flow generation and the level of indebtedness.

Group tax:

The effective rate of tax for the Group was 20.7%, with a charge of £(199)m based on underlying profit.  Last year's rate of 15.4% reflected the one-off effect of a lower UK corporate tax rate on deferred tax liabilities.

Diluted losses per share were (70.24)p.  Further details on the calculation can be found in Note 10 on page 29 of this statement. 

Summary of total indebtedness:

^* Includes both continuing and discontinued operations.

Total indebtedness increased by £(3.1)bn year-on-year to £(21.7)bn.  Net debt was £(8.5)bn, an increase of £(1.9)bn on last year, due to lower profits and a working capital outflow (before one-off items) of £(0.7)bn.  Further detail on net debt can be found in Note 15 on page 34 of this statement.

Discounted operating lease commitments were £(9.4)bn.  The operating lease expense in the year was £1,486m, an increase of £72m on last year, mainly due to rental inflation, the impact of the 53^rd week and the effect of sale and leaseback transactions completed during 2013/14 and in the first half.  Following the year-end, in March 2015 we regained sole ownership of 21 superstores in a transaction with British Land.  As a result of the transaction, which will result in lower lease commitments and a reduced exposure to inflation-indexed rent reviews, we will consolidate around £500m of debt.

Pensions.  We have agreed a deficit funding plan with the Pension Trustee, comprising cash contributions of £270m per annum.  This follows the completion of the triennial actuarial valuation last month, which determined the deficit at £(2.8)bn as at the valuation date of 31 March 2014.  On an accounting basis, the Group's net pension deficit after tax increased from £(2.6)bn last year to £(3.9)bn at the year end.  This was driven by a reduction of 80 basis points in real corporate bond yields, leading to a corresponding reduction in the discount rate used to measure our long term liabilities, and is despite a strong asset performance.  Further detail on pensions can be found in Note 13 on page 32 of this statement.

Protecting and strengthening the balance sheet is a priority for the Group.  We are taking a number of steps to improve our position: the portfolio review is well underway, we have reduced planned capital expenditure to £1bn this year, we have started consultation to close the defined benefit pension scheme and we made a decision not to pay a final dividend for 2014/15.  We have a strong funding and liquidity position including £2.2bn of bilateral facilities and a £2.6bn revolving credit facility, and a robust debt maturity profile.

Summary retail cash flow:

^* Includes both continuing and discontinued operations.

The decrease in retail working capital was driven by one-off items.  The outflow in working capital, before one-off items, was £(0.7)bn reflecting a new approach to our cash payment terms with suppliers, partially offset by an underlying improvement.  Cash interest paid was higher than last year, reflecting higher underlying finance costs and timing differences, which resulted in additional interest instalments on two medium term notes compared to the prior year.  Cash capital expenditure was down £0.5bn to £(2.2)bn in line with our commitment to reduce spend.  Further detail on cash flow can be found in Note 3 on pages 22 and 23 of this statement.

Capital expenditure and space:

^* Excluding franchise stores and 'gross space added' excludes repurposing/extensions.

Group capital expenditure decreased by £0.7bn year-on-year to £2.0bn, with lower spend in each region.  As we described in January, we are planning a significant reduction in Group capital expenditure for the current year to £1.0bn. 

We opened 1.6m square feet of gross new space in the year, but this was offset by the closure of 1.1m sq. ft. of space, primarily in Turkey and Hungary and the repurposing of 0.6m sq. ft. of space, mainly in Asia.  Since the year-end, we have completed the closure of the 43 stores in the UK announced in January 2015.  This represents 0.6m sq. ft. of space and is expected to result in a sales impact of around (0.4)% for 2015/16.

We continue to grow our franchise store network.  During the year, we opened 1m sq. ft. of space in our franchise stores, mostly in South Korea, and are planning to open a further 0.6m sq. ft. this year.

Detail of Group actual and forecast space is included in Appendix 6 starting on page 39 of this statement.

As we set out in October 2014, we will progressively enhance the transparency of our disclosure.  In today's release we have increased our disclosure relating to property, commercial income and net debt (Note 15 on page 34).  We will also add further detail to our notes on joint ventures and associates and operating leases in our 2015 Annual Report and Financial Statements.  For 2015/16 onwards we will move to operating profit as our headline performance measure, adjusted only for any large and distorting impacts, which will be fully disclosed.

Property:

At the year end, the estimated market value of fully-owned property across the Group was £22.9bn.  This represents a reduction of £7.6bn year-on-year, driven mainly by a significant weakening of the UK retail property market and some weakening in our other markets.  This valuation represents an estimated surplus of £2.7bn over the year-end net book value.  The estimated market value excludes our share of property joint ventures. Including this share, the valuation would increase by £0.9bn, net of the debt in the joint ventures.

Last year's disclosed property valuation of £34.1bn included £1.2bn relating to our Chinese operations and £2.4bn from our share of joint venture property, with no deduction for associated debt.

In March, the British Land asset swap added a further £0.7bn to the estimated market value of our fully-owned property as we took ownership of 21 superstores.  Including this increase, our Group freehold ownership percentage by value is now 55%.

Commercial income:

Commercial income represents part of our overall economic relationship with suppliers.  Consistent with standard grocery market practice, we negotiate a very wide range of payments to and from our suppliers including fees, contributions, discounts, multiple offers and volume rebates.  Whilst we have embarked on a fundamental review which will significantly simplify our approach, in total we currently use over 20 different categories of variation in payment terms.  Many of these relate to adjustments to a cost price and can be considered (and are in practice) a part of the standard unit price variations that can be expected under normal, competitive market conditions.  As such these amounts are recognised in the income statement as a deduction to the cost of goods sold.

A number of commercial income categories can be conditional on the satisfaction of certain actions or performance conditions by either Tesco or the supplier in question, including the achievement of agreed sales volume targets, the provision of certain benefits such as marketing materials or promotional product positioning, and costs incurred for unplanned variations in product specification.  In most instances, the arrangements that set out these terms cover periods that are within or end at the same point as our financial year. 

Where agreements are in place across a period end, judgement can be required to assess if the conditions will be met, and therefore to estimate the period end amounts payable and receivable.  For example, where there are volume-related allowances spanning different account periods, the Group assesses the probability that targeted volumes will be achieved based on historical and forecast performance, recognising the appropriate amounts in the period end balance sheet and income statement.

Commercial income is reflected in a number of balance sheet categories - principally due to differences in timing between recognition of income, receipt of cash and sale of goods.  In order to provide greater clarity on the accounting for commercial income - including those instances where judgement and estimates are used - we are increasing our disclosure to show the effects of commercial income on the following balance sheet accounts:

·      Inventories.  The carrying value of inventories is reduced by the value of commercial income which will be earned when the associated stock is sold.

·      Trade and other receivables.  Amounts that have been invoiced to suppliers but not yet received are included within trade and other receivables.

·      Accrued income.  Any amounts earned but not yet invoiced to suppliers are included in accrued income.  The majority relates to amounts outstanding under large supplier agreements or promotional allowances that run up to the period end.  The balance primarily reflects amounts due under long-term agreements for volume rebates.

·      Trade payables.  Most agreements with suppliers enable income earned to be offset against amounts owed.  These balances are included as a deduction within trade payables.

·      Accruals and deferred income.  Any amounts received in advance of income being earned are included in accruals and deferred income.

The impact of commercial income on each of these accounts for the years to 28 February 2015 and 22 February 2014 is shown below:

In highly competitive market conditions, Tesco Bank's revenue was up 2.1% to £1,024m driven by strong growth in lending to customers.  

We have expanded our range of mortgage and loan products and, in June 2014, we launched our personal current account.  Our core motor and home insurance business has seen 3% growth in accounts, having expanded our underwriting providers and implemented digital improvements to enhance the customer experience. 

Trading profit was £194m, in line with the prior year, with strong underlying growth offset by our ongoing investment in personal current accounts. 

An income statement for Tesco Bank is available in Appendix 7 on page 42 of this statement.  Balance sheet and cash flow detail for Tesco Bank is available within Note 3 starting on page 20 of this statement.  Tesco Bank's preliminary results are also published today and can be found at www.corporate.tescobank.com.

Contacts

Investor Relations:                       Chris Griffith                      01992 644 800

Media:                                       Tom Hoskin                       01992 644 645

Brunswick                         0207 404 5959

This document is available at www.tescoplc.com/prelims2015.

A meeting for investors and analysts will be held today at 9.00am at London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS.  Access will be by invitation only.  For those unable to attend, there will be a live webcast available on our website at www.tescoplc.com/prelims2015.  This will include all Q&A and will also be available for playback after the event.  All presentation materials, including a transcript, will be made available on our plc website.

An interview with Dave Lewis, Chief Executive, and Alan Stewart, Chief Financial Officer, discussing the Preliminary Results is available now to download in video, audio and transcript form at www.tescoplc.com/prelims2015.

Change in reporting date

We will provide a Q1 update to the market on the same date as our Annual General Meeting, on 26 June 2015.