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Tesco PLC  -  TSCO   

Preliminary Results 2017/18

Released 07:00 11-Apr-2018

RNS Number : 4964K
Tesco PLC
11 April 2018
 

Preliminary Results 2017/18

ANOTHER STRONG YEAR OF PROGRESS

FIRMLY ON TRACK TO DELIVER MEDIUM-TERM AMBITIONS

 

On a continuing operations basis

 

 

2017/18

 

 

2016/17

 

 

Change at

constant rates

 

Change at
actual rates

Headline measures1:

 

 

 

 

 

Group sales2

£51.0bn

£49.9bn

 

0.6%

2.3%

Group operating profit before exceptional items3

£1,644m

£1,280m

 

25.9%

28.4%

Diluted EPS pre-exceptional items, IAS 19 finance costs and IAS 39 fair value remeasurements4

11.88p

7.30p

 

 

62.7%

Dividend per share

3.0p

-

 

 

n/a

Retail operating cash flow5

£2,773m

£2,278m

 

 

21.7%

Net debt5,6

£(2,625)m

£(3,729)m

 

 

down 29.6%

Statutory measures:

Revenue

£57.5bn

£55.9bn

 

1.3%

2.8%

Operating profit

£1,837m

£1,017m

 

76.6%

80.6%

Profit before tax

£1,298m

£145m

 

769.7%

795.2%

Diluted EPS

12.08p

0.81p

 

 

1,391.4%

Headlines

Positive sales2 and profit3 growth, strong cash5 generation

·    Group sales2 up 2.3% to £51.0bn; ninth consecutive quarter of like-for-like sales growth in Q4

·    UK like-for-like sales7 up 2.2%; consistent strength in fresh food; (0.4)% drag from GM changes

·    Group operating profit before exceptional items3 up 28.4% to £1,644m

o Includes £31m full year profits arising on property-related items (£(2)m net loss in second half)

·    Group operating margin3 2.9% (+57bps); 3.0% (+64bps) in 2H, well on track for 3.5-4.0% 2019/20 ambition

·    Retail operating cash flow5 up 21.7% to £2.8bn; Retail free cash flow5 of £1,377m

·    Net debt reduced by £1.1bn during the year to £(2.6)bn; total indebtedness £4.4bn lower to £(12.3)bn

·    Final dividend of 2.0p, giving FY dividend of 3.0p - reflects improved performance and Board confidence

·    Statutory revenue up 2.8% to £57.5bn; Profit before tax up £1,153m to £1,298m

Further progress against each of our six strategic drivers

·    Brand health8 continues to strengthen; quality perception +2.7 points and value perception +2.0 points9

·    In-year cost savings of £594m; savings of £820m to date towards £1.5bn medium-term target

·    Generated £2.8bn of retail operating cash5; £499m underlying working capital10 inflow

·    Improving the mix across geographies, channels and product; 16% GM range reduction in the UK

·    Released a further £290m value11 from property; 109 sites sold; 1.1m sq. ft. space re-purposed

·    Innovations including contactless Clubcard; own brand re-launch: new Wicked Kitchen vegan range

Booker merger completed

·    Booker FY results12 show continued customer satisfaction, top line growth, and strong cash generation

·    On track to deliver recurring run-rate of at least £200m pre-tax synergies; c.£60m in first year

Dave Lewis, Chief Executive:

"This has been another year of strong progress, with the ninth consecutive quarter of growth. More people are choosing to shop at Tesco and our brand is stronger, as customers recognise improvements in both quality and value.

We have further improved profitability, with Group operating margin reaching 3.0% in the second half.  We are generating significant levels of cash and net debt is down by almost £6bn over the last three years.  All of this puts us firmly on track to deliver our medium-term ambitions and create long-term value for every stakeholder in Tesco.

I am delighted to have completed our merger with Booker, and we are moving quickly to deliver synergies and access new growth, making the most of the complementary skills in our combined business."

Serving Britain's shoppers a little better every day

 

Like-for-like sales performance7

 

 

1Q

2017/18

2Q

2017/18

3Q

2017/18

4Q

2017/18

 

1H

2017/18

2H

2017/18

 

FY

2017/18

UK & ROI

2.2%

2.1%

2.3%

2.4%

 

2.1%

2.4%

 

2.3%

   UK

2.3%

2.1%

2.3%

2.3%

 

2.2%

2.3%

 

2.2%

   ROI

0.2%

2.0%

3.3%

5.3%

 

1.1%

4.3%

 

2.7%

Central Europe

(0.4)%

0.6%

0.8%

0.4%

 

0.1%

0.6%

 

0.3%

Asia

(6.0)%

(10.7)%

(9.6)%

(14.0%)

 

(8.3)%

(11.8)%

 

(10.0)%

Group

1.0%

0.6%

0.9%

0.4%

 

0.8%

0.6%

 

0.7%

 

 

Headline Group results

 

A full Group income statement can be found on page 14.

 

52 weeks ended 24 February 2018

 

On a continuing operations basis

2017/18

 

2016/17

 

Year-on-year change

(Constant

exchange rates)

 

Year-on-year change

(Actual

exchange rates)

Group sales (exc. VAT, exc. fuel)2

£50,991m

 

£49,867m

 

0.6%

 

2.3%

Fuel

£6,500m

 

£6,050m

 

7.1%

 

7.4%

Revenue (exc. VAT, inc. fuel)

£57,491m

 

£55,917m

 

1.3%

 

2.8%

 

 

 

 

 

 

 

 

Group operating profit before exceptional items3

UK & ROI

Central Europe

Asia

Tesco Bank

 

£1,644m

£1,053m

£119m

£299m

£173m

 

 

£1,280m

£803m

£58m

£262m

£157m

 

 

25.9%

30.3%

89.7%

7.6%

10.2%

 

 

28.4%

31.1%

105.2%

14.1%

10.2%

Include exceptional items

 

£193m

 

 

£(263)m

 

 

 

 

 

Group operating profit

£1,837m

 

£1,017m

 

76.6%

 

80.6%

 

 

 

 

 

 

 

 

Group profit before tax before exceptional items, IAS 19 finance costs and IAS 39 fair value remeasurements

£1,282m

 

£781m

 

 

 

64.1%

 

 

 

 

 

 

 

 

Group statutory profit before tax

£1,298m

 

£145m

 

 

 

795.2%

 

 

 

 

 

 

 

 

Diluted EPS before exceptional items, IAS 19 finance costs and IAS 39 fair value remeasurements

11.88p

 

7.30p

 

 

 

 

Diluted EPS

12.08p

 

0.81p

 

 

 

 

Basic EPS

12.12p

 

0.81p

 

 

 

 

 

 

 

 

 

 

 

 

Dividend per share

3.0p

 

-

 

 

 

 

 

 

 

 

 

 

 

 

Capex13

£1.1bn

 

£1.2bn

 

 

 

 

Net debt5,6

£(2.6)bn

 

£(3.7)bn

 

 

 

 

Cash generated from retail operations5

£2.8bn

 

£2.3bn

 

 

 

 

Notes

1. The Group has defined and outlined the purpose of its alternative performance measures, including its headline measures, in the Glossary on page 55.

2. Group sales exclude VAT and fuel. Sales growth shown on a comparable days basis.

3. Excludes exceptional items by virtue of their size and nature in order to reflect management's view of the performance of the Group.

4. Headline earnings per share measure excludes IAS 39 fair value remeasurements as well as exceptional items and IAS 19 net pension finance costs.  Full details of this measure can be found in Note 9, starting on page 38.

5. Net debt, retail operating cash flow and retail free cash flow exclude the impact of Tesco Bank in order to provide further analysis of the retail cash flow statement.

6. Net debt includes both continuing and discontinued operations.

7. Like-for-like is a measure of growth in Group online sales and sales from stores that have been open for at least a year at constant foreign exchange rates.

8. As per YouGov BrandIndex (customers recommend) February 2018.

9. Reflects year-on-year change in YouGov Brand perception measures of quality and value.

10. Working capital excluding the impact of exceptional items.

11. Value released from property relates to gross proceeds from property disposals in the year.

12. Booker unaudited results for the financial year to 30 March 2018. Further details can be found on page 13 of this release.

13. Capex is shown excluding property buybacks. Statutory capital expenditure (including property buybacks) for the 52 weeks ended 24 February 2018 was £1.5bn (LY £1.6bn).

 

Creating value for our key stakeholders

We have continued to make further progress this year, guided by the six strategic drivers that we set out in October 2016, as we create long-term and sustainable value for our key stakeholders.

 

Customers

·    260,000 more shoppers are shopping at Tesco1

·    continued improvement in Brand perception measures of quality (+2.7 points) and value (+2.0 points)2

·    helpful introduction of contactless Clubcard, rolled out to 18 million Clubcard members

·    embarked on re-launch of over 10,000 own brand products with 1,300 completed to date

·    rolled out industry-leading same-day online grocery delivery service to 99% of UK postcodes

·    successful launch of Wicked Kitchen with 44% of ready meal sales to new customers in the category

·    completed roll-out of Tesco Pay+ to all our stores in the UK with 458,000 App downloads to date

·    surpassed 5 million customers at Tesco mobile and winner of 2018 Best Network for Customer Service3

·    significant improvement (+7 NPS) in customer ratings of community and charity initiatives

 

Colleagues

·    implementing a 10.5% increase for hourly paid store colleagues over the next two years with the first of three stages completed in November

·    maintained strong engagement as a great place to work and shop as we continue transformation

·    simplified our operational structures to improve efficiency, supporting all colleagues to offer the highest levels of customer service

·    low median gender pay gap of 8.7%, less than half the national average at 18.4%

·    developing the UK's leading workplace health programme for our 300,000 UK colleagues

 

Supplier partners

·    most improved retailer in our relationships with suppliers for the second successive year in the GCA survey published in June 2017

·    ranked first again in the independently-run Advantage supplier survey

·    Supplier Viewpoint measure maintained at a high level in the UK (78%) despite inflationary challenges

·    launched Partners Toolkit providing 1,695 UK fresh and packaged suppliers with convenient access to key documents and information

·    extended a number of UK supplier agreements to include our Central European businesses

·    innovations in packaging to cut down on food waste such as extending the freshness of avocados

 

Shareholders

·    operating margin of 2.9% (3.0% in 2H), up 57bps year-on-year

·    generated £2,773m of retail operating cash flow, including underlying working capital inflow of £499m

·    reduced net debt from February 2017 by £1,104m; pension deficit lowered by £2,776m

·    regained sole ownership of 17 stores; raised £290m in property-related proceeds

·    completion of our merger with Booker in line with deal timeline guidance

·    announced final dividend of 2.0p per share; targeting around two times EPS cover in medium term

 

Looking ahead

We remain firmly on track to deliver the medium-term ambitions we set out in October 2016:  to reduce our costs by £1.5bn, to generate £9bn of retail cash from operations and to improve operating margins to between 3.5% and 4.0% by 2019/20.  In addition, by further reducing debt and maintaining a disciplined approach to capital we can continue to strengthen the balance sheet and generate an increasing level of free cash flow.  Our intention remains to return to an investment grade credit rating, with our key metrics being fixed charge cover4 and total indebtedness/EBITDAR5.

The integration of Booker is well underway and we are focused on delivering the identified synergies to create value for all stakeholders. We anticipate a synergy benefit of c.£60m in the first year, growing to a cumulative c.£140m in the second year and reaching a recurring run-rate of c.£200m per year by the end of the third year.

As we look to capitalise on the enhanced opportunities for growth available to the combined Group, we will place increasing focus on growth in earnings and free cash flow generation, in order to deliver strong, sustainable returns for shareholders.

Notes

1. KantarWorldpanel UK data for the 52 weeks ending 25 February 2018.

2. Reflects year-on-year change in YouGov Brand perception measures of quality and value.

3. USwitch Broadband & Mobile Awards.

4. EBITDAR / Net finance costs (before exceptional charges, IAS 19 net pension finance costs and IAS 39 fair value remeasurements)  + Retail operating lease expense

5. Net Debt + defined pension deficit (net of tax) + discounted operating lease commitments / EBITDAR

 

Financial Results

Sales:

On a continuing operations basis

UK & ROI

Central Europe1

Asia2

Tesco Bank

Group

Sales

(exc. VAT, exc. fuel)

£38,650m

£6,343m

£4,947m

£1,051m

£50,991m

change at constant exchange rates3 %

2.2%

(1.6)%

(9.4)%

3.9%

0.6%

change at actual exchange rates3 %

2.5%

6.1%

(4.4)%

3.9%

2.3%

Like-for-like sales (exc. VAT, exc. fuel)

2.3%

0.3%

(10.0)%

-

0.7%

Statutory revenue

(exc. VAT, inc. fuel)

£44,908m

£6,585m

£4,947m

£1,051m

£57,491m

Includes: Fuel

£6,258m

£242m

-

-

£6,500m

1.  Central Europe consists of Czech Republic, Hungary, Poland and Slovakia.

2. Asia consists of Thailand and Malaysia.

3. Sales change shown on a comparable days basis; statutory Group sales change was 0.6% at constant exchange rates and 2.3% at actual exchange rates.

Group sales grew by 0.6% at constant exchange rates with like-for-like growth of 0.7%.  At actual exchange rates, sales grew by 2.3% including a 1.7% foreign exchange translation benefit due to the depreciation of Sterling.  Further information on sales performance is included in Appendices 1 to 3 on page 65 of this statement.

In the UK and the Republic of Ireland (ROI), like-for-like sales grew by 2.3%.  In the UK, like-for-like sales growth of 2.2% includes our ninth consecutive quarter of positive performance, despite an ongoing drag of (0.4)% from general merchandise as we take action to de-emphasise certain categories.  Like-for-like growth of 2.9% in food was driven by a consistently strong performance in fresh food, where we outperformed the market in volume terms by around 1.7%4.  During the fourth quarter we experienced some distribution-related disruption, following the administration of Palmer & Harvey, resulting in lost tobacco sales across December.  Despite these challenges, which are now behind us, we continued to deliver positive sales momentum through the fourth quarter.

Market conditions have remained challenging with continued cost price inflation.  We have worked hard with our supplier partners throughout the year to mitigate price increases wherever possible, and made a significant investment in the first half to further hold back inflation and protect customers.  We have continued to reduce promotional participation over the year, focusing instead on consistently offering the best value for customers on all of our products.

Our own brand ranges have performed very well, with like-for-like sales growing 4.2% year-on-year.  We have embarked on a re-launch of over 10,000 own brand products, across our entry, core and finest* ranges, with the initial focus on ready meals and Italian products.  Our new, exclusive Hearty Food Co. range of ready meals and improved core Tesco products have proved particularly popular, contributing to an increase in overall own brand participation of nearly one per cent.  Exciting innovations such as our plant-based Wicked Kitchen dishes have also proved popular with customers, experiencing strong repeat rate purchasing. 

We have continued to refine our general merchandise range, reducing SKUs by 16% as we focus on categories with more sustainable profitability.  We have delivered 2.7% sales growth in our home category, following the launch of our new own brand Go Cook and Fox & Ivy ranges.  These new brands have driven a 14% and 20% increase in customers to our cook and homeware ranges, respectively.  Clothing performed well throughout the year with like-for-like sales growth of 2.6%, reflecting the strength of the F&F brand and quality of our range. 

All store formats and channels have achieved like-for-like growth, with our large store business growing at 1.9% and our online grocery sales growing 5.1% with both higher order numbers and average basket size.  We have delivered 2.7% growth in our Express convenience stores, with a positive customer response to the changes we have made to tailor ranges and improve product availability.

4. Shows volume outperformance.  Data is for the 52-weeks ending 25 February and is sourced from IRI Retail AdvantageTM, global insight providers to the
   retail industry.  IRI market definition excludes Aldi and Lidl.

In ROI, like-for-like sales grew by 2.7% improving steadily throughout the year as customers responded well to an even more competitive price position.  The main driver of growth was a 4.2% increase in volume, well ahead of market volume growth.  Fresh food volumes were particularly strong, growing by 5.2% year-on-year.

In Central Europe, like-for-like sales increased by 0.3% despite competitive market conditions.  Our focus on improving the quality and breadth of the range in our stores has delivered positive results with fresh food sales growth of 1.2%.  However, this growth was held back by declines in general merchandise and clothing.  Our convenience formats delivered positive like-for-like growth across all countries.  We have continued to exit from unprofitable stores in the region, with 28 store closures contributing to an overall sales reduction of (1.6)% at constant exchange rates.  Legislative changes in the region are affecting our business, with Poland phasing in a gradual ban on Sunday trading from March 2018, which takes complete effect by 2020.

In Asia, our previously announced decision to withdraw from unprofitable bulk selling activities in Thailand and scale back mass couponing, contributed to a (10.0%) decline in like-for-like sales.  Adjusting for this impact, underlying like-for-like sales in the region were down (1.0)%, largely reflecting the deflationary effect of lowering our fresh food prices for customers. 

We have made a change to the reporting of a number of small sub-categories in Asia and Central Europe in order to better reflect Tesco's relationship with suppliers in respect of consignment sales.  This has a small impact on the total sales growth reported for our Asia and Central Europe segments - further information can be found in Appendices 1 and 2 on page 65.

Group statutory revenue of £57.5bn includes fuel sales of £6.5bn, which grew by 7.4% year-on-year driven largely by fuel retail price inflation.

 

Operating profit:

 

On a continuing operations basis

UK & ROI

Central Europe

Asia

Tesco Bank

Group

Operating profit before exceptional items

£1,053m

£119m

£299m

£173m

£1,644m

change at constant exchange rates %

30.3%

89.7%

7.6%

10.2%

25.9%

change at actual exchange rates %

31.1%

105.2%

14.1%

10.2%

28.4%

Operating profit margin before exceptional items

2.3%

1.8%

6.0%

16.5%

2.9%

change at constant exchange rates (basis points)

49bp

86bp

96bp

95bp

56bp

change at actual exchange rates (basis points)

50bp

87bp

99bp

95bp

57bp

Operating profit

£1,199m

£212m

£277m

£149m

£1,837m


Group operating profit before exceptional items was £1,644m, up 25.9% on last year at constant exchange rates and up 28.4% at actual rates.  Statutory operating profit of £1,837m includes the impact of exceptional items, which are described in more detail below and in Note 4 on page 32 of this statement.

UK & ROI operating profit before exceptional items was £1,053m, up 31.1%, with margin growth of 50 basis points year-on-year.  Our efforts to reduce operating costs and improve efficiencies across our store estate and head office have delivered a significant increase in profitability, particularly during the second half when our operating margin reached 2.5%, up 67 basis points year-on-year.  Further progress on maximising the mix within our business and driving volume more selectively, particularly in general merchandise, has aided margin expansion.

Central Europe operating profit before exceptional items was £119m, up £61m year-on-year at actual exchange rates. We have made continued progress towards operating the four markets we serve as one combined region, helping to improve our customer offer.  In the first half of the year we opened a new distribution centre in Galánta, Slovakia serving all four countries and benefiting from the best local practices in the region.  The resulting benefits of more effective stock management combined with our other efforts on cost savings have more than offset the impact of inflation on the cost base and enabled us to improve profitability.

Asia operating profit before exceptional items was £299m, up 7.6% at constant exchange rates and up 14.1% at actual rates.  This improvement has been driven by re-focusing on our core retail offer, as we have significantly reduced the level of bulk selling activity and short-term promotional couponing.  Furthermore, we have continued to reduce our cost base as part of the Group's overall cost savings programme.

Further information on operating profit performance is included in Note 2, starting on page 24 of this statement.

Property-related items in operating profit:

 

This year

Last year

Profits arising on property-related items

£31m

£(4)m

Exceptional property transactions

£79m

£165m

Other exceptional property-related items1

£10m

£(51)m

Total profits arising on property-related items

£120m

£110m

1. In 2017/18 this includes a £7m provision reversal relating to net restructuring and redundancy costs and a £3m provision reversal relating to net impairment of non-current assets and onerous lease provisions.  In 2016/17 we recognised a £(20)m charge relating to net restructuring and redundancy costs and a £(31)m net impairment of non-current assets and onerous lease provisions.

Across the Group, £31m of operating profit before exceptional items arose from property-related items.  This includes profits on the disposal of a development site in Welwyn Garden City in the UK and various other sites.  In the second half we realised a net loss of £(2)m with a gain on land and other smaller store disposals being offset by an increase in other property-related costs.

The majority of profits on property-related items have been treated as exceptional by virtue of the size and nature of the associated transactions.  In addition to £65m generated from two property-related transactions in the first half of the year (the development of our Hackney store as part of our 'air-rights' programme and our exit from a joint venture with British Land), a further £14m exceptional profit arose in the second half in relation to the disposal of one Central European store.

Further detail on exceptional property transactions and property-related items can be found in Note 4 on page 32 of this statement.

Exceptional items in operating profit:

 

This Year

Last Year

Net restructuring and redundancy costs

£(102)m

£(199)m

Net impairment reversal/(charge) of non-current assets and onerous lease provisions

£53m

£(6)m

Provision for customer redress

£(24)m

£(45)m

Interchange settlement

-

£57m

Investment disposal

£124m

-

Property transactions

£79m

£165m

Disposal of opticians business

£38m

-

Amounts provided and released in relation to SFO and FCA obligations

£25m

£(235)m

Total exceptional items in operating profit

£193m

£(263)m

Exceptional items are excluded from our headline performance measures by virtue of their size and nature in order to reflect management's view of the performance of the Group. In the current year, the net effect of exceptional items on operating profit is £193m, including the property transactions described above.

Net restructuring and redundancy charges of £(102)m relate principally to structural changes to our business to simplify our operating model within stores and head office. 

Net impairment reversal of non-current assets of £53m includes a net reversal of £185m in property, plant and equipment and investment property, a net £(24)m charge in software and other intangible assets and a net charge of £(108)m of onerous lease provisions.

Provision for customer redress of £(24)m relating to Tesco Bank, includes an increase of £(35)m in the provision for Payment Protection Insurance (PPI), partially offset by a £1m Consumer Credit Act (CCA) provision release and a credit of £10m received following the conclusion of negotiations with a third party in respect of previously recognised customer redress.

The gain on investment disposal of £124m reflects the sale of our remaining minority stake in the Lazada e-commerce platform, completed during the first half.  The sale of our opticians business in the UK & ROI to Vision Express resulted in a £38m gain on disposal.

In the prior year, we took an exceptional charge of £(235)m in respect of the Deferred Prosecution Agreement between Tesco Stores Limited and the UK Serious Fraud Office regarding historic accounting practices and an agreement with the UK Financial Conduct Authority of a finding of market abuse in relation to the Tesco PLC trading statement announced on 29 August 2014.  Included in this charge was £(85)m for the Shareholder Compensation Scheme.  With the Compensation Scheme now being closed to new claimants, we have released £25m of the amounts provided.  Outstanding claims submitted before the 22 February 2018 deadline are still being processed.

Further detail on exceptional items can be found in Note 4 on page 32 of this statement.

Joint ventures and associates:

 

This year

Last year

Share of post-tax losses from JVs and associates before exceptional items

 

£(6)m

£(30)m

Exceptional items:

Impairment in Gain Land

Insurance reserve adjustment

-

-

£(54)m

£(23)m

Share of post-tax losses from JVs and associates

£(6)m

£(107)m

Our share of post-tax losses from joint ventures and associates before exceptional items was £(6)m, an improvement of £24m year-on-year due to reduced losses recognised in Gain Land, our joint venture in China.  There were no exceptional items this year relating to our share of post-tax losses from joint ventures and associates.

 

Finance income and finance costs:

 

The following table sets out the components of net finance costs. 

 

 

This year

Last year

Interest payable on medium term notes, loans and bonds

£(363)m

£(434)m

Interest receivable on associated derivatives

£31m

£6m

Net interest on medium term notes, loans and bonds

£(332)m

£(428)m

Other interest receivable and similar income

£44m

£42m

Other finance charges and interest payable

£(70)m

£(89)m

Capitalised interest

£2m

£6m

Net finance cost before exceptional charges,  IAS 19 net pension finance costs and IAS 39 fair value remeasurements

£(356)m

£(469)m

IAS 39 fair value remeasurements

£23m

£61m

IAS 19 net pension finance costs

£(162)m

£(113)m

Exceptional charge - translation of Korea proceeds

£(38)m

£(244)m

Net finance costs

£(533)m

£(765)m

Net finance costs before exceptional charges, IAS 19 net pension finance costs and IAS 39 fair value remeasurements reduced by £113m year-on-year to £(356)m.  This 24.1% decline year-on-year was mainly driven by a net £96m reduction in interest on interest-bearing liabilities.  Debt maturities totalled £1.4bn during the year and we also undertook £1.3bn of bond tenders in two separate liability management exercises.  These bond tenders during the year contributed to £23m lower interest costs and we expect an associated reduction in interest payable of c.£50m on an annualised basis.  In cash interest terms, we were helped by a favourable timing benefit of £55m on our largest sterling-denominated bond, for which no annual coupon payment was made during the year owing to the timing of our year-end date. 

Net finance costs, which include non-cash items, were around 30% lower year-on-year.  Fair value remeasurements are largely driven by changes in the market's assessment of credit risk and various market indices which can fluctuate significantly.

Net pension finance costs increased by £(49)m year-on-year, driven by a higher opening pension deficit part offset by a lower opening discount rate.  Net pension finance costs are calculated by multiplying the opening deficit by the opening discount rate each year.  For 2018/19, they are expected to decrease to c.£(95)m as the impact of a higher opening discount rate is more than offset by the year-on-year reduction in deficit.

The exceptional charge of £(38)m relating to the translation of the remaining proceeds from the sale of our business in Korea will not arise again since the funds have now been moved to a Sterling denominated entity within the Group.  The proceeds had been held in GBP money market funds in a non-Sterling denominated subsidiary and the translation effect represents no economic cost to the Group.

Further detail on finance income and costs can be found in Note 5 on page 34.

Group tax:

 

This year

Last year

Tax on profit before exceptional items

£(286)m

£(185)m

Tax on exceptional items

£(20)m

£98m

Tax on profit

£(306)m

£(87)m

Tax on profit before exceptional items was £(286)m.

The effective tax rate on profit before exceptional items for the year is 25.0%.  As previously indicated this tax rate is higher than the UK statutory rate, primarily due to the depreciation of assets that do not qualify for tax relief and the impact of the 8% supplementary tax surcharge on bank profits.  We expect the impact of these items on the effective tax rate to reduce as our overall level of profitability continues to increase, and therefore expect the effective tax rate to reduce to around 20% in the medium term.

On a statutory basis, the total tax charge is £(306)m, which comprises £(232)m current tax and £(74)m deferred tax and includes £(20)m relating to tax on exceptional items.  Cash tax of £(176)m is £129m higher year-on-year, reflecting our improved profitability.  This is lower than the amount charged to the income statement in respect of current tax, primarily due to the timing of instalment payments.

The effective tax rate on profit before exceptional items for the 2018/19 financial year is expected to be slightly lower than this year, at around 24%.

Earnings per share:

On a continuing operations basis

This year

Last year

Diluted EPS pre-exceptional items, IAS 19 net pension finance costs and IAS 39 fair value remeasurements

11.88p

7.30p

Diluted earnings per share

12.08p

0.81p

Basic earnings per share

12.12p

0.81p

Our diluted earnings per share before exceptional items was 11.88p, 62.7% higher year-on-year principally due to our stronger profit performance.  Statutory basic earnings per share from continuing operations were 12.12p, significantly higher than last year.

Dividend:

As outlined in our merger prospectus published on 5 February 2018, we propose to pay a final dividend of 2.0 pence per ordinary share.  The proposed final dividend was approved by the Board of Directors on 10 April 2018 and is subject to the approval of shareholders at the Annual General Meeting to be held on 15 June 2018.  This takes the total dividend for the year to 3.0 pence per ordinary share following the payment of an interim dividend of 1.0 pence per ordinary share in November 2017.  We anticipate a split of broadly one-third to two-thirds between next year's interim and final dividends and intend to reach our targeted cover of around two times earnings in the medium term.

The final dividend will be paid on 22 June 2018 to shareholders who are on the register of members at close of business on 18 May 2018 (the Record Date).  Shareholders may elect to reinvest their dividend in the Dividend Reinvestment Plan (DRIP).  The last date for receipt of DRIP elections and revocations will be 1 June 2018.

Pension: 

On an IAS 19 basis, the pension deficit measure (net of deferred tax) has reduced from £5.5bn last year to £2.7bn at the end of the current year.  The movement during the year was partly driven by an increase in yields on corporate bonds, which drive the discount rate used for accounting purposes and our previously announced decision at the half-year stage to update the discount rate model in line with developing market practice and following actuarial advice.  In the Group's view, it now more appropriately reflects expected yields on corporate bonds over the life of the scheme's liabilities.  At the same time, the application of latest industry life expectancy tables and favourable actual scheme experience have also contributed to the reduction. 

During the year, the triennial pension review was concluded, with the business and the Trustees agreeing that annual contributions will increase by £15m to £285m per annum from April 2018, with our framework for the long-term funding of the scheme unchanged.  As at 31 March 2017, the actuarial deficit was £3.0bn, an increase of c.£0.25bn since the last triennial valuation. 

Further information on the Group's pension liability is available in Note 17 which begins on page 49.

Summary of total indebtedness1:

 

Feb 2018

Feb 2017

Movement

Net debt (excludes Tesco Bank)

£(2,625)m

£(3,729)m

£1,104m

Discounted operating lease commitments

£(6,931)m

£(7,440)m

£509m

Pension deficit, IAS 19 basis (post-tax)

£(2,728)m

£(5,504)m

£2,776m

Total indebtedness

£(12,284)m

£(16,673)m

£4,389m

1.     Total indebtedness is defined in the glossary, starting on page 55.

Retail net debt reduced by £1.1bn to £(2.6)bn as our retail operating cash flow and disposal proceeds were greater than capital expenditure and other charges.  Within net debt, we used surplus cash to prepay £1.3bn of the Group's long-dated bonds as part of our ongoing focus on strengthening the balance sheet.

Discounted operating lease commitments have reduced by £509m, including the benefit from the buyback of 17 stores in the UK during the year.

As outlined above, on an IAS 19 basis, our pension deficit decreased by £2.8bn as a result of an increase in yields on corporate bonds, as well as our decision to update the discount rate model.  We also updated our assumptions for life expectancy, reflecting the latest best estimates.

Overall, total indebtedness has reduced by £4.4bn in the year.  Net debt has reduced by almost £6bn over the last three years.

IFRS 16 'Leases' will be effective in the Group financial statements for the 52 weeks ending 29 February 2020.  The Group intends to retrospectively adopt the standard, with comparatives restated from a transition date of 25 February 2018.  The standard has no impact on the Group's underlying cash flows.  It is, however, expected to have a significant impact on reported assets, liabilities and the income statement of the Tesco Group, as well as the classification of cash flows relating to lease contracts.  The Group is in the process of finalising this work and setting out related accounting policies and procedures for leases.  Until this work has been carried out, it is not practical to provide a reasonable estimate of the financial effect of IFRS 16.

Summary retail cash flow:

The following table reconciles Group operating profit before exceptional items to Retail free cash flow. 

Further details are included in Note 2, beginning on page 24.

 

This year

Last year

Operating profit before exceptional items

£1,644m

£1,280m

Less: Tesco Bank operating profit before exceptional items

£(173)m

£(157)m

Retail operating profit from continuing operations before exceptional items

£1,471m

£1,123m

Less: Retail operating loss (discontinued operations)

-

£(15)m

Add back: Depreciation and amortisation

£1,212m

£1,172m

Other reconciling items

£28m

£12m

Pension deficit contribution

£(245)m

£(248)m

Underlying (increase) / decrease in working capital

£499m

£379m

Retail cash generated from operations before exceptional items

£2,965m

£2,423m

Exceptional cash items:

       Relating to prior years:

          - SFO Fine and Shareholder Compensation Scheme payments

          - Utilisation of onerous lease provisions

          - Restructuring payments

       Relating to current year:

          - Restructuring payments1

Other2

£(192)m

 

£(149)m

£(92)m

£(53)m

 

£(67)m

£169m

£(145)m

 

 

£(111)m

£(54)m

 

£(75)m

£95m

Retail operating cash flow

£2,773m

£2,278m

Memo: Retail operating cash flow on continuing operations basis

£2,773m

£2,279m

Cash capex

Net interest & tax

£(1,190)m

£(428)m

£(963)m

£(541)m

Property proceeds

£253m

£509m

Property purchases - store buybacks

Disposals and dividends received

£(393)m

£362m

£(365)m

£369m

Retail free cash flow

£1,377m

£1,287m

   1. In addition to cash outflows of £(67)m relating to current year restructuring, exceptional items charged to profit include a net restructuring provision of £(35)m, resulting in a total
      exceptional restructuring charge to operating profit of £(102)m.

   2. Other exceptional cash items include VAT recovered in relation to the appeal against HMRC regarding the treatment of VAT on Clubcard rewards of £160m and BLT working capital

      acquired of £9m (2016/17: legal settlement of £57m in respect of interchange fees, development stock disposal of £36m and discontinued operations of £2m).

Retail cash generated from operations increased by £495m to £2,773m in the year.  This increase of 21.7% year-on-year, was mainly driven by improved Group profitability.  Further improvements in working capital of £499m also contributed to the improvement in cash flow, although this includes £102m of timing benefits arising principally as a consequence of the failure of a supplier towards the end of the year.

Exceptional cash items include a cash outflow of £149m relating to payment of the SFO fine and Shareholder Compensation Scheme payments.  The Compensation Scheme is now closed to new claims and we expect a further cash outflow of c.£60m relating to claims currently being processed.  Other cash exceptional items totalling £169m include £160m VAT recovered from HMRC regarding the treatment of VAT on Clubcard rewards.  HMRC have appealed the decision and as a result, the VAT refund has no net effect in the Group's income statement as we have recognised a provision of £176m for the recovered VAT and interest which would be due to HMRC if their appeal is successful.

Cash capital expenditure of £(1.2)bn was up year-on-year due to the timing of payments relating to commitments made towards the end of the last financial year.  Combined net cash interest and tax of £(428)m was £113m lower than last year.  Whilst our Retail cash tax was £67m higher year-on year, cash interest benefited from debt maturities and bond tenders, as well as the favourable timing benefit of £55m on our largest sterling-denominated bond.

We generated £253m of proceeds from property sales, £256m lower year-on-year.  These proceeds include the sale of our Hackney store in the first half and a number of other sites mainly in the UK and Central Europe throughout the year.  We completed the buyback of 17 stores during the year, for a cash consideration of £393m, including £189m related to our transaction with British Land.  We anticipate rental savings of £26m on an annualised basis as a result of these property purchases, which reduce our discounted lease commitments by £197m.

Finally, cash inflows of £362m relating to disposals and dividends received includes consideration of £196m from the sale of our remaining minority stake in the Lazada online business, a dividend of £50m from Tesco Bank, and proceeds of £45m relating to the disposal of our optician business in the UK to Vision Express, in addition to a number of smaller transactions.

Retail free cash flow of £1,377m is up 7.0% year-on-year.  This is lower than the rate of growth in retail operating cash flow principally due to the timing of cash capital expenditure and lower property proceeds.

Capital expenditure and space:

 

UK & ROI

Central Europe

Asia

Tesco Bank

Group

 

This year

Last year

This year

Last year

This year

Last year

This year

Last year

This year

Last year

Capital expenditure

£676m

£731m

£133m

£141m

£239m

£261m

£50m

£46m

£1,098m

£1,179m

Openings (k sq ft)

104

180

13

-

477

549

-

-

594

729

Closures  (k sq ft)

(75)

(1,752)

(435)

(201)

(175)

(26)

-

-

(685)

(1,979)

Repurposed (k sq ft)

(75)

(98)

(492)

(133)

(527)

(696)

-

-

(1,094)

(927)

Net space added (k sq ft)

(46)

(1,670)

(914)

(334)

(225)

(173)

-

-

(1,185)

(2,177)

Capital expenditure shown in the table above reflects expenditure on ongoing business activities across the Group.  Our capital expenditure in the UK focused on maintaining and replacing essential assets, alongside programmes to refresh and repurpose the estate, enhancing our store operations.  New store capex has mainly been allocated to our new store opening programme in Thailand, with a limited number of Express store openings and a net gain of one new superstore in the UK.  Our capital expenditure in Central Europe relates mainly to repurposing of existing stores.

Across the Group, our repurposing programme has contributed to a net reduction of 1.1m sq. ft., has focused on improving the ease and relevance of our large-store shopping trip for customers.  In the UK & ROI, we have repurposed 75,000 sq. ft. across 20 stores.  Within the year, we opened over 50 concessions within our stores, including Arcadia Group, Holland & Barrett, Dixons Carphone and Next.  A brand new Booker 'Chef Central' concept store was also opened within the Tesco Extra Store at Bar Hill, Cambridge in February 2018.  The store primarily serves professional caterers but is open to all customers.

In Central Europe, we have primarily been partnering with other clothing brands in repurposed store space including H&M and Decathlon, as part of our biggest opening programme ever.  In Asia, we have worked with a range of different partners across a variety of brands including MR. DIY and Major Cineplex.

In the UK, we opened 24 new stores in the period but exited from 22.  The net increase consists of expansion in Superstore and Express store numbers offset by closures of Metro and One Stop stores.  In Asia, we opened a net 38 stores primarily in our convenience formats in Thailand, whilst in Central Europe we closed a net 26 stores during the year.

Capital expenditure for the full year was £1.1bn.  Going forward, we expect our annual capital expenditure to remain within a range of £1.1bn to £1.4bn.

Statutory capital expenditure of £1.5bn as shown in Note 2 on page 24 includes £398m relating to property buybacks.

Further details of current and forecast space can be found in Appendix 5 starting on page 66. 

Property

 

This year

Last year

 

UK & ROI

Central Europe

Asia

Group

UK & ROI

Central Europe

Asia

Group

Property1 - fully owned

 

 

 

 

 

 

 

 

- Estimated market value

£13.9bn

£3.1bn

£3.7bn

£20.7bn

£13.1bn

£3.1bn

£3.7bn

£19.9bn

- NBV2

£12.9bn

£2.8bn

£2.5bn

£18.2bn

£12.6bn

£2.6bn

£2.5bn

£17.8bn

% net selling space owned

54%

78%

69%

64%

52%

78%

68%

63%

% property owned - by value value3

52%

77%

78%

58%

50%

78%

77%

57%

1. Stores, malls, investment property, offices, distribution centres, fixtures and fittings and work-in-progress.  Excludes joint ventures.

2. Property, plant and equipment excluding vehicles.

3. Excludes fixtures and fittings.

The estimated market value of our fully owned property has increased by £0.8bn to £20.7bn, with a surplus of £2.5bn over the net book value (NBV).

Our Group freehold property ownership percentage, by value, has increased to 58% from 57% last year, driven by the UK & ROI.  We regained ownership of 17 stores in the UK during the year, increasing our proportion of freehold ownership by value in the UK & ROI to 52%.  This repurchase of stores will result in an annualised rental saving of £26m.  We continue to seek opportunities to further reduce our exposure to index-linked and fixed-uplift rent inflation where the economics are attractive.

Tesco Bank:

 

This year

Last year

YoY

Revenue

£1,051m

£1,012m

3.9%

Operating profit before exceptional items

£173m

£157m

10.2%

Statutory operating profit

£149m

£77m

93.5%

Lending to customers

£11,522m

£9,961m

15.7%

Customer deposits

£9,245m

£8,463m

9.2%

Net interest margin

3.9%

4.0%

(0.1)%

Risk asset ratio

19.3%

20.0%

(0.7)%

Tesco Bank celebrated twenty years of serving Tesco shoppers this year. Throughout the year, the Bank has continued to strengthen its product and service offering to customers, delivering growth of 4.1% in active customer account numbers across its primary products.  During the year, we completed the roll-out of the Group's digital wallet offering, Tesco Pay+, to every one of our stores in the UK.  In July 2017, we celebrated the fifth anniversary of the launch of our mortgage product which has now reached £3.0bn in balances.  In the space of thirteen years, we have opened over 300 Travel Money Bureaux, now selling over £1bn worth of currency per year and serving more than 3.7 million customers.

Operating profit before exceptional items increased by 10% year-on-year to £173m.  Lending growth in the year has been strong, driven by secured mortgage lending which now comprises 26% of the lending portfolio, versus 22% last year.  In addition, Money Services products have performed well overall as the Group continues to enhance the product range and expand the customer base.  Exceptional items of £(24)m relating to Tesco Bank are detailed in Note 4 on page 32 and include an increase in the provision for customer redress and a credit received following the conclusion of negotiations with a third party in respect of previously recognised customer redress.

The balance sheet remains strong and well-positioned to support future lending growth from both a liquidity and capital perspective with a risk asset ratio of 19.3%.

IFRS 9 'Financial instruments' replaces IAS 39 'Financial instruments: Recognition and Measurement', effective for accounting periods beginning on or after 1 January 2018.  The mandatory application date for IFRS 9 for the Group is 25 February 2018.  IFRS 9 requires the Group to recognise Expected Credit Losses (ECL) at all times, and to update the amount of ECL recognised at each reporting date to reflect changes in the credit risk of financial assets.  As a result of applying IFRS 9, the impact on opening retained earnings for the financial year 2018/19 for Tesco Bank is expected to be £(166)m.  This reflects the increase in impairment allowance under the new ECL model, net of deferred tax.  The impact of the new impairment requirements on the Retail business is not material.

An income statement for Tesco Bank can be found in Appendix 6 on page 69 of this statement.  Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 24 of this statement.  Tesco Bank's full year results are also published today and are available at www.corporate.tescobank.com.

 

Merger with Booker Group:

We completed our merger with Booker Group on 5 March, 2018, after the end of the Tesco financial year.  Our 'Joining Forces' integration programme is well underway and we are focused on delivering the synergies identified during the merger process.  We anticipate a synergy benefit of c.£60m in the first year post-completion, growing to a cumulative c.£140m in the second year and reaching the recurring run-rate of c.£200m per year by the end of the third year.

Booker Q4 results show a continued strong performance, with customer satisfaction up 0.3% to 85.7% and like-for-like sales up 9.9%.  Whilst Booker's full year results are still subject to audit approval, operating profit before exceptional items for the financial year to 30 March 2018 is c.£195m and net cash is c.£120m.

Transaction costs of £(26)m relating to our merger with Booker were included in Tesco's UK & ROI operating profit before exceptional items in the 2016/17 financial year.  Further costs and fees of £(21)m arising in the 2017/18 financial year have been treated in a consistent fashion.  A similar amount, consisting of stamp duty costs directly arising from the completion of the merger, will be charged to underlying profit in the 2018/19 financial year.  As outlined in our merger prospectus, we anticipate up to £(145)m of integration costs over three years, which will be treated as exceptional.

Contacts

Investor Relations:

Chris Griffith

01707 912 900

Media:

Jane Lawrie

01707 918 701

 

Philip Gawith, Teneo Blue Rubicon

0207 420 3143


This document is available at www.tescoplc.com/prelims2018

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/prelims2018.  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 website.

 

Disclaimer

This document may contain forward-looking statements that may or may not prove accurate.  For example, statements regarding expected revenue growth and operating margins, market trends and our product pipeline are forward-looking statements.  Phrases such as "aim", "plan", "intend", "should", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements.  Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is based on information available to Tesco as of the date of the statement. All written or oral forward-looking statements attributable to Tesco are qualified by this caution.  Tesco does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances.

 

Group income statement

 

 

 

 

 

Notes

52 weeks ended

24 February 2018

52 weeks ended

25 February 2017

Before exceptional items

 

£m

Exceptional items

(Note 4)

 

£m

Total

 

£m

Before exceptional items

 

£m

Exceptional items

(Note 4)

 

£m

 

 

Total

 

£m

Continuing operations

 

 

 

 

 

 

 

Revenue

2

57,491

-

57,491

55,917

-

55,917

Cost of sales

 

(54,092)

(49)

(54,141)

(52,899)

(116)

(53,015)

Gross profit/(loss)

 

3,399

(49)

3,350

3,018

(116)

2,902

Administrative expenses

 

(1,786)

153

(1,633)

(1,734)

(261)

(1,995)

Profits/(losses) arising on property-related items

 

31

89

120

(4)

114

110

Operating profit/(loss)

 

1,644

193

1,837

1,280

(263)

1,017

Share of post-tax profits/(losses) of joint ventures and associates

12

(6)

-

(6)

(30)

(77)

(107)

Finance income

5

98

-

98

109

-

109

Finance costs

5

(593)

(38)

(631)

(630)

(244)

(874)

Profit/(loss) before tax

 

1,143

155

1,298

729

(584)

145

Taxation

6

(286)

(20)

(306)

(185)

98

(87)

Profit/(loss) for the year from continuing operations

 

857

135

992

544

(486)

58

Discontinued operations

 

 

 

 

 

 

 

Profit/(loss) for the year from discontinued operations

7

-

216

216

(37)

(75)

(112)

Profit/(loss) for the year

 

857

351

1,208

507

(561)

(54)

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Owners of the parent

 

857

349

1,206

515

(555)

(40)

Non-controlling interests

 

-

2

2

(8)

(6)

(14)

 

 

857

351

1,208

507

(561)

(54)

 

 

 

 

 

 

 

 

Earnings/(losses) per share from continuing and discontinued operations

 

 

 

 

 

 

 

Basic

9

 

 

14.77p

 

 

(0.49)p

Diluted

9

 

 

14.72p

 

 

(0.49)p

 

 

 

 

 

 

 

 

Earnings/(losses) per share from continuing operations

 

 

 

 

 

 

 

Basic

9

 

 

12.12p

 

 

0.81p

Diluted

9

 

 

12.08p

 

 

0.81p

 

 

 

 

 

 

 

 

                         

The notes on pages 21 to 54 form part of this condensed consolidated financial information.

 

Group statement of comprehensive income/(loss)

 

 

 

 

 

Notes

52 weeks

2018

£m

52 weeks

2017

£m

Items that will not be reclassified to income statement

 

 

 

Remeasurements on defined benefit pension schemes

17

3,265

(3,567)

Tax on items that will not be reclassified

 

(554)

579

 

 

2,711

(2,988)

Items that may subsequently be reclassified to income statement

 

 

 

Change in fair value of available-for-sale financial assets and investments

 

(62)

80

Currency translation differences:

 

 

 

Retranslation of net assets of overseas subsidiaries, joint ventures and associates

 

179

764

Movements in foreign exchange reserve and net investment hedging on

subsidiary disposed, reclassified and reported in the Group income statement

7

140

-

Gains/(losses) on cash flow hedges:

 

 

 

Net fair value gains/(losses)

 

(146)

385

Reclassified and reported in the Group income statement

 

(52)

(384)

Tax on items that may be reclassified

 

22

(23)

 

 

81

822

Total other comprehensive income/(loss) for the year

 

2,792

(2,166)

Profit/(loss) for the year

 

1,208

(54)

Total comprehensive income/(loss) for the year

 

4,000

(2,220)

 

 

 

 

Attributable to:

 

 

 

Owners of the parent

 

3,993

(2,206)

Non-controlling interests

 

7

(14)

Total comprehensive income/(loss) for the year

 

4,000

(2,220)

 

 

 

 

Total comprehensive income/(loss) attributable to owners of the parent arises from:

 

 

 

Continuing operations

 

3,637

(2,096)

Discontinued operations

 

356

(110)

 

 

3,993

(2,206)

         

 

The notes on pages 21 to 54 form part of this condensed consolidated financial information.

 

Group balance sheet

 

 

 

 

 

 

Notes

24 February

 2018

£m

25 February

2017

£m

 

Non-current assets

 

 

 

 

Goodwill, software and other intangible assets

10

2,661

2,717

 

Property, plant and equipment

11

18,521

18,108

 

Investment property

 

100

64

 

Investments in joint ventures and associates

12

689

739

 

Other investments

 

860

823

 

Trade and other receivables

 

186

180

 

Loans and advances to customers

 

6,885

5,795

 

Derivative financial instruments

 

1,117

1,303

 

Deferred tax assets

 

117

707

 

 

 

31,136

30,436

 

Current assets

 

 

 

 

Other investments

 

68

284

 

Inventories

 

2,263

2,301

 

Trade and other receivables

 

1,482

1,475

 

Loans and advances to customers

 

4,637

4,166

 

Derivative financial instruments

 

27

286

 

Current tax assets

 

12

13

 

Short-term investments

13

1,029

2,727

 

Cash and cash equivalents

13

4,059

3,821

 

 

 

13,577

15,073

 

Assets of the disposal group and non-current assets classified as held for sale

7

149

344

 

 

 

13,726

15,417

 

Current liabilities

 

 

 

 

Trade and other payables

 

(8,996)

(8,875)

 

Borrowings

15

(1,479)

(2,560)

 

Derivative financial instruments

 

(69)

(61)

 

Customer deposits and deposits from banks

 

(7,812)

(6,687)

 

Current tax liabilities

 

(335)

(613)

 

Provisions

16

(547)

(438)

 

 

 

(19,238)

(19,234)

 

Liabilities of the disposal group classified as held for sale

7

-

(171)

 

Net current liabilities

 

(5,512)

(3,988)

 

Non-current liabilities

 

 

 

 

Trade and other payables

 

(364)

(324)

 

Borrowings

15

(7,142)

(9,433)

 

Derivative financial instruments

 

(594)

(607)

 

Customer deposits and deposits from banks

 

(2,972)

(2,276)

 

Post-employment benefit obligations

17

(3,282)

(6,621)

 

Deferred tax liabilities

 

(91)

(88)

 

Provisions

16

(721)

(685)

 

 

 

(15,166)

(20,034)

 

Net assets

 

10,458

6,414

 

Equity

 

 

 

 

Share capital

 

410

409

 

Share premium

 

5,107

5,096

 

All other reserves

 

735

601

 

Retained earnings

 

4,228

332

 

Equity attributable to owners of the parent

 

10,480

6,438

 

Non-controlling interests

 

(22)

(24)

 

Total equity

 

10,458

6,414

 

           

 

The notes on pages 21 to 54 form part of this condensed consolidated financial information.

 

Group statement of changes in equity

 

 

 

 

 

 

All other reserves

 

 

Share

capital

£m

Share

premium

£m

 

Other

reserves

£m

Capital

redemption

reserve

£m

 

Hedging

reserve

£m

Translation

reserve

£m

Treasury

shares

£m

Retained

earnings

£m

 

Total

£m

Non-

controlling

interests

£m

 

Total

equity

£m

At 25 February 2017

409

5,096

40

16

217

350

(22)

332

6,438

(24)

6,414

Profit/(loss) for the year

-

-

-

-

-

-

-

1,206

1,206

2

1,208

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of available-for-sale financial assets and investments

-

-

-

-

-

-

-

(62)

(62)

-

(62)

Currency translation differences

-

-

-

-

-

314

-

-

314

5

319

Remeasurements of defined benefit pension schemes

-

-

-

-

-

-

-

3,265

3,265

-

3,265

Gains/(losses) on cash flow hedges

-

-

-

-

(198)

-

-

-

(198)

-

(198)

Tax relating to components of other comprehensive income

-

-

-

-

21

(9)

-

(544)

(532)

-

(532)

Total other comprehensive income/(loss)

-

-

-

-

(177)

305

-

2,659

2,787

5

2,792

Total comprehensive income/(loss)

-

-

-

-

(177)

305

-

3,865

3,993

7

4,000

Transactions with owners

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury shares

-

-

-

-

-

-

(14)

-

(14)

-

(14)

Share-based payments

-

-

-

-

-

-

20

105

125

-

125

Issue of shares

1

11

-

-

-

-

-

-

12

-

12

Dividends

-

-

-

-

-

-

-

(80)

(80)

-

(80)

Changes in non-controlling interests

-

-

-

-

-

-

-

-

-

(5)

(5)

Tax on items charged to equity

-

-

-

-

-

-

-

6

6

-

6

Total transactions with owners

1

11

-

-

-

-

6

31

49

(5)

44

At 24 February 2018

410

5,107

40

16

40

655

(16)

4,228

10,480

(22)

10,458

                               

 

The notes on pages 21 to 54 form part of this condensed consolidated financial information.

 

 

 

 

 

 

 

All other reserves

 

 

Share

capital

£m

Share

premium

£m

 

Other

reserves

£m

Capital

redemption

reserve

£m

 

Hedging

reserve

£m

Translation

reserve

£m

Treasury

shares

£m

Retained

earnings

£m

 

Total

£m

Non-

controlling

interests

£m

 

Total

equity

£m

At 27 February 2016

407

5,095

40

16

211

(401)

(7)

3,265

8,626

(10)

8,616

Profit/(loss) for the year

-

-

-

-

-

-

-

(40)

(40)

(14)

(54)

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of available-for-sale financial assets and investments

-

-

-

-

-

-

-

80

80

-

80

Currency translation differences

-

-

-

-

-

764

-

-

764

-

764

Remeasurements on defined benefit pension schemes

-

-

-

-

-

-

-

(3,567)

(3,567)

-

(3,567)

Gains/(losses) on cash flow hedges

-

-

-

-

1

-

-

-

1

-

1

Tax relating to components of other comprehensive income

-

-

-

-

5

(13)

-

564

556

-

556

Total other comprehensive income/(loss)

-

-

-

-

6

751

-

(2,923)

(2,166)

-

(2,166)

Total comprehensive income/(loss)

-

-

-

-

6

751

-

(2,963)

(2,206)

(14)

(2,220)

Transactions with owners

 

 

 

 

 

 

 

 

 

 

 

Purchase of treasury shares

-

-

-

-

-

-

(24)

-

(24)

-

(24)

Share-based payments

-

-

-

-

-

-

9

28

37

-

37

Issue of shares

2

1

-

-

-

-

-

-

3

-

3

Dividends

-

-

-

-

-

-

-

-

-

-

-

Tax on items charged on equity

-

-

-

-

-

-

-

2

2

-

2

Total transactions with owners

2

1

-

-

-

-

(15)

30

18

             -

18

At 25 February 2017

409

5,096

40

16

217

350

(22)

332

6,438

(24)

6,414

                           

 

The notes on pages 21 to 54 form part of this condensed consolidated financial information.

 

Group cash flow statement

 

 

 

 

 

 

 

Notes

52 weeks

2018

£m

52 weeks

2017

£m

Cash flows generated from/(used in) operating activities

 

 

 

Operating profit/(loss) of continuing operations

 

1,837

1,017

Operating profit/(loss) of discontinued operations

 

-

(117)

Depreciation and amortisation

 

1,295

1,304

(Profit)/loss arising on sale of property, plant and equipment and intangible assets

 

(66)

(78)

(Profit)/loss arising on sale of subsidiaries and other investments

 

(165)

3

(Profit)/loss arising on sale of joint ventures and associates

 

(23)

(5)

Impairment loss on goodwill

 

-

46

Net impairment loss/(reversal) on other investments

 

(22)

(12)

Net impairment loss/(reversal) on property, plant and equipment, intangible assets and investment property

 

(167)

(5)

Adjustment for non-cash element of pensions charge

 

4

7

Additional contribution into pension schemes

17

(245)

(248)

Share-based payments

 

113

15

Tesco Bank fair value movements included in operating profit

 

156

98

Retail (increase)/decrease in inventories

 

55

124

Retail (increase)/decrease in development stock

 

21

16

Retail (increase)/decrease in trade and other receivables

 

(1)

(74)

Retail increase/(decrease) in trade and other payables

 

 278

             510

Retail increase/(decrease) in provisions

 

132

11

Retail (increase)/decrease in working capital

 

485

587

Tesco Bank (increase)/decrease in loans and advances to customers

 

(1,738)

(1,529)

Tesco Bank (increase)/decrease in trade and other receivables

 

30

(24)

Tesco Bank increase/(decrease) in customer and bank deposits, trade and other payables

 

1,821

1,474

Tesco Bank increase/(decrease) in provisions

 

(6)

25

Tesco Bank (increase)/decrease in working capital

 

107

(54)

Cash generated from/(used in) operations

 

3,309

2,558

Interest paid

 

(351)

(522)

Corporation tax (paid)/received

 

(176)

(47)

Net cash generated from/(used in) operating activities

 

2,782

1,989

 

The notes on pages 21 to 54 form part of this condensed consolidated financial information.

 

 

 

 

 

 

Notes

52 weeks

2018

£m

52 weeks

2017

£m

Net cash generated from/(used in) operating activities

 

2,782

1,989

Cash flows generated from/(used in) investing activities

 

 

 

Proceeds from sale of property, plant and equipment, investment property, intangible assets and non-current assets classified as held for sale

 

253

512

Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale

 

(1,440)

(1,205)

Purchase of intangible assets

 

(197)

(169)

Disposal of subsidiaries, net of cash disposed

 

66

205

Acquisition of subsidiaries, net of cash acquired

19

(27)

(25)

Proceeds from sale of joint ventures and associates

 

23

-

Net (increase)/decrease in loans to joint ventures and associates

 

-

15

Investments in joint ventures and associates

 

(21)

-

Net (investments in)/proceeds from sale of short-term investments

 

1,697

736

Net (investments in)/proceeds from sale of other investments

 

236

141

Dividends received from joint ventures and associates

 

26

28

Interest received

 

50

41

Net cash generated from/(used in) investing activities

 

666

279

Cash flows generated from/(used in) financing activities

 

 

 

Proceeds from issue of ordinary share capital

 

11

1

Increase in borrowings

 

313

185

Repayment of borrowings

 

(3,721)

(2,036)

Net cash flows from derivative financial instruments

 

253

475

Repayments of obligations under finance leases

 

(10)

(12)

Dividends paid to equity owners

8

(82)

-

Net cash generated from/(used in) financing activities

 

(3,236)

(1,387)

Net increase/(decrease) in cash and cash equivalents

 

212

881

Cash and cash equivalents at the beginning of the year

 

3,832

3,082

Effect of foreign exchange rate changes

 

15

(131)

Cash and cash equivalents including cash held in disposal group at the end of the year

 

4,059

3,832

Cash held in disposal group

7

-

(11)

Cash and cash equivalents at the end of the year

13

4,059

3,821

         

 

The notes on pages 21 to 54 form part of this condensed consolidated financial information.

 

Note 1 Basis of preparation

This preliminary consolidated financial information has been prepared in accordance with the Disclosure and Transparency Rules of UK Financial Conduct Authority, and the principles of International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies applied are consistent with those described in the Annual Report and Group financial statements 2018. This preliminary consolidated financial information has been prepared on a going concern basis. This preliminary consolidated financial information does not constitute statutory consolidated financial statements for the 52 weeks ended 24 February 2018 as defined under section 434 of the Companies Act 2006.

 

The Annual Report and Group financial statements for the 52 weeks ended 24 February 2018 were approved by the Board of Directors on 10 April 2018. The report of the auditor on those Group financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. An abbreviated copy of the audit report can be found on page 60. The Annual Report and Group financial statements for 2018 will be filed with the Registrar in due course.

 

The Annual Report and Group financial statements for the 52 weeks ended 25 February 2017 were approved by the Board of Directors on 11 April 2017. The report of the auditor on those Group financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

 

The Directors consider that the Group has, at the time of approving the Group financial statements, adequate resources to continue in operational existence for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the preliminary consolidated financial information.

Judgement - Equity transactions with joint venture partners

During the year the Group unwound its joint venture with British Land Co PLC (British Land). As part of the unwind, the Group obtained sole control of BLT Properties Ltd and seven stores, while British Land obtained sole control of BLT Holdings (2010) Ltd and two stores.

The Group is an equity partner in several joint ventures. Where the Group acquires the other partner's interests in the joint venture, management applies judgement in determining whether the transaction is accounted for as a business combination or as an asset acquisition. Factors considered in making this determination include whether the property management services in the joint venture are significant processes, and whether substantially all of the consideration paid relates to the fair value of purchased properties. For transactions accounted for as business combinations where the Group leases properties in the joint venture, management further considers whether increases in valuation of the properties above vacant possession value are attributable to the value of the lease contract or reflect residual goodwill.

Management exercised judgement in accounting for the Group's acquisition of BLT Properties Ltd as an asset acquisition, since substantially all of the purchase price related to the fair value of the seven stores purchased. The sale of shares in BLT Holdings (2010) Ltd was accounted for as a sale of an investment. Refer to Note 4.

Change in estimate - Post-employment benefit obligations

The present value of post-employment benefit obligations depends on a number of factors that are determined on an actuarial basis using a number of assumptions. The assumptions used in determining the net cost/(income) for pensions include the discount rate. Any changes in these assumptions will impact the carrying amount of post-employment benefit obligations.

During the year the Group has taken actuarial advice and decided to change the model used for deriving the discount rate assumption for valuing the Tesco PLC Pension Scheme's liabilities under IAS 19 'Employee Benefits'.

Further details of this change and its impact in the year are disclosed in Note 17.

Discontinued operations

In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the net results of discontinued operations are presented separately in the Group income statement and the assets and liabilities of these operations are presented separately in the Group balance sheet. Management has applied judgement in presenting the Group's retail operations in Turkey as a discontinued operation Management consider the retail operations in Turkey as an operating segment, one level below the reportable Retail Central Europe segment. Management further considered previous treatment of similar disposals in China and Korea as discontinued operations. Refer to Note 7.

Standards issued but not yet effective

At the date of authorisation of these condensed consolidated financial statements, the Group has not applied the following standards that have been issued but are not yet effective. The Group has not adopted any new or amended standards early.

•    IFRS 9 'Financial Instruments'

IFRS 9 'Financial Instruments' replaces IAS 39 'Financial Instruments: Recognition and Measurement' with the exception of macro hedge accounting. The standard will be effective in the Group financial statements for the 52 weeks ending 23 February 2019. The Group intends to apply the classification and measurement and impairment requirements of the standard retrospectively at the transition date of 25 February 2018 by adjusting the opening balance sheet, with no restatement of comparative periods. Hedge accounting relationships within the scope of IFRS 9 will transition prospectively.

 

The standard covers three elements:

- Classification and measurement: Changes to a more principle based approach to classify financial assets as either held at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss, dependent on the business model and cash flow characteristics of the financial asset;

- Impairment: Moves to an impairment model based on expected credit losses based on a three stage approach; and

- Hedge accounting: The IFRS 9 hedge accounting requirements are designed to allow hedge accounting to be more closely aligned with the Group's underlying risk management. A new International Accounting Standards Board (IASB) project is in progress to develop an approach to better reflect dynamic risk management in entities' financial statements.

 

Classification and measurement:

From a review of the Group's balance sheet as at 24 February 2018, the Group expects the following classification changes to take place:

- All financial instruments classified as loans and receivables under IAS 39 will be classified and measured at amortised cost under IFRS 9; and

- All financial instruments classified as available-for-sale under IAS 39 will be classified and measured at FVOCI under IFRS 9.

Impairment:

IFRS 9 requires the Group to recognise expected credit losses (ECL) at all times, and to update the amount of ECL recognised at each reporting date to reflect changes in the credit risk of financial assets. The ECL will be measured under the simplified approach, with the exception of loans and advances to customers, other investments and joint venture loans, where the three-stage approach will be applied.

 

The assessment of credit risk and the estimation of ECL are required to be unbiased, forward-looking and probability-weighted, determined by evaluating at the reporting date for each financial asset a range of possible outcomes using reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions. The estimation of ECL also takes into account the time value of money.

 

As a result of applying IFRS 9, the impact on opening retained earnings for the year ended 28 February 2019 for Tesco Bank is expected to be a reduction of £166m. This reflects the increase in impairment allowance under the new ECL model, net of deferred tax. The impact of the new impairment requirements on the Retail business is not material.

 

Hedge accounting:

The IFRS 9 hedge accounting requirements are designed to allow hedge accounting to be more closely aligned with financial risk management. A new IFRS is under development to account for dynamic risk management. As permitted under IFRS 9, the Group will elect to continue to apply the existing hedge accounting requirements of IAS 39 for its portfolio hedge accounting until this new standard is implemented. All other existing hedge relationships will transition to IFRS 9 on adoption.

 

•    IFRS 15 'Revenues from Contracts with Customers'

IFRS 15, 'Revenues from Contracts with Customers' will be effective in the Group financial statements for the 52 weeks ending 23 February 2019. The Group intends to adopt the standard retrospectively, with comparatives restated from a transition date of 26 February 2017.

 

IFRS 15 introduces a five-step approach to the timing of revenue recognition based on performance obligations in customer contracts. The core principle of IFRS 15 is that an entity should recognise revenue to depict the transfer of promised goods and services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

The Group recognises revenue from the principal activities of retailing and associated activities and retail banking and insurance services through Tesco Bank. For the majority of revenue streams, there is a low level of judgement applied in determining the consideration or the timing of transfer of control. As a result, revenue recognition under IFRS 15 will be largely consistent with current practice.

 

Revenue streams that will be impacted include Clubcard loyalty points, for which the fair value of consideration will change, and certain telecommunication contracts and bespoke contracts fulfilled by dunnhumby, for which the timing of revenue recognition will change.

 

IFRS 15 is not expected to result in a material impact to the Retail business. The impact for Tesco Bank is still under assessment.

 

·        IFRS 16 'Leases'

IFRS 16 'Leases' will be effective in the Group financial statements for the 53 weeks ending 29 February 2020. The Group intends to adopt the standard retrospectively, with comparatives restated from a transition date of 25 February 2018.

 

IFRS 16 provides a single lessee accounting model, requiring lessees to recognise right-of-use assets and lease liabilities for all applicable leases.

 

Under IFRS 16, lessees will be required to remeasure the lease liability upon the occurrence of certain events, such as a change in future lease payments resulting from a change in an index or rate used to determine those payments. The lessee will generally recognise the amount of the remeasurement of the lease liability as an adjustment to the right-of-use asset.

 

IFRS 16 is expected to have a significant impact on reported assets, liabilities and income statement of the Group, as well as the classification of cash flows relating to lease contracts. The standard will impact a number of key measures such as operating profit and cash generated from operations, as well as a number of alternative performance measures used by the Group.

 

The Group's IFRS 16 Project is governed by a Steering Committee, which regularly reports progress to the Group Audit Committee. During the current reporting period, progress has been made in the collation of the additional lease data required to support IFRS 16 calculations, establishing systems and processes required for accounting and reporting under IFRS 16 and in determining the appropriate discount rates to apply to lease payments.

 

During the next financial year, the Group will finalise this work and set out accounting policies and procedures for leases. The Group will also establish a process of parallel reporting for the comparative period. Until the impact assessment is completed, it is not practical to provide a reasonable estimate of the financial effect of IFRS 16.

Alternative performance measures (APMs)

In the reporting of financial information, the Directors have adopted various APMs.

These measures are not defined by International Financial Reporting Standards (IFRS) and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry.

APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.

Purpose

The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group.

APMs are also used to enhance the comparability of information between reporting periods and geographical units (such as like-for-like sales), by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid users in understanding the Group's performance.

Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive-setting purposes.

The key APMs that the Group has focused on in the financial year are as follows:

•      Group sales: This is the headline measure of revenue for the Group. It excludes the impact of sales made at petrol filling stations due to the significant volatility of fuel prices. This volatility is outside the control of management and can mask underlying changes in performance.

•      Like-for-like sales: This is a widely used indicator of a retailer's current trading performance. It is a measure of growth in Group online sales and sales from stores that have been open for at least a year (but excludes prior year sales of stores closed during the year) at constant foreign exchange rates.

•      Operating profit before exceptional items: This is the headline measure of the Group's performance, and is based on operating profit before the impact of exceptional items. Exceptional items relate to certain costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.

•      Retail operating cash flow: This is the operating cash flow of continuing operations, excluding the effects of Tesco Bank's cash flows.

•      Retail free cash flow: Retail free cash flow includes all cash flows from operating and investing activities for the Retail business, and the market purchase of shares in relation to share schemes. The following items are excluded: investing cash flows that increase/decrease items within Net debt, and cash flows from major corporate acquisitions and disposals.

•      Net debt: This excludes the net debt of Tesco Bank but includes that of the discontinued operations to reflect the net debt obligations of the Retail business.

•      Diluted earnings per share from continuing operations before exceptional items, net pension finance costs and fair value remeasurements on financial instruments: This relates to profit after tax before exceptional items from continuing operations, net pension finance costs and fair value remeasurements on financial instruments attributable to owners of the parent divided by the weighted average number of ordinary shares in issue during the financial year adjusted for the effects of potentially dilutive share options.

Some of the Group's IFRS measures are translated at constant exchange rates. Constant exchange rates are the average actual periodic exchange rates for the previous financial year and are used to eliminate the effects of exchange rate fluctuations in assessing performance. Actual exchange rates are the average actual periodic exchange rates for that financial year.

Changes to APMs

During the financial year, the following changes have been applied to the Group's APMs:

•       Free cash flow has been redefined to include all cash flows from operating and investing activities, and the market purchase of shares in relation to share schemes. The following items are excluded: investing cash flows that increase/decrease items within Group net debt, and cash flows from major corporate acquisitions and disposals. This measure reflects the cash available to shareholders. Previously, free cash flow only included capital expenditure cash flows within investing activities. Retail free cash flow is now considered a key APM.

•       Diluted earnings per share from continuing operations before exceptional items and net pension finance costs has been replaced with diluted earnings per share from continuing operations before exceptional items, net pension finance costs and fair value remeasurements on financial instruments. Fair value remeasurements are now excluded as they are impacted by changes to credit risk and various market indices, which can fluctuate significantly. Also included in these items are fair value remeasurements on financial instruments resulting from liability management exercises. Other earnings per share measures before exceptional items are no longer considered APMs and have been removed.

•      Total indebtedness ratio and Fixed charge cover have been included as new APMs during the year. Earnings before interest, tax, depreciation, amortisation and rent expense (EBITDAR) has also been included as it is used to calculate these debt metrics. Total indebtedness ratio and Fixed charge cover are measures of the Group's ability to meet its payment obligations and are widely used by analysts and credit rating agencies.

Refer to the Glossary for a full list, comprehensive descriptions and purpose of the Group's APMs.

 

Note 2 Segmental reporting

The Group's operating segments are determined based on the Group's internal reporting to the Chief Operating Decision Maker (CODM). The CODM has been determined to be the Group Chief Executive, with support from the Executive Committee, as the function primarily responsible for the allocation of resources to segments and assessment of performance of the segments.

In line with changes in management structure reporting to the CODM, the Group has reassessed its reportable segments and determined that the retailing and associated activities previously disclosed within the International segment should be segregated between the Central Europe and Asia segments.

The principal activities of the Group are therefore presented in the following segments:

·        Retailing and associated activities (Retail) in:

-      UK & ROI - the United Kingdom and Republic of Ireland;

-      Central Europe - Czech Republic, Hungary, Poland, Slovakia; and

-      Asia - Malaysia and Thailand.

·        Retail banking and insurance services through Tesco Bank in the UK (Tesco Bank).

 

This presentation reflects how the Group's operating performance is reviewed internally by management. Segmental information for the 52 weeks ended 25 February 2017 has been amended accordingly. The amounts disclosed within the Central Europe and Asia segments total the amounts previously disclosed within the International segment.

Excluded from the segmental information below are the Retail activities of Turkey which have been classified as discontinued operations. Refer to Note 7 for further details.

The CODM uses operating profit before exceptional items, as reviewed at monthly Executive Committee meetings, as the key measure of the segments' results as it reflects the segments' underlying performance for the financial year under evaluation. Operating profit before exceptional items is a consistent measure within the Group as defined within Note 1. Refer to Note 4 for exceptional items. Inter-segment revenue between the operating segments is not material.

Income statement

The segment results and the reconciliation of the segment measures to the respective statutory items included in the Group income statement are as follows:

52 weeks ended 24 February 2018

At constant exchange rates

UK & ROI

£m

Central

Europe

£m

Asia

£m

Tesco

Bank

£m

Total at constant

exchange

£m

 

Foreign

exchange

£m

Total at actual

exchange

£m

Continuing operations

 

 

 

 

 

 

 

Group sales

38,522

5,884

4,692

1,051

50,149

842

50,991

Revenue

44,775

6,109

4,692

1,051

56,627

864

57,491

Operating profit/(loss) before exceptional items*

1,046

110

282

173

1,611

33

1,644

Exceptional items

141

88

(20)

(24)

185

8

193

Operating profit/(loss)

1,187

198

262

149

1,796

41

1,837

Operating margin

2.3%

1.8%

6.0%

16.5%

2.8%

 

2.9%

 

52 weeks ended 24 February 2018

At actual exchange rates

UK & ROI

£m

Central

Europe

£m

Asia

£m

Tesco

Bank

£m

Total at actual

exchange

£m

Continuing operations

 

 

 

 

 

Group sales

38,650

6,343

4,947

1,051

50,991

Revenue

44,908

6,585

4,947

1,051

57,491

Operating profit/(loss) before exceptional items*

1,053

119

299

173

1,644

Exceptional items

146

93

(22)

(24)

193

Operating profit/(loss)

1,199

212

277

149

1,837

Operating margin

2.3%

1.8%

6.0%

16.5%

2.9%

Share of post-tax profits/(losses) of joint ventures and associates

 

 

 

 

(6)

Finance income

 

 

 

 

98

Finance costs

 

 

 

 

(631)

Profit/(loss) before tax

 

 

 

 

1,298

*   Intercompany recharges totalling £nil (2017: £2m) between continuing operations and the Turkey discontinued operations have been eliminated.

 

 

 

 

52 weeks ended 25 February 2017

At actual exchange rates

UK & ROI

£m

Central Europe

£m

Asia

£m

Tesco

Bank

£m

Total at actual

exchange

£m

Continuing operations

 

 

 

 

 

Group sales

37,692

5,977

5,186

1,012

49,867

Revenue

43,524

6,195

5,186

1,012

55,917

Operating profit/(loss) before exceptional items*

803

58

262

157

1,280

Exceptional items

(284)

132

(31)

(80)

(263)

Operating profit/(loss)

519

190

231

77

1,017

Operating margin

1.8%

0.9%

5.1%

15.5%

2.3%

Share of post-tax profits/(losses) of joint ventures and associates

 

 

 

 

(107)

Finance income

 

 

 

 

109

Finance costs

 

 

 

 

(874)

Profit/(loss) before tax

 

 

 

 

145

*   Refer to previous table for footnote

Balance sheet

The following tables showing segment assets and liabilities exclude those balances that make up net debt (cash and cash equivalents, short-term investments, joint venture loans and other receivables, bank and other borrowings, finance lease payables, derivative financial instruments and net debt of the disposal group). Net debt balances have been included within the unallocated segment to reflect how the Group manages these balances. Intercompany transactions have been eliminated other than intercompany transactions with Tesco Bank in net debt.

At 24 February 2018

 

UK & ROI

£m

Central Europe

£m

Asia

£m

Tesco

Bank

£m

Unallocated

£m

Total

£m

Goodwill, software and other intangible assets

 

1,281

36

271

1,073

-

2,661

Property, plant and equipment and investment property

 

13,190

2,799

2,564

68

-

18,621

Investments in joint ventures and associates

 

12

1

586

90

-

689

Non-current other investments

 

3

-

-

857

-

860

Non-current trade and other receivables(a)

 

30

6

12

-

-

48

Non-current loans and advances to customers

 

-

-

-

6,885

-

6,885

Deferred tax assets

 

19

33

65

-

-

117

Non-current assets(b)

 

14,535

2,875

3,498

8,973

-

29,881

 

 

 

 

 

 

 

 

Inventories and current trade and other receivables(c)

 

2,428

610

398

308

-

3,744

Current loans and advances to customers

 

-

-

-

4,637

-

4,637

Current other investments

 

-

-

-

68

-

68

Total trade and other payables

 

(7,241)

(853)

(1,028)

(238)

-

(9,360)

Total customer deposits and deposits from banks

 

-

-

-

(10,784)

-

(10,784)

Total provisions

 

(1,034)

(110)

(47)

(77)

-

(1,268)

Deferred tax liabilities

 

(20)

(35)

(32)

(4)

-

(91)

Net current tax

 

(263)

(9)

(16)

(35)

-

(323)

Post-employment benefits

 

(3,261)

-

(21)

-

-

(3,282)

Assets of the disposal group and classified as held for sale(d)

 

95

54

-

-

-

149

Liabilities of the disposal group(d)

 

-

-

-

-

-

-

Net debt (including Tesco Bank)(e)

 

-

-

-

(288)

(2,625)

(2,913)

Net assets

 

5,239

2,532

2,752

2,560

(2,625)

10,458

(a) Excludes loans to joint ventures of £138m (2017: £137m) which form part of Net debt.

(b) Excludes derivative financial instrument non-current assets of £1,117m (2017: £1,303m).

(c) Excludes net interest and other receivables of £1m (2017: £1m) which form part of Net debt.

(d) Excludes net debt of the disposal group of £nil (2017: £(65)m). Refer to Note 7.

(e) Refer to Note 18.

 

 

 

 

At 25 February 2017

 

UK & ROI

£m

Central Europe

£m

Asia

£m

Tesco

Bank

£m

Unallocated

£m

Total

£m

Goodwill, software and other intangible assets

 

1,293

44

278

1,102

-

2,717

Property, plant and equipment and investment property

 

12,893

2,613

2,593

73

-

18,172

Investments in joint ventures and associates

 

11

1

656

71

-

739

Non-current other investments

 

-

-

-

810

13

823

Non-current trade and other receivables(a)

 

23

7

13

-

-

43

Non-current loans and advances to customers

 

-

-

-

5,795

-

5,795

Deferred tax assets

 

601

23

83

-

-

707

Non-current assets(b)

 

14,821

2,688

3,623

7,851

13

28,996

 

 

 

 

 

 

 

 

Inventories and current trade and other receivables(c)

 

2,389

654

394

338

-

3,775

Current loans and advances to customers

 

-

-

-

4,166

-

4,166

Current other investments

 

-

-

-

156

128

284

Total trade and other payables

 

(7,006)

(799)

(1,152)

(242)

-

(9,199)

Total customer deposits and deposits from banks

 

-

-

-

(8,963)

-

(8,963)

Total provisions

 

(914)

(80)

(45)

(84)

-

(1,123)

Deferred tax liabilities

 

(7)

(26)

(41)

(14)

-

(88)

Net current tax

 

(579)

(1)

(12)

(8)

-

(600)

Post-employment benefits

 

(6,600)

-

(21)

-

-

(6,621)

Assets of the disposal group and classified as held for sale(d)

 

100

46

-

-

187

333

Liabilities of the disposal group(d)

 

-

-

-

-

(95)

(95)

Net debt (including Tesco Bank)(e)

 

-

-

-

(722)

(3,729)

(4,451)

Net assets

 

2,204

2,482

2,746

2,478

(3,496)

6,414

(a)-(e) Refer to previous table for footnotes.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other segment information

 

 

52 weeks ended 24 February 2018

UK & ROI

£m

Central Europe

£m

Asia

£m

Tesco

Bank

£m

Total

 continuing

operations

£m

Discontinued

operations

£m

Total

£m

Capital expenditure (including acquisitions through business combinations):

 

 

 

 

 

 

 

Property, plant and equipment

940

117

236

7

1,300

-

1,300

Investment property

1

-

-

-

1

-

1

Goodwill, software and other intangible assets*

141

16

3

43

203

-

203

Depreciation and amortisation:

 

 

 

 

 

 

 

Property, plant and equipment

(686)

(147)

(230)

(12)

(1,075)

-

(1,075)

Investment property

(1)

-

-

-

(1)

-

(1)

Software and other intangible assets

(121)

(18)

(9)

(71)

(219)

-

(219)

Impairment:

 

 

 

 

 

 

 

Property, plant and equipment loss

(50)

(6)

(32)

-

(88)

-

(88)

Property, plant and equipment reversal

154

112

9

-

275

-

275

Investment property loss

-

(1)

-

-

(1)

-

(1)

Investment property reversal

3

2

-

-

5

-

5

Goodwill, software and other intangible assets loss

(20)

(8)

-

-

(28)

-

(28)

Software and other intangible assets reversal

4

-

-

-

4

-

4

                                             

*   Includes £8m (2017: £nil) of goodwill, software and other intangible assets acquired through business combinations.

 

 

 

 

 

52 weeks ended 25 February 2017

UK & ROI

£m

Central Europe

£m

Asia

£m

Tesco

Bank

£m

Total

 continuing

operations

£m

Discontinued

operations*

£m

Total

£m

Capital expenditure (including acquisitions through business combinations):

 

 

 

 

 

 

 

Property, plant and equipment

995

127

259

12

1,393

2

1,395

Investment property

-

-

-

-

-

-

-

Goodwill, software and other intangible assets

111

13

3

34

161

-

161

Depreciation and amortisation:

 

 

 

 

 

 

 

Property, plant and equipment

(687)

(141)

(208)

(17)

(1,053)

(5)

(1,058)

Investment property

(1)

-

-

-

(1)

-

(1)

Software and other intangible assets

(117)

(16)

(10)

(101)

(244)

(1)

(245)

Impairment:

 

 

 

 

 

 

 

Property, plant and equipment loss

(12)

(121)

(34)

-

(167)

(106)

(273)

Property, plant and equipment reversal

118

158

3

-

279

-

279

Investment property loss

(2)

(1)

-

-

(3)

-

(3)

Investment property reversal

3

1

-

-

4

-

4

Goodwill, software and other intangible assets loss

(54)

-

-

-

(54)

-

(54)

Software and other intangible assets reversal

-

1

-

-

1

-

1

*   Discontinued operations in this table represents amounts up until the point a disposal group is classified as such. This comprises those of Turkey in the first four months of the 52 weeks ended 25 February 2017.

Cash flow statement

The following tables provide further analysis of the Group cash flow statement, including a split of cash flows between Retail and Tesco Bank. The current year's presentation includes additional details on the line items impacted by exceptional items, while removing the analysis between Retail continuing and discontinued operations. Comparatives for the prior year have been amended accordingly.

 

 

Retail

Tesco Bank

Tesco Group

 

52 weeks ended 24 February 2018

Before exceptional items

£m

Exceptional items

£m

Retail

Total

£m

Before exceptional items

£m

Exceptional items

£m

Tesco Bank

Total

£m

Total

£m

Operating profit/(loss) of continuing operations

1,471

217

1,688

173

(24)

149

1,837

Operating profit/(loss) of discontinued operations

-

-

-

-

-

-

-

Depreciation and amortisation

1,212

-

1,212

83

-

83

1,295

ATM net income

(37)

-

(37)

37

-

37

-

(Profit)/loss arising on sale of property, plant and equipment and intangible assets

(8)

(58)

(66)

-

-

-

(66)

(Profit)/loss arising on sale of subsidiaries and other investments

(3)

(162)

(165)

-

-

-

(165)

(Profit)/loss arising on sale of joint ventures and associates

(7)

(16)

(23)

-

-

-

(23)

Net impairment loss/(reversal) on other investments

(22)

-

(22)

-

-

-

(22)

Net impairment loss/(reversal) on property, plant and equipment, software and other intangible assets and investment property

(8)

(159)

(167)

-

-

-

(167)

Adjustment for non-cash element of pensions charge

4

-

4

-

-

-

4

Additional contribution into pension schemes

(245)

-

(245)

-

-

-

(245)

Share-based payments

109

-

109

4

-

4

113

Tesco Bank fair value movements included in operating profit

-

-

-

156

-

156

156

Cash flows generated from operations excluding working capital

2,466

(178)

2,288

453

(24)

429

2,717

(Increase)/decrease in working capital

499

(14)

485

110

(3)

107

592

Cash generated from/(used in) operations*

2,965

(192)

2,773

563

(27)

536

3,309

Interest paid

(347)

-

(347)

(4)

-

(4)

(351)

Corporation tax (paid)/received

(131)

-

(131)

(45)

-

(45)

(176)

Net cash generated from/(used in) operating activities

2,487

(192)

2,295

514

(27)

487

2,782

                       

*   APM: 'Retail operating cash flow' of £2,773m (2017: £2,279m) is the cash generated from operations of the continuing Retail business. Included in Retail cash generated from/(used in) operations of £2,773m (2017: £2,278m) is £nil (2017: £(1)m) relating to discontinued operations.

 

 

 

Retail

Tesco Bank

Tesco Group

52 weeks ended 24 February 2018

Before exceptional items

£m

Exceptional items

£m

Retail

Total

£m

Before exceptional items

£m

Exceptional items

£m

Tesco Bank

Total

£m

Total

£m

 

Net cash generated from/(used in) operating activities

2,487

(192)

2,295

514

(27)

487

2,782

 

 

 

 

 

 

 

 

 

 

Proceeds from the sale of property, plant and equipment, investment property, intangible assets and non-current assets classified as held for sale

175

78

253

-

-

-

253

 

Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale - store buy backs

(204)

(189)

(393)

-

-

-

(393)

 

Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale - other capital expenditure

(1,038)

-

(1,038)

(9)

-

(9)

(1,047)

 

Purchase of intangible assets

(152)

          -

(152)

(45)

-

(45)

(197)

 

Disposal of subsidiaries, net of cash disposed

-

66

66

-

-

-

66

 

Acquisition of subsidiaries, net of cash acquired

(27)

-

(27)

-

-

-

(27)

 

Proceeds from sale of joint ventures and associates

4

19

23

-

-

-

23

 

Investments in joint ventures and associates

(6)

-

(6)

(15)

-

(15)

(21)

 

Net (investments in)/proceeds from the sale of other investments

34

196

230

6

-

6

236

 

Dividends received from joint ventures and associates

26

-

26

-

-

-

26

 

Dividends received from Tesco Bank

50

-

50

(50)

-

(50)

-

 

Interest received

50

-

50

-

-

-

50

 

APM: Free cash flow

1,399

(22)

1,377

401

(27)

374

1,751

 

Net (increase)/decrease in loans to joint ventures and associates

-

-

-

-

-

-

-

 

Net (investments in)/proceeds from sale of short-term investments

1,697

-

1,697

-

-

-

1,697

 

Net cash generated from/(used in) investing activities

609

170

779

(113)

-

(113)

666

 

 

 

 

 

 

 

 

 

 

Proceeds from issue of ordinary share capital

11

-

11

-

-

-

11

 

Increase in borrowings

13

-

13

300

-

300

313

 

Repayment of borrowings

(3,571)

-

(3,571)

(150)

-

(150)

(3,721)

 

Net cash flows from derivative financial instruments

253

-

253

-

-

-

253

 

Repayment of obligations under finance leases

(10)

-

(10)

-

-

-

(10)

 

Dividends paid to equity owners

(82)

-

(82)

-

-

-

(82)

 

Net cash generated from/(used in) financing activities

(3,386)

-

(3,386)

150

-

150

(3,236)

 

 

 

 

 

 

 

 

 

 

Intra-Group funding and intercompany transactions

9

-

9

(9)

-

(9)

-

 

 

 

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

(281)

(22)

(303)

542

(27)

515

212

 

Cash and cash equivalents at the beginning of the year

 

 

3,043

 

 

789

3,832

 

Effect of foreign exchange rate changes

 

 

15

 

 

-

15

 

Cash and cash equivalents including cash held in disposal group at the end of the year

 

 

2,755

 

 

1,304

4,059

 

Cash held in disposal group

 

 

-

 

 

-

-

 

Cash and cash equivalents at the end of the year

 

 

2,755

 

 

1,304

4,059

 

                     

 

 

Retail

Tesco Bank

Tesco Group

52 weeks ended 25 February 2017

Before exceptional items

£m

Exceptional items

£m

Retail

Total

£m

Before

exceptional

items

£m

Exceptional

items

£m

Tesco Bank Total

£m

Total

£m

Operating profit/(loss) of continuing operations

1,123

(183)

940

 

157

(80)

77

1,017

Operating profit/(loss) of discontinued operations

(15)

(102)

(117)

-

-

-

(117)

Depreciation and amortisation

1,172

14

1,186

95

23

118

1,304

ATM net income

(43)

-

(43)

43

-

43

-

(Profit)/loss arising on sale of property, plant and equipment and intangible assets

54

(134)

(80)

2

-

2

(78)

(Profit)/loss arising on sale of subsidiaries and other investments

7

-

7

(4)

-

(4)

3

(Profit)/loss arising on sale of joint ventures and associates

(5)

-

(5)

-

-

-

(5)

Impairment loss on goodwill

-

46

46

-

-

-

46

Net impairment loss/(reversal) on other investments

(12)

-

(12)

-

-

-

(12)

Net impairment loss/(reversal) on property, plant and equipment, software and other intangible assets and investment property

(10)

5

(5)

-

-

-

(5)

Adjustment for non-cash element of pension charge

7

-

7

-

-

-

7

Additional contribution into pension schemes

(248)

-

(248)

-

-

-

(248)

Share-based payments

14

-

14

1

-

1

15

Tesco Bank fair value movements included in operating profit

-

-

-

96

2

98

98

Cash flows generated from operations excluding working capital

2,044

(354)

1,690

390

(55)

335

2,025

Decrease/(increase) in working capital

379

209

588

(77)

22

(55)

533

Cash flows generated from/(used in) operations*

2,423

(145)

2,278

313

(33)

280

2,558

Interest paid

(518)

-

(518)

(4)

-

(4)

(522)

Corporation tax (paid)/received

(64)

-

(64)

17

-

17

(47)

Net cash generated from/(used in) operating activities

1,841

(145)

1,696

326

(33)

293

1,989

                   

*   Refer to previous table for footnotes

 

 

Retail

Tesco Bank

Tesco Group

52 weeks ended 25 February 2017

Before exceptional items

£m

Exceptional items

£m

Retail

Total

£m

Before exceptional items

£m

Exceptional items

£m

Tesco Bank Total

£m

Total

£m

Net cash generated from/(used in) operating activities

1,841

(145)

1,696

326

(33)

293

1,989

Proceeds from sale of property, plant and equipment, investment property, intangible assets and non-current assets classified as held for sale

19

490

509

3

-

3

512

Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale - store buy backs

(365)

-

(365)

-

-

-

(365)

Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale - other capital expenditure

(834)

-

(834)

(6)

-

(6)

(840)

Purchase of intangible assets

(129)

-

(129)

(40)

-

(40)

(169)

Disposal of subsidiaries, net of cash disposed

205

-

205

-

-

-

205

Acquisition of subsidiaries, net of cash acquired

(25)

-

(25)

-

-

-

(25)

Proceeds from sale of joint ventures and associates

-

-

-

-

-

-

-

Investments in joint ventures and associates

-

-

-

-

-

-

-

Net (investments in)/proceeds from sale of other investments

111

-

111

30

-

30

141

Dividends received from joint ventures and associates

28

-

28

-

-

-

28

Dividends received from Tesco Bank

50

-

50

(50)

-

(50)

-

Interest received

41

-

41

-

-

-

41

APM: Free cash flow

942

345

1,287

263

(33)

230

1,517

Net (increase)/decrease in loans to joint ventures and associates

15

-

15

-

-

-

15

Net (investments in)/proceeds from sale of short-term investments

736

-

736

-

-

-

736

Net cash generated from/(used in) investing activities

(148)

490

342

(63)

-

(63)

279

 

 

 

 

 

 

 

 

Proceeds from issue of ordinary share capital

1

-

1

-

-

-

1

Increase in borrowings

185

-

185

-

-

-

185

Repayment of borrowings

(2,036)

-

(2,036)

-

-

-

(2,036)

Net cash flows from derivative financial instruments

475

-

475

-

-

-

475

Repayment of obligations under finance leases

(12)

-

(12)

-

-

-

(12)

Dividends paid to equity owners

-

-

-

-

-

-

-

Net cash generated from/(used in) financing activities

(1,387)

-

(1,387)

-

-

-

(1,387)

 

 

 

 

 

 

 

 

Intra-Group funding and intercompany transactions

(5)

-

(5)

5

-

5

-

 

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

301

345

646

268

(33)

235

881

Cash and cash equivalents at the beginning of the year

 

 

2,528

 

 

554

3,082

Effect of foreign exchange rate changes

 

 

(131)

 

 

-

(131)

Cash and cash equivalents including cash held in disposal group at the end of the year

 

 

3,043

 

 

789

3,832

Cash held in disposal group

 

 

(11)

 

 

-

(11)

Cash and cash equivalents at the end of the year

 

 

3,032

 

 

789

3,821

                 

 

Note 3 Income and expenses

Continuing operations

52 weeks 2018

£m

52 weeks 2017

£m

Profit/(loss) before tax is stated after charging/(crediting) the following:

 

 

Property rental income, of which £(34)m (2017: £(38)m) relates to investment properties

(372)

(358)

Other rental income

(55)

(50)

Direct operating expenses arising on rental earning investment properties

17

20

Costs of inventories recognised as an expense

42,297

41,140

Inventory losses and provisions

1,373

1,337

Depreciation and amortisation

1,295

1,298

Operating lease expenses, of which £70m (2017: £84m) relates to hire of plant and machinery

1,018

1,043

Net impairment loss/(reversal) on property, plant and equipment and investment property

(191)

(113)

Net impairment loss/(reversal) of goodwill, software and other intangible assets

24

53

Note 4 Exceptional items

Income statement

52 weeks ended 24 February 2018

Profit/(loss) for the year included the following exceptional items:

 

Exceptional items included in:

Cost of  sales

£m

Admin-istrative expenses

£m

Property- related items

£m

Total exceptional

items included  within operating profit  

 £m

Share of JV and associates profits/(losses)

£m

Finance costs

£m

Taxation

£m

Exceptional items within discontinued operations

£m

Net restructuring and redundancy costs(a)

(75)

(34)

7

(102)

-

-

19

-

Net impairment reversal of non-current assets and

onerous lease provisions(b)

50

-

3

53

-

-

28

-

Provision for customer redress(c)

(24)

-

-

(24)

-

-

(3)

-

Investment disposal(d)

-

124

-

124

-

-

(25)

-

Disposal of opticians business(e)

-

38

-

38

-

-

(7)

-

Release of amounts provided in relation to DPA and FCA obligations(f)

-

25

-

25

-

-

-

-

Property transactions(g)

-

-

79

79

-

-

(32)

-

Foreign exchange losses on GBP short-term investments held in overseas entities(h)

-

-

-

-

-

(38)

-

-

Exceptional items relating to discontinued operations(i)

-

-

-

-

-

-

-

216

Total

(49)

153

89

193

-

(38)

(20)

216

(a)   This includes £(68)m relating to UK & ROI changes to store and call centre colleague structures and working practices and £(34)m relating to head office restructuring costs.

(b)  Net impairment reversal of non-current assets includes a net reversal of £185m in property, plant and equipment and investment property, a net charge of £(24)m charge in goodwill, software and other intangible assets and a net charge of £(108)m of onerous lease provisions. Refer to Notes 10, 11 and 16 for further details on impairment and onerous lease provisions.

(c)   The net charge of £(24)m reflects an additional charge of £(35)m relating to an update to the Payment Protection Insurance (PPI) provision ruling during the year which resulted in the inclusion of items that had previously been out of scope for redress. This was partially offset by a £1m release of the Consumer Credit Act (CCA) provision and a £10m credit received following the conclusion of negotiations with a third party in respect of previously recognised customer redress.

(d)  The Group disposed of its remaining 8.8% investment stake in Lazada Group S.A. (Lazada) for net cash consideration of $254m (£196m), generating a profit of £124m. The tax charge of £25m arises due to a capital gain on the disposal.

(e)   £38m relates to the gain from disposal of the Group's opticians business to Vision Express (UK) Ltd in UK & ROI.

(f)   The Group had taken a total exceptional charge of £(235)m in respect of the Deferred Prosecution Agreement (DPA) and Financial Conduct Authority (FCA) obligations, including £(85)m for the compensation scheme in the 52 weeks to 25 February 2017. With the compensation scheme now being closed to new claimants, £25m relating to the compensation scheme was released in the 52 weeks to 24 February 2018.

(g)   As part of the Group's strategy to maximise value from property, the Group disposed of surplus properties which generated a profit of £58m. The Group also recognised a net gain of £21m from the unwind of its joint venture with British Land, whereby the Group purchased seven stores from the joint venture and disposed of its remaining equity interest in the joint venture.

(h)  The Group was holding proceeds from the sale of the Korea operations in GBP money market funds in an intermediate entity with a Euro functional currency. £(38)m loss represents the foreign exchange losses arising on the revaluation of these sterling-denominated funds into Euros until the repatriation of funds during the 52 weeks to 24 February 2018. The loss does not represent an economic loss to the Group since there is an offset within other comprehensive income.

(i)    Income from discontinued operations primarily relates to the release of a £340m provision relating to capital gains tax in respect of the disposal of the Group's Korean operations, following completion of the tax assessment by Korean Tax Authorities. The Group also recognised a £6m gain from the revaluation of the potential capital gains tax liability in the discontinued operations in China. These gains were partially offset by a £(128)m net loss relating to the disposal of the Group's Turkish operations and a £(2)m loss relating to costs associated with the disposal of the Korean business.

52 weeks ended 25 February 2017

Profit/(loss) for the year included the following exceptional items:

 

Exceptional items included in:

Cost

 of sales

£m

Admin-istrative expenses

£m

Property- related items

£m

Total exceptional items included  within operating profit

£m

Share of JV and associates  profits/

(losses)

£m

Finance costs

£m

Taxation

£m

Exceptional items within discontinued operations

£m

Net restructuring and redundancy costs

(153)

(26)

(20)

(199)

-

-

39

-

Net impairment (loss)/reversal of non-current assets and onerous lease provisions

25

-

(31)

(6)

(54)

-

20

-

Provision for customer redress

(45)

-

-

(45)

-

-

-

-

Interchange settlement

57

-

-

57

-

-

(11)

-

Amounts provided in relation to DPA and FCA obligations

-

(235)

-

(235)

-

-

-

-

Property transactions

-

-

165

165

-

-

50

-

Insurance reserve adjustment

-

-

-

-

(23)

-

-

-

Foreign exchange losses on GBP short term investments held in overseas entities

-

-

-

-

-

(244)

-

-

Exceptional items relating to discontinued operations

-

-

-

-

-

-

-

(75)

Total

(116)

(261)

114

(263)

(77)

(244)

98

(75)

Cash flow statement

The table below shows the impact of exceptional items on the Group cash flow statement:

 

 

Cash flows from

operating activities

Cash flows from

investing activities

 

 

52 weeks

2018

£m

52 weeks

2017

£m

52 weeks

2018

£m

52 weeks

2017

£m

Prior year restructuring costs and other exceptional costs including trading store redundancies(a)

(56)

   (54)

-

-

Current year restructuring costs and other exceptional costs including trading store redundancies(a)

(67)

(78)

-

-

Utilisation of onerous lease provisions

(93)

(113)

-

-

Property transactions(b)

9

36

(111)

490

Property transactions - sale of investment in joint venture

-

-

19

-

Provision for customer redress(c)

(23)

(28)

-

-

Legal settlement

-

57

-

-

DPA/compensation scheme payments

(149)

-

-

-

VAT refund - HMRC court case(d)

160

-

-

-

Proceeds from sale of investments - Lazada

-

-

196

-

Proceeds from sale of opticians business

-

-

45

-

Proceeds from sale of subsidiaries treated as discontinued(e)

-

-

26

-

Exceptional cash flows from discontinued operations

-

2

(5)

-

Total

(219)

(178)

170

490

(a)   Cash outflows on settlement of restructuring and redundancy costs.

(b)  Property transactions is made up of £78m proceeds from disposal of properties and £(180)m from property buy backs from the BLT Properties Limited joint venture, comprising £189m paid for the properties acquired and £9m relating to working capital and cash acquired. Refer to footnote (g) on the previous page.

(c)   Settlement of claims for customer redress in Tesco Bank.

(d)  VAT recovered in relation to the appeal against HMRC regarding the treatment of VAT on Clubcard rewards. Refer to Note 16 for further details.

(e)   This relates to the disposal of the Group's Turkish operations comprising £37m proceeds received and £11m cash disposed. Refer to Note 7 for further details.

 

Note 5 Finance income and costs

 

 

 

 

 

 

Continuing operations

 

 

Notes

52 weeks 2018

£m

52 weeks

2017

£m

Finance income

 

 

 

Interest receivable and similar income

 

75

48

Financial instruments - fair value remeasurements

 

23

61

Total finance income

 

98

109

Finance costs

 

 

 

GBP MTNs and Loans

 

(207)

(227)

EUR MTNs

 

(84)

(114)

USD Bonds

 

(72)

(93)

Finance charges payable under finance leases and hire purchase contracts

 

(8)

(8)

Other interest payable

 

(62)

(81)

Capitalised interest

11

2

6

Total finance costs before exceptional items and net pension finance costs

 

(431)

(517)

Net pension finance costs

17

(162)

(113)

Foreign exchange losses on GBP short-term investments held in overseas entities

4

(38)

(244)

Total finance costs

 

(631)

(874)

Net finance cost

 

(533)

(765)

         

Note 6 Taxation

Recognised in the Group income statement

Continuing operations

52 weeks

2018

£m

52 weeks

2017

£m

Current tax (credit)/charge

 

 

UK corporation tax

143

70

Overseas tax

118

111

Adjustments in respect of prior years

(29)

19

 

232

200

Deferred tax (credit)/charge

 

 

Origination and reversal of temporary differences

25

(43)

Adjustments in respect of prior years*

49

(36)

Change in tax rate

-

(34)

 

74

(113)

Total income tax (credit)/charge

306

87

*   Adjustments in respect of prior years include a tax charge of £25m in relation to an adjustment to capital losses on property disposals classified as exceptional.

 

The Finance Act 2016 included legislation to reduce the main rate of UK corporation tax from 20% to 19% from 1 April 2017 and to 17% from 1 April 2020. These rate reductions were substantively enacted by the balance sheet date and therefore included in these consolidated financial statements. Temporary differences have been remeasured using the enacted tax rates that are expected to apply when the liability is settled or the asset realised.

 

Reconciliation of effective tax charge

 

52 weeks

2018

£m

52 weeks

2017

£m

Profit/(loss) before tax

1,298

145

Tax credit/(charge) at 19.1% (2017: 20.0%)

(248)

(29)

Effect of:

 

 

Non-qualifying depreciation

(31)

(33)

Other non-taxable/(non-deductible) items(a)

10

(82)

Unrecognised tax losses

(27)

(48)

Property items taxed on a different basis to accounting entries(b)

25

77

Banking surcharge tax

(19)

(17)

Differences in overseas taxation rates

5

15

Adjustments in respect of prior years

(20)

17

Share of losses of joint ventures and associates

(1)

(21)

Change in tax rate

-

34

Total income tax credit/(charge)

(306)

(87)

Effective tax rate

23.6%

60.0%

(a)This includes impairment reversals on assets not qualifying for tax relief as well as current year movements on uncertain tax positions and expenses not qualifying for tax relief. The prior year included impairment and Deferred Prosecution Agreement (DPA) provisions not qualifying for tax relief.

(b)This includes property items where the carrying values differ from their valuation for tax purposes and recognition of capital losses on property asset disposals.

 Reconciliation of effective tax charge on APMs

 

52 weeks

2018

£m

52 weeks

2017

£m

Profit/(loss) before tax before exceptional items

1,143

729

Tax credit/(charge) at 19.1% (2017: 20.0%)

(218)

(146)

Effect of:

 

 

Non-qualifying depreciation

(31)

(33)

Other non-taxable/(non-deductible) items(a)

(27)

(50)

Unrecognised tax losses

(18)

(14)

Property items taxed on a different basis to accounting entries(b)

18

(1)

Banking surcharge tax

(19)

(17)

Differences in overseas taxation rates

5

(7)

Adjustments in respect of prior years

5

39

Share of losses of joint ventures and associates

(1)

(5)

Change in tax rate

-

49

Total income tax credit/(charge) before exceptional items

(286)

(185)

Effective tax rate before exceptional items

25.0%

25.4%

Net pension finance costs and fair value remeasurements

139

52

Tax charge at 19.1% (2017: 20.0%)

(26)

(10)

Change in tax rate

3

3

Total income tax credit/(charge) before exceptional items, net pension finance costs and fair value remeasurements

(309)

(192)

Effective tax rate before exceptional items, net pension finance costs and fair value remeasurements(c)

24.1%

24.6%

(a)This includes current year movements on uncertain tax positions and expenses not qualifying for tax relief. The prior year also included impairment provisions not qualifying for tax relief.

(b)This includes property items where the carrying values differ from their valuation for tax purposes and recognition of capital losses on property asset disposals.

(c)The APM has been amended during the year to exclude the impact of fair value remeasurements on financial instruments. The information for the 52 weeks ended 25 February 2017 has been amended accordingly. Refer to the Glossary for further details on the Group's APMs.

 

Note 7 Discontinued operations and non-current assets classified as held for sale

Assets and liabilities of the disposal group and non-current assets classified as held for sale

 

24 February

2018

£m

25 February

2017

£m

Assets of the disposal group

-   

198

Non-current assets classified as held for sale

149

146

Total assets of the disposal group and non-current assets classified as held for sale

149

344

Total liabilities of the disposal group

-

(171)

Total net assets of the disposal group and non-current assets classified as held for sale

149

173

The non-current assets classified as held for sale consist mainly of properties in the UK and Central Europe due to be sold within one year.

Discontinued operations

On 10 June 2016, the Group announced the proposed sale of its 95.5% controlling interest in Tesco Kipa Kitle Pazarlama Ticaret Lojistik ve Gıda Sanayi A.Ş. (referred to as Turkish operations or Turkey) to Migros Ticaret A.Ş. (Migros). Local regulatory approval was granted on 9 February 2017 and the sale completed on 1 March 2017. In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the Turkish operations for the period up to 1 March 2017 have been classified as a disposal group.

The tables below show the results of the discontinued operations which are included in the Group income statement and Group cash flow statement respectively.

Income statement

 

52 weeks(a)

2018

£m

52 weeks

2017

£m

Revenue

-

543

Expenses(b)

-

(580)

Profit/(loss) before tax before exceptional items

-

(37)

Taxation

-

-

Profit/(loss) after tax before exceptional items

-

(37)

Net impairment (loss)/reversal of non-current assets

-

(99)

Costs to sell and other provisions - Turkey

-

(3)

Loss after tax on disposal of Turkish operations

(128)

-

Net adjustments to profit/(loss) of past disposals(c)

344

27

Total profit/(loss) after tax of discontinued operations(d)

216

(112)

(a)These figures represent the income statement of Turkey for the current year and the net adjustments to profit/(loss) of past disposals of £344m. Refer to Note 4 for further details.

(b)Intercompany recharges totalling £nil (2017: £2m) between continuing operations and the Turkey discontinued operation have been eliminated.

(c)At 25 February 2017, the Group held a provision of £329m for potential additional capital gains tax relating to the disposal of the Group's Korean operations. During the year, the final tax assessment was received from the Korean Tax Authorities, confirming that no further capital gains tax is payable. As a result, the provision of £340m, after the impact of foreign exchange movements, has been released. The Group also recognised a £6m gain from the revaluation of the potential capital gains tax liability in the discontinued operations in China and a £(2)m loss relating to costs associated with the disposal of the Korean business. These amounts have been classified as exceptional items within 'Exceptional items relating to discontinued operations'.

(d)Total profit/(loss) after tax of discontinued operations includes a loss of £nil attributable to non-controlling interests (2017: £(6)m).

 

The loss after tax on disposal of the Group's Turkish operations is made up as follows:

 

£m

Gross proceeds

37

Deferred and contingent consideration

2

Net proceeds

39

Net book value of assets disposed:

 

     Goodwill, software and other intangible assets

(9)

     Property, plant and equipment

(121)

     Inventories

(43)

     Trade and other receivables

(14)

     Cash and cash equivalents

(11)

     Trade and other payables

88

     Borrowings

76

     Provisions

2

     Post-employment benefit obligation

5

Currency translation reserve recycled to the Group income statement

(140)

Taxation

-

Loss after tax of disposal of Turkish operations

(128)

 

Earnings/(losses) per share impact from discontinued operations

 

52 weeks

2018

Pence/share

52 weeks

2017

Pence/share

Basic

2.65

(1.30)

Diluted

2.64

(1.30)

 

Cash flow statement

 

 

52 weeks

2018

£m

52 weeks

2017

£m

Net cash flows from operating activities

-

(20)

Net cash flows from investing activities

-

13

Net cash flows from financing activities

-

21

Net cash flows from discontinued operations

-

14

Intra-Group funding and intercompany transactions

-

(2)

Net cash flows from discontinued operations, net of intercompany

-

12

Net cash flows from disposal of subsidiary

(11)

-

Net cash flows from discontinued operations, net of intercompany and disposal of subsidiary

(11)

12

 

Note 8 Dividends

 

2018

2017

 

Pence/share

£m

Pence/share

£m

Amounts recognised as distributions to owners in the financial year:

 

 

 

 

Current financial year interim dividend

1.00

82

-

-

Dividends paid to equity owners in the financial year

1.00

82

-

-

 

 

 

 

 

Current financial year proposed final dividend

2.00

195

-

-

           

 

The proposed final dividend was approved by the Board of Directors on 10 April 2018 and is subject to the approval of shareholders at the Annual General Meeting. The proposed dividend has not been included as a liability as at 24 February 2018, in accordance with IAS 10 'Events after the reporting period'. It will be paid on 22 June 2018 to shareholders who are on the Register of members at close of business on 18 May 2018.

 

The Group has implemented a share forfeiture programme following the completion of a tracing and notification exercise to any shareholders who have not had contact with Tesco PLC (the Company) over the past 12 years, in accordance with the provisions set out in the Company's Articles. £2m of unclaimed dividends in relation to these shares have been adjusted for in retained earnings.

 

Note 9 Earnings/(losses) per share and diluted earnings/(losses) per share

Basic earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year.

Diluted earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year adjusted for the effects of potentially dilutive share options. The dilutive effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned.

For the 52 weeks ended 24 February 2018 there were 27 million (2017: 20 million) potentially dilutive share options. As the Group has recognised a profit for the year from its continuing operations dilutive effects have been considered in calculating diluted earnings per share.

 

2018

2017

 

Basic

Potentially

 dilutive share options

Diluted

Basic

Potentially

 dilutive share options

Diluted

Profit/(loss) (£m)

 

 

 

 

 

 

Continuing operations(a)

990

-

990

66

-

66

Discontinued operations(b)

216

-

216

(106)

-

(106)

Total

1,206

-

1,206

(40)

-

(40)

Weighted average number of shares (millions)

8,165

27

8,192

8,148

20

8,168

Earnings/(losses) per share (pence)

 

 

 

 

 

 

Continuing operations

12.12

(0.04)

12.08

0.81

-

0.81

Discontinued operations

2.65

(0.01)

2.64

(1.30)

-

(1.30)

Total

14.77

(0.05)

14.72

(0.49)

-

(0.49)

(a)  Excludes profits/(losses) from non-controlling interests of £2m (2017: £(8)m).

(b)  Excludes profits/(losses) from non-controlling interests of £nil (2017: £(6)m).

APM: Earnings/(losses) per share from continuing operations before exceptional items, net pension finance costs and fair value remeasurements on financial instruments

 

 

Notes

52 weeks

2018

52 weeks

2017

Profit before tax from continuing operations before exceptional items (£m)

 

1,143

729

Add: Net pension finance costs (£m)

5

162

113

Less: Fair value remeasurements on financial instruments (£m)

5

(23)

(61)

Profit before tax from continuing operations before exceptional items, net pension finance costs and fair value measurements (£m)

 

1,282

781

Profit before tax from continuing operations before exceptional items, net pension finance costs and fair value remeasurements attributable to the owners of the parent (£m)

 

1,282

784

Taxation on profit from continuing operations before exceptional items, net pension finance costs and fair value remeasurements attributable to the owners of the parent (£m)

 

(309)

(188)

Profit after tax from continuing operations before exceptional items, net pension finance costs and fair value remeasurements attributable to the owners of the parent (£m)

 

973

596

 

 

 

 

Basic weighted average number of shares (millions)

 

8,165

8,148

Basic earnings per share from continuing operations before exceptional items, net pension finance costs and fair value remeasurements (pence)

 

11.92

7.31

 

 

 

 

Diluted weighted average number of shares (millions)

 

8,192

8,168

Diluted earnings per share from continuing operations before exceptional items, net pension finance costs and fair value remeasurements (pence)

 

11.88

7.30

 

Diluted earnings per share from continuing operations before exceptional items, net pension costs and fair value remeasurements on financial instruments is a new APM. Refer to page 55 for further details on the Group's APMs.

 

Note 10 Goodwill, software and other intangible assets

Goodwill

Goodwill, software and other intangible assets of £2,661m (2017: £2,717m) comprise £1,796m goodwill (2017: £1,792m), £788m software (2017: £879m) and other intangible assets of £77m (2017: £46m).

 

Impairment of goodwill

The goodwill balances, discount rates and long-term growth rates for each group of cash-generating units are shown below:

 

 

Balances

£m

Pre-tax

discount rates

Post-tax

discount rates

Long-term

growth rates

 

2018

2017

2018

2017

2018

2017

2018

2017

Tesco Bank

802

802

10.6%

12.0%

8.0%

9.1%

2.5%

3.0%

UK

735

735

8.9%

9.3%

7.2%

7.5%

2.1%

2.0%

Thailand

180

181

9.3%

10.0%

7.5%

8.0%

2.2%

2.7%

Malaysia

75

74

11.6%

12.4%

8.8%

9.4%

3.2%

2.3%

ROI

4

-

8.3%

-

7.3%

-

1.8%

-

 

1,796

1,792

 

 

 

 

 

 

 

Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis, or more frequently if there are indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at which management monitor that goodwill.

Impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the cash-generating units to which goodwill has been allocated. Recoverable amounts for cash-generating units are the higher of fair value less costs of disposal, and value in use. The key estimates for the value in use calculations are those regarding discount rates and expected changes to future cash flows.

Management estimates discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. The pre-tax discount rates used to calculate value in use are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each cash-generating unit.

Cash flow projections are based on the Group's three year internal forecasts, the results of which are reviewed by the Board. Estimates of selling prices and direct costs are based on past experience and expectations of future changes in the market. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term average growth rates as shown above. These long-term growth rates for the Retail business are based on inflation forecasts by recognised bodies. The long-term growth rate for Tesco Bank is based on inflation and GDP growth forecasts by recognised bodies.

The Group has carried out sensitivity analysis on the impairment tests of each group of cash-generating units to which goodwill has been allocated, using various reasonably possible scenarios based on recent market movements. Neither a one percentage point increase in discount rates nor a one percentage point decrease in year one sales growth would indicate impairment in any group of cash-generating units. This outcome includes Malaysia, which was disclosed as sensitive in the prior year.

 

Impairment of software and other intangible assets

A net impairment loss of £24m (£28m losses offset by £4m reversal) has been recognised against software and other intangible assets as part of the impairment review discussed in Note 11. The net loss of £24m has been classified as an exceptional item within 'Net impairment reversal of non-current assets and onerous lease provisions' within cost of sales.

 

Note 11 Property, plant and equipment

 

Land and

buildings

£m

Other(a)

£m

Total

£m

Cost

 

 

 

At 25 February 2017

22,690

10,681

33,371

Foreign currency translation

312

116

428

Additions(b)(c)

819

481

1,300

Reclassification

(83)

(49)

(132)

Classified as held for sale

(146)

(21)

(167)

Disposals

(139)

(299)

(438)

At 24 February 2018

23,453

10,909

34,362

Accumulated depreciation and impairment losses

 

 

 

At 25 February 2017

7,095

8,168

15,263

Foreign currency translation

121

97

218

Charge for the year

470

605

1,075

Impairment losses

44

44

88

Reversal of impairment losses

(268)

(7)

(275)

Reclassification(d)

(147)

100

(47)

Classified as held for sale

(92)

(11)

(103)

Disposals

(107)

(271)

(378)

At 24 February 2018

7,116

8,725

15,841

 

 

 

 

Net carrying value(e)

 

 

 

At 24 February 2018

16,337

2,184

18,521

At 25 February 2017

15,595

2,513

18,108

 

 

 

 

Construction in progress included above(f)

 

 

 

At 24 February 2018

68

57

125

At 25 February 2017

57

66

123

(a)Other assets consist of fixtures and fittings with a net carrying value of £1,752m (2017: £2,023m), office equipment with a net carrying value of £116m (2017: £161m) and motor vehicles with a net carrying value of £316m (2017: £329m).

(b)Includes £2m (2017: £6m) in respect of interest capitalised, principally relating to land and buildings. The capitalisation rate used to determine the amount of finance costs capitalised during the financial year was 4.5% (2017: 4.9%). Interest capitalised is deducted in determining taxable profit in the financial year in which it is incurred.

(c)Includes £189m net payment relating to the purchase of seven stores from a joint venture with British Land, which is a related party transaction. Refer to Note 4 for further details of the unwind of the joint venture with British Land.

(d)Reclassification includes amounts related to impairment losses and reversals booked in the year, comprising a £(199)m reduction to the net impairment reversal in Land and Buildings and a £164m reduction to the net impairment losses in Other assets. The offsetting £35m has been reclassified to Software and Other intangible assets.

(e)Includes £786m (2017: £788m) of assets pledged as security for secured bonds (Note 15) and £509m (2017: £411m) of property held as security in favour of the Tesco PLC Pension Scheme.   

(f)Construction in progress does not include land.

Assets held under finance leases

Net carrying value includes assets held under finance leases, which are analysed below. These assets are pledged as security for the finance lease liabilities.

                                                                                                                                   

2018

2017

Land and buildings

£m

 

Other

£m

Land and buildings

£m

 

Other

£m

Net carrying value

75

32

66

27

Land and buildings

The net carrying value of land and buildings comprises:

 

2018

£m

2017

£m

Freehold

13,779

13,175

Long leasehold - 50 years or more

412

404

Short leasehold - less than 50 years

2,146

2,016

Net carrying value

16,337

15,595

 

 

Land and

buildings

£m

Other(a)

£m

Total

£m

Cost

 

 

 

At 27 February 2016

22,557

10,468

33,025

Foreign currency translation

727

327

1,054

Additions(b)

816

579

1,395

Reclassification

(103)

58

(45)

Classified as held for sale

(316)

(6)

(322)

Disposals

(674)

(594)

(1,268)

Transfer to disposal group classified as held for sale

(317)

(151)

(468)

At 25 February 2017

22,690

10,681

33,371

 

 

 

 

Accumulated depreciation and impairment losses

 

 

 

At 27 February 2016

7,198

7,927

15,125

Foreign currency translation

258

239

497

Charge for the year

419

639

1,058

Impairment losses

246

27

273

Reversal of impairment losses

(246)

(33)

(279)

Reclassification

(58)

11

(47)

Classified as held for sale

(137)

(1)

(138)

Disposals

(353)

(539)

(892)

Transfer to disposal group classified as held for sale

(232)

(102)

(334)

At 25 February 2017

7,095

8,168

15,263

(a)-(b) Refer to previous page for footnotes

 

Commitments for capital expenditure contracted for, but not incurred, at 24 February 2018 were £116m (2017: £115m), principally relating to store development.

Impairment of property, plant and equipment

The Group has determined that for the purposes of impairment testing each store is a cash-generating unit. Cash-generating units are tested for impairment if there are indicators of impairment at the balance sheet date. Recoverable amounts for cash-generating units are the higher of fair value less costs of disposal, and value in use.

The key estimates for the value in use calculations are those regarding discount rates and expected changes to future cash flows.

Management estimates discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. The discount rates are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each geographical region and range from 7% to 12% (2017: 9% to 13%). On a post-tax basis, the discount rates range from 5% to 9% (2017: 7% to 10%).

Cash flow projections are based on the Group's three year internal forecasts, the results of which are reviewed by the Board. Estimates of selling prices and direct costs are based on past experience and expectations of future changes in the market. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on long-term average growth rates, which are derived from inflation forecasts by recognised bodies. These long-term average growth rates range from 1% to 4% (2017: 1% to 3%).

Fair values are determined with regard to the market rent for the stores or for alternative uses with investment yields appropriate to reflect the physical characteristics of the property, location, infrastructure, redevelopment potential and other factors. In some cases, fair values include residual valuations where stores may be viable for redevelopment. The key inputs to the valuation are the potential market rents and yields, both of which are largely based on rentals and yields for similar properties in that location. Fair values for the Group's properties were determined with the assistance of independent, professional valuers where appropriate.

The net carrying value of £18,521m (2017: £18,108m) above comprises £14,056m (2017: £13,338m) of unimpaired assets and £4,465m (2017: £4,770m) of impaired assets. Of the impaired assets, £1,795m (2017: £2,196m) carrying value was supported by value in use and £2,670m (2017: £2,574m) was supported by fair value. Due to the individual nature of each property, these fair values are classified as Level 3 within the fair value hierarchy.

The total net impairment reversal of £187m (£275m reversal offset by £88m losses) largely reflects normal fluctuations expected from store level performance, property fair values and changes in discount rates. These losses and reversals have been largely presented net at a country level to reflect the underlying trends in the businesses. The impairment reversal of £275m (2017: £279m) relates to properties in the UK & ROI of £154m (2017: £118m), Central Europe of £112m (2017: £158m) and Asia of £9m (2017: £3m), while the impairment losses of £88m (2017: £167m) relate to properties in the UK & ROI of £50m (2017: £12m), Central Europe of £6m (2017: £121m) and Asia of £32m (2017: £34m).

Of the £187m net reversal, a £183m reversal within exceptional items related to trading stores has been classified as 'Net impairment reversal of non-current assets and onerous lease provisions' included within cost of sales. In addition, a £1m loss within exceptional items related to closed stores has been classified as 'Net impairment reversal of non-current assets and onerous lease provisions' within profits/(losses) arising on property-related items. A further £3m loss within exceptional items related to the unwind of the Group's joint venture with British Land has been classified as 'Property transactions' within profits/(losses) arising on property-related items. The remaining £8m reversal was not included within exceptional items as it relates to the Group's day to day management of the property portfolio.

The prior year net impairment reversal of £6m included an impairment loss of £106m relating to the Group's decision to sell its Turkish operations, which was classified as an exceptional item relating to discontinued operations. Of the £112m net reversal relating to continuing operations, a £134m reversal was included within exceptional items, which related to trading stores and was classified as 'Net impairment of non-current assets and onerous lease provisions' within cost of sales. In addition, a £30m charge within exceptional items related to construction in progress and closed stores, which was classified as 'Net impairment of non-current assets and onerous lease provisions' within profits/(losses) arising on property-related items. The remaining £8m reversal was not included within exceptional items as it related to the Group's day to day management of the property portfolio.

The Group has carried out a sensitivity analysis on the impairment tests for its trading stores portfolio using various reasonably possible scenarios based on recent market movements. An increase of one percentage point in the discount rates for each geographic region would increase impairment by £232m. A decrease of one percentage point would decrease impairment by £239m. Neither a one percentage point increase nor decrease in year one sales growth would result in a material change to impairment.

Note 12 Group entities

The Group consists of the ultimate Parent Company, Tesco PLC, and a number of subsidiaries, joint ventures and associates held directly or indirectly by Tesco PLC.

Subsidiaries

The accounting year ends of the subsidiaries consolidated in these financial statements are on or around 24 February 2018.

Interests in joint ventures and associates

Principal joint ventures and associates

The Group's principal joint ventures and associates are:

 

Nature of relationship

Business activity

Share of issued share capital, loan capital and debt securities

Country of incorporation

Principal area of operation

Gain Land Limited

Associate

Retail

20%

British Virgin Islands

People's Republic of China / Hong Kong

Included in 'UK property joint ventures'

 

 

 

 

 

The Tesco Coral Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Blue Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Atrato Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Passaic Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Navona Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Sarum Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Dorney Limited Partnership

Joint venture

Property investment

50%

England

United Kingdom

The Tesco Property (No. 2) Limited Partnership

Joint venture

Property investment

50%

Jersey

United Kingdom

 

 

 

 

 

 

Included in 'Other joint ventures and associates':

 

 

 

 

 

Tesco Mobile Limited

Joint venture

Telecommunications

50%

England

United Kingdom

Tesco Underwriting Limited

Joint venture

Insurance

49.9%

England

United Kingdom

Trent Hypermarket Limited

Joint venture

Retail

50%

India

India

Tesco Lotus Retail Growth Freehold 

and Leasehold Property Fund

Associate

Property investment

25%

Thailand

Thailand

 

The accounting period end dates of the joint ventures and associates consolidated in these financial statements range from 31 December 2017 to 28 February 2018. The accounting period end dates for joint ventures differ from those of the Group for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group. The accounting period end dates of the associates are different from those of the Group as they depend upon the requirements of the parent companies of those entities.

There are no significant restrictions on the ability of joint ventures and associates to transfer funds to the parent, other than those imposed by the Companies Act 2006, and for Tesco Underwriting Limited, regulatory capital requirements.

The UK property joint ventures involve the Group partnering with third parties in carrying out some property investments in order to enhance returns from property and access funding, while reducing risks associated with sole ownership. These property investments generally cover shopping centres and standalone stores. The Group enters into operating leases for some or all of the properties held in the joint ventures. These leases provide the Group with some rights over alterations and adjacent land developments. Some leases also provide the Group with options to purchase the other joint venturers' equity stakes at a future point in time. In some cases the Group has the ability to substitute properties in the joint ventures with alternative properties of similar value, subject to strict eligibility criteria. In other cases, the Group carries out property management activities for third party rentals of shopping centre units.

The property investment activities are carried out in separate entities, usually partnerships or limited liability companies. The Group has assessed its ability to direct the relevant activities of these entities and impact Group returns and concluded that the entities qualify as joint ventures since decisions regarding them require the unanimous consent of both equity holders. This assessment included not only rights within the joint venture agreements, but also any rights within other contractual arrangements between the Group and the entities.

The Group made a number of judgements in arriving at this determination, the key ones being:

•          since the provisions of the joint venture agreements require the relevant decisions impacting investor returns to be either unanimously agreed by both joint venturers at the same time, or in some cases to be agreed sequentially by each venturer at different stages, there is joint decision making within the joint venture;

•          since the Group's leases are priced at fair value, and any rights embedded in the leases are consistent with market practice, they  do not provide the Group with additional control over the joint ventures or infer an obligation by the Group to fund the  settlement of liabilities of the joint ventures;

•          any options to purchase the other joint venturers' equity stakes are priced at market value, and only exercisable at future dates, hence they do not provide control to the Group at the current time;

•          where the Group has a right to substitute properties in the joint ventures, the rights are strictly limited and are at fair value, hence do not provide control to the Group; and

•          where the Group carries out property management activities for third party rentals in shopping centres, these additional activities are controlled through joint venture agreements or lease agreements, and do not provide the Group with additional powers over the joint venture.

 

Summarised financial information for joint ventures and associates

The summarised financial information below reflects the amounts presented in the financial statements of the relevant joint ventures and associates, and not the Group's share of those amounts. These amounts have been adjusted to conform to the Group's accounting policies where required. The summarised financial information for UK property joint ventures has been aggregated in order to provide useful information to users without excessive detail since these entities have similar characteristics and risk profiles largely based on their nature of activities and geographic market.

 

UK property joint ventures

Gain Land Limited

 

2018

£m

2017

£m

12 months to Dec 2017

£m

12 months to Dec 2016

£m

Summarised balance sheet

 

 

 

 

 

 

Non-current assets(a)

3,851

4,060

 

3,924

4,172

 

Current assets (excluding cash and cash equivalents)

92

99

 

1,801

2,231

 

Cash and cash equivalents

37

48

 

414

631

 

Current liabilities(b)

(304)

(301)

 

(5,318)

(6,232)

 

Non-current liabilities(b)

(4,561)

(4,831)

(409)

(169)

Net assets/(liabilities)(c)

(885)

(925)

412

633

 

 

 

 

 

Summarised income statement

 

 

 

 

 

 

 

 

Revenue

280

292

9,097

9,081

Profit/(loss) after tax

-

-

(230)

(626)

 

 

 

 

 

 

 

 

 

 

Reconciliation to carrying amounts:  

 

 

 

 

 

 

 

Opening balance

-

-

433

511

Additions/(disposals)

-

-

-

-

Foreign currency translation

-

-

(21)

47

Share of profits/(losses)(d)

12

14

(46)

(125)

Dividends received from joint ventures and associates

(12)

(14)

-

-

Deferred profits offset against carrying amounts(e)

-

-

-

-

Closing balance

-

-

366

433

 

 

 

 

 

Group's share in ownership

50%

50%

20%

20%

Group's share of net assets/(liabilities)

(443)

(463)

82

127

Goodwill

-

-

-

284

306

Deferred property profits offset against carrying amounts(e)

(61)

(63)

-

-

Cumulative unrecognised losses(d)(f)

168

175

-

-

Cumulative unrecognised hedge reserves(d)(f)

336

351

-

-

Carrying amount

-

-

366

433

 

 

(a)The non-current asset balances of UK property joint ventures are reflected at historic depreciated cost to conform to the Group's accounting policies. The aggregate fair values in the financial statements of the UK property joint ventures are £4,983m (2017: £5,242m).

(b)The current and non-current liabilities of UK property joint ventures largely comprise loan balances of £3,892m (2017: £4,121m) and derivative swap balances of £672m (2017: £703m) entered into to hedge the cash flow variability exposures of the joint ventures.

(c)The December 2016 comparative summarised balance sheet for Gain Land Limited (Gain Land) has been updated to reflect £353m impairment of assets within Gain Land. Tesco's 20% share of this impairment was previously recorded as an impairment of the goodwill inherent within Tesco's investment in Gain Land.

(d)The share of profit for the year for UK property joint ventures related to £12m dividends received from joint ventures with £nil carrying amounts. £5m of losses and £7m of increases in the fair values of derivatives arising from these entities have been included in cumulative unrecognised losses and cumulative unrecognised hedge reserves respectively.

(e)Deferred profits that arose from the transfer of properties into the UK property joint ventures have been offset against the carrying amounts of the related joint ventures. £2m relating to BLT Properties Limited has been released during the year as a result of the joint venture being wound up on 6 April 2017.

(f)Cumulative unrecognised losses of £24m and cumulative unrecognised hedge reserves of £8m were disposed of relating to BLT Properties Limited.

 

At 24 February 2018, the Group has £104m (2017: £103m) loans to UK property joint ventures and £nil (2017: £nil) to Gain Land.

 

Other joint ventures and associates

The Group also has interests in a number of other joint ventures and associates, excluding UK property joint ventures and Gain Land. These are not considered to be individually material to the Group.

 

Joint ventures

Associates

 

2018

£m

2017

£m

2018

£m

2017

£m

Aggregate carrying amount of other joint ventures and associates

262

245

 

61

61

 

Group's share of profits/(losses) for the year

17

(7)

11

11

Impairment

Management has performed impairment tests and sensitivity analysis on its investments in Gain Land, Trent Hypermarket Limited and Tesco Underwriting Limited. The carrying values of Trent Hypermarket Limited of £98m (2017: £112m) and Tesco Underwriting Limited of £90m (2017: £71m) are included within 'Other joint ventures and associates' as discussed above.

The recoverable values of these investments were estimated taking into account forecast cash flows, equity valuations of comparable entities and/or recent transactions for comparable businesses. No impairment was recognised in the year for these investments. The Group has performed sensitivity analysis on the impairment tests for these investments. A reasonably possible increase of one percentage point in the discount rate, based on recent market movements, would not indicate impairment in Gain Land or Tesco Underwriting Limited. An increase in the discount rate of one percentage point would not result in a material impairment to the carrying value of Trent Hypermarket Limited.  

Future changes in estimated cash flows, discount rates, competitive landscape, retail market conditions and other factors may result in impairment losses or reversals of impairment in future periods.

Note 13 Cash and cash equivalents and short-term investments

 

Cash and cash equivalents

2018

£m

2017

£m

Cash at bank and in hand

3,580

3,498

Short-term deposits

479

323

 

4,059

3,821

 

 

Short-term investments

2018

£m

2017

£m

Money market funds

1,029

2,727

 

Included in cash and cash equivalents is an amount of £777m (2017: £777m) that was set aside at the balance sheet date for completion of the merger with Booker Group PLC. This cash was invested at a floating rate of interest, held in ring-fenced accounts and was not available to the Group. The merger was completed on 5 March 2018, with £766m being paid on completion. Refer to Note 22 for further details on the Booker merger.

Note 14 Commercial income

Consistent with standard industry practice, the Group has agreements with suppliers whereby volume-related allowances, promotional and marketing allowances and various other fees and discounts are received in connection with the purchase of goods for resale from those suppliers. Most of the income received from suppliers relates to adjustments to a core cost price of a product, and as such is considered part of the purchase price for that product. Sometimes receipt of the income is conditional on the Group performing specified actions or satisfying certain performance conditions associated with the purchase of the product. These include achieving agreed purchases or sales volume targets and providing promotional or marketing materials and activities or promotional product positioning. While there is no standard industry definition, these amounts receivable from suppliers in connection with the purchase of goods for resale are generally termed commercial income.

Commercial income is recognised when earned by the Group, which occurs when all obligations conditional for earning income have been discharged, and the income can be measured reliably based on the terms of the contract. The income is recognised as a credit within cost of sales. Where the income earned relates to inventories which are held by the Group at period ends, the income is included within the cost of those inventories, and recognised in cost of sales upon the sale of those inventories.  

Amounts due relating to commercial income are recognised within trade and other receivables, except in cases where the Group currently has a legally enforceable right to set-off and intends to offset amounts due from suppliers against amounts owed to those suppliers, in which case only the net amount receivable or payable is recognised. Accrued commercial income is recognised within accrued income when commercial income earned has not been invoiced at the balance sheet date.

Management consider the best indicator of the estimation undertaken is by reference to commercial income balances not settled at the balance sheet date and has therefore provided additional disclosures of commercial income amounts reflected in the balance sheet.

 

Below are the commercial income balances included within inventories and trade and other receivables, or netted against trade and other payables. Amounts received in advance of income being earned are included in accruals and deferred income.

 

 2018

£m

2017

£m

Current assets

 

 

Inventories

(69)

(75)

Trade and other receivables

 

 

Trade/other receivables

169

215

Accrued income

186

150

 

 

 

Current liabilities

 

 

Trade and other payables

 

 

Trade payables

199

213

Accruals and deferred income

(7)

(22)

 

Note 15 Borrowings

Current

 

 

 

 

 

 

 

 

Par value

Maturity

2018

£m

 2017

£m

 

 

 

Bank loans and overdrafts

-

-

351

912

 

 

 

Loans from joint ventures

-

-

6

6

 

 

 

LIBOR + 0.5% Term Loan

£488m

Oct 2017

-

484

 

 

 

1.250% MTN

€500m

Nov 2017

-

423

 

 

 

5.5% USD Bond

$850m

Nov 2017

-

709

 

 

 

5.2% Tesco Bank Retail Bond

£125m

Aug 2018

126

-

 

 

 

3.375% MTN

€750m

Nov 2018

667

-

 

 

 

LIBOR + 0.65% Tesco Bank Bond(a)

£300m

Apr 2020

300

-

 

 

 

5.5457% Secured Bond(b)(c)

£350m

Feb 2029

17

15

 

 

 

Finance leases

-

-

12

11

 

 

 

 

 

 

1,479

2,560

 

 

 

                       

Non-current

 

Par value

Maturity

2018

£m

2017

£m

5.2% Tesco Bank Retail Bond

£125m

Aug 2018

-

129

3.375% MTN

€750m

Nov 2018

-

641

LIBOR + 0.45% Tesco Bank Bond(d)

£150m

May 2019

-

150

1.375% MTN(e)

€931m

Jul 2019

826

1,063

5.5% MTN(e)

£181m

Dec 2019

183

353

1% RPI Tesco Bank Retail Bond(f)

£70m

Dec 2019

70

67

 

LIBOR + 0.65% Tesco Bank Bond(a)

£300m

Apr 2020

-

299

 

2.125% MTN

€500m

Nov 2020

441

423

 

5% Tesco Bank Retail Bond

£200m

Nov 2020

204

210

 

LIBOR + 0.65% Tesco Bank Bond(g)

£350m

May 2021

350

349

 

6.125% MTN

£900m

Feb 2022

952

896

 

LIBOR + 0.53% Tesco Bank Bond(h)

£300m

Oct 2022

298

-

 

5% MTN(e)

£238m

Mar 2023

254

411

 

2.5% MTN

€750m

Jul 2024

666

640

 

3.322% LPI MTN(i)

£335m

Nov 2025

338

326

 

5.5457% Secured Bond(b)(c)

£350m

Feb 2029

322

339

 

6.067% Secured Bond(b)

£200m

Feb 2029

190

190

 

LIBOR + 1.2% Secured Bond(b)

£50m

Feb 2029

33

31

 

6% MTN(e)

£159m

Dec 2029

198

253

 

5.5% MTN(e)

£176m

Jan 2033

221

255

 

1.982% RPI MTN(j)

£277m

Mar 2036

279

270

 

6.15% USD Bond(e)

$850m

Nov 2037

616

1,063

 

4.875% MTN(e)

£102m

Mar 2042

103

175

 

5.125% MTN(e)

€356m

Apr 2047

323

522

 

5.2% MTN(e)

£168m

Mar 2057

165

275

 

Finance leases

-

-

110

103

 

 

 

 

7,142

9,433

           

 

(a)This bond was issued on 13 May 2015. The scheduled redemption date of this bond is April 2018.

(b)The bonds are secured by a charge over the property, plant and equipment held within the Tesco Property Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is £786m (2017: £788m).

(c)This is an amortising bond which matures in February 2029. £17m (2017: £15m) is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in February 2029.

(d)This bond was issued on 6 June 2014 and was redeemed on its scheduled redemption date of 19 May 2017.

(e)During the financial year, the Group undertook a tender for outstanding bonds and as a result the following notional amounts were repaid early: 1.375% MTN July 2019 €319m, 5.5% MTN December 2019 £169m, 5% MTN March 2023 £151m, 6% MTN December 2029 £41m, 5.5% MTN January 2033 £24m, 6.15% USD bond November 2037 $300m, 4.875% MTN March 2042 £71m, 5.125% MTN April 2047 €244m and 5.2% MTN March 2057 £111m.

(f)The 1% RPI Tesco Bank Retail Bond is redeemable at par, indexed for increases in the RPI over the life of the bond.

(g)This bond was issued on 6 June 2014. The scheduled redemption date of this bond is May 2019.

(h)This bond was issued on 7 November 2017. The scheduled redemption date of this bond is October 2020.

(i) The 3.322% Limited Price Inflation (LPI) MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%.

(j) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.

Borrowing facilities

The Group has the following undrawn committed facilities available at 24 February 2018, in respect of which all conditions precedent had been met as at that date:

 

2018

£m

 2017

£m

Expiring in less than one year

38

-

Expiring between one and two years

-

-

Expiring in more than two years

4,232

4,427

 

4,270

4,427

The current year undrawn committed facilities include £1.6bn (2017: £1.8bn) of bilateral facilities and a £2.6bn (2017: £2.6bn) syndicated revolving credit facility. All facilities incur commitment fees at market rates and would provide funding at floating rates.

Note 16 Provisions

 

Property

provisions

£m

Restructuring provisions

£m

Other

provisions

£m

Total

£m

At 27 February 2016

875

83

66

1,024

Foreign currency translation

12

4

-

16

Amount released in the year

(38)

(18)

-

(56)

Amount provided in the year

99

196

136

431

Amount utilised in the year

(141)

(162)

(28)

(331)

Transfer to disposal group classified as held for sale

-

(5)

-

(5)

Unwinding of discount