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RNS
Tesco PLC   -  TSCO   

Final Results

Released 07:00 10-Apr-2019

RNS Number : 6896V
Tesco PLC
10 April 2019
 

FULL-YEAR AHEAD OF EXPECTATIONS

SECOND HALF MARGIN OF 3.96% INC. BOOKER (3.79% EXC. BOOKER)

On a continuing operations basis

 

 

2018/19*

 

 

2017/18

 

 

Change at

constant rates

 

Change at
actual rates

Headline measures1:

 

 

 

 

 

Group sales2

£56.9bn

£51.0bn3

 

11.3%

11.5%

Group operating profit4

£2,206m

£1,646m3

 

33.5%

34.0%

Diluted EPS before exceptional and other items5

15.40p

11.90p

 

 

29.4%

Dividend per share

5.77p

3.00p

 

 

92.3%

Retail operating cash flow6

£2,502m

£2,773m

 

 

(9.8)%

Net debt6,7

£(2,863)m

£(2,625)m

 

 

up (9.1)%

Statutory measures:

Revenue

£63.9bn

£57.5bn

 

11.0%

11.2%

Operating profit

£2,153m

£1,839m

 

16.7%

17.1%

Profit before tax

£1,674m

£1,300m

 

28.3%

28.8%

Diluted EPS

13.55p

12.11p

 

 

11.9%

 

*Note: Booker consolidated from completion date of 5 March 2018 and therefore included in the 2018/19 figures for 51 weeks

Headlines

·    Group sales2 £56.9bn, +11.5%

-    UK & ROI LFL sales8 +2.9% incl. Tesco UK +1.7% and Booker +11.1%

-    Central Europe LFL sales8 (2.3)%: fewer trading days and less general merchandise

-    Asia LFL sales8 (6.2)%: improvement to (3.0)% in 4Q

·    Group operating profit4 £2,206m,+34.0%

-    UK & ROI £1,537m, +45.1%; incl. £196m Booker (last year: £185m9) and £79m synergies

-    Central Europe £186m, +56.3%: significant cost reductions and improved profit mix

-    Asia £286m, (4.3)%: supplier negotiations concluded and significant restructuring complete

-    Bank £197m, +16.6%: strong banking performance and one-off contract renewal benefit10

·    Group operating margin4 3.45%; 2H operating margin4 3.96% (3.79% excl. Booker)

·    Retail operating cash flow6 £2.5bn: c.£(490)m working capital timing impact year-on-year

·    Retail free cashflow of £906m: impacted y-o-y by working capital timing, higher tax and market purchases of shares

·    Net debt6,7 £(2.9)bn: increased by £(238)m after £(766)m Booker cash consideration

·    Final dividend 4.10p, giving FY dividend of 5.77p - now expect to reach c.2.0x EPS cover11 in 2019/20 

·    Statutory revenue +11.2% to £63.9bn; operating profit +17.1% to £2,153m; profit before tax +28.8% to £1,674m

 

Further progress against each of our six strategic drivers

·    Brand health12 continues to strengthen; quality perception +1.9 points and value perception +1.3 points13

·    In-year cost savings £532m; savings of £1.4bn to date towards £1.5bn target

·    Generated £2.5bn retail operating cash6; £8.6bn retail operating cash14 generated over three years

·    Improving the mix across geographies, channels and product; closure of Tesco Direct; less general merchandise in CE

·    Released a further £285m value15 from property; three store buybacks in Cirencester, Stroud and Shepton Mallet

·    Innovations including 10,000 own brand product relaunch; eight new 'Exclusively at Tesco' brands; launch of Jack's·                 

 

Dave Lewis, Chief Executive:

"After four years we have met or are about to meet the vast majority of our turnaround goals.  I'm very confident that we will complete the journey in 2019/20.

I'm delighted with the broad-based improvement across the business.  We have restored our competitiveness for customers - including through the introduction of 'Exclusively at Tesco' - and rebuilt a sustainable base of profitability. The full year margin of 3.45% represents clear progress and the second half level of 3.79%, even before the benefit of Booker, puts us comfortably in the aspirational range we set four years ago.

I'm pleased that we are able to accelerate the recovery in the dividend as a result of our continued capital discipline and strong improvement in cash profitability."

Like-for-like sales performance8

 

 

1Q

2018/19

2Q

2018/19

3Q

2018/19

4Q

2018/19

 

1H

2018/19

2H

2018/19

 

FY

2018/19

UK & ROI

3.5%

4.2%

1.9%

1.9%

 

3.8%

1.9%

 

2.9%

   Tesco UK

2.1%

2.5%

0.7%

1.7%

 

2.3%

1.2%

 

1.7%

   ROI

   Booker

3.0%

14.3%

3.1%

15.1%

(0.2)%

11.0%

(0.4)%

4.3%

 

3.1%

14.7%

(0.3)%

7.6%

 

1.3%

11.1%

Central Europe

(1.0)%

(2.0)%

(3.0)%

(3.0)%

 

(1.5)%

(3.0)%

 

(2.3)%

Asia

(9.0)%

(4.8)%

(8.0)%

(3.0)%

 

(7.0)%

(5.4)%

 

(6.2)%

Group

1.8%

2.7%

0.5%

0.9%

 

2.2%

0.7%

 

1.4%

 

 

Headline Group results

 

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

 

52 weeks ended 23 February 2019

 

On a continuing operations basis

2018/19

 

2017/18 (restated)3

 

Year-on-year change

(Constant

exchange rates)

 

Year-on-year change

(Actual

exchange rates)

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

£56,883m

 

£50,993m

 

11.3%

 

11.5%

Fuel

£7,028m

 

£6,500m

 

8.1%

 

8.1%

Revenue (exc. VAT, inc. fuel)

£63,911m

 

£57,493m

 

11.0%

 

11.2%

 

 

 

 

 

 

 

 

Group operating profit4

UK & ROI

Central Europe

Asia

Tesco Bank

£2,206m

£1,537m

£186m

£286m

£197m

 

£1,646m

£1,059m

£119m

£299m

£169m

 

33.5%

45.0%

56.3%

(6.7)%

16.6%

 

34.0%

45.1%

56.3%

(4.3)%

16.6%

Include exceptional items and amortisation of acquired intangibles

£(53)m

 

£193m

 

 

 

 

Group statutory operating profit

£2,153m

 

£1,839m

 

16.7%

 

17.1%

 

 

 

 

 

 

 

 

Group profit before tax before exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments

£1,958m

 

£1,284m

 

 

 

52.5%

 

 

 

 

 

 

 

 

Group statutory profit before tax

£1,674m

 

£1,300m

 

 

 

28.8%

 

 

 

 

 

 

 

 

Diluted EPS before exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments

15.40p

 

11.90p

 

 

 

29.4%

Statutory diluted EPS

13.55p

 

12.11p

 

 

 

 

Statutory basic EPS

13.65p

 

12.15p

 

 

 

 

 

 

 

 

 

 

 

 

Dividend per share

5.77p

 

3.00p

 

 

 

92.3%

 

 

 

 

 

 

 

 

Capex16

£1.1bn

 

£1.1bn

 

 

 

 

Net debt6,7

£(2.9)bn

 

£(2.6)bn

 

 

 

 

Cash generated from retail operations6

£2.5bn

 

£2.8bn

 

 

 

 

Notes

1. The Group has defined and outlined the purpose of its alternative performance measures, including its headline measures, in the Glossary on page 58.

2. Group sales exclude VAT and fuel. Sales growth shown on a comparable days basis and includes an adjustment to last year's figures to reflect a change in reporting of consignment sales.

3. Last year figures restated for impact of IFRS 15 'Revenue from contracts with customers'.  Impacts include a £2m increase in revenue and operating profit.

4. Excludes amortisation of acquired intangibles and excludes exceptional items by virtue of their size and nature in order to reflect management's view of underlying performance.

5. Headline earnings per share measure excludes exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments.  Full details of this measure can be found in Note 9, starting on page 38.

6. 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.

7. Net debt includes both continuing and discontinued operations.

8. 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).

9. In the current year, Booker is consolidated for 51 weeks.  Booker operating profit last year is adjusted to reflect a comparable 51 week period and to exclude property profits.  Previously referenced profit of c.£195m last year reflects the 53 weeks to 30 March 2018.

10. Relates to £13m up-front recognition of insurance renewals following a contract renewal with our pet insurance provider, as required by IFRS 15.

11.  On a post-IFRS 16 basis.

12. As per YouGov BrandIndex (customers recommend) February 2019.

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

14. Cumulative retail cash generated from operations excluding pension deficit repayments, cash outflows relating to SFO fine and shareholder compensation scheme payments and cash
 payments in lieu of colleague bonus shares.

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

16. Capex is shown excluding property buybacks. Statutory capital expenditure (including property buybacks) for the 52 weeks ended 23 February 2019 was £1.2bn (LY £1.5bn).

 

Creating value for our key stakeholders

We have continued to make strong 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

·    149,000 more customers are shopping at Tesco1

·    continued improvement in Brand perception measures of quality (+1.9 points) and value (+1.3 points)2

·    introduced eight new 'Exclusively at Tesco' brands; relaunch of 10,000 own brand products

·    launched 'Jack's' - a new brand and store format - as part of celebrating 100 years of great value at Tesco

·    refreshed Clubcard app in August with Faster Vouchers functionality; users up 34% year-on-year

·    offering Booker 'bulk buys' in 70 Tesco stores; wider roll-out to continue next year

·    unlocking benefits of 'Joining Forces' for Booker customers, with greater choice, lower prices and better quality

·    continued to work in partnership with Cancer Research UK, Diabetes UK and the British Heart Foundation to promote healthy living and support prevention and cure for the nation's biggest health challenges

·    committed to making customers' shopping more sustainable through long-term partnership with WWF

Colleagues

·    maintained colleague engagement: 83% recommend Tesco as a great place to work

·    implemented the third stage of a 10.5% increase for hourly paid store colleagues in November 2018

·    launched new Colleague Clubcard Plus, providing easier access to Tesco benefits in one place

·    conducted the UK's largest ever workplace health survey, with over 8,000 colleagues taking part

·    further simplified our operations, making changes to stores and offices to enable investment in serving customers

·    new partnership with The Prince's Trust, helping 10,000 young people to develop skills and employability

·    offered 1,193 new UK apprenticeships in areas such as HGV driving and food technology

Supplier partners

·    retailer with most improved supplier relationships for third successive year in June 2018 GCA survey

·    Supplier Viewpoint Group measure reached a high of 77.5%, up 260bps year-on-year

·    ranked first for the third successive year in the independently-run Advantage supplier survey

·    enabled suppliers to access higher level of combined UK sales growth through our merger with Booker

·    worked alongside 358 of our existing suppliers to create new 'Jack's' brand with 1,800 products

·    working in partnership with Carrefour to identify opportunities in own-label, branded products and goods not for resale

Shareholders

·    delivered Group operating margin of 3.45%; 2H operating margin 3.96% (3.79% excl. Booker)

·    generated £2.5bn retail operating cash flow; £8.6bn retail operating cash generated over three years

·    retail free cashflow of £906m; impacted y-o-y by working capital timing, higher tax and market purchases of shares

·    announced final dividend of 4.10p per share taking full-year dividend to 5.77p per share; now expect to reach c.2.0x EPS cover3 in 2019/20 

·    strategic repositioning of the Group: delivering faster growth through Booker; benefiting from long-term, strategic alliance with Carrefour; more sustainable general merchandise business, including closure of Tesco Direct in July

·    delivered Booker synergies ahead of plan; well on track to meet target of c.£200m p.a. by end of third year

 

Looking ahead

 

We are confident that we will meet the remaining goals in our turnaround plan in 2019/20 and deliver a level of profitability (pre-IFRS 16 and excluding Booker) within the 3.5%-4.0% margin range.

Whilst the market remains uncertain, our performance to date is strong, leaving us well-positioned to invest in our competitiveness as we continue to celebrate 100 years of great value for customers.  We remain comfortable with consensus profit expectations for 2019/20.

We are continuing to focus on customer satisfaction, cash profitability, free cash flow and earnings growth and are using these measures to inform our decisions as we look to create sustainable value for shareholders.

As a result of the progress we are making strengthening the balance sheet and delivering free cash flow we now expect to reach a dividend cover level of around two times earnings3 in the 2019/20 financial year.  We will maintain our focus on balance sheet strength, targeting a leverage range of 3 times to 2.5 times total indebtedness to EBITDAR3.

 

Forthcoming events

 

As we move beyond our medium-term ambitions, we plan to host a capital markets day on 18 June 2019 to share some of the 'untapped value opportunities' available for Tesco.  We will also hold an ESG-focused event on 26 June 2019.  Both events will be held at our Welwyn Garden City campus, with invitations being issued shortly.

We will be issuing full 2018/19 financial statements on an IFRS 16 basis on 29 April 2019, as described on page 13 below.

 

Notes

1. KantarWorldpanel UK data for the 52 weeks ending 24 February 2019

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

3. On a post-IFRS 16 basis.

 

 

Financial Results

Sales:

On a continuing operations basis

UK & ROI1

Central Europe2

Asia3

Tesco Bank

Group

Sales

(exc. VAT, exc. fuel)

£44,883m

£6,030m

£4,873m

£1,097m

£56,883m

change at constant exchange rates4 %

16.1%

(4.5)%

(4.1)%

4.7%

11.3%

change at actual exchange rates4 %

incl. first-time contribution of Booker

16.1%

15.1%

(4.9)%

 

(1.6)%

 

4.7%

 

11.5%

 

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

2.9%

(2.3)%

(6.2)%

-

1.4%

Statutory revenue

(exc. VAT, inc. fuel)

£51,643m

£6,298m

£4,873m

£1,097m

£63,911m

Includes: Fuel

£6,760m

£268m

-

-

£7,028m

1.  UK & ROI consists of Tesco UK, ROI and Booker. Booker consolidated from 5 March 2018.

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

3. Asia consists of Thailand and Malaysia.

4. Sales change shown on a comparable days basis; based on statutory accounting dates, Group sales grew by 11.0% at constant exchange rates and 11.2% at actual exchange rates.

Group sales grew by 11.3% at constant exchange rates with like-for-like growth of 1.4%.  At actual exchange rates, sales grew by 11.5%.  Booker, which is run as part of the UK & ROI business, was consolidated into the Group for 51 weeks from 5 March 2018 and contributed 11.4% to Group sales growth.  Further information on sales performance is included in Appendices 1 to 3 on page 70 of this statement.

In the UK and the Republic of Ireland (ROI), like-for-like sales grew by 2.9%, representing the third full year of growth.  Tesco UK like-for-like sales grew by 1.7% as we improved both our quality and value perception.  We have completed the roll-out of our range of eight new 'Exclusively at Tesco' brands, such as 'Ms Molly's' and 'Hearty Food Co.', as part of the overall relaunch of 10,000 own brand products.  In the third quarter, as expected, we saw an increase in customers trading into the outstanding value offered by these products.  The continuing success of 'Exclusively at Tesco' contributed to our overall UK market sales and volume outperformance during the fourth quarter.

In general merchandise, we continue to focus on sustainable categories that complement the grocery shop.  We are driving growth in those categories by differentiating our offer.  For example, our Fox & Ivy and Go Cook ranges contributed to like-for-like sales growth of 4.2% in our Home category.  Our clothing like-for-like sales grew by 3.0% and in February 2019 we launched selected F&F Womenswear items on Next.co.uk.  We closed Tesco Direct from 9 July, with our like-for-like sales performance removing the impact of this closure.

All store formats and channels delivered like-for-like sales growth, with particularly strong performance in our convenience business, including One Stop, where we launched a further 100 own brand products, offering excellent quality and value to customers.  Our online grocery sales grew by 2.8% year-on-year including our biggest ever sales week at Christmas with nearly 51 million items delivered and 776,000 orders.  We have seen a strong response to the launch of 'Jack's' - our new brand and store format - with a net promoter score of 53% and very high levels of customer awareness.

Booker's like-for-like sales grew by 11.1% (10.8% excluding tobacco) during the year, including a strong performance from symbol group stores.  Sales growth in the fourth quarter eased as we started to annualise contract wins secured in the prior year.  We are continuing to unlock the benefits of 'Joining Forces' for Booker's customers, with greater choice, lower prices and better quality.

In ROI, like-for-like sales grew by 1.3%.  In a competitive market, we have continued to make good progress during the year, growing volumes across all food categories.   

In Central Europe, overall like-for-like sales declined by (2.3)%. A planned reduction of unprofitable general merchandise sales, including a decision not to participate in 'Black Friday' promotions, impacted like-for-like sales performance by (1.2)% for the full year.  In addition, changes to Sunday trading regulations in Poland resulted in 25 fewer trading days in the year which, in addition to a public holiday announced at short notice, impacted like-for-like sales in the region by (1.3)%.  Sunday trading regulations effective from January 2019 mean that our stores in Poland are now only able to open on the last Sunday of each month, compared with two Sundays per month previously.  In the second half, we saw a strong customer response as we launched our 'Star lines' initiative across the region, reducing the price of more than 600 key products.

Overall like-for-like sales performance in Asia was (6.2)% for the year, including the impact of significant changes to our sales mix and promotional strategy, particularly in the first half.  Like-for-like sales performance improved to (3.0)% in the fourth quarter.  For the year, we saw an impact of (1.2)% from the issuance of government welfare cards in Thailand but this had eased by the end of the fourth quarter.

Group statutory revenue of £63.9bn grew by 11.2% year-on-year and includes fuel sales of £7.0bn.

 

Operating profit:

On a continuing operations basis

UK & ROI

Central Europe

Asia

Tesco Bank

Group

Operating profit before exceptional items and amortisation of acquired intangibles

£1,537m

£186m

£286m

£197m

£2,206m

change at constant exchange rates %

45.0%

56.3%

(6.7)%

16.6%

33.5%

change at actual exchange rates %

45.1%

56.3%

(4.3)%

16.6%

34.0%

Operating profit margin before exceptional items and amortisation of acquired intangibles

2.98%

2.95%

5.87%

17.95%

3.45%

change at constant exchange rates (basis points)

62bp

113bp

(17)bp

182bp

58bp

change at actual exchange rates (basis points)

62bp

115bp

(17)bp

182bp

59bp

Statutory operating profit

£1,535m

£232m

£219m

£167m

£2,153m

1. Excludes amortisation of acquired intangibles and excludes exceptional items by virtue of their size and nature in order to reflect management's view of the
    performance of the Group.


Group operating profit before exceptional items and amortisation of acquired intangibles was £2,206m, up 33.5% at constant exchange rates and up 34.0% at actual rates.  In the second half, Group operating margin1 was 3.96%.   Excluding Booker, second half margin1 was 3.79%, well within our ambition range of 3.5%-4.0%.

Statutory operating profit of £2,153m was up 17.1% year-on-year, and includes the impact of exceptional items and amortisation of acquired intangibles, which are described in more detail below and in Note 4 on page 33 of this statement.

UK & ROI operating profit before exceptional items and amortisation of acquired intangibles was £1,537m, up 45.1%, with operating margin growth of 62 basis points year-on-year.  During the year, our cost savings programme progressed well and we further simplified what we do and how we serve customers in our store operations and in head office.  Our strategic ambition to maximise the mix led to our focus on more sustainable general merchandise categories, including closing Tesco Direct in July. The operating loss relating to Tesco Direct was £(94)m in the 2017/18 financial year.

UK & ROI operating profit also includes a benefit of £52m relating to a change in Clubcard accounting estimates.  The change follows a detailed review of our accounting treatment ahead of the implementation of IFRS 15 and results in a more precise match between the redemption value per point and the historic issuance value.

Booker contributed £196m to operating profit before exceptional items and amortisation of acquired intangibles for the 51 weeks consolidated since completion of our merger on 5 March 2018.  We delivered £79m of the synergies identified in the Booker merger process - ahead of our initial expectation of £60m in the first year - and are well on track to deliver our target of c.£200m synergies per annum by the end of the third year.  We now anticipate that exceptional integration costs over the three years will total £(50)m-£(75)m, lower than the £(145)m which had been originally planned.

Excluding Booker operating profit and synergies, UK & ROI operating profit before exceptional items and amortisation of acquired intangibles was up 19.2%, with margin expansion of 39bps. 

Central Europe operating profit before exceptional items was £186m, up 56.3% year-on-year at actual exchange rates.  We are improving the quality of our business by focusing on more sustainable product categories and reducing less profitable ranges, such as electricals.  In addition, operating costs are being reduced across the region as we simplify the store service model, for example, we reduced the number of price changes by 28% in the year.  In Poland, we closed 62 loss-making stores which contributed to Poland making a small profit in the second half. 

Asia operating profit before exceptional items was £286m.  In the first half, profit was impacted by the combined effect of sales deleverage, price investment and repositioning of promotional investment in Thailand.  Performance improved significantly during the second half as we successfully concluded renegotiations with our suppliers and accelerated plans to restructure our store and office operations in Thailand.  As a result, we have been able to recover our operating margin more fully and quickly than we had anticipated at the half year stage.

Further information on operating profit performance is included in Note 2, starting on page 25 of this statement.  The impact of exceptional items and amortisation of acquired intangibles is described in more detail below and in Note 4 on page 33 of this statement.

 

Property-related items in operating profit:

 

This year

Last year

Profits/(losses) arising on property-related items

£(21)m

£31m

Exceptional property-related items

£105m

£89m

Total profits arising on property-related items

£84m

£120m

Property-related losses before exceptional items of £(21)m relate primarily to store pre-opening and closure costs. 

An exceptional profit of £105m related to disposals within the UK and Central Europe.  This includes a £50m gain on the disposal of our Kennington superstore as part of our 'air-rights' programme, £37m profit on the sale of three retail sites in Central Europe and a number of other small disposals in the UK.

Further detail on exceptional property transactions and property-related items can be found in Note 4 on page 33 of this statement.

Exceptional items and amortisation of acquired intangibles in statutory operating profit:

 

 

This Year

Last Year

Net restructuring and redundancy costs

£(220)m

£(102)m

Provision for customer redress

£(16)m

£(24)m

FCA obligations

£37m

£25m

Property transactions

£105m

£79m

Tesco Bank FCA charge

£(16)m

-

Booker integration costs

£(15)m

-

Release of provision relating to HMRC VAT appeal

£176m

-

Guaranteed minimum pensions (GMP) equalisation

£(43)m

-

Net impairment reversal of non-current assets and onerous lease provision

£10m

£53m

Sale of Lazada

£7m

£124m

Disposal of opticians business

-

£38m

Total exceptional items in statutory operating profit

£25m

£193m

Amortisation of acquired intangible assets

£(78)m

-

Total exceptional items and amortisation of acquired intangibles in statutory operating profit

£(53)m

£193m

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 underlying performance of the Group.

Restructuring and redundancy costs of £(220)m relate to the simplification of our business and working practices across the Group.  These include charges of £(38)m incurred as a result of the closure of our loss-making online general merchandise business, Tesco Direct.

Provision for customer redress of £(16)m relating to Tesco Bank, reflects additional costs in respect of Payment Protection Insurance (PPI) as a result of higher claim rates than previously estimated.  PPI compensation claims must be made before the deadline of 29 August 2019.

There is an exceptional credit of £37m in relation to the Shareholder Compensation Scheme which comprises a provision release of £17m as we have now processed all outstanding claims and an insurance recovery of £20m.  

As mentioned above, exceptional profits on property transactions of £105m have arisen from disposals within the UK and Central Europe.

We have incurred a charge of £(16)m relating to a settlement payment agreed with the Financial Conduct Authority following an online fraudulent attack on Tesco Bank in November 2016.

Booker integration costs of £(15)m relate to costs incurred in integrating Booker within the Tesco Group, mainly focused on aligning distribution networks and operating platforms.

In 2017/18, we recovered £160m of VAT from HMRC following a favourable court ruling regarding the treatment of VAT on Clubcard rewards.  We subsequently recognised a provision of £176m for VAT and interest as HMRC appealed the court decision.  Following HMRC's decision not to appeal a further court judgement in our favour in January this year, this provision has now been released.

Following a recent High Court ruling on equalisation of guaranteed minimum pensions (GMP), we have recognised a £(43)m non-cash charge in respect of the Group's defined benefit pension liability.

Net impairment reversal of non-current assets and onerous lease provision totals £10m.  This includes a net reversal of £69m in property, plant and equipment, a charge of £(14)m in software and intangible assets and a net charge of £(44)m in onerous property provisions.

Further detail on exceptional items can be found in Note 4 on page 33 of this statement.

Amortisation of acquired intangible assets is excluded from our headline performance measures.  Our combination with Booker resulted in the recognition of goodwill of £3,093m and a £755m intangible asset, driving amortisation of acquired intangible assets of £(78)m for the full year.  More detail of this and the impact of Booker on the Group's balance sheet can be found in Notes 4 and 19 on page 33 and 53, respectively.

The net effect of exceptional items and acquired intangibles amortisation on operating profit during the year was £(53)m.  This compares to a net £193m last year, which includes £124m profit on the sale of Lazada in June 2017.

Joint ventures and associates:

 

This year

Last year

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

 

£24m

£(6)m

Exceptional items: Share of property disposal gain in Gain Land

£11m

-

Share of post-tax profits from JVs and associates

£35m

£(6)m

Our share of post-tax profits from joint ventures and associates before exceptional items was £24m, an increase of £30m year-on-year due to a further reduction in losses recognised in Gain Land, our associate in China.  An exceptional gain of £11m was also recognised on our share of profits from a mall disposal in Gain Land.

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

£(256)m

£(363)m

Interest receivable on associated derivatives

£18m

£31m

Net interest on medium term notes, loans and bonds

£(238)m

£(332)m

Other interest receivable and similar income

£22m

£44m

Other finance charges and interest payable

£(57)m

£(70)m

Capitalised interest

£1m

£2m

Net finance cost before exceptional charges,  net pension finance costs and fair value remeasurements of financial instruments

£(272)m

£(356)m

Fair value remeasurements of financial instruments

£(153)m

£23m

Net pension finance costs

£(89)m

£(162)m

Exceptional charge - translation of Korea proceeds

-

£(38)m

Net finance costs

£(514)m

£(533)m

Net finance costs before exceptional charges, net pension finance costs and fair value remeasurements of financial instruments reduced by £84m year-on-year to £(272)m.  This improvement was mainly driven by a lower level of gross debt.  We saw a £94m reduction in net interest on medium term notes, loans and bonds from £(332)m to £(238)m as a result of debt maturities and bond tenders.  We undertook two bond tenders during the year which reduced interest payable by £34m and we expect an annualised benefit of £52m.

Net finance costs of £(514)m were £19m lower year-on-year.  Within net finance costs, fair value remeasurements includes £(121)m relating to the premium paid on the repurchase of long-dated bonds.  Net pension finance costs decreased by £73m year-on-year to £(89)m, driven by a lower opening pension deficit, partly offset by a higher discount rate.  For 2019/20, net pension finance costs are expected to decrease to c.£(72)m.

Last year, an exceptional loss of £(38)m arose on the translation of the proceeds from the sale of our Homeplus business in Korea.  This translation effect did not represent an economic cost to the Group.

Further detail on finance income and costs can be found in Note 5 on page 35.

Group tax:

 

This year

Last year

Tax on profit before exceptional items and amortisation of acquired intangibles

£(413)m

£(286)m

Tax on exceptional items and amortisation of acquired intangibles

 

£59m

£(20)m

Tax on profit

£(354)m

£(306)m

Tax on Group profit before exceptional items and amortisation of acquired intangibles was £(413)m.

The effective tax rate on profit before exceptional items and amortisation of acquired intangibles for the year is 24.1%.  This tax rate is higher than the UK statutory rate, primarily due to the impact of the 8% supplementary tax surcharge on bank profits and depreciation of assets that do not qualify for tax relief.

We expect the impact of these items on the effective tax rate to reduce as our overall level of profitability continues to increase.  Therefore, along with the additional impact from the UK corporation tax rate reducing by 2% from April 2020, we expect the effective tax rate to reduce to around 20% in the medium term.  The effective tax rate on profit before exceptional items for the 2019/20 financial year is expected to be around 22%.

On a statutory basis, the total tax charge is £(354)m which includes a £59m credit relating to exceptional items.  Cash tax paid in the year was £370m (up £194m year-on-year) including £232m of corporate tax paid in the UK (up £157m year-on-year).  This increase principally reflects our improved profitability and the benefit last year from utilising remaining UK tax losses.

Earnings per share:

On a continuing operations basis

This year

Last year

Diluted EPS pre-exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments

15.40p

11.90p

Statutory diluted earnings per share

13.55p

12.11p

Statutory basic earnings per share

13.65p

12.15p

Our diluted earnings per share before exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments was 15.40p, 29.4% higher year-on-year principally due to our stronger profit performance.  Statutory basic earnings per share from continuing operations were 13.65p, 12.3% higher year-on-year.

Dividend:

Reflecting the continued improvement in the business and our confidence in ongoing cash generation, we propose to pay a final dividend of 4.10 pence per ordinary share.  This takes the total dividend for the year to 5.77 pence per ordinary share, up 92.3% year-on-year, following the payment of an interim dividend of 1.67 pence per ordinary share in November 2018.

We now expect to reach a dividend cover level of around two times earnings (on a post-IFRS 16 basis) in the 2019/20 financial year.  We would then expect to maintain this level going forward, expressed as an earnings pay-out ratio of around 50%, with an anticipated split of broadly one-third to two-thirds between interim and final dividends in any given year.

The proposed final dividend was approved by the Board of Directors on 9 April 2019 and is subject to the approval of shareholders at the Annual General Meeting to be held on 13 June 2019.  The final dividend will be paid on 21 June 2019 to shareholders who are on the register of members at close of business on 17 May 2019 (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 31 May 2019.

Summary of total indebtedness1:

 

Feb 2019

Feb 2018

Movement

Net debt (excludes Tesco Bank)

£(2,863)m

£(2,625)m

£(238)m

Discounted operating lease commitments

£(6,999)m

£(6,931)m

£(68)m

Pension deficit, IAS 19 basis (post-tax)

£(2,338)m

£(2,728)m

£390m

Total indebtedness

£(12,200)m

£(12,284)m

£84m

1.  Total indebtedness is defined in the glossary, on page 58.

Overall, total indebtedness has decreased by £84m year-on-year.   

Retail net debt increased by £(0.2)bn to £(2.9)bn, after the cash outflow of £(0.8)bn relating to our combination with Booker.  Discounted operating lease commitments increased by £(68)m, including the consolidation of £(0.4)bn Booker lease commitments.

On 13 September 2018, we exercised our option to buy back the 50% equity holding in the Tesco Atrato Limited Partnership held by our property joint venture partner.  The acquisition is scheduled to complete in September 2019, and will lead to a reduction in discounted lease commitments of £400m (undiscounted £790m), and consolidation of the debt held by the joint venture.  Further details can be found in Note 21 on page 55.

On an IAS 19 basis, our pension deficit (net of deferred tax) has reduced from £2.7bn last year to £2.3bn at the end of the current year.  The movement during the year is primarily attributable to continued deficit contributions in addition to strong asset performance.

Our key credit metrics, which are fixed charge cover and total indebtedness/EBITDAR, have further improved since the end of the last financial year, from 2.7 to 3.2 times and from 3.3 to 2.8 times, respectively.

Summary retail cash flow:

The following table reconciles Group operating profit before exceptional items and amortisation of acquired intangibles to retail free cash flow.  Further details are included in Note 2, beginning on page 25.

 

 

This year

Last year

Operating profit before exceptional items and amortisation of acquired intangibles

£2,206m

£1,646m

Less: Tesco Bank operating profit before exceptional items

£(197)m

£(169)m

Retail operating profit from continuing operations before exceptional items and amortisation of acquired intangibles

£2,009m

£1,477m

Add back: Depreciation and amortisation

£1,214m

£1,212m

Other reconciling items

£94m

£28m

Pension deficit contribution

£(266)m

£(245)m

Underlying (increase) / decrease in working capital

£(312)m

£493m

Retail cash generated from operations before exceptional items

£2,739m

£2,965m

Exceptional cash items:

       Relating to prior years:

          - Shareholder Compensation Scheme payments and SFO fine

          - Utilisation of onerous lease provisions

          - Restructuring payments

       Relating to current year:

          - Restructuring payments

Other

£(237)m

 

£(43)m

£(81)m

£(60)m

 

£(68)m

£15m

£(192)m

 

£(149)m

£(92)m

£(53)m

 

£(67)m

£169m

Retail operating cash flow

£2,502m

£2,773m

Cash capex

Net interest

£(1,126)m

£(283)m

£(1,190)m

£(297)m

Tax

£(302)m

£(131)m

Property proceeds

£285m

£253m

Property purchases - store buybacks

Market purchases of shares (net of proceeds)

Acquisitions & disposals and dividends received

Add back: Booker acquisition costs (included in Acquisition & disposals above)1

£(136)m

£(146)m

£(635)m

£747m

£(393)m

£11m

£362m

-

Retail free cash flow2

£906m

£1,388m

   1. The cost of major acquisitions and disposals are removed from the Group's definition of free cash flow.  Note 19 (p.53) provides a full breakdown of the total Booker acquisition cost.

   2. Retail free cash flow includes £(146)m market purchases of shares (net of proceeds) in relation to share schemes.  Last year's retail free cash flow has been restated by £11m to reflect this.

Retail operating cash flow of £2,502m reflects a strong underlying improvement in cash profitability offset by a c.£(490)m working capital timing impact year-on-year, driven by two factors:

First, this year's working capital net outflow of £(312)m includes payments of £(139)m which were delayed from the last financial year following the failure of a key supplier (Palmer & Harvey).  Together with the corresponding benefit in last year's working capital net inflow, this creates a £(278)m year-on-year timing impact.

Second, a further £(210)m impact within working capital relates to decisions made in the second half of 2018/19.  The most significant of these relates to a decision to delay the implementation of a new general ledger system in the UK & ROI by a few months, which resulted in some receipts being postponed into the beginning of the 2019/20 financial year.  In addition, we chose to deprioritise some ongoing working capital initiatives in order to safeguard availability and service levels for customers at a time of political uncertainty.

In addition to the working capital timing impacts, the lower level of retail free cash flow year-on-year principally reflects two factors.  First, a higher tax charge as our profitability continues to improve and second, a net cash outflow of £(146)m relating to the market purchase of shares.  The market purchase follows our commitment to offset any dilution from the issuance of new shares to satisfy the requirements of share schemes.  We expect to utilise a similar amount of cash in future years in line with this commitment, with the exact amount dependent on performance.

Other items described in the table above include an exceptional cash outflow of £(43)m relating to final payments under the Shareholder Compensation Scheme which have now been processed.

Exceptional cash items also include the utilisation of £(81)m of our exceptional onerous lease provision in the year, of which £(23)m related to one-off costs to surrender leases and £(58)m related to ongoing lease agreements.

We reduced cash capital expenditure by 5.3% year-on-year to £(1.1)bn reflecting our disciplined approach to capital investment.

In net cash interest, the benefit of lower interest paid was partially offset by the timing of £55m of interest payable on our largest sterling-denominated bond.  The timing of our year end date has meant that last year's annual coupon payment on this bond was made in this financial year.

Retail cash tax paid in the year was £(302)m, higher than last year reflecting our improved profitability and the benefit last year from utilising remaining UK tax losses.

We generated £285m of proceeds from property sales including £129m relating to Kennington and a number of small disposals in the UK, £92m relating to three retail sites in Central Europe and £58m relating to two Booker properties.  We completed the buyback of Stroud superstore in the first half and Cirencester Extra and Shepton Mallet superstore in the second half.

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

£709m

£676m

£130m

£133m

£235m

£239m

£31m

£50m

£1,105m

£1,098m

Openings (k sq ft)

176

104

-

13

622

477

-

-

798

594

Closures (k sq ft)

(270)

(75)

(1,013)

(435)

(196)

(175)

-

-

(1,479)

(685)

Repurposed (k sq ft)

-

(75)

(669)

(492)

(341)

(527)

-

-

(1,010)

(1,094)

Net space change (k sq ft)

(94)

(46)

(1,682)

(914)

85

(225)

-

-

(1,691)

(1,185)

1. The definition of space has been updated to reflect 'Retail Selling Space'.  This is defined as net space in store adjusted to exclude checkouts, space behind checkouts, customer service
    desks and customer toilets. Appendix 5 (p.71) provides a full breakdown of space by segment.

Capital expenditure shown in the table above reflects expenditure on ongoing business activities across the Group.  Our capital expenditure for the year was £1.1bn, a similar level to last year and lower than we originally anticipated for this year as we continue to exercise discipline in our investment decisions.  In the UK & ROI, spend was focused on maintaining and refreshing our stores, alongside convenience store openings in the UK.  Capital spend in Central Europe and Asia has remained at a broadly similar level as last year.  The focus of spend in Central Europe was on repurposing our existing store estate and in Asia, spend primarily related to our new store opening programme in Thailand. Going forward, we expect our annual capital expenditure to remain within a range of £1.1bn to £1.4bn.

Statutory capital expenditure of £1.2bn includes £136m relating to the three UK property buybacks.

We reduced the total amount of retailing selling space across the Group by just under 1.7 million square feet in the year.  Across Central Europe and Asia, our repurposing programme has contributed a net reduction of 1.0 million square feet.  In Central Europe, we have repurposed 669,000 square feet across 14 stores, partnering with H&M, Reserved, Decathlon and Rossman.  In Asia, we have repurposed 26 stores, mainly in Thailand where we have partnered with Mr.DIY home improvement and additional leisure partners including cinemas and play centres.

In the UK & ROI, we opened 24 new stores in the period, including 13 in our convenience formats in the UK and eight Jack's stores.  We closed a further 20 stores in the UK, including two Booker stores.  Our net reduction of 66 stores in Central Europe during the year was driven primarily by the closure of 62 stores in Poland.  In Asia, we opened 72 stores including 70 in Thailand, principally in our convenience format.  We closed a further 56 stores in Thailand as we optimise our convenience store network. 

Further details of current and forecast space can be found in Appendix 5 starting on page 71, including details of our restated space measures.

 

Property

 

This year

Last year

 

UK & ROI

Central Europe

Asia

Group

UK & ROI

Central Europe

Asia

Group

Property1 - fully owned

 

 

 

 

 

 

 

 

- Estimated market value

£14.3bn

£3.0bn

£4.0bn

£21.3bn

£13.9bn

£3.1bn

£3.7bn

£20.7bn

- NBV2

£13.3bn

£2.7bn

£2.6bn

£18.6bn

£12.9bn

£2.8bn

£2.5bn

£18.2bn

% net selling space owned

51%

79%

68%

61%

54%

78%

69%

64%

% property owned - by value3 value3

51%

77%

77%

58%

52%

77%

78%

58%

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 £0.6bn to £21.3bn, with £0.2bn of this increase resulting from our merger with Booker.  The market value of £21.3bn represents a surplus of £2.7bn over the net book value (NBV). 

Our Group freehold property ownership percentage, by value, has remained stable at 58% year-on-year.  In addition to an increase in market value of existing properties, we regained ownership of three stores in the UK.  This was offset by the impact of consolidating Booker's 183 leasehold properties.  The repurchase of the three UK stores will result in an annualised rental saving of £7m.  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

£1,097m

£1,047m

4.7%

Operating profit before exceptional items

£197m

£169m

16.6%

Statutory operating profit

£167m

£145m

15.2%

Lending to customers

£12,426m

£11,522m

7.8%

Customer deposits

£10,465m

£9,245m

13.2%

Net interest margin

3.8%

3.9%

(0.1)%

Risk asset ratio

18.4%

19.4%

(1.0)%

 

Tesco Bank has continued to focus on delivering a positive experience for our banking and insurance customers.  We have made significant improvements to the online credit card journey and relaunched a Banking app, making it easier for customers to self-serve.  In a difficult and competitive Insurance market, investment has been focused on retention of existing customers.  Overall, active customer numbers have reduced by (1.0)% year-on-year with growth in Banking offset by a reduction in Insurance.

 

Operating profit before exceptional items increased by 16.6% year-on-year to £197m, including strong retail banking performance with both cards and loans continuing to perform well.  The insurance contribution has fallen year-on-year, impacted by competitive market conditions, albeit partly offset by a £13m one-off benefit relating to upfront recognition of insurance renewals following a contact renewal with our third party insurance provider.  Exceptional items of £(30)m relating to Tesco Bank are detailed in Note 4 on page 33 and include a payment of £(16)m in relation to a settlement agreed with the Financial Conduct Authority (FCA) following an online fraudulent attack on Tesco Bank in November 2016 and a PPI charge of £(16)m recognised in the year.  On an underlying basis, the cost-to-income ratio has improved to 56.2% from 60.0%.

 

Lending balances rose 7.8% year-on-year to £12.4bn, comprising £3.8bn secured lending (up 25%) and £8.7bn unsecured lending (up 1.8%).  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 18.4%.

 

The Group has adopted IFRS 9 'Financial Instruments' for the period ending 24 February 2019.  IFRS 9 has been applied retrospectively at 25 February 2018 by adjusting the opening balance sheet at that date. For Tesco Bank, the adoption of IFRS 9 has resulted in a decrease in opening total assets of £223m, with a related deferred tax asset of £57m. The overall impact on opening equity was therefore a reduction of £166m. Further details on the impact of the adoption of this standard are described in Note 23 on page 56.

An income statement for Tesco Bank can be found in Appendix 6 on page 74 of this statement.  Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 25 of this statement.  Tesco Bank's full year results are also published today and are available at www.corporate.tescobank.com.

 

Introducing IFRS 16

Tesco is introducing IFRS 16, the new financial reporting standard on accounting for leases, for its 2019/20 financial year.  As previously indicated, we intend to adopt the standard fully retrospectively.

The first Tesco accounts prepared under IFRS 16 will be the 2019/20 interim results, published in October 2019, followed by the 2019/20 preliminary results, published in April 2020.  In order to help investors and analysts update their models in advance of these results, we will be issuing the full 2018/19 financial statements on an IFRS 16 basis on Monday 29 April 2019.  A summary of the impacts on our 2018/19 results is included in Note 1 on page 23.

Further details on the implementation of IFRS 16 were outlined in the Group's 'Introducing IFRS 16' analyst and investor briefing which was held on 15 February 2019.  The relevant release, presentation and webcast of the briefing are available on www.tescoplc.com/investors/reports-results-and-presentations.

 

Contacts

Investor Relations:

Chris Griffith

01707 912 900

Media:

Christine Heffernan

01707 918 701

 

Philip Gawith, Teneo

0207 420 3143

 

This document is available at www.tescoplc.com/prelims2019

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/prelims2019.  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

23 February 2019

52 weeks ended

24 February 2018 (restated*)

Before exceptional items and amortisation of acquired intangibles

£m

Exceptional items and amortisation of acquired intangibles

(Note 4)

£m

Total

£m

Before exceptional items and amortisation of acquired intangibles

£m

Exceptional items and amortisation of acquired intangibles

(Note 4)

£m

Total

£m

Continuing operations

 

 

 

 

 

 

 

Revenue

2

63,911

-

63,911

57,493

-

57,493

Cost of sales

 

(59,695)

(72)

(59,767)

(54,092)

(49)

(54,141)

Gross profit/(loss)

 

4,216

(72)

4,144

3,401

(49)

3,352

Administrative expenses

 

(1,989)

(86)

(2,075)

(1,786)

153

(1,633)

Profits/(losses) arising on property-related items

 

(21)

105

84

31

89

120

Operating profit/(loss)

 

2,206

(53)

2,153

1,646

193

1,839

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

12

24

 

11

 

35

 

(6)

-

(6)

Finance income

5

22

-

22

67

-

67

Finance costs

5

(536)

-

(536)

(562)

(38)

(600)

Profit/(loss) before tax

 

1,716

(42)

1,674

1,145

155

1,300

Taxation

6

(413)

59

(354)

(286)

(20)

(306)

Profit/(loss) for the year from continuing operations

 

1,303

17

1,320

859

135

994

Discontinued operations

 

 

 

 

 

 

 

Profit/(loss) for the year from discontinued operations

7

-

-

-

-

216

216

Profit/(loss) for the year

 

1,303

17

1,320

859

351

1,210

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

Owners of the parent

 

1,305

17

1,322

859

349

1,208

Non-controlling interests

 

(2)

-

(2)

-

2

2

 

 

1,303

17

1,320

859

351

1,210

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Basic

9

 

 

13.65p

 

 

14.80p

Diluted

9

 

 

13.55p

 

 

14.75p

 

 

 

 

 

 

 

 

Earnings/(losses) per share from continuing operations

 

 

 

 

 

 

 

Basic

9

 

 

13.65p

 

 

12.15p

Diluted

9

 

 

13.55p

 

 

12.11p

 

 

 

 

 

 

 

 

 

                           

The notes on pages 21 to 57 form part of this condensed consolidated financial information.

*  Restated for the adoption of IFRS 15 and reclassification of derivative interest income as explained in Note 1 and Note 23.

 

Group statement of comprehensive income/(loss)

 

 

 

 

 

Notes

52 weeks

2019

£m

52 weeks

2018

(restated*)

£m

Items that will not be reclassified to income statement

 

 

 

Remeasurement gains/(losses) of defined benefit pension schemes

17

364

3,265

Tax on items that will not be reclassified

 

(61)

(554)

 

 

303

2,711

Items that may subsequently be reclassified to income statement

 

 

 

Change in fair value of debt instruments at fair value through other comprehensive income

 

(10)

-

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

 

-

(62)

Currency translation differences:

 

 

 

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

 

100

179

Movements in foreign exchange reserve and net investment hedging on

subsidiary disposed, reclassified and reported in the Group income statement

 

-

140

Gains/(losses) on cash flow hedges:

 

 

 

Net fair value gains/(losses)

 

130

(146)

Reclassified and reported in the Group income statement

 

(57)

(52)

Tax on items that may be reclassified

 

5

22

 

 

168

81

Total other comprehensive income/(loss) for the year

 

471

2,792

Profit/(loss) for the year

 

1,320

1,210

Total comprehensive income/(loss) for the year

 

1,791

4,002

 

 

 

 

Attributable to:

 

 

 

Owners of the parent

 

1,793

3,995

Non-controlling interests

 

(2)

7

Total comprehensive income/(loss) for the year

 

1,791

4,002

 

 

 

 

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

 

 

 

Continuing operations

 

1,793

3,639

Discontinued operations

 

-

356

 

 

1,793

3,995

         

 

The notes on pages 21 to 57 form part of this condensed consolidated financial information.

*  Restated for the adoption of IFRS 15 as explained in Note 1 and Note 23.

 

Group balance sheet

 

 

 

 

 

 

Notes

23 February 

 2019

£m

24 February 2018 (restated*)              £m

 

Non-current assets

 

 

 

 

Goodwill and other intangible assets

10

6,264

2,661

 

Property, plant and equipment

11

19,023

18,521

 

Investment property

 

36

100

 

Investments in joint ventures and associates

12

704

689

 

Financial assets at fair value through other comprehensive income

 

979

860

 

Trade and other receivables

 

195

186

 

Loans and advances to customers and banks

 

7,868

6,885

 

Derivative financial instruments

 

1,178

1,117

 

Deferred tax assets

 

132

116

 

 

 

36,379

31,135

 

Current assets

 

 

 

 

Financial assets at fair value through other comprehensive income

 

67

68

 

Inventories

 

2,617

2,264

 

Trade and other receivables

 

1,640

1,504

 

Loans and advances to customers and banks

 

4,882

4,637

 

Derivative financial instruments

 

52

27

 

Current tax assets

 

6

12

 

Short-term investments

13

390

1,029

 

Cash and cash equivalents

13

2,916

4,059

 

 

 

12,570

13,600

 

Non-current assets classified as held for sale

7

98

149

 

 

 

12,668

13,749

 

Current liabilities

 

 

 

 

Trade and other payables

 

(9,354)

(8,994)

 

Borrowings

15

(1,599)

(1,479)

 

Derivative financial instruments

 

(250)

(69)

 

Customer deposits and deposits from banks

 

(8,832)

(7,812)

 

Current tax liabilities

 

(325)

(335)

 

Provisions

16

(320)

(544)

 

 

 

(20,680)

(19,233)

 

Net current liabilities

 

(8,012)

(5,484)

 

Non-current liabilities

 

 

 

 

Trade and other payables

 

(384)

(364)

 

Borrowings

15

(5,673)

(7,142)

 

Derivative financial instruments

 

(389)

(594)

 

Customer deposits and deposits from banks

 

(3,296)

(2,972)

 

Post-employment benefit obligations

17

(2,808)

(3,282)

 

Deferred tax liabilities

 

(236)

(96)

 

Provisions

16

(747)

(721)

 

 

 

(13,533)

(15,171)

 

Net assets

 

14,834

10,480

 

Equity

 

 

 

 

Share capital

 

490

410

 

Share premium

 

5,165

5,107

 

All other reserves

 

3,798

735

 

Retained earnings

 

5,405

4,250

 

Equity attributable to owners of the parent

 

14,858

10,502

 

Non-controlling interests

 

(24)

(22)

 

Total equity

 

14,834

10,480

 

 

The notes on pages 21 to 57 form part of this condensed consolidated financial information.

*  Restated for the adoption of IFRS 15 as explained in Note 1 and Note 23.

 

Group statement of changes in equity

 

 

 

 

 

 

 

All other reserves

 

 

Share

capital

£m

Share

premium

£m

Currency basis

reserve

£m

Capital

redemption

reserve

£m

 

Hedging

reserve

£m

Translation

reserve

£m

Own

shares

held

£m

 

Merger reserve(b)

£m

Retained

earnings 

£m

 

Total

£m

Non-

controlling

interests

£m

Total

equity 

£m

At 24 February 2018

(as previously reported)

410

5,107

-

16

40

655

(16)

40

4,228

10,480

(22)

10,458

Cumulative adjustment to opening balances from application of

IFRS 15  (net of tax)

-

-

-

-

-

-

-

-

22

22

-

22

At 24 February 2018 (restated(a))

410

5,107

-

16

40

655

(16)

40

4,250

10,502

(22)

10,480

Adjustment on initial application of IFRS 9

(net of tax)

-

-

1

-

(1)

-

-

-

(177)

(177)

-

(177)

At 25 February 2018

410

5,107

1

16

39

655

(16)

40

4,073

10,325

(22)

10,303

Profit/(loss) for the year

-

-

-

-

-

-

-

-

1,322

1,322

(2)

1,320

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of financial assets at fair value through other comprehensive income

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

(10)

 

 

 

(10)

 

 

 

-

 

 

 

(10)

 

 

 

Currency translation differences

-

 

-

 

-

 

-

 

-

 

100

 

-

 

-

-

 

100

 

-

 

100

 

Remeasurements of defined benefit pension schemes

-

 

-

 

-

 

-

 

-

 

-

 

-

 

-

364

 

364

 

-

 

364

 

Gains/(losses) on cash flow hedges

-

-

(6)

-

79

-

-

-

-

73

-

73

Tax relating to components of other comprehensive income

-

-

-

-

-

3

-

-

(59)

(56)

-

(56)

Total other comprehensive income/(loss)

-

 

 

-

 

 

(6)

 

 

-

 

 

79

 

 

103

 

 

-

 

 

-

295

 

 

471

 

 

-

 

 

471

 

 

Total comprehensive income/(loss)

-

-

(6)

-

79

103

-

-

1,617

1,793

(2)

1,791

Transactions with owners

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of own shares

-

-

-

-

-

-

(277)

-

-

(277)

-

(277)

Share-based payments

-

-

-

-

-

-

114

-

67

181

-

181

Issue of shares

80

58

-

-

-

-

-

3,050

-

3,188

-

3,188

Dividends (Note 8)

-

-

-

-

-

-

-

-

(357)

(357)

-

(357)

Tax on items charged to equity

-

-

-

-

-

-

-

-

5

5

-

5

Total transactions with owners

80

58

-

-

-

-

(163)

3,090

(285)

2,740

-

2,740

At 23 February 2019

490

5,165

(5)

16

118

758

(179)

3,090

5,405

14,858

(24)

14,834

                             

 

The notes on pages 21 to 57 form part of this condensed consolidated financial information.

 

(a) Restated for the adoption of IFRS 15 as explained in Note 1 and Note 23.

(b) 'Merger reserve' was previously titled 'Other reserves' in prior financial years.

 

 

 

 

 

 

 

 

All other reserves

 

 

Share

capital

£m

Share

premium

£m

Currency basis

reserve

£m

Capital

redemption

reserve

£m

 

Hedging

reserve

£m

Translation

reserve

£m

Own

shares

held

£m

 

Merger

reserve(b)

£m

Retained

earnings

£m

 

Total

£m

Non-

controlling

interests

£m

Total

equity

£m

At 25 February 2017

(as previously reported)

409

5,096

-

16

217

350

(22)

40

332

6,438

(24)

6,414

Adjustment on initial application of IFRS 15

(net of tax)

-

-

-

-

-

-

-

-

20

20

-

20

At 25 February 2017 (restated(a))

409

5,096

-

16

217

350

(22)

40

352

6,458

(24)

6,434

Profit/(loss) for the year

(as previously reported)

-

-

-

-

-

-

-

-

1,206

1,206

2

1,208

IFRS 15 adjustment to profit/(loss) for the year

-

-

-

-

-

-

-

-

2

2

-

2

Profit/(loss) for the year (restated(a))

-

-

-

-

-

-

-

-

1,208

1,208

2

1,210

Other comprehensive income/(loss)

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of financial assets at fair value through other comprehensive income

-

-

-

-

-

-

-

-

(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) (restated(a))

-

-

-

-

(177)

305

-

-

3,867

3,995

7

4,002

Transactions with owners

 

 

 

 

 

 

 

 

 

 

 

 

Purchase of own shares

-

-

-

-

-

-

(14)

-

-

(14)

-

(14)

Share-based payments

-

-

-

-

-

-

20

-

105

125

-

125

Issue of shares

1

11

-

-

-

-

-

-

-

12

-

12

Dividends (Note 8)

-

-

-

-

-

-

-

-

(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 (restated(a))

410

5,107

-

16

40

655

(16)

40

4,250

10,502

(22)

10,480

                             

 

The notes on pages 21 to 57 form part of this condensed consolidated financial information.

 

(a) Restated for the adoption of IFRS 15 as explained in Note 1 and Note 23.

(b) 'Merger reserve' was previously titled 'Other reserves' in prior financial years.

 

Group cash flow statement

 

 

 

 

 

 

 

Notes

52 weeks

2019

£m

52 weeks

2018

(restated*)

£m

Cash flows generated from/(used in) operating activities

 

 

 

Operating profit/(loss) from continuing operations

 

2,153

1,839

Depreciation and amortisation

 

1,375

1,295

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

 

(107)

(66)

(Profit)/loss arising on sale of subsidiaries and financial assets at fair value through other comprehensive income

 

(8)

(165)

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

 

-

(23)

Net impairment loss/(reversal) on financial assets at fair value through other comprehensive income

 

-

(22)

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

 

(58)

(167)

Adjustment for non-cash element of pensions charge

 

45

4

Additional contribution into defined benefit pension schemes

17

(266)

(245)

Share-based payments

 

77

113

Tesco Bank fair value movements included in operating profit/(loss)

 

127

156

Retail (increase)/decrease in inventories

 

11

55

Retail (increase)/decrease in development stock

 

(2)

21

Retail (increase)/decrease in trade and other receivables

 

98

(8)

Retail increase/(decrease) in trade and other payables

 

(307)

 280

Retail increase/(decrease) in provisions

 

(238)

132

Retail (increase)/decrease in working capital

 

(438)

480

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

 

(1,585)

(1,738)

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

 

4

34

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

 

1,348

1,820

Tesco Bank increase/(decrease) in provisions

 

(25)

(6)

Tesco Bank (increase)/decrease in working capital

 

(258)

110

Cash generated from/(used in) operations

 

2,642

3,309

Interest paid

 

(306)

(328)

Corporation tax (paid)/received

 

(370)

(176)

Net cash generated from/(used in) operating activities

 

1,966

2,805

         

 

The notes on pages 21 to 57 form part of this condensed consolidated financial information.

*  Restated for the adoption of IFRS 15 and reclassification of derivative interest income as explained in Note 1 and Note 23.

 

 

 

 

 

Notes

52 weeks

2019

£m

52 weeks

2018

(restated*)

£m

Net cash generated from/(used in) operating activities

 

1,966

2,805

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

 

286

253

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

 

(1,101)

(1,440)

Purchase of intangible assets

 

(191)

(197)

Disposal of subsidiaries, net of cash disposed

 

8

66

Acquisition of subsidiaries, net of cash acquired

19

(715)

(27)

Proceeds from sale of joint ventures and associates

 

-

23

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

 

5

-

Investments in joint ventures and associates

 

(11)

(21)

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

 

639

1,697

Net (investments in)/proceeds from sale of financial assets at fair value through other comprehensive income

 

(122)

236

Dividends received from joint ventures and associates

 

41

26

Interest received

 

18

27

Net cash generated from/(used in) investing activities

 

(1,143)

643

Cash flows generated from/(used in) financing activities

 

 

 

Proceeds from issue of ordinary share capital

 

60

11

Own shares purchased

 

(206)

-

Increase in borrowings

 

975

313

Repayment of borrowings

 

(2,471)

(3,721)

Net cash flows from derivative financial instruments

 

35

253

Repayments of obligations under finance leases

 

(17)

(10)

Dividends paid to equity owners

8

(357)

(82)

Net cash generated from/(used in) financing activities

 

(1,981)

(3,236)

Net increase/(decrease) in cash and cash equivalents

 

(1,158)

212

Cash and cash equivalents at the beginning of the year

 

4,059

3,832

Effect of foreign exchange rate changes

 

15

15

Cash and cash equivalents at the end of the year

13

2,916

4,059

 

The notes on pages 21 to 57 form part of this condensed consolidated financial information.

*  Restated for the adoption of IFRS 15 and reclassification of derivative interest income as explained in Note 1 and Note 23.

 

Note 1 Basis of preparation

 

This preliminary consolidated financial information has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Conduct Authority, and the principles of International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies applied, and the judgements, estimates and assumptions made in applying these policies, are consistent with those used in preparing the Annual Report and Group financial statements 2019, which are the same as those used in preparing the Annual Report and Group financial statements 2018, except as noted below. The financial year represents the 52 weeks ended 23 February 2019 (prior financial year 52 weeks ended 24 February 2018). This preliminary consolidated financial information does not constitute statutory consolidated financial statements for the 52 weeks ended 23 February 2019 as defined under section 434 of the Companies Act 2006.

 

The Annual Report and Group financial statements for the 52 weeks ended 23 February 2019 were approved by the Board of Directors on 9 April 2019. 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 63. The Annual Report and Group financial statements for 2019 will be filed with the Registrar in due course.

 

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.

 

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.

 

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 comparatives restated) and the assets and liabilities of these operations are presented separately in the Group balance sheet.

 

Adoption of new IFRSs

The Group has adopted IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers' effective for the year ending 23 February 2019. IFRS 15 has been applied fully retrospectively and comparatives for the prior financial year have been restated, whilst IFRS 9 has been applied retrospectively at 25 February 2018 by adjusting the opening balance sheet at that date. Further details on the impact of adoption of these standards is described in Note 23.

 

Prior financial year reclassification of derivative interest income

During the current financial year, the Group reclassified interest income arising from derivative financial instruments hedging the Group's borrowings from finance income to finance costs. This reclassification more appropriately reflects the net finance cost to the Group. Prior year comparatives have been restated to align to the current year approach.

 

The impact of this reclassification on prior year amounts has been a reduction of finance costs and finance income in the Group income statement by £31m, and a reduction of interest received and interest paid in the Group cash flow statement by £27m.

 

Line item name changes

"Loans and advances to customers" has been renamed "Loans and advances to customers and banks". There were no balances relating to banks in this line in the prior years.

"Other investments" has been renamed "Financial assets at fair value through other comprehensive income".

 

Accounting policies

Revenue
Revenue is income arising from the sale of goods and services in the ordinary course of the Group's activities, net of value added taxes. Revenue is recognised when performance obligations are satisfied and control has transferred to the customer. For the majority of revenue streams, there is a low level of judgement applied in determining the transaction price or the timing of transfer of control.

Sale of goods
The sale of goods represents the vast majority of the Group's revenue. For goods sold in store, revenue is recognised at the point of sale. For online or wholesale sales of goods, revenue is recognised on collection by, or delivery to, the customer. Revenue is reduced by a provision for expected returns (refund liability). An asset and corresponding adjustment to cost of sales is recognised for the Group's right to recover goods from customers.

Clubcard (customer loyalty)
Clubcard points issued by Tesco when a customer purchases goods are a separate performance obligation providing a material right to a future discount. The total transaction price (sales price of goods) is allocated to the Clubcard points and the goods sold based on their relative standalone selling prices, with the Clubcard points standalone price based on the value of the points to the customer, adjusted for expected redemption rates (breakage). The amount allocated to Clubcard points is deferred as a contract liability within trade and other payables. Revenue is recognised as the points are redeemed by the customer.

Financial services
Revenue consists of interest, fees and income from the provision of retail banking and insurance. Interest income on financial assets that are measured at amortised cost is determined using the effective interest rate method.

Calculation of the effective interest rate takes into account fees receivable that are an integral part of the instrument's yield, premiums or discounts on acquisition or issue, early redemption fees and transaction costs. Interest income is calculated on the gross carrying amount of a financial asset unless the financial asset is impaired, in which case interest income is calculated on the amortised cost.

The majority of the fees in respect of services (credit card interchange fees, late payment and ATM revenue) are recognised at the point in time at which the transaction with the customer takes place and the service is performed. For services performed over time, payment is generally due monthly in line with the satisfaction of performance obligations.

The Group generates commission from the sale and service of motor and home insurance policies underwritten by Tesco Underwriting Limited, or in a minority of cases by a third-party underwriter. This is based on commission rates, which are independent of the profitability of underlying insurance policies. Similar commission income is also generated from the sale of white label insurance products underwritten by other third party providers. This commission income is recognised on a net basis as such policies are sold.

In the case of some commission income on insurance policies managed and underwritten by a third party, the Group recognises commission income from policy renewals as such policies are sold. This is when the Group has satisfied all of its performance obligations in relation to the policy sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. This calculation takes into account both estimates of future renewal volumes and renewal commission rates. A contract asset is recognised in relation to this revenue. This is unwound over the remainder of the contract with the customer, in this case being the third party insurance provider.

The end policy holders have the right to cancel an insurance policy at any time. Therefore, a contract liability is recognised for the amount of any expected refunds due and the revenue recognised in relation to these sales is reduced accordingly. This contract refund liability is estimated using prior experience of customer refunds. The appropriateness of the assumptions used in this calculation is reassessed at each reporting date.

Financial instruments
Financial assets and financial liabilities are recognised in the Group balance sheet when the Group becomes a party to the contractual provisions of the instrument. Financial assets are classified as either fair value through profit and loss, fair value through other comprehensive income, or amortised cost. Classification and subsequent remeasurement depends on the Group's business model for managing the financial asset and its cash flow characteristics. Assets that are held for collection of contractual cash flows, where those cash flows represent solely payments of principal and interest, are measured at amortised cost.

Investments
Debt instruments are classified as at fair value through other comprehensive income. Gains and losses arising from changes in fair value are recognised directly in other comprehensive income, except for impairment gains or losses, interest income and foreign exchange gains and losses, which are recognised in the income statement. When the debt instrument is derecognised, cumulative amounts in other comprehensive income are reclassified to the income statement.

Equity investments have been irrevocably designated as at fair value through other comprehensive income. Gains and losses arising from changes in fair value are recognised directly in other comprehensive income, and are not subsequently reclassified to the Group income statement, including on derecognition. Impairment losses are not recognised separately from other changes in fair value. Dividends are recognised in the Group income statement when the Group's right to receive payment is established.

Impairment of financial assets

Since adoption of IFRS 9 on 25 February 2018, the Group assesses on a forward-looking basis the expected credit losses (ECLs) associated with its financial assets carried at amortised cost and debt instruments at fair value through other comprehensive income. The ECLs are updated at each reporting date to reflect changes in credit risk.

The three-stage model for impairment has been applied to loans and advances to customers and banks, debt instruments at fair value through other comprehensive income, and loan receivables from joint ventures and associates. The credit risk is determined through modelling a range of possible outcomes for different loss scenarios, using reasonable and supportable information about past events, current conditions and forecasts of future events and economic conditions and taking in to account the time value of money. A 12-month ECL is recognised, unless the credit risk on the financial asset increases significantly after initial recognition, when the lifetime ECL is recognised. 

For trade and other receivables, contract assets and lease receivables, the Group applies the simplified approach permitted by IFRS 9, with lifetime ECLs recognised from initial recognition of the receivable. These assets are grouped based on shared credit risk characteristics and days past due, with ECLs for each risk grouping determined based on the Group's historical credit loss experience, adjusted for factors specific to each receivable, general economic conditions and expected changes in forecast conditions.

Supplier financing arrangements

Management reviews supplier financing arrangements to determine the appropriate presentation of balances outstanding as trade payables or borrowings, dependent on the nature of each arrangement. Factors considered in determining the appropriate presentation include the commercial rationale for the arrangement, impact on the Group's working capital positions, credit enhancements or other benefits provided to the bank and recourse exposures.

 

Balances outstanding under current supplier financing arrangements are classified as accounts payables, since the financing arrangements are agreed between the supplier and the banks, and the Group does not provide additional credit enhancement nor obtain any benefit from the arrangements. These outstanding balances are not material to the Group.

Critical accounting judgements

Business combinations

The acquisition of Booker Group PLC (Booker) on 5 March 2018 has been accounted for as an acquisition of a business in accordance with IFRS 3 'Business Combinations', resulting in the recognition of goodwill of £3,093m. This goodwill is allocated to, and tested for impairment at, the UK group of cash-generating units, which is the level at which management monitor the goodwill. Refer to Note 10 and Note 19 for further additional disclosures.

 

Operating segments

Following the acquisition of Booker, management has applied the guidance of IFRS 8 "Operating Segments" in determining the presentation of Booker's performance and balances within the Group.  Management has carefully considered a number of areas including how the business is managed on an integrated basis with the rest of the UK retail business, the strategic rationale of the merger in forming the UK's leading Food business, the significant synergies flowing across the UK businesses, and the level at which the Chief Operating Decision Maker (CODM) monitors performance and allocates resources to the business.

 

Based on these considerations, management concluded that the most appropriate presentation for Booker is within the UK & ROI segment. This presentation reflects that the CODM is monitoring performance and allocating resources at a combined UK & ROI level which includes Booker.

Key sources of estimation uncertainty

Tesco Bank expected credit loss measurement

The measurement of ECLs for Tesco Bank financial assets requires the use of complex models and significant assumptions about future macro-economic conditions and credit behaviour, such as the likelihood of customers defaulting and the resulting losses.

 

Standard issued but not yet effective

As of the date of authorisation of these condensed consolidated financial statements, the following standard was in issue but not yet effective and is expected to have a material impact:

IFRS 16 'Leases'

IFRS 16 'Leases' will be effective in the Group financial statements for the accounting period commencing 24 February 2019. The Group will adopt the standard retrospectively, with comparatives restated from a transition date of 25 February 2018.

IFRS 16 has a significant impact on reported assets, liabilities and the income statement of the Group, as well as the classification of cash flows relating to lease contracts and a number of APMs used by the Group.

The Group will recognise additional lease liabilities of £10.2 billion and right of use assets of £7.5 billion as at 24 February 2018. The Group will also derecognise onerous lease provisions and other working capital balances associated with leases, resulting in a £1.3 billion post-tax reduction in net assets. Net debt will increase by £10.1 billion and total indebtedness by £3.2 billion.

Under IFRS 16, straight line operating lease rental expense is replaced by depreciation of the right of use asset and interest on the lease liability. Operating profit for the 52 weeks ended 23 February 2019 increases by £496 million, finance costs increase by £553 million and profit before tax (which includes the impact of exceptional impairment reversals) decreases by £57 million. Operating profit before exceptional items and amortisation of acquired intangibles increases by £401 million, operating margin increases by 0.6%, and profit before tax before exceptional items and amortisation of acquired intangibles decreases by £152 million. Basic EPS decreases by 0.52p and diluted adjusted EPS decreases by 1.39p.

IFRS 16 has no impact on total cash flow for the year or cash and cash equivalents at the end of the year. Cash generated from operations for the 52 weeks ended 23 February 2019 increases by £1,139 million as operating lease rental expenses are no longer recognised as operating cash outflows. Cash outflows are instead split between interest paid (included in operating activities) and repayments of obligations under leases (included in financing activities), which increase by £553 million and £589 million respectively.

Further details on the impact of IFRS 16 can be found in the Group's 'Introducing IFRS 16' analyst and investor briefing held on 15 February 2019 and available on www.tescoplc.com/investors/reports-results-and-presentations.

 

Alternative performance measures (APMs)

In the reporting of financial information, the Directors have adopted various APMs. These measures are not defined by 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 and amortisation of acquired intangibles: This is the headline measure of the Group's performance, and is based on operating profit before the impact of exceptional items and amortisation of intangible assets acquired in business combinations. 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 similar type, in aggregate, are excluded by virtue of their size and nature in order to reflect management's view of the underlying performance of the Group.

•     Retail operating cash flow: This is the operating cash flow from 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 and the market purchase of shares net of proceeds from shares issued in relation to share schemes, excluding the effects of Tesco Bank's cash flows. 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 and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements on financial instruments: This relates to profit after tax before exceptional items and amortisation of acquired intangibles 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 period 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 period 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 period.

Changes to APMs

During the period, the following change has been applied to the Group's APMs:

•      The Directors and management have decided to exclude the amortisation of intangible assets acquired in business combinations from profit measures. The amortisation charge is excluded because management does not consider the incremental amortisation charge arising from acquired intangible assets when assessing the underlying trading performance of the Group. Business combinations which occurred before the acquisition of Booker did not result in a material amortisation expense arising from the acquired intangible assets.   

As a result of the change above, the following APMs have been changed to exclude the amortisation of intangible assets acquired in business combinations:

•     Operating profit before exceptional items and amortisation of acquired intangibles;

•     Profit before tax before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements on financial instruments;

•     Earnings per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements on financial instruments;

•     Effective tax rate before exceptional items and amortisation of acquired intangibles; and

•     Effective tax rate before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements on financial instruments.

Operating margin is now calculated as Operating profit before exceptional items and amortisation of acquired intangibles divided by revenue.

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.

Following the acquisition of Booker on 5 March 2018, management has applied judgement in determining the presentation of Booker within the UK & ROI Retail segment. Note 1 provides further details on the rationale for this presentation.

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.

The CODM uses operating profit before exceptional items and amortisation of acquired intangibles, 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 and amortisation of acquired intangibles is a consistent measure within the Group as defined within Note 1. Refer to Note 4 for exceptional items and amortisation of acquired intangibles. 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 23 February 2019

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

44,876

6,058

4,746

1,097

56,777

106

56,883

Revenue

51,636

6,325

4,746

1,097

63,804

107

63,911

Operating profit/(loss) before exceptional items and amortisation of acquired intangibles

1,536

 

186

 

279

 

197

 

2,198

 

8

 

2,206

 

Exceptional items and amortisation of acquired intangibles

(2)

 

46

(66)

(30)

(52)

(1)

(53)

Operating profit/(loss)

1,534

232

213

167

2,146

7

2,153

Operating margin

3.0%

2.9%

5.9%

18.0%

3.4%

 

3.5%

 

52 weeks ended 23 February 2019

At actual exchange rates

UK & ROI

£m

Central

Europe

£m

Asia

£m

Tesco

Bank

£m

Total at actual

exchange

£m

Continuing operations

 

 

 

 

 

Group sales

44,883

6,030

4,873

1,097

56,883

Revenue

51,643

6,298

4,873

1,097

63,911

Operating profit/(loss) before exceptional items and amortisation of acquired intangibles

1,537

 

186

 

286

 

197

 

2,206

 

Exceptional items and amortisation of acquired intangibles

(2)

46

(67)

(30)

(53)

Operating profit/(loss)

1,535

232

219

167

2,153

Operating margin

3.0%

3.0%

5.9%

18.0%

3.5%

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

 

 

 

 

35

Finance income

 

 

 

 

22

Finance costs

 

 

 

 

(536)

Profit/(loss) before tax

 

 

 

 

1,674

 

Tesco Bank revenue of £1,097m (2018: £1,047m) comprises interest and similar revenues of £729m (2018: £673m) and fees and commissions revenue of £368m (2018: £374m).

 

 

 

 

52 weeks ended 24 February 2018 (restated)

At actual exchange rates

UK & ROI

£m

Central

Europe

£m

Asia

£m

Tesco

Bank

£m

Total at

actual

exchange

£m

Continuing operations

 

 

 

 

 

Group sales

38,656

6,343

4,947

1,047

50,993

Revenue

44,914

6,585

4,947

1,047

57,493

Operating profit/(loss) before exceptional items and amortisation of acquired intangibles

1,059

119

299

169

1,646

Exceptional items and amortisation of acquired intangibles

146

93

(22)

(24)

193

Operating profit/(loss)

1,205

212

277

145

1,839

Operating margin

2.4%

1.8%

6.0%

16.1%

2.9%

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

 

 

 

 

(6)

Finance income

 

 

 

 

67

Finance costs

 

 

 

 

(600)

Profit/(loss) before tax

 

 

 

 

1,300


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 23 February 2019

 

UK & ROI

£m

Central Europe

£m

Asia

£m

Tesco

Bank

£m

Unallocated

£m

Total

£m

Goodwill and other intangible assets

 

4,927

27

284

1,026

-

6,264

Property, plant and equipment and investment property

 

13,638

2,669

2,690

62

-

19,059

Investments in joint ventures and associates

 

12

1

605

86

-

704

Non-current financial assets at fair value through other comprehensive income

 

 

 

3

-

-

976

-

979

Non-current trade and other receivables(a)

 

52

5

14

19

-

90

Non-current loans and advances to customers and banks

 

-

-

-

7,868

-

7,868

Deferred tax assets

 

-

24

50

58

-

132

Non-current assets(b)

 

18,632

2,726

3,643

10,095

-

35,096

 

 

 

 

 

 

 

 

Inventories and current trade and other receivables(c)(d)

 

3,066

487

390

285

-

4,228

Current loans and advances to customers and banks

 

-

-

-

4,882

-

4,882

Current financial assets at fair value through other comprehensive income

 

-

-

-

67

-

67

Total trade and other payables

 

(7,627)

(801)

(1,069)

(241)

-

(9,738)

Total customer deposits and deposits from banks

 

-

-

-

(12,128)

-

(12,128)

Total provisions

 

(889)

(65)

(61)

(52)

-

(1,067)

Deferred tax liabilities

 

(196)

(28)

(12)

-

-

(236)

Net current tax

 

(265)

(12)

(11)

(31)

-

(319)

Post-employment benefits

 

(2,788)

-

(20)

-

-

(2,808)

Assets classified as held for sale

 

68

30

-

-

-

98

Net debt (including Tesco Bank)(e)

 

-

-

-

(378)

(2,863)

(3,241)

Net assets

 

10,001

2,337

2,860

2,499

(2,863)

14,834

(a)                     Excludes loans to joint ventures of £105m (2018: £138m) which form part of net debt.

(b)                     Excludes derivative financial instrument non-current assets of £1,178m (2018: £1,117m).

(c)                     Excludes net interest and other receivables of £1m (2018: £1m) which form part of net debt.

(d)                     Excludes loans to joint ventures of £28m (2018: £nil) which form part of net debt.

(d)                     Refer to Note 18.

 

 

At 24 February 2018 (restated)

UK & ROI

£m

Central Europe

£m

Asia

£m

Tesco

Bank

£m

Unallocated

£m

Total

£m

Goodwill 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 financial assets at fair value through other comprehensive income

3

-

-

857

-

860

Non-current trade and other receivables(a)

30

6

12

-

-

48

Non-current loans and advances to customers and banks

-

-

-

6,885

-

6,885

Deferred tax assets

18

33

65

-

-

116

Non-current assets(b)

14,534

2,875

3,498

8,973

-

29,880

 

 

 

 

 

 

 

Inventories and current trade and other receivables(c)(d)

2,435

610

399

323

-

3,767

Current loans and advances to customers and banks

-

-

-

4,637

-

4,637

Current financial assets at fair value through other comprehensive income

-

-

-

68

-

68

Total trade and other payables

(7,236)

(853)

(1,028)

(241)

-

(9,358)

Total customer deposits and deposits from banks

-

-

-

(10,784)

-

(10,784)

Total provisions

(1,034)

(110)

(47)

(74)

-

(1,265)

Deferred tax liabilities

(21)

(35)

(32)

(8)

-

(96)

Net current tax

(263)

(9)

(16)

(35)

-

(323)

Post-employment benefits

(3,261)

-

(21)

-

-

(3,282)

Assets classified as held for sale

95

54

-

-

-

149

Net debt (including Tesco Bank) (e)

-

-

-

(288)

(2,625)

(2,913)

Net assets

5,249

2,532

2,753

2,571

(2,625)

10,480

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

 

 

Other segment information

 

 

52 weeks ended 23 February 2019

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(a)

1,028

113

232

4

1,377

-

1,377

Investment property

-

-

-

-

-

-

-

Goodwill and other intangible assets(b)

4,005

17

3

27

4,052

-

4,052

Depreciation and amortisation:

 

 

 

 

 

 

 

Property, plant and equipment

(699)

(136)

(234)

(10)

(1,079)

-

(1,079)

Investment property

(1)

-

-

-

(1)

-

(1)

Other intangible assets

(201)

(14)

(7)

(73)

(295)

-

(295)

Impairment:

 

 

 

 

 

 

 

Property, plant and equipment loss

(46)

(64)

(36)

-

(146)

-

(146)

Property, plant and equipment reversal

129

86

4

-

219

-

219

Investment property loss

-

(1)

-

-

(1)

-

(1)

Investment property reversal

2

-

-

-

2

-

2

Goodwill and other intangible assets loss

(5)

(16)

-

-

(21)

-

(21)

Other intangible assets reversal

-

5

-

-

5

-

5

Financial assets net (loss)/reversal

(20)

-

(1)

(164)

(185)

-

(185)

 

(a) Includes £326m acquired through business combinations.

(b) Includes £3,861m (2018: £8m) of goodwill and other intangible assets acquired through business combinations.

 

 

 

 

52 weeks ended 24 February 2018 (restated)

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 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)

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 and other intangible assets loss

(20)

(8)

-

-

(28)

-

(28)

Other intangible assets reversal

4

-

-

-

4

-

4

Financial assets net (loss)/reversal

(6)

3

(1)

(137)

(141)

-

(141)

 

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.

 

 

Retail

Tesco Bank

Tesco Group

52 weeks ended 23 February 2019

Before exceptional items and amortisation of acquired intangibles

£m

Exceptional items and amortisation of acquired intangibles

£m

Retail

Total

£m

Before exceptional items and amortisation of acquired intangibles

£m

Exceptional items and amortisation of acquired intangibles

£m

Tesco

Bank

Total

£m

Total

£m

Operating profit/(loss) from continuing operations

2,009

(23)

1,986

197

(30)

167

2,153

Depreciation and amortisation

1,214

78

1,292

83

-

83

1,375

ATM net income

(34)

-

(34)

34

-

34

-

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

5

(104)

(99)

 

(8)

 

-

 

(8)

 

(107)

 

(Profit)/loss arising on sale of subsidiaries and financial assets at fair value through other comprehensive income

(1)

(7)

(8)

 

 

-

 

 

-

 

 

-

 

 

(8)

 

 

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

(3)

(55)

(58)

 

 

-

 

 

-

 

 

-

 

 

(58)

 

 

Adjustment for non-cash element of pensions charge

45

-

45

-

 

-

 

-

 

45

Additional contribution into defined benefit pension schemes

(266)

-

(266)

-

 

-

 

-

 

(266)

Share-based payments

82

-

82

(5)

-

(5)

77

Tesco Bank fair value movements included in operating profit/(loss)

-

-

-

127

-

127

127

Cash flows generated from operations excluding working capital

3,051

(111)

2,940

428

(30)

398

3,338

(Increase)/decrease in working capital

(312)

(126)

(438)

(223)

(35)

(258)

(696)

Cash generated from/(used in) operations*

2,739

(237)

2,502

205

(65)

140

2,642

Interest paid

(301)

-

(301)

(5)

-

(5)

(306)

Corporation tax (received)/paid

(302)

-

(302)

(68)

-

(68)

(370)

Net cash generated from/(used in) operating activities

2,136

(237)

1,899

132

(65)

67

1,966

 

 

 

 

 

 

 

 

                     

* APM: 'Retail operating cash flow' of £2,502m (2018: £2,773m) is the cash generated from operations of the continuing Retail business.

 

Retail

                              Tesco Bank

Tesco Group

52 weeks ended 23 February 2019

Before

exceptional items and amortisation of acquired intangibles

£m

Exceptional items and amortisation of acquired intangibles

£m

Retail

Total

£m

Before

exceptional items and amortisation of acquired intangibles

£m

Exceptional

items and amortisation of acquired intangibles

£m

Tesco

Bank

Total

£m

Total

£m

Net cash generated from/(used in) operating activities

2,136

(237)

1,899

132

(65)

67

1,966

 

 

 

 

 

 

 

 

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

22

263

 

285

 

 

1

 

 

-

 

 

1

 

 

286

 

 

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

(136)

 

 

-

 

 

(136)

 

 

-

 

 

-

 

 

-

 

 

(136)

 

 

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

(962)

 

 

-

 

 

(962)

 

 

(3)

 

 

-

 

 

(3)

 

 

(965)

 

 

Purchase of intangible assets

(164)

-

(164)

(27)

-

(27)

(191)

Disposal of subsidiaries, net of cash disposed

8

-

8

-

-

-

8

Acquisition of subsidiaries, net of cash acquired

(715)

-

(715)

-

-

-

(715)

Proceeds from sale of joint ventures and associates

-

-

-

5

-

5

5

Investments in joint ventures and associates

(11)

-

(11)

-

-

-

(11)

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

639

-

 

639

-

-

-

639

Net (investments in)/proceeds from sale of financial assets at fair value through other comprehensive income

(5)

 

 

7

 

 

2

 

 

(124)

 

 

-

 

 

(124)

 

 

(122)

 

 

Dividends received from joint ventures and associates

31

-

31

10

-

10

41

Dividends received from Tesco Bank

50

-

50

(50)

-

(50)

-

Interest received

18

-

18

-

-

-

18

Net cash generated from/(used in) investing activities

(1,225)

270

(955)

(188)

-

(188)

(1,143)

 

 

 

 

 

 

 

 

Proceeds from issue of ordinary share capital

60

-

60

-

-

-

60

Own shares purchased

(206)

-

(206)

-

-

-

(206)

Add: Cash outflow from major acquisition (Note 19)

747

-

747

-

-

-

747

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

-

-

 

-

(5)

-

(5)

(5)

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

(639)

-

 

(639)

-

-

-

(639)

APM: Free cash flow

873

33

906

(61)

(65)

(126)

780

Increase in borrowings

704

-

704

271

-

271

975

Repayment of borrowings

(2,046)

-

(2,046)

(425)

-

(425)

(2,471)

Net cash flows from derivative financial instruments

35

-

35

-

-

-

35

Repayment of obligations under finance leases

(17)

-

(17)

-

-

-

(17)

Dividends paid to equity owners

(357)

-

(357)

-

-

-

(357)

Net cash generated from/(used in) financing activities

(1,827)

-

(1,827)

(154)

-

(154)

(1,981)

 

 

 

 

 

 

 

 

Intra-Group funding and intercompany transactions

(14)

-

(14)

14

-

14

-

 

 

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

(930)

33

(897)

(196)

(65)

(261)

(1,158)

Cash and cash equivalents at the beginning of the year

 

 

2,755

 

 

1,304

4,059

Effect of foreign exchange rate changes

 

 

15

 

 

-

15

Cash and cash equivalents at the end of the year

 

 

1,873

 

 

1,043

2,916

 

 

Retail

Tesco Bank

Tesco Group

52 weeks ended 24 February 2018 (restated)

Before

exceptional items and amortisation of acquired intangibles

£m

Exceptional

items and amortisation

of acquired intangibles

£m

Retail

Total

£m

Before

exceptional

items and amortisation of acquired intangibles

£m

Exceptional

items and amortisation of acquired intangibles

£m

Tesco Bank Total

£m

Total

£m

Operating profit/(loss) from continuing operations

1,477

217

1,694

169

(24)

145

1,839

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 financial assets at fair value through other comprehensive income

(3)

(162)

(165)

-

-

-

(165)

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

(7)

(16)

(23)

-

-

-

(23)

Net impairment loss/(reversal) on financial assets at fair value through other comprehensive income

(22)

-

(22)

-

-

-

(22)

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

(8)

(159)

(167)

-

-

-

(167)

Adjustment for non-cash element of pensions charge

4

-

4

-

-

-

4

Additional contribution into defined benefit pension schemes

(245)

-

(245)

-

-

-

(245)

Share-based payments

109

-

109

4

-

4

113

Tesco Bank fair value movements included in operating profit/(loss)

-

-

-

156

-

156

156

Cash flows generated from operations excluding working capital

2,472

(178)

2,294

449

(24)

425

2,719

(Increase)/decrease in working capital

493

(14)

479

114

(3)

111

590

Cash flows generated from/(used in) operations*

2,965

(192)

2,773

563

(27)

536

3,309

Interest paid

(324)

-

(324)

(4)

-

(4)

(328)

Corporation tax (paid)/received

(131)

-

(131)

(45)

-

(45)

(176)

Net cash generated from/(used in) operating activities

2,510

(192)

2,318

514

(27)

487

2,805

                 


*  APM: Refer to previous table for footnotes.

 

Retail

Tesco Bank

Tesco Group

52 weeks ended 24 February 2018 (restated)

Before

exceptional items and amortisation of acquired intangibles

£m

Exceptional items and amortisation of acquired intangibles

£m

Retail

Total

£m

Before

exceptional items and amortisation of acquired intangibles

£m

Exceptional

items and amortisation of acquired intangibles

£m

Tesco

Bank Total

£m

Total

£m

Net cash generated from/(used in) operating activities

2,510

(192)

2,318

514

(27)

487

2,805

 

 

 

 

 

 

 

 

Proceeds from 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 sale of short-term investments

1,697

-

1,697

-

-

-

1,697

Net (investments in)/proceeds from sale of financial assets at fair value through other comprehensive income

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

27

-

27

-

-

-

27

Net cash generated from/(used in) investing activities

586

170

756

(113)

-

(113)

643

 

 

 

 

 

 

 

 

Proceeds from issue of ordinary share capital

11

-

11

-

-

-

11

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

(1,697)

-

(1,697)

-

-

-

(1,697)

APM: Free cash flow

1,410

(22)

1,388

401

(27)

374

1,762

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 at the end of the year

 

 

2,755

 

 

1,304

4,059


 

Note 3 Income and expenses

 

 

Continuing operations

52 weeks 2019

£m

52 weeks 2018

£m

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

 

 

Property rental income, of which £(35)m (2018: £(34)m) relates to investment properties

(398)

(372)

Other rental income

(56)

(55)

Direct operating expenses arising on rental earning investment properties

19

17

Costs of inventories recognised as an expense

48,124

42,297

Inventory losses and provisions

1,399

1,373

Depreciation and amortisation charged

1,375

1,295

Operating lease expenses, of which £76m (2018: £70m) relates to hire of plant and machinery

1,078

1,018

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

(73)

(191)

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

16

24

Net impairment loss/(reversal) on financial assets

185

141

Note 4 Exceptional items and amortisation of acquired intangibles

Income statement

52 weeks ended 23 February 2019

Profit/(loss) for the year included the following exceptional items and amortisation of acquired intangibles:

Exceptional items and amortisation of acquired intangibles included in:

Cost of  sales

£m

Administrative expenses

£m

Property- related items

£m

Total exceptional items and amortisation of acquired intangibles included within operating profit

 £m

Share of JV and associates profits/(losses)

£m

Taxation

£m

Discontinued operations

£m

Exceptional items:

 

 

 

 

 

 

 

Tesco Direct closure costs(a)

(38)

-

-

(38)

-

7

-

Net restructuring and redundancy costs(b)

(159)

(23)

-

(182)

-

30

-

Provision for customer redress(c)

(16)

-

-

(16)

-

-

-

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

-

17

-

17

-

-

-

Insurance recovery of amounts in relation to DPA and FCA obligations(e)

-

20

-

20

-

-

-

Property transactions(f)

-

-

104

104

11

7

-

Tesco Bank FCA charge(g)

-

(16)

-

(16)

-

-

-

Booker integration(h)

(8)

(7)

-

(15)

-

3

-

Freetime VAT provision release(i)

176

-

-

176

-

(33)

-

Lazada contingent proceeds(j)

-

7

-

7

-

-

-

GMP equalisation(k)

(37)

(6)

-

(43)

-

7

-

Net impairment reversal of non-current assets and onerous property provisions(l)

10

-

1

11

-

23

-

Total exceptional items

(72)

(8)

105

25

11

44

-

Amortisation of acquired intangibles:

 

 

 

 

 

 

 

Amortisation of acquired intangible assets (Note 10)

-

(78)

-

(78)

-

15

-

Total exceptional items and amortisation of acquired intangibles

(72)

 

(86)

 

105

 

(53)

 

11

 

59

 

-

 

(a)   This relates to impairment, redundancy and inventory losses arising from the closure of the Group's non-food business, Tesco Direct in July 2018.

(b)  This net charge relates to simplification of our business and working practices in Central Europe £(27)m, UK & ROI £(131)m and Asia £(26)m netted off against a £2m reduction in business simplification costs previously provided for in Tesco Bank.

(c)   The charge of £(16)m relates to additional costs in respect of Payment Protection Insurance (PPI) as a result of higher claim rates than previously estimated.

(d)  The Group had taken an exceptional charge in respect of the Deferred Prosecution Agreement (DPA), including the Shareholder Compensation Scheme, in the 52 weeks to 25 February 2017. £17m charges relating to the Shareholder Compensation Scheme have been released in the 52 weeks ended 23 February 2019.

(e)   This relates to an insurance recovery recognised relating to the Shareholder Compensation Scheme.

(f)   As part of the Group's strategy to maximise value from property, the Group disposed of surplus properties which generated a profit of £104m. The £11m gain relates to the Group's share of the property disposal gain in Gain Land Limited, an associated undertaking of the Group.

(g)  This relates to the settlement payment to the Financial Conduct Authority (FCA) in respect of an online fraudulent attack on Tesco Bank in 2016, as detailed in Note 16.

(h)  This covers the costs incurred in integrating Booker within the Tesco Group, mainly focussed on aligning distribution networks and operating platforms.

(i)    After the resolution of a dispute with HMRC regarding the treatment of VAT on Clubcard rewards, the related provision of £176m was released. Refer to Note 16.

(j)    This relates to receipt of contingent proceeds previously held back and not recognised in our sale proceeds.

(k)  This relates to a non-cash charge in respect of the Group's defined benefit pension liability arising from equalisation of guaranteed minimum pensions (GMPs) following recent high court ruling, as detailed in Note 17.

(l)    This comprises a net impairment reversal of £69m in property, plant and equipment, a net impairment charge of £(14)m in software and intangible assets and a net charge of £(44)m in onerous property provisions.

 

52 weeks ended 24 February 2018

Profit/(loss) for the year included the following exceptional items and amortisation of acquired intangibles:

Exceptional items and amortisation of acquired intangibles included in:

Cost

 of sales

£m

Administrative expenses

£m

Property- related items

£m

Total exceptional items and amortisation of acquired intangibles included within operating profit

£m

Finance costs

£m

Taxation

£m

Exceptional items within discontinued operations

£m

 

Exceptional items:

 

 

 

 

 

 

 

 

Net restructuring and redundancy costs

(75)

(34)

7

(102)

-

19

-

 

Net impairment reversal of non-current assets and onerous lease provisions

50

-

3

53

-

28

-

 

Provision for customer redress

(24)

-

-

(24)

-

(3)

-

 

Investment disposal

-

124

-

124

-

(25)

-

 

Disposal of opticians business

-

38

-

38

-

(7)

-

 

Release of amounts provided in relation to DPA and FCA obligations

-

25

-

25

-

-

-

 

Property transactions

-

-

79

79

-

(32)

-

 

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

-

-

-

-

(38)

-

-

 

Exceptional items relating to discontinued operations

-

-

-

-

-

-

216

 

Total exceptional items

(49)

153

89

193

(38)

(20)

216

 

Amortisation of acquired intangibles:

 

 

 

 

 

 

 

 

Amortisation of acquired intangible assets

-

-

-

-

-

-

-

 

Total exceptional items and amortisation of acquired intangibles

(49)

 

153

 

89

 

193

 

(38)

 

(20)

 

216

 

 

 

Cash flow statement

52 weeks ended 23 February 2019

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

Amortisation of acquired intangibles does not affect the Group's cash flow.

 

Cash flows from

operating activities

Cash flows from

investing activities

 

 

52 weeks

2019

£m

52 weeks

2018

£m

52 weeks

2019

£m

52 weeks

2018

£m

Payments relating to Tesco Direct Closure

(38)

-

-

-

Prior year restructuring and redundancy costs(a)

(60)

(56)

-

-

Current year restructuring and redundancy costs(a)

(30)

(67)

-

-

Utilisation of onerous lease provisions

(82)

(93)

-

-

Property transactions(b)

-

9

263

(111)

Property transactions - sale of investment in joint venture

-

-

-

19

Settlement of claims for customer redress in Tesco Bank

(49)

(23)

-

-

DPA/shareholder compensation scheme payments

(43)

(149)

-

-

Freetime VAT refund(c)

12  

160

-

-

Tesco Bank FCA settlement payment

(16)

-

-

-

Insurance recovery of amounts in relation to FCA obligations

16

-

-

-

Booker integration cash payments

(12)

-

-

-

Proceeds from sale of investments - Lazada

-

-

7

196

Proceeds from sale of opticians business

-

-

-

45

Proceeds from sale of subsidiaries treated as discontinued

-

-

-

26

Exceptional cash flows from discontinued operations

-

-

-

(5)

Total

(302)

(219)

270

170

(a) These are cash outflows on settlement of restructuring and redundancy costs.
(b) These relate to proceeds from property disposals primarily in UK & ROI and Central Europe.
(c) VAT recovered in relation to the appeal against HMRC regarding the treatment of VAT on Clubcard rewards. 

Note 5 Finance income and costs

 

 

Continuing operations

 

 

Notes

52 weeks 2019

£m

52 weeks

2018

(restated(a))

£m

Finance income

 

 

 

Interest receivable and similar income

 

22

44

Financial instruments - fair value remeasurements

 

-

23

Total finance income

 

22

67

Finance costs

 

 

 

GBP MTNs and Loans

 

(144)

(207)

EUR MTNs

 

(77)

(94)

USD Bonds

 

(17)

(31)

Finance charges payable under finance leases and hire purchase contracts

 

(8)

(8)

Other interest payable

 

(49)

(62)

Capitalised interest

11

1

2

Financial instruments - fair value remeasurements(b)

 

(153)

-

Total finance costs before exceptional items and net pension finance costs

 

(447)

(400)

Net pension finance costs

17

(89)

(162)

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

4

-

(38)

Total finance costs

 

(536)

(600)

Net finance cost

 

(514)

(533)

(a)  Restated for reclassification of derivative interest income as detailed in Note 1.

(b)  Fair value remeasurements includes £(121)m (2018: £(30)m) relating to the premium paid on the repurchase of long-dated bonds.

Note 6 Taxation

Recognised in the Group income statement

Continuing operations

52 weeks

2019

£m

52 weeks

2018

(restated)

£m

Current tax (credit)/charge

 

 

UK corporation tax

221

143

Overseas tax

131

118

Adjustments in respect of prior years

(8)

(29)

 

344

232

Deferred tax (credit)/charge

 

 

Origination and reversal of temporary differences

3

25

Adjustments in respect of prior years

7

49

 

10

74

Total income tax (credit)/charge

354

306

 

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 are therefore included in these condensed consolidated interim 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

2019

£m

52 weeks

2018

(restated)

£m

Profit/(loss) before tax

1,674

1,300

Tax credit/(charge) at 19% (2018: 19.1%)

(318)

(248)

Effect of:

 

 

Non-qualifying depreciation

(30)

(31)

Expenses not deductible(a)

(26)

(25)

Unrecognised tax losses

(9)

(27)

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

21

25

Impairment of non-current assets

17

35

Banking surcharge tax

(18)

(19)

Differences in overseas taxation rates

14

5

Adjustments in respect of prior years

1

(20)

Share of losses of joint ventures and associates

7

(1)

Irrecoverable withholding taxes

(13)

-

Total income tax credit/(charge)

(354)

(306)

Effective tax rate

21.1%

23.5%

(a)  This includes current year movements on uncertain tax positions and the release of amounts provided for in relation to DPA and FCA obligations.

(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

2019

£m

52 weeks

2018

(restated)

£m

Profit/(loss) before tax before exceptional items and amortisation of acquired intangibles

1,716

1,145

Tax credit/(charge) at 19% (2018: 19.1%)

(326)

(219)

Effect of:

 

 

Non-qualifying depreciation

(30)

(31)

Expenses not deductible(a)

(24)

(26)

Unrecognised tax losses

(5)

(18)

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

-

18

Banking surcharge tax

(19)

(19)

Differences in overseas taxation rates

7

5

Adjustments in respect of prior years

(8)

5

Share of losses of joint ventures and associates

5

(1)

Irrecoverable withholding taxes

(13)

-

Total income tax credit/(charge) before exceptional items and amortisation of acquired intangibles

(413)

(286)

Effective tax rate before exceptional items and amortisation of acquired intangibles

24.1%

25.0%

Tax charge on net pension finance costs and fair value remeasurements at 19% on £242m (2018: 19.1% on £139m)

(46)

 

(26)

 

Change in tax rate

2

3

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

(457)

(309)

Effective tax rate before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements

23.3%

24.1%

(a)  This includes current year movements on uncertain tax positions and expenses 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.

 

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

Non-current assets classified as held for sale

 

23 February

2019

£m

24 February 2018

£m

Non-current assets classified as held for sale

98

149

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
There were no discontinued operations in the year. The discontinued operations in the prior financial year related to the Group's Turkish and Korean operations.

The tables below show the results of the discontinued operations which were included in the Group income statement and Group cash flow statement in the prior year. 

 

Income statement

 

52 weeks

2019

£m

52 weeks

2018

£m

Loss after tax on disposal of Turkish operations

-

(128)

Net adjustments to profit/(loss) of past disposals

-

344

Total profit/(loss) after tax of discontinued operations

-

216

Cash flow statement

 

 

52 weeks

2019

£m

52 weeks

2018

£m

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

-

(11)

 

Note 8 Dividends

 

2019

2018

 

Pence/share

£m

Pence/share

£m

Amounts recognised as distributions to owners in the financial year:

 

 

 

 

Prior financial year final dividend

2.00

195

-

-

Paid interim dividend*

1.67

162

1.00

82

Dividends paid to equity owners in the financial year

3.67

357

1.00

82

 

 

 

 

 

Proposed final dividend at financial year end

4.10

402

2.00

195

* Excludes £2m dividends waived (2018: £nil).

 

The proposed final dividend was approved by the Board of Directors on 9 April 2019 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 23 February 2019, in accordance with IAS 10 'Events after the reporting period'. It will be paid on 21 June 2019 to shareholders who are on the Register of members at close of business on 17 May 2019.

A dividend reinvestment plan (DRIP) is available to shareholders who would prefer to invest their dividends in the shares of the Company. For those shareholders electing to receive the DRIP, the last date for receipt of a new election is 31 May 2019.

The Group has 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. £nil (2018: £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 23 February 2019 there were 72 million (2018: 27 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.

 

 

2019

2018 (restated)

 

Basic

Potentially

 dilutive share options

Diluted

Basic

Potentially

 dilutive share options

Diluted

Profit/(loss) (£m)

 

 

 

 

 

 

Continuing operations*

1,322

-

1,322

992

-

992

Discontinued operations

-

-

-

216

-

216

Total

1,322

-

1,322

1,208

-

1,208

Weighted average number of shares (millions)

9,686

72

9,758

8,165

27

8,192

Earnings/(losses) per share (pence)

 

 

 

 

 

 

Continuing operations

13.65

(0.10)

13.55

12.15

(0.04)

12.11

Discontinued operations

-

-

-

2.65

(0.01)

2.64

Total

13.65

(0.10)

13.55

14.80

(0.05)

14.75

* Excludes profits/(losses) from non-controlling interests of £(2)m (2018: £2m).

APM: Diluted earnings/(losses) per share from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements on financial instruments

 

 

Notes

52 weeks

2019

52 weeks

2018

(restated)

Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles (£m)

 

1,716

1,145

Add: Net pension finance costs (£m)

5

89

162

Add/(less): Fair value remeasurements on financial instruments (£m)

5

153

(23)

Profit before tax from continuing operations before exceptional items and amortisation of acquired intangibles, net pension finance costs and fair value remeasurements (£m)

 

1,958

 

1,284

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

 

1,958

 

 

1,284

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

 

(455)

 

 

(309)

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

 

1,503

 

 

975

 

 

 

 

Basic weighted average number of shares (millions)

 

9,686

8,165

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

 

15.52

 

 

11.94

 

 

 

 

Diluted weighted average number of shares (millions)

 

9,758

8,192

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

 

15.40

 

 

11.90

 

Note 10 Goodwill and other intangible assets

Goodwill

Goodwill and other intangible assets of £6,264m (2018: £2,661m) comprise £4,909m Goodwill (2018: £1,796m), £586m Software (2018: £788m), Customer relationships of £643m (2018: £nil) and intangible assets of £126m (2018: £77m).

The acquisition of Booker on 5 March 2018 resulted in recognition of additional goodwill of £3,093m, customer relationships of £715m and other intangible assets of £40m. This goodwill is supported by the expected increase in cash flows for the combined UK retail business and has been reflected at the UK level, consistent with the lowest level at which management monitors that goodwill. The £74m impact of the amortisation of the intangible assets recognised upon the Booker acquisition has been included within 'exceptional items and amortisation of intangible assets'. Refer to Note 4 and Note 19 for further details.

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

 

2019

2018

2019

2018

2019

2018

2019

2018

Tesco Bank

802

802

10.4%

10.6%

7.8%

8.0%

2.0%

2.5%

UK

3,834

735

8.8%

8.9%

7.1%

7.2%

2.0%

2.1%

Thailand

193

180

9.6%

9.3%

7.7%

7.5%

1.9%

2.2%

Malaysia

77

75

11.8%

11.6%

9.0%

8.8%

2.4%

3.2%

ROI

3

4

8.5%

8.3%

7.4%

7.3%

1.9%

1.8%

 

4,909

1,796

 

 

 

 

 

 

 

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, including a Brexit risk adjustment in the UK & ROI segment. 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 group of cash-generating units.

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.

 

Impairment of other intangible assets

A net impairment loss of £16m (£21m losses offset by £5m reversal) has been recognised against other intangible assets as part of the impairment review discussed in Note 11. Of this loss, £14m has been included within exceptional items, classified as 'Net impairment reversal of non-current assets and onerous property provisions' within cost of sales in Note 4.

 

Note 11 Property, plant and equipment

 

Land and

buildings

£m

Other(a)

£m

Total

£m

Cost

 

 

 

At 24 February 2018

23,453

10,909

34,362

Foreign currency translation

50

40

90

Additions(b)

518

533

1,051

Acquired through business combinations(c)

258

68

326

Reclassification(d)

926

(787)

139

Classified as held for sale

(48)

5

(43)

Disposals

(73)

(450)

(523)

Fully depreciated assets(e)

(135)

(3,255)

(3,390)

At 23 February 2019

24,949

7,063

32,012

 

Accumulated depreciation and impairment losses

 

 

 

At 24 February 2018

7,116

8,725

15,841

Foreign currency translation

9

21

30

Charge for the year

500

579

1,079

Impairment losses

80

66

146

Reversal of impairment losses

(181)

(38)

(219)

Reclassification(d)

790

(787)

(3)

Classified as held for sale

(20)

5

(15)

Disposals

(60)

(426)

(486)

Fully depreciated assets(e)

(135)

(3,255)

(3,390)

At 23 February 2019

8,099

4,890

12,989

 

 

 

 

Net carrying value(f)

 

 

 

At 23 February 2019

16,850

2,173

19,023

At 24 February 2018

16,337

2,184

18,521

 

 

 

 

Construction in progress included above(g)

 

 

 

At 23 February 2019

37

109

146

At 24 February 2018

68

57

125

(a) Other assets consist of fixtures and fittings with a net carrying value of £1,657m (2018: £1,752m), office equipment with a net carrying value of £292m (2018: £116m) and motor vehicles with a net carrying value of £224m (2018: £316m).

(b) Includes £1m (2018: £2m) 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% (2018: 4.5%). Interest capitalised is deducted in determining taxable profit in the financial year in which it is incurred.

(c) £326m relates to the acquisition of Booker. Refer to Note 19 for further details.

(d) Reclassification includes £892m related to fully depreciated assets no longer in use that were reclassified within property, plant and equipment, and £105m reclassified between property, plant and equipment and software and intangible assets, prior to removal from the fixed assets registers.

(e) During the current financial year, the Group performed a comprehensive review of all fully depreciated assets held in the Group's fixed asset registers, and removed £3,390m of cost and accumulated depreciation and impairment losses relating to those fully depreciated assets which are no longer in use by the Group. This change will provide users with a greater understanding of the imputed depreciation rates on the Group's assets.

(f)  Includes £803m (2018: £786m) of assets pledged as security for secured bonds (Note 15) and £489m (2018: £509m) of property held as security in favour of the Tesco PLC pension scheme.

(g) 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.

                                                                                                                                   

2019

2018

Land and buildings

£m

 

Other

£m

Land and buildings

£m

 

Other

£m

Net carrying value

70

34

75

32

 

Land and buildings

The net carrying value of land and buildings comprises:

 

2019

£m

2018

£m

 

Freehold assets(a)(b)

14,563

14,117

 

Long leasehold improvements - 50 years or more

323

412

 

Short leasehold improvements - less than 50 years(a)

1,894

1,733

 

Assets held under finance leases(b)

70

75

 

Net carrying value

16,850

16,337

 

(a) £413m of freehold assets previously classified as short leasehold in the prior financial year have now been reclassified.

(b) Assets held under finance leases previously included within freehold land have now been disclosed separately.

 

 

 

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)

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

(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

16,337

2,184

18,521

             

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

 

Commitments for capital expenditure contracted for, but not incurred, at 23 February 2019 were £70m (2018: £116m), principally relating to store development.

Impairment of property, plant and equipment

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, including a Brexit risk adjustment in the UK & ROI segment. 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% (2018: 7% to 12%). On a post-tax basis, the discount rates range from 6% to 9% (2018: 5% to 9%).

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 3% (2018: 1% to 4%).

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 £19,023m (2018: £18,521m) above comprises £15,067m (2018: £14,056m) of unimpaired assets and £3,956m (2018: £4,465m) of impaired assets. Of the impaired assets, £1,871m (2018: £1,795m) carrying value was supported by value in use and £2,085m (2018: £2,670m) 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 £73m (£219m reversal offset by £146m 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 £219m (2018: £275m) relates to properties in the UK & ROI of £129m (2018: £154m), Central Europe of £86m (2018: £112m) and Asia of £4m (2018: £9m), while the impairment losses of £146m (2018: £88m) relate to properties in the UK & ROI of £46m (2018: £50m), Central Europe of £64m (2018: £6m) and Asia of £36m (2018: £32m).

Of the £73m net reversal (2018: £187m net reversal), a £68m reversal (2018: £183m reversal) within exceptional items related to trading stores has been classified as 'Net impairment reversal of non-current assets and onerous property provisions' within cost of sales. In addition, a £1m reversal (2018: £1m loss) within exceptional items related to closed stores has been classified as 'Net impairment reversal of non-current assets and onerous property provisions' within profits/(losses) arising on property-related items. In the prior financial year, 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 £4m reversal (2018: £8m reversal) has not been included within exceptional items as it relates 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, including discount rates, sales growth and property fair values:

-       An increase of one percentage point in the discount rates for each geographic region would increase impairment by £265m (2018: £231m). A decrease of one percentage point would decrease impairment by £227m (2018: £239m).

-       An increase of one percentage point in year one sales growth for each geographic region would decrease impairment by £55m (2018: £40m). A decrease of one percentage point in year one sales growth would increase impairment by £64m (2018: £41m).

-       An increase of five percentage points in property fair values for each geographic region would decrease impairment by £95m. A decrease of five percentage points in property fair values would increase impairment by £99m.

 

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 23 February 2019.

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

The Tesco Arena Unit Trust

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 2018 to 28 February 2019. 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 parents, other than those imposed by the Companies Act 2006 or equivalent local regulations, and for Tesco Underwriting Limited, regulatory capital requirements.

Management has applied judgement in determining that Gain Land Limited (Gain Land) is an associate of the Group. The Group has significant influence by virtue of holding 20% equity interest which presumes significant influence per IAS 28, together with having a contractual right to appoint two out of 10 Directors, while taking into account that the remaining 80% interest is held by one other party.

On 13 September 2018, the Group exercised its option to buy back the 50% equity holding in the Tesco Atrato Limited Partnership held by the other joint venture partner. Refer to Note 21.

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 any impact on 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

 

2019

£m

2018

£m

12 months to Dec 2018

£m

12 months to Dec 2017

£m

Summarised balance sheet

 

 

 

 

 

 

Non-current assets(a)

3,786

3,851

3,864

3,924

Current assets (excluding cash and cash equivalents)

98

92

2,291

1,801

Cash and cash equivalents

40

37

649

414

Current liabilities(b)

(359)

(304)

(5,943)

(5,318)

Non-current liabilities(b)

(4,529)

(4,561)

(519)

(409)

Net assets/(liabilities)

(964)

(885)

342

412

 

 

 

 

 

Summarised income statement

 

 

 

 

Revenue

289

280

9,038

9,097

Profit/(loss) after tax

-

-

(48)

(230)

 

 

 

366

 

 

 

 

 

 

Reconciliation to carrying amounts:  

 

 

 

 

Opening balance

-

-

366

433

Additions/(disposals)

-

-

-

-

Foreign currency translation

-

-

9

(21)

Share of profits/(losses)(c)

15

12

(10)

(46)

Dividends received from joint ventures and associates

(15)

(12)

-

-

Deferred profits offset against carrying amounts(d)

-

-

-

-

Closing balance

-

-

365

366

 

 

 

 

 

Group's share in ownership

50%

50%

20%

20%

Group's share of net assets/(liabilities)

(482)

(443)

68

82

Goodwill

-

-

-

297

284

Deferred property profits offset against carrying amounts(d)

(61)

(61)

-

-

Cumulative unrecognised losses(c)

183

168

-

-

Cumulative unrecognised hedge reserves(c)

360

336

-

-

Carrying amount

-

-

365

366

 

 

(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 £5,503m (2018: £4,983m).

(b)  The current and non-current liabilities of UK property joint ventures largely comprise loan balances of £3,809m (2018: £3,892m) and derivative swap balances of £720m (2018: £672m) entered into to hedge the cash flow variability exposures of the joint ventures.

(c)  The share of profit for the year for UK property joint ventures related to £15m dividends received from joint ventures with £nil carrying amounts. £2m of losses and £24m 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.

(d)  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.

 

At 23 February 2019, the Group has £105m (2018: £104m) loans to UK property joint ventures.

 

Other joint ventures and associates

The Group also has interests in a number of individually immaterial joint ventures and associates, excluding UK property joint ventures and Gain Land.

 

Joint ventures

Associates

 

2019

£m

2018

£m

2019

£m

2018

£m

Aggregate carrying amount of individually immaterial joint ventures and associates

275

262

64

61

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

15

17

15

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 £102m (2018: £98m) and Tesco Underwriting Limited of £86m (2018: £90m) 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.

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

2019

£m

2018

£m

Cash at bank and in hand

2,683

3,580

Short-term deposits

233

479

 

2,916

4,059

 

 

 

 

Short-term investments

2019

£m

2018

£m

Money market funds

390

1,029

 

Cash and cash equivalents includes £62m of restricted amounts mainly relating to the Group's pension schemes and employee benefit trusts. At the prior financial year end, £777m was set aside for completion of the merger with Booker, with £766m being paid on completion. Refer to Note 19 for further details on the Booker merger.

Note 14 Commercial income

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.

 

 

2019

£m

2018

£m

Current assets

 

 

Inventories

(69)

(69)

Trade and other receivables

 

 

Trade/other receivables

183

169

Accrued income

155

186

 

 

 

Current liabilities

 

 

Trade and other payables

 

 

Trade payables*

327

199

Accruals

(4)

(7)

 

* The commercial income balance netted against trade payables increased from £199m to £327m. This increase primarily relates to the delayed settlement of commercial income receivables, due to the decision to delay the implementation of a new general ledger system in the UK & ROI, and inclusion of commercial income balances related to Booker.

 

Note 15 Borrowings

Borrowings are classified as current and non-current based on their scheduled redemption date, and not their maturity date. Repayments of principal amounts are classified as current if the repayment is scheduled to be made within one year of the reporting date.

Current

 

 

 

 

 

 

 

 

Par value

Maturity

 

2019

£m

 

2018

£m

 

 

Bank loans and overdrafts

-

-

387

351

 

 

Loans from joint ventures

-

-

-

6

 

 

5.2% Tesco Bank Retail Bond

£125m

Aug 2018

-

126

 

 

3.375% MTN

€750m

Nov 2018

-

667

 

 

1.375% MTN(a)

€726m

Jul 2019

636

-

 

 

5.5% MTN(a)

£97m

Dec 2019

98

-

 

 

1% RPI Tesco Bank Retail Bond(b)

£72m

Dec 2019

72

-

 

 

LIBOR + 0.65% Tesco Bank Bond(c)

£300m

Apr 2020

-

300

 

 

LIBOR + 0.65% Tesco Bank Bond(d)

£350m

May 2021

350

-

 

 

5.5457% Secured Bond(e)(f)

£332m

Feb 2029

20

17

 

 

Finance leases

 

 

36

12

 

 

 

 

 

1,599

1,479

 

 

                         

(e)  During the year, the Group undertook a tender for outstanding bonds and as a result the following notional amounts were repaid early, 1.375% MTN Jul 2019 €205m, 5.5% MTN Dec 2019 £84m, 6.125% MTN Feb 2022 £369m, 5% MTN Mar 2023 £67m, 6% MTN Dec 2029 £61m, 5.5% MTN Jan 2033 £26m, 6.15% USD Bond Nov 2037 $325m, 4.875% MTN Mar 2042 £70m and 5.2% MTN Mar 2057 £95m.

(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 13 May 2015 and was redeemed on its scheduled redemption date in April 2018.

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

(i)    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 £803m (2018: £786m).

(j)    This is an amortising bond which matures in Feb 2029. £20m (2018: £17m) is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in Feb 2029.

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

(l)    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%.

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

 

Non-current

 

Par value

Maturity

 

2019

£m

 

2018

£m

1.375% MTN(a)

€726m

Jul 2019

-

826

5.5% MTN(a)

£97m

Dec 2019

-

183

1% RPI Tesco Bank Retail Bond(b)

£72m

Dec 2019

-

70

 

2.125% MTN

€500m

Nov 2020

436

441

 

1m USD LIBOR + 0.70% Tesco Bank Bond

$350m

Nov 2020

262

-

 

5% Tesco Bank Retail Bond

£200m

Nov 2020

203

204

 

LIBOR + 0.65% Tesco Bank Bond(d)

£350m

May 2021

-

350

 

6.125% MTN(a)

£531m

Feb 2022

561

952

 

LIBOR + 0.53% Tesco Bank Bond(g)

£300m

Oct 2022

299

298

 

5% MTN(a)

£171m

Mar 2023

183

254

 

1.375% MTN

€750m

Oct 2023

658

-

 

2.5% MTN

€750m

Jul 2024

658

666

 

3.322% LPI MTN(h)

£346m

Nov 2025

349

338

 

5.5457% Secured Bond(e)(f)

£332m

Feb 2029

303

322

 

6.067% Secured Bond(e)

£200m

Feb 2029

191

190

 

LIBOR + 1.2% Secured Bond(e)

£50m

Feb 2029

34

33

 

6% MTN(a)

£98m

Dec 2029

119

198

 

5.5% MTN(a)

£150m

Jan 2033

186

221

 

1.982% RPI MTN(i)

£286m

Mar 2036

288

279

 

6.15% USD Bond(a)

$525m

Nov 2037

428

616

 

4.875% MTN(a)

£32m

Mar 2042

32

103

 

5.125% MTN

€356m

Apr 2047

319

323

 

5.2% MTN(a)

£73m

Mar 2057

71

165

 

Finance leases

 

 

93

110

 

 

 

 

5,673

7,142

           

*  Refer to previous table for footnotes.

Borrowing facilities

The Group has the following undrawn committed facilities available at 23 February 2019, in respect of which all conditions precedent had been met as at that date:

 

2019

£m

2018

£m

Expiring in less than one year

38

38

Expiring between one and two years

-

-

Expiring in more than two years

3,000

4,232

 

3,038

4,270

The undrawn committed facilities include £0.4bn (2018: £1.6bn) of bilateral facilities and a £2.6bn (2018: £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 25 February 2017 (as previously reported)

851

98

174

1,123

IFRS 15 restatement (Note 23)

-

-

(3)

(3)

At 26 February 2017 (restated)

851

98

171

1,120

Foreign currency translation

5

1

-

6

Amount released in the year

(33)

(32)

(14)

(79)

Amount provided in the year

153

157

211

521

Amount utilised in the year

(120)

(146)

(50)

(316)

Unwinding of discount

13

-

-

13

At 24 February 2018

869

78

318

1,265

Foreign currency translation

2

(1)

-

1

Acquired through business combinations (Note 19)

40

-

4

44

Amount released in the year

(68)

(26)

(196)

(290)

Amount provided in the year

115

221

53

389

Amount utilised in the year

(118)

(129)

(110)

(357)

Unwinding of discount

15

-

-

15

At 23 February 2019

855

143

69

1,067

 

The balances are analysed as follows:

 

2019

£m

2018

£m

Current

320

544

Non-current

747

721

 

1,067

1,265

Property provisions

Property provisions comprise onerous lease provisions, including leases on unprofitable stores and vacant properties, dilapidations provisions and asset retirement obligation provisions.

The calculation of the value in use of the leased properties to the Group is based on the same assumptions for growth rates and expected changes to future cash flows as those for Group owned properties, as discussed in detail in Note 11, discounted at the appropriate risk free rate. The cost of exiting lease contracts is estimated as the present value of expected surrender premiums or deficits from subletting at market rents, assuming that the Group can sublet properties at market rents, based on discounting at the appropriate risk adjusted rate. For some leases, termination of the lease at the break clause requires the Group to either purchase the property or buy out the equity ownership of the property at fair value. No value is attributed to the purchase conditions since they are at fair value. It is also assumed that the Group is indifferent to purchasing the properties.

Based on the factors set out above, the Group has recognised a net onerous property provision charge in the year of £47m (2018: £120m), of which a £115m charge and £68m release, largely relating to onerous lease contracts for fully impaired properties and other onerous contracts relating to properties.

Of the net £47m (2018: £120m) onerous property provision charge recognised in the year, a £44m (2018: £105m) charge has been recognised as an exceptional item within cost of sales classified as 'Net impairment reversal of non-current assets and onerous property provisions'. The remaining £3m charge was not included in exceptional items.

The Group has performed sensitivity analysis on the onerous lease provisions using reasonably possible scenarios based on recent market movements. Neither a half a percentage point increase nor decrease in the risk-free rate would result in a material change to the onerous lease provisions.

Onerous lease provisions will be utilised over the relevant lease terms, predominantly within the next 25 years.

Restructuring provisions

Of the £195m net charge (£221m charge, £26m release) recognised in the year, £182m (2018: £102m) has been classified within exceptional items as 'Net restructuring and redundancy costs' and related to store and head office restructuring in the UK & ROI £131m (£102m), Central Europe £27m (2018: £nil), Asia £26m (2018: £nil) and Tesco Bank £2m release (2018: £nil),.

 

Other provisions

In prior financial years Tesco PLC and Tesco Freetime Limited, a wholly-owned subsidiary undertaking of the Group, initiated an appeal against Her Majesty's Revenue and Customs (HMRC) regarding the treatment of VAT on Clubcard rewards. Following the Upper Tier Tribunal ruling in the Group's favour on 24 January 2019, HMRC's Solicitors Office confirmed that they would not appeal the ruling, the Group has therefore released the £176m provision within exceptional items, classified as 'Freetime VAT provision release' within cost of sales.

On 1 October 2018, the FCA issued a warning notice to the Group in relation to an online fraudulent attack against Tesco Bank's debit cards in November 2016. The Group agreed to a settlement payment of £16m which was paid in the year.

Other provisions also includes provisions for Tesco Bank customer redress in respect of potential complaints arising from the historic sales of PPI, and in respect of customer redress relating to instances where certain of the requirements of the Consumer Credit Act (CCA) for post-contract documentation have not been fully complied with. In each instance, management have exercised judgement as to both the timescale for implementing the redress campaigns and the final scope of any amounts payable. During the current financial year, an additional charge of £16m was recognised in the Group income statement within exceptional items, classified as 'Provision for customer redress' within cost of sales. Refer to Note 4 for further details.

Other provisions are expected to be utilised in the next financial year.

 

Note 17 Post-employment benefits

Pensions

The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit schemes and defined contribution schemes.

Business Combinations

On 5 March 2018, the Group acquired Booker, which has three defined benefit schemes. The Booker Pension Scheme, closed to future accrual, is the primary scheme, with two smaller closed schemes relating to retail partners Budgens and Londis. The last Booker Pension Scheme triennial valuation showed a funding deficit of £41m at 31 March 2016, with agreed contributions of £5m per annum for six years from 1 April 2017. No contributions were required for the Budgens or Londis schemes.

Guaranteed Minimum Pension

On 26 October 2018 a High Court judgement was handed down regarding the Lloyds Banking Group's defined benefit pension scheme which affects many pension schemes in the UK, including the Group's UK schemes. The judgement concluded that schemes should be amended to ensure that members who have guaranteed minimum pensions (GMPs) receive the same benefits regardless of their gender. This change impacts GMP benefits accrued between 1990 and 1997. The trustees of the Group's UK schemes are considering the impact of the judgement on scheme liabilities and individual members, and at 23 February this work is ongoing.

In consultation with independent actuaries, the Group has estimated the financial effect of equalising benefits is to increase the Group accounting pension deficit by £43m. This has been recognised as a past service cost, and is presented as an exceptional item in the income statement (Note 4).

Summary of movements in Group deficit during the current financial year

 

2019

£m

2018

£m

Deficit in schemes at the beginning of the year

(3,282)

(6,621)

Current service cost

(35)

(38)

Past service cost

(43)

-

Net pension finance cost

(89)

(162)

Contributions by employer

33

34

Additional contributions by employer

266

245

Foreign currency translation

-

(5)

Return on plan assets excluding finance income

932

(57)

Financial assumption gains/(losses)

(478)

2,190

Demographic assumption gains/(losses)

(51)

680

Experience gains/(losses)

(39)

452

Deficit acquired through business combination*

(22)

-

Deficit in schemes at the end of the year

(2,808)

(3,282)

Deferred tax asset

470

554

Deficit in schemes at the end of the year, net of deferred tax

(2,338)

(2,728)

Refer to Note 19 for details of the acquisition of Booker.

 

Scheme principal financial assumptions

The principal defined benefit pension plan within the Group is the Tesco PLC Pension Scheme (the Scheme), a UK scheme closed to future accrual. The major assumptions, on a weighted average basis, used by the actuaries to value the defined benefit obligation for the Scheme were as follows:

 

2019

%

2018

%

Discount rate

2.8

2.9

Price inflation

3.1

3.1

Rate of increase in deferred pensions*

2.1

2.1

Rate of increase in pensions in payment*

 

 

Benefits accrued before 1 June 2012

2.9

2.9

Benefits accrued after 1 June 2012

2.2

2.2

In excess of any Guaranteed Minimum Pension (GMP) element.

If the discount rate assumption increased by 0.1% or 1.0%, the Scheme defined benefit obligation would decrease by approximately £401m or £3,406m respectively. If this assumption decreased by 0.1% or 1.0%, the Scheme defined benefit obligation would increase by approximately £401m or £4,709m respectively.

If the inflation assumption increased by 0.1% or 1.0%, the Scheme defined benefit obligation would increase by approximately £334m or £3,607m respectively. If this assumption decreased by 0.1% or 1.0%, the Scheme defined benefit obligation would decrease by approximately £301m or £2,839m respectively.

 

Note 18 Analysis of changes in net debt

 

At

24 February

2018

£m

 

 

IFRS 9 adjustment*

£m

Cash

flow

£m

Fair value movements

£m

Foreign exchange movements

£m

Interest income/

(charge)

£m

Other

non-cash

movements

£m

At

23 February

2019

£m

Total Group

 

 

 

 

 

 

 

 

Bank and other borrowings

(8,318)