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3 October, 2012

Interim Results 2012/13

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(If viewing this page on the Tesco IR App, please view the full statement in the Document Library)

IMPLEMENTING THE PLAN – INVESTING IN A BETTER TESCO

Financial headlines:

  • Group sales up 1.4% to £36.0bn* (up 3.2% at constant rates); Group sales exc. petrol up 1.6% (up 3.7% at constant rates)
  • Statutory profit before tax down (11.6)% to £1.7bn; Underlying profit before tax down (8.5)% to £1.8bn
  • Group trading profit of £1.6bn, down (10.5)% – UK down (12.4)% to £1.1bn; International down (17.1)% to £0.4bn; Tesco Bank up 114% to £94m
  • Underlying diluted EPS reduction of (7.9)%**
  • Interim dividend per share maintained at 4.63p
  • Group capital expenditure brought down from £2.1bn to £1.6bn; on track for a full year reduction to c.£3.2bn

Business update:

  • UK plan implementation underway, with improvements in UK sales performance, including like-for-like sales growth in second quarter
  • Reduced new UK space programme on track; greater focus on Express, with 60 new stores in H1
  • Grocery online business continues to outperform, growing by 11% in the UK; dotcom now launched in Poland and Slovakia, with Thailand and Malaysia launching soon
  • Tesco Bank migration successfully completed onto new, modern platforms; mortgages launched
  • Majority of businesses in Asia and Europe gained or held share, in tough external environment
  • United States losses reduced slightly to £(72)m at constant rates; actions taken to reduce losses further in the second half
  • Successful property transactions completed in Thailand and Korea, raising c.£700m proceeds
  • Japanese market exit deal agreed with Aeon

UK Plan – Building a Better Tesco:

  • Our £1bn investment programme to improve the shopping trip for customers is on schedule, with tangible improvements in all elements of the plan:
    1. Service & Staff – second phase now complete; total of 8,000 additional staff now in store
    2. Stores & Formats – over 230 stores refreshed in first half; c.40% reduction in full-year new space growth confirmed; started process of reallocating space within existing stores
    3. Price & Value – increased use of personalised Clubcard offers starting to deliver results
    4. Range & Quality – successful Everyday Value launch; over 2,000 core Tesco products also upgraded so far
    5. Brand & Marketing – store-specific ranging work underway; new creative agency W+K in place; new marketing campaign launching before the end of the year
    6. Clicks & Bricks – Click & Collect rolled out to over 1,300 locations; 200,000 non-food product lines now available online

Philip Clarke – Chief Executive

“We continue to act decisively to tackle challenges and seize opportunities across the Group. In April, I set out our plans to 'Build a Better Tesco' in the UK. We have been hard at work and I am encouraged by our customers’ initial responses to the changes we have made – but there is much more to be done. I am pleased that the team is in place, highly focused and energised, and I want to thank them for everything they have done.

“The external environment continues to present challenges all over the world. Whilst our businesses in Asia and Europe have continued to do a great job for customers, our financial performance there reflects the tough economic backdrop and particularly the regulatory changes in South Korea. That we have gained or held market share in the majority of markets is a testimony to the skill of our teams across the Group.

“We have made some important strategic changes which have fundamentally altered our approach to capital allocation. First, significantly reducing space growth in the UK and focusing on improving the performance of our existing stores – and second, investing in online to enable Tesco to take a leadership role in the digital revolution: playing our part in shaping the future of retailing.

“It is in serving the changing needs of customers, as Tesco has done over many years, that we will create more value for shareholders."

FINANCIAL HIGHLIGHTS

Continuing operations
26 weeks ended 25 August 2012 (unaudited)
2012/13 Change
vs. 2011/12
Group sales (inc. VAT)* £36,010m 1.4%
Group revenue (exc. VAT) £32,311m 1.6%
Group trading profit £1,587m (10.5)%
Underlying profit before tax £1,759m (8.5)%
Group profit before tax £1,662m (11.6)%
Underlying diluted earnings per share 17.08p (7.9)%**
Diluted earnings per share 16.14p (9.8)%
Dividend per share 4.63p 0.0%

Outlook

Whilst there is a long way to go, we believe that our investment in ‘Building a Better Tesco’ in the UK will continue to strengthen our competitiveness by delivering further improvements in the shopping trip for customers. Consistent with our previous guidance, we expect trading margins in the UK to be similar in the second half to the first.

We are planning on the basis that the global economic environment continues to be very challenging, with customers facing real financial pressures and our businesses bearing the burden of higher costs.

In Korea, the new regulations restricting opening hours for large retailers are having an immediate, unhelpful effect on our performance and are expected to impact our profit performance by around £100m for the year, weighted towards the second half.

Financial Strategy and Returns for Shareholders

We are on track with our plans to invest a lower level of Group capital expenditure in the current financial year and now expect our full-year investment to be c.£3.2bn. This is mainly due to our reduced new space programme in the UK, which will result in an overall reduction in UK capital expenditure, even though we are stepping up our investment in existing stores and online. Our investment outside the UK will also show a reduction year-on-year, due to our decision to slow down further our new store opening programme in the United States and the application of higher hurdle rates for new capital investment around the Group, as we described at our full year results in April.

This reduction in capital expenditure demonstrates our continued commitment to the financial strategy we laid out in April: investing to support sustainable business growth while also moving towards a higher level of cash generation and improving returns for shareholders.

*Group sales (inc. VAT) exclude the accounting impact of IFRIC 13.
**Underlying diluted EPS reduction calculated on a constant tax rate basis; (6.7)% at actual tax rates.

SUMMARY OF GROUP RESULTS1

Continuing operations2 Group UK3 Asia Europe US Tesco Bank
  TY
£m
LY
£m
Growth
%
TY
£m
TY
£m
TY
£m
TY
£m
TY
£m
Sales (inc. VAT)4 36,010 35,530 1.4% 23,940 5,906 5,285 365 514
Growth %       2.2% 5.4% (6.8)% 20.1% (1.5)%
UK LFL (exc. Petrol)       (0.6)%        
Revenue (exc. VAT)5 32,311 31,812 1.6% 21,407 5,490 4,542 358 514
Growth %       2.5% 5.4% (7.4)% 19.3% (1.5)%
UK LFL – IFRIC 13 compliant basis (exc. Petrol)       (0.2)%        
Trading profit/(loss)6 1,587 1,773 (10.5)% 1,115 281 171 (74) 94
Growth %       (12.4)% (3.8)% (27.8)% (1.4)% 113.6%
Trading profit margin4 4.87% 5.51% (64)bp 5.15% 5.10% 3.75% (20.50)% 18.29%
Change (basis points)       (86)bp (49)bp (106)bp 383bp 986bp
Profit arising on property-related items 324 245 32.2%          
Deduct: IAS adjustments (102) (81) (25.9)%          
Statutory/ operating profit 1,809 1,937 (6.6)%          
JVs and associates 25 41 (39.0)%          
Net finance costs (172) (97) (77.3)%          
Statutory profit before tax 1,662 1,881 (11.6)%          
Add: IAS adjustments 97 41 136.6%          
Underlying profit before tax7 1,759 1,922 (8.5)%          
Dividend per share (pence) 4.63 4.63 0.0%          
  Group UK Asia Europe US Tesco Bank
  TY LY YOY Change TY TY TY TY TY
Capital expenditure (£bn) 1.6 2.1 (0.5) 0.9 0.4 0.2 0.0 0.1
Gross space added
(million sq.ft.)
2.7 3.3 (0.6) 0.6 1.1 0.9 0.1 n/a
  Group  

Notes

  1. For UK, ROI and US, these results are for the 26 weeks ended 25 August 2012 and the previous year comparison is made with the 26 week period ended 27 August 2011. For Tesco Bank and India these results are for the 6 months ended 31 August 2012 and the previous year comparison is made with the 6 months ended 31 August 2011. For all other countries these results are for the 179 days ended 26 August 2012 and the previous year comparison is made with the 181 days ended 28 August 2011. All growth rates are calculated at actual exchange rates unless otherwise stated. Statutory numbers include the accounting impact of IFRIC 13 (Customer Loyalty Programmes). All other numbers are shown excluding the accounting impact of IFRIC 13, consistent with internal management reporting. More information can be found in Note 1 to the interim consolidated financial information.
  2. Continuing operations exclude the results from our operation in Japan which have been treated as discontinued following our decision to sell the business.
  3. The UK segment excludes Tesco Bank, which is reported separately in accordance with IFRS 8 ‘Operating Segments’.
  4. Excludes the accounting impact of IFRIC 13. Trading margin is based on revenue excluding the accounting impact of IFRIC 13.
  5. Includes the accounting impact of IFRIC 13.
  6. Trading profit excludes property profits and makes the same additional adjustments as our underlying profit measure, except for the impact of non-cash elements of IAS 32 and 39, and the interest element of IAS 19.
  7. Underlying profit excludes the impact of non-cash elements of IAS 17, 19, 32, and 39 (principally the impact of annual uplifts in rents and rent-free periods, pension costs, and the marking to market of financial instruments); the amortisation charge on intangible assets arising on acquisition (Tesco Bank) and acquisition costs, and the non-cash impact of IFRIC 13.
  8. Including Japan as a discontinued operation.
  TY LY YOY Change  
Cash flow from operating activities (£bn) 1.2 2.0 (0.8)  
IFRS pensions liability post-tax (£bn) 1.8 1.2 0.6  
Net debt (£bn)8 7.2 7.6 (0.4)  

GROUP RESULTS

Group sales, including VAT, increased by 1.4% to £36.0bn. At constant exchange rates, sales also increased by 3.2% (including petrol) and 3.7% (excluding petrol).

Group trading profit was £1,587m, down (10.5)% on last year, reflecting the significant investment in the shopping trip for customers in the UK, as announced earlier this year. Underlying profit before tax declined by (8.5)% to £1,759m. Group profit before tax declined by (11.6)% to £1,662m.

The results of our business in Japan have been classified as discontinued operations, in line with our previously announced agreement with Aeon, under which we will exit the market.

Net finance costs increased to £172m, from £97m last year, driven in part by the revaluation of the liability relating to the purchase of the minority interest in our Korean business in July 2011, which reduced net finance costs by £35m in the first half last year. Underlying net interest costs also increased to £173m, mainly driven by pre-financing of debt which was retired in September and reduced capitalised interest.

Total Group tax has been charged at an effective rate of 22.0% (last year 23.0%). This reduction mainly reflects a fall in the UK corporation tax rate.

Cash Flow and Balance Sheet. Net debt at £7.2bn is £0.4bn lower than at the same point last year, despite a reduction in operating cash flow. This reflects an overall reduction in capital expenditure, combined with the additional proceeds generated from our property programme. Consistent with previous years, this is higher than the year end net debt of £6.8bn, reflecting the cash outflow from the final dividend payment. We expect to see an overall reduction in net debt by the year end.

In addition to the previously announced successful launch of the Tesco Lotus Property Fund Public Offering (PFPO) in Thailand in March, which realised proceeds of £379m from the sale of 17 hypermarket-anchored shopping malls, we also released value from the sale and subsequent leaseback of four stores in Korea just prior to the half-year end, raising further proceeds of more than £300m.

Pensions. The Group’s net pension deficit after tax under the IAS 19 methodology of pension valuation has increased from £1,406m at the year end to £1,758m, due to a decrease in the high-quality corporate bond rate used to derive the discount rate for valuing the Fund’s future liabilities, as well as lower than expected asset returns.

The triennial actuarial valuation of the UK Pension Scheme was completed in 2012, with a deficit of £0.9bn at the valuation date of 31 March 2011. The increase in deficit since the last valuation was largely due to the adoption of more prudent assumptions to target a higher level of security for members, as well as lower than assumed asset returns. As previously announced, the Company agreed with the Trustees to make an additional contribution of £180m in March 2012.

Group capital expenditure in the first half was £1.6bn, or 4.5% of sales – a significant reduction versus the first half last year (£2.1bn). Capital expenditure in the UK was £0.9bn, with a further £0.1bn in the Bank, and £0.6bn in International.

Dividend

The Board has approved a maintained interim dividend of 4.63p per share, demonstrating our confidence in the progress that is being made in implementing the UK Plan, notwithstanding the necessary investment in ‘Building a Better Tesco’. The interim dividend will be paid on 21 December 2012 to shareholders on the Register of Members at the close of business on 12 October 2012.

BUSINESS PERFORMANCE

UK

  UK Results H1 2012/13
  £m % growth
UK sales £23,940m 2.2%
UK revenue (exc. VAT, exc. impact of IFRIC 13) £21,645m 2.1%
UK trading profit £1,115m (12.4)%
UK trading margin (trading profit/revenue) £5.15% (86)bp

Trading conditions continued to be tough across the whole of the UK market in the first half, with consumer confidence remaining at very low levels.

Our own UK like-for-like sales performance, while affected by the tough conditions in the market, improved through the first half, delivering positive growth of 0.1% in the second quarter before petrol and VAT. This was helped by stronger volumes which more than offset the effect of lower inflation and is our first positive result on this basis for over six quarters, following (1.6)% for the fourth quarter of 2011/12 and (1.5)% for the first quarter of this year.

The improved like-for-like sales performance benefits from a more competitive offer as some of the changes we are making to the customer shopping trip start to come through, including in part the stronger blend of price, promotions, coupons and Clubcard offers we described earlier in the year.

General merchandise and electrical sales continue to be a drag on our overall performance – however clothing has returned to growth – particularly in the second quarter – as our offer benefited from further investment in both price and quality.

  UK LFL Growth 2012/13
  Q1 Q2 H1
LFL (inc.VAT, inc. petrol) (1.1)% (0.8)% (1.0)%
LFL (inc.VAT, exc. petrol) (1.4)% 0.2% (0.6)%
LFL (exc.VAT, exc. petrol) (1.5)% 0.1% (0.7)%
LFL (exc.VAT, exc. petrol and IFRIC 13 compliant) (0.7)% 0.3% (0.2)%

With net new space contributing 3.3%, total sales (excluding petrol and including VAT) grew by 2.7% in the first half.

UK trading profit and margin performance reflects our previously announced and planned investment, with the trading margin of 5.2% being around 90 basis points lower than for the same period last year. We expect a similar level of trading margin in the second half.

The UK Plan – Building a Better Tesco

We are on track with the implementation of our plans to Build a Better Tesco in the UK. The additional investment we announced in January and the detailed plans we laid out in April are being implemented across the business, led by the strong, experienced UK leadership team we now have in place and supported by the hard work of our more than 300,000 staff.

In summary, our plans comprise a combined revenue and capital investment of over £1bn across six key areas to reinvigorate the UK core business:

  1. Service & Staff
  2. Stores & Formats
  3. Price & Value
  4. Range & Quality
  5. Brand & Marketing
  6. Clicks & Bricks

The changes we are making to improve the customer shopping trip are significant and there is much more that can be done. However, customers are already starting to respond positively to the improvements we have begun to make in each area of the plan:

  • Service & Staff. We have completed the recruitment, training and deployment of more than 8,000 staff across our existing stores. The first phase of this work entailed slightly more than half of the additional staff being deployed primarily into our fresh food departments by the beginning of June. The second phase has put a similar amount of staff into the remaining food and grocery departments across the store. These additional hours are allocated to specific departments – helped by new, distinct uniforms – and with the 350,000 hours of specialist training we have provided, help to give our stores more of the people and training they need to serve customers well.

    In April, we referred to an uplift of 1.1% in the like-for-like sales performance following the first phase of labour investment in the pilot group of 200 stores. This level of uplift has been maintained and we saw a similar uplift as we rolled the first phase of investment out across the remainder of the store network. Our sales performance since the beginning of June – when we rolled out the second phase of investment – has improved versus the market, a testament to the efforts of all of our staff across the business. Importantly, customer perceptions of service, quality and availability have all begun to show signs of improvement.

  • Stores & Formats. Customers have responded very enthusiastically to the changes we have already made to the look and feel of many of our stores. Over 230 stores have undergone varying degrees of refresh work in the first half, ranging from signage and colour-scheme changes, all the way through to comprehensive refits. The changes include interior design improvements featuring more use of wood and warmer colours, improved lighting, better sightlines and significantly improved counters and fresh food departments.

    We have also started the process of space reallocation in some of our larger stores, reducing the space devoted to a number of general merchandise categories and increasing that allocated to others such as clothing and in certain cases, food.

    The lower level of space growth in the first half reflects our strategic decision to reduce capital investment in the UK going forward and focus more of the remaining investment on smaller formats. We opened 60 Express stores, bringing the total number we trade from in the UK to nearly 1,500. This trend will continue into the second half and beyond, with new space for the year expected to be just less than 1.5m square feet, of which nearly a quarter will be in Express.

  • Price & Value. With the continuing strain on household budgets, customers are increasingly seeking out even greater value for money. We have focused our efforts in the first half on providing a stronger blend of great prices, relevant and engaging promotions – including couponing – and more highly-personalised offers using Clubcard. The new Clubcard Bonus mailings have been particularly successful, helping customers get the very best, most relevant offers without them having to shop elsewhere.

    Seasonal and special events are especially important for customers during these tough times and we saw a very positive response to our efforts to help them celebrate during the Olympic period, especially in London.

  • Range & Quality. Our re-launch of the Tesco Value range of 550 products as Everyday Value has proved hugely popular with customers who love the contemporary packaging and increased quality at the same low prices, helping them to manage their weekly budgets. Nearly 80% of customers have purchased Everyday Value since launch, and we have already added more than 100 new lines to the range.

    We are also part-way through a programme of renewing our entire core Tesco own label food range of over 8,000 products, which represents c.40% of our food and grocery sales. In just six months, we have already upgraded more than 2,000 products, including significant quality and packaging improvements in our Indian, Oriental, Tex-Mex and Italian ready meal ranges and a complete overhaul of our in-store bakery offer, introducing over 30 new artisanal breads and a new patisserie range. Over the coming weeks, we are re-launching our fresh meat category, including more than 150 upgraded products, across the entire business.

  • Brand & Marketing. We have ensured that dunnhumby – and the insight that it provides using data from Clubcard – is instrumental in making sure we are focusing on the right areas as we seek to improve the shopping trip for customers. Our work to increase the level of localisation in our offer is still at an early stage, although a number of ranges – such as bottled water, wine and herbs and spices – have already been adapted to give a more relevant range for some stores based on local market demographics. Customer response to these initial changes has been positive and this work will continue to build during the second half.

    In July, we brought Wieden + Kennedy on board as our new creative agency – the first time we have fundamentally changed our creative team for over 15 years. W+K are actively engaged in helping us to develop our brand communication, which will describe Tesco for our customers and our other stakeholders in the years to come.

  • Clicks & Bricks. Our online Grocery business has continued to outperform in the first half, with sales up by more than 11% compared to the same period last year, maintaining its very strong market share. Over 70,000 customers have already signed up to our Delivery Saver subscription service, since its launch in May. Another innovation, that is proving increasingly popular, is Grocery Click & Collect drive-through, which we have now rolled-out to over 90 locations in total. Our online General Merchandise business, Tesco Direct, has significantly expanded the range of products offered, from around 75,000 to over 200,000 in just the last six months, many of them sold by the 14 marketplace sellers who have already signed up to sell through tesco.com. Click & Collect continues to be the channel of choice for Tesco Direct, with the majority of customers choosing to pick their orders up from one of the collection points now in more than 1,300 stores across the country.

    In June, we acquired the personalised internet radio service We-7 and just last month we also acquired the e-book business MobCast. Together, these complement Blinkbox and will eventually provide a full range of digital entertainment products for our customers online, on tablets and on smartphones.

Tesco Telecoms

We are now the biggest Mobile Virtual Network Operator (MVNO) in the UK, with more than one million customers on pay monthly contracts. We opened an additional 15 phone shops within our stores in the first half and our online business has trebled in size since this time last year.

We are also currently trialling a new look and feel Phone Shop, with better product information, more modern fixtures and live handsets for customers to try in store. Initial customer response to the changes has been very positive.

ASIA, EUROPE & UNITED STATES

  International Results* H1 2012/13
  Actual rates Constant rates
£m % growth % growth
International sales £11,556m (0.2)% 5.5%
International revenue (exc. VAT, exc. impact of IFRIC 13) £10,426m (0.2)% 5.2%
International trading profit £378m (17.1)% (11.8)%
International trading margin (trading profit/revenue) 3.63% (73)bp (70)bp

*Exc. Japan

The performance of our international businesses has been impacted, like that of many of our competitors, by unprecedented external pressures – both economic and regulatory. In Europe, there has been a step-change in the impact of the Eurozone crisis on consumer confidence – and actual consumer demand – with rising unemployment, taxation and inflation also taking their toll in many markets. In Asia, our largest market Korea is being impacted by new opening hour restrictions which are being imposed on all large retailers and China also continues to see weakening consumer demand.

Despite these significant challenges, we have gained or held share in the majority of our markets, demonstrating that we are still highly competitive, through the success of our customer offer and its ability to adapt to changing circumstances.

  Asia, Europe, US LFL* Growth 2012/13
  Q1 Q2 H1
Asia 0.4% (3.0)% (1.4)%
Europe 0.4% (0.8)% (0.2)%
United States 3.6% 6.9% 5.2%
Total International 0.5% (1.7)% (0.7)%

*Exc. petrol, exc. Japan.
Note: A full table of quarterly country LFL growth is provided in Appendix 2 on page 15.

We opened 2.0 million square feet of net new space across our international businesses in the first half, of which nearly 50% was in smaller format stores. We are planning to open a further 3.1 million square feet in the second half, around 0.8 million square feet less than our original plan at the start of the year.

We have continued our development of the Extra format and now have 42 Extras trading in Europe and four in Asia, including our first conversion in Malaysia. Our first half conversions have seen a significant rise in customer numbers, both in Europe and Asia, as Extras are increasingly seen as destination shopping trips. Clothing departments have seen particularly good uplifts, helped by the well-received reallocation of space.

Our international businesses increasingly benefit from the application of Group skill and scale and one of the clearest examples of this is in the launch of the online grocery platform to provide home delivery services for customers overseas at a relatively low cost of deployment. In the first half, we successfully launched the service in a number of cities in Poland, following on from our earlier launch in the Czech Republic and we have continued to grow our more established businesses in Korea and the Republic of Ireland. We have just launched the service in Slovakia and are rolling it out to Thailand and Malaysia in the coming months.

Asia

  Asia Results* H1 2012/13
  Actual rates Constant rates
£m % growth % growth
Asia sales £5,906m 5.4% 6.0%
Asia revenue (exc. VAT, exc. impact of IFRIC 13) £5,505m 5.4% 6.0%
Asia trading profit £281m (3.8)% (1.7)%
Trading margin (trading profit/revenue) 5.10% (49)bp (41)bp

*Exc. Japan

Total sales (including VAT) in Asia increased by 6.0% at constant rates and by 5.4% at actual rates.

We made good progress in Thailand and Malaysia but our performance in the region as a whole was held back by the unhelpful effect of new shopping hour regulation in our key Asian market, Korea. Like-for-like sales declined by (1.4)% for the region as a whole.

Our business in Thailand delivered a strong performance in the first half, with total sales up by more than 14% at both actual and constant rates, including like-for-like sales growth of 1.7% on top of a very strong performance in the first half last year. Malaysia also continued its run of improving like-for-like performance, delivering positive like-for-like sales growth in the second quarter.

The regulations introduced in Korea allow regional municipalities to impose forced closures on all large retailers. By the beginning of July, this had resulted in nearly all of our stores – hypermarkets and convenience stores – being required to close for two Sundays per month with trading hours on all other days restricted to between 8.00am and midnight. As Sunday is the peak trading day in Korea, accounting for more than 20% of weekly trade, these measures have had a substantial impact on like-for-like sales performance in the second quarter and, as a result, on trading profit. While some legal challenges have been upheld against the restrictions in recent weeks, we expect any respite to be temporary and therefore the impact on sales and trading profit to continue through the second half.

We have continued to experience challenging conditions throughout the first half in China, in line with other retailers in the market. Consumer demand continues to lag the general pace of new store development in the market, endorsing our decision to take a more cautious stance on the pace of new development. China remains a strategically important market for Tesco. Our opening programme for the year – which is skewed towards the second half – is focusing new store development in and around our existing geographic spread, which has enabled us to scale back our regional and central overhead accordingly.

The value of our property portfolio in Asia was demonstrated by the successful completion of two transactions in the first half, with a sale and leaseback programme in Korea in August following the launch of the Tesco Lotus PFPO earlier in the year. Combined, these transactions raised proceeds of more than £700m from stores representing less than 5% of our total net selling area in Asia.

We added just over 1.0 million square feet in Asia in the first half. Nearly half of this was in Thailand, including almost 150 Tesco Lotus Express stores; with a further strong Express opening programme in the second half, we will have more than 1,000 convenience stores across the country by the end of the year. We are currently expecting to open a further 2.2 million square feet of net new space across Asia as a whole in the second half.

Europe

  Europe Results H1 2012/13
  Actual rates Constant rates
£m % growth % growth
Europe sales £5,285m (6.8)% 4.4%
Europe revenue (exc. VAT, exc. impact of IFRIC 13) £4,560m (7.4)% 3.6%
Europe trading profit £171m (27.8)% (21.1)%
Europe trading margin (trading profit/revenue) 3.75% (106)bp (115)bp

Market conditions in Europe have been significantly impacted by the effects of the continued crisis in the Eurozone and associated austerity measures in many of our markets in Central Europe. As a result, total sales grew just 4.4% at constant rates and were severely affected by weakening European currencies versus Sterling, declining by (6.8)% at actual rates. While the economic situation in Europe has been worsening for some time, the majority of the region was still performing well until the end of the first half of 2011/12, so this first half performance is being delivered against relatively strong comparatives.

General merchandise and electrical sales have been particularly affected across the region and are a significant contributor to the declining like-for-like sales performance. Our clothing performance however, continues to have robust sales growth of 5.3% at constant exchange rates following the previous year’s strong growth of 11%. Our F&F clothing business now operates as a single unit across the UK, Ireland and Central Europe, which is enabling improvements in stock management, range and margin.

While the crisis tax in Hungary was already being applied in the first half last year, it has continued to impact profit performance. We are continuing to hold back new capital in the market until we are clear on the measures that will be applied once the tax reaches the end of its three-year life in early 2013.

Consumers in the Czech Republic – already one of the markets most affected by the economic crisis – faced an increase of 4% in the lower of its two VAT rates earlier in the year, which has led to significantly reduced consumer confidence and levels of demand. This in turn has led to a further decline in our like-for-like sales performance throughout the half.

The Republic of Ireland was one of the markets first and most profoundly affected by the financial crisis and subsequent recession. Our business there performed well in the first half this year, delivering two successive quarters of positive like-for-like sales growth, albeit profit performance remained subdued.
Our performance in our largest markets in Europe relative to our local peers has held up well, with particularly strong market share performances in Poland and Ireland.

We opened 0.9m square feet of net new space in the region, with over half of this new space in smaller format stores, including 32 new franchise stores in the Czech Republic. We are planning to open a similar amount of space in the second half.

United States

  US Results H1 2012/13
  Actual rates Constant rates
£m % growth % growth
US sales £365m 20.1% 16.4%
US revenue (exc. VAT, exc. impact of IFRIC 13) £361m 20.3% 16.7%
US trading loss £(74)m Up (1.4)% Improved 1.4%

Fresh & Easy has delivered a small reduction in losses at constant rates in the first half, with sales performance improving throughout the period. Like-for-like sales growth was 5.2% for the half, following a stronger performance in the second quarter.

The number of stores delivering a positive cash contribution (before central overheads) has continued to increase, from 30 at the start of the year to 55 by the end of the first half – nearly 30% of the portfolio. We expect an increased number of stores to cross over into positive territory in the second half.

We are focusing all of our efforts on driving forward the profitability of our existing stores and have taken further steps to reduce the new space opening programme going forward. As a result, we expect to end the year with just over 200 stores in total, rather than the 230 we had in the programme at the start of the year. This move, together with a number of other measures we have already put in place to reduce costs, will lead to a more significant reduction in losses in the second half. Notwithstanding these measures, further steps are being reviewed to accelerate the pace of improvement. In the meantime, new capital investment will be tightly constrained.

We have rolled out further innovations to the in-store offer for customers, with the most recent being the launch of our ‘Kitchen-to-go’ American, Asian, Italian and Mexican ready meal ranges, which provide an even more compelling selection of convenient meal solutions. We have also introduced a wider range of own label and branded grocery lines and continued to build on the successful launch of our Meal Deals range.

TESCO BANK

  Tesco Bank Results H1 2012/13
  £m % growth
Tesco Bank revenue (exc. VAT, exc. impact of IFRIC 13) £514m (1.5)%
Tesco Bank trading profit £94m 113.6%
Tesco Bank trading margin 18.29% 986bp
Tesco Bank Baseline profit £89m 0.0%
Tesco Bank Baseline trading margin 17.52% 7bp

Tesco Bank’s performance was held back by our decision to slow down the final stages of migration, as we held off actively marketing existing products and launching new products until the process had been completed. We are pleased to report that the final transition – of our 2.8 million credit card accounts – went smoothly, with all of our six million customer accounts now successfully transferred on to our new, modern platforms. The Bank can now focus on serving the needs of our many millions of loyal Tesco customers.

Our mortgage range launched in August, including two, three and five-year fixed rate products and two-year tracker products. These come with a number of attractive features such as payment holidays, a 20% overpayment threshold and Clubcard points paid at a rate of one point for every £4 of monthly repayment.

Customer account numbers for the Bank as a whole increased by 1.0%, driven by growth in credit cards and loans, offset by a reduction in the number of active insurance policies. Loan balances increased by 6%, as we scaled up our marketing following the completion of the migration process.

Revenues fell slightly in the first half, mainly due to the effects of slowing down the final stages of migration.

We have continued to review the level of provisioning appropriate to cover possible future claims against Tesco arising from alleged mis-selling of payment protection insurance policies, primarily prior to 2008. In line with many others in the sector, we felt it appropriate to increase our current provision by a further £30m towards the end of the first half, leaving our net provision at £78m.

Separately, trading profit has benefited from a £30m one-off credit, following the settlement of a dispute with a former business partner.

Bad debts have reduced by 35%, driven by further improvements in the rate of customer defaults. The current level of default experience has also led to a bad debt provision release of £10m.

Trading profit increased by 114%, largely due to the higher £57m PPI provision increase last year. Excluding PPI, fair value and the £30m one-off credit, the Bank baseline profit was broadly stable versus last year at £89m.

An income statement, balance sheet and cash flow statement for Tesco Bank is available in the Investor Centre section of our corporate website – (www.tescoplc.com/interims2012).

COMMUNITY, ENVIRONMENT AND CORPORATE RESPONSIBILITY

This year we are refocusing on putting customers right at the heart of everything we do – this includes making sure we are a business that makes a positive contribution to society and doing more to ensure that Tesco is valued and trusted in local communities all around the world for doing the right thing. Our achievements in the first half of this year include:

Caring for the environment

We have won the 'Green Retailer of the Year' Award at the retail industry's Grocer Gold Awards 2012 and have once again been recognised as one of the top 10 UK companies in the Carbon Disclosure Project’s Global 500 index. Such awards acknowledge our continued work to meet our ambitious carbon targets. This work includes investing in cutting-edge green technology, such as natural refrigeration systems, and working with suppliers to run carbon reduction projects in different product areas including tea, dairy and clothing.

Actively supporting local communities

We have been active in supporting charities across the world. In the UK, we are on track to raise over £10m for our 2012 Charity of the Year, Cancer Research UK. Fundraising activity continues with a Stand Up 2 Cancer telethon on 19th October. A number of our markets are particularly focused on supporting children, including in Malaysia, where we have launched a three-year charity partnership to fund treatment for children with leukaemia and in Poland, where we have established a new Tesco Foundation for Children.

Buying and selling products responsibly

We are committed to supporting local suppliers, including helping them export to other Tesco markets. In the UK, we have held Taste of Korea and Taste of Thailand events, the latter focused on exotic fruits, along with a Taste of Malaysia event in Beijing and a Taste of Turkey event in Poland. We also supported local suppliers in Slovakia with a ‘Made in Slovakia’ in-store promotion in June.

Providing customers with healthy choices

We continue to develop healthy ranges across the Group, recently launching a new ‘Healthy Appetite’ initiative in Poland, showing customers through a website, mobile phone app and in-store events, that healthy eating can be easy, tasty and affordable. We have also launched a new healthy kids range in Slovakia (Vitakids) and established education corners in-store where children can learn about healthy living through animations and activities.

Creating good jobs and careers

Building on the opening of our training Academy in Asia last year, we have a new Academy building in the UK and we are creating 20,000 new jobs and offering 10,000 new apprenticeships over two years. Alongside this, we are investing more in training our current staff, as part of our Building a Better Tesco plan and have also become a member of a new employers group on workplace flexibility, which is supported by the UK Government. We have launched our Tesco Academy Online, which will give our people across the world the opportunity to access training anywhere. We have also recently opened our first regeneration store in Hungary in Debrecen, offering employment to the long term unemployed.

Supplementary Information

The following supplementary information can be found within our analyst pack, which is available via the internet at www.tescoplc.com/interims2012

  • Group Income Statement
  • Segmental Summary
  • Tesco Bank – Income Statement, Balance Sheet, Cash flow
  • Group Cash flow
  • UK Sales Performance
  • International Sales Performance
  • Group Space Summary and Forecast
  • Earnings Per Share

Contacts

Investor Relations:

Chris Griffith
+44 (0) 1992 644 800

Press:

Tom Curry
+44 (0) 1992 644 544
Brunswick
+44 (0) 20 7404 5959

This document is available via the internet at www.tescoplc.com/interims2012

A meeting for investors and analysts will be held today at 10.00am at Nomura Bank, 1 Angel Lane, London, EC4R 3AB. Access will be by invitation only. Presentations from the meeting will be available at www.tescoplc.com/interims2012

An interview with Philip Clarke, Chief Executive, discussing the Interim Results is available now to download in video, audio and transcript form at www.tescoplc.com/interims2012

Additional Disclosures

Risks and Uncertainties

As with any business, risk assessment and the implementation of mitigating actions and controls are vital to successfully achieving the Group’s strategy. The Tesco Board has overall responsibility for risk management and internal control within the context of achieving the Group’s objectives. The principal risks and uncertainties faced by the Group remain those set out in our 2012 Annual Report and include:

  • Operational threats and performance risk in the business
  • Reputational risk
  • People
  • Business and financial strategies
  • Competition and consolidation
  • Fraud, compliance and internal controls
  • IT systems and infrastructure
  • Group Treasury, finance and Tesco Bank/financial services risks
  • Property
  • Product safety and health and safety
  • Climate change and sustainability
  • Regulatory, economic and political risks, activism and terrorism
  • Pension risks

Greater detail on these risks and uncertainties are set out in our 2012 Annual Report.

Statement of Directors’ Responsibilities

The Directors confirm that this interim consolidated financial information has been prepared in accordance with IAS 34 as adopted by the European Union and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R.

The Directors of Tesco PLC are listed in the Tesco PLC Annual Report and Financial Statements 2012, with the exception of the following changes: Andrew Higginson retired on 1 September 2012 and Deanna Oppenheimer was appointed on 1 March 2012. A list of current directors is maintained on the Tesco PLC website: at www.tescoplc.com

By order of the Board

Directors
Sir Richard Broadbent* – Chairman
Philip Clarke – Chief Executive
Tim Mason – Deputy Chief Executive
Laurie McIlwee – Chief Financial Officer
Dame Lucy Neville-Rolfe DBE, CMG Executive Director (Corporate and Legal Affairs)
Gareth Bullock*
Patrick Cescau* – Senior Non-executive Director
Stuart Chambers*
Karen Cook*
Ken Hanna*
Ken Hydon*
Deanna Oppenheimer*
Jacqueline Tammenoms Bakker*
*Non-executive Directors

Company Secretary
Jonathan Lloyd
2 October 2012

Appendix 1 – Segmental Sales Growth Rates*

  Total Sales Growth – Actual Rates**
  2011/12 2012/13
H1 H2 FY Q1 Q2 H1
Inc. Petrol Group 8.8% 6.1% 7.4% 2.2% 1.0% 1.4%
International 12.3% 7.0% 9.5% 2.9% (1.4)% (0.2)%
Asia 11.7% 9.4% 10.5% 9.0% 4.3% 5.4%
Europe 12.4% 3.4% 7.7% (3.9)% (8.3)% (6.8)%
United States 23.1% 31.0% 27.1% 19.7% 20.8% 20.1%
UK 7.1% 5.4% 6.2% 2.1% 2.3% 2.2%
Tesco Bank 10.1% 17.3% 13.6% (3.7)% 0.4% (1.5)%
Exc. Petrol Group 7.3% 4.6% 5.9% 2.2% 1.6% 1.6%
International 12.4% 6.9% 9.5% 3.0% (1.3)% (0.1)%
Asia 11.7% 9.4% 10.5% 9.0% 4.3% 5.4%
Europe 12.7% 3.2% 7.7% (4.0)% (8.3)% (6.9)%
United States 23.1% 31.0% 27.1% 19.7% 20.8% 20.1%
UK 4.4% 3.0% 3.7% 2.0% 3.4% 2.7%
Tesco Bank 10.1% 17.3% 13.6% (3.7)% 0.4% (1.5)%
  Total Sales Growth – Constant Rates**
  2011/12 2012/13
H1 H2 FY Q1 Q2 H1
Inc. Petrol Group 8.2% 6.7% 7.4% 3.8% 3.2% 3.2%
International 10.4% 8.9% 9.6% 7.8% 5.1% 5.5%
Asia 11.9% 9.0% 10.4% 9.1% 5.4% 6.0%
Europe 7.8% 7.8% 7.8% 6.0% 4.3% 4.4%
United States 32.0% 31.0% 31.5% 17.1% 16.1% 16.4%
UK 7.1% 5.4% 6.2% 2.1% 2.3% 2.2%
Tesco Bank 10.1% 17.3% 13.6% (3.7)% 0.4% (1.5)%
Exc. Petrol Group 6.7% 5.3% 6.0% 3.9% 4.0% 3.7%
International 10.6% 8.8% 9.6% 7.8% 5.2% 5.5%
Asia 11.9% 9.0% 10.4% 9.1% 5.4% 6.0%
Europe 8.1% 7.5% 7.8% 6.0% 4.3% 4.4%
United States 32.0% 31.0% 31.5% 17.1% 16.1% 16.4%
UK 4.4% 3.0% 3.7% 2.0% 3.4% 2.7%
Tesco Bank 10.1% 17.3% 13.6% (3.7)% 0.4% (1.5)%

* Growth rates shown on a continuing operations basis.
** Quarterly growth rates based on comparable days for the current year and the previous year comparison. Half 1 growth rates based on comparable days for the current year and the previous year comparison for the UK, US and the Republic of Ireland. All other countries are for 179 days ended 26 August 2012 compared to 181 days ended 28 August 2011.

  Like-For-Like Sales Growth*
  2011/12 2012/13
H1 H2 FY Q1 Q2 H1
Inc. Petrol Group 3.3% 1.8% 2.4% (0.6)% (1.1)% (0.8)%
International 2.6% 0.8% 1.6% 0.5% (1.7)% (0.6)%
Asia 3.8% 0.2% 1.9% 0.4% (3.0)% (1.4)%
Europe 0.9% 0.8% 0.9% 0.5% (0.8)% (0.1)%
United States 11.7% 12.1% 11.9% 3.6% 6.9% 5.2%
UK 3.5% 2.2% 2.8% (1.1)% (0.8)% (1.0)%
Tesco Bank N/A N/A N/A N/A N/A N/A
Exc. Petrol Group 1.4% (0.1)% 0.6% (0.7)% (0.5)% (0.6)%
International 2.7% 0.7% 1.6% 0.5% (1.7)% (0.7)%
Asia 3.8% 0.2% 1.9% 0.4% (3.0)% (1.4)%
Europe 1.0% 0.6% 0.8% 0.4% (0.8)% (0.2)%
United States 11.7% 12.1% 11.9% 3.6% 6.9% 5.2%
UK 0.5% (0.5)% (0.0)% (1.4)% 0.2% (0.6)%
Tesco Bank N/A N/A N/A N/A N/A N/A

*Like-for-like growth shown on a continuing operations basis.

Appendix 2 – Country Like-For-Like Sales Growth Inc. VAT Exc. Petrol*

  Like-For-Like Sales Growth
  2011/12 2012/13
  H1 H2 FY Q1 Q2 H1
UK 0.5% (0.5)% 0.0% (1.4)% 0.2% (0.6)%
Asia 3.8% 0.2% 1.9% 0.4% (3.0)% (1.4)%
China 6.2% 2.5% 4.1% 0.6% (1.0)% (0.3)%
Malaysia 1.2% (4.1)% (1.7)% (1.7)% 0.9% (0.2)%
South Korea 1.0% (1.0)% 0.0% (1.1)% (6.6)% (4.0)%
Thailand 7.8% 1.9% 4.7% 2.5% 0.9% 1.7%
Europe 1.0% 0.6% 0.8% 0.4% (0.8)% (0.2)%
Czech Republic 1.8% (3.0)% (0.8)% (4.5)% (7.0)% (5.8)%
Hungary 2.6% 1.8% 2.2% 0.1% (0.8)% (0.4)%
Poland (0.4)% 3.4% 1.6% 3.3% 1.0% 2.2%
Slovakia 7.8% 3.3% 5.4% 3.4% 2.6% 3.0%
Turkey 4.4% (1.3)% 1.5% (2.7)% (1.6)% (2.1)%
Republic of Ireland (3.4)% (1.5)% (2.4)% 0.4% 0.2% 0.3%
United States 11.7% 12.1% 11.9% 3.6% 6.9% 5.2%

* Like-for-like growth shown on a continuing operations basis.

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