Press Releases

                               

TESCO PLC

INTERIM RESULTS 2009/10

 

SOLID RESULTS, WELL-PLACED FOR GLOBAL RECOVERY

 

 

Terry Leahy, Chief Executive, comments:

“Tesco’s core strengths are even more important as we tackle successfully the challenges of recession. Our focus on the customer, the consistency of our strategy, an efficient business model, strong local management teams, and a spirit of innovation and knowledge-sharing, have enabled us to improve the shopping trip for customers – by investing in consistent value they can trust and in rewarding their loyalty through Clubcard – whilst at the same time delivering a robust financial performance.

Last year’s acquisitions – Homever in Korea and Tesco Bank – are already making good contributions to sales and profits. In International, the markets with the greatest growth potential for the long-term have been some of the hardest hit in the short-term but we have nevertheless delivered a good performance against strong headwinds. Our UK business is delivering solid growth and improving volumes. This progress across the Group, combined with our strong financial position funding continued investment in new space and new businesses, means we’re well-placed for the global recovery.”

HIGHLIGHTS

·         11.4% increase in Group sales (ex-petrol), 8.3% inc-petrol at £30.4bn

·         14.0% growth in Group trading profit and 8.6% rise in underlying profit

·         Underlying EPS growth of 9.1%; dividend per share growth of 9.0%

·         Strong market share gains in international markets

·         UK like-for-like sales converged with industry, driven by strong volumes

·         On-track to deliver 8m sq ft of new space this year; 75% outside the UK

·         Net debt on-track for £8.5bn by year-end; further reductions planned in 2010/11

·         Strong property profits; divestments totalling £0.8bn at attractive yields

·         Leadership on climate change; on-track to meet our target of a 5.5% global reduction in CO₂ emissions from existing stores and distribution centres

·         6,500 jobs created, including 2,500 through local employment partnerships, for UK business

*               Growth reported on a consistent calendar 26-week basis. On a statutory basis, Group revenue (ex.VAT) growth was 9.2% and Group profit before tax growth   
  was 1.2%

**              Group sales (inc. VAT) excludes the accounting impact of IFRIC13 (Customer Loyalty Programmes)

*** Growth in underlying diluted EPS has been adjusted to reflect a normalised tax rate of 26.7% for the first half

SUMMARY OF GROUP RESULTS

These results are for the 26 weeks ended 29 August 2009. The previous year comparison is made with the 26-week period ended 30 August 2008 for the UK, Republic of Ireland and the United States (US), and for the 26 weeks ended 23 August 2008 for the rest of the Group. All growth rates are calculated at actual exchange rates.

 

*   Growth reported on a consistent calendar 26-week basis and excludes the accounting impact of IFRIC13 (Customer Loyalty Programmes). On a statutory basis,
     Group revenue (ex. VAT) growth was 9.2% and Group profit before tax growth was 1.2%.  Trading margin also excludes the accounting impact of IFRIC13

** Underlying profit excludes the impact of non-cash elements of IAS 19, 32, 39 and 17 (principally pension costs, the marking to market of financial instruments
     and the impact of annual uplifts in rents and rent-free periods), the amortisation charge on intangible assets arising on acquisition (Tesco Bank), and the non-       

     cash impact of IFRIC13 (Customer Loyalty Programmes).  It also excludes exceptional costs relating to restructuring in Ireland and relating to the impairment
     of goodwill in Japan
*** Trading profit excludes property profits and makes the same additional adjustments as our underlying profit measure

⁺     The UK segment excludes Tesco Bank.  Tesco Bank is reported separately in accprdance with IFRS8 ‘Operating Segments’

GROUP RESULTS

These results are for the 26 weeks ended 29 August 2009. In the last full financial year, we reported a 53-week period for the UK, Republic of Ireland and the United States (US) and a 52-week period for the rest of the Group.  Growth rates in these results have been re-based for the UK, Republic of Ireland and US to coincide with the comparable 26-week period last year.

Statutory numbers have been adjusted for IFRIC 13 (Customer Loyalty Programmes).  All other numbers are shown excluding IFRIC 13, consistent with internal management reporting methodology.  More information can be found in Note 1 to the consolidated interim financial information.

Group sales, including VAT, increased by 8.3% to £30.4bn. At constant exchange rates, sales increased by 6.9%.  There was significant petrol deflation in the first half and on an ex-petrol basis, sales rose by 11.4%.

Underlying profit before tax rose to £1,571m in the first half, an increase of 8.6%.  Group trading profits were £1,551m, up 14.0% on last year and Group trading margin, at 5.5%, rose 23 basis points, helped by the full consolidation of Tesco Bank, which was accounted for as a joint venture last year.   

Group operating profit rose by 11.0% to £1,602m.  Within this, total net Group property profits were £235m in the half.  Group profit before tax increased 1.5% to £1,419m and was held back by large non-cash IAS adjustments – principally the amortisation of the intangible assets from the Tesco Bank acquisition and an impairment of goodwill in Japan – and an increase in net finance costs relating to the acquisition of Tesco Bank and the Homever stores in the second half of last year. 

On a statutory basis, Group operating profit rose by 10.7% to £1,602m and Group profit before tax rose by 1.2% to £1,419m.

Cash Flow and Balance Sheet.Tesco has a strong, property-backed balance sheet, with sufficient funding in place to meet our needs and with no material bond maturities during the current financial year. We plan to reduce the level of net debt on the balance sheet by maintaining capital expenditure below our operating cash flow, by releasing working capital, mainly through inventory reduction, and by using proceeds from the divestment of property assets.

Group capital expenditure was £1.6bn (last year £2.5bn) and we maintain our full-year capital expenditure guidance of £3.5bn. As outlined at our Preliminary results, this reduced level of spend can be achieved while still delivering strong organic growth in Group selling space of around 9% in the current year, in part because the cost of construction has fallen but also because we will be undertaking fewer capital-intensive mixed-use development schemes in the UK.

Cash flow from operating activities (excluding Tesco Bank) totalled £2.3bn (last year £2.2bn), including an improvement within working capital, driven principally by improved inventory management. 

Net debt has reduced to £9.5bn from £9.6bn at year-end. We remain on-track to achieve our year-end net debt target of £8.5bn – assuming Sterling remains stable – with, as usual,  substantially more operating cashflow being generated in the second half. We are planning further reductions in net debt for the 2010/11 financial year.

Finance costs and tax. Net finance costs rose substantially to £205m (last year £88m), reflecting primarily the increased average net debt levels linked to our acquisitions last year. We expect the interest charge in the second half of this year to be a little lower than in the first half, as a result of the expected reduction in net debt during the remainder of the year. Further falls in the interest charge are expected next year. Total Group tax has been charged at an effective rate of 27.5% (last year 27.5%), similar to our expected rate for the full-year.

Dividend. Underlying diluted earnings per share increased by 9.1% to 14.48p in the first half, calculated using a normalised tax rate* of 26.7%. The Board has declared an interim dividend of 3.89p per share (last year 3.57p). This represents an increase of 9.0% on last year’s interim dividend in line with the growth in underlying diluted earnings per share, which are inclusive of property profits. The interim dividend will be paid on 18 December 2009 to shareholders on the Register of Members at the close of business on 16 October 2009.

Property. We are continuing to release value created through the long-term development of our property portfolio and in the first half we completed deals with proceeds of £0.8bn. Further transactions during the second half to date have resulted in aggregate proceeds of £1.3bn so far this year. The strong demand for these assets and the good yields achieved (around 5.2% initial yields for stores) demonstrate the strong underlying value of our property and the strength of the Tesco covenant. Profits from property in the half were £235m; we expect around £100m in property profits during the second half. 

Our freehold property mix remains strong, consistent with our commitment to maintain a freehold component to our property assets of at least 70%.

Pension. Our award-winning defined-benefit career-average pension scheme is an important part of our competitive benefits package, which helps Tesco recruit and retain the best people.

As at August 2009, under the IAS 19 methodology of pension liability valuation, the scheme had a deficit on a post-tax basis of £1.4bn (£1.1bn at year end).  This change is due to a fall of over 100 basis points in the high-quality corporate bond rate which drives the discount rate for valuing the Fund’s future liabilities. The last actuarial valuation of the scheme’s assets and liabilities showed a small and manageable deficit.

UPDATE ON STRATEGY

We have continued to make good progress with our strategy, which has delivered pleasing growth in challenging times and which we believe will both sustain the business through the downturn and position the Group well for when the economic environment improves. The strategy has five elements:

-                                             be an international retailer
-                                             maintain a strong core UK business
-                                             be as strong in non-food as in food
-                                             develop retailing services
-                                             and put community at the heart of what we do

INTERNATIONAL

Our international business has delivered a strong performance despite deep recession impacting many of our markets. Strong market share growth across our international network demonstrates the underlying resilience of the international business, which is underpinned by having over 90% of international sales and profits from countries in which we have a number one or number two market position.

*  The statutory tax rate this year is 27.5%, which has been normalised, for the purposes of the underlying EPS calculation, for an impairment of Japan
    goodwill

We are driving much more meaningful benefits from being a Group – with economies of both

scale and skill. In addition to the work on the Operating Model we now have: a Step Change productivity programme in each of our countries; Discount Brands in four markets; Clubcard running in seven countries, working with local Dunnhumby teams; and clothing as a company-wide strength with our F&F brand available in five European markets already and due to be available in four countries in Asia later this year.

These and other best-practice and international scale benefits, combined with strong local management teams, are enabling us to bring prices down for customers when they need it most – and at the same time deliver a robust profit performance, despite negative like-for-like sales growth. This has also been achieved whilst making the necessary investment in future growth – particularly in new stores and infrastructure. 

The markets that offer us the greatest opportunities in the long-term have been some of the hardest hit by external factors in the short-term. The long-term potential remains however, and we are continuing to invest through the downturn. Although we have slowed the pace of expansion in some markets, recognising the severity of the current economic conditions – we still plan to open around six million square feet of new space in International this year - all through organic growth - and have good plans in place for further growth next year and beyond.

Asia

We have delivered a strong performance in Asia despite the region being in the midst of recession. We have grown sales strongly – driven by new space and the Homever stores acquired in Korea last year – and we have also grown market share. A focus on cost control, our continued roll-out of supply chain infrastructure and the movement of the Homever stores into profitability have all helped to ensure that our financial performance overall has been robust.

Our Asian markets offer a significant long-term opportunity and we are continuing to invest through the downturn to ensure that we will be in an even stronger position when the economies recover. We are on track to meet our store opening programme targets for the year, which will see more than three million square feet of new space open across the region – an increase of 11%. We have also continued to make good progress towards developing a strong brand in our most developed Asian markets with further expansion of Clubcard and our retailing services businesses.

·                     Homeplus in Korea delivered another very good performance despite poor weather during the summer. The converted ex-Homever stores are trading with sales uplifts of around 40% and have moved into profitability, with stronger year-on-year improvement to come in the second half. Korea also opened 38 new stores in the half. These developments saw Homeplus overall gain around 2% in market share (compared with the same period last year), significantly narrowing the gap with the market leader.

·                     Tesco Lotus in Thailand has delivered an excellent performance in achieving sales and profit growth despite a background of continued political and economic uncertainty. A strong store opening programme is driving our growth in a market in which we remain the clear market leader. Strong productivity gains have enabled us to make significant investments in lower prices for customers whilst maintaining margins. The launch of Clubcard in August marks a new stage in the development of our business and take-up from customers so far has been very encouraging with three million customers signing up in the first seven weeks.

·                     In China, we are laying the foundations for long-term growth, with further investments in new stores, infrastructure and management. We expect to open 19 hypermarkets in the year, including our first multi-level freehold shopping centre developments in Foshun, Qingdao and Qinghuangdao. We have recently organised our operations and our management team into a three-region structure in order to provide an improved local customer focus – which is important in a country as large and diverse as China – and to develop an effective regional supply chain infrastructure. The first three distribution centres designed to the Tesco blueprint are planned to be opened next year.

·                     Malaysiahas made a very good start to the year with solid growth in sales and profits. Our market share has grown to over 10%, further strengthening our position as market leader. Clubcard is now in its second year with more than 750,000 customers receiving quarterly voucher mailings.

·                     Japan’s economy and retail market remain difficult. In our annual report, we stated that with the challenging market conditions in Japan, we had only limited headroom on the carrying value of our Japan assets.  Given the further deterioration in the retail market, it became appropriate to make an impairment of around half the goodwill arising on the acquisition we made to enter the market in 2003 and this involved an £82m one-off charge to the income statement.

Our new team in Japan continues to make significant improvements to our offer and to  our stores. We’ve launched our first 100 own-label lines with a target of 500 by the end of the year. Our Express stores have delivered a good performance with well-targeted promotions and an improved range delivering strong like-for-like sales growth.

·                     Our early plans in India are progressing well. Our growing local management team is working with our partner, Trent, to develop its Star Bazaar hypermarket operation which is seeing significant sales uplifts. Plans for our wholesale business are also on track with our first cash and carry store expected to open in 2010.

 

Europe

 

 

Europe overall delivered a robust performance given the economic backdrop of falling output, growing unemployment and deflation. A good contribution from new space helped total sales grow slightly year-on-year. Profits overall reduced slightly, reflecting the severity of recession across our markets. We expect to see a return to profit growth during the second half for Europe as a whole as we pass the anniversary of the sharp contractions in a number of economies last Autumn.

Our Discount Brands, offered now in four countries, combined with pan-European sourcing of products from clothing to fruit, have helped us to keep our costs and prices low. The success of our smaller formats, including the former Leader Price stores in Poland, shows the benefit of our multi-format strategy as our customers are shopping more in local, convenient stores during the downturn. As we’ve continued to focus on reducing costs and delivering lower prices, we have made good market share gains across our Central European markets.

We continue to invest for the longer term in all our European businesses. Our capital investment programme remains on-track for the year with build costs reducing in the current economic climate. We’re investing more in the shopping trip for customers and through the introduction of Clubcard across our markets we are working to strengthen further our brand and loyalty. Step Change savings are allowing us to fund these longer-term initiatives whilst still delivering low prices to customers today.

·                     In Ireland we have made substantial changes to our business, which was facing the dual challenge of a severe recession and cross-border trading. By integrating more of our international brand buying with our UK business we have been able to reduce the prices of 12,500 products by an average of 22%. The cost of this exceptional restructuring activity was £15m in the first half. In a nationwide roll-out over the last few months, we closed and then re-opened every store with the improved offer. Customers are responding enthusiastically with significant uplifts in volumes, offsetting much of the impact of lower prices. These changes, combined with a substantial cost reduction programme, have enabled Tesco Ireland to deliver a steady financial performance despite the economic headwinds and significant self-imposed price deflation.

·                     Our business in Hungary continues to perform well – with sales and profits growing on a constant exchange rate basis. The economy remains weak and the 5% increase in sales tax, introduced in July, has been a further setback for consumers. We are continuing to execute our strategy of cutting costs and investing in lower prices. Like-for-like sales, excluding petrol, were stable and we have continued to generate good sales growth from new space. Our overall market share grew 1.3% in the last year, further consolidating our market leadership.

·                     In Poland, we’ve made a pleasing start to the year, with good growth in sales and profits on a constant exchange rates basis. A good performance from the former Leader Price stores, the popularity of our Discount Brands and our clothing range, which achieved like-for-like sales growth of more than 20%, have helped our business maintain positive ex-petrol like-for-like sales growth overall. The launch of Clubcard in August has been very well-received, with more than a million customers signing up so far.

·                     In the Czech Republic our strong new store opening programme has helped us maintain sales on last year and improve our market share significantly. Our Express and 1k format stores continue to do well with positive like-for-like sales growth but as in most markets, the larger stores remain subdued as customers curtail their spending on non-food in the current environment. We are progressing our store re-fit and redevelopment programmes, which have seen our flagship Norodni department store in Prague relaunched in the first half.

·                     In Slovakia, the overall retail market remains very challenging with rising unemployment and sharp falls in industrial output. Cross-border shopping remained significant for much of the first half but has started to abate since we reduced prices within Slovakia to bring them more closely into line with neighbouring countries. Total sales growth remained positive, driven by a strong store opening programme, which is on track to add over 5% to our selling space this year. These capital investments, in combination with other investments in the shopping trip and customer loyalty - with Clubcard launched in Slovakia in September – will help us maintain growth and extend our market-leading position going forward.

·                      In Turkey, although we have slowed our rate of expansion in light of current economic conditions - as previously explained at year-end - our sales from new space have been strong, helping us to maintain overall sales growth during the first half and to grow our market share. We have plans to accelerate our expansion next year, to coincide with an expected return to growth in the economy. Turkey remains an important strategic long-term opportunity for us as a large, growing and relatively under-developed retail market.

United States

 

In the United States we have been making good progress in developing the Fresh & Easy business, despite the prolonged weakness in the California, Nevada and Arizona economies.  Customers are enthusiastic about the offer, particularly the fresh food prepared in the Fresh & Easy kitchen. As with any of our new businesses, we are adapting and improving our offer in response to customer feedback. Customers have told us that they would like to find more of their weekly shopping list at Fresh & Easy so we've broadened the range in some key categories - like cereals and pet food - and added larger pack sizes for families. We've also introduced a range of house brands to help families on a budget.

In recognition of the difficult economic climate, we’ve been focusing on building sales steadily, with a cautious approach to new store openings and a reduced marketing expenditure compared to the first half of last year. Since we’ve taken this approach at the same time as making the range changes, like-for-like sales growth has softened. Nevertheless, we are pleased with the underlying performance of the business – particularly in our coastal California stores which are achieving good sales densities - approaching the range we're looking for.

In mid-September - with the number of stores at 126 - and with the latest changes to our range complete - we undertook a full marketing launch of the business for the first time. The campaign focuses on explaining to customers how Fresh & Easy can offer both high quality and low prices. The initial reaction from customers has been positive and we’re confident that the increased customer awareness will support the changes we’ve made in store to drive further growth.

We issued guidance at the Preliminary results in April that we expect dollar-denominated trading losses this year to be similar to last year ($259m for 2008/9 as a whole) and we remain on-track to meet this expectation. Trading losses reflect the fact that Fresh & Easy has been built with the necessary infrastructure in place to support hundreds of stores and is currently therefore operating with a high cost base relative to the scale of the business. We expect to open stores at a rate of around one per week this year with a focus on established centres rather than expanding new community developments.

UK

 

                           ^**5.5% sales growth ex-petrol

Our UK business has delivered a solid first half despite competitive market conditions and the backdrop of a weak economy. We have a strong foundation for the sustainable development of our UK business, based on taking a balanced approach to the key building blocks of top-line growth; solid like-for-like performance and a consistent contribution from new stores. Strong productivity gains and good cost controls have enabled us to deliver this growth profitably whilst providing even lower prices and a better shopping trip for customers.

* tesco.com, Tesco Telecoms and dunnhumby are included in the UK segment and Tesco Bank is excluded from the UK segment, under IFRS8

Our second quarter sales growth moderated a little compared with the first quarter, reflecting reduced inflation. Excluding petrol and including VAT, second quarter like-for-like sales were 2.1% (3.1% on a VAT-adjusted basis), including a stronger volume performance. For the first half overall, like-for-like sales, excluding petrol and including VAT, were 2.7% (3.7% on a VAT-adjusted basis). This growth, and also the pattern of trading we have seen so far during the second half, confirm that our growth rate has converged with the wider industry.

Although the retail economy remains subdued, customers are showing signs of greater optimism, reflected in both consumer confidence data and in buying patterns, with improving growth in some of our more discretionary food lines such as Finest. Inflation has reduced across the sector as we pass the anniversary of last year’s high commodity prices, and although this has impacted our like-for-like sales growth a little in the second quarter, the effect has been partially offset by strengthening volume growth.

As always, Tesco remains focused on doing the right thing for customers who are looking for consistent and sustainable value they can trust in uncertain times. Our strategy of earning customers’ loyalty by helping them to spend less – with low prices and affordable new products such as the Discount Brands – and rewarding them with Clubcard points, is working. We are winning market share from the limited range discount formats and we are starting to see significant improvement in our relative performance versus our main competitors. This strategy is sustainable for the long-term because our low prices are based on permanent productivity improvements – our Step Change programme is on-track to meet the £550m savings target for the year – and because we can differentiate Tesco in a unique way with Clubcard.

We’ve made good progress in availability with improvements in ordering systems and good work on replenishment and stock levels. Recent measures are showing some of the highest availability scores ever.

In fresh food, we are now 18 months into a change programme, which is delivering significant benefits to customers. Improved technical standards, additional staff training, closer relationships with our suppliers, further improvements in the accuracy of our ordering and significant changes to the way we merchandise some key products – such as the transformation in the way bananas, tomatoes and other high volume produce lines are displayed in our stores – are helping us deliver a stronger range and better shopping experience for customers. 

Building on these improvements, our increased investment in Clubcard – first with the ‘Double-Up’ campaign and now with ‘Double Points’ – is giving customers even greater reward for their loyalty.  Although we expect the benefits of the increased Clubcard investment to grow steadily over time we are already seeing some encouraging results: we are signing up new Clubcard holders at a much faster rate; customer data shows that Clubcard is growing in importance as a reason for shopping with us; and the strongest response has been from customers who were previously shopping less frequently at Tesco.

While our strategy of lowering prices and rewarding loyalty has helped us achieve solid like-for-like sales growth, the contribution to our overall sales growth from new space continues to be very pleasing. In the first half we opened 87 stores – including our thousandth Express store - and we remain on track to open two million square feet of space this year. 

Competition Commission.  Last week the Competition Commission published its final remittal report recommending a competition test in the planning system. Whilst this is a small aspect of its Inquiry, we continue to believe that the Commission has made the wrong recommendation in what is acknowledged to be a highly competitive industry.  

The Commission's proposal risks blocking investment in a sector which is an important source of jobs in today's challenging economic climate and creating delay and unpredictability in the planning system, depriving customers of the benefits of new and updated stores.

NON-FOOD

Our non-food business has been very resilient through the downturn and we are confident it will emerge from the recession even stronger as some competitors have felt the strain and more customers will have been encouraged to try our non-food range in the search for great value.

We delivered a very strong non-food performance in the UK with improving like-for-like sales growth in the second quarter and total growth of 4.9% in the half. A number of hardlines categories had double-digit like-for-like growth including electricals, with our own brand - Technika – now the fifth best selling TV brand in the UK. Home categories, which had been particularly hard hit with the slowdown in the housing market, are now growing.

Our clothing continues to develop well. Clothing sales in the UK grew by 6.6% in total, including positive like-for-like growth, helped by a successful back-to-school campaign. The launch of our online clothing range on 1 October signals an exciting new development and is in direct response to customer requests. In addition to familiar Tesco labels – such as Cherokee and F&F – we will have some new Tesco lines exclusively offered online, plus a number of other brands. The online range will offer customers a wider choice overall with more of a focus on fashionable, higher-value lines and will make our Clothing more accessible to customers who do not live near to one of our larger stores.

Internationally our non-food performance was strong with sales growth of 16% despite the economic climate hitting customers’ discretionary spend. Group non-food sales rose 8% to £6.2bn, with £4.3bn in the UK and £1.9bn in International.

RETAILING SERVICES

Following the announcement last July of our intention to take full ownership of Tesco Bank, we set a target to grow the profitability of the services businesses from a little under £400m in 2007/8 to £1bn. We are committing more management and other resources to support this and the businesses are making good progress with growth in customer numbers, sales and profits. Total retailing services sales were £1.7bn, up slightly on last year; profits were £221m, up 11%.

Tesco Bank

We are pleased to announce today the renaming of Tesco Personal Finance as Tesco Bank in recognition of our longer-term objective of creating a full-service retail bank for Tesco customers, offering a range of banking and insurance services through branches in stores and online.

Overall, Tesco Bank has delivered a good performance in a challenging retail banking market, despite rising bad debt and having absorbed additional costs as we begin the process of moving the business onto its own infrastructure and build the team in preparation for a faster rate of growth.

·                     Commercial performance. We grew the number of customer accounts by more than 300,000 in the last year - to a total of more than six million across all products. We’ve achieved double-digit growth in savings, loans and credit cards – in fact we’re now the seventh largest credit card issuer in the UK. In Insurance we held our number of policies broadly flat in a very competitive market. We grew the number of in-store travel bureaux to 130 (compared to 79 last year) and the number of ATMs in our network by 7% to over 2,700.

·                     Profit. Gross profit grew to £359m with a good performance in banking being partly offset by lower profitability in Insurance, primarily as a result of lower investment income. Operating profit, excluding the amortisation of intangible assets linked to the acquisition, was £115m. This was achieved against the background of an increase in bad debts – to £92m - although Tesco Bank’s experience in this area remains better than the banking industry average. This profit is also after an increase in operating costs as a result of the change of ownership as the business prepares for expansion. Profit before tax was £53m.

 

·                     Capital and liquidity. The Tier 1 capital ratio at the half year is 12.6%. The funding and liquidity position of the business remained robust throughout the period with customer deposits in excess of customer lending. This is further supported by a high quality liquid asset portfolio, net short-term wholesale cash and investment grade assets worth £1.7bn.

 

·                     Development of banking and insurance platforms. In September we signed an agreement with Fortis (UK) Ltd to help us build the operational platform and technical expertise required to further develop our insurance business. Tesco Bank will be responsible for all commercial decision-making whilst benefiting from an efficient claims-handling function. We have also selected the core technology platforms for the banking products.

An interim income statement and balance sheet for Tesco Bank is available in the Investor Centre section of our corporate website – (www.tesco.com/corporate - Presentations and results – Analyst packs).

tesco.com

Our online businesses – including dotcom grocery and Direct - delivered another strong performance, achieving an 11% increase in sales to £1.0bn, with profits, after losses on Tesco Direct, rising 21% to £58m.

The number of active customers in our online grocery business has grown - to over one million – and basket size has increased. Service levels are continuing to improve with reduced numbers of lapsed customers and fewer calls to the service centre.

Tesco Direct extends the reach of our non-food offer to customers via the internet and catalogues. Customers can choose to have goods delivered to their home or they can pick them up at one of our 240 in-store Direct desks. Tesco Direct had a good first half, growing sales by 29% and continuing on its path towards profitability.

Tesco Telecoms

Profit from our telecoms business grew, driven primarily by Tesco Mobile, which achieved a 10% increase in customer numbers - to 1.9 million – in a declining pre-pay market. We have made good progress in rolling out our Phone Shops with 59 now open and 100 planned by year-end. The Phone Shops are transforming our ability to sell products that require an assisted sale – particularly contract mobile phones.

dunnhumby

dunnhumby continues to grow its business serving retailers and manufacturers around the world with data analysis and insight to help them understand their customers better. In the first half of the year, profits were up 19%, with a good contribution from its US business, which is rapidly growing with clients such as Macy's and Kroger.

COMMUNITY, ENVIRONMENT AND CORPORATE RESPONSIBILITY

Caring for the environment.  We are on track to meet our target of a 5.5% global reduction in CO₂ emissions from existing stores and distribution centres, with a 5.7% reduction in the UK so far this year. We have delivered on our promise to divert 100% of store waste away from landfill, through a combination of reducing packaging, improving re-use and recycling. We are well on track to deliver our commitment to carbon footprint 500 products by the end of the year. 

We launched a new eco website in Poland to raise awareness of environmental issues and give customers tips about how they can do their bit to lead greener lifestyles.  We have also relaunched our Greener Living website in the UK, which aims to help customers be greener and save money. 

Our leadership on climate change has been recognised through a number of awards, including the Carbon Trust Standard.  We were also the highest ranking retailer and won the overall award for greenest big company in the ‘Sunday Times’ Green List.

Giving customers healthy choices.  One million children have now taken part in the FA Tesco Skills football coaching programme, achieved just two years after the programme’s launch.  We are also getting people active through football in China, Korea, Thailand and Turkey.   

This year 21,000 staff ran in our Cancer Research UK events - a huge increase on last year.  In the Czech Republic and Slovakia around 7,000 people have taken part in a series of nine running events to raise money for the Foundation for Cancer Research and the Foundation of Children’s Oncology. 

Actively supporting our local communities.  We piloted a new community initiative this summer, Community Fairs, to bring charities and our customers together to help encourage more community engagement.  Fairs took place in the car parks at 20 stores over a four-week period.  Initial feedback has been very encouraging: over 1,700 customers signed up as charity volunteers at the events. 

Our Community Champions have gone from strength to strength, both in the UK and internationally.  In the UK we now have Champions in over 100 stores and five distribution centres. Community Champions help us forge closer relationships with local communities and support local charities. We recently introduced Community Champions in Ireland where we now have champions in 11 stores. We also have champions in China, Korea, Malaysia, Czech Republic and Slovakia.

This has been another successful year for our refreshed Tesco for Schools and Clubs scheme. The number of schools and clubs ordering equipment has increased by 45%, with many smaller organisations participating.  Through the new scheme, schools and clubs can choose from equipment spanning five different areas of the curriculum, giving them the flexibility to choose the right items for their particular needs, from laptops to digital cameras and even composting bins. In the US the first year of our Shop for Schools programme raised over $130,000 for schools in California, Arizona and Nevada. We have well-established schools programmes in Ireland and Poland.  

Our growth and investment is creating many thousands of jobs across our markets - over 6,500 for the UK business alone, including over 2,500 people recruited through the government’s local employment partnerships.

CONTACTS

Investor Relations:    Steve Webb                                                   01992 644800

                             Mark George                                                   01992 806149

Press:                     Jonathan Church                                             01992 644645                              Angus Maitland – The Maitland Consultancy         0207 379 5151

This document is available via the internet at www.tesco.com/investorcentre.
A meeting for investors and analysts will be held today at 9.00am at the Royal Bank of Scotland, 280 Bishopsgate, London EC2 4RB.   Access will be by invitation only.
An interview with Sir Terry Leahy discussing the Interim Results is available now to download in video, audio and transcript form at www.tesco.com/corporate.

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 for the remainder of the financial year have not changed from those previously reported, namely:

·                     Business and financial strategy, including Group Treasury risk

·                     Operational threats and performance risk in the business, as well as competition and consolidation

·                     People capabilities, reputational, environmental and climate change risks

·                     Product safety, health and safety risks, ethical risks in the supply chain, fraud and compliance

·                     Property and non-food risks

·                     IT systems and infrastructure

·                     Regulatory and political environment, activism and terrorism

·                     Pension risks, joint venture governance and partnerships

·                     Funding and liquidity, interest rate and foreign currency risk management

·                     Credit risk, Tesco Bank and insurance

For greater detail on these risks and uncertainties, please refer to our 2009 Annual Report.

Statement of Directors’ Responsibilities

The Directors confirm that this consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the European Union (EU) and that the interim management statement includes a fair review of the information required by DTR 4.2.7 and DTR 4.2.8, namely:

§                     an indication of important events that have occurred during the first six months and their impact on the condensed set of financial statements, a description of the principal risks and uncertainties for the remaining six months of the financial year; and

§                     material related party transactions in the first six months and any material changes in the related-party transactions described in the last Annual Report

The accounting policies applied are consistent with those described in the Annual Report 2009, except those detailed in Note 1 to the consolidated interim financial information. The Directors of Tesco PLC as at the date of this announcement are as set out below.

The Board

Directors

David Reid*                                         Rodney Chase* CBE

Chairman                                              Deputy Chairman

Sir Terry Leahy                                    Richard Brasher

Chief Executive

Philip Clarke                                        Andrew Higginson

Tim Mason                                              Laurie McIlwee

Lucy Neville-Rolfe CMG                        David Potts                     

Charles Allen* CBE                              Patrick Cescau*

Karen Cook*                                                 Dr Harald Einsmann*

Ken Hanna*                                                  Ken Hydon*

Jacqueline Tammenoms Bakker*                                                                             

* Non-executive Directors

Company Secretary

Jonathan Lloyd