Interim Results 2015/2016

Transformation on track
Broad-based improvement across the Group

  • UK 1H like-for-like sales performance of (1.1)%, including further improvement in 2Q
  • International 1H like-for-like sales growth of +1.0%; both Europe and Asia positive in 2Q
  • UK focus on service, availability and price maintaining momentum in challenging market
    • Transactions up +1.5%; volumes up +1.4%
  • £354m Group operating profit – investing for customers and rebuilding profitability in UK
  • On track to deliver £400m annual cost savings from Group restructuring investment
  • Significant progress made on balance sheet priority with sale of Homeplus in Korea and confirmation of move to defined contribution pension scheme in UK
  • Portfolio reshaping concluded; dunnhumby retained; firm focus on generating cash from retained assets

Dave Lewis, Chief Executive:

“We have delivered an unprecedented level of change in our business over the last twelve months and it is working. The first half results show sustained improvement across a broad range of key indicators.

In the UK, we continue to improve all aspects of our offer for customers, resulting in volume growth which is allowing us to create a virtuous circle of investment.

Our transformation programme in Europe has accelerated growth and reduced operating expenses, and in Asia, we have gained market share in challenging economic conditions.

We have concluded our portfolio review with the sale of Homeplus, our business in Korea, enabling us to take a significant step forward on our priority of strengthening the balance sheet. Further progress will be driven by continuing to increase the level of cash generated from our retained assets.”


26 weeks ended 29 August 2015 (unaudited)
On a continuing operations basis
1H 2015/16   1H 2014/15   Change
exchange rates)
exchange rates)
Group sales (exc. VAT, exc. Fuel)1 £23,940m   £24,266m   (1.9)%   (0.3)%
Group statutory operating profit £354m   £216m   63.9%   62.0%
Includes exceptional items -   £(563)m        
Group operating profit before exceptional items2 £354m   £779m   (54.6)%   (55.1)%
- UK & ROI £166m   £543m3   (69.4)%   (70.0)%
- International £102m   £137m   (25.5)%   (26.3)%
- Tesco Bank £86m   £99m   (13.1)%   (13.1)%
Group statutory profit/(loss) before tax £74m   £(19)m   n/m    
Group profit before tax before exceptional items and net pension finance costs £158m   £614m   (74.3)%    
Diluted earnings/(losses) per share 0.31p   (0.31)p   n/m    
Diluted earnings per share before exceptional items and net pension finance costs 1.13p   6.11p   (81.5)%    
Capex £0.4bn   £0.9bn   down 61%    
Net debt4 £(8.6)bn   £(7.5)bn   (14.6)%    


  1. Group sales change shown on a comparable 26 week basis; statutory Group sales change was (1.3)% at actual exchange rates and 0.3% at constant exchange rates.
  2. Exceptional items are excluded by virtue of their size and nature in order to better reflect management’s view of the performance of the Group.
  3. The elimination of intercompany transactions between continuing operations and the Korea discontinued operation, as required by IFRS 5 and IFRS 10, has resulted in a reduction to the prior period UK & ROI operating profit of £7m.
  4. Net debt excludes the net debt of Tesco Bank but includes that of discontinued operations.


We have made good progress in the first half against the three key priorities we set out in October 2014. This includes:

1. Regaining competitiveness in core UK business:

  • maintained investment in service, with increased proportion of customer-facing roles
  • further reduced prices for customers, with more than 500 additional reductions on key product lines
  • improved on-shelf availability to record levels across all measures
  • improved systems and stock management underpinning three days’ stock reduction year-on-year
  • completed 21 customer-focused range reviews including nine full category resets
  • average number of products per range reviewed reduced by 15%, with prices reduced on 10% of remaining range
  • positive volume growth, supporting efforts to build long-term, sustainable and productive relationships with suppliers
  • increased level of innovation, with hundreds of new products introduced as part of ongoing review
  • total of 53 unprofitable stores now closed since start of year

2. Protecting and strengthening the balance sheet:

  • reached agreement to sell our Homeplus business in Korea, which will deliver a pro-forma £4.2bn reduction in total indebtedness
  • replacing UK defined benefit pension scheme with a defined contribution scheme from November this year, providing greater certainty on future cash requirements whilst providing sustainable benefits for colleagues
  • portfolio reshaping concluded; dunnhumby retained following comprehensive strategic review
  • generated £1.0bn cash from retail operations within the half, despite £(0.6)bn outflows relating to prior year exceptional items and our new approach to cash payment terms with suppliers
  • reduced capital expenditure by 61% year-on-year; on track for less than £1bn for full year
  • asset swap completed in March with British Land to regain sole ownership of 21 superstores, reducing lease commitments and reducing our exposure to inflation-indexed rent reviews
  • continued active review of opportunities to release value from former development sites
  • restructure of Central European overheads complete, improving potential for medium-term returns
  • no interim dividend proposed

3. Rebuilding trust and transparency:

  • 300,000 colleagues aligned behind one purpose:‘Serving Britain’s shoppers a little better every day’
  • further increased emphasis on lower, more stable prices; redirected promotional and couponing investment into core pricing; reduced number of shelf-edge label changes by 21% vs last year
  • progress made towards building longer-term, mutually beneficial supplier relationships; 3,300 suppliers joined Supplier Network; learning sessions completed with more than 800 suppliers
  • extended Tesco Sustainable Dairy Group milk pricing model to British cheese suppliers, guaranteeing dairy farmers continue to be paid at a level above the cost of production
  • strong improvement in Supplier Viewpoint measure of overall supplier satisfaction
  • launched ‘FareShare FoodCloud’ pilot scheme, directing unsold food to charities
  • strengthened Tesco Bank’s offer for customers, with removal of monthly current account fees, monthly communication of foregone interest and becoming the first bank to achieve Defaqto 5* rating on all insurance products


The market remains challenging. In the second half we will continue to benefit from initiatives already undertaken to improve our competitive position and reduce our cost base, leaving our full year expectations unchanged. Our focus remains on doing the right thing for customers and we are prepared to invest further if we see additional opportunity or need to enhance the long-term competitive position of the business.


As communicated in our first quarter trading statement, our reporting segments (‘UK & ROI’, ‘International’ and ‘Tesco Bank’) have been aligned to the way we now operate the business and report performance internally.

The results of our business in Korea have been classified as discontinued operations following the proposed sale of Homeplus which was announced on 7 September 2015 and approved by shareholders on 30 September 2015. Further detail can be found in Note 7 on page 22 of this statement.


  UK & ROI International1 Tesco Bank Group
  TY TY  TY  TY 
(exc. VAT, exc. Fuel)
£18,394m £5,068m £478m £23,940m
Change at actual exchange rates %2 (1.2)% (4.6)% (0.8)% (1.9)%
Change at constant exchange rates %2 (0.6)% 0.8% (0.8)% (0.3)%
LFL (exc. VAT, exc. Fuel) (1.3)% 1.0% n/a (0.8)%
(exc. VAT, inc. Fuel)
£21,581m £5,168m £478m £27,227m
Includes: Fuel £3,187m £100m n/a £3,287m
  1. International consists of Central Europe (Czech Republic, Hungary, Poland and Slovakia), Malaysia, Thailand and Turkey.
  2. Group sales change shown on a comparable 26 week basis; statutory Group sales change was (1.3)% at actual exchange rates and 0.3% at constant exchange rates.

Group sales declined by (0.3)% at constant rates and by (1.9)% at actual rates, reflecting the impact on translation to sterling of weakness across European currencies being only partially offset by a stronger Thai Baht. Further information on sales performance is included in Appendices 1 to 4 starting on page 34 of this statement.

Like-for-like sales in the UK and Republic of Ireland declined by (1.3)%, with an improving trajectory in performance from (2.0)% in the fourth quarter last year to (1.5)% in the first quarter and (1.0)% in the second quarter.

In the UK, customers are responding well to improvements in our core offer and we are seeing sustained year-on-year growth in transactions and volume. As a result, despite continued high levels of deflation driven by both our price investment and lower commodity prices, like-for-like sales performance in the UK improved again in the second quarter to (1.0)%.

The closure of a total of 53 unprofitable stores in the UK since the start of the year and the reduced level of new store openings led to a contribution from net new space of just 0.5%. After taking into account the like-for-like sales performance, this results in a decline in total UK sales of (0.6)%. The contribution from net new space in the second half is expected to be minimal.

In the Republic of Ireland, we have made a significant investment to ensure our customers receive the most competitive offer possible when shopping with Tesco. The response so far has been encouraging, with an improving trend in both sales and volume throughout the half and an increase in market share for the first time since 2013.

Total international like-for-like sales increased in the half for the first time in nearly three years. Like-for-like sales grew in all European markets as customers responded well to investments in the fresh food offer, with improving sales trends particularly evident in Poland and Slovakia. We delivered positive like-for-like sales growth in Thailand in the second quarter driven by both increased customer numbers and higher volumes, despite high levels of deflation and a difficult consumer environment.

Operating Profit before exceptional items:

  UK & ROI International Tesco Bank Group
  TY  TY  TY  TY 
Operating profit before exceptional items £166m £102m £86m £354m
Change at actual exchange rates % (69.4)% (25.5)% (13.1)% (54.6)%
Change at constant exchange rates % (70.0)% (26.3)% (13.1)% (55.1)%
Operating profit margin before exceptional items 0.77% 1.97% 17.99% 1.30%
Change at actual exchange rates (bp) (169)bp (62)bp (255)bp (150)bp
Change at constant exchange rates (bp) (171)bp (74)bp (255)bp (153)bp

As communicated at our Preliminary Results on 22 April 2015, for these and future results, we are moving to operating profit as our headline performance measure, adjusted only for any exceptional items.

In 2014/15, our Group performance was characterised by a significant reduction in operating profitability, to the extent that our UK business made a loss in the second half of the year. This reduction is reflected in the year-on-year profit decline shown for the first half.

In the current year, the changes we have made throughout every aspect of our operation in the UK have enabled us to start rebuilding profitability whilst at the same time investing in our customer offer. We have made permanent reductions to our cost base, fundamentally changed the way we do business with our suppliers and have started to generate positive operating leverage through increasing volumes. The progress we have made so far, combined with improved productivity as we continue our work to simplify our ranges, will enable us to fund further improvements for customers in the second half.

First half UK profit also includes charges in respect of the restructuring of dunnhumby’s US relationship with The Kroger Co., in addition to income received following the settlement of proceedings against MasterCard in July 2015.

International profits declined by (26)% at constant rates to £102m, driven by the impact of investments in the customer offer and legislative changes in Hungary, including mandated store closures on Sundays and the introduction of a ‘food supervision fee’ from January this year. The European Commission is currently investigating the compatibility of this legislation with European Union law.

The restructure of the teams in Czech Republic, Hungary, Poland and Slovakia is now complete, moving from operating as individual country teams to one regional team. We see significant opportunity for synergies in buying, marketing and operations across the markets, which will enable us to fund further investment in the customer offer.

We are making good progress on our cost saving initiatives and are on track to deliver annual savings of c.£400m across the Group.

Exceptional items:

Impairment of PPE and onerous lease provisions - £(136)m
Inventory valuations and provisions - £(63)m
Reversal of commercial income recognised in previous years1 - £(187)m
Other restructuring and exceptional items - £(177)m
Total exceptional items - £(563)m
  1. Last year’s number has been revised to reflect the first half impact of the updated commercial income adjustment recognised within our full year results in April 2015. This has no effect on either statutory or full year numbers.

Exceptional items are excluded from our headline performance measures by virtue of their size and nature, in order to better reflect management’s view of the performance of the Group. There are no exceptional items affecting Group operating profit in the first half.

Joint ventures and associates:

Share of post-tax profits from JVs and associates £13m £19m

Our share of post-tax profits from joint ventures and associates was £13m, a decline of £(6)m year-on-year due to increased losses in our partnership with China Resources (Holdings) Company Ltd.

Finance income and finance costs:

Interest receivable and similar income £10m £42m
IAS 32 and 39 ‘Financial instruments’ £34m -
Finance income £44m £42m

Interest receivable and similar income reduced by £(32)m year-on-year due to reduced income from index-linked and foreign exchange swaps.  This was offset by £34m favourable impact from the mark-to-market of financial instruments as required by IAS 32 and 39 (compared to a negative impact of £12m, included in finance costs last year).

Interest payable £(259)m £(239)m
Capitalised interest £6m £25m
IAS 32 and 39 ‘Financial instruments’ - £(12)m
IAS 19 net pension finance costs £(84)m £(70)m
Finance costs £(337)m £(296)m

Finance costs rose by £(41)m, primarily due to an increase in interest payable and a reduction in capitalised interest.  The increase in interest payable was driven by additional finance charges including the costs of committed credit facilities and the unwinding of the discount on onerous lease provisions.  These charges offset an overall reduction in interest payable on bonds and medium term notes.  More details can be found in Note 5 on page 21 of this statement.  Finance costs also include net pension finance costs of £84m (1H 2014/15: £70m) as calculated in accordance with IAS 19.  These finance costs are impacted by corporate bond yields which can fluctuate significantly over time.

Group tax:

Tax on profit before exceptional items £(52)m £(105)m
Tax on profit/(loss) £(52)m £(6)m

The effective rate of tax for the full year is expected to be around 30%, which includes the anticipated effect on deferred tax of further reductions in the main rate of UK corporation tax that were proposed in the July 2015 UK Budget statement.  The effective rate of tax in the half has been impacted by the relative scale of permanent disallowable items to our overall level of profit.


Summary of total indebtedness:

  TY Feb 15
Net debt (excludes Tesco Bank) £(8,588)m £(8,481)m
Discounted operating lease commitments £(9,091)m £(9,353)m
Pension deficit, IAS 19 basis (post-tax) £(4,201)m £(3,885)m
Total indebtedness (including lease commitments and pension deficit) £(21,880)m £(21,719)m
Pro-forma effect of Homeplus disposal1 £4,225m  
Total indebtedness, adjusting for pro-forma effect of Homeplus disposal1 £(17,655)m  
  1. The proposed sale of Homeplus was announced on 7 September 2015, after the half-year end, and was approved by shareholders on 30 September 2015. The pro-forma effect shown above is illustrative, to show the scale of the reduction in indebtedness that will occur following completion, as if the sale had occurred on 28 February 2015.

Total indebtedness has remained at a similar level to the year end despite a reduction in discounted operating lease commitments, due to an increase in the IAS 19 defined pension deficit and a small increase in net debt.

The increase of £(0.1)bn in net debt includes the consolidation of £(0.5)bn debt relating to our transaction with British Land in March, which allowed us to regain sole ownership of 21 superstores.  This transaction reduced lease commitments and reduced our exposure to inflation-indexed rent reviews in future.

On an IAS 19 basis, the Group’s net pension deficit after tax increased from £(3.9)bn at the year end to £(4.2)bn, driven mainly by asset returns which have been impacted by volatile equity markets in recent months.  In accordance with the £270m annual deficit funding plan agreed with the Trustee, a cash contribution of £92m (£75m post-tax) was made into the scheme in the reporting period.  Following consultation with colleagues, we have confirmed that the UK defined benefit pension scheme will be closed and replaced from November 2015 with a defined contribution scheme.

The completion of the sale of Homeplus, our business in Korea is expected to lead to a pro-forma reduction of £4.2bn in total indebtedness, comprising net cash proceeds of £3.4bn and c.£0.8bn associated reduction in capitalised lease and other commitments.  Further reductions in indebtedness will be driven by continuing to increase the level of cash generated from our retained assets.

Summary retail cash flow1:

Cash flow from operations excluding working capital £1,199m £1,255m
(Increase)/decrease in working capital    
- cash impact from prior year exceptional items £(401)m -
- cash impact of new approach to supplier payments £(231)m -
- underlying decrease in working capital £438m £255m
Cash generated from operations £1,005m £1,510m
Interest paid £(173)m £(269)m
Corporation tax paid £(53)m £(244)m
Net cash generated from retail operating activities £779m £997m
Cash capital expenditure £(498)m £(1,131)m
Memo: Free cash flow £281m £(134)m
Other investing activities £507m £(1,341)m
Net cash (used in)/from financing activities and intra-Group funding and intercompany transactions £(560)m £1,415m
Net increase/(decrease) in cash and cash equivalents £228m £(60)m
Exclude cash movements in debt items £448m £(1,005)m
Fair value and other non-cash movements £(783)m £171m
Movement in net debt £(107)m £(894)m
  1. Includes both continuing and discontinued operations.

Excluding working capital, cash flow from both continuing and discontinued retail operations was £1.2bn.  Reported working capital includes payments against exceptional restructuring and onerous lease provisions totalling £(0.4)bn and the remaining £(0.2)bn outflow relating to the new approach to cash payments to suppliers which we outlined in April.  Prior to these items, working capital improved by £0.4bn including a reduction in inventory levels and lower trade receivables.  Overall, we generated £1.0bn retail cash from operations within the half.

Retail interest paid was £(96)m lower than last year principally due to a timing difference in the payment of instalments on a medium term note.  In addition, two other medium term notes with coupons of 5% and 5.125% matured in the prior year and were refinanced at lower rates.  Cash capital expenditure reduced to £498m, consistent with a full year spend of no more than £1bn.

The cash flow in other retail investing activities principally relates to investments in and proceeds from short-term investments.  The prior year comparative also includes a total investment of £342m in the China and India joint ventures.

Capital expenditure and space:

  Group   UK & ROI International Tesco Bank
Capital expenditure (£bn) 0.4 0.9 (0.6)   0.3 0.7 0.1 0.2 0.0 0.0
Gross space added (mn sq ft)1 0.3 0.8 (0.5)   0.0 0.3 0.2 0.4 n/a n/a
Net space added (mn sq ft)1 (1.0) 0.5 (1.5)   (0.9) 0.2 (0.1) 0.3 n/a n/a
  1. Excluding franchise stores and ‘gross space added’ excludes repurposing/extensions.

Capital expenditure fell by 61% to £0.4bn as we reduced gross space additions by 0.5m sq ft year-on-year.  The majority of our significantly reduced opening programme was focused on Thailand where we opened 0.2 million square feet, including four hypermarkets.

Overall, net space in the Group fell by (1.0)m square feet as we closed unprofitable space, primarily in the UK.  Further detail on Group space can be found in Appendix 6 starting on page 36 of this statement. 


  TY LY YOY Change
Revenue £478m £482m (0.8)%
Operating profit before exceptional items £86m £99m (13.1)%
Lending to customers £8,297m £7,528m 10.2%
Customer deposits £6,581m £6,632m (0.8)%
Net interest margin 4.2% 4.4% (0.2)%
Risk asset ratio 19.1% 17.1% 2.0%

Operating profit before exceptional items at Tesco Bank decreased by (13.1)% to £86m mainly due to an initial reduction in interchange income following MasterCard’s agreement with the Competition and Markets Authority for a phased introduction of new, lower fee levels.  This agreement is ahead of the introduction of European Commission caps which will lead to a further reduction from December.

We have made further progress in our efforts to differentiate Tesco Bank’s offer for customers.  In July, we became the first UK bank to show foregone interest on our customers’ monthly statements.  This allows customers to see if they could have earned more interest by transferring deposits from their current account to an Instant Access Savings account.

In addition, we introduced a 95% loan-to-value mortgage and smaller loan sizes in the half and these contributed to an overall increase of 10.2% in customer lending.  The balance sheet remains strong and well-positioned to support future lending growth from both a liquidity and capital perspective.

Our strong portfolio of insurance products was recognised in August when we became the first bank to have a Defaqto 5* rating across all categories.  In a very competitive market, the insurance business was able to broadly maintain the number of in-force policies.  The profitability of both Home and Motor products has benefited from further enhancements to our underwriting approach.

An income statement for Tesco Bank can be found in Appendix 7 on page 39 of this statement.  Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 16 of this statement.  Tesco Bank’s Interim results are also published today and are available at


Investor Relations: Chris Griffith 01992 644 800
Media: Tom Hoskin
01992 644 645
0207 240 2486

This document is available at

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  This will include all Q&A and will also be available for playback after the event.  All presentation materials, including a transcript, will be made available on our plc website.

An interview with Dave Lewis, Chief Executive, and Alan Stewart, Chief Financial Officer, discussing the Interim Results is available now to download in video, audio and transcript form at


Risks and Uncertainties

As with any business, risk assessment and the implementation of mitigating actions and controls are critical to successfully achieving the Group's strategy. The Tesco Board has overall responsibility for risk management and internal controls within the context of achieving the Group's objectives. The principal risks and uncertainties faced by the Group remain those set out in our 2015 Annual Report and Financial Statements.  The Group also faces risks and uncertainties as a result of the SFO and other investigations, and the litigation risk associated with the matters under investigation as described in Note 16 of this release (Contingent Liabilities) and in our 2015 Annual Report and Financial Statements.

Statement of Directors' Responsibilities

The Directors confirm that to the best of their knowledge 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 2015 Annual Report and Financial Statements.  A list of current directors is maintained on the Tesco PLC website at:

By order of the Board

John Allan* - Chairman
Dave Lewis - Chief Executive
Alan Stewart - Chief Financial Officer
Mark Armour*
Richard Cousins* - Senior Non-executive Director
Byron Grote*
Mikael Ohlsson*
Deanna Oppenheimer*
*Non-executive Directors

Company Secretary
Paul Moore

6 October 2015

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