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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Tesco Plc | LSE:TSCO | London | Ordinary Share | GB00BLGZ9862 | ORD 6 1/3P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| -1.30 | -0.46% | 281.40 | 281.80 | 282.00 | 282.40 | 279.30 | 281.40 | 10,195,021 | 16:35:14 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Grocery Stores | 65.76B | 744M | 0.1046 | 26.95 | 20.05B |
From Apr 2019 to Apr 2024
TIDMTSCO
RNS Number : 2573C
Tesco PLC
12 April 2017
STRONG FOOD PERFORMANCE DRIVES SALES GROWTH
PROFIT RECOVERY CONTINUES - AHEAD OF EXPECTATIONS
Hot Features
Premium
On a continuing operations 2016/17 2015/16 Change Change
basis at at
constant actual
rates rates
================================== =============== ================ ========== =============
Headline measures(1) :
Group sales(2) GBP49.9bn GBP47.9bn 1.1% 4.3%
Group operating profit before
exceptional items(3) GBP1,280m GBP985m 24.9% 29.9%
Diluted EPS pre-exceptionals
& IAS19 finance costs 7.90p 5.61p n/a 40.8%
Retail operating cash flow(4) GBP2,279m GBP2,088m n/a 9.1%
Net debt(4,5) GBP(3,729)m GBP(5,110)m n/a down 27.0%
Statutory measures:
Revenue GBP55.9bn GBP53.9bn 0.8% 3.7%
Operating profit GBP1,017m GBP1,072m (11.8)% (5.1)%
Profit before tax GBP145m GBP202m (39.1)% (28.2)%
Diluted EPS 0.81p 3.22p n/a (74.8)%
Headlines
Growth in sales(2) , volume, profit(3) and cash(4)
-- Group sales(2) up 4.3% to GBP49.9bn
-- UK like-for-like sales(6) up 0.9% - first reported full-year growth since 2009/10; UK food LFL up 1.3%
-- Positive volume growth in both UK & ROI and International
-- Group operating profit before exceptional items(3) up 30% to GBP1,280m; UK & ROI up 60% to GBP803m
-- Step up in Group operating margin(3) from 1.8% to 2.3%; on track for 3.5-4.0% ambition by 2019/20
-- Retail operating cash flow(4) up 9% to GBP2.3bn -- Net debt(4,5) of GBP(3.7)bn, down 27%; GBP1.9bn of debt repaid within the year
-- Statutory revenue up 3.7% to GBP55.9bn; PBT down year-on-year after GBP(235)m exceptional charge booked post year-end following our agreement with SFO and FCA(7)
Six strategic drivers guiding our actions
-- Brand health(8) at strongest level in five years
o Further improvement in core offer, including c.GBP300m investment in seven exclusive fresh food brands in March 2016, contributing to sustained market outperformance in fresh food
o Price of typical basket down 6% since Sept 2014; promotional participation down to 32%
o Most improved food retailer for quality perception; record rating for staff helpfulness at 80%
o Availability at record high; simpler range with 24% net reduction over two years
-- Cost savings of GBP226m already achieved towards GBP1.5bn medium-term target; FY savings of GBP455m
-- Generated GBP2.3bn retail operating cash; GBP0.4bn underlying working capital(9) inflow -- More efficient mix across channels & products; improved service model in 1,500 stores
-- Released GBP0.5bn value(10) from property; 1.0m sq. ft. space re-purposed; 16 stores re-purchased
-- Innovated to remove 14bn calories from soft drinks in two years; food donations up 148% as FareShare FoodCloud now in all large UK stores; PayQwiq digital wallet used once every 5 seconds
Dave Lewis, Chief Executive:
"Today, our prices are lower, our range is simpler and our service and availability have never been better. Our exclusive fresh food brands have strengthened our value proposition and our food quality perception is at its highest level for five years. At the same time, we have increased profits, generated more cash and significantly reduced debt.
We are ahead of where we expected to be at this stage, having made good progress on all six of the strategic drivers we shared in October. We are confident that we can build on this strong performance in the year ahead, making further progress towards our medium-term ambitions.
On top of this, our proposed merger with Booker will bring together two complementary businesses, driving additional value for shareholders by realising substantial synergies and enabling us to access the faster growing 'out of home' food market."
Serving Britain's shoppers a little better every day
Like-for-like sales performance(6)
1Q 2Q 3Q 4Q 1H 2H FY
2016/17 2016/17 2016/17 2016/17 2016/17 2016/17 2016/17
--------------- --------- --------- --------- --------- --------- --------- ---------
UK & ROI 0.3% 0.9% 1.7% 0.6% 0.6% 1.3% 0.9%
--------------- --------- --------- --------- --------- --------- --------- ---------
UK 0.3% 0.9% 1.8% 0.7% 0.6% 1.2% 0.9%
ROI 0.3% 0.1% 0.5% (1.3)% 0.2% (0.4)% (0.1)%
--------------- --------- --------- --------- --------- --------- --------- ---------
International 3.0% 2.1% 0.6% (0.3)% 2.6% 0.1% 1.3%
--------------- --------- --------- --------- --------- --------- --------- ---------
Europe 2.8% 1.3% 0.7% (0.8)% 2.0% (0.1)% 0.9%
Asia 3.3% 3.0% 0.4% 0.5% 3.2% 0.4% 1.8%
--------------- --------- --------- --------- --------- --------- --------- ---------
Group 0.9% 1.1% 1.5% 0.4% 1.0% 1.0% 1.0%
--------------- --------- --------- --------- --------- --------- --------- ---------
Headline Group results
A full Group income statement can be found on page 13 of this statement.
52 weeks ended 25 2016/17 2015/16 Year-on-year Year-on-year
February 2017 change change
(Constant (Actual
On a continuing exchange exchange
operations basis rates) rates)
---------------------------- ----------- ----------- ------------- -------------
Group sales (exc.
VAT, exc. fuel)(2) GBP49,867m GBP47,859m 1.1% 4.3%
---------------------------- ----------- ----------- ------------- -------------
Fuel GBP6,050m GBP6,074m (1.0)% (0.4)%
---------------------------- ----------- ----------- ------------- -------------
Revenue (exc. VAT,
inc. fuel) GBP55,917m GBP53,933m 0.8% 3.7%
---------------------------- ----------- ----------- ------------- -------------
Group operating
profit before exceptional
items(3)
* UK & ROI(11) GBP1,280m GBP985m 24.9% 29.9%
GBP803m GBP503m 57.7% 59.6%
GBP320m GBP320m (12.5)% 0.0%
* International GBP157m GBP162m (3.1)% (3.1)%
* Tesco Bank
---------------------------- ----------- ----------- ------------- -------------
Include exceptional GBP(263)m GBP87m
items
---------------------------- ----------- ----------- ------------- -------------
Group operating
profit GBP1,017m GBP1,072m (11.8)% (5.1)%
---------------------------- ----------- ----------- ------------- -------------
Group profit before
tax before exceptional
items and net pension
finance costs GBP842m GBP490m 71.8%
---------------------------- ----------- ----------- -------------
Group statutory
profit before tax GBP145m GBP202m (28.2)%
---------------------------- ----------- ----------- -------------
Diluted EPS before
exceptional items 6.75p 4.05p
---------------------------- ----------- -----------
Diluted EPS before
exceptional items
and net pension
finance costs 7.90p 5.61p
---------------------------- ----------- -----------
Diluted EPS 0.81p 3.22p
---------------------------- ----------- -----------
Basic EPS 0.81p 3.24p
---------------------------- ----------- -----------
Capex(12) GBP1.2bn GBP1.0bn
---------------------------- ----------- -----------
Net debt(4,5) GBP(3.7)bn GBP(5.1)bn
---------------------------- ----------- -----------
Cash generated from GBP2.3bn GBP2.1bn
retail operations(4)
---------------------------- ----------- -----------
A detailed analysis of discontinued operations can be found in Note 7 on page 32.
Notes
1. The Group has defined and outlined the purpose of its alternative performance measures, including its headline measures, in the Glossary on page 52.
2. Group sales exclude VAT and fuel. Sales growth shown on a comparable days basis.
3. Excludes exceptional items by virtue of their size and nature in order to reflect management's view of the performance of the Group.
4. Net debt and retail operating cash flow exclude the impact of Tesco Bank, in order to provide further analysis of the retail cash flow statement.
5. Net debt includes both continuing and discontinued operations.
6. Like-for-like is a measure of growth in Group online sales and sales from stores that have been open for at least a year at constant foreign exchange rates.
7. SFO and FCA are acronyms for the Serious Fraud Office and the Financial Conduct Authority respectively.
8. As per YouGov BrandIndex, February 2017.
9. Working capital excluding the impact of exceptional items.
10. Value released from property relates to gross proceeds from property disposals in the year.
11. The elimination of intercompany transactions between continuing operations and the discontinued Turkey operation, as required by IFRS 5 and IFRS 10, has resulted in a reduction to the prior period UK & ROI operating profit of GBP(2)m.
12. Capex is shown excluding property buybacks.
Creating value for our key stakeholders
Guided by the six strategic drivers we shared in October 2016, we have made strong progress this year with our focus on creating long-term, sustainable value for our key stakeholders.
Customers
-- introduced seven new, exclusive fresh food brands, investing c.GBP300m, further removing reasons for customers to shop elsewhere; these brands now feature in 64% of customers' baskets
-- simpler, clearer and lower prices; multi-buy promotions reduced by a further 24% year-on-year; typical customer basket 6% cheaper than in September 2014
-- simpler product range with 24% net range reduction and 4,400 new products over two years
-- improvements across all key customer metrics; record sales-based availability of 96%, continue to be rated first by customers for speed of service and score for staff helpfulness up to 80%
-- product and packaging innovation helping customers reduce waste, e.g. new, individual-portion chicken packaging and new frozen fruit ranges
Colleagues
-- 83% of all colleagues recommend us as a 'great place to work', up from 81% last year
-- significant improvement in colleagues recommending us as a 'great place to shop' vs last year (+7 NPS)
-- more opportunities, with 4,000 colleague promotions; plan for 2,500 apprenticeships this year -- two-thirds of colleagues believe their job has become simpler year-on-year
-- moved replenishment from nights to days in 195 stores, increasing number of colleagues available to help customers at peak times
-- first UK colleague health month in January 2017 including 1.8m pieces of free fruit provided
Supplier partners
-- Supplier Viewpoint measure improved from 70% to 77% this year (UK: from 68% to 78%)
-- ranked as top overall retailer by the independently-run Advantage Report Mirror supplier survey
-- Supplier Network re-launched and now has 5,000 members; 94% rate network as beneficial -- launched food waste hotline in March 2017 to quickly address potential waste in supply chain
-- 99.5% of small suppliers and 93% of largest suppliers moved to standardised payment terms; all to move by end-August 2017
Shareholders
-- in October 2016, shared ambition to deliver Group operating margin of 3.5-4.0% by 2019/20, underpinned by six strategic drivers including GBP1.5bn cost savings
-- generated GBP2.3bn retail operating cash flow, including underlying working capital inflow of GBP0.4bn
-- regained full ownership of another 16 UK stores, in line with aim to reduce exposure to fixed-uplift or inflation-linked rental agreements; further seven large stores re-purchased in April 2017
-- completed sale of our business in Turkey, avoiding incremental cash investment -- proposed merger with Booker to enable access to larger, faster-growing market opportunity
-- intention to resume dividend payments in respect of the 2017/18 financial year; expected to grow progressively, with aim of achieving target cover of around two times EPS over the medium-term
Looking ahead
We made good progress over the last year, further strengthening our customer offer and delivering an improvement in profitability a little ahead of expectations.
We are confident in the plans we have shared and in the progress we will make this year, including further steps towards reducing our costs by GBP1.5bn, generating GBP9bn retail cash from operations and improving Group operating margin to between 3.5% and 4.0% by 2019/20. With a much more competitive offer and supplier partnerships as strong as they have ever been, we are much better positioned to navigate challenging market conditions.
In January, we announced that we had agreed the terms of a proposed merger with Booker, focused on unlocking new growth, particularly in the faster-growing 'out of home' food market. We are continuing to engage as planned with the Competition and Markets Authority in advance of seeking shareholder approval for the transaction, anticipated in late 2017/early 2018.
Financial Results
The results of Kipa, our business in Turkey, have been classified as discontinued operations in these results. We announced the sale of Kipa on 10 June 2016, with the transaction completing on 1 March 2017.
Sales:
On a continuing operations UK & ROI International[1] Tesco Group basis Bank ---------------------------- ----------- ----------------- ---------- ----------- Sales GBP37,692m GBP11,163m GBP1,012m GBP49,867m (exc. VAT, exc. fuel) ---------------------------- ----------- ----------------- ---------- ----------- change at constant exchange rates(2) % 0.6% 2.1% 6.0% 1.1% change at actual exchange rates(2) % 1.4% 15.2% 6.0% 4.3% ---------------------------- ----------- ----------------- ---------- ----------- Like-for-like sales (exc. VAT, exc. fuel) 0.9% 1.3% - 1.0% ---------------------------- ----------- ----------------- ---------- ----------- Statutory revenue GBP43,524m GBP11,381m GBP1,012m GBP55,917m (exc. VAT, inc. fuel) Includes: Fuel GBP5,832m GBP218m - GBP6,050m ---------------------------- ----------- ----------------- ---------- -----------
1. International consists of Central Europe (Czech Republic, Hungary, Poland and Slovakia), Thailand and Malaysia.
2. Sales change shown on a comparable days basis; statutory Group sales change was 1.0% at constant exchange rates and 4.2% at actual exchange
rates.
Group sales grew by 1.1% at constant exchange rates with positive like-for-like growth in both the UK & ROI and International. At actual exchange rates, sales grew by 4.3% including a 3.2% foreign exchange translation benefit due to the weakness of Sterling. Further information on sales performance is included in Appendices 1 to 3 on page 61 of this statement.
In the UK and the Republic of Ireland (ROI), we have now seen five consecutive quarters of like-for-like sales growth.
In the UK, volumes grew 1.6% and transactions grew 1.7% as we continued to make fundamental improvements to all aspects of our offer. We saw annual positive like-for-like growth for the first time in seven years and outperformed the market across all categories on a volume basis. Volume outperformance was particularly strong in fresh food, where the exclusive brands we launched in March 2016 have helped to significantly strengthen our value proposition.
Significant product cost deflation in the first half of the year eased in the second half. In collaboration with our supplier partners, we have worked hard to minimise the impact of emerging inflationary cost pressures. Despite some inflation in a number of categories, the price of a typical customer basket remains around 6% cheaper than in September 2014 and promotional participation has fallen to 32% as we made a conscious decision to focus our investments on sustainable improvements rather than on short-term couponing and promotions. We achieved improvements in all key customer metrics, including colleague helpfulness and availability, where performance reached record levels.
In the Republic of Ireland, like-for-like sales fell by (0.1)% as we continued to invest in lowering prices. We have a leading position in the market in volume terms and have further grown volume share by making improvements across our customer offer, with a focus on fresh produce, meat and bakery.
International sales grew by 2.1% at constant exchange rates, including a 0.8% new store contribution driven by store openings in Thailand which more than offset the impact of store closures, primarily in Europe. International sales growth weakened in the second half due to an increasingly competitive environment in Europe, particularly Poland, and as we annualised a strong performance last year in Asia.
In the year, we grew like-for-like sales strongly in Thailand as we invested in both lowering prices and improving our fresh food proposition. We grew market share and were pleased to retain our number one position(1) for customers for brand and trust. In Malaysia, top-line sales growth was held back by weak consumer spending across the market and a trend away from large stores towards convenience shopping, where we are currently under-represented.
In Central Europe, like-for-like sales grew in all markets apart from Poland which remains intensely competitive. Positive volume growth in the region was driven by a strong performance in fresh food where we improved quality and inspired customers with new ranges and events.
Group statutory revenue of GBP55.9bn includes sales of fuel, which were stable year-on-year. Fuel retail price deflation had eased by the end of the first half, returning to significant retail price inflation by the end of the second half.
[1] According to BASIS Global Brand Image tracker, February 2017
Operating profit:
On a continuing operations UK & International Tesco Group basis ROI Bank ----------------------------- -------- -------------- -------- ---------- Operating profit before GBP803m GBP320m GBP157m GBP1,280m exceptional items ----------------------------- -------- -------------- -------- ---------- change at constant exchange rates % 57.7% (12.5)% (3.1)% 24.9% change at actual exchange rates % 59.6% 0.0% (3.1)% 29.9% ----------------------------- -------- -------------- -------- ---------- Operating profit margin before exceptional items 1.84% 2.81% 15.51% 2.29% ----------------------------- -------- -------------- -------- ---------- change at constant exchange 67bp (46)bp (145)bp 44bp rates (basis points) change at actual exchange 68bp (42)bp (145)bp 46bp rates (basis points) Operating profit GBP519m GBP421m GBP77m GBP1,017m ----------------------------- -------- -------------- -------- ----------
Group operating profit before exceptional items was GBP1,280m, up 24.9% on last year at constant exchange rates and up 29.9% at actual rates. Statutory operating profit of GBP1,017m includes the impact of exceptional items, which are described in more detail below and in Note 4 on page 28 of this statement.
Our full year UK & ROI operating profit before exceptional items was GBP803m, up 60% on last year, with margin growth of 68 basis points year-on-year. This improvement includes the impact of investments we have made in all aspects of our offer, particularly in lowering core prices and in the quality and price of the exclusive fresh food brands which we launched in March 2016. These investments enabled us to drive volume growth, generating positive operational leverage. In addition to managing costs more effectively year-on-year, we are also optimising the mix of our offer across channels and products. For example, within our beers, wines and spirits category we have focused on improving the relevance and profitability of our offer by broadening our range of speciality beers, increasing the prominence of own brand products and maintaining a strong, stable core price position in an extremely promotional market.
In a highly competitive environment, international operating profit before exceptional items was GBP320m, flat year-on-year at actual exchange rates and down by (12.5)% at constant exchange rates. Whilst we continued to invest in our offer in all of our markets, our response to intense competition in Poland weighed on profitability in Central Europe. We continued to focus on improving our store economics across the region, including simplifying management structures, reducing store administration and closing unprofitable store counters. We also opened a new distribution centre at Poznan in Poland, reducing transport costs for the country by 20%. From April 2017, we have separated the management of our international business, creating two new Executive Committee roles leading Asia and Central Europe, giving greater focus to each region.
The introduction of a new retail tax in Poland remains suspended pending the outcome of the European Commission's investigation. We continue to be cautious about potential legislative changes in our European markets.
Further information on operating profit performance is included in Note 2, starting on page 22 of this statement.
Exceptional items in operating profit:
This Last
year year
-------------------------------------- ---------- ----------
Net impairment of non-current GBP(6)m GBP(423)m
assets and onerous lease provisions
Net restructuring and redundancy GBP(199)m GBP(126)m
costs
Provision for customer redress GBP(45)m -
Interchange settlement GBP57m -
Property transactions GBP165m GBP156m
Provision for SFO and FCA obligations GBP(235)m -
Past service credit and associated - GBP480m
costs arising on UK defined
benefit pension scheme closure
Total exceptional items in GBP(263)m GBP87m
operating profit
-------------------------------------- ---------- ----------
Exceptional items are excluded from our headline performance measures by virtue of their size and nature, in order to reflect management's view of the performance of the Group. In the current year, the net effect of exceptional items on operating profit is GBP(263)m.
Our annual impairment testing resulted in a net charge of GBP(6)m. This comprises a net GBP103m provision release relating to property, a net increase of GBP(56)m in onerous lease provisions and a net GBP(53)m impairment charge in goodwill and intangible assets, principally relating to dunnhumby subsidiary, Sociomantic.
Net restructuring and redundancy charges of GBP(199)m relate principally to changes to our distribution network and store colleague structures and working practices in the UK & ROI, and also includes a GBP(35)m charge relating to Tesco Bank business simplification.
The provision for customer redress of GBP(45)m was recognised in Tesco Bank in the first half, following updated guidance published by the Financial Conduct Authority, proposing an extension to the Payment Protection Insurance settlement deadline which is now set at August 2019.
Exceptional items include a credit of GBP57m in relation to a legal settlement in respect of interchange fees.
We generated net profits (pre-tax) of GBP165m from property transactions in the year, of which GBP91m related to the sale of the Letnany Shopping Mall and Liberec Forum Shopping Centre in the Czech Republic. We also sold a number of properties and development sites in the UK & ROI business.
An exceptional charge of GBP(235)m has been recorded as an adjusting post balance sheet event, following judicial approval on 10 April 2017 of a Deferred Prosecution Agreement between Tesco Stores Limited and the UK Serious Fraud Office regarding historic accounting practices and an agreement with the UK Financial Conduct Authority of a finding of market abuse in relation to the Tesco PLC trading statement announced on 29 August 2014.
Further detail on all exceptional items can be found in Note 4 on page 28 of this statement.
Joint ventures and associates:
This year Last year
------------------------- ---------- ----------
Share of post-tax losses GBP(30)m GBP(21)m
from JVs and associates
before exceptional
items
Exceptional items:
Impairment in Gain GBP(54)m -
Land
Insurance reserve GBP(23)m -
adjustment
------------------------- ---------- ----------
Share of post-tax losses GBP(107)m GBP(21)m
from JVs and associates
------------------------- ---------- ----------
Losses from joint ventures and associates before exceptional items increased by GBP(9)m to GBP(30)m, due to lower profits recognised in our UK property joint ventures. After exceptional items, including an impairment of investment property within Gain Land, our associate in China, and an adjustment in insurance reserves in Tesco Underwriting, our share of post-tax losses from joint ventures and associates rose to GBP(107)m from GBP(21)m last year.
Further detail can be found in Note 12, starting on page 39 of this statement.
Finance income and finance costs:
This year Last year
--------------------------- ---------- ----------
Interest receivable GBP48m GBP29m
and similar income
IAS 32 and 39 'Financial GBP61m -
instruments' - fair
value remeasurements
--------------------------- ---------- ----------
Finance income GBP109m GBP29m
--------------------------- ---------- ----------
Interest payable GBP(523)m GBP(490)m
Capitalised interest GBP6m GBP6m
IAS 32 and 39 'Financial - GBP(19)m
instruments' - fair
value remeasurements
IAS 19 net pension finance GBP(113)m GBP(155)m
costs
--------------------------- ---------- ----------
Finance costs GBP(630)m GBP(658)m
--------------------------- ---------- ----------
Exceptional charge: GBP(244)m GBP(220)m
Translation of Korea
proceeds
--------------------------- ---------- ----------
Statutory finance costs GBP(874)m GBP(878)m
--------------------------- ---------- ----------
Finance income rose to GBP109m, mainly due to the favourable effect of marking-to-market financial instruments. These are non-cash adjustments driven by changes in the market's assessment of credit and debt risk.
Interest payable increased to GBP(523)m due to debt acquired as part of our February 2016 agreement to regain sole ownership of 49 stores and two distribution centres. The impact of this was partially offset by a GBP26m reduction in interest following the repayment of debt in the year.
Net pension finance costs of GBP(113)m reduced in line with the reduction in the opening IAS 19 pension deficit at the start of the 2016/17 financial year. Net pension finance costs are calculated by multiplying the opening net deficit by the opening discount rate each year. For 2017/18, they are expected to increase to c.GBP(165)m.
An exceptional non-cash loss of GBP(244)m arose on the translation of the proceeds from the sale of our Homeplus business in Korea which were held in GBP money market funds in a non-Sterling denominated subsidiary. This does not represent any economic cost to the Group.
Further detail can be found in Note 5 on page 30 of this statement.
Group tax:
This year Last year
--------------------- ---------- ----------
Tax on profit before GBP(185)m GBP(8)m
exceptional items
--------------------- ---------- ----------
Tax on profit GBP(87)m GBP54m
--------------------- ---------- ----------
Tax on profit before exceptional items was GBP(185)m with an effective rate of tax for the Group of 25%. This tax rate is higher than the UK statutory rate primarily due to the impact of the 8% supplementary tax surcharge on bank profits, introduced in January 2016, and depreciation of assets that does not qualify for tax relief. The tax rate benefited from the impact on deferred tax of the expected reduction in the UK corporation tax rate from 18% to 17% in 2020.
On a statutory basis, including an exceptional credit of GBP98m principally relating to a lower book value than tax value of property disposals and tax relief on exceptional impairment and restructuring costs, the tax charge was GBP(87)m.
The effective tax rate on profit before exceptional items for the 2017/18 financial year is expected to be similar to this year, at around 25%.
Earnings per share:
On a continuing operations This Last basis year year ---------------------------- ------ ------ Diluted earnings per share before exceptional items and net pension finance costs 7.90p 5.61p Diluted earnings per share 0.81p 3.22p Basic earnings per share 0.81p 3.24p ---------------------------- ------ ------
Diluted earnings per share before exceptional items and net pension finance costs were 7.90p, 41% higher year-on-year principally due to our stronger profit performance. Statutory basic earnings per share from continuing operations were 0.81p, lower than last year driven by higher net exceptional costs.
Summary of total indebtedness(1) :
This year Last year Movement
--------------------- ------------- ------------- ------------
Net debt (excludes GBP(3,729)m GBP(5,110)m GBP1,381m
Tesco Bank)
Discounted operating GBP(7,440)m GBP(7,814)m GBP374m
lease commitments
Pension deficit, IAS GBP(5,504)m GBP(2,612)m GBP(2,892)m
19 basis (post-tax)
--------------------- ------------- ------------- ------------
Total indebtedness GBP(16,673)m GBP(15,536)m GBP(1,137)m
--------------------- ------------- ------------- ------------
1. Total indebtedness is defined in the glossary, starting on page 52
Net debt (excluding Tesco Bank) reduced by GBP1.4bn to GBP(3.7)bn, as our retail operating cash flow and property and business disposal proceeds were greater than capital expenditure and other charges.
The reduction in discounted operating lease commitments includes a benefit from the buybacks we have completed in the UK. In the year, we regained sole ownership of 16 superstores from a number of different vendors, resulting in an annual rent saving of GBP22m.
The IAS 19 pension deficit measure, which relates to our closed UK defined benefit scheme, increased by GBP(2.9)bn to GBP(5.5)bn due to the reduction in bond yields. Despite this increase in the IAS 19 measure of our liabilities, the actual pension payments that are payable to members in the future have not changed.
During the year, we completed a de-risking programme which has reduced the future volatility of the scheme's long-term funding.
At the last triennial valuation, the Trustee and the Company agreed a long-term funding plan where the Company is paying contributions of GBP270m a year to the UK defined benefit scheme. The next triennial actuarial valuation is effective as at 31 March 2017 and work is already underway. The Trustee is aiming to conclude the valuation as soon as is reasonably possible. Further detail can be found in Note 17 on page 46 of this statement.
We have a strong funding and liquidity profile underpinned by GBP4.4bn committed facilities and our key credit metrics (fixed charge cover, net debt/EBITDA and total indebtedness ratio) have improved over the year.
Summary retail cash flow:
This year Last year
--------------------------------------- ------------ ------------
Cash flow from continuing operations GBP1,695m GBP2,033m
excluding working capital
--------------------------------------- ------------ ------------
(Increase)/decrease in working
capital
- underlying decrease in working GBP387m GBP377m
capital
- impact from exceptional items GBP197m GBP(91)m
- cash impact of new approach - GBP(231)m
to supplier payments
Cash generated from operations GBP2,279m GBP2,088m
- continuing operations
--------------------------------------- ------------ ------------
Cash generated from operations GBP(1)m GBP493m
- discontinued operations
--------------------------------------- ------------ ------------
Cash generated from operations GBP2,278m GBP2,581m
--------------------------------------- ------------ ------------
Interest paid GBP(518)m GBP(422)m
Corporation tax (paid)/received GBP(64)m GBP125m
--------------------------------------- ------------ ------------
Net cash generated from retail GBP1,696m GBP2,284m
operating activities
--------------------------------------- ------------ ------------
Cash capital expenditure GBP(1,328)m GBP(1,004)m
--------------------------------------- ------------ ------------
Free cash flow GBP368m GBP1,280m
--------------------------------------- ------------ ------------
Other investing activities GBP1,620m GBP543m
Net cash (used in)/from financing GBP(1,342)m GBP(854)m
activities and intra-Group
funding and intercompany transactions
--------------------------------------- ------------ ------------
Net increase in cash and cash GBP646m GBP969m
equivalents
--------------------------------------- ------------ ------------
Include/(exclude) cash movements GBP1,114m GBP4,219m
in debt items
Fair value and other non-cash GBP(379)m GBP(1,817)m
movements
--------------------------------------- ------------ ------------
Movement in net debt GBP1,381m GBP3,371m
--------------------------------------- ------------ ------------
On an underlying basis, working capital improved by GBP387m driven by growing sales volumes, initiatives to reduce stockholding and the timing effect of a fuel payment. The reported total reduction in working capital also includes the net impact of exceptional items.
Excluding working capital, we generated GBP1.7bn of cash from continuing retail operations. The decrease of GBP(0.3)bn on the previous year primarily reflects the payment of a Turnaround bonus to colleagues in cash rather than shares and higher net exceptional costs than last year.
Interest paid was GBP(96)m higher than last year due to the debt acquired as part of our February 2016 agreement to regain sole ownership of 49 stores and two distribution centres. The impact of this was partially offset by GBP1.2bn of debt we redeemed in September 2016 and a further GBP0.7bn of debt we redeemed in January 2017.
The cash tax outflow of GBP(64)m reflects payments by our international businesses which more than offset a refund of taxes already paid in the UK, as we continue to agree and close historic enquiries into tax returns.
Cash movements of GBP1.1bn in debt items primarily reflect the redemption of three medium-term notes on their maturity.
A reconciliation between the Retail and Group cash flow can be found in Note 2, starting on page 22.
Capital expenditure and space:
Group UK & International Tesco
ROI Bank
------------------------ -------------- ---------------- --------------
This Last YOY This Last This Last This Last
year year change year year year year year year
--------------------- ------ ------ -------- ------ ------ ------- ------- ------ ------
Capital expenditure
(GBPm) 1,180 970 210 731 676 403 254 46 40
--------------------- ------ ------ -------- ------ ------ ------- ------- ------ ------
Gross space added/
(reduced) (m
sq ft)(1,2) 0.7 0.7 - 0.2 0.3 0.5 0.4 n/a n/a
--------------------- ------ ------ -------- ------ ------ ------- ------- ------ ------
Net space added/
(reduced) (m
sq ft)(1) (2.2) (1.0) (1.2) (1.7) (0.8) (0.5) (0.2) n/a n/a
--------------------- ------ ------ -------- ------ ------ ------- ------- ------ ------
1. Excluding franchise stores.
2. 'Gross space added' excludes repurposing/extensions.
Capital expenditure (excluding buybacks) of GBP1.2bn was GBP0.2bn higher than last year reflecting our planned increase in spend to refresh more than 200 stores in the UK and to accelerate the store opening programme in Thailand. We now expect Group capital expenditure to be around GBP1.25bn in 2017/18. This is around GBP250m below our original estimate, as we continue to focus on capital spend that delivers attractive returns and move more of our planned technology spend to cloud-based services.
The net reduction of (2.2)m square feet includes (1.7)m square feet related to the disposal of Dobbies garden centres with the balance being net closures of space. In Asia, we opened 114 stores, primarily in our convenience format in Thailand. In Europe, we closed 23 stores.
This year we repurposed 1.0m square feet across the Group, improving the ease and relevance of the shopping trip for customers. This included 0.5m square feet in Thailand repurposed for new and existing partners, including five new branches of Decathlon Sports, exclusive in the market to Tesco Lotus, and four new cinemas. In the UK, we repurposed 0.1m square feet in 14 stores, introducing brands such as Miss Selfridge, Wallis and Holland & Barrett.
Further details of current and forecast space can be found in Appendix 5 starting on page 63.
Property:
This year Last year
-------------------------------------- --------------------------------------
UK & International Group UK & International Group
ROI ROI
---------------------- ---------- -------------- ---------- ---------- -------------- ----------
Property(1) -
fully owned
- Estimated market GBP13.1bn GBP6.7bn GBP19.9bn GBP13.3bn GBP6.4bn GBP19.7bn
value
- NBV(2) GBP12.6bn GBP5.1bn GBP17.8bn GBP12.6bn GBP5.0bn GBP17.6bn
% net selling
space owned 52% 74% 63% 52% 71% 61%
% total property
owned - by value(3) 50% 78% 57% 47% 75% 54%
---------------------- ---------- -------------- ---------- ---------- -------------- ----------
1. Stores, malls, investment property, offices, distribution centres, fixtures and fittings and work-in-progress. Excludes joint ventures.
2. Property, plant and equipment excluding vehicles.
3. Excludes fixtures and fittings.
The estimated market value of our fully owned property has increased by GBP0.2bn to GBP19.9bn, retaining a surplus of GBP2.1bn over the net book value, as the repurchase of 16 stores in the UK and a foreign exchange translation effect more than offset the impact of the sale of Turkey and Dobbies garden centres.
Our Group freehold property ownership percentage, by value, has increased from 54% to 57% year-on-year, driven by both the UK & ROI and International. In International, the effect of the sale of our business in Turkey more than offset the impact of the sale of two large freehold shopping centres in the Czech Republic on the mix of freehold to leasehold.
In April 2017, we regained ownership of a further seven large stores in the UK with a freehold valuation of GBP219m in a transaction with British Land. Including the effect of this transaction, we have now increased our proportion of freehold ownership by value in the UK & ROI to 51%, up by 10% over two years. The repurchase of stores to date has resulted in an annualised saving of GBP152m rent, predominantly in relation to fixed-uplift and index-linked rental agreements.
The Group operating lease charge reduced by 9% in the year to GBP1.0bn. We continue to seek opportunities to further reduce our exposure to index-linked and fixed-uplift rent inflation where the economics are attractive.
Tesco Bank:
This year Last year YOY change
---------------------- ---------- ---------- -----------
Revenue GBP1,012m GBP955m 6.0%
---------------------- ---------- ---------- -----------
Operating profit
before exceptional
items GBP157m GBP162m (3.1)%
---------------------- ---------- ---------- -----------
Operating profit GBP77m GBP161m (52.2)%
Lending to customers GBP9,961m GBP8,542m 16.6%
Customer deposits GBP8,463m GBP7,397m 14.4%
Net interest margin 4.0% 4.2% (0.2)%
Risk asset ratio 20.0% 20.0% -
---------------------- ---------- ---------- -----------
Tesco Bank continues to provide a simple and transparent product offer to serve the banking and insurance needs of Tesco customers. Active customer account numbers grew by 3.5%, with particularly strong growth in current accounts. We have continued to improve our customer offer by introducing a new premium credit card, simplifying the loan application process by introducing digital signatures, giving interest-rate guarantees on current accounts for new and existing customers and through a national roll-out of PayQwiq to all large stores, a digital wallet app that allows customers to pay with their phone in our shops.
Operating profit before exceptional items reduced by (3.1)% to GBP157m. This decline was due to the full year effect of the introduction of European Commission caps on interchange income which first came into effect in December 2015. Adjusting for this impact, we saw strong profit growth driven primarily by lending income. Exceptional items of GBP(80)m relating to Tesco Bank are detailed in Note 4 on page 28 and include an increase in the provision for customer redress and a restructuring charge.
Risk-weighted assets have risen in line with lending and the Core Tier 1 ratio has improved to 16.7%. The balance sheet remains strong and well-positioned to support future lending growth from both a liquidity and capital perspective.
An income statement for Tesco Bank can be found in Appendix 6 on page 66 of this statement. Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 22 of this statement. Tesco Bank's full year results are also published today and are available at www.corporate.tescobank.com
Contacts
Investor Relations: Chris Griffith 01707 912 900 Media: Ed Young 01707 918 701 Philip Gawith, Teneo Blue Rubicon 0207 420 3143
This document is available at www.tescoplc.com/prelims2017.
A meeting for investors and analysts will be held today at 9.00am at London Stock Exchange, 10 Paternoster Square, London, EC4M 7LS. Access will be by invitation only. For those unable to attend, there will be a live webcast available on our website at www.tescoplc.com/prelims2017. This will include all Q&A and will also be available for playback after the event. All presentation materials, including a transcript, will be made available on our website.
A video featuring Dave Lewis, Chief Executive, Jason Tarry, Chief Product Officer and Alessandra Bellini, Chief Customer Officer, discussing the Preliminary Results and our fresh food offer is available now to download in video, audio and transcript form at www.tescoplc.com/prelims2017.
Disclaimer
This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and operating margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is based on information available to Tesco as of the date of the statement. All written or oral forward-looking statements attributable to Tesco are qualified by this caution. Tesco does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstances.
Group income statement
52 weeks ended 52 weeks ended
25 February 2017 27 February 2016
----------------------------------- ----- ----------------------------------- -----------------------------------
Before Exceptional Total Before Exceptional Total
exceptional items GBPm exceptional items GBPm
items (Note items (Note
GBPm 4) GBPm 4)
Notes GBPm GBPm
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Continuing operations
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Revenue 2 55,917 - 55,917 53,933 - 53,933
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Cost of sales (52,899) (116) (53,015) (51,124) 35 (51,089)
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Gross profit/(loss) 3,018 (116) 2,902 2,809 35 2,844
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Administrative expenses (1,734) (261) (1,995) (1,836) 22 (1,814)
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Profits/(losses) arising
on property-related items (4) 114 110 12 30 42
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Operating profit/(loss) 1,280 (263) 1,017 985 87 1,072
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Share of post-tax profits/(losses)
of joint ventures and
associates 12 (30) (77) (107) (21) - (21)
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Finance income 5 109 - 109 29 - 29
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Finance costs 5 (630) (244) (874) (658) (220) (878)
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Profit/(loss) before
tax 729 (584) 145 335 (133) 202
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Taxation 6 (185) 98 (87) (8) 62 54
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Profit/(loss) for the
year from continuing
operations 544 (486) 58 327 (71) 256
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Discontinued operations
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Profit/(loss) for the
year from discontinued
operations 7 (37) (75) (112) 26 (153) (127)
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Profit/(loss) for the
year 507 (561) (54) 353 (224) 129
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Attributable to:
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Owners of the parent 515 (555) (40) 359 (221) 138
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Non-controlling interests (8) (6) (14) (6) (3) (9)
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
507 (561) (54) 353 (224) 129
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Earnings/(losses) per
share from continuing
and discontinued operations
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Basic 9 6.32p (0.49)p 4.42p 1.70p
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Diluted 9 6.31p (0.49)p 4.40p 1.69p
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Earnings/(losses) per
share from continuing
operations
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Basic 9 6.76p 0.81p 4.06p 3.24p
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
Diluted 9 6.75p 0.81p 4.05p 3.22p
----------------------------------- ----- ------------ ----------- -------- ------------ ----------- --------
The notes on pages 20 to 51 form part of this condensed consolidated financial information.
Group statement of comprehensive income/(loss)
52 weeks 52 weeks
2017 2016
Notes GBPm GBPm
----------------------------------------------- ----- -------- --------
Items that will not be reclassified to
income statement
----------------------------------------------- ----- -------- --------
Remeasurements on defined benefit pension
schemes 17 (3,567) 1,164
----------------------------------------------- ----- -------- --------
Tax on items that will not be reclassified 579 (300)
----------------------------------------------- ----- -------- --------
(2,988) 864
----------------------------------------------- ----- -------- --------
Items that may subsequently be reclassified
to income statement
----------------------------------------------- ----- -------- --------
Change in fair value of available-for-sale
financial assets and investments 80 5
----------------------------------------------- ----- -------- --------
Currency translation differences:
----------------------------------------------- ----- -------- --------
Retranslation of net assets of overseas
subsidiaries, joint ventures and associates 764 168
----------------------------------------------- ----- -------- --------
Movements in foreign exchange reserve
and net investment hedging on
subsidiary disposed, reclassified and
reported in the Group income statement - (88)
----------------------------------------------- ----- -------- --------
Gains/(losses) on cash flow hedges:
----------------------------------------------- ----- -------- --------
Net fair value gains/(losses) 385 318
----------------------------------------------- ----- -------- --------
Reclassified and reported in the Group
income statement (384) (292)
----------------------------------------------- ----- -------- --------
Change in hedge relationship - 186
----------------------------------------------- ----- -------- --------
Tax on items that may be reclassified (23) (30)
----------------------------------------------- ----- -------- --------
822 267
----------------------------------------------- ----- -------- --------
Total other comprehensive income/(loss)
for the year (2,166) 1,131
----------------------------------------------- ----- -------- --------
Profit/(loss) for the year (54) 129
----------------------------------------------- ----- -------- --------
Total comprehensive income/(loss) for
the year (2,220) 1,260
----------------------------------------------- ----- -------- --------
Attributable to:
----------------------------------------------- ----- -------- --------
Owners of the parent (2,206) 1,270
----------------------------------------------- ----- -------- --------
Non-controlling interests (14) (10)
----------------------------------------------- ----- -------- --------
Total comprehensive income/(loss) for
the year (2,220) 1,260
----------------------------------------------- ----- -------- --------
Total comprehensive income/(loss) attributable
to owners of the parent arises from:
----------------------------------------------- ----- -------- --------
Continuing operations (2,096) 1,485
----------------------------------------------- ----- -------- --------
Discontinued operations (110) (215)
----------------------------------------------- ----- -------- --------
(2,206) 1,270
----------------------------------------------- ----- -------- --------
The notes on pages 20 to 51 form part of this condensed consolidated financial information.
Group balance sheet
25 February
2017 27 February
Notes GBPm 2016 GBPm
---------------------------------------- ----- ----------- -----------
Non-current assets
---------------------------------------- ----- ----------- -----------
Goodwill, software and other intangible
assets 10 2,717 2,874
---------------------------------------- ----- ----------- -----------
Property, plant and equipment 11 18,108 17,900
---------------------------------------- ----- ----------- -----------
Investment property 64 78
---------------------------------------- ----- ----------- -----------
Investments in joint ventures and
associates 12 739 785
---------------------------------------- ----- ----------- -----------
Other investments 823 1,078
---------------------------------------- ----- ----------- -----------
Trade and other receivables 180 201
---------------------------------------- ----- ----------- -----------
Loans and advances to customers 5,795 4,723
---------------------------------------- ----- ----------- -----------
Derivative financial instruments 1,303 1,532
---------------------------------------- ----- ----------- -----------
Deferred tax assets 707 49
---------------------------------------- ----- ----------- -----------
30,436 29,220
---------------------------------------- ----- ----------- -----------
Current assets
---------------------------------------- ----- ----------- -----------
Other investments 284 57
---------------------------------------- ----- ----------- -----------
Inventories 2,301 2,430
---------------------------------------- ----- ----------- -----------
Trade and other receivables 1,475 1,406
---------------------------------------- ----- ----------- -----------
Loans and advances to customers 4,166 3,819
---------------------------------------- ----- ----------- -----------
Derivative financial instruments 286 176
---------------------------------------- ----- ----------- -----------
Current tax assets 13 15
---------------------------------------- ----- ----------- -----------
Short-term investments 13 2,727 3,463
---------------------------------------- ----- ----------- -----------
Cash and cash equivalents 13 3,821 3,082
---------------------------------------- ----- ----------- -----------
15,073 14,448
---------------------------------------- ----- ----------- -----------
Assets of the disposal group and
non-current assets classified as
held for sale 7 344 236
---------------------------------------- ----- ----------- -----------
15,417 14,684
---------------------------------------- ----- ----------- -----------
Current liabilities
---------------------------------------- ----- ----------- -----------
Trade and other payables (8,875) (8,293)
---------------------------------------- ----- ----------- -----------
Borrowings 15 (2,560) (2,826)
---------------------------------------- ----- ----------- -----------
Derivative financial instruments
and other liabilities (61) (62)
---------------------------------------- ----- ----------- -----------
Customer deposits and deposits from
banks (6,687) (5,906)
---------------------------------------- ----- ----------- -----------
Current tax liabilities (613) (419)
---------------------------------------- ----- ----------- -----------
Provisions 16 (438) (360)
---------------------------------------- ----- ----------- -----------
(19,234) (17,866)
---------------------------------------- ----- ----------- -----------
Liabilities of the disposal group
classified as held for sale 7 (171) -
---------------------------------------- ----- ----------- -----------
Net current liabilities (3,988) (3,182)
---------------------------------------- ----- ----------- -----------
Non-current liabilities
---------------------------------------- ----- ----------- -----------
Trade and other payables (324) (275)
---------------------------------------- ----- ----------- -----------
Borrowings 15 (9,433) (10,711)
---------------------------------------- ----- ----------- -----------
Derivative financial instruments
and other liabilities (607) (889)
---------------------------------------- ----- ----------- -----------
Customer deposits and deposits from
banks (2,276) (1,573)
---------------------------------------- ----- ----------- -----------
Post-employment benefit obligations 17 (6,621) (3,175)
---------------------------------------- ----- ----------- -----------
Deferred tax liabilities (88) (135)
---------------------------------------- ----- ----------- -----------
Provisions 16 (685) (664)
---------------------------------------- ----- ----------- -----------
(20,034) (17,422)
---------------------------------------- ----- ----------- -----------
Net assets 6,414 8,616
---------------------------------------- ----- ----------- -----------
Equity
---------------------------------------- ----- ----------- -----------
Share capital 409 407
---------------------------------------- ----- ----------- -----------
Share premium 5,096 5,095
---------------------------------------- ----- ----------- -----------
All other reserves 601 (141)
---------------------------------------- ----- ----------- -----------
Retained earnings 332 3,265
---------------------------------------- ----- ----------- -----------
Equity attributable to owners of
the parent 6,438 8,626
---------------------------------------- ----- ----------- -----------
Non-controlling interests (24) (10)
---------------------------------------- ----- ----------- -----------
Total equity 6,414 8,616
---------------------------------------- ----- ----------- -----------
The notes on pages 20 to 51 form part of this condensed consolidated financial information.
Group statement of changes in equity
All other reserves
------------------------------------------------------
Capital Non-
Share Share Other redemption Hedging Translation Treasury Retained controlling Total
capital premium reserves reserve reserve reserve shares earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- -------
At 27 February
2016 407 5,095 40 16 211 (401) (7) 3,265 8,626 (10) 8,616
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- -------
Profit/(loss)
for the year - - - - - - - (40) (40) (14) (54)
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- -------
Other comprehensive
income/(loss)
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- -------
Change in fair
value of
available-for-sale
financial assets
and investments - - - - - - - 80 80 - 80
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- -------
Currency translation differences - - - - - 764 - - 764 - 764 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Remeasurements of defined benefit pension schemes - - - - - - - (3,567) (3,567) - (3,567) ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Gains/(losses) on cash flow hedges - - - - 1 - - - 1 - 1 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Tax relating to components of other comprehensive income - - - - 5 (13) - 564 556 - 556 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Total other comprehensive income/(loss) - - - - 6 751 - (2,923) (2,166) - (2,166) ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Total comprehensive income/(loss) - - - - 6 751 - (2,963) (2,206) (14) (2,220) ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Transactions with owners ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Purchase of treasury shares - - - - - - (24) - (24) - (24) ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Share-based payments - - - - - - 9 28 37 - 37 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Issue of shares 2 1 - - - - - - 3 - 3 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Dividends - - - - - - - - - - - ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Tax on items charged to equity - - - - - - - 2 2 - 2 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- Total transactions with owners 2 1 - - - - (15) 30 18 - 18 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- ------- At 25 February 2017 409 5,096 40 16 217 350 (22) 332 6,438 (24) 6,414 ------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------- ----------- -------
The notes on pages 20 to 51 form part of this condensed consolidated financial information.
All other reserves
------------------------------------------------------
Capital Non-
Share Share Other redemption Hedging Translation Treasury Retained controlling Total
capital premium reserves reserve reserve reserve shares earnings Total interests equity
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
At 28 February
2015 406 5,094 40 16 35 (488) (17) 1,985 7,071 - 7,071
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Profit/(loss)
for the year - - - - - - - 138 138 (9) 129
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Other comprehensive
income/ (loss)
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Change in fair
value of
available-for-sale
financial assets
and investments - - - - - - - 5 5 - 5
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Currency
translation
differences - - - - - 81 - - 81 (1) 80
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Remeasurements
of defined benefit
pension schemes - - - - - - - 1,164 1,164 - 1,164
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Gains/(losses)
on cash flow
hedges - - - - 212 - - - 212 - 212
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Tax relating
to components
of other
comprehensive
income - - - - (36) 6 - (300) (330) - (330)
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Total other
comprehensive
income/(loss) - - - - 176 87 - 869 1,132 (1) 1,131
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Total comprehensive
income/(loss) - - - - 176 87 - 1,007 1,270 (10) 1,260
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Transactions
with owners
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Purchase of
treasury shares - - - - - - (5) - (5) - (5)
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Share-based
payments - - - - - - 15 273 288 - 288
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Issue of shares 1 1 - - - - - - 2 - 2
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Dividends - - - - - - - - - - -
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
Total transactions
with owners 1 1 - - - - 10 273 285 - 285
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
At 27 February
2016 407 5,095 40 16 211 (401) (7) 3,265 8,626 (10) 8,616
------------------- ------- ------- --------- ---------- -------- ----------- -------- -------- ------ ----------- -------
The notes on pages 20 to 51 form part of this condensed consolidated financial information.
Group cash flow statement
Notes 52 weeks 52 weeks
2017 2016
GBPm GBPm
---------------------------------------------------- ----- -------- --------
Cash flows generated from/(used in) operating
activities
---------------------------------------------------- ----- -------- --------
Operating profit/(loss) of continuing operations 1,017 1,072
---------------------------------------------------- ----- -------- --------
Operating profit/(loss) of discontinued
operations (117) 102
---------------------------------------------------- ----- -------- --------
Depreciation and amortisation 1,304 1,334
---------------------------------------------------- ----- -------- --------
(Profit)/loss arising on sale of property,
plant and equipment and intangible assets (78) 164
---------------------------------------------------- ----- -------- --------
(Profit)/loss arising on sale of subsidiaries
and other investments 3 -
---------------------------------------------------- ----- -------- --------
(Profit)/loss arising on sale of joint ventures
and associates (5) (1)
---------------------------------------------------- ----- -------- --------
Impairment loss on goodwill 46 18
---------------------------------------------------- ----- -------- --------
Net impairment loss/(reversal) on other
investments (12) (7)
---------------------------------------------------- ----- -------- --------
Net impairment loss/(reversal) on loans/investments
in joint ventures and associates - 1
---------------------------------------------------- ----- -------- --------
Net impairment loss/(reversal) on property,
plant and equipment, intangible assets and
investment property (5) 182
---------------------------------------------------- ----- -------- --------
Adjustment for non-cash element of pensions
charge 17 7 (395)
---------------------------------------------------- ----- -------- --------
Additional contribution into pension schemes 17 (248) (223)
---------------------------------------------------- ----- -------- --------
Share-based payments 15 283
---------------------------------------------------- ----- -------- --------
Tesco Bank fair value movements included
in operating profit 98 72
---------------------------------------------------- ----- -------- --------
Retail (increase)/decrease in inventories 124 251
---------------------------------------------------- ----- -------- --------
Retail (increase)/decrease in development
stock 16 99
---------------------------------------------------- ----- -------- --------
Retail (increase)/decrease in trade and
other receivables (74) 20
---------------------------------------------------- ----- -------- --------
Retail increase/(decrease) in trade and
other payables 510 260
---------------------------------------------------- ----- -------- --------
Retail increase/(decrease) in provisions 11 (280)
---------------------------------------------------- ----- -------- --------
Tesco Bank (increase)/decrease in loans
and advances to customers (1,529) (868)
---------------------------------------------------- ----- -------- --------
Tesco Bank (increase)/decrease in trade
and other receivables (24) (78)
---------------------------------------------------- ----- -------- --------
Tesco Bank increase/(decrease) in customer
and bank deposits, trade and other payables 1,474 463
---------------------------------------------------- ----- -------- --------
Tesco Bank increase/(decrease) in provisions 25 (35)
---------------------------------------------------- ----- -------- --------
(Increase)/decrease in working capital 533 (168)
---------------------------------------------------- ----- -------- --------
Cash generated from/(used in) operations 2,558 2,434
---------------------------------------------------- ----- -------- --------
Interest received/(paid) (522) (426)
---------------------------------------------------- ----- -------- --------
Corporation tax received/(paid) (47) 118
---------------------------------------------------- ----- -------- --------
Net cash generated from/(used in) operating
activities 1,989 2,126
---------------------------------------------------- ----- -------- --------
The notes on pages 20 to 51 form part of this condensed consolidated financial information.
52 weeks 52weeks
2017 2016
Notes GBPm GBPm
----------------------------------------------- ----- -------- -------
Net cash generated from/(used in) operating
activities 1,989 2,126
----------------------------------------------- ----- -------- -------
Cash flows generated from/(used in) investing
activities
----------------------------------------------- ----- -------- -------
Purchase of property, plant and equipment,
investment property and non-current assets
classified as held for sale (1,205) (871)
----------------------------------------------- ----- -------- -------
Purchase of intangible assets (169) (167)
----------------------------------------------- ----- -------- -------
Disposal of subsidiaries, net of cash disposed 19 205 3,237
----------------------------------------------- ----- -------- -------
Acquisition of subsidiaries, net of cash
acquired 19 (25) (325)
----------------------------------------------- ----- -------- -------
Proceeds from sale of joint ventures and
associates - 192
----------------------------------------------- ----- -------- -------
Proceeds from sale of property, plant and
equipment, investment property, intangible
assets and non-current assets classified
as held for sale 512 350
----------------------------------------------- ----- -------- -------
Net (increase)/decrease in loans to joint
ventures and associates 15 (1)
----------------------------------------------- ----- -------- -------
Investments in joint ventures and associates - (77)
----------------------------------------------- ----- -------- -------
Net (investments in)/proceeds from sale of
short-term investments 736 (2,894)
----------------------------------------------- ----- -------- -------
Net (investments in)/proceeds from sale of
other investments 141 (103)
----------------------------------------------- ----- -------- -------
Dividends received from joint ventures and
associates 28 41
----------------------------------------------- ----- -------- -------
Interest received/(paid) 41 3
----------------------------------------------- ----- -------- -------
Net cash generated from/(used in) investing
activities 279 (615)
----------------------------------------------- ----- -------- -------
Cash flows generated from/(used in) financing
activities
----------------------------------------------- ----- -------- -------
Proceeds from issue of ordinary share capital 1 1
----------------------------------------------- ----- -------- -------
Increase in borrowings 185 586
----------------------------------------------- ----- -------- -------
Repayment of borrowings (2,036) (1,328)
----------------------------------------------- ----- -------- -------
Net cash flows from derivative financial
instruments 475 154
----------------------------------------------- ----- -------- -------
Repayments of obligations under finance leases (12) (17)
----------------------------------------------- ----- -------- -------
Dividends paid to equity owners 8 - -
----------------------------------------------- ----- -------- -------
Net cash generated from/(used in) financing
activities (1,387) (604)
----------------------------------------------- ----- -------- ------- Net increase/(decrease) in cash and cash equivalents 881 907 ----------------------------------------------- ----- -------- ------- Cash and cash equivalents at beginning of the year 3,082 2,174 ----------------------------------------------- ----- -------- ------- Effect of foreign exchange rate changes (131) 1 ----------------------------------------------- ----- -------- ------- Cash and cash equivalents including cash held in disposal group at the end of the year 3,832 3,082 ----------------------------------------------- ----- -------- ------- Cash held in disposal group 7 (11) - ----------------------------------------------- ----- -------- ------- Cash and cash equivalents at the end of the year 13 3,821 3,082 ----------------------------------------------- ----- -------- -------
The notes on pages 20 to 51 form part of this condensed consolidated financial information.
Note 1 Basis of preparation
This preliminary consolidated financial information has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Conduct Authority, and the principles of International Financial Reporting Standards (IFRS) as adopted by the European Union. The accounting policies applied are consistent with those described in the Annual Report and Group Financial Statements 2017. The preliminary consolidated financial information has been prepared on a going concern basis. This preliminary consolidated financial information does not constitute statutory consolidated financial statements for the 52 weeks ended 25 February 2017 as defined under section 434 of the Companies Act 2006.
The Annual Report and Group Financial Statements for the 52 weeks ended 25 February 2017 were approved by the Board of Directors on 11 April 2017. The report of the auditor on those Group Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. An abbreviated copy of the audit report can be found on page 56. The Annual Report and Group Financial Statements for 2017 will be filed with the Registrar in due course.
The Annual Report and Group Financial Statements for the 52 weeks ended 27 February 2016 were approved by the Board of Directors on 12 April 2016 and have been filed with the Registrar of Companies. The report of the auditor on those Group Financial Statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.
The Directors consider that the Group has, at the time of approving the Group financial statements, adequate resources to continue in operational existence for the foreseeable future and have therefore continued to adopt the going concern basis in preparing the preliminary consolidated financial information.
Discontinued operations
In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the net results of discontinued operations are presented separately in the Group income statement (and the comparatives restated) and the assets and liabilities of these operations are presented separately in the Group balance sheet. Refer to Note 7 for further details.
Standards issued but not yet effective
As of the date of authorisation of these financial statements, the following standards were in issue but not yet effective. The Group has not applied these standards in the preparation of the financial statements, and has not adopted any new or amended standards early:
-- IFRS 9 'Financial instruments' replaces IAS 39 'Financial instruments: Recognition and Measurement' with the exception of macro hedge accounting. The standard is effective for accounting periods beginning on or after 1 January 2018. The standard covers three elements:
- Classification and measurement. Changes to a more principle based approach to classify financial assets as either held at amortised cost, fair value through other comprehensive income (FVOCI) or fair value through profit or loss, dependent on the business model and cash flow characteristics of the financial asset.
- Impairment. Moves to an impairment model based on expected credit losses based on a three stage approach.
- Hedge accounting. The IFRS 9 hedge accounting requirements are designed to allow hedge accounting to be more closely aligned with the Group's underlying risk management. A new IASB project is in progress to develop an approach to better reflect dynamic risk management in entities' financial statements.
The Group expects to continue applying the existing hedge accounting requirements of IAS 39 for its portfolio hedge accounting until this new approach is implemented.
The Group intends to quantify the potential impact of IFRS 9 once it is practicable to provide reliable estimates, which will be no later than in the Annual Report and Financial Statements for the year ended 24 February 2018. IFRS 9 is expected to result in a more significant impact for Tesco Bank than for the Retail business.
-- IFRS 15, 'Revenues from Contracts with Customers' is effective for periods beginning on or after 1 January 2018. IFRS 15 introduces a five-step approach to the timing of revenue recognition based on performance obligations in customer contracts.
The Group recognises revenue from the following principal activities:
- Retailing and associated activities; and - Retail banking and insurance services through Tesco Bank.
An assessment of the impact of IFRS 15 has been completed. Revenue recognition under IFRS 15 is expected to be consistent with current practice for the Group's revenue, with the exception of Clubcard loyalty points, certain telecommunication contracts and certain bespoke contracts fulfilled by dunnhumby, where the timing of revenue recognition will change. Had the principles of IFRS 15 been applied in the current reporting period, it would not have had a significant impact on the financial statements.
-- IFRS 16 'Leases' is effective for annual periods beginning on or after 1 January 2019 subject to EU endorsement. IFRS 16 provides a single lessee accounting model, requiring lessees to recognise right of use assets and lease liabilities for all applicable leases.
IFRS 16 is expected to have a significant impact on the amounts recognised in the Group's consolidated financial statements. On adoption of IFRS 16 the Group will recognise within the balance sheet a right of use asset and lease liability for all applicable leases. Within the income statement, rent expense will be replaced by depreciation and interest expense. This will result in a decrease in cost of sales and an increase in finance costs. The standard will also impact a number of statutory measures such as operating profit and cash generated from operations, and alternative performance measures used by the Group.
The full impact of IFRS 16 is currently under review, including understanding the practical application of the principles of the standard. It is therefore not practical to provide a reasonable estimate of the financial effect until this review is complete.
Alternative performance measures (APMs)
In the reporting of financial information, the Directors have adopted various APMs, previously termed 'Non-GAAP measures', of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).
These measures are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry.
APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.
Purpose
The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group.
APMs are also used to enhance the comparability of information between reporting periods and geographical units (such as like-for-like sales), by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding the Group's performance.
Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year.
The key APMs that the Group has focused on this year are as follows:
-- Group sales (previously termed Revenue exc. fuel): This is the headline measure of revenue for the Group. It excludes the impact of sales made at petrol filling stations due to the significant volatility of fuel prices. This volatility is outside the control of management and can mask underlying changes in performance.
-- Like-for-like sales: This is a widely used indicator of a retailer's current trading performance. It is a measure of growth in Group online sales and sales from stores that have been open for at least a year (but excludes prior year sales of stores closed during the year) at constant foreign exchange rates.
-- Operating profit before exceptional items: This is the headline measure of the Group's performance, and is based on operating profit before the impact of exceptional items. Exceptional items relate to certain costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.
-- Retail operating cash flow: This is the operating cash flow of continuing operations, excluding the effects of Tesco Bank's cash flows.
-- Net debt: This excludes the net debt of Tesco Bank but includes that of the discontinued operations to reflect the net debt obligations of the Retail business.
-- Diluted earnings per share from continuing operations before exceptional items and net pension finance costs: This relates to profit after tax before exceptional items from continuing operations, and net pension finance costs attributable to owners of the parent divided by the weighted average number of ordinary shares in issue during the financial period adjusted for the effects of potentially dilutive options.
Some of our IFRS measures are translated at constant exchange rates. Constant exchange rates are the average actual periodic exchange rates for the previous financial year and are used to eliminate the effects of exchange rate fluctuations in assessing performance. Actual exchange rates are the average actual periodic exchange rates for that financial year.
Refer to the Glossary (page 52) for a full list and comprehensive descriptions and purpose of the Group's APMs.
Note 2 Segmental reporting
The Group's operating segments are determined based on the Group's internal reporting to the Chief Operating Decision Maker (CODM). The CODM has been determined to be the Group Chief Executive, with support from the Executive Committee, as the function primarily responsible for the allocation of resources to segments and assessment of performance of the segments.
The principal activities of the Group are therefore presented in the following segments:
-- Retailing and associated activities (Retail) in: - UK & ROI - the United Kingdom and Republic of Ireland; and - International - Czech Republic, Hungary, Poland, Slovakia, Malaysia and Thailand; and -- Retail banking and insurance services through Tesco Bank in the UK (Tesco Bank).
This presentation reflects how the Group's operating performance is reviewed internally by management.
Excluded from the current year segmental information below are the retailing and associated activities of Turkey which have been classified as discontinued operations. Turkey's performance in the comparative year has been excluded from segmental information. Refer to Note 7 for further detail.
The CODM uses operating profit before exceptional items, as reviewed at monthly Executive Committee meetings, as the key measure of the segments' results as it reflects the segments' underlying performance for the financial period under evaluation. Operating profit before exceptional items is a consistent measure within the Group as defined within Note 1. Refer to Note 4 for exceptional items. Inter-segment revenue between the operating segments is not material.
Income statement
The segment results and the reconciliation of the segment measures to the respective statutory items included in the Group income statement are as follows:
52 weeks ended 25 February Total Total
2017 UK & Tesco at constant Foreign at actual
At constant exchange ROI International Bank exchange exchange exchange
rates GBPm GBPm GBPm GBPm GBPm GBPm
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Continuing operations
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Group sales 37,424 9,892 1,012 48,328 1,539 49,867
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Revenue 43,248 10,084 1,012 54,344 1,573 55,917
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Operating profit before
exceptional items(*) 793 280 157 1,230 50 1,280
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Exceptional items (291) 87 (80) (284) 21 (263)
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Operating profit/(loss) 502 367 77 946 71 1,017
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Operating margin 1.8% 2.8% 15.5% 2.3% - 2.3%
--------------------------- ------ ------------- ----- ------------ ---------- ----------
Total
Tesco at actual
52 weeks ended 25 February 2017 UK & ROI International Bank exchange
At actual exchange rates GBPm GBPm GBPm GBPm
--------------------------------------------- -------- ------------- ----- ----------
Continuing operations
--------------------------------------------- -------- ------------- ----- ----------
Group sales 37,692 11,163 1,012 49,867
--------------------------------------------- -------- ------------- ----- ----------
Revenue 43,524 11,381 1,012 55,917
--------------------------------------------- -------- ------------- ----- ----------
Operating profit before exceptional items(*) 803 320 157 1,280
--------------------------------------------- -------- ------------- ----- ----------
Exceptional items (284) 101 (80) (263)
--------------------------------------------- -------- ------------- ----- ----------
Operating profit/(loss) 519 421 77 1,017
--------------------------------------------- -------- ------------- ----- ----------
Operating margin 1.8% 2.8% 15.5% 2.3%
--------------------------------------------- -------- ------------- ----- ----------
Share of post-tax profits/(losses) of joint
ventures and associates (107)
--------------------------------------------- -------- ------------- ----- ----------
Finance income 109
--------------------------------------------- -------- ------------- ----- ----------
Finance costs (874)
--------------------------------------------- -------- ------------- ----- ----------
Profit/(loss) before tax 145
--------------------------------------------- -------- ------------- ----- ----------
(*) Intercompany recharges totalling GBP2m (2016: GBP2m) between continuing operations and the Turkey discontinued operations have been eliminated.
Total
52 weeks ended 27 February Tesco at actual
2016 UK & ROI International Bank exchange
At actual exchange rates GBPm GBPm GBPm GBPm
----------------------------------- -------- ------------- ----- ----------
Continuing operations
----------------------------------- -------- ------------- ----- ----------
Group sales 37,189 9,715 955 47,859
----------------------------------- -------- ------------- ----- ----------
Revenue 43,080 9,898 955 53,933
----------------------------------- -------- ------------- ----- ----------
Operating profit before
exceptional items(*) 503 320 162 985
----------------------------------- -------- ------------- ----- ----------
Exceptional items 94 (6) (1) 87
----------------------------------- -------- ------------- ----- ----------
Operating profit/(loss) 597 314 161 1,072
----------------------------------- -------- ------------- ----- ----------
Operating margin 1.2% 3.2% 17.0% 1.8%
----------------------------------- -------- ------------- ----- ----------
Share of post-tax profits/(losses)
of joint ventures and associates (21)
----------------------------------- -------- ------------- ----- ----------
Finance income 29
----------------------------------- -------- ------------- ----- ----------
Finance costs (878)
----------------------------------- -------- ------------- ----- ----------
Profit/(loss) before tax 202
----------------------------------- -------- ------------- ----- ----------
(*) Refer to previous table for footnote.
Balance sheet
The following tables showing segment assets and liabilities exclude those balances that make up net debt (cash and cash equivalents, short-term investments, joint venture loans and other receivables, bank and other borrowings, finance lease payables, derivative financial instruments and net debt of the disposal group). Net debt balances have been included within the unallocated segment to reflect how the Group manages these balances. Intercompany transactions have been eliminated other than intercompany transactions with Tesco Bank in net debt.
Tesco
UK & ROI International Bank Unallocated Total
At 25 February 2017 GBPm GBPm GBPm GBPm GBPm
-------------------------------- -------- ------------- ------- ----------- -------
Goodwill, software and
other intangible assets 1,293 322 1,102 - 2,717
--------------------------------- -------- ------------- ------- ----------- -------
Property, plant and equipment
and investment property 12,893 5,206 73 - 18,172
--------------------------------- -------- ------------- ------- ----------- -------
Investments in joint
ventures and associates 11 657 71 - 739
--------------------------------- -------- ------------- ------- ----------- -------
Non-current other investments - - 810 13 823
--------------------------------- -------- ------------- ------- ----------- -------
Non-current trade and
other receivables(a) 23 20 - - 43
--------------------------------- -------- ------------- ------- ----------- -------
Non-current loans and
advances to customers - - 5,795 - 5,795
--------------------------------- -------- ------------- ------- ----------- -------
Deferred tax asset 601 106 - - 707
--------------------------------- -------- ------------- ------- ----------- -------
Non-current assets(b) 14,821 6,311 7,851 13 28,996
--------------------------------- -------- ------------- ------- ----------- -------
Inventories and current
trade and other receivables(c) 2,389 1,048 338 - 3,775
--------------------------------- -------- ------------- ------- ----------- -------
Current loans and advances
to customers - - 4,166 - 4,166
--------------------------------- -------- ------------- ------- ----------- -------
Current other investments - - 156 128 284
--------------------------------- -------- ------------- ------- ----------- -------
Total trade and other
payables (7,006) (1,951) (242) - (9,199)
--------------------------------- -------- ------------- ------- ----------- -------
Total customer deposits
and deposits from banks - - (8,963) - (8,963)
--------------------------------- -------- ------------- ------- ----------- -------
Total provisions (914) (125) (84) - (1,123)
--------------------------------- -------- ------------- ------- ----------- -------
Deferred tax liability (7) (67) (14) - (88)
--------------------------------- -------- ------------- ------- ----------- -------
Net current tax (579) (13) (8) - (600)
--------------------------------- -------- ------------- ------- ----------- -------
Post-employment benefits (6,600) (21) - - (6,621)
--------------------------------- -------- ------------- ------- ----------- -------
Assets held for sale
and of the disposal group(d) 100 46 - 187 333
--------------------------------- -------- ------------- ------- ----------- -------
Liabilities of the disposal
group(d) - - - (95) (95)
--------------------------------- -------- ------------- ------- ----------- -------
Net debt (including Tesco
Bank)(e) - - (722) (3,729) (4,451)
--------------------------------- -------- ------------- ------- ----------- -------
Net assets 2,204 5,228 2,478 (3,496) 6,414
--------------------------------- -------- ------------- ------- ----------- -------
(a) Excludes loans to joint ventures of GBP137m (2016: GBP149m) which forms part of Net debt.
(b) Excludes derivative financial instrument non-current assets of GBP1,303m (2016: GBP1,532m).
(c) Excludes net interest and other receivables of GBP1m (2016: GBP1m) which forms part of Net debt.
(d) Excludes Net debt of the disposal group of GBP(65)m. Refer to Note 7.
(e) Refer to Note 18.
UK & Tesco
ROI International Bank Unallocated Total
At 27 February 2016 GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------- ------------- ------- ----------- -------
Goodwill, software and
other intangible assets 1,391 309 1,174 - 2,874
--------------------------------- ------- ------------- ------- ----------- -------
Property, plant and equipment
and investment property 12,815 5,085 78 - 17,978
--------------------------------- ------- ------------- ------- ----------- -------
Investments in joint
ventures and associates 5 704 76 - 785
--------------------------------- ------- ------------- ------- ----------- -------
Non-current other investments - - 927 151 1,078
--------------------------------- ------- ------------- ------- ----------- -------
Non-current trade and
other receivables(a) 31 21 - - 52
--------------------------------- ------- ------------- ------- ----------- -------
Non-current loans and
advances to customers - - 4,723 - 4,723
--------------------------------- ------- ------------- ------- ----------- -------
Deferred tax asset - 49 - - 49
--------------------------------- ------- ------------- ------- ----------- -------
Non-current assets(b) 14,242 6,168 6,978 151 27,539
--------------------------------- ------- ------------- ------- ----------- -------
Inventories and current
trade and other receivables(c) 2,526 995 314 - 3,835
--------------------------------- ------- ------------- ------- ----------- -------
Current loans and advances
to customers - - 3,819 - 3,819
--------------------------------- ------- ------------- ------- ----------- -------
Current other investments - - 57 - 57
--------------------------------- ------- ------------- ------- ----------- -------
Total trade and other
payables (6,580) (1,736) (252) - (8,568)
--------------------------------- ------- ------------- ------- ----------- -------
Total customer deposits
and deposits from banks - - (7,479) - (7,479)
--------------------------------- ------- ------------- ------- ----------- -------
Total provisions (837) (129) (58) - (1,024)
--------------------------------- ------- ------------- ------- ----------- -------
Deferred tax liability (64) (39) (32) - (135)
--------------------------------- ------- ------------- ------- ----------- -------
Net current tax (403) (3) 2 - (404)
--------------------------------- ------- ------------- ------- ----------- -------
Post-employment benefits (3,153) (22) - - (3,175)
--------------------------------- ------- ------------- ------- ----------- -------
Assets held for sale
and of the disposal group(d) 165 71 - - 236
--------------------------------- ------- ------------- ------- ----------- -------
Liabilities of the disposal - - - - -
group(d)
-------------------------------- ------- ------------- ------- ----------- -------
Net debt (including Tesco
Bank)(e) - - (975) (5,110) (6,085)
--------------------------------- ------- ------------- ------- ----------- -------
Net assets 5,896 5,305 2,374 (4,959) 8,616
--------------------------------- ------- ------------- ------- ----------- -------
(a)-(e) Refer to previous table for footnotes.
Other segment information
Total
UK & Tesco continuing Discontinued
52 weeks ended 25 February ROI International Bank operations operations(b) Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Capital expenditure (including
acquisitions through
business combinations):
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Property, plant and equipment
(a) 995 386 12 1,393 2 1,395
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Investment property - - - - - -
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Goodwill, software and
other intangible assets 111 16 34 161 - 161
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Depreciation and amortisation:
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Property, plant and equipment (687) (349) (17) (1,053) (5) (1,058)
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Investment property (1) - - (1) - (1)
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Software and other intangible
assets (117) (26) (101) (244) (1) (245)
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Impairment:
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Property, plant and equipment
loss (12) (155) - (167) (106) (273)
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Property, plant and equipment
reversal 118 161 - 279 - 279
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Investment property loss (2) (1) - (3) - (3)
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Investment property reversal 3 1 - 4 - 4
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Goodwill, software and
other intangible assets
loss (54) - - (54) - (54)
-------------------------------- ------- ------------- ------- ----------- -------------- -------
Goodwill, software and
other intangible assets
reversal - 1 - 1 - 1
-------------------------------- ------- ------------- ------- ----------- -------------- -------
(a) Includes GBPnil (2016: GBP1,742m) of property, plant and equipment acquired through business combinations.
(b) Discontinued operations in this table represents amounts up until the point a disposal group is classified as such. This comprises those of Turkey in the first four months of the year ended 25 February 2017 and the 12 months of the year ended 27 February 2016. In the year ended 27 February 2016, discontinued operations also comprises the results of Korea for the first six months of the year.
Total
UK & Tesco continuing Discontinued
52 weeks ended 27 February ROI International Bank operations operations(b) Total
2016 GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Capital expenditure (including
acquisitions through
business combinations):
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Property, plant and equipment(a) 2,300 231 8 2,539 60 2,599
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Investment property 5 - - 5 - 5
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Goodwill, software and
other intangible assets 188 17 32 237 4 241
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Depreciation and amortisation:
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Property, plant and equipment (688) (279) (16) (983) (94) (1,077)
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Investment property (2) - - (2) - (2)
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Software and other intangible
assets (145) (26) (75) (246) (9) (255)
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Impairment:
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Property, plant and equipment
loss (164) (98) - (262) (1) (263)
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Property, plant and equipment
reversal 126 105 - 231 14 245
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Investment property loss - (2) - (2) - (2)
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Investment property reversal 7 - - 7 - 7
----------------------------------- ----- ------------- ----- ----------- -------------- -------
Goodwill, software and
other intangible assets
loss (177) (10) - (187) - (187)
----------------------------------- ----- ------------- ----- ----------- -------------- -------
(a)-(b) Refer to previous table for footnotes.
Cash flow statement
The following tables provide further analysis of the Group cash flow statement, including a split of cash flows between Retail and Tesco Bank as well as an analysis of Retail continuing and discontinued operations.
Retail Tesco Bank Tesco Group
------------ ------------ -------------
2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------- ----- ----- ----- ----- ------ -----
Operating profit/(loss)
of continuing operations(*) 940 911 77 161 1,017 1,072
-------------------------------- ----- ----- ----- ----- ------ -----
Operating profit/(loss)
of discontinued operations (117) 102 - - (117) 102
-------------------------------- ----- ----- ----- ----- ------ -----
Depreciation and amortisation 1,186 1,243 118 91 1,304 1,334
-------------------------------- ----- ----- ----- ----- ------ -----
ATM net income (43) (38) 43 38 - -
-------------------------------- ----- ----- ----- ----- ------ -----
(Profit)/loss arising
on sale of property, plant
and equipment and intangible
assets (80) 165 2 (1) (78) 164
-------------------------------- ----- ----- ----- ----- ------ -----
(Profit)/loss arising
on sale of subsidiaries
and other investments 7 - (4) - 3 -
-------------------------------- ----- ----- ----- ----- ------ -----
(Profit)/loss arising
on sale of joint ventures
and associates (5) (1) - - (5) (1)
-------------------------------- ----- ----- ----- ----- ------ -----
Impairment loss on goodwill 46 18 - - 46 18
-------------------------------- ----- ----- ----- ----- ------ -----
Net impairment loss/(reversal)
on other investments (12) (7) - - (12) (7)
-------------------------------- ----- ----- ----- ----- ------ -----
Net impairment loss/(reversal)
on loans/investments in
joint ventures and associates - 1 - - - 1
-------------------------------- ----- ----- ----- ----- ------ ----- Net impairment loss/(reversal) on property, plant and equipment, intangible assets and investment property (5) 182 - - (5) 182 -------------------------------- ----- ----- ----- ----- ------ ----- Adjustment for non-cash element of pensions charge 7 (395) - - 7 (395) -------------------------------- ----- ----- ----- ----- ------ ----- Additional contribution into pension schemes (248) (223) - - (248) (223) -------------------------------- ----- ----- ----- ----- ------ ----- Share-based payments 14 273 1 10 15 283 -------------------------------- ----- ----- ----- ----- ------ ----- Tesco Bank fair value movements included in operating profit - - 98 72 98 72 -------------------------------- ----- ----- ----- ----- ------ ----- Cash flows generated from operations excluding working capital 1,690 2,231 335 371 2,025 2,602 -------------------------------- ----- ----- ----- ----- ------ ----- (Increase)/decrease in working capital 588 350 (55) (518) 533 (168) -------------------------------- ----- ----- ----- ----- ------ ----- Cash generated from/(used in) operations 2,278 2,581 280 (147) 2,558 2,434 -------------------------------- ----- ----- ----- ----- ------ ----- Interest received/(paid) (518) (422) (4) (4) (522) (426) -------------------------------- ----- ----- ----- ----- ------ ----- Corporation tax received/(paid) (64) 125 17 (7) (47) 118 -------------------------------- ----- ----- ----- ----- ------ ----- Net cash generated from/(used in) operating activities 1,696 2,284 293 (158) 1,989 2,126 -------------------------------- ----- ----- ----- ----- ------ -----
(*) Tesco Bank operating profit as per Bank income statement excluding ATM net income segmental adjustment.
Retail Tesco Bank Tesco Group
---------------- ------------ ----------------
2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------- ------- ----- ----- ------- -------
Net cash generated from/(used
in) operating activities 1,696 2,284 293 (158) 1,989 2,126
----------------------------------- ------- ------- ----- ----- ------- -------
Purchase of property, plant
and equipment, investment
property and non-current
assets classified as held
for sale (1,199) (858) (6) (13) (1,205) (871)
----------------------------------- ------- ------- ----- ----- ------- -------
Purchase of intangible assets (129) (146) (40) (21) (169) (167)
----------------------------------- ------- ------- ----- ----- ------- -------
Alternative performance
measure: Free cash flow 368 1,280 247 (192) 615 1,088
----------------------------------- ------- ------- ----- ----- ------- -------
Disposal of subsidiaries,
net of cash disposed 205 3,237 - - 205 3,237
----------------------------------- ------- ------- ----- ----- ------- -------
Acquisition of subsidiaries,
net of cash acquired (25) (325) - - (25) (325)
----------------------------------- ------- ------- ----- ----- ------- -------
Proceeds from sale of joint
ventures and associates - 192 - - - 192
----------------------------------- ------- ------- ----- ----- ------- -------
Proceeds from sale of property,
plant and equipment, investment
property, intangible assets
and non-current assets classified
as held for sale 509 350 3 - 512 350
----------------------------------- ------- ------- ----- ----- ------- -------
Net (increase)/decrease
in loans to joint ventures
and associates 15 (1) - - 15 (1)
----------------------------------- ------- ------- ----- ----- ------- -------
Investments in joint ventures
and associates - (77) - - - (77)
----------------------------------- ------- ------- ----- ----- ------- -------
Net (investments in)/proceeds
from sale of short-term
investments 736 (2,894) - - 736 (2,894)
----------------------------------- ------- ------- ----- ----- ------- -------
Net (investments in)/proceeds
from sale of other investments 111 17 30 (120) 141 (103)
----------------------------------- ------- ------- ----- ----- ------- -------
Dividends received from
joint ventures and associates 28 41 - - 28 41
----------------------------------- ------- ------- ----- ----- ------- -------
Interest received/(paid) 41 3 - - 41 3
----------------------------------- ------- ------- ----- ----- ------- -------
Net cash generated from/(used
in) investing activities 292 (461) (13) (154) 279 (615)
----------------------------------- ------- ------- ----- ----- ------- -------
Proceeds from issue of ordinary
share capital 1 1 - - 1 1
----------------------------------- ------- ------- ----- ----- ------- -------
Increase in borrowings 185 286 - 300 185 586
----------------------------------- ------- ------- ----- ----- ------- -------
Repayment of borrowings (2,036) (1,328) - - (2,036) (1,328)
----------------------------------- ------- ------- ----- ----- ------- -------
Net cash flows from derivative
financial instruments 475 154 - - 475 154
----------------------------------- ------- ------- ----- ----- ------- -------
Repayment of obligations
under finance leases (12) (17) - - (12) (17)
----------------------------------- ------- ------- ----- ----- ------- -------
Dividends paid to equity
owners - - - - - -
----------------------------------- ------- ------- ----- ----- ------- -------
Net cash generated from/(used
in) financing activities (1,387) (904) - 300 (1,387) (604)
----------------------------------- ------- ------- ----- ----- ------- -------
Intra-Group funding and
intercompany transactions 45 50 (45) (50) - -
----------------------------------- ------- ------- ----- ----- ------- -------
Net increase/(decrease)
in cash and cash equivalents 646 969 235 (62) 881 907
----------------------------------- ------- ------- ----- ----- ------- -------
Cash and cash equivalents
at the beginning of the
year 2,528 1,558 554 616 3,082 2,174
----------------------------------- ------- ------- ----- ----- ------- -------
Effect of foreign exchange
rate changes (131) 1 - - (131) 1
----------------------------------- ------- ------- ----- ----- ------- -------
Cash and cash equivalents
including cash held in disposal
group at the end of the
year 3,043 2,528 789 554 3,832 3,082
----------------------------------- ------- ------- ----- ----- ------- -------
Cash held in disposal group (11) - - - (11) -
----------------------------------- ------- ------- ----- ----- ------- -------
Cash and cash equivalents
at the end of the year 3,032 2,528 789 554 3,821 3,082
----------------------------------- ------- ------- ----- ----- ------- -------
Continuing Discontinued
operations operations Retail
-------------- -------------- --------------
2017 2016 2017 2016 2017 2016
GBPm GBPm GBPm GBPm GBPm GBPm
----------------------------------- ------- ----- ------ ------ ------- -----
Operating profit/(loss) 940 911 (117) 102 823 1,013
----------------------------------- ------- ----- ------ ------ ------- -----
Depreciation and amortisation 1,180 1,140 6 103 1,186 1,243
----------------------------------- ------- ----- ------ ------ ------- -----
ATM net income (43) (38) - - (43) (38)
----------------------------------- ------- ----- ------ ------ ------- -----
(Profit)/loss arising on
sale of property, plant
and equipment and intangible
assets (84) 167 4 (2) (80) 165
----------------------------------- ------- ----- ------ ------ ------- -----
(Profit)/loss arising on
sale of subsidiaries and
other investments 7 - - - 7 -
----------------------------------- ------- ----- ------ ------ ------- ----- (Profit)/loss arising on sale of joint ventures and associates (5) (1) - - (5) (1) ----------------------------------- ------- ----- ------ ------ ------- ----- Impairment loss on goodwill 46 18 - - 46 18 ----------------------------------- ------- ----- ------ ------ ------- ----- Net impairment loss/(reversal) on other investments (12) (7) - - (12) (7) ----------------------------------- ------- ----- ------ ------ ------- ----- Net impairment loss/(reversal) on loans/investments in joint ventures and associates - 1 - - - 1 ----------------------------------- ------- ----- ------ ------ ------- ----- Net impairment loss/(reversal) on property, plant and equipment, intangible assets and investment property (106) 195 101 (13) (5) 182 ----------------------------------- ------- ----- ------ ------ ------- ----- Adjustment for non-cash element of pensions charge 6 (401) 1 6 7 (395) ----------------------------------- ------- ----- ------ ------ ------- ----- Additional contribution into pension schemes (248) (223) - - (248) (223) ----------------------------------- ------- ----- ------ ------ ------- ----- Share-based payments 14 271 - 2 14 273 ----------------------------------- ------- ----- ------ ------ ------- ----- Cash flow generated from operations excluding working capital 1,695 2,033 (5) 198 1,690 2,231 ----------------------------------- ------- ----- ------ ------ ------- ----- (Increase)/decrease in working capital 584 55 4 295 588 350 ----------------------------------- ------- ----- ------ ------ ------- ----- Cash generated from/(used in) operations 2,279 2,088 (1) 493 2,278 2,581 ----------------------------------- ------- ----- ------ ------ ------- ----- Interest received/(paid) (499) (379) (19) (43) (518) (422) ----------------------------------- ------- ----- ------ ------ ------- ----- Corporation tax received/(paid) (64) 167 - (42) (64) 125 ----------------------------------- ------- ----- ------ ------ ------- ----- Net cash generated from/(used in) operating activities 1,716 1,876 (20) 408 1,696 2,284 ----------------------------------- ------- ----- ------ ------ ------- ----- Purchase of property, plant and equipment, investment property and non-current assets classified as held for sale (1,193) (770) (6) (88) (1,199) (858) ----------------------------------- ------- ----- ------ ------ ------- ----- Purchase of intangible assets (129) (145) - (1) (129) (146) ----------------------------------- ------- ----- ------ ------ ------- ----- Alternative performance measure: Free cash flow 394 961 (26) 319 368 1,280 ----------------------------------- ------- ----- ------ ------ ------- -----
Included within net impairment loss/(reversal) of property, plant and equipment and intangible assets for discontinued operations is GBP99m of impairment loss representing remeasurement to fair value less costs to sell of the Group's Turkish operations. Refer to Note 7.
Note 3 Income and expenses
2017 2016
Continuing operations GBPm GBPm
-------------------------------------------------------------- ------ ------
Profit/(loss) before tax is stated after charging/(crediting)
the following:
-------------------------------------------------------------- ------ ------
Property rental income, of which GBP38m (2016:
GBP39m) relates to investment properties (358) (316)
-------------------------------------------------------------- ------ ------
Other rental income (50) (53)
-------------------------------------------------------------- ------ ------
Direct operating expenses arising on rental
earning investment properties 20 20
-------------------------------------------------------------- ------ ------
Costs of inventories recognised as an expense 41,140 39,534
-------------------------------------------------------------- ------ ------
Inventory losses and provisions 1,337 1,252
-------------------------------------------------------------- ------ ------
Depreciation and amortisation 1,298 1,231
-------------------------------------------------------------- ------ ------
Operating lease expenses, of which GBP84m
(2016: GBP102m) relates to hire of plant and
machinery 1,043 1,142
-------------------------------------------------------------- ------ ------
Net impairment loss/(reversal) on property,
plant and equipment and investment property (113) 26
-------------------------------------------------------------- ------ ------
Net impairment loss/(reversal) of goodwill,
software and other intangible assets 53 187
-------------------------------------------------------------- ------ ------
Net impairment loss/(reversal) of investments
in and loans to joint ventures and associates - 1
-------------------------------------------------------------- ------ ------
Note 4 Exceptional items
Income statement
52 weeks ended 25 February 2017
Profit/(loss) for the period included the following exceptional items:
Share
of JV Exceptional
Total exceptional and items
Cost Property- items included associates within
Exceptional items of Administrative related within operating profits/ Finance discontinued
included sales expenses items profit (losses) costs Taxation operations
in: GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Net restructuring
and
redundancy
costs(a) (153) (26) (20) (199) - - 39 -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Net impairment
(loss)/reversal
of non-current
assets
and onerous
lease
provisions(b) 25 - (31) (6) (54) - 20 -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Provision for
customer
redress(c) (45) - - (45) - - - -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Interchange
settlement(d) 57 - - 57 - - (11) -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Amounts provided
in relation
to DPA and FCA
obligations(e) - (235) - (235) - - - -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Property
transactions(f) - - 165 165 - - 50 -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Insurance reserve
adjustment(g) - - - - (23) - - -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Foreign exchange
losses
on GBP short
term investments
held in overseas
entities
(h) - - - - - (244) - -
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Exceptional items
relating
to discontinued
operations(i) - - - - - - - (75)
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
Total (116) (261) 114 (263) (77) (244) 98 (75)
----------------- ------ -------------- --------- ----------------- ----------- ------- -------- -------------
(a) This includes GBP164m relating to ongoing UK & ROI changes to the Group's distribution network and to store colleague structures and working practices. It also includes GBP35m relating to Tesco Bank business simplification and head office relocation cost.
(b) Net impairment (loss)/reversal of non-current assets includes a reversal of GBP103m in property, plant and equipment and investment property, a net GBP(53)m loss in goodwill, software and other intangible assets and a net charge of GBP(56)m of onerous lease provisions. Refer to Notes 10, 11 and 16 for further details on impairment. The GBP(54)m loss relates to the Group's share of impairment in Gain Land Limited following a fair valuation exercise of its investment properties.
(c) Updated guidance from the Financial Conduct Authority (FCA) proposing an extension to the expected Payment Protection Insurance (PPI) settlement deadline, inclusion of items that had previously been out of scope for settlement and higher operational costs and claim rates than previously estimated, have resulted in a provision of GBP45m.
(d) This relates to settlement of a legal case in respect of interchange fees.
(e) The Group has taken a total exceptional charge of GBP235m in respect of the Deferred Prosecution Agreement (DPA) of GBP129m, the expected costs of the compensation scheme of GBP85m, and related costs. This has been recorded in the financial statements in the year to 25 February 2017 as an adjusting post balance sheet event. Refer to Notes 16 and 22 for further details.
(f) As part of the Group's strategy to maximise value from property, the Group generated a profit on disposal of surplus properties and development sites of GBP74m. In addition, two malls in Central Europe were disposed of, generating a profit of GBP91m. There is a tax credit of GBP50m primarily due to a lower book value than tax value of assets disposed. Refer to item (b) overleaf for cash proceeds.
(g) The Group's share of the results for the year of its joint venture, Tesco Underwriting, reflects an adjustment to insurance reserves following a revision to the Ogden tables, which are used to calculate future losses in personal injury and fatal accident claims.
(h) The Group received GBP2.5bn of proceeds from the sale of the Korean operations in GBP money market funds in an intermediate entity with a Euro functional currency. Over the year, this has generated a GBP244m loss which represents foreign exchange losses arising on the revaluation of these sterling-denominated funds into Euros. The loss does not represent an economic loss to the Group since there is an offset within other comprehensive income.
(i) On 10 June 2016, the Group announced the proposed sale of its Turkish operations. This charge includes: an impairment of GBP(99)m following a remeasurement of the assets and liabilities of the Turkish operations to fair value less costs to sell; GBP(3)m of costs to sell the Turkish operations and GBP27m of net adjustments on profits/(losses) of past disposals. Refer to Note 7 for further details.
52 weeks ended 27 February 2016
Profit/(loss) for the period included the following exceptional items:
Total exceptional
items included Exceptional
Cost Property- within items within
of Administrative related operating Finance discontinued
Exceptional items sales expenses items profit costs Taxation operations
included in: GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Net impairment (loss)/reversal
of non-current assets
and onerous lease
provisions (314) - (109) (423) - 73 15
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Net restructuring
and redundancy costs (75) (34) (17) (126) - 9 -
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Property transactions - - 156 156 - (20) -
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Past service credit
and other associated
costs 424 56 - 480 - (86) -
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Foreign exchange
losses on GBP balances
held in overseas
entities - - - - (220) - -
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Release of overprovision
of tax liabilities
in prior years - - - - - 86 -
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Loss on disposal
of Korean operations - - - - - - (168)
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Total 35 22 30 87 (220) 62 (153)
------------------------------ ------ -------------- --------- ----------------- ------- -------- -------------
Cash flow statement
The table below shows the impact of exceptional items on the Group cash flow statement:
Cash flows from Cash flows from
operating activities investing activities
----------------------- -----------------------
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
--------------------------------------------- ----------- ---------- ----------- ----------
Prior year restructuring costs and other
exceptional costs including trading store
redundancies(a) (54) (251) - -
--------------------------------------------- ----------- ---------- ----------- ----------
Current year restructuring costs and other
exceptional costs including trading store
redundancies(a) (78) (63) - -
--------------------------------------------- ----------- ---------- ----------- ----------
Utilisation of onerous lease provisions (113) (90) - -
--------------------------------------------- ----------- ---------- ----------- ----------
Property transactions(b) 36 218 490 -
--------------------------------------------- ----------- ---------- ----------- ----------
Provision for customer redress(c) (28) (34) - -
--------------------------------------------- ----------- ---------- ----------- ----------
Legal settlement 57 - - -
--------------------------------------------- ----------- ---------- ----------- ----------
Exceptional cash flows from discontinued
operations 2 - - -
--------------------------------------------- ----------- ---------- ----------- ----------
Defined benefit pension scheme closure cost - (58) - -
--------------------------------------------- ----------- ---------- ----------- ----------
Property transactions - buy-back of property
joint ventures, net of GBP15m cash acquired - - - (139)
--------------------------------------------- ----------- ---------- ----------- ----------
Total (178) (278) 490 (139)
--------------------------------------------- ----------- ---------- ----------- ----------
(a) Cash outflows on settlement of restructuring and redundancy costs.
(b) The proceeds from property transactions totalled GBP526m comprising GBP490m net proceeds from the sale of two malls in Central Europe and other properties in the UK & ROI, and GBP36m for development sites in UK & ROI. Refer to item (f) on the previous page.
(c) Settlement of claims for customer redress in Tesco Bank.
Note 5 Finance income and costs
2017 2016
Continuing operations GBPm GBPm
-------------------------------------------------- ----- -----
Finance income
-------------------------------------------------- ----- -----
Interest receivable and similar income 48 29
-------------------------------------------------- ----- -----
Financial instruments - fair value remeasurements 61 -
-------------------------------------------------- ----- -----
Total finance income 109 29
-------------------------------------------------- ----- -----
Finance costs
-------------------------------------------------- ----- -----
GBP MTNs and Loans (227) (176)
-------------------------------------------------- ----- -----
EUR MTNs (114) (122)
-------------------------------------------------- ----- -----
USD Bonds (93) (86)
-------------------------------------------------- ----- -----
Finance charges payable under finance leases
and hire purchase contracts (8) (9)
-------------------------------------------------- ----- -----
Other interest payable (81) (97)
-------------------------------------------------- ----- -----
Capitalised interest (Note 11)* 6 6
-------------------------------------------------- ----- -----
Financial instruments - fair value remeasurements - (19)
-------------------------------------------------- ----- -----
Total finance costs before exceptional items
and net pension finance costs (517) (503)
-------------------------------------------------- ----- -----
Net pension finance costs (Note 17) (113) (155)
-------------------------------------------------- ----- -----
Foreign exchange losses on GBP short-term
investments held in overseas entities (Note
4) (244) (220)
-------------------------------------------------- ----- -----
Total finance costs (874) (878)
-------------------------------------------------- ----- -----
Net finance cost (765) (849)
-------------------------------------------------- ----- -----
(*) A deferred tax liability is recognised in respect of capitalised interest at the applicable rate in the country in which the interest is capitalised.
Note 6 Taxation
Recognised in the Group income statement
2017 2016
Continuing operations GBPm GBPm
-------------------------------------------------- ----- -----
Current tax (credit)/charge
-------------------------------------------------- ----- -----
UK corporation tax 70 81
-------------------------------------------------- ----- -----
Release of UK provisions for uncertain tax
positions - exceptional credit - (86)
-------------------------------------------------- ----- -----
Foreign tax 111 73
-------------------------------------------------- ----- -----
Adjustments in respect of prior years 19 (191)
-------------------------------------------------- ----- -----
200 (123)
-------------------------------------------------- ----- -----
Deferred tax (credit)/charge
-------------------------------------------------- ----- -----
Origination and reversal of temporary differences (43) (69)
-------------------------------------------------- ----- -----
Adjustments in respect of prior years(*) (36) 169
-------------------------------------------------- ----- -----
Change in tax rate (34) (31)
-------------------------------------------------- ----- -----
(113) 69
-------------------------------------------------- ----- -----
Total income tax (credit)/charge 87 (54)
-------------------------------------------------- ----- -----
(*) Prior year adjustments include a tax credit of GBP24m in relation to an impairment reversal classified as exceptional.
The Finance Act 2016 included legislation to reduce the main rate of UK corporation tax from 20% to 19% from 1 April 2017 and to 17% from 1 April 2020. These rate reductions were substantively enacted by the balance sheet date and therefore included in these consolidated financial statements. Temporary differences have been remeasured using the enacted tax rates that are expected to apply when the liability is settled or the asset realised.
Reconciliation of effective tax charge
2017 2016
GBPm GBPm
---------------------------------------------------- ----- -------
Profit/(loss) before tax 145 202
---------------------------------------------------- ----- -------
Tax credit/(charge) at 20% (2016: 20.1%) (29) (41)
---------------------------------------------------- ----- -------
Effect of:
---------------------------------------------------- ----- -------
Non-qualifying depreciation (33) (49)
---------------------------------------------------- ----- -------
Other non-deductible items(a) (82) (4)
---------------------------------------------------- ----- -------
Unrecognised tax losses (48) (103)
---------------------------------------------------- ----- -------
Release of provisions for uncertain tax positions
- exceptional credit - 86
---------------------------------------------------- ----- -------
Property items taxed on a different basis
to accounting entries(b) 77 114
---------------------------------------------------- ----- -------
Banking surcharge tax (17) (3)
---------------------------------------------------- ----- -------
Differences in overseas taxation rates 15 5
---------------------------------------------------- ----- -------
Adjustments in respect of prior years 17 22
---------------------------------------------------- ----- -------
Share of losses of joint ventures and associates (21) (4)
---------------------------------------------------- ----- -------
Change in tax rate 34 31
---------------------------------------------------- ----- -------
Total income tax credit/(charge) for the year (87) 54
---------------------------------------------------- ----- -------
Effective tax rate 60.0% (26.6%)
---------------------------------------------------- ----- -------
(a) This includes expenses not qualifying for tax relief including DPA and FCA obligations provision, impairments and movements in uncertain tax positions partially offset by non-taxable income.
(b) This includes property items with differences in the book value and the valuation for tax purposes in addition to recognition of capital losses on property asset disposals.
Reconciliation of effective tax charge on alternative performance measures
2017 2016
GBPm GBPm
---------------------------------------------------- ----- -----
Profit/(loss) before tax before exceptional
items 729 335
---------------------------------------------------- ----- -----
Tax credit/(charge) at 20% (2016: 20.1%) (146) (67)
---------------------------------------------------- ----- -----
Effect of:
---------------------------------------------------- ----- -----
Non-qualifying depreciation (33) (30)
---------------------------------------------------- ----- -----
Other non-deductible items(a) (50) (4)
---------------------------------------------------- ----- -----
Unrecognised tax losses (14) (59)
---------------------------------------------------- ----- -----
Property items taxed on a different basis
to accounting entries(b) (1) 102
---------------------------------------------------- ----- -----
Banking surcharge tax (17) (3)
---------------------------------------------------- ----- -----
Differences in overseas taxation rates (7) 8
---------------------------------------------------- ----- -----
Adjustments in respect of prior years 39 22
---------------------------------------------------- ----- -----
Share of losses of joint ventures and associates (5) (4)
---------------------------------------------------- ----- -----
Change in tax rate 49 27
---------------------------------------------------- ----- -----
Total income tax credit/(charge) for the year (185) (8)
---------------------------------------------------- ----- -----
Effective tax rate before exceptional items 25.4% 2.4%
---------------------------------------------------- ----- -----
Net pension finance costs 113 155
---------------------------------------------------- ----- ----- Tax charge at 20% (2016: 20.1%) (23) (31) ---------------------------------------------------- ----- ----- Change in tax rate 4 3 ---------------------------------------------------- ----- ----- Total income tax credit/(charge) before exceptional items and net pension finance cost for the year (204) (36) ---------------------------------------------------- ----- ----- Effective tax rate before exceptional items and net pension finance costs 24.2% 7.3% ---------------------------------------------------- ----- -----
(a) This includes expenses not qualifying for tax relief, impairments and movements in uncertain tax positions partially offset by non-taxable income.
(b) This includes property items with differences in the book value and the valuation for tax purposes in addition to recognition of capital losses on property asset disposals.
Note 7 Discontinued operations and non-current assets classified as held for sale
Assets and liabilities of the disposal group and non-current assets classified as held for sale
25 February 27 February
2017 2016
GBPm GBPm
--------------------------------------------------- ----------- -----------
Assets of the disposal group 198 -
--------------------------------------------------- ----------- -----------
Non-current assets classified as held for
sale 146 236
--------------------------------------------------- ----------- -----------
Total assets of the disposal group and non-current
assets classified as held for sale 344 236
--------------------------------------------------- ----------- -----------
Total liabilities of the disposal group (171) -
--------------------------------------------------- ----------- -----------
Total net assets of the disposal group and
non-current assets classified as held for
sale 173 236
--------------------------------------------------- ----------- -----------
The non-current assets classified as held for sale consist mainly of properties in the UK and Central Europe due to be sold within one year.
Discontinued operations
On 10 June 2016, the Group announced the proposed sale of its 95.5% controlling interest in Tesco Kipa Kitle Pazarlama Ticaret Lojistik ve Gıda Sanayi A. . (referred to as Turkish operations or Turkey) to Migros Ticaret A. (Migros). In accordance with IFRS 5 'Non-current Assets Held for Sale and Discontinued Operations', the assets and liabilities related to the Turkish operations have been classified as a disposal group held for sale within the period. Local regulatory approval was granted on 9 February 2017 and the sale completed on 1 March 2017.
At year end, an impairment charge of GBP99m has been recognised in property, plant and equipment primarily based on the latest completion statement as at 1 March 2017 reflecting fair value less costs to sell. This impairment has been included as an exceptional item within discontinued operations. The gain/(loss) on disposal at completion will also reflect the impact of recycling of Turkey's currency translation reserve; at the year end the recycling would have increased the loss on sale by GBP119m. The equivalent amount for the recycling of the currency translation reserve at the date of disposal will be recorded as a non-cash loss within discontinued operations in the year ending 24 February 2018.
The tables on the next page show the results of the discontinued operations which are included in the Group income statement, Group balance sheet and Group cash flow statement respectively. The comparative includes the Korean operations, which were sold on 22 October 2015 and disclosed as discontinued in the 2016 Annual Report.
Income statement 2017 2016
-------- ------------------------
Total(a) Turkey Korea Total
GBPm GBPm GBPm GBPm
------------------------------------------- -------- ------ ------- -------
Revenue 543 500 3,526 4,026
------------------------------------------- -------- ------ ------- -------
Expenses(b) (580) (555) (3,404) (3,959)
------------------------------------------- -------- ------ ------- -------
Profit/(loss) before tax before
exceptional items (37) (55) 122 67
------------------------------------------- -------- ------ ------- -------
Taxation - - (41) (41)
------------------------------------------- -------- ------ ------- -------
Profit/(loss) after tax before exceptional
items (37) (55) 81 26
------------------------------------------- -------- ------ ------- -------
Net impairment (loss)/reversal of
non-current assets and onerous lease
provisions (99) 15 - 15
------------------------------------------- -------- ------ ------- -------
Costs to sell and other provisions
- Turkey (3) - - -
------------------------------------------- -------- ------ ------- -------
Loss after tax on disposal of Korean
operations - - (168) (168)
------------------------------------------- -------- ------ ------- -------
Net adjustments to profit/(loss)
of past disposals 27 - - -
------------------------------------------- -------- ------ ------- -------
Total profit/(loss) after tax of
discontinued operations(c) (112) (40) (87) (127)
------------------------------------------- -------- ------ ------- -------
(a) These figures represent the income statement of Turkey for the current year and the net adjustments to profit/(loss) of past disposals of GBP27m.
(b) Intercompany recharges totalling GBP2m (2016: GBP2m) between continuing operations and the Turkey discontinued operation have been eliminated and intercompany recharges and intercompany loan interest totalling GBP48m between continuing operations and the Korea discontinued operation have been eliminated in 2016. These eliminations impact the performance of continuing and discontinued operations, reducing the profit/(loss) before tax of continuing operations by GBP2m (2016: GBP50m), whilst increasing the profit/(loss) before tax of Turkey and Korea discontinued operations by the same respective amounts.
(c) Total profit/(loss) after tax of discontinued operations includes a loss of GBP6m attributable to non-controlling interests (2016: loss of GBP2m).
Loss per share impact from discontinued 2017 2016
operations Pence/share Pence/share
---------------------------------------- ------------ ------------
Basic (1.30) (1.54)
---------------------------------------- ------------ ------------
Diluted (1.30) (1.53)
---------------------------------------- ------------ ------------
Balance sheet Turkey
2017
GBPm
---------------------------------------- ------
Assets of the disposal group
---------------------------------------- ------
Goodwill and other intangible assets 9
---------------------------------------- ------
Property, plant and equipment 121
---------------------------------------- ------
Inventories 43
---------------------------------------- ------
Trade and other receivables 14
---------------------------------------- ------
Cash and cash equivalents 11
---------------------------------------- ------
Total assets of the disposal group 198
---------------------------------------- ------
Trade and other payables (88)
---------------------------------------- ------
Borrowings (76)
---------------------------------------- ------
Other liabilities (7)
---------------------------------------- ------
Total liabilities of the disposal group (171)
---------------------------------------- ------
Total net assets of the disposal group 27
---------------------------------------- ------
Cash flow statement
Korea
and
Turkey Turkey
2017 2016
GBPm GBPm
-------------------------------------------------- ------ -------
Net cash flows from operating activities (20) 408
-------------------------------------------------- ------ -------
Net cash flows from investing activities 13 (20)
-------------------------------------------------- ------ -------
Net cash flows from financing activities 21 8
-------------------------------------------------- ------ -------
Net cash flows from discontinued operations 14 396
-------------------------------------------------- ------ -------
Intra-Group funding and intercompany transactions (2) (108)
-------------------------------------------------- ------ -------
Net cash flows from discontinued operations,
net of intercompany 12 288
-------------------------------------------------- ------ -------
Net cash flows from disposal of subsidiary - (366)
-------------------------------------------------- ------ -------
Net cash flows from discontinued operations,
net of intercompany and disposal of subsidiary 12 (78)
-------------------------------------------------- ------ -------
Note 8 Dividends
No dividend has been paid or is proposed in respect of the financial year ended 25 February 2017 (2016: GBPnil).
Note 9 Earnings/(losses) per share and diluted earnings/(losses) per share
Basic earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year.
Diluted earnings/(losses) per share amounts are calculated by dividing the profit/(loss) attributable to owners of the parent by the weighted average number of ordinary shares in issue during the financial year adjusted for the effects of potentially dilutive options. The dilutive effect is calculated on the full exercise of all potentially dilutive ordinary share options granted by the Group, including performance-based options which the Group considers to have been earned.
For the 52 weeks ended 25 February 2017 there were 20 million (2016: 26 million) potentially dilutive share options. As the Group has recognised a profit for the period from its continuing operations, dilutive effects have been considered in calculating diluted earnings per share.
2017 2016
---------------------------- ----------------------------
Potentially Potentially
dilutive dilutive
share share
Basic options Diluted Basic options Diluted
--------------------------- ------ ----------- ------- ------ ----------- -------
Profit/(loss) (GBPm)
--------------------------- ------ ----------- ------- ------ ----------- -------
Continuing operations(a) 66 - 66 263 - 263
--------------------------- ------ ----------- ------- ------ ----------- -------
Discontinued operations(b) (106) - (106) (125) - (125)
--------------------------- ------ ----------- ------- ------ ----------- -------
Total (40) - (40) 138 - 138
--------------------------- ------ ----------- ------- ------ ----------- -------
Weighted average number
of shares (millions) 8,148 20 8,168 8,126 26 8,152
--------------------------- ------ ----------- ------- ------ ----------- -------
Earnings/(losses)
per share (pence)
--------------------------- ------ ----------- ------- ------ ----------- -------
Continuing operations 0.81 - 0.81 3.24 (0.02) 3.22
--------------------------- ------ ----------- ------- ------ ----------- -------
Discontinued operations (1.30) - (1.30) (1.54) 0.01 (1.53)
--------------------------- ------ ----------- ------- ------ ----------- -------
Total (0.49) - (0.49) 1.70 (0.01) 1.69
--------------------------- ------ ----------- ------- ------ ----------- -------
(a) Excludes losses from non-controlling interest of GBP8m (2016: GBP7m).
(b) Excludes losses from non-controlling interests of GBP6m (2016: GBP2m).
Alternative performance measure: Earnings/(losses) per share and diluted earnings/(losses) per share from continuing operations before exceptional items
2017 2016
------ ----------- ------- ----- ----------- -------
Potentially Potentially
dilutive dilutive
share share
Basic options Diluted Basic options Diluted
--------------------------- ------ ----------- ------- ----- ----------- -------
Profit/(loss) (GBPm)
--------------------------- ------ ----------- ------- ----- ----------- -------
Continuing operations(a) 551 - 551 330 - 330
--------------------------- ------ ----------- ------- ----- ----------- -------
Discontinued operations(b) (36) - (36) 29 - 29
--------------------------- ------ ----------- ------- ----- ----------- -------
Total 515 - 515 359 - 359
--------------------------- ------ ----------- ------- ----- ----------- -------
Weighted average number
of shares (millions) 8,148 20 8,168 8,126 26 8,152
--------------------------- ------ ----------- ------- ----- ----------- -------
Earnings/(losses)
per share (pence)
--------------------------- ------ ----------- ------- ----- ----------- -------
Continuing operations 6.76 (0.01) 6.75 4.06 (0.01) 4.05
--------------------------- ------ ----------- ------- ----- ----------- -------
Discontinued operations (0.44) - (0.44) 0.36 (0.01) 0.35
--------------------------- ------ ----------- ------- ----- ----------- -------
Total 6.32 (0.01) 6.31 4.42 (0.02) 4.40
--------------------------- ------ ----------- ------- ----- ----------- -------
(a) Excludes losses from non-controlling interest of GBP7m (2016: GBP3m).
(b) Excludes losses from non-controlling interests of GBP1m (2016: GBP3m).
Alternative performance measure: Diluted earnings/(losses) per share from continuing operations before exceptional items and net pension finance costs
2017 2016
----- -----
Profit before tax from continuing operations
before exceptional items (GBPm) 729 335
-------------------------------------------------- ----- -----
Add: Net pension finance costs (GBPm) 113 155
-------------------------------------------------- ----- -----
Profit before tax from continuing operations
before exceptional items and net pension finance
costs (GBPm) 842 490
-------------------------------------------------- ----- -----
Profit before tax from continuing operations
before exceptional items and net pension finance
costs attributable to the owners of the parent
(GBPm) 845 494
-------------------------------------------------- ----- -----
Taxation on profit from continuing operations
before exceptional items and net pension finance
costs attributable to the owners of the parent
(GBPm) (200) (37)
-------------------------------------------------- ----- -----
Profit after tax from continuing operations
before exceptional items and net pension finance
costs attributable to the owners of the parent
(GBPm) 645 457
-------------------------------------------------- ----- -----
Diluted weighted average number of shares
(millions) 8,168 8,152
-------------------------------------------------- ----- -----
Diluted earnings per share from continuing
operations before exceptional items and net
pension finance costs (pence) 7.90 5.61
-------------------------------------------------- ----- -----
Refer to page 52 for further detail on the Group's APMs.
Note 10 Goodwill, software and other intangible assets
Goodwill, software and other intangible assets of GBP2,717m (2016: GBP2,874m) comprise GBP1,792m goodwill (2016: GBP1,827m), GBP879m software (2016: GBP975m) and other intangible assets of GBP46m (2016: GBP72m).
Impairment of goodwill
The goodwill balances, discount rates and long-term growth rates for each group of cash-generating units are shown below:
Balances Pre-tax Post-tax Long- term
GBPm discount rates discount rates growth rates
------------ ----------------- ----------------- ---------------
2017 2016 2017 2016 2017 2016 2017 2016
----------- ----- ----- -------- ------- -------- ------- ------- ------
Tesco Bank 802 802 12.0% 11.0% 9.1% 8.2% 3.0% 4.0%
----------- ----- ----- -------- ------- -------- ------- ------- ------
UK(*) 735 796 9.3% 9.1% 7.5% 7.2% 2.0% 2.0%
----------- ----- ----- -------- ------- -------- ------- ------- ------
Thailand 181 159 10.0% 10.1% 8.0% 8.1% 2.7% 2.6%
----------- ----- ----- -------- ------- -------- ------- ------- ------
Malaysia 74 70 12.4% 12.3% 9.4% 9.4% 2.3% 2.1%
----------- ----- ----- -------- ------- -------- ------- ------- ------
1,792 1,827
----------- ----- ----- -------- ------- -------- ------- ------- ------
(*) Included in the UK prior year balance is GBP29m previously disclosed as Other.
Goodwill arising on business combinations is not amortised but is reviewed for impairment on an annual basis, or more frequently if there are indications that goodwill may be impaired. Goodwill acquired in a business combination is allocated to groups of cash-generating units according to the level at which management monitor that goodwill.
Impairment reviews were performed by comparing the carrying value of goodwill with the recoverable amount of the cash-generating units to which goodwill has been allocated. Recoverable amounts for cash-generating units are the higher of fair value less costs of disposal, and value in use. The key estimates for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins.
Management estimates discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. The pre-tax discount rates used to calculate value in use are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each cash-generating unit.
Cash flow projections are based on the Group's three year internal forecasts, the results of which are reviewed by the Board. Estimates of selling prices and direct costs are based on past experience and expectations of future changes in the market. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term average growth rates as shown above. These long-term growth rates for the Retail business are based on inflation forecasts by recognised bodies. The long-term growth rate for Tesco Bank is based on inflation and GDP growth forecasts by recognised bodies.
Goodwill related to the Sociomantic acquisition of GBP46m, within the UK balance, was fully impaired in the year due to lower forecast cash flows for the business. This charge has been classified as an exceptional item within 'Net impairment of non-current assets and onerous lease provisions' within cost of sales.
The Group has carried out a sensitivity analysis on the impairment tests of each group of cash-generating units to which goodwill has been allocated. A reasonably possible increase in the discount rate or reduction in the long-term growth rate by one percentage point, would not indicate impairment in any group of cash-generating units apart from Malaysia where an increase in the discount rate by one percentage point would reduce the recoverable value by GBP90m to its carrying value of GBP74m.
Impairment of software and other intangible assets
A net impairment loss of GBP7m has been recognised against software and other intangible assets as part of the impairment review discussed in Note 11. This loss has been classified as an exceptional item within 'Net impairment of non-current assets and onerous lease provisions' within cost of sales. Of the prior year impairment loss of GBP169m, a loss of GBP154m was recognised principally as a result of an evaluation of the cash-generating unit for technology relating to online general merchandising as the Group moved towards a single online platform for customers.
Note 11 Property, plant and equipment
Land
and
buildings Other(a) Total
GBPm GBPm GBPm
---------- -------- -------
Cost
------------------------------------------- ---------- -------- -------
At 27 February 2016 22,557 10,468 33,025
------------------------------------------- ---------- -------- -------
Foreign currency translation 727 327 1,054
------------------------------------------- ---------- -------- -------
Additions(b) 816 579 1,395
------------------------------------------- ---------- -------- -------
Reclassification (103) 58 (45)
------------------------------------------- ---------- -------- -------
Classified as held for sale (316) (6) (322)
------------------------------------------- ---------- -------- -------
Disposals (674) (594) (1,268)
------------------------------------------- ---------- -------- -------
Transfer to disposal group classified
as held for sale (317) (151) (468)
------------------------------------------- ---------- -------- -------
At 25 February 2017 22,690 10,681 33,371
------------------------------------------- ---------- -------- -------
Accumulated depreciation and impairment
losses
------------------------------------------- ---------- -------- -------
At 27 February 2016 7,198 7,927 15,125
------------------------------------------- ---------- -------- -------
Foreign currency translation 258 239 497
------------------------------------------- ---------- -------- -------
Charge for the year 419 639 1,058
------------------------------------------- ---------- -------- -------
Impairment losses 246 27 273
------------------------------------------- ---------- -------- -------
Reversal of impairment losses (246) (33) (279)
------------------------------------------- ---------- -------- -------
Reclassification (58) 11 (47)
------------------------------------------- ---------- -------- -------
Classified as held for sale (137) (1) (138)
------------------------------------------- ---------- -------- -------
Disposals (353) (539) (892)
------------------------------------------- ---------- -------- -------
Transfer to disposal group classified
as held for sale (232) (102) (334)
------------------------------------------- ---------- -------- -------
At 25 February 2017 7,095 8,168 15,263
------------------------------------------- ---------- -------- -------
Net carrying value
------------------------------------------- ---------- -------- -------
At 25 February 2017 15,595 2,513 18,108
------------------------------------------- ---------- -------- -------
At 27 February 2016 15,359 2,541 17,900
------------------------------------------- ---------- -------- -------
Construction in progress included above(c)
------------------------------------------- ---------- -------- -------
At 25 February 2017 57 66 123
------------------------------------------- ---------- -------- -------
At 27 February 2016 121 63 184
------------------------------------------- ---------- -------- -------
(a) Other assets consist of fixtures and fittings with a net carrying value of GBP2,023m (2016: GBP2,145m), office equipment with a net carrying value of GBP161m (2016: GBP144m) and motor vehicles with a net carrying value of GBP329m (2016: GBP252m).
(b) Includes GBP6m (2016: GBP7m) in respect of interest capitalised, principally relating to land and building assets. The capitalisation rate used to determine the amount of finance costs capitalised during the financial year was 4.9% (2016: 4.6%). Interest capitalised is deducted in determining taxable profit in the financial year in which it is incurred.
((c) Construction in progress does not include land.
Assets held under finance leases
Net carrying value includes assets held under finance leases, which are analysed below. These assets are pledged as security for the finance lease liabilities.
2017 2016
------------------- ------------------- -------------------
Land Land
and and
buildings Other buildings Other
GBPm GBPm GBPm GBPm
------------------- ---------- ------- ---------- -------
Net carrying value 66 27 55 21
------------------- ---------- ------- ---------- -------
Land and buildings
The net carrying value of land and buildings 2017 2016 comprises: GBPm GBPm --------------------------------------------- ------ ------ Freehold 13,175 13,005 --------------------------------------------- ------ ------ Long leasehold - 50 years or more 404 491 --------------------------------------------- ------ ------ Short leasehold - less than 50 years 2,016 1,863 --------------------------------------------- ------ ------ Net carrying value 15,595 15,359 --------------------------------------------- ------ ------
In the current year the Group reclassified property, plant and equipment with a net book value of GBPnil (2016: GBP8m) to development properties in inventories.
Land
and
buildings Other(a) Total
GBPm GBPm GBPm
---------------------------------------- ---------- -------- -------
Cost
---------------------------------------- ---------- -------- -------
At 28 February 2015 25,298 11,493 36,791
---------------------------------------- ---------- -------- -------
Foreign currency translation 76 34 110
---------------------------------------- ---------- -------- -------
Additions (b) 364 493 857
---------------------------------------- ---------- -------- -------
Acquired through business combinations 1,725 17 1,742
---------------------------------------- ---------- -------- -------
Reclassification (93) 2 (91)
---------------------------------------- ---------- -------- -------
Classified as held for sale (715) (23) (738)
---------------------------------------- ---------- -------- -------
Disposals (515) (346) (861)
---------------------------------------- ---------- -------- -------
Transfer to disposal group classified
as held for sale (3,583) (1,202) (4,785)
---------------------------------------- ---------- -------- -------
At 27 February 2016 22,557 10,468 33,025
---------------------------------------- ---------- -------- -------
Accumulated depreciation and impairment
losses
---------------------------------------- ---------- -------- -------
At 28 February 2015 8,021 8,330 16,351
---------------------------------------- ---------- -------- -------
Foreign currency translation 93 49 142
---------------------------------------- ---------- -------- -------
Charge for the year 318 759 1,077
---------------------------------------- ---------- -------- -------
Impairment losses 263 - 263
---------------------------------------- ---------- -------- -------
Reversal of impairment losses (220) (25) (245)
---------------------------------------- ---------- -------- -------
Reclassification (28) (77) (105)
---------------------------------------- ---------- -------- -------
Classified as held for sale (475) (20) (495)
---------------------------------------- ---------- -------- -------
Disposals (295) (281) (576)
---------------------------------------- ---------- -------- -------
Transfer to disposal group classified
as held for sale (479) (808) (1,287)
---------------------------------------- ---------- -------- -------
At 27 February 2016 7,198 7,927 15,125
---------------------------------------- ---------- -------- -------
(a)-(b) Refer to previous page for footnotes.
Commitments for capital expenditure contracted for, but not incurred, at 25 February 2017 were GBP115m (2016: GBP215m), principally relating to store development.
Impairment of property, plant and equipment
The Group has determined that for the purposes of impairment testing, each store is a cash-generating unit. Cash-generating units are tested for impairment if there are indicators of impairment at the balance sheet date. Recoverable amounts for cash-generating units are the higher of fair value less costs of disposal, and value in use.
The key estimates for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimates discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the risks specific to the cash-generating units. The discount rates are derived from the Group's post-tax weighted average cost of capital, as adjusted for the specific risks relating to each geographical region and predominately range from 9% to 13% (2016: 9% to 12%). On a post-tax basis, the discount rates predominately range from 7% to 10% (2016: 7% to 9%).
Cash flow projections are based on the Group's three year internal forecasts, the results of which are reviewed by the Board. Estimates of selling prices and direct costs are based on past experience and expectations of future changes in the market. The forecasts are extrapolated to five years based on management's expectations, and beyond five years based on estimated long-term average growth rates. These long-term growth rates are based on inflation forecasts by recognised bodies and range from 1% to 3% (2016: 2% to 6%).
Fair values are determined with regard to the market rent for the stores or for alternative uses with investment yields appropriate to reflect the physical characteristics of the property, location, infrastructure, redevelopment potential and other factors. In some cases, fair values include residual valuations where stores may be viable for redevelopment. The key inputs to the valuation are the potential market rents and yields, both of which are largely based on rentals and yields for similar properties in that location. Fair values for the Group's properties were determined with the assistance of independent, professional valuers where appropriate.
The net carrying value of GBP18,108m (2016: GBP17,900m) above comprises GBP13,338m (2016: GBP13,731m) of unimpaired assets and GBP4,770m (2016: GBP4,169m) of impaired assets. Of the impaired assets, GBP2,196m (2016: GBP1,805m) carrying value was supported by value in use and GBP2,574m (2016: GBP2,364m) was supported by fair value. Due to the individual nature of each property, these fair values are classified as Level 3 within the fair value hierarchy.
The total net impairment reversal of GBP6m includes an impairment loss of GBP106m relating to the Group's decision to sell its Turkish operations. This impairment has been classified as an exceptional item relating to discontinued operations; refer to Note 4 and Note 7 for further details.
The remaining net impairment reversal of GBP112m (GBP279m reversal offset by GBP167m losses) relating to continuing operations largely reflects normal fluctuations expected from store level performance within the continuing challenging economic environment. These losses and reversals have been largely presented net at a country level to reflect the underlying trends in the businesses. The impairment reversal of GBP279m (2016: GBP231m) relates to properties in the UK & ROI of GBP118m (2016: GBP126m) and International of GBP161m (2016: GBP105m), whilst the impairment losses of GBP167m (2016: GBP263m) relate to properties in the UK & ROI of GBP12m (2016: GBP164m) and International of GBP155m (2016: GBP99m).
Of the GBP112m net reversal relating to continuing operations, a GBP134m reversal within exceptional items related to trading stores has been classified as 'Net impairment of non-current assets and onerous lease provisions' included within cost of sales. In addition, a GBP30m charge within exceptional items related to construction in progress and closed stores has been classified as 'Net impairment of non-current assets and onerous lease provisions' included within profits/(losses) arising on property-related items. The remaining GBP8m reversal has not been included within exceptional items as it relates to the ongoing management of the property portfolio.
The prior period net impairment charge of GBP18m included a GBP14m reversal relating to the Turkish operations, which were classified as discontinued in the current financial year. Of the remaining GBP32m impairment charge related to continuing operations, an GBP80m release within exceptional items related to trading stores and online general merchandising hardware, which was classified as 'Net impairment of non-current assets and onerous lease provisions' included within cost of sales. In addition, a GBP90m charge within exceptional items related to construction in progress and closed stores was classified as 'Net impairment of non-current assets and onerous lease provisions' included within profits/(losses) arising on property-related items. An additional GBP34m charge within exceptional items relating to business rationalisation in the UK & ROI was classified as 'Net restructuring and redundancy costs' included within cost of sales. The remaining GBP12m reversal was not included within exceptional items.
The Group has carried out a sensitivity analysis on the impairment tests for its trading stores portfolio. A reasonably possible increase of one percentage point in the post-tax discount rates for each geographic region would increase impairment by GBP278m. A decrease by one percentage point would decrease impairment by GBP243m.
Note 12 Group entities
The Group consists of the ultimate parent company, Tesco PLC, and a number of subsidiaries, joint ventures and associates held directly or indirectly by Tesco PLC.
Subsidiaries
The accounting year ends of the subsidiaries consolidated in these financial statements are on or around 25 February 2017.
Interests in joint ventures and associates
Principal joint ventures and associates
The Group's principal joint ventures and associates are:
Share
of issued
share
capital,
loan
capital Principal
Nature Business and debt Country area of
of relationship activity secrurities of incorporation operation
--------------------- ----------------- ------------------- ------------- ------------------ -----------
Gain Land Limited Associate Retail 20% British People's
Virgin Republic
Islands of China
/ Hong
Kong
Included in 'UK
property joint
ventures'
BLT Properties Joint Property 50% England United
Limited(*) venture investment Kingdom
The Tesco Coral Joint Property 50% England United
Limited Partnership venture investment Kingdom
The Tesco Blue Joint Property 50% England United
Limited Partnership venture investment Kingdom
The Tesco Atrato Joint Property 50% England United
Limited Partnership venture investment Kingdom
The Tesco Passaic Joint Property 50% England United
Limited Partnership venture investment Kingdom
The Tesco Navona Joint Property 50% England United
Limited Partnership venture investment Kingdom
The Tesco Sarum Joint Property 50% England United
Limited Partnership venture investment Kingdom
The Tesco Dorney Joint Property 50% England United
Limited Partnership venture investment Kingdom
The Tesco Property Joint Property 50% Jersey United
(No. 2) Limited venture investment Kingdom
Partnership
Included in 'Other
joint ventures
and associates':
Tesco Mobile Limited Joint Telecommunications 50% England United
venture Kingdom
Tesco Underwriting Joint Financial 49.9% England United
Limited venture services Kingdom
Trent Hypermarket Joint Retail 50% India India
Limited venture
Tesco Lotus Retail Associate Property 25% Thailand Thailand
Growth Freehold investment
and Leasehold
Property Fund
--------------------- ----------------- ------------------- ------------- ------------------ -----------
(*) On 6 April 2017, the Group purchased the remaining 50% of equity interest in BLT Properties Limited. Refer to Note 22 for further details.
The accounting period end dates of the joint ventures and associates consolidated in these financial statements range from 31 December 2016 to 25 February 2017. The accounting period end dates for joint ventures differ from those of the Group for commercial reasons and depend upon the requirements of the joint venture partner as well as those of the Group. The accounting period end dates of the associates are different from those of the Group as they depend upon the requirements of the parent companies of those entities.
There are no significant restrictions on the ability of joint ventures and associates to transfer funds to the parent, other than those imposed by the Companies Act 2006, and for Tesco Underwriting Limited, regulatory capital requirements.
The UK property joint ventures involve the Group partnering with third parties in carrying out some property investments in order to enhance returns from property and access funding, whilst reducing risks associated with sole ownership. These property investments generally cover shopping centres and standalone stores. The Group enters into operating leases for some or all of the properties held in the joint ventures. These leases provide the Group with some rights over alterations and adjacent land developments. Some leases also provide the Group with options to purchase the other joint venturers' equity stakes at a future point in time. In some cases the Group has the ability to substitute properties in the joint ventures with alternative properties of similar value, subject to strict eligibility criteria. In other cases, the Group carries out property management activities for third party rentals of shopping centre units.
The property investment activities are carried out in separate entities, usually partnerships or limited liability companies. The Group has assessed its ability to direct the relevant activities of these entities and impact Group returns and concluded that the entities qualify as joint ventures since decisions regarding them require the unanimous consent of both equity holders. This assessment included not only rights within the joint venture agreements, but also any rights within other contractual arrangements between the Group and the entities.
The Group made a number of judgements in arriving at this determination, the key ones being:
-- since the provisions of the joint venture agreements require the relevant decisions impacting investor returns to be either unanimously agreed by both joint venturers at the same time, or in some cases to be agreed sequentially by each venturer at different stages, there is joint decision making within the joint venture;
-- since the Group's leases are priced at fair value, and any rights embedded in the leases are consistent with market practice, they do not provide the Group with additional control over the joint ventures or infer an obligation by the Group to fund the settlement of liabilities of the joint ventures;
-- any options to purchase the other joint venturers' equity stakes are priced at market value, and only exercisable at future dates, hence they do not provide control to the Group at the current time;
-- where the Group has a right to substitute properties in the joint ventures, the rights are strictly limited and are at fair value, hence do not provide control to the Group; and
-- where the Group carries out property management activities for third party rentals in shopping centres, these additional activities are controlled through joint venture agreements or lease agreements, and do not provide the Group with additional powers over the joint venture.
Summarised financial information for joint ventures and associates
The summarised financial information below reflects the amounts presented in the financial statements of the relevant joint ventures and associates, and not the Group's share of those amounts. These amounts have been adjusted to conform to the Group's accounting policies where required. The summarised financial information for UK property joint ventures has been aggregated in order to provide useful information to users without excessive detail since these entities have similar characteristics and risk profiles largely based on their nature of activities and geographic market.
UK property Gain Land
joint ventures Limited
----------------- --------------------
12 months 12 months
to Dec to Dec
2017 2016 2016 2015
GBPm GBPm GBPm GBPm
------------------------------------------ -------- ------- --------- ---------
Summarised balance sheet
------------------------------------------ -------- ------- --------- ---------
Non-current assets(a) 4,060 4,158 4,471 4,712
------------------------------------------ -------- ------- --------- ---------
Current assets (excluding cash and
cash equivalents) 99 58 2,261 2,047
------------------------------------------ -------- ------- --------- ---------
Cash and cash equivalents 48 38 631 581
------------------------------------------ -------- ------- --------- ---------
Current liabilities(b) (301) (327) (6,208) (5,550)
------------------------------------------ -------- ------- --------- ---------
Non-current liabilities(b) (4,831) (4,572) (169) (153)
------------------------------------------ -------- ------- --------- ---------
Net (liabilities)/assets (925) (645) 986 1,637
------------------------------------------ -------- ------- --------- ---------
Summarised income statement
------------------------------------------ -------- ------- --------- ---------
Revenue 292 296 9,081 8,408
------------------------------------------ -------- ------- --------- ---------
Profit/(loss) after tax - (36) (626) (341)
------------------------------------------ -------- ------- --------- ---------
Reconciliation to carrying amounts:
------------------------------------------ -------- ------- --------- ---------
Opening balance - 49 511 582
------------------------------------------ -------- ------- --------- ---------
Additions/(disposals) - (10) - -
------------------------------------------ -------- ------- --------- ---------
Foreign currency translation - - 47 (3)
------------------------------------------ -------- ------- --------- ---------
Share of profits/(losses)(c) 14 22 (125) (68)
------------------------------------------ -------- ------- --------- ---------
Dividends received from joint ventures
and associates (14) (29) - -
------------------------------------------ -------- ------- --------- ---------
Deferred profits offset against carrying
amounts(d) - (32) - -
------------------------------------------ -------- ------- --------- ---------
Closing balance - - 433 511
------------------------------------------ -------- ------- --------- ---------
Group's share in ownership 50% 50% 20% 20%
------------------------------------------ -------- ------- --------- ---------
Group's share of net assets/(liabilities) (463) (323) 197 327
------------------------------------------ -------- ------- --------- ---------
Goodwill - - 236 184
------------------------------------------ -------- ------- --------- ---------
Deferred property profits offset
against carrying amounts(d) (63) (64) - -
------------------------------------------ -------- ------- --------- ---------
Cumulative unrecognised losses(e) 175 143 - -
------------------------------------------ -------- ------- --------- ---------
Cumulative unrecognised hedge reserves(f) 351 244 - -
------------------------------------------ -------- ------- --------- ---------
Carrying amount - - 433 511
------------------------------------------ -------- ------- --------- ---------
(a) The non-current asset balances of UK property joint ventures are reflected at historic depreciated cost to conform to the Group's accounting policies. The aggregate fair values in the financial statements of the joint ventures are GBP5,242m (2016: GBP5,415m).
(b) The current and non-current liabilities of UK property joint ventures largely comprise loan balances of GBP4,121m (2016: GBP4,151m) and derivative swap balances of GBP703m (2016: GBP487m) entered into to hedge the cash flow variability exposures of the joint ventures. The 2016 derivative balance of GBP487m reflects a GBP159m reduction due to valuation adjustments for credit risk not included in the prior year.
(c) The profit for the year for UK property joint ventures related to GBP14m dividends received from joint ventures with GBPnil carrying amounts GBP21m of losses and GBP107m of decreases in the fair values of derivatives arising from these entities have been included in cumulative unrecognised losses and cumulative unrecognised hedge reserves respectively. The loss of GBP(125)m for Gain Land Limited includes an impairment loss of GBP(54)m treated as an exceptional item. Refer to Note 4.
(d) Deferred profits that arose from the transfer of properties into the UK property joint ventures have been offset against the carrying amounts of the related joint ventures. GBP1m relating to The Brookmaker Limited Partnership has been released during the year as a result of the disposal.
(e) Cumulative unrecognised losses of GBP3m were disposed of relating to The Brookmaker Limited Partnership.
(f) The 2016 cumulative unrecognised hedge reserves balances have been reduced by GBP79m to reflect valuation adjustments for credit risks.
At 25 February 2017, the Group has GBP103m (2016: GBP115m) loans to UK property joint ventures and GBPnil (2016: GBPnil) to Gain Land Limited.
Other joint ventures and associates
The Group also has interests in a number of other joint ventures and associates, excluding UK Property joint ventures and Gain Land Limited. These are not considered to be individually material to the Group.
Joint ventures Associates
---------------- ------------
2017 2016 2017 2016
GBPm GBPm GBPm GBPm
----------------------------------- ------- ------- ----- -----
Aggregate carrying amount of other
joint ventures and associates 245 219 61 55
----------------------------------- ------- ------- ----- -----
Group's share of profits/(losses)
for the year (7) 23 11 2
----------------------------------- ------- ------- ----- -----
Impairment
Management has performed impairment tests and sensitivity analysis on its investments in Gain Land Limited, Trent Hypermarket Limited and Tesco Underwriting Limited. The carrying values of Trent Hypermarket Limited of GBP112m (2016: GBP96m) and Tesco Underwriting Limited of GBP71m (2016: GBP76m) are included within 'Other joint ventures and associates' as discussed above.
The recoverable values of these investments were estimated taking into account forecast cash flows, equity valuations of comparable entities and/or recent transactions for comparable businesses. No impairment was recognised in the period for these investments. Sensitivity tests for reasonably possible increases in the discount rates of one percentage point would not indicate impairment in any of the investment.
Future changes in estimated cash flows, discount rates, competitive landscape, retail market conditions and other factors may result in impairment losses or reversals of impairment in future periods.
Note 13 Cash and cash equivalents and short-term investments
Cash and cash equivalents 2017 2016
GBPm GBPm
--------------------------- ----- -----
Cash at bank and in hand 3,498 2,334
--------------------------- ----- -----
Short-term deposits 323 748
--------------------------- ----- -----
3,821 3,082
--------------------------- ----- -----
Short-term investments 2017 2016
GBPm GBPm
------------------------ ----- -----
Money market funds 2,727 3,463
------------------------ ----- -----
Included in cash and cash equivalents is an amount of GBP777m that has been set aside for completion of the merger with Booker Group Plc. This cash is not available to the Group and must be held in ring-fenced accounts until released jointly by the Group and its advisors on satisfaction of the completion terms of the merger as set out in the offering circular dated 27 January 2017. Until that time, or if the merger is not completed, it remains an asset of the Group. At the balance sheet date it was invested with a single financial institution at a floating rate of interest. Interest accrues and is payable to the Group.
Note 14 Commercial income
Consistent with standard industry practice, the Group has agreements with suppliers whereby volume-related allowances, promotional and marketing allowances and various other fees and discounts are received in connection with the purchase of goods for resale from those suppliers. Most of the income received from suppliers relates to adjustments to a core cost price of a product, and as such is considered part of the purchase price for that product. Sometimes receipt of the income is conditional on the Group performing specified actions or satisfying certain performance conditions associated with the purchase of the product. These include achieving agreed purchases or sales volume targets and providing promotional or marketing materials and activities or promotional product positioning. Whilst there is no standard industry definition, these amounts receivable from suppliers in connection with the purchase of goods for resale are generally termed commercial income.
Commercial income is recognised when earned by the Group, which occurs when all obligations conditional for earning income have been discharged, and the income can be measured reliably based on the terms of the contract. The income is recognised as a credit within cost of sales. Where the income earned relates to inventories which are held by the Group at period ends, the income is included within the cost of those inventories, and recognised in cost of sales upon sale of those inventories.
Amounts due relating to commercial income are recognised within trade and other receivables, except in cases where the Group currently has a legally enforceable right of set-off and intends to offset amounts due from suppliers against amounts owed to those suppliers, in which case only the net amount receivable or payable is recognised. Accrued commercial income is recognised within accrued income when commercial income earned has not been invoiced at the balance sheet date.
Management consider the best indicator of the estimation undertaken is by reference to commercial income balances not settled at the balance sheet date and has therefore provided additional disclosures of commercial income amounts reflected in the balance sheet.
Below are the commercial income balances included within inventories and trade and other receivables, or netted against trade and other payables. Amounts received in advance of income being earned are included in accruals and deferred income.
2017 2016
GBPm GBPm
------------------------------ ------ ------
Current assets
------------------------------ ------ ------
Inventories (75) (75)
------------------------------ ------ ------
Trade and other receivables
------------------------------ ------ ------
Trade/other receivables 215 201
------------------------------ ------ ------
Accrued income 150 100
------------------------------ ------ ------
Current liabilities
------------------------------ ------ ------
Trade and other payables
------------------------------ ------ ------
Trade payables 213 305
------------------------------ ------ ------
Accruals and deferred income (22) (43)
------------------------------ ------ ------
The 27 February 2016 accruals and deferred income disclosure, previously disclosed in Note 13 of the 2015/16 Preliminary Results, included amounts that were unrelated to commercial income and has therefore been amended accordingly.
Note 15 Borrowings
2017 2016
Current Par value Maturity GBPm GBPm
---------------------------- --------- -------- ----- -----
Bank loans and overdrafts - - 912 845
---------------------------- --------- -------- ----- -----
Loans from joint ventures - - 6 6
---------------------------- --------- -------- ----- -----
4% RPI MTN GBP310m Sep 2016 - 316
---------------------------- --------- -------- ----- -----
5.875% MTN EUR1,039m Sep 2016 - 877
---------------------------- --------- -------- ----- -----
2.7% USD Bond $500m Jan 2017 - 361
---------------------------- --------- -------- ----- -----
5.4478% Term Loan GBP382m Jan 2017 - 396
---------------------------- --------- -------- ----- -----
LIBOR + 0.5% Term Loan GBP488m Oct 2017 484 -
---------------------------- --------- -------- ----- -----
1.250% MTN EUR500m Nov 2017 423 -
---------------------------- --------- -------- ----- -----
5.5% USD Bond $850m Nov 2017 709 -
---------------------------- --------- -------- ----- -----
5.5457% Secured Bond (a)(b) GBP366m Feb 2029 15 14
---------------------------- --------- -------- ----- -----
Finance leases - - 11 11
---------------------------- --------- -------- ----- -----
2,560 2,826
---------------------------- --------- -------- ----- -----
(a)-(b) Refer to the next page for footnotes.
Non-current
Par 2017 2016
value Maturity GBPm GBPm
---------------------------------- --------- -------- ----- ------
Oct
LIBOR +0.5% Term Loan GBP488m 2017 - 478
---------------------------------- --------- -------- ----- ------
Nov
1.250% MTN EUR500m 2017 - 394
---------------------------------- --------- -------- ----- ------
Nov
5.5% USD Bond $850m 2017 - 666
---------------------------------- --------- -------- ----- ------
Aug
5.2% Tesco Bank Retail Bond GBP125m 2018 129 132
---------------------------------- --------- -------- ----- ------
Nov
3.375% MTN EUR750m 2018 641 595
---------------------------------- --------- -------- ----- ------
May
LIBOR + 0.45% Tesco Bank Bond GBP150m 2019 150 150
---------------------------------- --------- -------- ----- ------
Jul
1.375% MTN EUR1,250m 2019 1,063 990
---------------------------------- --------- -------- ----- ------
Dec
5.5% MTN GBP350m 2019 353 353
---------------------------------- --------- -------- ----- ------
Dec
1% RPI Tesco Bank Retail Bond(c) GBP67m 2019 67 66
---------------------------------- --------- -------- ----- ------
Apr
LIBOR + 0.65% Tesco Bank Bond GBP300m 2020 299 299
--------------------------------- --------- -------- ----- ------
Nov
2.125% MTN EUR500m 2020 423 394
--------------------------------- --------- -------- ----- ------
Nov
5% Tesco Bank Retail Bond GBP200m 2020 210 211
--------------------------------- --------- -------- ----- ------
May
LIBOR + 0.65% Tesco Bank Bond GBP350m 2021 349 349
--------------------------------- --------- -------- ----- ------
Feb
6.125% MTN GBP900m 2022 896 896
--------------------------------- --------- -------- ----- ------
Mar
5% MTN GBP389m 2023 411 411
--------------------------------- --------- -------- ----- ------
Jul
2.5% MTN EUR750m 2024 640 595
--------------------------------- --------- -------- ----- ------
Nov
3.322% LPI MTN(d) GBP323m 2025 326 320
--------------------------------- --------- -------- ----- ------
Feb
5.5457% Secured Bond(a)(b) GBP366m 2029 339 353
--------------------------------- --------- -------- ----- ------
Feb
6.067% Secured Bond(a) GBP200m 2029 190 189
--------------------------------- --------- -------- ----- ------
Feb
LIBOR + 1.2% Secured Bond(a) GBP50m 2029 31 30
--------------------------------- --------- -------- ----- ------
Dec
6% MTN GBP200m 2029 253 257
--------------------------------- --------- -------- ----- ------
Jan
5.5% MTN GBP200m 2033 255 259
--------------------------------- --------- -------- ----- ------
Mar
1.982% RPI MTN(e) GBP268m 2036 270 265
--------------------------------- --------- -------- ----- ------
Nov
6.15% USD Bond $1,150m 2037 1,063 1,035
--------------------------------- --------- -------- ----- ------
Mar
4.875% MTN GBP173m 2042 175 175
--------------------------------- --------- -------- ----- ------
Apr
5.125% MTN EUR600m 2047 522 486
--------------------------------- --------- -------- ----- ------
Mar
5.2% MTN GBP279m 2057 275 275
--------------------------------- --------- -------- ----- ------
Finance leases - - 103 88
--------------------------------- --------- -------- ----- ------
9,433 10,711
--------------------------------- --------- -------- ----- ------
(a) The bonds are secured by a charge over the property, plant and equipment held within the Tesco Property Limited Partnership, a 100% owned subsidiary of Tesco PLC. The carrying amounts of assets pledged as security for secured bonds is GBP788m (2016: GBP838m).
(b) This is an amortising bond which matures in February 2029. GBP15m (2016: GBP14m) is the principal repayment due within the next 12 months. The remainder is payable in quarterly instalments until maturity in February 2029.
(c) The 1% RPI Tesco Bank Retail Bond is redeemable at par, indexed for increases in the RPI over the life of the bond.
(d) The 3.322% Limited Price Inflation (LPI) MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN. The maximum indexation of the principal in any one year is 5%, with a minimum of 0%.
(e) The 1.982% RPI MTN is redeemable at par, indexed for increases in the RPI over the life of the MTN.
Borrowing facilities
The Group has the following undrawn committed facilities available at 25 February 2017, in respect of which all conditions precedent had been met as at that date:
2017 2016
GBPm GBPm
----------------------------------- ----- -----
Expiring in less than one year - 100
----------------------------------- ----- -----
Expiring between one and two years - 2,200
----------------------------------- ----- -----
Expiring in more than two years 4,427 2,700
----------------------------------- ----- -----
4,427 5,000
----------------------------------- ----- -----
The current year undrawn committed facilities include GBP1.8bn (2016: GBP2.4bn) of bilateral facilities and a GBP2.6bn (2016: GBP2.6bn) syndicated revolving credit facility. During the year, GBP1.8bn equivalent of bilateral facilities were refinanced in a tenor of three years to a final maturity of August 2019.
All facilities incur commitment fees at market rates and would provide funding at floating rates.
Note 16 Provisions
Property Restructuring Other
provisions provisions provisions Total
GBPm GBPm GBPm GBPm
----------------------------- ----------- ------------- ----------- -----
At 28 February 2015 941 325 100 1,366
----------------------------- ----------- ------------- ----------- -----
Foreign currency translation (1) 4 - 3
----------------------------- ----------- ------------- ----------- -----
Amount released in the year (4) (77) - (81)
----------------------------- ----------- ------------- ----------- -----
Amount provided in the year 154 166 - 320
----------------------------- ----------- ------------- ----------- -----
Amount utilised in the year (188) (335) (34) (557)
----------------------------- ----------- ------------- ----------- -----
Transfer to disposal group
classified as held for sale (74) - - (74)
----------------------------- ----------- ------------- ----------- -----
Unwinding of discount 47 - - 47
----------------------------- ----------- ------------- ----------- -----
At 27 February 2016 875 83 66 1,024
----------------------------- ----------- ------------- ----------- -----
Foreign currency translation 12 4 - 16
----------------------------- ----------- ------------- ----------- -----
Amount released in the year (38) (18) - (56)
----------------------------- ----------- ------------- ----------- -----
Amount provided in the year 99 196 136 431
----------------------------- ----------- ------------- ----------- -----
Amount utilised in the year (141) (162) (28) (331)
----------------------------- ----------- ------------- ----------- -----
Transfer to disposal group
classified as held for sale - (5) - (5)
----------------------------- ----------- ------------- ----------- -----
Unwinding of discount 44 - - 44
----------------------------- ----------- ------------- ----------- -----
At 25 February 2017 851 98 174 1,123
----------------------------- ----------- ------------- ----------- -----
The balances are analysed as follows:
2017 2016
GBPm GBPm
------------ ----- -----
Current 438 360
------------ ----- -----
Non-current 685 664
------------ ----- -----
1,123 1,024
------------ ----- -----
Property provisions
Property provisions comprise onerous lease provisions, including leases on unprofitable stores and vacant properties, dilapidations provisions and asset retirement obligation provisions. These provisions are based on the least net cost of fulfilling or exiting the contract.
The calculation of the value in use of the leased properties to the Group is based on the same assumptions for growth rates and expected change in margins as those for Group owned properties, as discussed in detail in Note 11, discounted at the appropriate risk free rate. The cost of exiting lease contracts is estimated as the present value of expected surrender premiums or deficits from subletting at market rents, assuming that the Group can sublet properties at market rents, based on discounting at the appropriate risk adjusted rate. For some leases, termination of the lease at the break clause requires the Group to either purchase the property or buy out the equity ownership of the property at fair value. No value is attributed to the purchase conditions since they are at fair value. It is also assumed that the Group is indifferent to purchasing the properties.
Based on the factors set out above, the Group has recognised a net onerous property provision charge in the year of GBP61m (2016: GBP150m), largely relating to onerous lease contracts for fully impaired properties and other onerous contracts relating to properties. The Group has performed sensitivity analysis on the onerous lease provisions. A reasonably possible increase of one percentage point in the risk-free rate would reduce the provision by GBP43m. A decrease of one percentage point would increase the provision by GBP50m.
Of the net onerous property provision charge, a GBP76m charge (2016: GBP151m) has been recognised as an exceptional item; GBP56m in cost of sales and GBP20m in property-related items. This is made up of GBP56m classified as 'Net impairment of non-current assets and onerous lease provisions' and GBP20m classified as 'Net restructuring and redundancy costs'.
Onerous lease provisions will be utilised over the relevant lease terms, predominantly within the next 25 years.
Restructuring provisions
Of the GBP178m net charge (GBP196m charge, GBP18m release) recognised in the year, GBP135m relating to ongoing UK & ROI changes to the distribution network and to store colleague structures and working practices has been classified as an exceptional item. Refer to Note 4 for further details. The exceptional charges are expected to be utilised in the next financial year.
Other provisions
On 10 April 2017, the Group announced that its subsidiary, Tesco Stores Limited, had obtained Court approval and entered into a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO) regarding historic accounting practices. On 28 March 2017, the Group also announced that it had agreed with the UK Financial Conduct Authority (FCA) to a finding of market abuse in relation to its trading statement announced on 29 August 2014. In making its finding, the FCA has expressly stated that it is not suggesting that the Tesco PLC Board of Directors knew, or could reasonably be expected to have known, that the information contained in that trading statement was false or misleading. The Group has agreed with the FCA (under its statutory powers) to establish a compensation scheme which will compensate certain net purchasers of Tesco ordinary shares and listed bonds between 29 August 2014 and 19 September 2014 inclusive. The Group has taken a total exceptional charge of GBP235m in respect of the DPA of GBP129m, the expected costs of the compensation scheme of GBP85m, and related costs. This has been recorded in the financial statements in the year to 25 February 2017 as an adjusting post balance sheet event.
Of the GBP235m, GBP91m is included in other current provisions to cover the cost of the compensation scheme and related costs. The remaining GBP144m has been recorded within accruals. These charges have been classified as an exceptional item within administrative expenses.
Other current provisions also include provisions for Tesco Bank customer redress in respect of potential complaints arising from the historic sales of Payment Protection Insurance (PPI), and in respect of customer redress relating to instances where certain of the requirements of the Consumer Credit Act (CCA) for post contract documentation have not been fully complied with. In each instance, management have exercised judgement as to both the timescale for implementing the redress campaigns and the final scope of any amounts payable. A charge of GBP45m has been recognised in the year as an exceptional item in cost of sales. Refer to Note 4 for further details.
Note 17 Post-employment benefits
Pensions
The Group operates a variety of post-employment benefit arrangements, covering both funded and unfunded defined benefit schemes and funded defined contribution schemes. The most significant of these are the funded defined benefit pension schemes for the Group's employees in the UK (now closed to future accrual) and the Republic of Ireland, and the funded defined contribution pension scheme for employees in the UK. Of these schemes, the UK defined benefit deficit represents 98% of the Group deficit (2016: 94%).
The principal plan within the Group is the Tesco PLC Pension Scheme (the 'Scheme'), which is a funded defined benefit pension scheme in the UK, the assets of which are held as a segregated fund and administered by the Trustee.
The Career Average section of the Scheme ('Pension Builder') was closed to new members and future accrual on 21 November 2015. The Final Salary section of the Scheme, which was closed to new entrants in 2001, was also closed to future accrual on 21 November 2015. As a result of this closure a one off past service credit of GBP538m and other associated costs of GBP(58)m were recognised as exceptional items in the prior year. Refer to Note 4.
A defined contribution scheme, Tesco Retirement Savings Plan, was opened on 22 November 2015 and is open to all Tesco employees in the UK.
At 31 March 2014, the deficit valuation arising from the triennial actuarial assessment was GBP2.8bn. A plan to pay GBP270m a year was agreed with the Trustee to fund the UK pension deficit and to meet the expenses of the scheme. The expenses of the scheme were GBP22m (2016: GBP27m).
The next triennial actuarial valuation is effective as at 31 March 2017 and work is already underway. The Trustee is aiming to conclude the valuation as soon as is reasonably possible.
UK Principal assumptions
The major assumptions, on a weighted average basis, used by the actuaries to value the defined benefit obligation as at 25 February 2017 were as follows:
2017 2016
% %
------------------------------------------- ---- ----
Discount rate 2.5 3.8
------------------------------------------- ---- ----
Price inflation 3.2 2.9
------------------------------------------- ---- ----
Rate of increase in deferred pensions(*) 2.2 1.9
------------------------------------------- ---- ----
Rate of increase in pensions in payment(*)
------------------------------------------- ---- ----
Benefits accrued before 1 June 2012 3.0 2.7
------------------------------------------- ---- ----
Benefits accrued after 1 June 2012 2.2 1.9
------------------------------------------- ---- ----
(*) In excess of any Guaranteed Minimum Pension ('GMP') element.
The main financial assumption is the discount rate. If the discount rate increased by 0.1% or 1.0%, the UK defined benefit obligation would decrease by approximately GBP526m or GBP4,536m respectively. If this assumption decreased by 0.1% or 1.0%, the UK defined benefit obligation would increase by approximately GBP545m or GBP6,541m respectively.
Summary of movements in Group deficit during the financial year
Changes in the Group deficit, including movements of discontinued operations up to classification as held for sale, are as follows:
2017 2016
GBPm GBPm
---------------------------------------------- ------- -------
Deficit in schemes at beginning of the year (3,175) (4,842)
---------------------------------------------- ------- -------
Current service cost (35) (570)
---------------------------------------------- ------- -------
Past service credit - 535
---------------------------------------------- ------- -------
Net pension finance cost(a) (113) (155)
---------------------------------------------- ------- -------
Contributions by employer(b) 28 433
---------------------------------------------- ------- -------
Additional contributions by employer 248 223
---------------------------------------------- ------- -------
Foreign currency translation (12) (8)
---------------------------------------------- ------- -------
Remeasurements (3,567) 1,164
---------------------------------------------- ------- -------
Transfer to disposal group classified as held
for sale 5 45
---------------------------------------------- ------- -------
Deficit in schemes at the end of the year (6,621) (3,175)
---------------------------------------------- ------- -------
Deferred tax asset 1,122 563
---------------------------------------------- ------- -------
Deficit in schemes at the end of the year,
net of deferred tax (5,499) (2,612)
---------------------------------------------- ------- -------
(a) Includes GBPnil (2016: GBPnil) discontinued operations up to reclassification as held for sale.
(b) Contributions by employer include GBPnil (2016: GBP125m) of salaries paid as pension contributions.
Note 18 Analysis of changes in net debt
Reclassifications
of movements
Fair value in net
At and foreign Interest Other debt of At
27 February Cash exchange (charge)/ non-cash the disposal 25 February
2016 flow movements income movements group 2017
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------
Total Group
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------
Cash and cash
equivalents 3,082 881 (131) - - (11) 3,821
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------
Short-term
investments 3,463 (736) - - - - 2,727
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------
Joint venture
loans 149 (15) - - 3 - 137
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------
Interest and
other receivables 1 (25) - 25 - - 1
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------
Bank and other
borrowings (13,253) 1,851 (372) (21) 10 73 (11,712)
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------
Interest payables (185) 522 (18) (479) (10) 3 (167)
------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Finance lease payables (99) 12 (6) - (21) - (114) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net derivative financial instruments 698 (475) 655 15 - - 893 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net derivative interest 59 (16) - (15) - - 28 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net debt of the disposal group - - - - - (65) (65) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Total Group (6,085) 1,999 128 (475) (18) - (4,451) ------------------- ------------ ----- ---------- Tesco Bank ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Cash and cash equivalents 554 235 - - - - 789 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Joint ventures loans 34 - - - - - 34 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Bank and other borrowings (1,441) - 1 - - - (1,440) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Interest payables (1) 4 - (3) - - - ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net derivative financial instruments (121) - 16 - - - (105) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Tesco Bank (975) 239 17 (3) - - (722) ------------------- ------------ ----- ---------- Retail ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Cash and cash equivalents 2,528 646 (131) - - (11) 3,032 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Short-term investments 3,463 (736) - - - - 2,727 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Joint ventures loans 115 (15) - - 3 - 103 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Interest and other receivables 1 (25) - 25 - - 1 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Bank and other borrowings (11,812) 1,851 (373) (21) 10 73 (10,272) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Interest payables (184) 518 (18) (476) (10) 3 (167) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Finance lease payables (99) 12 (6) - (21) - (114) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net derivative financial instruments 819 (475) 639 15 - - 998 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net derivative interest 59 (16) - (15) - - 28 ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net debt of the disposal group - - - - - (65) (65) ------------------- ------------ ----- ------------ ---------- ---------- ----------------- ------------ Net debt (5,110) 1,760 111 (472) (18) - (3,729) ------------------- ------------ ----- ----------
Net debt excludes the net debt of Tesco Bank but includes that of discontinued operations. Balances and movements in respect of the total Group and Tesco Bank are presented to allow reconciliation between the Group balance sheet and the Group cash flow statement.
Reconciliation of net cash flow to movement in Net debt
2017 2016
GBPm GBPm
Net increase/(decrease) in cash and cash equivalents 881 907
Elimination of Tesco Bank movement in cash and cash equivalents (235) 62
Retail cash movement in other Net debt items
Net increase/(decrease) in short-term investments (736) 2,894
Net increase/(decrease) in joint venture loans (15) 1
Net (increase)/decrease in borrowings and lease financing 1,863 1,059
Net cash flows from derivative financial instruments (475) (154)
Net interest paid on components of net debt 477 419
Change in Net debt resulting from cash flow 1,760 5,188
Retail net interest charge on components of net debt (472) (447)
Retail fair value and foreign exchange movements 111 113
Debt disposed on disposal of Korean operations - 97
Debt acquired on business combinations - (1,545)
Retail other non-cash movements (18) (35)
(Increase)/decrease in Net debt for the year 1,381 3,371
Opening Net debt (5,110) (8,481)
Closing Net debt (3,729) (5,110)
Note 19 Business combinations and disposals
Business combinations
The Group has paid GBP25m of deferred consideration in the year, related to its obligations under the purchase agreements for the acquisitions of Sociomantic Labs and Bzz Agent Limited from prior years.
Disposals
During the year, the Group sold its interests in Dobbies Garden Centres, Giraffe and Harris + Hoole and closed its Nutricentre business, further enhancing the focus of the UK retail business on its core strengths. The Group received GBP213m in cash, net of cash disposed, and recognised GBP1m in deferred consideration. Of the net cash received, GBP192m related to the sale of Dobbies Garden Centres. In total, the Group disposed of net assets of GBP243m and incurred costs to sell of GBP15m, GBP8m of which had been paid as at the year end.
In addition, the Group disposed of a 6.9% interest (on a fully diluted basis) in Lazada Group S.A. (Lazada) for net cash consideration of US$115m (GBP81m), retaining an 8.8% shareholding.
The total loss on these transactions amounted to GBP7m, which is included within operating profit before exceptional items.
On 10 June 2016, the Group announced the proposed sale of its 95.5% controlling interest in its Turkish operations to Migros. The assets and liabilities related to the Turkish operations have been classified as a disposal group held for sale during the year and are presented within discontinued operations. Local regulatory approvals were obtained on 9 February 2017 and the sale completed on 1 March 2017. Refer to Note 7 and 22 for further information.
Note 20 Contingent liabilities
There are a number of contingent liabilities that arise in the normal course of business which if realised are not expected to result in a material liability to the Group. The Group recognises provisions for liabilities when it is more likely than not that a settlement will be required and the value of such a payment can be reliably estimated.
As previously reported, law firms in the UK have announced the intention of forming claimant groups to commence litigation against the Group for matters arising out of or in connection with its overstatement of expected profits in 2014, and purport to have secured third party funding for such litigation. In this regard, the Group has received two High Court claims against Tesco PLC. The first was received on 31 October 2016 from a group of 112 investors and the second was received on 5 December 2016 from an investment company and a trust company. The merit, likely outcome and potential impact on the Group of any such litigation that either has been or might potentially be brought against the Group is subject to a number of significant uncertainties and therefore, the Group cannot make any assessment of the likely outcome or quantum of any such litigation as at the date of this disclosure.
Prior to the disposal of its Korean operations (Homeplus), Tesco PLC provided guarantees in respect of 13 Homeplus lease agreements in Korea in the event of termination of the relevant lease agreement by the landlord due to Homeplus' default. Entities controlled by MBK and CPPIB, as the purchasers of Homeplus, undertook to procure Tesco PLC's release from these guarantees following the disposal of Homeplus, which currently remains outstanding. This liability decreases over time with all relevant leases expiring in the period between 2026 and 2033. Tesco PLC has the benefit of an indemnity from the purchasers of Homeplus for any claims made under such guarantees. The maximum potential liability under the lease guarantees as at 25 February 2017 is KRW575bn (GBP407m).
Note 21 Lease commitments
Operating lease commitments - Group as lessee
Future minimum lease commitments under non-cancellable operating leases are as follows:
2017 2016
GBPm GBPm
Within one year 1,199 1,296
Greater than one year but less than five years 3,767 3,918
After five years 7,395 7,831
Total minimum lease commitments 12,361 13,045
Future minimum lease commitments under non-cancellable operating leases after five years are analysed further as follows:
2017 2016
GBPm GBPm
Greater than five years but less than ten years 3,161 3,272
Greater than ten years but less than fifteen years 2,225 2,303
After fifteen years 2,009 2,256
Total minimum lease commitments - after five years 7,395 7,831
The Group has used operating lease commitments discounted at 7% (2016: 7%) of GBP7,440m (2016: GBP7,814m) in its calculation of total indebtedness. Total operating lease commitments in Turkey of GBP27m were included in 2016. The discounted operating lease commitment included in total indebtedness is not an appropriate proxy for the expected impact of recognising a lease liability under IFRS 16 'Leases', primarily due to differences in the discount rates used and the treatment of additional lease rentals arising from contracts that contain extend or buy conditions, amongst other differences.
Operating lease commitments represent rentals payable by the Group for certain of its retail, distribution and office properties and other assets such as motor vehicles. The leases have varying terms, purchase options, escalation clauses and renewal rights. Purchase options and renewal rights, where they occur, are at market value. Escalation clauses are in line with market practices and include inflation linked, fixed rates, resets to market rents and hybrids of these.
The Group has lease-break options on certain sale and leaseback transactions. These options are exercisable if the Group exercises an existing option to buy back, at market value and at a specified date, either the leased asset or the equity of the other joint venture partner. No commitment has been included in respect of the buy-back option as the option is at the Group's discretion. The Group is not obliged to pay lease rentals after that date, therefore minimum lease commitments exclude those falling after the buy-back date. The current market value of these properties is GBP2.9bn (2016: GBP3.2bn) and the total undiscounted lease rentals, if they were to be incurred following the option exercise date, would be GBP2.6bn (2016: GBP2.6bn) using current rent values, as shown below.
The additional lease rentals if incurred following the option exercise date would be as follows:
2017 2016
GBPm GBPm
Within one year 23 45
Greater than one year but less than five years 170 72
Greater than five years but less than ten years 709 686
Greater than ten years but less than fifteen years 670 718
After fifteen years 1,019 1,115
Total undiscounted contingent additional lease rentals 2,591 2,636
Total discounted contingent additional lease rentals at 7% 1,107 1,111
The lease break options are exercisable between 2017 and 2023.
Operating lease commitments with joint ventures and associates
In prior years, the Group entered into several joint ventures and associates, and sold and leased back properties to and from these joint ventures and associates. The terms of these sale and leasebacks varied. However, common factors included: the sale of the properties to the joint venture or associate at market value; options within the lease for the Group to repurchase the properties at market value; market rent reviews; and 20 to 30 full-year lease terms. The Group reviews the substance as well as the form of the arrangements when determining the classification of leases as operating or finance. All of the leases under these arrangements are operating leases.
Note 22 Events after the reporting period
On 1 March 2017, the Group announced the completion of the disposal of its 95.5% controlling stake in the Kipa business in Turkey following the receipt of all local regulatory approvals.
On 10 April 2017, the Group announced that its subsidiary, Tesco Stores Limited, had obtained Court approval and entered into a Deferred Prosecution Agreement (DPA) with the UK Serious Fraud Office (SFO) regarding historic accounting practices. On 28 March 2017, the Group also announced that it had agreed with the UK Financial Conduct Authority (FCA) to a finding of market abuse in relation to its trading statement announced on 29 August 2014. In making its finding, the FCA has expressly stated that it is not suggesting that the Tesco PLC Board of Directors knew, or could reasonably be expected to have known, that the information contained in that trading statement was false or misleading. The Group has agreed with the FCA (under its statutory powers) to establish a compensation scheme which will compensate certain net purchasers of Tesco ordinary shares and listed bonds between 29 August 2014 and 19 September 2014 inclusive. The Group has taken a total exceptional charge of GBP235m in respect of the DPA of GBP129m, the expected costs of the compensation scheme of GBP85m, and related costs. This has been recorded in the financial statements in the year to 25 February 2017 as an adjusting post balance sheet event.
On 6 April 2017, the Group unwound its joint venture with British Land Co PLC (British Land). The Group obtained sole control of BLT Properties Limited through the acquisition of British Land's 50% interest in the joint venture. The acquisition increased the Group's owned property portfolio by GBP0.2bn, comprising seven stores. British Land obtained sole control of one store and one retail centre, previously held in the joint venture.
Note 23 Proposed Booker Group transaction
On 27 January 2017, the Group announced that it had reached an agreement on the terms of a recommended share and cash merger with Booker Group Plc. The transaction is subject to shareholder and regulatory approvals.
Glossary - Alternative performance measures
Introduction
In the reporting of financial information, the Directors have adopted various Alternative Performance Measures (APMs), previously termed 'Non-GAAP measures' of historical or future financial performance, position or cash flows other than those defined or specified under International Financial Reporting Standards (IFRS).
These measures are not defined by IFRS and therefore may not be directly comparable with other companies' APMs, including those in the Group's industry.
APMs should be considered in addition to, and are not intended to be a substitute for, or superior to, IFRS measurements.
Purpose
The Directors believe that these APMs assist in providing additional useful information on the underlying trends, performance and position of the Group.
APMs are also used to enhance the comparability of information between reporting periods and geographical units (such as like-for-like sales), by adjusting for non-recurring or uncontrollable factors which affect IFRS measures, to aid the user in understanding the Group's performance.
Consequently, APMs are used by the Directors and management for performance analysis, planning, reporting and incentive setting purposes and have remained consistent with prior year.
The key APMs that the Group has focused on this year are as follows:
-- Group sales (previously termed Revenue exc. fuel): This is the headline measure of revenue for the Group. It excludes the impact of sales made at petrol filling stations due to the significant volatility of fuel prices. This volatility is outside the control of management and can mask underlying changes in performance.
-- Like-for-like sales: This is a widely used indicator of a retailer's current trading performance. It is a measure of growth in Group online sales and sales from stores that have been open for at least a year (but excludes prior year sales of stores closed during the year) at constant foreign exchange rates.
-- Operating profit before exceptional items: This is the headline measure of the Group's performance, and is based on operating profit before the impact of exceptional items. Exceptional items relate to certain costs or incomes that derive from events or transactions that fall within the normal activities of the Group but which, individually or, if of a similar type, in aggregate, are excluded by virtue of their size and nature in order to reflect management's view of the performance of the Group.
-- Retail operating cash flow: This is the operating cash flow of continuing operations, excluding the effects of Tesco Bank's cash flows.
-- Net debt: This excludes the net debt of Tesco Bank but includes that of the discontinued operations to reflect the net debt obligations of the Retail business.
-- Diluted earnings per share from continuing operations before exceptional items and net pension finance costs: This relates to profit after tax before exceptional items from continuing operations, and net pension finance costs attributable to owners of the parent divided by the weighted average number of ordinary shares in issue during the financial period adjusted for the effects of potentially dilutive options.
Some of our IFRS measures are translated at constant exchange rates. Constant exchange rates are the average actual periodic exchange rates for the previous financial year and are used to eliminate the effects of exchange rate fluctuations in assessing performance. Actual exchange rates are the average actual periodic exchange rates for that financial year.
APM Closest Adjustments to reconcile Note reference Definition and purpose
equivalent to IFRS measure for
IFRS reconciliation
measure
Income
statement
Revenue
measures
Group sales Revenue Note 2
* Exclude sales made at petrol * Excludes the impact of sales made at petrol filling
stations to demonstrate the Group's underlying
performance in the core retail and financial services
filling stations businesses by removing the volatilities associated
with the movement in fuel prices. This is a key
management incentive metric.
Growth in No direct Not applicable
sales equivalent * Consistent with accounting policy * Growth in sales is a ratio that measures year on-year
movement in Group sales for continuing operations for
52 weeks. It shows the annual rate of increase in the
Group's sales and is considered a good indicator of
how rapidly the Group's core business is growing.
Like-for-like No direct Not applicable
equivalent * Consistent with accounting policy * Like-for-like is a measure of growth in Group online
sales and sales from stores that have been open for
at least a year (but excludes prior year sales of
stores closed during the year) at constant foreign
exchange rates. It is a widely used indicator of a
retailer's current trading performance and is
important when comparing growth between retailers
that have different profiles of expansion, disposals
and closures.
APM Closest Adjustments to reconcile Note reference Definition and purpose
equivalent to IFRS measure for
IFRS reconciliation
measure
Profit measures
Operating profit Operating Note 2
before profit(*) * Exceptional items * Operating profit before exceptional items is the
exceptional headline measure of the Group's performance. It is
items based on operating profit before the impact of
certain costs or incomes that derive from events or
transactions that fall within the normal activities
of the Group, but which are excluded by virtue of
their size and nature in order to reflect
management's view of the performance of the Group.
This is a key management incentive metric.
Operating margin No direct Not applicable
equivalent * Consistent with accounting policy * Operating margin is calculated as operating profit
before exceptional items divided by revenue.
Progression in operating margin is an important
indicator of the Group's operating efficiency.
Profit before Profit Note 9
tax before before tax * Exceptional items * This measure excludes exceptional items and the net
exceptional finance costs of the defined benefit pension deficit
items and net as the costs are impacted by corporate bond yields,
pension * Net pension finance costs which can fluctuate significantly and are reset each
finance costs year based on often volatile external market factors.
Profits/(losses) No direct Not applicable
arising on equivalent * Consistent with accounting policy * Profits/(losses) arising on property-related items
property-related relates to the Group's property activities including;
items gains and losses on disposal of property assets,
development property built for resale and property
joint ventures; costs resulting from changes in the
Group's store portfolio and distribution network,
including pre-opening and post-closure costs; and
income/(charges) associated with impairment of
non-trading property and related onerous contracts.
* These items are disclosed separately to clearly
identify the impact of these items versus the other
operating expenses related to the core retail and
financial services operations of the business. They
are often one-time in nature and can have a
disproportionate impact on profit between reporting
periods.
Total finance Finance Note 5
costs before costs * Exceptional items * Total finance costs before exceptional items and net
exceptional pension finance costs is the net finance costs
items and adjusted for non-recurring one off items, and net
net pension * Net pension finance costs pension finance costs, as the costs are impacted by
finance costs bond yields, which can fluctuate significantly and
are reset each year.
Diluted earnings Diluted Note 9
per share earnings * Exceptional items * This relates to profit after tax before exceptional
from continuing per share items from continuing operations, attributable to
operations owners of the parent divided by the weighted average
before * Discontinued operations number of ordinary shares in issue during the
exceptional financial period adjusted for the effects of
items potentially dilutive options.
* It excludes the impact of certain costs or income
that derive from events or transactions that fall
within the normal activities of the Group, but which
are excluded by virtue of their size and nature in
order to reflect management's view of the performance
of the Group.
Diluted earnings Diluted Note 9
per share from earnings * Exceptional items * This relates to profit after tax before exceptional
continuing per share items from continuing operations, and net pension
operations finance costs attributable to owners of the parent
before * Net pension finance costs divided by the weighted average number of ordinary
exceptional shares in issue during the financial period adjusted
items and net for the effects of potentially dilutive options.
pension finance * Discontinued operations
costs
* It excludes the impact of certain costs or income
that fall within the normal activities of the Group,
but which are excluded by virtue of their size and
nature in order to reflect management's view of the
performance of the Group. It also excludes
potentially volatile net pension finance costs.
Tax measures
Effective tax Effective Note 6
rate before tax rate * Exceptional items and their tax impact * Effective tax rate before exceptional items is
exceptional calculated as total income tax credit/(charge)
items excluding the tax impact of exceptional items divided
by profit before tax before exceptional items. This
provides an indication of the ongoing tax rate across
the Group.
APM Closest Adjustments to reconcile Note reference Definition and purpose
equivalent to IFRS measure for
IFRS reconciliation
measure
Effective Effective Note 6
tax tax rate * Exceptional items and their tax impact * Effective tax rate before exceptional items and net
rate before pension finance costs is calculated as total income
exceptional tax credit/(charge) excluding the tax impact of
items and * Net pension finance costs and their tax impact exceptional items and net pension finance costs
net pension divided by the profit before tax before exceptional
finance items and net pension finance costs.
costs
Balance
sheet
measures
Net debt Borrowings Note 18
less cash * Net debt from Tesco Bank * Net debt excludes the net debt of Tesco Bank but
and includes that of the discontinued operations to
related reflect the net debt obligations of the Retail
hedges business. Net debt comprises bank and other
borrowings, finance lease payables, net derivative
financial instruments, joint venture loans and other
receivables and net interest receivables/ payables,
offset by cash and cash equivalents and short-term
investments. It is a useful measure of the progress
in generating cash and strengthening of our balance
sheet position and is a measure widely used by credit
rating agencies.
Total Borrowings Page 8 of the
indebtedness less cash * Net debt from Tesco Bank Preliminary * Total indebtedness is the net debt plus the IAS19
and Results deficit in the pension schemes (net of associated
related 2016/17 deferred tax) plus the present value of future
hedges * Present value of future minimum lease payments under minimum lease payments under non-cancellable
non-cancellable operating leases. operating leases to provide an overall view of the
Group's obligations. It is an important measure of
the long term obligations of the Group and is a
* IAS19 deficit in the pension schemes measure widely used by credit rating agencies.
Cash flow
measures
Retail Cash Note 2
operating generated * Tesco Bank operating cash flow * Retail operating cash flow is the cash generated from
cash flow from operations of continuing operations, excluding the
operating effects of Tesco Bank cash flows. It is a measure of
activities * Discontinued operations the cash generation and working capital efficiency by
the retail business, recognising that Tesco Bank is
run and regulated independently from the retail
operations, and a key measure to demonstrate the
recovery of the retail operations. This is a key
management incentive metric.
Free cash Cash Note 2
flow generated * Purchase of property, plant and equipment, investmen * Free cash flow is net cash generated from/(used in)
from t operating activities less capital expenditure on
operating property and non-current assets classified as held property, plant and equipment, investment property
activities for sale and intangible assets. It is a measure of cash
generation, working capital efficiency and capital
discipline of the business.
* Purchase of intangible assets
(*) Operating profit is not defined per IFRS, however is a generally accepted profit measure.
Glossary - Other
Capital expenditure (Capex)
The additions to property, plant and equipment, investment property and intangible assets (excluding assets acquired under business combinations).
Capital employed
Net assets plus net debt plus dividend creditor less net assets of the disposal groups and non-current assets classified as held for sale.
Enterprise Value
This is calculated as market capitalisation plus net debt.
FTE
FTE refers to full-time equivalents.
LPI
LPI refers to Limited Price Inflation.
Market capitalisation
The total value of all Tesco shares calculated as total number of shares multiplied by closing share price at year-end.
MTN
MTN refers to Medium Term Note.
Net Promoter Score (NPS)
This is a loyalty measure based on a single question requiring a score between 0-10. The NPS is calculated by subtracting the percentage of detractors (scoring 0-6) from the percentage of promoters (scoring 9-10). This generates a figure between -100 and 100 which is the NPS.
Return on capital employed (ROCE)
Return divided by the average of opening and closing capital employed.
Return
Profit before exceptional items and interest, after tax (applied at effective rate of tax).
RPI
RPI refers to Retail Price Index.
Total shareholder return
The notional annualised return from a share, measured as the percentage change in the share price, plus the dividends paid with the gross dividends reinvested in Tesco shares. This is measured over both a one and five year period.
Independent auditor's report to the members of Tesco PLC on the Preliminary Announcement of Tesco PLC
We confirm that we have issued an unqualified opinion on the full financial statements of Tesco PLC.
Our audit report on the Group Financial Statements sets out the following risks of material misstatement which had the greatest effect on our audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team, together with how our audit responded to those risks:
Risk description
The Group held GBP18,108m (2015/16: GBP17,900m) of property, plant and equipment at 25 February
2017.
Under IFRS, the Group is required to complete an impairment review of its store portfolio
where there are indicators of impairment or impairment reversal.
There continues to be judgement required in identifying indicators of impairment and determining
the fair value of the Group's store portfolio. Additionally, there is judgement is relation
to triggering the reversals of impairments recognised in previous periods.
In light of the continued competitive environment in which the Group operates and changes
in the macro environment, there is a risk that the carrying value of stores and related fixed
assets may be higher than the recoverable amount. Where a review for impairment, or reversal
of impairment, is conducted, the recoverable amount is determined based on the higher of 'value
in use' and 'fair value less costs of disposal':
* value in use is calculated from cash flow projections
and relies upon the Directors' assumptions and
estimates of future trading performance, longer-term
growth rates and discount rates utilised; and
* fair value less costs of disposal is determined by
reference to a sample of valuations completed by
independent valuation specialists where applicable.
As a result of the Group's impairment review completed during the year, an impairment release
of GBP6m (2015/16: charge of GBP18m) was recognised.
How the scope of our audit responded to the risk
Our audit procedures included assessing the design and implementation of key controls around
the impairment review processes, assessing the appropriateness of the methodology applied
by the Directors in calculating the impairment charges and reversals, and the judgements applied
in determining the cash generating units ("CGUs") of the business, which the Group has determined
as being individual stores and, in the UK, the general merchandising online business. As part
of our procedures we have used data analytics to assist us in determining the completeness
of the impairment indicator assessment.
In relation to the completeness of the Group's impairment review process, we have assessed
the completeness of the Group's impairment charges and impairment reversals with reference
to CGU performance.
In relation to the Group's 'value in use' valuations, we have assessed the review completed
by the Group by:
* assessing the methodology applied in determining the
value in use compared with the requirements of IAS 36
Impairment of Assets and checking the integrity of
the impairment model utilised by the Group;
* challenging the key assumptions utilised in the cash
flow forecasts with reference to historical trading
performance, market expectations and our
understanding of the Group's strategic initiatives;
* assessing the long-term growth rates and discount
rates applied to the impairment review for each
country, comparing the rates utilised to third party
evidence and in relation to the discount rate, our
independently estimated discount rates; and
* completing sensitivity analysis in relation to key
assumptions to consider the extent of change in those
assumptions that either individually or collectively
would be required for the assets to be impaired, in
particular property fair values, long term growth
rates and discount rates applied.
In relation to the Group's 'fair value less costs of disposal', we have challenged the assumptions
used by the Group in determining the fair market value of the assets, including those completed
by external valuers, using internal property valuation specialists and assessing whether appropriate
valuation methodologies have been applied.
Additionally, we assess the adequacy of the store impairment related disclosures.
Key observations
Whilst we note actions are required by the Group to achieve these forecasts over the medium
term, we concluded that the assumptions in the impairment models were within an acceptable
range, and that the overall level of net reversal of impairment was reasonable.
We also agree that the disclosure of the net impairment as an exceptional item is in accordance
with the Group's policy on exceptional items.
Risk description
The Group has agreements with suppliers whereby volume-related allowances, promotional and
marketing allowances and various other fees and discounts are received in connection with
the purchase of goods for resale from those suppliers. As such, the Group recognises a reduction
in cost of sales as a result of amounts receivable from suppliers.
In accordance with IFRS, commercial income should only be recognised as income within the
income statement when the performance conditions associated with it have been met, for example
where the marketing campaign has been held.
The variety and number of the buying arrangements with suppliers can make it complex to determine
the performance conditions associated with the income, giving rise to a requirement for management
judgement and scope for error in accounting for such income. As such we have identified this
as a key risk.
How the scope of our audit responded to the risk
We obtained a detailed understanding and evaluated the design and implementation of controls
that the Group has established in relation to commercial income.
In addition, our substantive audit procedures across the Group's retail operations included
a combination of the following:
* we tested whether amounts recognised were accurate
and recorded in the correct period based on the
contractual performance obligations by agreeing a
sample of individual supplier agreements;
* commercial income balances included within
inventories and trade and other receivables, or
netted against trade and other payables have been
tested via balance sheet reconciliation procedures;
* we circularised a sample of suppliers to test whether
the arrangements recorded were complete and held
discussions with a sample of buyers to further
understand the buying processes where required. Where
responses from suppliers were not received, we
completed alternative procedures such as agreement to
underlying contractual arrangements;
* we used data analytics to profile commercial income,
identifying deals which exhibited characteristics of
audit interest upon which we completed detailed
testing;
* we reviewed the steps taken by the Group to address
the recommendations made by the Groceries Code
Adjudicator ("GCA") and reviewed the Group's ongoing
compliance with the Groceries Supplier Code of
Practice ("GSCOP"). Additionally, we reviewed the
reporting and correspondence to the supplier hotline
in order to help identify any areas where further
investigation was required; and
* we also considered the adequacy of the commercial
income related disclosure within the Group's
financial statements.
Key observations
The results of our testing were satisfactory. We consider the disclosure given around supplier
rebates to provide an appropriate understanding of the types of rebate income received and
impact on the Group's balance sheet as at 25 February 2017.
Pension obligation valuation
Risk description
The Group has a defined benefit pension plan in the UK. At 25 February 2017, the Group recorded
a net retirement obligation before deferred tax of GBP6,621m (2015/16: GBP3,175m), comprising
scheme assets of GBP13,196m (2015/16: GBP10,302m) and scheme liabilities of GBP19,817m (2015/16:
GBP13,477m).
The pension valuation is dependent on market conditions and assumptions made. The risk specifically
relates to the following key assumptions: discount rate, inflation expectations and life expectancy
assumptions. The setting of these assumptions is complex and requires the exercise of significant
management judgement with the support of third party actuaries.
How the scope of our audit responded to the risk
We obtained a detailed understanding and evaluated the design and implementation of controls
that the Group has established in relation to the pension obligation valuation process.
In testing the pension valuation, we have utilised internal pension actuarial specialists
to review the key actuarial assumptions used, both financial and demographic, and considered
the methodology utilised to derive these assumptions. Furthermore, we have benchmarked and
performed a sensitivity analysis on the key assumptions determined by the Directors.
Key observations
We are satisfied that the methodology and assumptions applied in relation to determining the
pension valuation are within an acceptable range.
Risk description
The Group has been under investigation by the Serious Fraud Office (SFO) in the UK following
the commercial income misstatements identified in 2014/15. On 10 April 2017, the Group announced
that its subsidiary, Tesco Stores Limited, had reached a Deferred Prosecution Agreement (DPA)
with the SFO. In addition, Tesco PLC and Tesco Stores Limited accepted a finding of market
abuse from the FCA, arising from the same circumstances and as a result will implement a compensation
scheme. This brings greater certainty to the Group's exposure and a GBP235m liability has
been recognised accordingly. Additionally, in 2016/17 UK shareholder actions were initiated
against the Group linked to the commercial income misstatements identified in 2014/15 which
may result in legal exposures. Separately, the Group has other ongoing legal matters relating
to previous corporate transactions which require management judgement to be applied in order
to determine the likely outcome.
As a result, judgement is required in assessing the nature of these exposures and their accounting
and disclosure requirements.
How the scope of our audit responded to the risk
In assessing the potential exposures to the Group, we have completed a range of procedures
including :
* assessing the design and implementation of controls
in relation to the monitoring of known exposures;
* reading Board and other meeting minutes to identify
areas subject to Group consideration;
* meeting with the Group's internal legal advisors in
understanding ongoing and potential legal matters
impacting the Group;
* reviewing third party correspondence and reports; and
* reviewing the proposed accounting and disclosure of
actual and potential legal liabilities, drawing on
third party assessment of open matters.
Key observations
We concur that the liability recognised by management in respect of the DPA and the FCA compensation
scheme and the disclosures in relation to the ongoing UK shareholder actions are appropriate.
In relation to other ongoing legal matters in respect of previous corporate transactions,
we are satisfied no specific disclosure is required.
Risk description
The Group carries inventory at the lower of cost and net realisable value. As at 25 February
2017, the Group held inventories of GBP2,301m (2015/16: GBP2,430m). The Group provides for
obsolescence based on forecast inventory usage. This methodology relies upon assumptions made
in determining appropriate provisioning percentages to estimates of future sales.
How the scope of our audit responded to the risk
We obtained a detailed understanding and evaluated the design and implementation of controls
that the Group has established in relation to inventory valuation.
We obtained assurance over the appropriateness of management's assumptions applied in calculating
the value of inventory provisions by:
* critically assessing the Group's inventory
provisioning policy, with specific consideration
given to aged inventory (especially for non-food and
general merchandising products) as well as stock turn
calculations, including the impact of seasonality;
* verifying the value of a sample of inventory to
confirm whether it is held at the lower of cost and
net realisable value, through comparison to vendor
invoices and sales prices;
* within the UK business, using data analytics to
identify unusual inventory usage characteristics,
completing assumption tolerance testing and
recalculating the provision in totality based on the
Group's policy; and
* reviewing historical accuracy of inventory
provisioning with reference to inventory write-offs
during the year in relation to stock loss or other
inventory adjustments.
Key observations
We concur that the total level of provision is within an acceptable range.
Risk description
There are a number of areas within the Group financial statements which comprise accounting
estimates by management and accordingly there is a risk that the Group's results are influenced
through management bias in determining such estimates. Additionally, the Group's processes
continue to be complex and reliant on legacy IT systems which lead to an increased risk of
management override of controls.
Specifically this risk lies in those areas with high levels of judgement such as commercial
income, value-in-use calculations within the impairment reviews, inventory accounting and
provisioning.
Management also exercises judgement in the presentation of the Group's income statement and
the quality of the Group's earnings.
A risk exists that invalid journal entries are recorded to influence the results and/or the
financial position as desired through the override of controls implemented to prevent the
recording of inappropriate journals.
How the scope of our audit responded to the risk
In order to address this risk, in addition to the procedures set out in the commercial income,
impairment and inventory risks
above, we have completed audit procedures including:
* assessing the design and implementation of controls
which address the risk of management override, such
as the 'entity level' controls which underpin the
overall control environment for the Group;
* auditing key areas of management estimate and
judgement, including consideration of exceptional
items disclosed by the Group and the existence of any
further potential exceptional items included within
the Group's underlying profit measures;
* using data analytics, testing journal entries for
fraud characteristics by testing the completeness of
the journal population reviewed and risk profiling
the population to focus our work on journals of
interest;
* assessing transactions completed outside of the
normal course of business; and
* obtaining an understanding of the work of internal
audit so as to assist us in directing our audit
effort and obtaining greater understanding of the
controls in place across the Group.
Key observations
We have no matters to highlight in these areas.
However, we note that consistent with other businesses of a similar scale to the Group, there
are non-recurring income and expense items included within profit before exceptional items
which do not meet the Group's definition of exceptional items and which largely offset. We
concur that these have been appropriately included within profit before exceptional items.
Risk description
In November 2016, Tesco Bank's debit cards were the subject of an online fraudulent attack.
The Group continues to work closely with the authorities and regulators on this incident.
There is a risk that the Group has not identified and accounted for any liabilities which
may arise from the incident.
How the scope of our audit responded to the risk
In assessing the potential exposures to the Bank, we have completed a range of procedures
including:
* understanding the cause of the issue, reviewing the
incident reports prepared by external consultants and
understanding management's response to findings;
* understanding the status of discussions with
authorities and regulators;
* assessing the fraud losses and the treatment of
associated recoveries from merchants; and
* assessing whether the Group has appropriately
identified and accounted for any other liabilities
related to the payment fraud.
Key observations
We are satisfied that the Group has appropriately accounted for liabilities associated with
the incident.
Risk description
The Group's retail operations utilise a range of information systems where in 2015/16 we identified
deficiencies in certain IT controls. These deficiencies could have an adverse impact on the
Group's controls and financial reporting systems.
The Group is undergoing the replacement of a number of the Group's key systems and changes
to key elements of the Group's IT infrastructure.
How the scope of our audit responded to the risk
We have understood the Group's replacement programme and the planned enhancements to the retail
technology environment, including IT security.
During the year we have assessed the design and implementation of the Group's controls over
the information systems that are important to financial reporting, including the changes made
as part of the Group's replacement programme.
Where we noted deficiencies which affected applications and databases within the scope of
our audit, we extended the scope of our substantive audit procedures.
Key observations
Although we note progress has been made during the year in enhancing the Group's controls
over the information systems described above, given the complexity of the underlying systems
the remediation process is not yet complete and therefore weaknesses remain in the control
environment. The historical weaknesses we noted last year in relation to user access and change
management controls linked to the Group's financial reporting systems are in the process of
being remediated.
These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we did not provide a separate opinion on these matters.
Our liability for this report, and for our full audit report on the financial statements is to the Company's members as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members as a body, for our audit work, for our audit report or this report, or for the opinions we have formed.
Deloitte LLP
Chartered Accountants and Statutory Auditor
Appendix 1
Total sales performance at actual rates (exc. VAT, exc. fuel)
1Q 2Q 3Q 4Q 1H 2H FY
2016/17 2016/17 2016/17 2016/17 2016/17 2016/17 2016/17
UK & ROI 0.7% 1.7% 2.3% 0.7% 1.2% 1.5% 1.4%
UK 0.3% 1.0% 1.4% 0.2% 0.7% 0.8% 0.7%
ROI 8.7% 15.3% 19.7% 11.9% 11.9% 15.6% 13.8%
International 5.6% 16.5% 23.2% 16.1% 10.9% 19.5% 15.2%
Europe 8.2% 15.1% 19.6% 12.3% 11.6% 15.7% 13.7%
Asia 2.8% 18.2% 27.7% 20.9% 10.1% 24.1% 17.1%
Tesco Bank 3.5% 7.2% 6.3% 6.9% 5.3% 6.6% 6.0%
Group 1.8% 4.7% 6.5% 4.1% 3.3% 5.2% 4.3%
Appendix 2
Total sales performance at constant rates (exc. VAT, exc. fuel)(*)
1Q 2Q 3Q 4Q 1H 2H FY
2016/17 2016/17 2016/17 2016/17 2016/17 2016/17 2016/17
UK & ROI 0.3% 1.0% 1.4% 0.1% 0.6% 0.6% 0.6%
UK 0.3% 1.0% 1.4% 0.2% 0.7% 0.7% 0.7%
ROI 0.2% (0.3)% 0.0% (1.7)% (0.1)% (0.9)% (0.5)%
International 3.6% 2.8% 1.5% 0.6% 3.2% 1.0% 2.1%
Europe 2.4% 1.2% 0.1% (1.5)% 1.8% (0.7)% 0.5%
Asia 5.0% 4.8% 3.2% 3.2% 4.9% 3.2% 4.0%
Tesco Bank 3.5% 7.2% 6.3% 6.9% 5.3% 6.6% 6.0%
Group 1.1% 1.5% 1.5% 0.3% 1.3% 0.9% 1.1%
(*) These results have been reported on a continuing operations basis and exclude the results from our operations in Turkey.
Growth rates are all based on comparable days.
Appendix 3
Country detail
Revenue
(exc. VAT, inc. fuel)
Local GBPm Average exchange rate Closing exchange rate
currency
(m)
UK 41,458 41,458 1.000 1.000
ROI 2,483 2,066 1.202 1.184
Czech Republic 43,017 1,324 32.49 31.98
Hungary 595,463 1,593 373.8 365.0
Poland 10,832 2,070 5.233 5.096
Slovakia 1,405 1,169 1.202 1.184
Malaysia 4,458 808 5.517 5.557
Thailand 204,059 4,378 46.61 43.66
Appendix 4
UK sales area by size of store
Store size (sq ft) February 2017 February 2016
No. of stores Million % of total sq ft No. of stores Million % of total sq ft
sq ft sq ft
0 - 3,000 2,507 5.2 13.1% 2,498 5.2 12.5%
3,001 - 20,000 288 3.4 8.6% 289 3.5 8.4%
20,001 - 40,000 283 8.2 20.5% 283 8.3 20.0%
40,001 - 60,000 182 9.4 23.5% 204 10.4 25.0%
60,001 - 80,000 120 8.6 21.5% 132 8.9 21.5%
80,001 - 100,000 45 4.2 10.6% 45 4.2 10.2%
Over 100,000 8 0.9 2.2% 9 1.0 2.4%
Total(*) 3,433 39.9 100.0% 3,460 41.5 100.0%
(*) Excludes franchise stores.
Appendix 5
Actual Group space - store numbers(a)
2015/16 year end 2016/17 Net gain/ Openings Closures/ Repurposing/
year end Reduction(b) disposals extensions
Extra 252 252 - - - 14
Superstore 478 479 1 2 (1) -
Metro 177 176 (1) - (1) -
Express 1,732 1,740 8 17 (9) -
Dotcom only 6 6 - - - -
Total Tesco 2,645 2,653 8 19 (11) 14
One Stop(c) 779 780 1 23 (22) -
Dobbies 36 - (36) - (36) -
UK(c) 3,460 3,433 (27) 42 (69) 14
ROI 149 148 (1) - (1) -
UK & ROI(c) 3,609 3,581 (28) 42 (70) 14
Czech Republic(c) 201 198 (3) - (3) 1
Hungary 208 206 (2) - (2) 2
Poland 440 429 (11) - (11) 1
Slovakia 161 154 (7) (7) 2
Europe(c) 1,010 987 (23) - (23) 6
Malaysia 62 71 9 9 - 6
Thailand 1,815 1,914 99 105 (6) 44
Asia 1,877 1,985 108 114 (6) 50
International(c) 2,887 2,972 85 114 (29) 56
Group(c) 6,496 6,553 57 156 (99) 70
UK (One Stop) 134 158 24 32 (8) -
Czech Republic 103 98 (5) - (5) -
Franchise stores 237 256 19 32 (13) -
(a) Continuing operations.
(b) The net gain/reduction reflects the number of store openings less the number of store closures/disposals.
(c) Excludes franchise stores.
Actual Group space - '000 sq ft(a)
2015/16 year end 2016/17 year end Net gain/ Openings Closures/ Repurposing/
reduction disposals Extensions(c)
Extra 17,846 17,748 (98) - - (98)
Superstore 14,002 14,075 73 96 (23) -
Metro 2,005 1,993 (12) - (12) -
Express 4,031 4,054 23 40 (17) -
Dotcom only 716 716 - - - -
Total Tesco 38,600 38,586 (14) 136 (52) (98)
One Stop(b) 1,256 1,269 13 44 (31) -
Dobbies 1,652 - (1,652) - (1,652) -
UK(b) 41,508 39,855 (1,653) 180 (1,735) (98)
ROI 3,560 3,543 (17) - (17) -
UK & ROI(b) 45,068 43,398 (1,670) 180 (1,752) (98)
Czech Republic(b) 5,558 5,479 (79) - (28) (51)
Hungary 6,931 6,896 (35) - (5) (30)
Poland 9,688 9,578 (110) - (85) (25)
Slovakia 3,969 3,859 (110) - (83) (27)
Europe(b) 26,146 25,812 (334) - (201) (133)
Malaysia 4,164 4,005 (159) 35 - (194)
Thailand 15,536 15,522 (14) 514 (26) (502)
Asia 19,700 19,527 (173) 549 (26) (696)
International(b) 45,846 45,339 (507) 549 (227) (829)
Group(b) 90,914 88,737 (2,177) 729 (1,979) (927)
UK (One Stop) 185 212 27 39 (12) -
Czech Republic 96 92 (4) - (4) -
Franchise stores 281 304 23 39 (16) -
(a) Continuing operations.
(b) Excludes franchise stores.
(c) Repurposing of gross selling space is not included in the above net selling space measure.
Group space forecast to 24 February 2018 - '000 sq ft(a)
2016/17 year end 2017/18 year end Net gain/ Openings Closures/ Repurposing/
reduction disposals extensions
Extra 17,748 17,748 - - - -
Superstore 14,075 14,149 74 74 - -
Metro 1,993 1,993 - - - -
Express 4,054 4,112 58 60 (2) -
Dotcom only 716 716 - - - -
Total Tesco 38,586 38,718 132 134 (2) -
One Stop(b) 1,269 1,297 28 49 (21) -
UK(b) 39,855 40,015 160 183 (23) -
ROI 3,543 3,584 41 40 - 1
UK & ROI(b) 43,398 43,599 201 223 (23) 1
Czech Republic(b) 5,479 5,049 (430) - (291) (139)
Hungary 6,896 6,800 (96) - - (96)
Poland 9,578 9,221 (357) - (167) (190)
Slovakia 3,859 3,630 (229) - (208) (21)
Europe(b) 25,812 24,700 (1,112) - (666) (446)
Malaysia 4,005 3,891 (114) 65 (60) (119)
Thailand 15,522 15,622 100 436 (16) (320)
Asia 19,527 19,513 (14) 501 (76) (439)
International(b) 45,339 44,213 (1,126) 501 (742) (885)
Group(b) 88,737 87,812 (925) 724 (765) (884)
UK (One Stop) 212 277 65 65 - -
Czech Republic 92 92 - - - -
Franchise stores 304 369 65 65 - -
(a) Continuing operations.
(b) Excludes franchise stores.
Appendix 6
Tesco Bank income statement
2016/17(a) 2015/16(a)
GBPm GBPm
Revenue
Interest receivable and similar income 622 576
Fees and commissions receivable 390 379
1,012 955
Direct costs
Interest payable (175) (166)
Fees and commissions payable (23) (3)
(198) (169)
Gross profit 814 786
Other expenses:
Staff costs (165) (172)
Premises and equipment (76) (81)
Other administrative expenses (215) (212)
Depreciation and amortisation (96) (91)
Provisions for bad and doubtful debts (105) (68)
Operating profit before exceptional items 157 162
Restructuring and other exceptional items(b) (80) (1)
Operating profit 77 161
Net finance costs: movements on derivatives and hedge accounting 6 (8)
Net finance costs: interest (4) (4) Share of profit/(loss) of joint venture(c) (16) (3) Deduct: management charges - (1) Profit before tax 63 145
(a) These results are for the 12 months ended 28 February 2017 and the previous period comparison is made with the 12 months ended 29 February 2016.
(b) Restructuring and other exceptional items in 2016/17 consists of an increase in the provision for customer redress of GBP45m and business simplification and head office relocation costs of GBP35m.
(c) Share of profit/(loss) of joint venture includes a charge of GBP23m, representing the Group's share of losses incurred by Tesco Underwriting Limited (TU) relating to the impact on TU's insurance reserves of a change in the Ogden tables, which are used to calculate future losses in personal injury and fatal accident cases. The GBP23m charge has been reported as an exceptional item in the Group income statement.
This information is provided by RNS
The company news service from the London Stock Exchange
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