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Tesco Annual Report

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    More than the weekly shop Most people know something about Tesco. After all, we are the UK’s largest grocer and we’ve been serving customers for the best part of a century. What you might not know, is that Tesco is also the world’s third largest grocery retailer with operations in 12 international markets, employing over 440,000 people and serving millions of customers every week. We’re not simply about providing great quality food at affordable prices. We provide more choice than ever to more customers, whether it’s through our expanding international operations, innovative retailing services or our growing non-food offer.

    It doesn’t matter how people choose to shop with us or what they choose to buy, our core purpose remains the same – to create value for customers to earn their lifetime loyalty. We are also playing our part in tackling some of the social and environmental challenges we all face by putting community at the heart of what we do. From carrots to computers, from banking to broadband, from Shanghai to San Diego. We more than the weekly shop.

    I believe these numbers also clearly show that our new businesses are coming of age, after years of patient investment. I am pleased about that because the breadth this gives the Group, combined with the strength of our business model, means that we are able to cope well with changing market conditions and at the same time make the necessary investment in our future growth – in the United States, China and Tesco Direct.

    International is an important part of this. It now makes more than  00m of trading profit, which is about the same as the whole of Tesco did a decade ago, and it contributed over half of the growth in Group trading profit in the year. We have built a new Tesco in the last ten years, serving markets with hundreds of millions of customers – and I believe its growth prospects are even better than the original’s were back then. We saw excellent progress across the international business. Sales and profits grew well, returns rose again but the most striking improvements came in the strengthening positions we have in our chosen markets.

    We added over six and a half million square feet of new selling space overseas in the year – over three times as much as in the UK. Our focus on combining this organic growth with selective acquisitions is also delivering – in Poland, the Czech Republic and Malaysia – with more to come. Our international business now has the scale, the competitiveness and the momentum it needs to be a key driver of our growth for the long-term – because our operations in most of these markets can be two, three or more times larger than they are today. We have made solid progress in the UK.

    It hasn’t been an easy year for our core business – recovering competitors and cautious consumers made sales growth harder to come by. But with strong productivity, mix and margin control, we delivered good results and after a slower end to the year, we have come into the new financial year on better form, trading ahead of the industry and a little ahead of our planned performance range. I believe we are entering the kind of market conditions where Tesco’s strengths stand out; where customers will be looking to us to help them cope with higher bills for mortgages and fuel as well as higher taxes.

    As always, our focus will therefore be on improving their shopping trip – whether it’s in lower prices, shorter queues at checkouts or healthier products to feed the family. Customers recognise the improvements we are making. Whilst we have seen pleasing progress in Non-Food, this has been against a background of more subdued consumer spending in some product categories. Nevertheless, sales grew faster than the core business, profitability was strong and we saw good market share gains.

    Our core general merchandise categories, which are less sensitive to the economic cycle, grew well and we saw robust growth in newer areas such as electricals, furniture and DIY, helped in part by an excellent first full year of trading in Tesco Direct, our online and catalogue non-food business. Our Services businesses had another good year – again demonstrating the growing breadth of the Group – supported by our increasing strength as a leading internet retailer. Dotcom was on excellent form, with sales in our online business again up by over 30%.

    Tesco Telecoms performed well, driven by a very good performance in Tesco Mobile, our joint venture with O2, which moved into profit for the first time in the year. Elsewhere in Services, Tesco Personal Finance (TPF), which celebrates its tenth anniversary this year, has got back to a faster rate of growth, driven by a strong sequence of new product launches and a 20% rise in online sales. TPF has also weathered a difficult financial services market well – with falling bad debts and credit card arrears. But for the impact of last year’s floods on household insurance claims, we would have seen strong profit growth from TPF.

    Our work with communities and the environment has also seen Tesco make encouraging progress. To make sure this work gets the right focus and priority in the business, we made an important change in 2007 by adding it to our four-part strategy for growth – so making Community the fifth element. As the first change of any kind to Tesco’s strategy in more than a decade, this represents a very significant commitment. More detail about our initiatives in this area can be found elsewhere in this report, in our separate Corporate Responsibility Review and on our website.

    We are making strides towards a revolution in green consumption by incentivising the environmental option and making it affordable. We do not start from the position that it is a choice between growing or being green; that somehow we will give up a bit of potency in the focus of the business in pursuing these things. My strong belief is that this is not the case, and that being green will be a good way to grow and add value for shareholders whilst discharging our responsibilities to other stakeholders. That is why Tesco has taken a lead on these matters.

    Some key milestones passed this year included the early achievement of our target to reduce the number of free carrier bags issued to UK customers by 25% in a little over 12 months – saving well over one billion bags, far more than any other retailer. We are on track to save two billion this year. We have also halved our energy use per square foot of selling space since 2000, two years ahead of target. We have invested  25m in creating a Sustainable Consumption Institute at the University of Manchester, bringing together world-leading experts from various disciplines.

    The Institute will help lead the way to a low-carbon economy and society. We plan to begin a programme of carbon labelling of our products in the early weeks of the current year, using our experience of putting clear, useful information in front of customers to help them make informed decisions about the CO2 implications of their product choices. The Directors present their Annual Report to shareholders on the affairs of the Group and Company, together with the audited financial statements of the Company for the year ended 23 February 2008.

    Markets served and business model Tesco’s growth, driven by this strategy, has been predominantly organic and we have used our skills and knowledge in understanding customers, property development, supply chain management, new product development, store formatting and how to localise our offer – to create strong business models in our chosen markets. Where we do not have all the required skills ourselves to be successful, we regularly partner with existing businesses – and these relationships have formed the basis of some of our most successful operations – for example with Samsung in South Korea and with the Royal Bank of Scotland in Tesco Personal Finance.

    The UK grocery retail market remains our largest source of revenue, representing some 46% of last year’s  51. 8bn of sales. International retail sales – from our 12 markets in Europe, Asia and the United States, comprise a further 19% of Group revenues and non-food (in a variety of categories from health and beauty to electronics) accounts for most of the remainder. Our services businesses – not least in financial services and telecoms – have comparatively small revenue streams because some of the most important of them are joint-ventures but they are increasingly material to our earnings base. At the core of Tesco’s business model is a focus on trying to improve what we do for customers.

    We aim to make their shopping experience as easy as possible, lower prices where we can to help them spend less, give them more choice about how they shop – in small stores, large stores or online, and seek to bring simplicity and value to sometimes complicated markets. And we aim to be a good neighbour in the communities we serve, be responsible, fair and honest in our dealings and give customers the information and products they need to make greener choices. We are also an inclusive business – everyone is welcome at Tesco. Because we are a discounter, underpinning this approach is a relentless attitude to being the lowest cost provider of goods and services in our chosen sectors – and this combination of qualities is the reason we have been successful in some of the world’s most competitive markets.

    We have recognised skills and proprietory systems in key areas which help us deliver a low cost model – particularly in customer relationship management, justin-time supply chain and distribution, property development and store formatting. In some of our newer markets – such as telecoms or financial services, our willingness to partner with established businesses has given us access to their existing investment in systems and infrastructure and enabled Tesco to develop competitive, profitable business models quickly and, at the same time, limit our own investment and risk in the early years. Business Review This Business Review analyses the performance of the Tesco Group in the financial year ended 23 February 2008.

    It also explains other aspects of the Group’s markets, results and operations, including strategy and risk management. Long-term strategy Tesco has a well-established and consistent strategy for growth, which has allowed us to strengthen our core UK business and drive expansion into new markets. The rationale for the strategy is to broaden the scope of the business to enable it to deliver strong sustainable long-term growth by following the customer into large expanding markets at home – such as financial services, non-food and telecoms – and new markets abroad, initially in Central Europe and Asia, and now also in the United States. The strategy to diversify the business was laid down in 1997 and has been the foundation of Tesco’s success in recent years.

    The new businesses which have been created and developed over the last decade as part of this strategy now have scale, they are competitive and profitable – in fact, the International business alone makes about the same profit as the entire Group did a decade ago. The Group has continued to make progress with this strategy, which now has five elements, reflecting our four established areas of focus, and also Tesco’s long-term commitments on community and environment. The objectives of the strategy are:

    • to grow the core UK business;
    • to become a successful international retailer;
    • to be as strong in non-food as in food;
    • to develop retailing services.

    We have sustained good growth in the UK and coped well with the challenges of poor weather, recovering competitors, and a deteriorating consumer background. In our international operations we have also made excellent progress, completing a large programme of new store openings and overcome difficult conditions in some of our largest markets. We have also begun operations on the west coast of the United States with our Fresh & Easy stores.

    In non-food, more customers are choosing to shop with us even in a period of more cautious consumer spending and we have seen good growth from Tesco Direct, which extends our reach in selling a broad range of products on the internet and via a catalogue. Our retailing services have delivered another good year, with tesco. om sustaining its rapid growth, Tesco Personal Finance making progress in challenging markets and Telecoms continuing to build its customer base strongly and moving into profitability. Finally, we are making strides towards a revolution in green consumption, having reduced carrier bag use by over one billion – more than any other retailer and are on target to sell ten million energy efficient lightbulbs in a year as part of the Climate Group’s ‘Together’ campaign.

    Group performance This year’s results represent very good progress across the Group and have been achieved by investing to improve the shopping experience for customers in our businesses in the UK and around the world. We have been able to deliver another solid sales performance, and through good cost control and productivity improvements, we have grown profits slightly faster than revenue – and thereby improved returns for shareholders. These improvements have been achieved whilst continuing to invest in the long term – in the people, assets, processes and systems, which will enable Tesco to sustain its success in the future. Results These results are for the 52 weeks ended 23 February 2008, compared with the same period ending in February 2007. Results from our business in China are consolidated in the full-year results for the first time.

    Group sales, including VAT, increased by 11. 1% to  51. 8bn (last year  46. 6bn). At constant exchange rates, sales increased by 10. 4%. In April 2006, with our Preliminary Results for 2005/6, and following our transition to IFRS, we introduced an underlying profit measure, which excludes the impact of the non-cash elements of IAS 19, IAS 32 and IAS 39 (principally pension costs and the marking to market of financial instruments). With these Results, the underlying profit measure also excludes the impact of the non-cash element of IAS 17 ‘Leases’, relating to the impact of annual uplifts in rent and rent free periods.

    We have also benefited from an adjustment of deferred tax balances as a result of the lowering of the rate of UK corporation tax from 30% to 28% with effect from 1 April 2008. We expect the effective tax rate for the current year to be around 27. 5%. Underlying diluted earnings per share increased by 20. 8% to 27. 02p (last year 22. 36p), benefiting from the significantly lower than normal effective tax rate for the year and from the elimination of earnings dilution linked to new share issuance, resulting from our share buy-back programme. On a normalised 28. 9% tax rate basis, underlying diluted earnings per share rose by 13. 1%. Dividend The Board has proposed a final dividend of 7. 70p per share (last year 6. 83p).

    This represents an increase of 12. %, and takes the fullyear increase in dividend to 13. 1%. This increase in dividend is in line with the growth in underlying diluted earnings per share, which are inclusive of net property profits, using our normalised tax rate of 28. 9%. Going forward, we intend to continue to grow annual dividends broadly in line with underlying diluted earnings per share growth. The final dividend will be paid on 4 July 2008 to shareholders on the Register of Members at the close of business on 25 April 2008. Shareholders have the opportunity to elect to reinvest their cash dividend and purchase existing Tesco shares in the Company through a Dividend Reinvestment Plan.

    We manage and fund our scheme on an actuarial valuation basis and, as at December 2007, the scheme was estimated to be broadly fully funded. As at February 2008, under the IAS 19 methodology of pension liability valuation, the Group pension deficit on a post-tax basis was  603m. Return on capital employed In January 2004, we said that we had an aspiration to increase our post-tax return on capital employed (ROCE) of 10. 2% in the 2002/3 financial year by 200 basis points over five years on then current plans. In April 2006, we renewed our commitment to increasing our post-tax return on capital employed (ROCE) by a further 200 basis points, having exceeded our 2004 aspiration early.

    ROCE rose to 12. % in the year, using a normalised tax rate, before start-up costs on the US and Tesco Direct and the impact of foreign exchange equity and our acquisition of a majority share in Dobbies (last year ROCE was 12. 6%, excluding the Pensions A-Day credit). This represents a good performance and we remain on track to deliver our targeted ROCE improvement in the years ahead as these investments mature. In the UK, our planned investments in strengthening further our offer for customers, involving our latest round of price cuts and the introduction of stronger promotions – and at the same time continuing to improve availability and service standards – have gone well.

    UK like-for-like sales growth, excluding petrol, was over 4% in the first five weeks of the new year. This figure is adjusted for the different timing of Easter this year and is a little ahead of our planned performance range (of between 3% and 4%) for the year as a whole. Within this, inflation was under 1. 5%. International sales progress has also been pleasing. Sales growth was strong – 19% at actual rates in the first five weeks.

    Overall, growth moderated only slightly compared with last year despite passing the anniversary of the acquisition of both Leader Price in Poland and the majority holding in our business in China. Total Group sales increased by 13% in the same period. Releasing value from property Our ? bn-plus programme of releasing value from property through a sequence of joint ventures and other transactions and return significant cash to shareholders over five years, both through enhanced dividends and share buy-backs, is on track. The two transactions completed in 2007 delivered aggregate proceeds of 1. 2bn.

    The first of these deals, with the British Airways Pension Fund, was completed at the end of the 2006/7 financial year. A second, larger joint venture transaction was completed with The British Land Company PLC in March 2007 and our reported first half property profits largely reflected the significant book profit on this transaction. We completed a third such deal in February 2008 – with Prudential plc – on a 4. 8% yield, realising proceeds of  207m. The premium to book value on this transaction was 66%.

    Whilst yields have increased modestly in recent months, appetite for Tesco’s property and covenant remains strong, and if market conditions remain conducive, we expect to be able to complete further transactions on attractive terms in the months ahead. We are currently in discussion with potential counterparties. Proceeds will continue to be used to fund expansion and our share buy-back programme – which has already re-purchased Tesco shares worth over  1. 1bn. The net book value of our fixed assets is  19. 8bn, most of it in our freehold store portfolio – even after recent property divestments linked to our  5bn programme. We estimate the current market value of these assets to be  31bn, representing a 57% premium to book value.

    Key performance indicators (KPIs) We operate a balanced scorecard approach to managing the business that is known internally within the Group as our ‘Steering Wheel’. This unites the Group’s resources and in particular focuses the efforts of our staff around our customers, people, operations, finance and the community. Its prime focus is as a management tool for the company so that there is appropriate balance in the trade-offs that need to be made all the time between the main levers of management – such as operations measures, financial measures or delivery of customer metrics. It therefore enables the business to be operated and monitored on a balanced basis with due regard to the needs of all stakeholders.

    For the owners of the business, it is simply based around the philosophy that if we look after customers well and operate efficiently and effectively then shareholders’ interests will always be best served by the inevitable outputs of those – growth in sales, profits and returns. Tesco PLC Annual Report and Financial Statements 2008 7 Business Review continued 2008* 2007 Sales growth Change in Group sales over the year (including value added tax) UK sales growth International sales growth International sales growth (at constant exchange rates) Profit before tax Underlying profit before tax Trading margin UK trading margin International trading margin Trading margin is calculated from the trading profit expressed as a percentage of Group revenue (sales excluding value added tax).

    It is a measure of profit generation from sales and is a comparable performance measure with other companies. This is how much we made from trade in our stores, taking account of the cost of the products sold, wages and salaries, expenses associated with running the stores, depots and head office, and the cost of depreciation of the assets used to generate the profits. Trading profit is stated after adjusting operating profit for the impact of IAS 19, IAS 32 and IAS 39 (principally pension costs and the marking to market of financial instruments). It also excludes the non-cash elements of IAS 17 ‘Leases’, relating to the impact of annual uplifts in rents and rent-free periods.

    Net cash inflow/(outflow) Net cash inflow is the cash received less cash spent during the financial period, after financing activities. Capital expenditure This is the amount invested in purchasing fixed assets. UK International Net borrowings and gearing Net borrowings Gearing Return on capital employed (ROCE) ROCE is calculated as profit before interest less tax divided by the average of net assets plus net debt plus dividend creditor less net assets held for sale. ROCE is a relative profit measurement that not only incorporates the funds shareholders have invested, but also funds invested by banks and other lenders, and therefore shows the productivity of the assets of the Group.

    Underlying diluted earnings per share Underlying diluted earnings per share is the calculation of profit after tax and minority interest divided by the diluted weighted average number of shares in issue during the year. It is the amount which could be paid out on each share if the Company decided to distribute all its profits as dividends instead of retaining some for future expansion. The measurement of net debt has been revised to include loans receivable from joint ventures. Going forward net debt will be stated inclusive of the loan receivables from joint ventures.

    International margins rose by 15 basis points excluding the impact of consolidating the China business. Using a ‘normalised’ tax rate before start-up costs in the US and Tesco Direct, and excludes the impact of foreign exchange in equity and our acquisition of a majority share of Dobbies. Including the one-off gain from Pensions A-Day, ROCE was 13. 6%. Total shareholder return is the notional return from a share and is measured as the percentage change in the share price, plus the dividend paid. This is measured over the last five years.

    Full year dividend per share The growth of the dividend per share from one period to the next is important to shareholders since this represents their actual cash return, and is usually paid twice a year.We monitor a wide range of KPIs, both financial and non-financial. Individual business units have their own versions of the Steering Wheel which incorporate their own priorities and KPIs. Some of the Group KPIs below are tracked through the Steering Wheel and those above are tracked as a monitor of investor return. Across the Group, KPIs are set for local markets, with oversight from the Executive Directors, to ensure they are tailored to drive the priorities of each business.

    During the last year we have made good progress with rolling out our Corporate Responsibility management system to our International operations. We report quarterly on Community, which includes social, ethical and environmental matters alongside Customer, Operations, Finance and People KPIs. More detail on each country follows in the ‘Operations, resources and relationships’ section.

    Returns – CROI All our established markets are now profitable and with growing local scale, increasing store maturity and the benefits of new investment in supply chain infrastructure, returns from our international operations are continuing to rise. On a constant currency basis and excluding China, cash return on investment (CROI*) for International was the same as last year at 11. 5%. This reflects the rise in invested capital linked to our acquisitions in Poland and the Czech Republic in 2006 and higher capital expenditure. Like-for-like CROI shows a strong improvement, rising to 13. 1% (last year 12. 7%), with our lead markets maintaining significantly higher levels overall. Returns in Turkey and Malaysia have shown pleasing improvement.

    In Central Europe, Hungary and Slovakia delivered increases in returns, while the performance in Poland and the Czech Republic was held back temporarily by the additional capital linked to our acquisitions in 2006. Asia We have delivered a very strong performance in Asia, despite retail markets in our two largest countries – South Korea and Thailand – remaining subdued. We are now market leader in Malaysia, just seven years after we entered the country and we are accelerating growth and investment in China now that we have full control of our business there. > In China, with majority ownership and full management control of the business, we have begun to accelerate store and infrastructure development as part of our long-term strategy to become a leader in the market.

    We plan to construct large multi-level freehold shopping centres, built around Tesco hypermarkets, in the major cities of the three main economic regions – around Shanghai, Beijing and Shenzhen/Guangzhou. These regions will each have modern distribution and supply chain facilities. We now have 56 hypermarkets, mostly around Shanghai and our first stores in the other regions are trading well. The first four of our new large developments will be constructed in the current year. We saw strong sales, including good like-for-like growth in the year and China made a modest profit.  The retailing environment in Japan remains difficult. Our small but profitable business there has continued to focus on refining and developing the trial Express-type stores, which we began to open last year – with seven now trading – into an expandable format.

    In Central Europe we are emerging from a long period of economic instability and intense competition as one of the clear winners across the region – and the prospects for improving returns as we continue to build our market positions, and benefit from increased scale, regional economies and improved infrastructure, have never been better. The work we have done on pan-European sourcing of Tesco own brand and general merchandise has further strengthened our competitive position in the region. Our business in Ireland has also made excellent progress and we are increasingly confident about the scale of opportunity for Tesco in Turkey as we build on the excellent Kipa brand, which has already proven itself capable of trading well across much of the country. gt; In the Czech Republic, the benefits of our improved market position – we are now among the leaders – and stability following the very successful acquisition and integration of the Carrefour stores last year are starting to come through well.

    The performance of the acquired stores has been excellent – with second year like-for-like sales growth of 11%. Our first Express stores have also been well-received by customers in central Prague and we are continuing a programme of refits – and in some cases major redevelopments – of our department stores.  The economic background in Hungary is showing early signs of improvement although the consumer environment remains challenging.

    However, our strategy of investing hard to build on our already strong market position by lowering prices and expanding our store network is yielding good results. We have seen improving performance from our stores, including a resumption of like-for-like sales growth last summer, renewed profit growth and a significant improvement in returns.

    Consumer electronics saw very strong growth (31%), with particularly large increases in the sales of flat-screen televisions, laptop computers and digital cameras. Other strong categories include DIY, furniture and books. Tesco Direct Our new general merchandise business, which is designed to extend the reach of our non-food offer by making it more available to customers who cannot access one of our Extra stores, is now established and thriving. We started Tesco Direct in a low-key way – with initially 8,000 products offered online and 1,500 by catalogue, including new categories such as furniture and last March, we successfully launched a more comprehensive offer.

    Our latest catalogue, the third of our big books, which was launched last month, demonstrates the growing strength of our offer. We have 11,000 products online and 7,000 in the catalogue. The breadth of range is similar but we have refined the mix of products, increasing the proportion of higher ticket items. Service levels and availability for customers have also seen steady improvement. Customer response has been very positive with order volumes rising season by season. As well as wider ranges, Tesco Direct provides customers with the choice of ordering online, by phone or in selected stores and the option to pick up items from some stores is proving very popular.

    We have desks in 200 stores with plans to add a further 80 by the end of the year, which will mean that most areas of the country will be served. Sales are growing well, and last year, we comfortably exceeded our plan to generate turnover in excess of  150m – delivering sales of almost  180m. Start-up costs and initial operating losses on Direct were 25m, up on last year and we expect these to reduce this year to around  20m. Homeplus We are extending the trial of our general merchandise-only stores to a further ten large sites, including our new store at Cribbs Causeway, Bristol, which will open this summer, selling some Tesco Direct products from stock.

    Dobbies The acquisition of a majority share in Dobbies Garden Centres PLC was completed at the end of the first half and with our 65. 5% ownership of the business we are now implementing the strategy we outlined for the business at the time the offer was announced. Dobbies is a strong business, already a leading innovator in its market and with Tesco’s resources, it will be able to expand more rapidly towards national coverage. It will also become a platform for the group to encourage green consumption – by developing an offer for customers who are looking for sustainable solutions – from water recycling, to wind and solar power. In April 2008, Dobbies announced an open offer of new shares to raise 150m of additional capital to fund expansion.

    Retailing services operations Our efforts to bring simplicity and value to sometimes complicated markets are behind the success of our retailing services businesses. Underpinning our services strategy is a strong economic model, based around leveraging existing assets – either our own or a partner’s – so that we can simultaneously price our services competitively for customers and also achieve high returns for shareholders.

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    Tesco Annual Report. (2018, Mar 01). Retrieved from https://graduateway.com/tesco-annual-report/

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    What are the annual profits of Tesco?
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    Tesco's latest twelve months gross profit margin is 7.8%. Tesco's gross profit margin for fiscal years ending February 2018 to 2022 averaged 6.2%. Tesco's operated at median gross profit margin of 6.2% from fiscal years ending February 2018 to 2022.

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