«Build a Better Tesco»: Group will exit the U.S.

Dundee / UK. (tplc) Tesco PLC announced its preliminary results 2012/2013. Group sales, including VAT, increased by 1,3 percent to 72,4 billion GBP. At constant exchange rates, sales increased by 2,5 percent (including petrol) and 3,1 percent (excluding petrol).

Group trading profit was 3’453 million GBP, down (13,0) percent on last year, reflecting the investment in the shopping trip for customers in the UK, in addition to the impact of regulatory restrictions on opening hours in Korea and the effects of deteriorating economic conditions, particularly in Central Europe. Group trading margin was 5,3 percent, down 87 basis points.

Chief Executive´s Statement

CEO Philip Clarke: «The announcements made with this release are natural consequences of the strategic changes we first began over a year ago and which conclude today. With profound and rapid change in the way consumers live their lives, our objective is to be the best multichannel retailer for customers».

«Our plan to ‘Build a Better Tesco’ is on track and I am pleased with the real progress in the UK. We have already made substantial improvements to our customers´ shopping experience, which are starting to be reflected in a better performance».

«We have set the business on the right track to deliver realistic, sustainable and attractive returns and long-term growth for shareholders. The consequences are non-cash write-offs relating to the United States, from which we today confirm our decision to exit and for UK property investments which we will not pursue because of our fundamentally different approach to space».

«We have also faced external challenges which have affected our performance, notably in Europe and Korea. Our focus now is on disciplined and targeted investment in those markets with significant growth potential and the opportunity to deliver strong returns».

Highlights:

  • 3,5 billion GBP trading profit – year-on-year performance largely reflects UK reinvestment
  • Final dividend maintained at 10,13 Pence, giving full-year dividend of 14,76 Pence
  • Good progress in the UK, delivering improved results – for customers and for Tesco
  • Strong online performance: Group sales of over three billion GBP for the first time – up 13 percent
  • Confirming exit from the United States – process well-advanced
  • F+F brand clothing sales now exceed one billion GBP in UK alone, with plus nine percent LFL sales growth
  • Clear approach to future growth, capital expenditure, returns and cash, providing clarity for shareholders

Strategic Update

It has been an important year for the Tesco Group, with challenges and opportunities in many of the markets we operate in. Some of these formed a core part of our plans for the year – such as our investment to get the UK business back on track; some became more prevalent throughout the course of the year – such as the severity of the impact of regulatory restrictions on opening hours in Korea and the deteriorating economic conditions and the consequential impacts on consumers in Europe.

Despite these challenges, we have taken action throughout the year to better position the Group for the future. In the last twelve months, we have:

  • Announced and made progress on our plans to ‘Build a Better Tesco’ in the UK
  • Launched a strategic review of Fresh + Easy in the United States
  • Taken a more measured approach to our growth in China
  • Successfully completed our work to establish Tesco Bank on our own platforms
  • Exited Japan

Further action in two areas: First, based on our progress so far with our strategic review of Fresh + Easy, including the indications of interest received from third parties, we have confirmed that the outcome of the review will be an exit from the United States. As such, Fresh + Easy has been treated as a discontinued operation within these results. Whilst the process is ongoing and as such the form and final financial impact of the exit is still to be determined, we have written down the assets of the business and booked a provision for ongoing liabilities. The total impact to profit after tax is (1,2) billion GBP, including (169) million GBP trading losses and (1,0) billion GBP non-cash items – predominantly the impairment of fixed assets and provisions for onerous leases.

Second, following on from an announcement in April 2012 that we would be reducing the level of new space growth in the UK going forward, we have carried out an in-depth review of our property pipeline. We have reviewed all of the schemes included in the pipeline individually, assessing their viability and potential to deliver an appropriate level of return on capital employed if built out. As a result, we have identified more than 100 sites – the majority of which were bought between five and ten years ago, at a higher point in the property cycle – which we no longer plan to develop and have therefore written their values down. In addition to a number of other provisions, including for the impairment of schemes which still can deliver an attractive return, but one lower than originally anticipated, this has led to a total one-off UK property write-down of (804) million GBP.

The fundamental change in our approach to new space also has implications for our sale and leaseback programme. Two years ago, we reviewed the programme and announced a steady reduction in the level of divestments, in order to ensure that any property profits released were matched to the level of new profit created by development activities. Given that we have significantly reduced the amount of these activities going forward, we believe that it is appropriate to accelerate the scaling back of the sale and leaseback programme, such that it is unlikely to make a material contribution after the next few years.

Our reported underlying profit measure includes these property profits and therefore its growth over the next few years will be held back by this accelerated reduction. We will therefore adjust for this impact when using underlying earnings per share as the basis for our dividend policy.

Group Results

Group sales, including VAT, increased by 1,3 percent to 72,4 billion GBP. At constant exchange rates, sales increased by 2,5 percent (including petrol) and 3,1 percent (excluding petrol).

Group trading profit was 3’453 million GBP, down (13,0) percent on last year, reflecting an investment in the shopping trip for customers in the UK, in addition to the impact of regulatory restrictions on opening hours in Korea and the effects of deteriorating economic conditions, particularly in Central Europe. Group trading margin was 5,3 percent, down 87 basis points.

Underlying profit before tax declined by (14,5) percent to 3’549 million GBP. Group profit before tax declined by (51,5) percent to 1’960 million GBP, due to the impact of a number of significant one-off charges, including:

  • UK property write-down of (804) million GBP, following an in-depth review of our forward pipeline
  • Goodwill impairment of (495) million GBP, reflecting the impact of differing growth prospects in today´s environment for the businesses we acquired in Poland, the Czech Republic and Türkiye in the mid-1990s to early-2000s
  • Increase of (115) million GBP in our provision for potential Payment Protection Insurance claims against Tesco Bank

Following our confirmation that the strategic review of Fresh + Easy will result in an exit from the United States, the results of our business there, in addition to those of our business in Japan, have been classified as discontinued operations in these results.

Info: The complete and very long statement about Tesco´s preliminary results 2012/2013 is available on tescoplc.com (HTML and PDF).
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