Tesco PLC
25 April 2006
TESCO PLC
PRELIMINARY RESULTS 2005/6
Year ended 25 February 2006*
STRONG PROGRESS ACROSS THE GROUP
RESULTS
On a continuing** Including 52 weeks Including 60 weeks
business basis: International International
Group sales (inc. VAT) £41.8bn 13.2% £43.1bn 16.7%
Group revenue (exc. £38.3bn 13.0% £39.5bn 16.5%
VAT)
New underlying profit*** £2,251m 16.9% £2,277m 18.3%
Old UK GAAP underlying £2,307m 13.7% - -
profit**** (LY £2,029m)
Group profit before tax £2,210m 16.7% £2,235m 18.0%
New underlying diluted 20.06p 14.1% 20.30p 15.5%
earnings per share
Diluted earnings per 19.70p 13.9% 19.92p 15.1%
share
HIGHLIGHTS (on a 52-week basis)
• 13.2% increase in group sales**
• 16.9% increase in new underlying profit***
• 14.1% increase in new underlying*** diluted earnings per share
• 14.2% increase in full year dividend - in future also to rise in line
with earnings
• Return on capital employed reaches 12.8%. Target of 12.2% exceeded two
years early. New target set
• Up to £5bn cash to be released from property over next five years -
£1.5bn to be used to buy-back shares to offset future earnings per share
dilution from options etc.
• Good progress with all four parts of strategy:
- International sales up 23.0%; pre-property operating profit up 28.8%
- Core UK sales up 10.7%; pre-property operating profit up 10.6%
- UK Non-food sales up 13%
- Tesco.com sales up 31.9% to almost £1bn; Tesco Personal Finance
delivers £139m profit; Telecoms customer numbers exceed 1.5m
• Over 20,000 new jobs to be created worldwide this year
• New £100m capital fund established to invest in environmental technology
Terry Leahy, Chief Executive, comments:
' These results represent good progress across the group in a more challenging
year. By investing to improve the shopping experience for customers in our
businesses around the world, we have been able to deliver another strong sales
performance, manage the impact of higher oil-related and other external costs
and improve returns for shareholders.'
* In April 2005, Tesco announced that in the 2005/6 financial year it intended
to align the year end of its International operations with its UK business.
These results combine 60-weeks trading for International and 52-weeks trading
for the UK and Republic of Ireland, for the period ended 25 February 2006.
** These results are presented on a continuing business basis (i.e. excluding
Taiwan, which we intend to divest as part of the asset swap deal with Carrefour
announced last September).
*** New underlying pre-tax profit is our internal profit measure which excludes
IAS 32 and IAS 39 and the non-cash elements of IAS 19, which are replaced by the
normal cash contributions.
**** Our pre-IFRS underlying pre-tax profit excluded net profit or loss on
disposal of fixed assets, integration costs and goodwill amortisation.
RESULTS
Year-end Convergence. We announced in April 2005 that due to the increasing
contribution our international businesses make to group results, we had taken a
decision to align our international accounting period with the UK's year-end in
2005/6. These results therefore report on the performance of our International
business on the basis of a 60-week (14 month) year, including a 36-week second
half to the end of February, compared with the normal 52 weeks to the end of
December. The UK and Republic of Ireland's accounting period remains unchanged.
Where appropriate for ease of comparison, international and Group results are
also reported on a 52-week basis (based on the normal 12 month calendar year for
International).
Group. These results are presented on a continuing business basis (i.e.
excluding Taiwan, which we intend to divest as part of the asset swap deal with
Carrefour announced last September).
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
Group sales (inc. VAT) £41,819m 13.2% 11.6% £43,137m 16.7% 15.0%
Statutory profit before tax £2,210m 16.7% 15.3% £2,235m 18.0% 16.5%
Following our transition to IFRS, we have introduced a new underlying profit
measure, which excludes the impact of the volatile non-cash elements of IAS 19,
IAS 32 and IAS 39 (principally pension costs and the marking to market of
financial instruments).
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
New underlying profit £2,251m 16.9% 15.5% £2,277m 18.3% 16.8%
before tax
For comparison, using our pre-IFRS underlying profit definition, profit
increased by 13.7% to £2,307m on a 52-week basis (last year £2,029m).
IFRS. From the beginning of the financial year we have fully adopted
International Financial Reporting Standards (IFRS). Prior year (2004/5)
comparatives have been restated and these are used as the basis for comparison
throughout this statement, except for the adoption of IAS 32 and IAS 39. For
these we used the exemption available under IFRS1 in 2004/5, and they were
adopted for the first time in 2005/6.
The impact of IFRS on profit after tax for the whole of 2005/6, before IAS 32
and IAS 39, is a reduction of £37m, broadly in line with the guidance we
provided at our IFRS Seminar in February 2005. Together, IAS32 and IAS39 reduced
pre-tax profit in the year by £13m.
The following table shows key results as reported under IFRS and the equivalent
performance using our previous accounting policies under UK GAAP. Further
summary reconciliations to UK GAAP can be found in Appendices A and B.
Key IFRS profit measures and UK GAAP equivalent measures
On a continuing and IFRS UK GAAP equivalent*
52-Week Comparison Basis 05/06 04/05 Growth 05/06 04/05 Growth
Group profit before tax (£m) 2,210 1,894 16.7% 2,287 1,962 16.6%
New underlying profit (£m) 2,251 1,925 16.9% n/a n/a n/a
Pre-IFRS group underlying profit n/a n/a n/a 2,307 2,029 13.7%
(£m) ** (£m)
UK operating profit (£m)*** 1,788 1,556 14.9% 1,858 1,694 9.7%
Asia operating profit (£m)*** 200 153 30.7% 200 152 31.6%
Europe operating profit (£m)*** 265 243 9.1% 272 218 24.8%
Joint Ventures & Associates (£m) ** 82 74 10.8% 160 135 18.5%
** (£m)
Underlying diluted EPS (p) 20.06 17.58 14.1% 20.43 18.30 11.6%
* Under UK GAAP, Taiwan losses are included.
** Underlying pre-tax profit excluded net profit or loss on disposal of fixed
assets, integration costs and goodwill amortisation.
*** Under UK GAAP, our operating profit measure excluded net profit or loss on
disposal of fixed assets, integration costs and goodwill amortisation.
**** Under IFRS, share of Joint Ventures and Associates profit is reported net
of interest and tax.
International
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
International sales (inc. £9,162m 23.0% 15.5% £10,480m 40.7% 31.8%
VAT)
International pre-property £474m 28.8% 21.6% £505m 37.2% 29.3%
operating profit
International operating £465m 17.4% 10.8% £492m 24.2% 17.2%
profit
International pre-property operating margins rose from 5.5% to 5.7% on a 52-week
basis. Using our pre-IFRS underlying operating profit definition, and on a
52-week basis, operating profit increased by 27.6% to £472m (last year £370m).
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
Asia sales (inc. VAT) £3,916m 26.4% 16.8% £4,660m 50.5% 39.0%
Asia pre-property operating £203m 30.1% 20.0% £236m 51.3% 39.6%
profit
Asia operating profit £200m 30.7% 20.6% £229m 49.7% 38.2%
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
Rest of Europe sales (inc. 5,246m 20.6% 14.6% £5,820 33.8% 26.7%
VAT)
Rest of Europe pre-property £271m 27.8% 22.7% £269m 26.9% 21.8%
operating profit
Rest of Europe operating £265m 9.1% 4.7% £263m 8.2% 3.9%
profit
Operating profit growth in Rest of Europe was impacted by the existence of a
one-off £31m property profit in the prior year (see Appendix B2). Pre-property
operating profit in Rest of Europe rose by 27.8% on a 52-week basis.
UK. UK sales increased by 10.7% to £32.7bn (last year £29.5bn), with
like-for-like growth of 7.5% (including volume of 7.6%) and 3.2% from net new
stores. Deflation overall was 0.1%, despite the effect of rising oil prices on
our petrol business. We saw deflation of 1.8% in our stores as we continued to
invest in lowering prices for customers.
Petrol continues to have a significant impact on sales growth, helped by our
efforts to keep fuel prices down, although its contribution to like-for-like
sales during the second half, against last year's exceptionally strong growth,
was lower than in the first half.
Fourth quarter like-for-like sales growth, excluding petrol, was 4.9%. Including
petrol, like-for-like sales grew by 6.2%. Total sales grew by 9.4% in the
quarter, including 3.2% from net new stores. In the final seven weeks of the
financial year, like-for-like growth, excluding petrol and adjusted for the
different timing of Easter, was 4.0%. We saw slower like-for-like sales growth
in January but the rate of growth picked up in February before the year-end and
again in the early weeks of the current year.
Through good cost control and productivity we have absorbed significant external
cost increases during the year, particularly during the second half, arising
mainly from higher oil-related costs and increases in local business taxes.
Consequently, UK operating profit was 14.9% higher at £1,788m (last year
£1,556m). The UK pre-property operating profit rose 10.6% to £1,698m, leaving
the operating margin unchanged at 5.7%. Using our pre-IFRS underlying profit
definition, operating profit increased by 9.7% to £1,858m (last year £1,694m).
We have discontinued our practice of depreciating land premia (the premium paid
for food retail use over alternative use) for store sites. Due to the general
increase in land prices and in particular residual values, we believe this to be
no longer appropriate. This is a change of accounting estimate and as such has
been accounted for in 2005/6 and benefits the income statement by approximately
£20m.
Joint Ventures and Associates. Our share of profit (net of tax and interest) for
the year was £82m compared to £74m last year. Using the pre-IFRS, UK GAAP
measure, our share of Joint Venture and Associates profit rose to £160m. Tesco
Personal Finance profit was £139m, of which our share was £70m, down 1.4% on
last year, due to the change in provision policy for bad debts under IFRS and
the competitive nature of the motor insurance market. On a pre-IFRS basis,
profit was slightly higher than last year, including growth of 2.4% in the
second half.
Net finance costs were £127m (last year £132m), giving interest cover of 18.6
times (last year 15.3 times). Total Group tax has been charged at an effective
rate of 29.0% (last year 28.6%).
New underlying diluted earnings per share increased by 14.1% to 20.06p on a
52-week comparison basis (last year -17.58p).
Dividend. The Board has proposed a final dividend of 6.10p per share (last year
5.27p). This represents an increase of 15.7% and brings the full year dividend
per share to 8.63p, up 14.2% on last year. We have now built dividend cover to
comfortable levels and this increase in the full year dividend is in line with
52-week earnings per share growth. We also intend to grow future dividends
broadly in line with underlying diluted earnings per share growth going forward,
instead of building dividend cover, which has been our dividend policy for the
last three years.
The final dividend will be paid on 14 July 2006 to shareholders on the Register
of Members at the close of business on 5 May 2006. Shareholders will continue to
have the right to receive the dividend in the form of fully paid ordinary shares
instead of cash. The first day of dealing in the new shares will be 14 July
2006.
Cash Flow and Balance Sheet. The group generated net cash of £165m during the
year, benefiting from strong cash flow from operating activities (£3.4bn) and
the net proceeds of £346m from our property joint venture with Consensus. Within
this, £239m of cash was released from working capital, which was £199m lower
than last year. This was due mainly to a smaller rise in trade creditors than
last year (last year's increase was exceptionally large and the change in the
International year end reduced trade creditors), higher non-food stocks (linked
to direct sourcing) and increased debtors (resulting mainly from key money on
new leasehold stores in Korea).
Net borrowings, at £4.5bn at the year-end, were higher than last year, primarily
due to IAS 32 and IAS 39. Excluding the impact of IAS 32 and IAS 39, net debt
was broadly unchanged at £3.9bn. Gearing was 48%.
Group capital expenditure during the year (excluding acquisitions) was £2.8bn
(last year £2.4bn). This includes £0.1bn of capital spent in International
during the extra trading weeks in early 2006. UK capital expenditure was £1.8bn
(last year £1.7bn), including £760m on new stores and £404m on extensions and
refits. Total international capital expenditure rose to £1.0bn (last year
£0.7bn) reflecting the extra trading weeks, plus our enlarged new store opening
programme, and comprising £0.4bn in Asia and £0.6bn in Europe.
We expect group capital expenditure to be around £3.0bn this year, reflecting a
stable level of investment in the existing business, together with the £250m of
capital, which we announced in February would be invested in establishing our
operations in the United States.
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. The
excellent progress the business has made since then means that ROCE has exceeded
our target of 12.2% this year; two years early.
On an equivalent (pre-IFRS) basis ROCE increased by 260 basis points to 12.8% in
just three years. This increase represents more than a 70% increase in the
economic profit made by the business (the extent to which return on capital
exceeds the estimated weighted cost of capital for the group). Operational
improvement in the business has delivered almost three-quarters of this increase
in returns and the balance reflects the benefits of our property funding
initiatives with Topland and Consensus.
We remain committed to delivering rising returns for shareholders and to
demonstrate this we have decided to set a new return on capital employed target
for the group. We aim to improve ROCE by a further 200 basis points from a
combination of operational improvement and more efficient use of the property
element of our balance sheet. All four parts of our strategy will contribute to
this improvement. The base ROCE in 2005/6 under IFRS, which includes pension
fund liabilities, is 12.6% (12.7% on a 60-week basis). The formula we use for
calculating ROCE can be found in Appendix C.
PROPERTY FUNDING & CONSERVING EQUITY
We have sought freehold tenure for most of our new selling space in recent years
because leased developments have in the past tended to give disproportionate
rewards to landlords, making it hard to remodel or expand stores. As a result,
freeholds now represent significantly more of our property assets - around 85%
of book value - compared with historic levels of around 70%. A strength of our
balance sheet is this asset-backing; the net book value of our fixed assets is
£15.9bn, most of it in freehold property valued at historic cost.
These appreciating freehold assets, whose market value we estimate to be around
50% higher than book value, provide us with the platform we require as retailers
to expand and develop our stores for customers and they also represent an
important store of value for our shareholders. Through capital expenditure we
are currently adding some £2bn of new freehold assets a year.
Over the last two years, through our joint ventures with Topland, Consensus and
Morley, Tesco has developed an updated version of our property joint ventures.
These provide us with the right platform to run our stores. At the same time,
they have enabled us to fund our growth efficiently by releasing cash from our
freehold property base, create a stream of material property profits and enhance
returns.
Looking forward, we plan to release more cash from property in the same way,
through a sequence of similar joint venture deals, both in the UK and
internationally. We intend to maintain an overall asset mix of over 70%
freehold. The total scale of this sale and leaseback programme in terms of cash
proceeds over the next five years is expected to be up to £5bn.
At least £1.5bn of these proceeds will be used to buy Tesco shares in the
market, initially to offset future dilution to earnings per share principally
from scrip dividend and share option issuance. The balance will be used to
enhance shareholder value, either through the funding of future growth, or by
further return of capital.
PENSIONS
The provision of Tesco's award-winning UK defined benefit pension scheme for our
staff remains an important priority. It goes to the heart of our values and
helps us attract and retain the best people. During the year, the Trustee
completed its 3-yearly valuation of the pension fund. In March 2005, it had a
small deficit of £153m in a Scheme which now has over £3bn of assets. By the end
of the financial year in February 2006, the fund was estimated to be fully
funded, largely as a result of improved asset performance. In recognition of the
increasing cost of pensions we have recently increased both the company and
member contributions.
It is a young scheme. With 150,000 employed members but only 15,000 pensioners,
the scheme has many years to ensure that the type of assets held match its
liabilities. The fund's strategy is to invest in 50% equities, 20% bonds, 10%
property and 20% alternative asset classes, including private equity and
commodities. It offers the prospect, over time, of returns that should make the
scheme more cost efficient for the members and the business. In 2005, the
scheme's assets appreciated by around 20%.
IFRS requires that we value pension scheme liabilities using a high quality
corporate bond yield, and calculate the operating charge in the income statement
as if invested purely in bonds. This has proven to be an extremely volatile
measure. During a two-week period in January 2006, for example, bond yields fell
by 20 basis points, increasing our IAS 19 liability by £200m (before tax). At
February 2006, the IAS19 pension deficit was around £850m on a post-tax basis.
Mainly as a consequence of bond yields falling by 0.6% during 2005/6 as a whole,
our IFRS pensions charge for next year could increase by approximately £130m.
We will, of course, produce our accounts in full compliance with IFRS. However,
we intend to include in our new underlying profit number, the normal cash cost
of funding the pension to reflect how the fund is actually managed and funded.
STRATEGY
We have continued to make good progress with all four parts of our strategy:
- maintain a strong core UK business
- become an international retailer
- be as strong in non-food as in food
- develop retailing services
We have done this by keeping our focus on trying to improve what we do for
customers. We try 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 on-line, and seek to bring
simplicity and value to sometimes complicated markets.
International. Our international businesses delivered a solid performance in the
year, despite challenging economic and competitive conditions in some markets.
With rising customer numbers, good sales growth, growing local scale, increasing
store maturity and the benefits of central distribution, performance and returns
from our international operations are continuing to strengthen.
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
International sales (inc. VAT) £9.2bn 23.0% 15.5% £10.5bn 40.7% 31.8%
International pre-property £474m 28.8% 21.6% £505m 37.2% 29.3%
operating profit
International operating profit £465m 17.4% 10.8% £492m 24.2% 17.2%
International returns are continuing to rise. On a constant currency basis, cash
return on investment (CROI*) for international has increased to 11.4%, despite a
high level of immature capital. Like-for-like CROI in our four largest
international businesses - Thailand, Korea, Ireland and Hungary - where over 60%
of our international capital is invested, is running at an average of 16%. This
demonstrates that our international model is not only delivering good growth but
also developing good returns as we build strong market positions, and our stores
mature.
A total of 238 stores, with 5.4m square feet of selling area, were opened during
the year including 72 hypermarkets. In Asia we opened 3.1m square feet of space
and in Rest of Europe 2.3m square feet. In Central Europe, we opened more new
space than we did in the UK. These numbers included the acquisition of 12 stores
in Korea from Aram-Mart early in the first half, nine from Julius Meinl in
Poland and eight Tanekin stores in Japan. 27 small stores from Edeka in the
Czech Republic were acquired after the year-end.
At the end of February, our international operations were trading from 814
stores, including 341 hypermarkets, with a total of 32.8m square feet of selling
space. Almost 56% of group sales area is now in International. Excluding the
Edeka stores, we plan to open 392 new stores in the current year, adding 6.6m
square feet of selling area.
The deal we announced in September to swap our store assets in Taiwan plus cash
for Carrefour's hypermarkets in the Czech Republic and Slovakia has been given
clearance by the competition authorities in Taiwan and the Czech Republic. A
decision in Slovakia is expected soon and, assuming the combination of the four
Carrefour stores with Tesco's existing network is permitted, we anticipate that
the deal will be completed during the current year.
Multi-format capability is developing well across our International network.
With our large destination stores now established and with first class supply
chain infrastructure in place or planned for most of our main markets, a growing
part of our new space is coming through our smaller formats, such as compact
hypermarkets, discount supermarkets and convenience stores. Smaller formats
serve the needs of customers in smaller catchment areas and they also cost less
to build. For example, we now have Express stores in six countries outside the
UK, with 139 stores in Thailand alone, and discount supermarkets in seven
countries, including openings in the Czech Republic, Malaysia and Thailand. Of
the 419 stores planned to open outside the UK this year (including the Edeka
stores), 338 will be in smaller formats.
* Cash return on investment (CROI) is measured as earnings before interest, tax,
depreciation and amortisation, expressed as a percentage of net invested
capital.
Asia
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
Asia sales (inc. VAT) £3.9bn 26.4% 16.8% £4.7bn 50.5% 39.0%
Asia pre-property operating £203m 30.1% 20.0% £236m 51.3% 39.6%
profit
Asia operating profit £200m 30.7% 20.6% £229m 49.7% 38.2%
• We have now established a strong local team which has begun to
accelerate our expansion programme in China beyond the Yangtse delta and
manage the transfer of Tesco know-how and systems into the business. Hymall
now trades from a portfolio of 39 hypermarkets with 12 more planned in the
current year. The first store in Guangzhou has opened, the first in Beijing
opens this Autumn and sites have been secured in Shenzhen. Hymall's sales
have continued to grow strongly and the business made a small profit after
tax and interest, of which our share was £2m, which is included in Joint
Ventures and Associates.
• In Japan, it was a challenging year. Sales grew but profits reduced,
mainly as a result of the cost of integrating the remaining Fre'c stores in
the first half and the eight Tanekin units acquired in Tokyo in October. The
first trial Express format store opened three weeks ago.
• In Korea, Homeplus has continued to make very pleasing progress,
delivering increased sales, including strong like-for-like, and excellent
profit growth. During the year we increased our selling space by 29% by
opening eight new hypermarkets, including our first three compact hypers,
and completing the conversion of the 12 stores we acquired in March 2005
from Aram-Mart. We are also now rolling out the Express convenience format
and we have 11 such stores trading. Our organic store development programme
is accelerating as planned, with a further 47 stores planned this year.
• In Malaysia, we moved close to break-even and we are making positive
cash returns, helped by very strong sales growth, both from new space and
from our existing stores. We have a good pipeline of new space to enable us
to build a strong position. We opened seven new stores in the year,
including our first Express store at Selayang, Selangor.
• Given the uncertainties arising from the announcement of the asset swap
deal with Carrefour last September, it has been a challenging few months for
the business in Taiwan. Sales grew strongly and although losses increased,
the team has held the performance of the business together remarkably well
in difficult circumstances.
• In Thailand we have had another excellent year, with growth in sales,
profit and returns. The successful development of new formats continues and
we now have 219 stores trading across four formats, including 139 Express
stores, 14 Value stores and ten new supermarkets. All the newer formats are
continuing to perform well, giving us many more opportunities to develop our
national store network.
Rest of Europe
52 weeks 60 weeks
Actual rates Constant Actual rates Constant
Rest of Europe sales (inc. VAT) £5.2bn 20.6% 14.6% £5.8bn 33.8% 26.7%
Rest of Europe pre-property £271m 27.8% 22.7% £269m 26.9% 21.8%
operating profit
Rest of Europe operating profit £265m 9.1% 4.7% £263m 8.2% 3.9%
Operating profit growth was impacted by the existence of a one-off £31m property
profit in the prior year (see Appendix B2).
In Central Europe our strategic investments in lower prices, higher product
quality and faster development of new space have contributed to strong sales and
profit growth across the region. Successful regional initiatives to strengthen
our business - from joint purchasing of own brand products to the introduction
of a Cherokee clothing range - have also contributed. Customer numbers are up
significantly and this is driving large market share gains.
• In the Czech Republic, the business has delivered strong sales and
profit growth despite very competitive market conditions. We have also
accelerated our new store development, adding 20% to our sales area during
the year, with ten openings, including eight compact hypermarkets, and one
of our new '1k' supermarket format (1,000 square metre) stores.
• The more challenging economic and retail environment has held back our
growth in Hungary but we have still made solid progress. We have
strengthened our market leading position by lowering prices, expanding our
store network and developing our infrastructure. We opened 18 new stores in
the year, adding 22% to our total space, including our first 30,000 square
feet compact hypermarket. A further 30 stores, representing a further
880,000 square feet of new space are planned for this year.
• In Poland, the economic background is looking better and signs of
renewed consumer confidence, combined with an improving offer in our stores,
have been reflected in strengthening like-for-like sales. We have made good
progress with the development of our 1k, 2k and 3k store formats, with the
early units trading well, giving us access to a broader range of store
development opportunities.
• In the Republic of Ireland we have achieved strong growth in sales and,
on a pre-IFRS basis, profit as well. Under IFRS, operating profit growth was
reduced due to the inclusion of a significant property profit in the prior
year results. Sales growth has benefited from strong like-for-like
performance and an acceleration in the growth of our space. We opened six
new stores with 111,000 square feet of new sales area during the year, with
a further eight new stores planned this year.
• Our business in Slovakia has delivered another very strong performance,
with sales and profits significantly up on last year. Our new store
programme is now supported by the growth of our compact hypermarket format.
We now have 18 such stores, with five more planned this year. Our new
central distribution depot at Beckov, measuring 500,000 square feet, is
fully operational and delivering significant benefits in lower costs and
better product quality.
• In Turkey, Kipa delivered a very strong performance. Sales rose strongly
and profit doubled. We now have eight hypermarkets, including three trading
very successfully outside Izmir, with eight more planned for the current
year. The introduction into Kipa of a new suite of IT systems called 'Tesco
in a Box' to run many key functions in the business, including supply chain
and replenishment, went live last year and this implementation has been the
model for subsequent roll-out to Japan and China.
Core UK Business. UK sales grew by 10.7% in the year, including a like-for-like
increase of 7.5%. Growth in customer numbers was the main driver of our sales.
Customer spend per visit (excluding Express) also rose in the year despite
deflation in our stores.
We have continued to invest in the things that matter for customers:
• We have strengthened again our position as the UK's best value retailer
by investing in lower prices for our customers, with price deflation of 1.8%
during the year (excluding petrol).
• On-shelf availability has also improved again and is now at its highest
ever level. Our measure of this, which is based on our in-store picking of
Tesco.com orders, shows that availability improved by a full percentage
point compared with last year.
• New technology has helped our 'one-in-front' checkout queue performance
to improve so that many more customers wait a shorter time to be served. A
total of 1.5 million customers a week, in more than 200 stores, now
regularly choose to use our self-scan checkouts.
• At the same time customers are recognising that they can also shop more
easily and comfortably in clearer aisles as we introduce more shelf-ready
packaging to speed replenishment of products.
• We've added 200 new Finest lines this year, over 100 new Healthy Living
products, including a Kids' Healthy range, nearly 100 Wholefoods natural
snack and cupboard lines as well as hundreds more standard own brand and
Value items.
Record efficiency savings of £330m were delivered this year by our Step-Change
programme, which brings together many initiatives to make what we do better for
customers, simpler for staff and cheaper for Tesco. Most of these savings are
reinvested to improve our offer for customers. This year, we have made
particularly good progress with our efforts to control energy costs. Other
examples include:
• We have introduced mobile display units for pre-packed bread into 400
stores, with a further 300 planned in the first half of this year. Bread is
now presented better for customers, availability has improved and the
replenishment of stock is quicker and easier for staff.
• New ways of managing stock in stores to increase the availability of
products for customers, involving scanning gaps using hand-held computers on
a regular cycle, has significantly reduced out-of-stocks and also reduced
costs.
We have made further good progress with the development of new space and store
formats. A total of 2.0m square feet of new sales area was opened during the
year in all formats, of which over 660,000 square feet was in extensions to
existing stores. With Extra and Express being our least mature formats and with
both now delivering above-average investment returns, these are important
drivers of our growth. Going forward, we are aiming to maintain our rate of
growth in selling area, from a combination of extensions, principally for
non-food, and new stores.
During the year, we opened another 18 Extra hypermarkets, most of them through
extensions to existing stores, bringing the total to 118. Extra now represents
31% of our total sales area. The trading performance of the large Extra stores
we opened in 2005 - in Bar Hill, near Cambridge; Talbot Green, Mid-Glamorgan and
Slough in Berkshire, all of which have more than 100,000 square feet of sales
area, have been significantly ahead of expectations.
More customers have access to our Express convenience stores as we bring the
Tesco offer and lower prices to neighbourhoods. 115 new Express stores opened
during the year, bringing the overall total to over 650. A further 130 new
Expresses are planned for 2006/7, as we focus on organic expansion.
On 6 April, we submitted a response to the Office of Fair Trading on its
proposal to refer the grocery sector to the Competition Commission. If an
enquiry goes ahead, we believe the Commission will find that competition in our
industry works well and continues to deliver value, innovation and convenience
to consumers.
Non-Food. Against the background of subdued consumer spending in the UK, our
non-food offer has again made very good progress. Sales growth, in the UK alone,
was over 13% during the year with total non-food sales increasing to £6.8bn
(last year £6.0bn). Volume growth was again even higher, driven by our ability
to pass on lower prices to customers, funded by our growing scale and supply
chain efficiency, including more direct sourcing in Asia.
UK consumers have been more cautious in their shopping behaviour for many months
but they remain willing to spend on our competitively priced, good quality and
well-presented merchandise. As a result, we have seen strong growth in most
large non-food categories, including product groups which have seen flat or
reduced overall consumer spending.
Our established categories, which benefit less from new space, grew strongly,
with health and beauty sales increasing by 10% and stationery, news and
magazines by 17%. Clothing sales grew well in a difficult market - up by 16% -
and we saw strong market share gains by volume and value. Some product groups,
to which we have been able to allocate more space to in our larger Extra stores,
did particularly well. For example, consumer electronics sales were up 34%,
sports goods 31% and books 52%.
With only just over a quarter of UK households currently able to get to an Extra
store easily, we are looking at ways to improve access for our customers to our
non-food offer:
• On-line. Following the success of tesco.com and our in-store non-food
offer, we are continuing to investigate whether we could build a substantial
on-line non-food business.
• Homeplus. The performance of our first Homeplus trial non-food only
store, which opened last October in Denton, Manchester, has encouraged us to
extend the trial. Further trial stores will open shortly in Bristol,
Southampton and Telford. These stores, which will trade from more than
30,000 square feet sales area, will stock a wide range of non-foods, similar
to the assortment offered in Extra hypermarkets.
Retailing Services. Our efforts to bring simplicity and value to sometimes
complicated markets are behind the success of our retailing services businesses.
Also underpinning this element of our 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.
• tesco.com sales continued to grow strongly - up by 31.9% in the year to
almost £1bn of sales. Profit also increased by 54.9% to £56.2m. The business
now has over 750,000 regular customers, more than 200,000 orders a week and
represents over 3% of UK sales. For parts of the country where Tesco has few
stores or where those we have are exceptionally busy, we have developed a
tesco.com-only store. The first opened in Croydon, South London in February.
Only a few locations are likely to be appropriate for this.
• In Telecoms, we are a product retailer and also an operator providing
telecoms services to our customers. In both we now have a very competitive
offer - from pay-as-you go mobiles to home phones and we already serve over
1.5m customers. Telecoms introduced many new services during the year,
including our first dedicated telecoms centre (inside our Slough Extra), a
range of pay-monthly mobiles on-line, and Tesco internet phone, which is now
available in 350 stores.
• Tesco Personal Finance (TPF) has delivered a good performance in a
difficult financial services market. On a pre-IFRS basis total operating
profit increased slightly to £205m, of which our share is £103m. Net of
interest and tax, and the other reporting changes required by IFRS, profit
reduced to £139m (last year £142m) of which our share is £70m. After a flat
first half, in which market conditions in two of TPF's core markets - credit
cards and motor insurance - were challenging, TPF saw a stronger second half
performance. TPF is providing excellent and growing returns in only its
eighth year of operation. Over the last two years, a total of £86m of
surplus capital, representing over 37% of the original investment in the
joint venture, has been returned to Tesco through two cash dividend
payments. This has reduced Tesco's net investment in the joint venture to
£141m. We now have over 5m customer accounts, of which 1.8m are credit cards
and 1.4m are motor insurance policies. Customer numbers are up over 200,000
on last year.
CORPORATE RESPONSIBILITY
As a responsible company, Tesco works hard to bring real benefits to the
communities we serve, the environment and the economy. This is recognised
through our inclusion in the FTSE4Good and Dow Jones Sustainability indices.
Our fundraising efforts have again delivered great results. Each year we
contribute the equivalent of at least 1% of our pre-tax profits to charities and
good causes and a total of £41m was given during 2005/6 in donations, staff time
and gifts in kind. Our Charity of the Year was Age Concern, for which staff and
customers raised £2m.
We are committed to playing our part in tackling climate change by reducing our
energy use and emissions from our distribution fleet. In 2005/6 we reduced our
energy use per square foot by 15% which has saved 59,000 tonnes of carbon
dioxide emissions.
We have set up a £100m fund within our business to be used for innovation in
sustainable environmental technology. We will be installing wind turbines at
some of our new stores, alongside solar energy technology, geothermal power,
combined heat and power and trigeneration. We will also be trialling
gasification, a revolutionary technology to turn waste into clean, sustainable
power.
Against a baseline of 2000, we want to cut the average energy use in our
buildings (KwH/sqft) in half by 2010, delivering a huge reduction in carbon
emissions. We built our first model energy efficient store in Diss in 2005. The
store uses 20% less energy than comparable stores by using clear roof sections
to maximise natural light, wind turbines power the tills and cold air from
chilled areas is re-used for air conditioning. Our second model energy store has
now opened in Swansea. We are also drawing up plans for the first ever
supermarket to be built entirely from recyclable materials including wood,
recycled plastics and other green materials. This store which we hope to build
in Aylsham in Norfolk will also house all of the latest environmental technology
making it, we believe, the greenest store in the world.
Our investments will also include further recycling initiatives to make
recycling easy and attractive for customers. In 2005, we recycled 71% of all
store waste, saving nearly 27,000 tonnes from landfill. We invested over
£600,000 in new automated recycling machines for customers at our stores in
Winchester, Havant, Portsmouth, Southampton, Andover and Royston and we plan to
install these at many more stores. We believe this will enable us to double the
amount our customers bring for recycling and this additional material would
account for around 10% of the total additional tonnage needed to meet the UK's
EU packaging recycling targets by 2008.
We continue to play an active role in regeneration, encouraging inward
investment and creating rewarding jobs and careers in our most deprived areas.
Over the last seven years we have completed 14 Regeneration Partnership Schemes
creating 3,500 jobs and helping 2,200 long-term unemployed people back into
work. In 2005/6 we completed two such Schemes in Manchester and Leicester. To
attract and retain the best workforce we offer training and development to help
people achieve their full potential. In 2004 we launched our Apprenticeship in
Retail Scheme with just 16 staff taking part from three stores and this year 445
general assistants from 92 stores will attain their Apprenticeships and GSCE
equivalent qualifications in English and Maths.
Our nutritional 'signpost' labelling provides simple, clear, information about
calories, salt, fat and sugar content on the front of packs. Over 2,500 product
packs have been re-designed and the entire Tesco range will have been completed
by the end of the year. They are already proving very popular with customers,
who are changing what they buy as a result.
We are also making our approach to corporate responsibility genuinely
international. Each of our international businesses now has a corporate
responsibility strategy with a set of key performance indicators.
CONTACTS
Investor Relations: Steve Webb 01992 644800
Press: Jonathan Church 01992 644645
Angus Maitland - The Maitland Consultancy 020 7379 5151
This document is available via the internet at www.tesco.com
A meeting for investors and analysts will be held today at 9.00am and a press
conference at 11.00am both at the Royal Bank of Scotland, 280 Bishopsgate,
London EC2 4RB.
A Cantos interview with Sir Terry Leahy is available now to download in video,
audio and transcript form at either www.tesco.com/corporate or www.cantos.com
APPENDIX A - Reconciliation of group profit on a 52-week basis
A1 - Impact of initial transition to IFRS on profit before tax and profit after
tax
Actual Actual IFRS seminar
2005/06 2004/05 guidance for
2004/05
£m £m £m
Share-based payments (50) (52) (50)
Pensions (43) (41) (40)
Goodwill 66 61 60
JV's/ Associates tax (38) (32) (30)
Leasing
- Operating leases to finance leases (4) (4) Immaterial
- Fixed rental uplifts (12) (8) -
Derecognition of JV loss 3 2 -
Reversal of impairment provision 5 - -
--------- ---------- -------------
Profit before tax (73) (74) (50) to (70)
Tax 36 52 40 to 50
--------- ---------- -------------
Profit after tax (37) (22) 0 to (30)
A2 - Impact of adoption of IAS 32 and IAS 39 on 2005/06 profit before tax
£m
Fair value of derivatives (8)
Impact on Tesco Personal Finance (4)
Korean share purchase agreement
- Change in net present value (11)
- Revaluation of liability 24
- Foreign exchange revaluation (14)
---------
(13)*
* Excluding the impact on TPF, IAS 32 and IAS 39 reduce profit before tax by £9m
in 2005/6
A3 - Reconciliation of IFRS profit before tax to UK GAAP underlying profit
Actual
2005/06
£m
IFRS profit before tax (from continuing operations) 2,210
less: Loss before tax on discontinuing operation (9)
---------
2,201
add back: Initial transition to IFRS 73
add back: Impact of IAS 32 and IAS 39 13
---------
Pro-forma UK GAAP profit before tax 2,287
add back: Integration costs 35
add back: Goodwill amortisation 66
less: Property profit (81)
---------
Pro-forma UK GAAP underlying profit 2,307
APPENDIX B - Reconciliation of segmental operating profit on a 52-week basis
B1 - Reconciliation of UK operating profit
2005/06 2004/05 Growth
£m £m
IFRS operating profit 1,788 1,556 14.9%
add back: Share-based payments 44 48
add back: Pensions 67 43
add back: Write down of iVillage investment - 6
less: Leasing (2) (2)
add back: Fixed rental uplift adjustment 19 11
less: Profit arising on property-related items (90) (21)
add back: Integration costs 32 53
-------- --------
Pro-forma UK GAAP underlying operating profit 1,858 1,694 9.7%
B2 - Reconciliation of International operating profit
Asia
2005/06 2004/05 Growth
£m £m
IFRS operating profit (excluding Taiwan) 200 153 30.7%
less: Taiwan operating loss (9) (6)
add back: Share-based payments 2 1
add back: Fixed rental uplift adjustment 1 1
add back: Loss arising on property-related items 3 3
add back: Integration costs 3 -
------- --------
Pro-forma UK GAAP underlying operating profit 200 152 31.6%
Europe
2005/06 2004/05 Growth
£m £m
IFRS operating profit 265 243 9.1%
add back: Share-based payments 4 3
add back: Pensions 1 2
less: Release of impairment provision (5) -
add back: Leasing - 1
add back/(less): Loss/(Profit) arising on 6 (31)
property-related items
add back: Integration costs 1 -
------- --------
Pro-forma UK GAAP underlying operating profit 272 218 24.8%
APPENDIX C - Calculation of Return on Capital Employed (ROCE) on an IFRS-basis
ROCE is calculated as:
Numerator: Profit before interest, less tax
Denominator: Average of opening and closing:
Net assets
Add net debt
Add dividend creditor
Less assets held for sale and assets of disposal groups
Add disposal group liabilities
ROCE calculation for 60 weeks on a continuing basis under IFRS
2005/6
£m
Numerator
Profit before tax from continuing operations 2,235
Add back: finance costs 241
Less: finance income (114)
---------
2,362
Less: tax at effective rate
- Income tax 649
- Profit before tax 2,235
- Effective rate of tax on continuing operations 29.04% (686)
---------
Profit before interest, less tax (numerator) 1,676
2006 2005
£m £m
Denominator
Net assets 9,444 8,654
Add back: net debt 4,509 3,899
Add back: dividend creditor 6 6
Less: assets held for sale and assets of the disposal (168) -
group
Add back: Liabilities associated with the disposal group 86 -
-------- ---------
Capital employed 13,877 12,559
Average capital employed (denominator) 13,218
60-week IFRS ROCE 12.7%
TESCO PLC
GROUP INCOME STATEMENT
Year ended 25 February 2006
2006 2005 Increase
Note £m £m %
Continuing operations
Revenue (Sales excluding VAT) 2 39,454 33,866 16.5
Cost of sales (36,426) (31,231)
------ -------- -------- -------
Gross Profit 3,028 2,635
Administrative expenses (825) (732)
Profit arising on property related 77 49
items ------ -------- -------- -------
Operating Profit 2 2,280 1,952 16.8
Share of post-tax profits of joint 82 74
ventures and associates
Finance costs (241) (235)
Finance income 114 103
------ -------- -------- -------
Profit before tax 2,235 1,894 18.0
Taxation (649) (541)
------ -------- -------- -------
Profit for the period from continuing 1,586 1,353 17.2
operations
Discontinuing operation
Loss for the period from discontinuing (10) (6)
operation ------ -------- -------- -------
Profit for the period 1,576 1,347 17.0
------ -------- -------- -------
Attributable to:
Equity holders of the parent 4 1,570 1,344
Minority interests 6 3
------ -------- -------- -------
1,576 1,347
------ -------- -------- -------
Earnings per share from continuing and
discontinuing operations
Basic 4 20.07p 17.44p 15.1
Diluted 4 19.79p 17.22p 14.9
Earnings per share from continuing
operations
Basic 4 20.20p 17.52p 15.3
Diluted 4 19.92p 17.30p 15.1
Non-GAAP measure: new underlying 1 £m £m
profit
Profit before tax (excluding 2,235 1,894 18.0
discontinuing operation)
Adjustments for:
IAS 32 and IAS 39 9 -
Total IAS 19 Income Statement charge 8 303 268
'Normal' cash contributions for 8 (270) (237)
pensions ------ -------- -------- -------
2,277 1,925 18.3
------ -------- -------- -------
Underlying diluted EPS 20.30p 17.58p 15.5
Dividend per share (including proposed 3 8.63p 7.56p 14.2
final dividend)
* Results for the year ended 25 February 2006 includes 52 weeks for the UK and
the Republic of Ireland and 60 weeks for the majority of the remaining
international businesses
TESCO PLC
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
Year ended 25 February 2006*
2006 2005
Note £m £m
Gains on revaluation of available-for-sale 2 -
investments
Currency translation differences 25 11
Actuarial losses on defined benefit pension 8 (442) (230)
schemes
Gains on cash flow hedges 39 -
Tax on items taken directly to equity 133 92
------ ---------- ---------
Net expense recognised directly in equity (243) (127)
Profit for the financial period 1,576 1,347
------ ---------- ---------
Total recognised income and expense for the 1,333 1,220
period ------ ---------- ---------
Attributable to:
Equity holders of the parent 7 1,327 1,217
Minority interests 6 3
------ ---------- ---------
1,333 1,220
------ ---------- ---------
Effect of changes in accounting policy (adoption
of IAS 32/39):
Equity holders of the parent 10 (314)
Minority interests -
------ ----------
(314)
------ ----------
TESCO PLC
GROUP BALANCE SHEET
25 Feb 26 Feb
2006 2005
Note £m £m
Non-current assets
Goodwill and intangible assets 1,525 1,408
Property, plant and equipment 15,882 14,521
Investment property 745 565
Investments in joint ventures and associates 476 416
Other investments 4 7
Deferred tax assets 12 14
------ -------- ----------
18,644 16,931
Current assets
Inventories 1,464 1,309
Trade and other receivables 892 769
Derivative financial instruments 70 -
Cash and cash equivalents 1,325 1,146
------ -------- ----------
3,751 3,224
Non-current assets classified as held for sale and 168 -
assets of the disposal group ------ -------- ----------
3,919 3,224
Current liabilities
Trade and other payables (5,083) (4,974)
Financial liabilities
- Borrowings (1,646) (482)
- Derivative financial instruments (239) -
Current tax liabilities (462) (221)
Provisions (2) (3)
------ -------- ----------
(7,432) (5,680)
Liabilities directly associated with the disposal (86) -
group ------ -------- ----------
(7,518) (5,680)
Net current liabilities (3,599) (2,456)
Non-current liabilities
Financial liabilities
- Borrowings (3,742) (4,563)
- Derivative financial instruments and other (294) -
liabilities
Post-employment benefit obligations 8 (1,211) (735)
Other non-current liabilities (29) (21)
Deferred tax liabilities (320) (496)
Provisions (5) (6)
------ -------- ----------
(5,601) (5,821)
------ -------- ----------
Net assets 9,444 8,654
------ -------- ----------
25 Feb 26 Feb
2006 2005
Note £m £m
Equity
Share capital 395 389
Share premium account 3,988 3,704
Other reserves 40 40
Retained earnings 4,957 4,470
----------- -------- ----------
Equity attributable to equity holders of the 9,380 8,603
parent
Minority interests 64 51
----------- -------- ----------
Total equity 7 9,444 8,654
----------- -------- ----------
TESCO PLC
GROUP CASH FLOW STATEMENT
Year ended 25 February 2006*
2006 2005
Note £m £m
Cash flows from operating activities
Cash generated from operations 5 3,412 3,009
Interest paid (364) (350)
Corporation tax paid (429) (483)
----- --------- ---------
Net cash from operating activities 2,619 2,176
----- --------- ---------
Cash flows from investing activities
Acquisition of subsidiaries, net of cash acquired (54) (81)
Proceeds from sale of subsidiary, net of cash - 5
disposed
Purchase of property, plant and equipment & (2,561) (2,197)
investment property
Purchase of intangible assets (139) (107)
Proceeds from sale of property, plant and equipment 664 823
Net increase in loans to joint ventures (16) (10)
Equity investments made (34) (152)
Dividends received 82 135
Interest received 96 83
----- --------- ---------
Net cash used in investing activities (1,962) (1,501)
----- --------- ---------
Cash flows from financing activities
Proceeds from issue of ordinary share capital 123 146
Repayments of borrowings (109) (18)
New finance leases - 161
Repayments of obligations under finance leases (6) (349)
Dividends paid (441) (448)
Own shares purchased (59) (143)
----- --------- ---------
Net cash used in financing activities (492) (651)
----- --------- ---------
Net increase in cash and cash equivalents 165 24
Cash and cash equivalents at beginning of period 1,146 1,100
Effect of foreign exchange rate changes 16 22
----- --------- ---------
Cash and cash equivalents at end of period 1,327 1,146
Less cash held in disposal group (2) -
----- --------- ---------
Cash and cash equivalents not held in a disposal 1,325 1,146
group ----- --------- ---------
Reconciliation of net cash flow to movement in net debt
2006 2005
£m £m
Net increase in cash and cash equivalents 165 24
Cash outflow from decrease in debt and lease 115 206
financing
Loans and finance leases acquired with - (17)
subsidiaries
Net debt included within disposal group 55 -
Other non-cash movements (357) 11
------- --------- ---------
(Increase)/decrease in net debt in the period (22) 224
before the impact of IAS 32 and IAS 39
IAS 32 and IAS 39 adjustments to net debt (588) -
------- --------- ---------
(Increase)/decrease in net debt (610) 224
Opening net debt (3,899) (4,123)
------- --------- ---------
Closing net debt 6 (4,509) (3,899)
------- --------- ---------
NB: The reconciliation of net cash flow to movement in net debt is not a primary
statement and does not form part of the cash flow statement.
The Preliminary Report for the year ended 25 February 2006 was approved by the
Directors on 24 April 2006.
NOTE 1 General information
Basis of preparation
The consolidated financial statements have been prepared in accordance with
International Financial Reporting Standards (IFRS) and International Financial
Reporting Interpretation Committee (IFRIC) interpretations as endorsed by the
European Union, and those parts of the Companies Act 1985 applicable to
companies reporting under IFRS.
This is the first year that the Group's consolidated financial statements have
been prepared under IFRS and IFRS 1 'First time adoption of IFRS' has been
applied. Accordingly, the comparatives presented in this document have been
restated for IFRS, with the exception of IAS 32 'Financial Instruments:
Presentation and Disclosure' and IAS 39 'Financial Instruments: Recognition and
Measurement' for which the Group took advantage of the one-year exemption
available. Therefore, for the 2004/05 comparatives, financial instruments
continue to be accounted for and presented in accordance with UK Generally
Accepted Accounting Principles (UK GAAP), with an opening balance sheet
adjustment made at 27 February 2005 to bring the Group in line with IAS 32 and
IAS 39.
The accounting policies of the Group under IFRS are available on the Group's
website (www.tesco.com/corporate).
Reconciliations between UK GAAP and IFRS for the year ended 26 February 2005 are
included in note 9.
The financial information set out in this document does not constitute the
statutory accounts of the Group for the years ended 25 February 2006 or 26
February 2005 but is derived from the 2006 Annual Report and Financial
Statements. The Annual Report and Financial Statements for 2005, which were
prepared under UK GAAP, have been delivered to the Registrar of Companies and
the Group Annual Report and Financial Statements for 2006, prepared under IFRS,
will be delivered to the Registrar of Companies in due course. The auditors have
reported on those accounts and have given an unqualified report which does not
contain a statement under Section 237(2) or (3) of the Companies Act 1985.
Use of adjusted measures
The Directors believe that the new underlying profit and underlying diluted
earnings per share measures provide additional useful information for
shareholders on underlying trends. These measures are used for internal
performance analysis. Underlying profit is not defined by IFRS and therefore may
not be directly comparable with other companies' adjusted profit measures. It is
not intended to be a substitute for, or superior to IFRS measurements of profit.
The adjustments made to reported profit before tax are:
• IAS 32/39 adjustments - fair value remeasurements - under IAS 32/39, the
Group applies hedge accounting to its various hedge relationships
(principally interest rate swaps, cross currency swaps and forward exchange
contracts and options) when it is allowed under the rules of IAS 39 and
practical to do so. Sometimes, the Group is unable to apply hedge accounting
to the arrangements, but continues to enter into these arrangements as they
provide certainty or active management of the exchange rates and interest
rates applicable to the Group. The Group believes these arrangements remain
effective and economically and commercially viable hedges despite the
inability to apply hedge accounting.
Where hedge accounting is not applied to certain hedging arrangements the
reported results reflect the movement in fair value of related derivatives due
to changes in foreign exchange and interest rates. In addition at each period
end, any gain or loss accruing on open contracts is recognised in the result
for the period, regardless of the expected outcome of the hedging contract on
termination. This may mean that the Income Statement charge is highly
volatile, whilst the resulting cash flows may not be as volatile. The
underlying profit measure removes this volatility to help better identify
underlying business performance.
• IAS 19 Income Statement charge - Under IAS 19 'Employee Benefits', the
cost of providing pension benefits in the future is discounted to a present
value at the corporate bond yield rates applicable on the last day of the
previous financial year. Corporate bond yields rates vary over time which in
turn creates volatility in the Income Statement and Balance Sheet. IAS 19
also increases the charge for young pension schemes, such as Tesco's, by
requiring the use of rates which do not take into account the future
expected returns on the assets held in the pension scheme which will fund
pension liabilities as they fall due. The sum of these two effects makes the
IAS 19 charge disproportionately higher and more volatile than the cash
contributions the Group is required to make in order to fund all future
liabilities.
Therefore within underlying profit we have included the 'normal' cash
contributions within the measure but excluded the volatile element of IAS 19
to represent what the group believes to be a fairer measure of the cost of
providing post retirement benefits.
NOTE 2 Segmental analysis
Management view the Group's operations of retailing and associated activities as
being carried out within three geographical areas - the UK, the Rest of Europe
and Asia. The Group's geographical segments are determined by the location of
the Group's assets and operations. These geographical areas are the basis on
which the Group reports its primary segment information.
The Rest of Europe reporting segment includes the Republic of Ireland, Hungary,
Poland, the Czech Republic, Slovakia and Turkey. The Asia reporting segment
includes Thailand, South Korea, Malaysia and Japan. Given its pending transfer
to the Carrefour Group, our Taiwanese business (previously included within the
Asia segment) has been included within discontinuing operations.
Year ended 2006 2006 2006 2005 2005 2005
25 February 2006 Sales Revenue Operating Sales Revenue Operating
including excluding profit including excluding profit
VAT VAT VAT VAT
£m £m £m £m £m £m
Continuing
operations
UK 32,657 29,990 1,788 29,511 27,146 1,556
Rest of Europe 5,820 5,095 263 4,349 3,818 243
Asia 4,660 4,369 229 3,097 2,902 153
-------- --------- --------- -------- --------- ---------
43,137 39,454 2,280 36,957 33,866 1,952
Share of post-tax profit from joint 82 74
ventures and associates
Net finance costs (127) (132)
--------- ---------
Profit before tax 2,235 1,894
Taxation (649) (541)
--------- ---------
Profit for the period from 1,586 1,353
continuing operations
Loss from discontinuing operation (10) (6)
--------- ---------
Profit for the period 1,576 1,347
--------- ---------
NOTE 3 Dividends
2006 2005 2006 2005
Pence/share Pence/share £m £m
Amounts recognised as
distributions to equity holders in
the period:
Final dividend for the year ended 5.27 4.77 410 365
26 February 2005
Interim dividend for the year 2.53 2.29 199 177
ended 25 February 2006 ----------- ----------- --------- -------
7.80 7.06 609 542
Proposed final dividend 6.10 5.27 482 410
----------- ----------- --------- -------
The proposed final dividend was approved by the Board on 24 April 2006 but was
not included as a liability as at 25 February 2006, in accordance with IAS 10
'Events after the Balance Sheet date'.
NOTE 4 Earnings per share and diluted earnings per share
Earnings per share is calculated by dividing the profit for the period
attributable to the equity holders of the parent by the weighted average number
of ordinary shares in issue during the period. Diluted earnings per share is
calculated by dividing the profit for the period attributable to the equity
holders of the parent by the weighted average number of ordinary shares in issue
during the period adjusted for the effects of dilutive options.
2006 2005
Basic Potentially Diluted Basic Potentially Diluted
dilutive dilutive
share share
options options
Profit (£m)
Continuing 1,580 - 1,580 1,350 - 1,350
operations
Discontinuing (10) - (10) (6) - (6)
operation ------- ---------- -------- --------- ---------- --------
Total 1,570 - 1,570 1,344 - 1,344
------- ---------- -------- --------- ---------- --------
Weighted 7,823 109 7,932 7,707 97 7,804
average number ------- ---------- -------- --------- ---------- --------
of shares
(millions)
Earnings per
share (pence)
Continuing 20.20 (0.28) 19.92 17.52 (0.22) 17.30
operations
Discontinuing (0.13) - (0.13) (0.08) - (0.08)
operation ------- ---------- -------- --------- ---------- --------
Total 20.07 (0.28) 19.79 17.44 (0.22) 17.22
------- ---------- -------- --------- ---------- --------
NOTE 4 Earnings per share and diluted earnings per share (continued)
Continuing operations underlying earnings per share reconciliation
2006 2006 2005 2005
% £m % £m
Underlying profit 2,277 1,925
Effective tax rate on continuing operations 29.04 (661) 28.56 (550)
Minority interests (6) (3)
------- -------
Total 1,610 1,372
------- -------
Underlying diluted EPS (pence) 20.30p 17.58p
NOTE 5 Reconciliation of operating profit to cash generated from operations
2006 2005
£m £m
Operating profit 2,280 1,952
Operating loss of discontinuing operation (9) (6)
Depreciation and amortisation 838 743
Profit arising on property related items (77) (49)
Loss arising on disposal of non-property assets 4 -
Reversal of impairment provisions (5) -
Share-based payments 142 131
Additional pension contribution - (200)
Increase in inventories (146) (67)
Increase in trade and other receivables (38) (48)
Increase in trade payables 89 337
Increase in other payables 334 216
Decrease in working capital (a) 239 438
---------- ---------
Cash generated from operations (b) 3,412 3,009
---------- ---------
(a) The decrease in working capital includes the impact of translating foreign
currency working capital movements at average exchange rates rather than period
end exchange rates.
(b) The subsidiaries acquired during the period have not had a significant
impact on Group operating cash flows.
NOTE 6 Analysis of changes in net debt
At 26 Feb Opening Cash Net debt Other non At 25
2005 adjustment flow held in -cash Feb
for IAS 32 disposal movements 2006
and 39 group
£m £m £m £m £m £m
Cash and cash 1,146 - 165 (2) 16 1,325
equivalents
Finance lease - - - - 17 17
debtors
Derivative - 40 (22) - 52 70
financial --------- ----------- ------- -------- ---------- --------
instruments
included in
debtors
Cash and 1,146 40 143 (2) 85 1,412
receivables --------- ----------- ------- -------- ---------- --------
Bank and other (471) (63) (1,074) 57 (75) (1,626)
borrowings
Finance leases (11) - 6 - (15) (20)
Derivative - (258) 300 - (281) (239)
financial --------- ----------- ------- -------- ---------- --------
instruments
Debt due within (482) (321) (768) 57 (371) (1,885)
one year --------- ----------- ------- -------- ---------- --------
Bank and other (4,486) (53) 939 - (58) (3,658)
borrowings
Finance leases (77) - - - (7) (84)
Derivative - (402) (34) - 142 (294)
financial --------- ----------- ------- -------- ---------- --------
instruments
Debt due after (4,563) (455) 905 - 77 (4,036)
one year --------- ----------- ------- -------- ---------- --------
(3,899) (736) 280 55 (209) (4,509)
--------- ----------- ------- -------- ---------- --------
NOTE 7 Reconciliation of movements in equity
2006 2005
£m £m
Equity attributable to equity holders of the parent: 8,603 7,693
At 26 February 2005
Transition adjustments on adoption of IAS 32 and IAS 39 (314) -
At 27 February 2005 8,289 7,693
Total recognised income and expense for the period 1,327 1,217
Share-based payments 57 56
New share capital subscribed less expenses 111 130
Reduction/(increase) in own shares held 38 (44)
Dividends to equity holders of the parent company (609) (542)
Payment of dividends by shares in lieu of cash 167 93
--------- --------
At 25 February 2006 9,380 8,603
Minority interests 64 51
--------- --------
Total equity 9,444 8,654
--------- --------
NOTE 8 Post employment benefits
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 are funded defined benefit schemes for the Group's
employees in the UK, the Republic of Ireland and South Korea.
The principal plan within the Group is the Tesco PLC Pension 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 trustees. An independent actuary, using
the projected unit method, carried out the latest triennial actuarial assessment
of the scheme at 31 March 2005. The scheme deficit at that date was £153m.
Principal Assumptions
The valuations used for IAS 19 have been based on the most recent actuarial
valuations and updated by Watson Wyatt Limited to take account of the
requirements of IAS 19 in order to assess the liabilities of the schemes at 25
February 2006. The major assumptions, on a weighted average basis, used by the
actuaries were as follows:
2006 2005
% %
Rate of increase in salaries 4.0 3.9
Rate of increase in pensions in payment 2.7 2.6
Rate of increase in deferred pensions 2.7 2.6
Rate of increase in career average benefits 2.7 2.6
Discount rate 4.8 5.4
Price inflation 2.7 2.6
The main financial assumption is the real discount rate, i.e. the excess of the
discount rate over the rate of price inflation. If this assumption increased/
decreased by 0.1%, the UK defined benefit obligation would decrease/increase by
approximately £110m and the annual UK current service cost would decrease/
increase by between £13m-£15m.
Movement in the deficit during the year
The movement of the deficit during the year was as follows:
2006 2005
£m £m
Deficit in schemes at beginning of the year (735) (674)
Movement in year:
Current service cost (328) (272)
Other finance income 25 4
Contributions 270 437*
Exchange loss (1) -
Actuarial loss (442) (230)
Deficit in schemes at end of the year (1,211) (735)
* Includes additional contribution of £200m paid in February 2005.
Note 9 Explanation of transition to IFRS
Tesco PLC previously prepared its consolidated financial statements under UK
Generally Accepted Accounting Principles (UK GAAP). These financial results are
the first that the Group has presented under IFRS. As required by IFRS 1 'First
time adoption of IFRS', the analysis in the following note shows:
• a reconciliation of profit for the period to 26 February 2005; and
• a reconciliation of equity as at 29 February 2004 (the date of
transition to IFRS) and as at 26 February 2005 (date of last UK GAAP
financial statements).
Apart from adjustments made for the recent IFRIC clarification on the accounting
treatment for fixed rental uplifts and some immaterial balance sheet
reclassifications, the information presented below is consistent with that
provided in the 'Restatement of financial information for 2004/05 under IFRS'
which was made available on the Group's website on 25 May 2005.
Reconciliation of profit for the year ended 26 February 2005
Reported Share-based Business Leasing Employee
under UK payments combinations benefits
GAAP*
IFRS 2 IFRS 3 IAS 17 IAS 19
£m £m £m £m £m
Revenue 33,974 - - - -
Cost of sales (31,271) - - (11) (40)
-------- -------- --------- ------- -------
Gross profit 2,703 - - (11) (40)
Administrative expenses (754) (52) 56 - (5)
Profit/(loss) arising on 53 - - (4) -
property related items -------- -------- --------- ------- -------
Operating profit 2,002 (52) 56 (15) (45)
Share of post-tax 130 - 5 4 -
profits from joint
ventures and associates
Finance costs (269) - - (1) -
Finance income 99 - - - 4
-------- -------- --------- ------- -------
Profit before tax 1,962 (52) 61 (12) (41)
Taxation (593) 16 - 5 12
Discontinuing operation - - - - -
-------- -------- --------- ------- -------
Profit for the period 1,369 (36) 61 (7) (29)
======== ======== ========= ======= =======
Presentation Deferred Total IFRS Reclass of Restated
of JVs and tax adjustments discontinuing under
associates operations IFRS
IAS 28/31 IAS 12
£m £m £m £m £m
Revenue - - - (108) 33,866
Cost of sales - - (51) 91 (31,231)
-------- ------- -------- -------- -------
Gross profit - - (51) (17) 2,635
Administrative - - (1) 23 (732)
expenses
Profit/(loss) - - (4) - 49
arising on -------- ------- -------- -------- -------
property related
items
Operating profit - - (56) 6 1,952
Share of post-tax (64) - (55) (1) 74
profits from joint
ventures and
associates
Finance costs 34 - 33 1 (235)
Finance income - - 4 - 103
-------- ------- -------- -------- -------
Profit before tax (30) - (74) 6 1,894
Taxation 32 (13) 52 - (541)
Discontinuing - - - (6) (6)
operation -------- ------- -------- -------- -------
Profit for the 2 (13) (22) - 1,347
period ======== ======= ======== ======== =======
Reconciliation to underlying profit (non-GAAP measure under UK GAAP)
Profit before tax 1,962 (52) 61 (12) (41)
Net profit/(loss) on disposal (53) - - 4 -
of fixed assets
Integration costs 53 - - - -
Goodwill amortisation 67 - (61) - -
-------- -------- --------- ------- -------
Underlying profit 2,029 (52) - (8) (41)
-------- -------- --------- ------- -------
Profit before tax (30) - (74) 6 1,894
Net profit/(loss) on disposal of - - 4 - (49)
fixed assets
Integration costs - - - - 53
Goodwill amortisation - - (61) - 6
-------- ------- -------- -------- -------
Underlying profit (30) - (131) 6 1,904
-------- ------- -------- -------- -------
* The above UK GAAP numbers have been adjusted into IFRS format in accordance
with IAS 1.
Reconciliation of Equity - As at 29 February 2004 (date of transition to IFRS)
Reported Business Employee Dividends Investment Intangible
under UK combinations benefits property assets
GAAP*
IFRS 3 IAS 19 IAS 10 IAS 40 IAS 38
£m £m £m £m £m £m
Non-current
assets
Goodwill and 965 - - - - 255
intangible
assets
Property, plant 14,094 - - - (473) (255)
and equipment
Investment - - - - 473 -
property
Investments in 330 - - - - -
joint ventures
and associates
Other 6 - - - - -
investments
Deferred tax - - - - - -
assets ------- -------- ------- ------- -------- -------
15,395 - - - - -
Current assets
Inventories 1,199 - - - - -
Trade and other 826 - (12) - - -
receivables
Investments 430 - - - - -
Cash and cash 670 - - - - -
equivalents ------- -------- ------- ------- -------- -------
3,125 - (12) - - -
Current
liabilities
Trade and other (4,364) - 10 365 - -
payables
Financial
liabilities
- Borrowings (844) - - - - -
Current tax (308) - - - - -
payable
Provisions - - - - - -
------- -------- ------- ------- -------- -------
(5,516) - 10 365 - -
Net current (2,391) - (2) 365 - -
liabilities
Non-current
liabilities
Financial
liabilities
- Borrowings (4,346) - - - - -
Post-employment - - (674) - - -
benefit
obligations
Other (22) - - - - -
non-current
liabilities
Deferred tax (579) - 199 - - -
liabilities
Provisions (14) - - - - -
------- -------- ------- ------- -------- -------
(4,961) - (475) - - -
------- -------- ------- ------- -------- -------
Net assets 8,043 - (477) 365 - -
======= ======== ======= ======= ======== =======
Equity
Share capital 384 - - - - -
Share premium 3,470 - - - - -
account
Other reserves 40 - - - - -
Retained 4,104 - (477) 365 - -
earnings ------- -------- ------- ------- -------- -------
Equity 7,998 - (477) 365 - -
attributable to
equity holders
of the parent
Minority 45 - - - - -
interests ------- -------- ------- ------- -------- -------
Total equity 8,043 - (477) 365 - -
======= ======== ======= ======= ======== =======
Leasing Share- Impairment Deferred Other Restated
based of fixed tax under
payments assets IFRS
IAS 17 IFRS 2 IAS 36 IAS 12
£m £m £m £m £m £m
Non-current assets
Goodwill and - - - - - 1,220
intangible assets
Property, plant and 29 - (142) - - 13,253
equipment
Investment property - - - - - 473
Investments in joint - - - - 1 331
ventures and
associates
Other investments - - - - - 6
Deferred tax assets - - - - 12 12
------ ------- -------- ------ ------ ------
29 - (142) - 13 15,295
Current assets
Inventories - - - - - 1,199
Trade and other (3) - - - - 811
receivables
Investments - - - - (430) -
Cash and cash - - - - 430 1,100
equivalents ------ ------- -------- ------ ------ ------
(3) - - - - 3,110
Current liabilities
Trade and other (1) - - - 3 (3,987)
payables
Financial liabilities
- Borrowings (3) - - - - (847)
Current tax payable - - - - - (308)
Provisions - - - - (4) (4)
------ ------- -------- ------ ------ ------
(4) - - - (1) (5,146)
Net current (7) - - - (1) (2,036)
liabilities
Non-current
liabilities
Financial liabilities
- Borrowings (30) - - - - (4,376)
Post-employment - - - - - (674)
benefit obligations
Other non-current - - - - (3) (25)
liabilities
Deferred tax 1 17 15 (79) (12) (438)
liabilities
Provisions 2 - - - 4 (8)
------ ------- -------- ------ ------ ------
(27) 17 15 (79) (11) (5,521)
------ ------- -------- ------ ------ ------
Net assets (5) 17 (127) (79) 1 7,738
====== ======= ======== ====== ====== ======
Equity
Share capital - - - - - 384
Share premium account - - - - - 3,470
Other reserves - - - - - 40
Retained earnings (5) 17 (127) (79) 1 3,799
------ ------- -------- ------ ------ ------
Equity attributable (5) 17 (127) (79) 1 7,693
to equity holders of
the parent
Minority interests - - - - - 45
------ ------- -------- ------ ------ ------
Total equity (5) 17 (127) (79) 1 7,738
====== ======= ======== ====== ====== ======
* The above UK GAAP numbers have been adjusted into IFRS format (in accordance
with IAS 1)
Reconciliation of Equity - As at 26 February 2005 (date of last UK GAAP
financial statements)
Reported Business Employee Dividends Investment Intangible
under UK combinations benefits property assets
GAAP*
IFRS 3 IAS 19 IAS 10 IAS 40 IAS 38
£m £m £m £m £m £m
Non-current
assets
Goodwill and 1,044 58 - - - 306
intangible
assets
Property, plant 15,495 - - - (565) (306)
and equipment
Investment - - - - 565 -
property
Investments in 407 5 - - - -
joint ventures
and associates
Other 7 - - - - -
investments
Deferred tax - - - - - -
assets ------- -------- ------- ------- -------- -------
16,953 63 - - - -
Current assets
Inventories 1,309 - - - - -
Trade and other 1,002 - (230) - - -
receivables
Investments 346 - - - - -
Cash and cash 800 - - - - -
equivalents ------- -------- ------- ------- -------- -------
3,457 - (230) - - -
Current
liabilities
Trade and other (5,374) - 14 410 - -
payables
Financial
liabilities
- Borrowings (477) - - - - -
Current tax (221) - - - - -
payable
Provisions - - - - - -
------- -------- ------- ------- -------- -------
(6,072) - 14 410 - -
Net current (2,615) - (216) 410 - -
liabilities
Non-current
liabilities
Financial
liabilities
- Borrowings (4,511) - - - - -
Post-employment - - (735) - - -
benefit
obligations
Other (20) - - - - -
non-current
liabilities
Deferred tax (731) - 279 - - -
liabilities
Provisions (19) - - - - -
------- -------- ------- ------- -------- -------
(5,281) - (456) - - -
------- -------- ------- ------- -------- -------
Net assets 9,057 63 (672) 410 - -
======= ======== ======= ======= ======== =======
Equity
Share capital 389 - - - - -
Share premium 3,704 - - - - -
account
Other reserves 40 - - - - -
Retained 4,873 63 (672) 410 - -
earnings ------- -------- ------- ------- -------- -------
Equity 9,006 63 (672) 410 - -
attributable to
equity holders
of the parent
Minority 51 - - - - -
interests ------- -------- ------- ------- -------- -------
Total equity 9,057 63 (672) 410 - -
======= ======== ======= ======= ======== =======
Leasing Share- Impairment Deferred Other Restated
based of fixed tax under
payments assets IFRS
IAS 17 IFRS 2 IAS 36 IAS 12
£m £m £m £m £m £m
Non-current assets
Goodwill and - - - - - 1,408
intangible assets
Property, plant and 49 - (152) - - 14,521
equipment
Investment property - - - - - 565
Investments in joint 4 - - - - 416
ventures and
associates
Other investments - - - - - 7
Deferred tax assets - - - - 14 14
------ ------- -------- ------ ------ ------
53 - (152) - 14 16,931
Current assets
Inventories - - - - - 1,309
Trade and other (3) - - - - 769
receivables
Investments - - - - (346) -
Cash and cash - - - - 346 1,146
equivalents ------ ------- -------- ------ ------ ------
(3) - - - - 3,224
Current liabilities
Trade and other (17) (8) - - 1 (4,974)
payables
Financial liabilities
- Borrowings (5) - - - - (482)
Current tax payable - - - - - (221)
Provisions - - - - (3) (3)
------ ------- -------- ------ ------ ------
(22) (8) - - (2) (5,680)
Net current (25) (8) - - (2) (2,456)
liabilities
Non-current
liabilities
Financial liabilities
- Borrowings (52) - - - - (4,563)
Post-employment - - - - - (735)
benefit obligations
Other non-current - - - - (1) (21)
liabilities
Deferred tax 6 41 17 (94) (14) (496)
liabilities
Provisions 7 - - - 6 (6)
------ ------- -------- ------ ------ ------
(39) 41 17 (94) (9) (5,821)
------ ------- -------- ------ ------ ------
Net assets (11) 33 (135) (94) 3 8,654
====== ======= ======== ====== ====== ======
Equity
Share capital - - - - - 389
Share premium account - - - - - 3,704
Other reserves - - - - - 40
Retained earnings (11) 33 (135) (94) 3 4,470
------ ------- -------- ------ ------ ------
Equity attributable (11) 33 (135) (94) 3 8,603
to equity holders of
the parent
Minority interests - - - - - 51
------ ------- -------- ------ ------ ------
Total equity (11) 33 (135) (94) 3 8,654
====== ======= ======== ====== ====== ======
* The above UK GAAP numbers have been adjusted into IFRS format (in accordance
with IAS 1)
Notes to the reconciliations of equity and profit
The following describes the most significant adjustments arising from the
transition to IFRS.
Share-based payments (IFRS 2)
Share option schemes
The main impact of IFRS 2 for the Group is the expensing of employees' and
directors' share options.
The expense is calculated with reference to the fair value of the award on the
date of grant and is recognised over the vesting period of the scheme, adjusted
to reflect actual and expected levels of vesting. We have used the Black-Scholes
model to calculate the fair value of options on their grant date.
In the 2004/05, application of IFRS 2 results in a pre-tax charge to the Income
Statement of £48m; the pre-tax effect is partially offset by a deferred tax
credit of £16m. Deferred tax is calculated based on the difference between the
market price at the Balance Sheet date and the option exercise price. As a
result the tax effect will not correlate to the charge. The excess of the
deferred tax over the cumulative Income Statement charge at the tax rate is
recognised in equity (in 2004/05 this amounted to a credit of £9m to retained
earnings). The deferred tax asset recognised in February 2004 and February 2005
relating to the share option schemes are £25m and £49m respectively.
Share bonus schemes
Under UK GAAP we expensed share bonus schemes by applying the rules of UITF 17.
Whereas the UK GAAP P&L charge was based on the intrinsic value of the award,
the IFRS 2 charge is based on the fair value. This results in an additional
charge of £4m to the Income Statement in 2004/05.
As a result of IFRS, deferred tax assets recognised under UK GAAP relating to
share bonus schemes have reduced by approximately £8m at both the 2004 and 2005
Balance Sheet dates.
Goodwill arising on Business Combinations (IFRS 3)
Under IFRS 3, goodwill is not amortised on a straight-line basis but instead is
subject to annual impairment testing. Consequently, the goodwill balances were
reviewed for impairment as at February 2004 and February 2005 and no impairment
adjustments were identified.
In terms of adjustments to the Income Statement in 2004/05, the non-amortisation
of goodwill results in an increase in pre-tax profits of £61m. There are no
associated tax impacts.
In the February 2005 Balance Sheet, a foreign exchange gain of £2m has been
recognised through reserves relating to the non-amortisation of goodwill;
therefore, the total adjustment to net assets relating to goodwill amounts to
£63m.
Recognition of dividends (IAS 10 - Post balance sheet events)
Under IFRS, dividends declared after the Balance Sheet date are not recognised
as a liability as at that Balance Sheet date.
The final dividend of £365m declared in April 2004 relating to the 2003/04
financial year has been reversed in the opening IFRS Balance Sheet and charged
to equity in the Balance Sheet as at 26 February 2005. Similarly, the final
dividend accrued for the 2004/05 financial year of £410m has been reversed in
the IFRS Balance Sheet as at 26 February 2005 and has been charged to equity in
2005/06.
Leasing (IAS 17)
There are two impacts that have arisen from the adoption of IAS 17 - firstly,
the reclassification of some leases between operating and finance leases, and
secondly on the treatment of fixed rental uplifts.
Reclassification between operating and finance leases
The finance lease tests under UK GAAP and IFRS are broadly similar except that
IAS 17 requires the Group to consider property leases in their component parts
(i.e. land and building elements separately).
Following a detailed review of our property lease portfolio, a small number of
'building' leases have been reclassified as finance leases and brought onto the
Balance Sheet as at 29 February 2004, based on the criteria of IAS 17. As at 29
February 2004, this led to a relatively small increase in fixed assets, and a
similar increase in the finance lease creditor.
The following adjustments have been made at the opening Balance Sheet and as at
26 February 2005:
29 February 26 February
2004 2005
£m £m
Property, plant & equipment 29 49
Adjustment to net assets (4) (5)
The associated impact on the Income Statement of the above is that some UK GAAP
operating lease expenses are replaced with depreciation and financing charges
for the building elements of the reclassified leases. Over the life of the
lease, the total Income Statement charge will remain the same, but the timing of
expenses will change, with more of the total expense recognised earlier in the
lease term. The net pre-tax impact on the Income Statement is immaterial for the
year ended 26 February 2005.
In 2004/05, there is a one-off Income Statement adjustment of £4m, relating to
the deferral of some profit from the sale and leaseback deal completed in April
2004, which instead will be recognised over the 25 year lease term.
Fixed rental uplifts
The Group has a number of leases that contain minimum rental uplifts at
predetermined rent review dates. Some of these leases are with external
landlords and some with the Group's Property Joint ventures. The International
Financial Reporting Interpretations Committee (IFRIC) has recently clarified
that it is necessary to account for these increases on a straight-line basis
over the life of the lease. Previously the Group charged such increases to the
Income Statement in the year they arose.
The total amount payable over the life of the lease remains unchanged but the
timing of the Income Statement charge changes. The excess of the rent charged to
the Income Statement over the cash payment in any given period will be held on
the Balance Sheet in Trade and other payables. This change in accounting
treatment has the following effect on the Balance Sheets as at February 2004 and
February 2005, and the Income Statement for 2004/05.
29 February 2004/05 26 February
2004 Income 2005
Balance Sheet Statement Balance Sheet
£m £m £m
Operating profit impact (1) (12) (13)
Joint ventures and associates - 4 4
Deferred tax - 3 3
------------- ------------- -------------
Impact on net assets/ profit after (1) (5) (6)
tax ------------- ------------- -------------
Employee benefits (IAS 19)
For UK GAAP reporting, we applied the measurement and recognition policies of
SSAP 24 for pensions and other post-employment benefits, whilst providing
detailed disclosures for the alternative measurement principles of FRS 17
'Retirement Benefits'.
IAS 19 takes a similar approach to accounting for defined benefit schemes as FRS
17, thus, on transition, the deficit disclosed under FRS 17 has been recognised
in the Balance Sheet. At the opening Balance Sheet, this resulted in a pre-tax
reduction in net assets of £676m which represented the sum of the deficit plus
the reversal of a SSAP 24 debtor in the UK GAAP Balance Sheet as at 28 February
2004. An associated deferred tax asset of £199m was recognised in respect of the
pension deficit. Therefore the total adjustment to net assets as at February
2004 was £477m.
Thereafter, we have applied the amendment to IAS 19 which allows actuarial gains
and losses to be recognised immediately in the Statement of Recognised Income
and Expense i.e. the actuarial gains and losses will be taken directly to
equity.
The incremental pre-tax Income Statement charge for 2004/05 from the adoption of
IAS 19 is £41m. This is split between the current service cost (increases
operating costs by £45m) and the return on plan assets (increases finance income
by £4m). The related tax effect of this is a £12m credit to the Income
Statement. The actuarial loss on the scheme for the same period, recognised
through reserves, is £230m, with an offsetting tax adjustment of £67m.
The February 2005 IAS 19 pension deficit is £735m, with an associated deferred
tax of £279m.
Joint ventures (IAS 31) and associates (IAS 28)
The Group applies the equity method of accounting for joint ventures (JVs) and
associates, which is largely consistent with how they were accounted for under
UK GAAP.
The adoption of IFRS leads to a change in the presentation of the Group's share
of the results of JVs and associates. Under UK GAAP, we included our share of JV
and associate operating profit before interest and tax and showed our share of
their interest and tax in the respective Group lines on the Profit and Loss
account. Under IFRS, JV and associate profit is shown as a net figure i.e. post
interest and tax. This has the effect of reducing profit before tax for 2004/05,
by £32m, but reduces the tax charge by the same amount. Overall, there is no
impact on the Group profit after tax as this is purely a presentational change.
Another impact of using the equity method of accounting for JVs and associates
under IFRS is that when the Balance Sheet investment in a loss-making JV or
associate reduces to zero then no further losses should be recognised in the
Income Statement. Under UK GAAP losses would continue to be recognised. This
change has led to a small adjustment in the opening Balance Sheet of £1m and an
increase in JV and Associate profit of £2m in 2004/05.
Impairment of assets (IAS 36)
Under IAS 36, individual assets are reviewed for impairment when there are any
indicators of impairment. Where individual assets do not generate cash flows
independently from one another, the impairment reviews are carried out at the
'Cash-Generating Unit' level, which represents the lowest level at which cash
flows are independently generated. The illustrative examples in IAS 36 suggest
that for retailers this is at the individual store level.
Following impairment reviews as at the opening Balance Sheet date, we identified
a small number of stores which required a provision for impairment of £142m.
This had the effect of reducing the total fixed asset balance by approximately
1% as at 29 February 2004.
A similar review was performed for 2004/05 but no further stores required an
impairment provision. However, due to movements in foreign exchange rates, the
overall provision set against fixed assets increased by £10m - this
consolidation adjustment has been taken through equity, with no impact on the
2004/05 Income Statement.
IAS 36 has the additional effect of reducing the deferred tax liability by £15m
as at 29 February 2004 and £17m as at 26 February 2005 (the movement
year-on-year relates to foreign exchange differences which have been taken to
equity). The deferred tax adjustments arise because the impairment reviews have
reduced the net book values of certain assets qualifying for capital allowances,
with no corresponding change in the tax base.
Intangible assets (IAS 38)
Under UK GAAP, we included licences and capitalised development costs within
Tangible fixed assets on the Balance Sheet. Under IAS 38, 'Intangible Assets',
such items are disclosed separately on the face of the Balance Sheet.
As a result, there is a reclassification of £255m in the opening Balance Sheet,
and £306m in the Balance Sheet as at 26 February 2005, between Property, plant
and equipment and Intangible assets. There is no impact on the Income Statement
from this reclassification.
Investment properties (IAS 40)
Under UK GAAP, we included all owned property assets within Tangible fixed
assets on the Balance Sheet. Under IAS 40, 'Investment Properties', we are
required to split out any property which earns rental income or is held for
capital appreciation.
As a result, there is a reclassification of £473m in the opening Balance Sheet
and £565m in the Balance Sheet as at 26 February 2005 between Property, plant
and equipment and Investment property. There is no impact on the Income
Statement from this reclassification.
Deferred and current taxes (IAS 12)
Under UK GAAP, deferred tax was recognised in respect of all timing differences
that had originated but not reversed by the Balance Sheet date and which could
give rise to an obligation to pay more or less taxation in the future.
Deferred tax under IAS 12 is recognised in respect of all temporary differences
at the Balance Sheet date between the tax bases of assets and liabilities and
their carrying value for financial reporting purposes.
The change to a Balance Sheet liability method of providing for deferred tax
leads to a number of adjustments, as follows:
Feb 2004 04/05 04/05 Feb 2005
Net assets Income Equity Net assets
statement
£m £m £m £m
Impact of IAS 12 (79) (13) (2)* (94)
Tax effect of accounting changes 232 33 78* 343
---------- ---------- --------- ---------
Net impact on tax balance/profit 153 20 76 249
after tax
JV and associate presentation 32
change (IAS 28/31) ----------
Total impact on tax 52
* Includes foreign currency translation differences in respect of foreign
operations
The significant components of the Balance Sheet adjustments are the recognition
of deferred tax assets on the pension deficit and share-based payments, less
deferred tax provisions for potential future gains arising from rolled-over
gains and for the potential future tax liabilities arising from fair value
adjustments recorded for business combinations. Neither of these provisions were
previously recognised under FRS 19.
Other adjustments
Other adjustments arise from the reclassification of money market deposits from
current asset investments to cash and cash equivalents (as a result of the
definition within IAS 7 'Cash Flow Statements') and other minor presentation
differences.
NOTE 10 Adoption of IAS 32 and IAS 39
The Group adopted IAS 32 'Financial Instruments: Presentation and Disclosure'
and IAS 39 'Financial Instruments: Recognition and Measurement' from 27 February
2005. The Group has taken the exemption available under IFRS 1 'First Time
Adoption of IFRS' not to restate comparatives for IAS 32 and IAS 39. The
analysis below details the transitional adjustments arising from the adoption of
IAS 32 and IAS 39 as at 27 February 2005:
Reported under Financial Financial Restated for
IFRS Instruments: Instruments: IAS 32 and
(excluding IAS Presentation Recognition IAS 39
32 and 39) and and
Disclosure Measurement
IAS 32 IAS 39
£m £m £m £m
Non-current assets
Goodwill and 1,408 - - 1,408
intangible assets
Property, plant and 14,521 - - 14,521
equipment
Investment property 565 - - 565
Investments in joint 416 - (10) 406
ventures and
associates
Other investments 7 - (7) -
Deferred tax assets 14 - - 14
----------- ----------- ---------- ---------
16,931 - (17) 16,914
Current assets
Inventories 1,309 - - 1,309
Trade and other 769 - (64) 705
receivables
Derivative financial - - 40 40
instruments
Cash and cash 1,146 - - 1,146
equivalents ----------- ----------- ---------- ---------
3,224 - (24) 3,200
Current liabilities
Trade and other (4,974) - 475 (4,499)
payables
Financial liabilities
- Borrowings (482) - (63) (545)
- Derivative financial - - (258) (258)
instruments
Current tax (221) - - (221)
liabilities
Provisions (3) - - (3)
----------- ----------- ---------- ---------
(5,680) - 154 (5,526)
Net current (2,456) - 130 (2,326)
liabilities
Non-current
liabilities
Financial liabilities
- Borrowings (4,563) - (53) (4,616)
- Derivative financial - (228) (174) (402)
instruments and other
liabilities
Post-employment (735) - - (735)
benefit obligations
Other non-current (21) - - (21)
liabilities
Deferred tax (496) - 28 (468)
liabilities
Provisions (6) - - (6)
----------- ----------- ---------- ---------
(5,821) (228) (199) (6,248)
----------- ----------- ---------- ---------
Net assets 8,654 (228) (86) 8,340
=========== =========== ========== =========
Equity
Share capital 389 - - 389
Share premium account 3,704 - - 3,704
Other reserves 40 - - 40
Retained earnings 4,470 (228) (86) 4,156
----------- ----------- ---------- ---------
Equity attributable to 8,603 (228) (86) 8,289
equity holders of the
parent
Minority interests 51 - - 51
----------- ----------- ---------- ---------
Total equity 8,654 (228) (86) 8,340
=========== =========== ========== =========
Notes to the adjustment of equity at 27 February 2005 for IAS 32 and IAS 39.
1. The Group has entered into an agreement with the Samsung Corporation to
purchase the remaining shares of Samsung Tesco still held by Samsung. These
shares are expected to be purchased in three tranches in 2007, 2011 and 2012.
The purchase will reflect the market value of these shares at the date of
acquisition.
Under IAS 32, the net present value of the future payments are shown as a
financial liability, the forecast value of which was £228m at February 2005.
2. In 2003, the Group monetised profitable interest rate swaps. The amount
realised was held in deferred income and amortised through the interest line in
the Income Statement.
On transition to IAS 32 and IAS 39, the remaining credit balance held in
deferred income, £163m, is transferred to retained earnings.
Under IFRS 1, there is a corresponding credit of £163m to the value of financial
liabilities, which is subsequently amortised through the interest line in the
Income Statement.
The net effect is a transfer of £163m from deferred income to financial
liabilities, with no impact on the Income Statement and net assets.
3. Other adjustments are due to the marking-to-market of financial instruments
and the reclassification of other creditors and debtors which are defined as net
borrowings under IFRS.
4. The deferred tax impacts of the introduction of IAS 32/39 at 27 February 2005
is £28m.
NOTE 11 Annual Review
Copies of the 2006 Annual Review and Summary Financial Statement will be sent to
all shareholders. Copies of the 2006 Annual Report and Financial Statements will
be sent to shareholders who have requested them. Copies of both documents will
be available late May 2006 from the Company Secretary, Tesco PLC, PO Box 18,
Delamare Road, Cheshunt, Waltham Cross, Hertfordshire, EN8 9SL. These documents
will also be available on the internet at www.tesco.com
NOTE 12 AGM
The Annual General Meeting will be held at the Queen Elizabeth II Conference
Centre, Broad Sanctuary, Westminster, London, SW1P 3EE on Friday 7th July 2006
at 11am
This information is provided by RNS
The company news service from the London Stock Exchange
