Tesco announces preliminary results for 2023/24

April 10, 2024 (press release) –

MARKET SHARE GAINS AND RETURN TO POSITIVE VOLUME GROWTH AS CUSTOMERS SHOP MORE AT TESCO.

Ken Murphy, Chief Executive

Sales growth across all markets and continued cost savings deliver strong financial performance:

• Strong sales performance across the Group, with Retail LFL⁸ sales up 6.8%; inflation fell throughout the year, with volume growth in the UK and Republic of Ireland across the second half
  • UK & ROI LFL sales up 7.3%, including UK up 7.7%, ROI up 6.8% and Booker up 5.4%
  • Central Europe LFL sales up 0.2% in a challenging trading environment, with our investments in value supporting an improving volume trajectory during the second half
• Statutory revenue £68,187m, up 4.4%, includes impact of (17.2)% lower fuel sales, primarily due to reduced retail prices
• Retail adjusted operating profit⁵ £2,760m, up 10.9% at constant rates, including Save to Invest delivery of c.£640m
  • UK & ROI adjusted operating profit £2,670m, up 15.7%, as a strong trading performance and accelerated cost savings offset significant cost headwinds and our investments in value, quality and service
  • Central Europe adjusted operating profit £90m, down (50.0)%, primarily driven by cost inflation headwinds and regulatory actions in Hungary
• Statutory operating profit¹ £2,821m, up 100.1%, reflects last year’s £(982)m non-cash impairment charge compared to a £28m net release this year
• Strong retail free cash flow⁶ £2,063m, including a positive working capital inflow of £418m
• Net debt^6,7 reduced by £729m due to strong cash flow and Bank special dividend of £250m; net debt/EBITDA ratio at 2.2x
• Supporting returns to shareholders through ongoing buyback programme; £750m of shares purchased during 23/24
• Proposed final dividend of 8.25pps, with full year dividend of 12.10pps, up 11.0% year-on-year

Winning with customers through investments in value, quality and service:

• Strengthening brand perception in both value and quality; all customer satisfaction measures improving
• Overall gains in both value and volume share in UK and ROI; UK value +28bps and volume +8bps, with 12 consecutive periods of switching gains; ROI value +73bps and volume +76bps, with 15 consecutive periods of switching gains
• Latest market share results (to 17 March 2024) strengthened further, with UK value +53bps and volume +26bps
• Unique customer offer combining Aldi Price Match on >600 lines, Low Everyday Prices on >1,000 lines and c.8,000 exclusive Clubcard Prices deals each week, means we have been the cheapest full-line grocer for 16 consecutive months
• Investing in product quality and innovation, launching over 1,000 new products and improving c.2,700 existing lines
• Value for money and quality reflected in 19 consecutive periods of net switching gains from premium retailers

Maintaining disciplined approach to investment whilst investing in high-returning future growth & digital capability:

• Continued store expansion & improvement, with net increase of 87 stores (UK 74, ROI 4, CE 9) and 389 store refreshes
• Developing AI technology solutions to drive productivity, competitiveness and value for customers, including new range optimisation tool which automates bespoke product selection based on store location and demographic
• Enhanced transport scheduling system and new stock assembly processes driving greater supply chain efficiency
• Started construction of fresh food distribution centre in Aylesford, Kent, incorporating robotic automation technology
• Stepped up investment to support Booker growth, including conversion of Fareham Makro into c.120k sq.ft retail hub, unlocking more choice for retail customers and freeing up catering capacity
• Continuing to selectively invest in high-returning initiatives, with total capital expenditure of £1.3bn in 23/24; expected spend of £1.4bn in 24/25
• Entered into global grocery retail innovation partnership with Ahold Delhaize, Sobeys, Shoprite and Woolworths, to jointly invest in startups which accelerate growth and sustainability

Balancing the needs of all stakeholders to create long-term, sustainable value:

• Largest ever increase in colleague pay, in addition to ‘Thank You’ payment for hourly paid colleagues and new wellbeing benefits, including virtual GP appointments and enhanced family leave
• Investing in skills and employment with more hours for existing colleagues, the launch of a new retail apprenticeship programme, and plans to create c.2,000 additional UK roles across 70 new stores and our technology and online teams
• Continued strong support for our communities with launch of Stronger Starts programme, funding activities and nutrition in 4,000 projects, and significantly increased donations to food banks and charities, now at 4 million meals per month
• Improving product sourcing and efficiency of supply chain through collaboration with suppliers, contributing an additional £75m to British agriculture; #1 position in Advantage supplier survey for eighth year in a row
• Healthy products now 63% of sales volume in UK and ROI, well on track to achieve 2025 target of 65%

Planned sale of banking operations and long-term strategic partnership with Barclays announced in February 2024:

• Sale expected to complete in second half of 2024, generating c.£700m cash (net of transaction costs) made up of c.£600m consideration and c.£100m other net cash; planned sale results in a remeasurement loss of £(628)m (post-tax)
• Combined with £250m special dividend paid to the Group by Tesco Bank in August 2023, expected to deliver c.£1bn of cash
• Total Tesco Bank adjusted operating profit for the year of £148m, in line with guidance; including £69m from retained business (insurance and money services), presented within continuing operations
• Banking operations classified as discontinued, with £79m adjusted operating profit excluded from headline performance
• On an annualised basis, we expect the retained Tesco Bank business to generate £80m to £100m adjusted operating profit, including income from partnership with Barclays, enabling us to offer Tesco-branded financial products and services

CAPITAL RETURN PROGRAMME.

Since launching our capital return programme in October 2021, we have now purchased £1.8bn worth of shares, including £750m in the twelve months to April 2024. We continue to see the buyback programme as an ongoing and critical driver of shareholder returns and we are pleased to announce that we will buy back £1.0bn worth of shares over the next twelve months, including £250m funded by the special dividend paid by Tesco Bank in August 2023. A further update on our plans for the return of the proceeds generated from the sale of our banking operations will be provided following completion.

OUTLOOK.

The investments we’ve made to date have strengthened our offer to customers, made us more efficient, and more digitally capable, establishing a strong foundation for future growth. We are building a consistent track record of delivery against the performance framework we set out in October 2021.

For the 2024/25 financial year, we expect retail adjusted operating profit of at least £2.8bn. In addition, we expect total adjusted operating profit from the retained Tesco Bank business of around £80m, which includes a part-year amount of partnership income, based on the completion of the transaction towards the end of this calendar year. We expect to generate retail free cash flow within our guidance range of £1.4bn to £1.8bn.

STRATEGIC PRIORITIES.

Our strategic priorities ensure that we focus on offering great value, quality and convenience whilst also rewarding loyalty. Through our colleagues, our reach and our supplier relationships we are well-placed to serve our customers whenever, wherever and however they need us. Our strategy guides us to drive top-line growth, grow profit and generate cash and in doing so, deliver for all our stakeholders.

1) Magnetic Value for Customers – Re-defining value to become the customer’s favourite

• Led the way on passing savings on to customers; prices cut on over 4,000 products by an average of c.12% over the year
• Clubcard Prices on around 8,000 products each week, saving customers up to £360 off the annual cost of their groceries
• Continual process of quality innovation and improvement, with 1,047 new lines introduced during the year, including our new Finest Summer, ‘Slow Cooked’ and Christmas party food ranges and meat-free Plant Chef ready meals
• Finest sales now >£2bn, up 15.7% during the year, with volumes up 9.0% and more than 23m customers buying into our Finest brand, including one in four customer baskets containing a Finest product over Christmas
• Increases in all customer perception scores, including satisfaction (+101bps), quality (+96bps) and value (+88bps)
• Further strengthening our non-food offering with the introduction of Paperchase and The Entertainer brands, adding premium stationery and an even more compelling toys range to our stores, respectively
• Quality of Booker offer reflected in winning 2023 Quality Awards Foodservice Operator of the year
• Largest ever Booker Catering price lock on over 700 products throughout the Christmas period, with a further 600 products locked through to May 2024

2) I Love my Tesco Clubcard – Creating a competitive advantage through our powerful digital capability

• Expanding Clubcard reach: now over 22m Clubcard households in UK, +6.2% YoY; Tesco app users increased to 16.3m across the Group: UK 12.7m, ROI 1.0m, Central Europe 2.6m
• Clubcard sales penetration up in all markets, now at: UK 82%, ROI 85%, Central Europe 87%, Mobile 88% and Bank 66%
• Double Clubcard points event for first time in a decade, >10bn Clubcard points issued during January & February event
• Growing personalisation: issuing 289m personalised coupons to 7.6m customers during the year; ‘Clubcard Unpacked’ shopper insight reached over 17m customers, up from 9m last year
• Growing reach of digital media with significant increase in number of connected screens; c.2,000 now installed
• Leveraging Clubcard insights and dunnhumby expertise to create sophisticated digital platform; more than 17,000 campaigns delivered in the year, with newly created team focused on growing our retail media contribution

3) Easily the Most Convenient – Serving customers wherever, whenever and however they want to be served

• Opened 113 stores across the Group (seven new superstores, 60 Express stores & 27 One Stop stores in UK, one superstore and four Express stores in ROI, and 14 new stores in Central Europe)
• UK online market share strong at c.34%; further strengthened availability to 98.1% with ‘perfect orders’ up 20ppts YoY
• Whoosh now available in 1,424 stores; available to 66% of population; with 74% of deliveries within 30 minutes and larger baskets now available in over 1,000 stores
• Opened a further three Urban Fulfilment Centres in Gallions Reach, King’s Lynn and Coventry; now at nine UFCs in total
• Almost doubled number of electric home delivery vans to 571, now at 11% of fleet; target to be fully electric in UK by 2030
• Working with 354 net new Booker retail partners; converted existing Fareham site into c.120k sq.ft retail hub, unlocking more choice for retail customers and freeing up catering capacity
• Tesco Mobile ranked highest mobile brand in the UK Customer Satisfaction index - also won overall network of the year and best network for customer service at the 2024 Uswitch Telecoms Awards

4) Save to Invest – Significant opportunities to simplify, become more productive and reduce costs

• Exceeded savings target, with c.£640m of savings in 23/24 and £1.2bn total cumulative savings over past two years
• Strong delivery across all areas: goods and services not for resale, property, operations and central overheads
• Completed space realignment and optimisation of management structures in large stores
• End-to-end review of promotional replenishment to strengthen availability and deliver efficiency gains
• Further energy consumption initiatives delivered in the year, including upgraded LED lighting
• Strong plan to deliver a further £500m of efficiency savings in 24/25

COMMUNITIES.

During the year, we launched Stronger Starts, our £5m grant programme, which has so far supported around 4,000 projects for children and young people, providing support around health, nutrition and physical activity.

We have worked with our redistribution partners to significantly increase the amount of surplus food we donate to charities and local communities in the UK, donating over four million meals per month, bringing our total to date to over 200 million meals. In ROI, we celebrated ten years of the Surplus Redistribution Programme, with 20 million meals donated to date, whilst Booker have joined Tesco in being awarded the FareShare Food Partner Logo in recognition of their consistent food donation work.

We’ve made strong progress on health in the year, with healthy products now accounting for 63% of sales volume in the UK and ROI, well on track towards achieving our target of 65% by 2025. We remain committed to making healthy options more accessible and affordable for all our customers, and we expanded our Better Baskets campaign in the year, with dedicated zones now in seven different aisles in our large stores.

PLANET.

We continue to take action on climate change and this year we became one of the first companies globally to set validated science-based targets on all greenhouse gas emissions across our full Group value chain, including those originating from forests, land and agriculture (FLAG). The Science Based Targets Initiative (SBTi) validated our stretching commitments, as we work towards our objective of net zero across our entire value chain by 2050, aligned to a 1.5-degree pathway. We have made significant progress in the year in reducing emissions in our own operations (Scope 1 and 2), delivering a 61% reduction against our baseline, exceeding our 2025 target of 60%. Our actions included rolling out 278 more electric delivery vans in the UK, moving to lower emissions refrigerant gases in our chilled distribution network, and installing heat pumps which are now in most of our UK Express stores and a small number of stores across ROI and Central Europe.

We already use 100% renewable electricity across the Group and plan to roll-out solar panels on 100 of our stores across the UK over the next three years. We generate renewable energy as part of our partnership with EDF Renewables and a number of other partners, through offsite power purchase arrangements. These partnerships are expected to generate around a third of our UK electricity demand within the next 18 months. We are also supporting our agricultural suppliers’ transition to low-carbon fertilisers, with our second year of trials underway and covering ten times the area of the first year; and engaging our suppliers to better support our net zero commitment, with over 70% (by cost of goods sold) now having publicly set a net zero ambition.

GROUP REVIEW OF PERFORMANCE.

On a continuing operations basis¹

As set out on page 1 of this release, the results of our existing banking operations have been treated as discontinued following the announcement of our proposed sale to Barclays. As such, Tesco Bank results included in the table below and within the segmental review of performance, refer only to the retained Tesco Bank business, i.e. insurance and money services, unless otherwise stated.

Group sales⁴ increased by 7.2% at constant rates, with growth across all segments. The impact of inflation was evident across all markets, although reduced gradually across the year as many global commodity prices fell and we passed savings on to customers by cutting prices across everyday grocery lines. Customer demand was resilient and volume performance improved across the year, supported by our ongoing investments in value, quality, and service. Revenue increased by 4.2% at constant rates, including a (17.2)% decline in fuel sales, primarily driven by lower retail prices year-on-year.

Group adjusted operating profit⁵ increased by 12.7% at constant rates, including a further c.£640m contribution from Save to Invest in the year. We effectively managed significant cost headwinds, whilst our ongoing investments in the customer offer drove stronger than expected volumes.

Group statutory operating profit improved by 100.1% year-on-year, primarily due to a £(982)m non-cash net impairment charge in the prior year. The non-cash net impairment release of £28m in the current year reflects an improvement in UK & ROI performance, partially offset by lower property market values.

Net finance costs were broadly flat year-on-year, with stable net interest costs and a £(98)m increase in net pensions finance costs, being largely offset by a £91m movement in fair value remeasurements of financial instruments.

The higher tax charge this year was driven mainly by an increase in UK corporation tax rates effective from April 2023, the impact of higher retail operating profits and a lower tax credit on adjusting items, driven by last year’s net impairment charge.

Adjusted diluted EPS⁵ increased by 14.0%, due to higher retail adjusted operating profits and the ongoing benefit from our share buyback programme. We have announced a full year dividend of 12.10 pence per ordinary share, up 11.0% year-on-year.

We generated £2,063m of retail free cash flow⁶, including a net £418m working capital inflow. Net debt^6,7 reduced by £729m to £9.8bn, driven by this strong retail free cash flow and the £250m special dividend from Tesco Bank. This was partially offset by cash returned to shareholders via our ongoing share buyback programme and dividend payments made in the year. The net debt/EBITDA ratio was 2.2 times, compared to 2.6 times last year, driven by strong cash generation and higher retail EBITDA.

Further commentary on these metrics can be found below and a full income statement can be found on page 15.

Notes.

1. Following the announcement in February 2024 that we have reached an agreement to sell our Banking operations, the performance of these banking operations has been presented as a discontinued operation with comparatives also restated.  Discontinued operations are excluded from our headline performance metrics. The assets and liabilities related to the discontinued operations have been classified as held for sale. Retained business (money services and insurance) has been presented on a continuing operations basis and therefore within headline performance measures.  Further details on discontinued operations can be found in Note 6, starting on page 30, and please refer to Note 2 for the segmental results of the Bank.

2.  The Group has defined and outlined the purpose of its alternative performance measures, including its performance highlights, in the Glossary starting on page 50.

3. Comparatives have been restated for the adoption of IFRS 17 ‘Insurance contracts’ and to present Banking operations as a discontinued operation. Refer to Notes 1, 6 and 22 for further details.

4. Group sales exclude VAT and fuel. Sales change shown on a comparable days basis for Central Europe.

5. Adjusted operating profit and adjusted diluted EPS exclude adjusting items.

6. Net debt and Retail free cash flow exclude Tesco Bank.

7. All measures apart from Net debt and Dividend per share are shown on a continuing operations basis unless otherwise stated. Further information on Net debt can be found in Note 21, starting on page 45.

8. Like-for-like (LFL) is a measure of growth in Group sales from stores that have been open for at least a year and online sales (at constant exchange rates, excluding VAT and fuel).

9. Capex excludes additions arising from business combinations, property buybacks (typically stores) and other store purchases. Refer to page 54 for further details.

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