Tesco deliver strong performance with group sales up 5.3%

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Tesco plc (LON:TSCO) has announced its preliminary results for 2022/2023.

Performance highlights^1,2:	FY 22/23	FY 21/22	Change at actual rates	Change at constant rates
Group sales (exc. VAT, exc. fuel)³	£57,656m	£54,768m	5.3%	5.3%
Adjusted operating profit⁴	£2,630m	£2,825m	(6.9)%	(7.1)%
– Retail	£2,487m	£2,649m	(6.1)%	(6.3)%
– Tesco Bank	£143m	£176m	(18.8)%	(18.8)%
Retail free cash flow⁵	£2,133m	£2,277m	(6.3)%
Net debt^2,5	£(10,493)m	£(10,516)m	0.2%
Adjusted diluted EPS⁴	21.85p	21.86p	(0.0)%
Dividend per share	10.90p	10.90p	–
Statutory measures:
Revenue (exc. VAT, inc. fuel)	£65,762m	£61,344m	7.2%
Operating profit	£1,525m	£2,560m	(40.4)%
Profit before tax	£1,000m	£2,033m	(50.8)%
Retail cash generated from operating activities	£3,752m	£3,614m	3.8%
Diluted EPS	10.08p	19.64p	(48.7)%

Delivered strong financial performance, with retail free cash flow ahead of expectations:

Strong sales performance across the Group, with Retail LFL6 sales up 5.1%, as volumes held up relatively well despite cost-of-living pressures and some further post-pandemic normalisation

‑ UK & ROI LFL sales up 4.7%, including UK up 3.3%, ROI up 3.3% and Booker up 12.0%

‑ Central Europe LFL sales up 10.4%

Statutory revenue £65,762m, up 7.2% including fuel sales up 23.3%
Total retail adjusted operating profit4 £2,487m, down (6.3)% at constant rates

‑ UK & ROI adjusted operating profit £2,307m, down (7.0)% driven by the impact of lower YoY volumes and ongoing investment in our customer offer, with Save to Invest largely offsetting significant operating cost inflation

‑ C.Europe adjusted operating profit £180m, up 3.6% with volumes resilient in the face of significant market inflation

Bank adjusted operating profit £143m, down (18.8)%, reflecting post COVID-19 macroeconomic provision release last year
Statutory operating profit £1,525m, after £(982)m non-cash impairment charge due primarily to higher discount rates
Strong retail free cash flow5 £2,133m, including working capital inflow of £468m
Flat net debt2,5 year-on-year, with net debt/EBITDA ratio in middle of target range at 2.6x
Adjusted diluted EPS4 21.85p, flat year-on-year; statutory diluted EPS 10.08p, down YoY due to impairment charge
Proposed final dividend of 7.05pps to take full year dividend to 10.90pps (in line with last year’s full year dividend)

Further strengthening our customer offer, underpinned by a relentless focus on value:

Solid UK market share performance; only full-line grocer to gain share over three years
Highest brand NPS of the full-line grocers; outperformed market on customer satisfaction
Most competitive offer ever, with powerful combination of Aldi Price Match, Clubcard Prices & Low Everyday Prices helping us mitigate inflation and drive value perception ahead of the market
Customers recognising our focus on great quality, with perception up 89bps YoY vs other full-line grocers down (153)bps
Opened 2,000th Express store and 1,000th One Stop store; Whoosh rapid delivery service now available in 1,000 stores
Clubcard penetration up again in all markets; further increase in app users, now 11.7m in UK, 0.7m in ROI and 2.0m in CE

Creating long-term, sustainable value for all Tesco stakeholders:

Continued strong focus on customer satisfaction, market share and cash, ensuring we balance all stakeholders’ needs
Biggest ever investment in pay; UK store colleagues now paid £11.02/hour7 with access to additional colleague benefits
Working with suppliers to mitigate as much inflation as possible; record supplier satisfaction score of 86.6%
Supporting foodbanks and our communities with daily donations; 52m meals provided by Tesco and our customers
Further progress towards 2035 carbon neutral own operations commitment; additional 243 electric home delivery vans; accelerated aim to halve our food waste in our own operations by 2025, five years earlier than planned
£750m worth of shares bought back since April 2022; cumulative £1.05bn bought back since October 2021

Ken Murphy, Chief Executive:

“It’s been an incredibly tough year for many of our customers, and we have been determined to do everything we can to help. Our results reflect our continued investment in delivering great value and quality for our customers, whilst at the same time looking after our colleagues. This is despite unprecedented levels of inflation in the prices we have paid our suppliers for their products, and the cost of running our own operations. I am very proud of the way the Tesco team has responded to these challenges and would like to thank every colleague for the contribution they have made.

The resilience and agility that we have developed over the last few years has created a sustainable competitive advantage that leaves us well-placed to deal with any challenges that may arise. It has enabled us to deliver another strong performance across the Group, whilst continuing to make strategic progress.

Perhaps most importantly, over the last few years we have fundamentally repositioned our value proposition. We are the most competitive we have ever been, with our market-leading combination of Aldi Price Match, Clubcard Prices and Low Everyday Prices changing the way customers perceive value at Tesco.

Through the combination of an ever more digital Clubcard, a world-class integrated app for all our customers’ needs, the 30+ years of experience at dunnhumby and our unique reach and scale, we have built a powerful digital platform that puts us in prime position to take advantage of the exciting media monetisation and personalisation opportunities available to us.

We continue to target growth through making Tesco the most convenient place to shop. This year we have opened 91 stores across the Group and are serving over 450 net new Booker retail partners. Booker delivered its strongest year ever, helped by an outstanding catering performance as even more customers benefited from its unbeatable choice, price and service. Our acquisition of nine Joyce’s stores in the Republic of Ireland and, more recently, the Paperchase brand in the UK signals our appetite to find new, value-creating growth opportunities in our core markets.

Our focus on customer satisfaction, market share and free cash flow is working. It is delivering strong results and enabling us to re-invest in the business, maintain a strong balance sheet and return cash to shareholders. We have already bought back over £1bn worth of shares and have today announced a further £750m worth over the next twelve months.

I am really confident that by investing to give customers the best possible value and continuing to look after our colleagues, we will create further significant value for every stakeholder in Tesco.”

OUTLOOK

We are pleased with our strong performance in 2022/23 and confident that we have the right strategy to keep winning. We will continue to prioritise investment in our customer offer whilst doing everything we can to offset the impact of ongoing elevated cost inflation.

We expect to be able to deliver a broadly flat level of retail adjusted operating profit in 2023/24 and retail free cash flow within our target range of £1.4bn to £1.8bn. We expect Bank adjusted operating profit of between £130m and £160m.

CAPITAL RETURN PROGRAMME.

Since launching our ongoing capital return programme in October 2021, we have now purchased a total of £1.05bn worth of shares, including £750m worth since April 2022, as expected.

We see the buyback programme as an ongoing and critical driver of shareholder returns. Reflecting the strength of our balance sheet and our confidence in delivering strong future cash flows, we are pleased to announce that we will buy back a total of £750m worth of shares over the next twelve months.

We will continue to announce any new forward commitments regarding our ongoing capital return programme as part of our preliminary results each April.

STRATEGIC PRIORITIES.

Our four strategic priorities continue to guide us by ensuring we offer outstanding value, great quality and market-leading convenience whilst also rewarding loyalty. Our unrivalled reach, strong supplier relationships and the capability of our exceptional teams means we are best-placed to serve our customers whenever, wherever and however they need us. Through our digital platform, powered by Clubcard and dunnhumby, we are building a significant competitive advantage. We remain focused on driving top-line growth, profit and cash, and in doing so, continuing to deliver for all of our stakeholders.

We have made further strong progress against our strategic priorities over the last year:

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

We are at the most competitive we have ever been, including our market-leading combination of:

‑ Aldi Price Match: market-leading commitment on >600 lines; in 99% of large baskets & >85% of top-up shops

‑ Low Everyday Prices: continuing price lock on over a thousand everyday products until July 2023

‑ Clubcard Prices: continuing to provide great offers and value to customers; >10% increase in promotions YoY

Improved quality perception: +89bps YoY (+492bps over 3yrs) vs other full-line grocers (153)bps YoY (+15bps over 3yrs)
Brand NPS highest of the full-line grocers; outperformed market on customer satisfaction
Record supplier satisfaction score of 86.6%; #1 in Advantage supplier survey for seventh consecutive year
Continued focus on health & sustainability; launched ‘Better Baskets’ instore & online; removed 71bn calories to date
Further progress towards 2035 carbon neutral own operations commitment; additional 243 electric home delivery vans; accelerated plans to halve food waste in our own operations by five years, from 2030 to 2025

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

Further increase in Clubcard sales penetration across all markets; UK now at 79%, ROI at 77% and C.Europe at 83%
Nearly 21m active UK Clubcard households; over 14m Clubcard app users across Group (UK: 11.7m, ROI: 0.7m, CE: 2.0m)
Number of UK customers receiving in-app personalised coupons doubled to 4 million; 89m coupons issued to date
Clubcard ranked #1 loyalty scheme in all three C.Europe countries; 95% of CE promotions now on Clubcard Prices
Completed migration of Clubcard app into Grocery app; now includes home delivery, Click & Collect, Whoosh rapid delivery, GetGo queue-free shopping, in-store stock checking, payment and full Clubcard functionality

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

Online sales remain nearly 60% ahead of pre-pandemic levels, with orders held at 1.1m per week
Online market share remained strong at c.35%; opened fifth and sixth urban fulfilment centres (UFCs)
Tesco Whoosh delivery service now in 1,000 stores, available to >55% UK households; average delivery time c.25mins
Opened two superstores, 50 Express stores, 18 One Stop stores in UK; working with 451 net new Booker retail partners
Nine stores converted from Joyce’s supermarkets in the Republic of Ireland, trading ahead of expectations; also opened four new Express stores in Ireland and seven small format stores in C.Europe
Acquired Paperchase brand in January 2023; first products to be launched in UK stores later this year

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

Strong progress across all areas: goods & services not for resale, property, operations and central overheads
Accelerated delivery of savings plan; in excess of £550m saved TY; on track to achieve at least £1bn cumulative by Feb-24
Streamlined management structure in larger Superstores and Extra stores; closing all 467 remaining counters
Implemented energy reduction initiatives in stores, significantly improving efficiency and reducing costs
Replaced weekly paper offer booklets with digital flyer in C.Europe, removing c.3,500 tonnes of paper annually

GROUP REVIEW OF PERFORMANCE

52 weeks ended 25 February 2023^1,2	FY 22/23	FY 21/22	Change at actual rates	Change at constant rates
Sales (exc. VAT, exc. fuel)³	£57,656m	£54,768m	5.3%	5.3%
Fuel	£8,106m	£6,576m	23.3%	23.2%
Revenue (exc. VAT, inc. fuel)	£65,762m	£61,344m	7.2%	7.3%

Adjusted operating profit⁴	£2,630m	£2,825m	(6.9)%	(7.1)%
Adjusting items	£(1,105)m	£(265)m
Statutory operating profit	£1,525m	£2,560m	(40.4)%

Net finance costs	£(533)m	£(542)m
Joint ventures and associates	£8m	£15m
Statutory profit before tax	£1,000m	£2,033m	(50.8)%
Group tax	£(247)m	£(510)m
Statutory profit after tax	£753m	£1,523m	(50.6)%

Adjusted diluted EPS⁴	21.85p	21.86p	(0.0)%
Statutory diluted EPS	10.08p	19.64p	(48.7)%
Dividend per share	10.90p	10.90p	–
Net debt^2,5	£(10,493)m	£(10,516)m	0.2%
Retail free cash flow⁵	£2,133m	£2,277m	(6.3)%
Capex⁸	£1,235m	£1,101m	12.2%

Group sales³ increased by 5.3% at constant rates, driven by strong sales performance in all segments as volumes held up relatively well despite cost-of-living pressures and some further post-pandemic normalisation. We delivered a market-leading performance over the important Christmas trading period, continuing to inflate behind the market as overall levels of inflation increased. Booker delivered an exceptionally strong performance, particularly in catering, with higher out-of-home consumption. Revenue increased by 7.3% at constant rates, including fuel sales growth of 23.2%.

Group adjusted operating profit⁴ decreased by (7.1)% at constant rates, primarily reflecting the impact of lower year-on-year volumes, the ongoing investment in our customer offer and significant operating cost inflation, partially offset by a very strong Booker catering recovery and the acceleration of our Save to Invest programme, which delivered in excess of £550m of savings in the year.

Group statutory operating profit reduced by (40.4)% year-on-year due to the operating profit impacts above and an increase in adjusting items, with the key driver being a £(982)m non-cash impairment charge on non-current assets (primarily property), mainly due to an increase in discount rates.

Net finance costs were broadly flat year-on-year as the benefit from higher interest receivable and net pension finance income was partially offset by non-cash fair value remeasurements. Further detail is shown on page 10. Our share of profits from joint ventures and associates was lower year-on-year due to a reduction in profits from UK property joint ventures. The reduction in tax this year reflects the lower retail operating profits and a one-off charge in the prior year related to the revaluation of deferred tax.

Adjusted diluted EPS⁴ was in line with last year, as the impact of the reduction in operating profit was offset by lower finance costs and tax charges, and the benefit of our ongoing share buyback programme. We have announced a full year dividend of 10.90p per ordinary share, in line with last year.

Net debt^2,5 was broadly flat year-on-year, with strong cash generation funding over £1.6bn of shareholder returns in the form of share buybacks and dividends. We generated £2,133m of retail free cash flow⁵, including a net £468m working capital inflow. Retail free cash flow reduced by £(144)m due to lower retail operating profits and higher levels of capital investment, offset by a reduction in cash tax. The net debt/ EBITDA ratio was 2.6 times, up from 2.5 times in the prior year due to a reduction in retail EBITDA.

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

Notes:

1. The Group has defined and outlined the purpose of its alternative performance measures, including its performance highlights, in the Glossary starting on page 46.

2. All measures apart from Net debt are shown on a continuing operations basis unless otherwise stated. Further details on discontinued operations can be found in Note 6 on page 29.

3. Group sales exclude VAT and fuel. Sales change shown on a comparable day’s basis for Central Europe.

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

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

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

7. UK colleagues in stores are now paid £11.02/hr (from 2-Apr-23). Colleagues in Outer London stores are paid £11.75/hr and those in London Boroughs are paid £11.95/hr (both rates include location allowances).

8. Capex excludes additions arising from business combinations and buybacks of property (typically stores). Refer to page 50 for a full reconciliation.

Segmental review of performance:

UK & ROI OVERVIEW:

In the UK, Republic of Ireland (ROI) and Booker, like-for-like sales increased by 4.7% versus last year, with growth of 6.7% in the second half. We delivered a very strong performance over Christmas (with like-for-like sales growth of 7.8%), continuing to inflate behind the market as overall levels of inflation increased. Booker delivered particularly strong sales growth of 12.0%, benefiting from continued market share growth in its catering business.

UK & ROI adjusted operating profit was £2,307m, down (7.0)% at constant rates, primarily reflecting the impact of lower year-on-year volumes, the ongoing investment in our customer offer and significant operating cost inflation, partially offset by a very strong Booker catering recovery and the acceleration of our Save to Invest programme.

Adjusted operating margin was 3.8%, (57)bps lower year-on-year, reflecting a margin mix benefit last year from higher non- food sales and the year-on-year operating profit impacts above.

Further information on each of the UK & ROI businesses follows below.

UK – strong customer offer and relentless focus on value:

Like-for-like sales grew by 3.3%, with particularly strong growth of 7.2% across the six-week Christmas trading period. In the first half, like-for-like sales grew by 0.7%, reflecting reduced year-on-year volumes due to higher levels of in-home consumption in the prior year. Growth accelerated in the second half, with like-for-like sales of 6.0%, driven by rising levels of general market inflation and strong demand in the fourth quarter, particularly during the key Christmas trading period.

Food sales grew by 4.6% for the full year, with own brand volume participation increasing by 46bps as customers responded to our overall value proposition, driving growth at both ends of our range; Finest sales were up 6.8% and sales of our entry price and Exclusively at Tesco ranges were up 5.9%. We are at the most competitive we have ever been, with our strongest price index to date, as we continue to invest in our value proposition for customers. The powerful combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices, supported by our market-leading ranges, is helping customers manage higher costs of living. We maintained a strong market share at 27.3% and were the only full-line grocer to grow share versus pre-pandemic, whilst also growing our overall brand index ahead of the market across the three years, most noticeably in quality up 492bps.

Customers took greater advantage of our exclusive Clubcard Prices promotions, with promotional participation increasing by 3.8ppts to 25.5% in February. Clubcard sales penetration reached 78.5% by the end of the year, up 4.4ppts, with penetration in convenience up 9.9ppts, benefiting from the roll-out of Clubcard Prices to our Express stores in the second half of last year and more recently the launch of our market-leading Clubcard Price Meal Deal.

Non-food sales declined by (4.5)% as we traded over strong sales in Home and Clothing categories last year. Home sales declined by (6.4)%, driven by a (9.8)% reduction in our range as we selectively exited low margin categories such as electricals. We outperformed the market in key categories, such as gifting and stationery (by 8.7ppts and 4.3ppts respectively). We purchased the Paperchase brand in January, and we look forward to introducing a wider range of cards, gifting and stationery later this year.

Clothing sales declined by (1.2)%, which mainly reflects the impact of trading over exceptionally strong lockdown-linked demand in the first half of the 2021/22 financial year, partly offset by our efforts to rebalance space from Home to Clothing. We saw a significant improvement in value perception, ahead of other clothing retailers, and the number of customers purchasing at least one product from our Home and Clothing ranges increased by 11.0% and 7.6% respectively. Clothing delivered growth of 7.0% in the fourth quarter.

Sales grew well in both large and convenience store formats, by 4.0% and 6.4% respectively, driven by particularly strong performance in food and higher footfall as some customers switched back into stores from online. Growth was particularly strong in our city centre convenience stores, notably in the London region where sales grew by 9.4%.

Online sales declined by (5.4)%, in line with overall normalisation in the market. Online sales participation stabilised to c.13%, around 4ppts higher than pre-pandemic, driven by strong customer retention.

We opened our fifth and sixth Urban Fulfilment Centres (UFCs) in Rutherglen, Glasgow (in May) and Bar Hill, Cambridge (in January). Tesco Whoosh – our rapid delivery service – is now in 1,000 stores, exceeding our original target of 800 stores. Our average delivery times have improved by around five minutes to c.25 minutes with nearly two million orders delivered to customers to date. Satisfaction scores are amongst the highest in the Group, with Whoosh proving particularly popular amongst our most loyal customers.

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ROI – consistently outperforming the market:

Like-for-like sales grew by 3.3% for the full year, including growth of 6.6% in the second half as general market inflation increased. We delivered a particularly strong Christmas, despite trading over high levels of in-home consumption in the prior year as a result of hospitality restrictions. We grew our market share to 22.9% by the end of the year, with gains of 64bps year-on-year and 110bps versus pre-pandemic.

Total sales grew by 5.4% at constant rates, including a 1.5ppts contribution from the nine Joyce’s stores we acquired in June which were fully converted and re-opened as Tesco stores in the third quarter. In addition, we opened four new convenience stores, which contributed 0.7ppts to total sales growth.

Our continued investment in value through Aldi Price Match, Low Everyday Prices and Clubcard Prices is proving to be a winning formula for customers in Ireland. Clubcard Prices has been a particular success, with sales penetration increasing by 22.8ppts to 76.5%.

BOOKER – an exceptionally strong performance across both catering and retail:

Booker delivered exceptionally strong like-for-like sales growth of 12.0%. Catering sales were particularly strong, increasing by 35.5% in the first half as we lapped subdued demand due to pandemic-related restrictions in the prior year. Catering grew by 18.9% in the second half as we continued to significantly outperform the market, working with hospitality customers to ensure they could continue to offer outstanding value whilst maintaining strong menu choice. This included our price freeze on around 450 key catering lines across the festive period. The number of customers signing up to our ‘Food Clubs’ has further increased, with 44,000 members now able to access exclusive deals and discounts.

The retail business also continued to grow well, with sales up 9.9% excluding tobacco. Our Jack’s product range is proving popular with our Booker retail partners, enabling them to offer their customers a great value own brand alternative on over 500 lines.

Retail tobacco sales declined by (5.6)%, reflecting the market trend as customers returned to overseas travel and duty-free imports increased. Excluding tobacco, total Booker sales growth was 18.4%.

CENTRAL EUROPE – strong delivery of cost reduction plans delivering profit growth:

Like-for-like sales grew by 10.4%, with strong growth in all three markets. Inflationary pressures were felt to a greater extent across our Central European markets with even more significant levels of input cost inflation. Food sales grew by 11.9%, with strong growth in both fresh and packaged categories.

We rolled out Clubcard Prices to c.95% of promotions and our Low-Price Guarantee continues to be positively received across all countries. Clubcard penetration is now at 83% versus 60% last year and we have seen strong improvements across our reward perceptions. Our reward scheme is ranked number one in all three countries.

Central Europe adjusted operating profit was £180m, an increase of 3.6% at constant rates. Our cost reduction programme helped offset significant energy inflation, foreign exchange headwinds and an incremental £(25)m charge related to a new extraordinary retail tax in Hungary.

In June, we completed the sale of 17 malls and one retail park, generating proceeds of £203m and a £37m profit on disposal within adjusting items. We are continuing to operate the Tesco hypermarkets in these malls on a leasehold basis.

TESCO BANK:

Revenue grew by 20.1%, driven by an increase in credit card spend, a recovery in demand for travel money and an increase in ATM transactions year-on-year as cash usage continued to recover post-pandemic. In addition, insurance revenue increased due to an additional two-month benefit from the acquisition of Tesco Underwriting Limited in May 2021 as well as underlying growth in policies.

Tesco Bank adjusted operating profit was £143m, down (18.8)% year-on-year, predominantly due to the impact of a significant provision release in the prior year related to the improved macroeconomic outlook post-pandemic. This was partially offset by a strong performance in our travel money and ATM businesses, combined with higher credit card income, in addition to a higher contribution from the full consolidation of Tesco Underwriting Limited.

Overall lending to customers has increased by 9.1% to £7.1bn, due mainly to higher credit card balances as a result of both increased retail spending and growth in newly acquired accounts. Loan balances remained stable year-on-year. Our level of customer defaults remains low and the Bank’s balance sheet remains in a strong position, with sufficient capital and liquidity to absorb changes in both regulatory and funding requirements.

In addition to winning ‘Credit Builder Card Provider of the Year’ and ‘Best Card Provider (Introductory Rate)’ at the Moneyfacts Awards in the first half, Tesco Bank has since won ‘Credit Card Provider’ of the year at the 2023 Moneyfacts Consumer Awards in recognition of the wide range of credit cards we offer for customers, combined with the unique benefit of being able to earn Tesco Clubcard points.

We announced our two new charity partnerships with The Trussell Trust, who work to end the need for food banks in the UK, and Maggie’s, the cancer support charity.

PLANET – Serving our customers, communities and planet a little better every day:

We continue to roll-out innovations to help achieve our aim of net zero emissions across our entire value chain by 2050, aligned to a 1.5-degree pathway. In the fourth quarter we announced two new trials with our farmer suppliers. We launched a low-carbon fertiliser trial with five of our key field vegetable suppliers. With 75% of the fertiliser alternatives manufactured in the UK, the trial is focused on increasing food security and cutting greenhouse gas emissions for the harvests linked to the low-carbon fertiliser of those key suppliers. We also launched a fava bean trial to help scale up this UK-native, low carbon alternative protein to pea and soya, including using it as an ingredient and as alternative feed for pigs.

We have made further progress towards our commitment to be carbon neutral in our own operations by 2035. We introduced a further 243 electric vans into our home delivery fleet, and in an industry first, we introduced a zero-emissions electric lorry to trial deliveries across the 400 London stores served by our Dagenham distribution centre.

This year we launched our ‘Better Baskets’ campaign, bringing together affordable products to help customers make healthier and more sustainable choices. Healthy products now account for 60% of sales volumes, up from 58% last year, and we are on track to achieve our target of 65% by 2025. Reformulation of own brand ranges has contributed to the removal of 71 billion calories to date, putting us well on track to delivering our 100 billion calorie reduction ambition by 2025.

In the third quarter, we announced our new aim to halve food waste in our own operations by 2025, five years ahead of our previous commitment and the UN Sustainable Development Goals (SDG) of 2030. In November, we rebranded ‘Reduced to Clear’ with new signage to let customers know that products are ‘Reduced in price. Just as nice.’, helping them to save on their weekly shop and reduce food waste.

To help support the unprecedented demand in our communities, we have given daily donations to foodbanks and local charities. In the third quarter we launched The Give Back Express, allowing customers to purchase products most needed by charities and donate them in store. Alongside our Winter Food Collection, which provided an equivalent of 2.4 million meals this year, these initiatives are made possible through our longstanding partnerships with Community Food Connection, Trussell Trust, FareShare and free sharing app Olio.

Adjusting items are excluded from our adjusted operating profit performance by virtue of their size and nature to provide a helpful alternative perspective of the year-on-year performance of the Group’s ongoing trading business. Total adjusting items in statutory operating profit resulted in a charge of £(1,105)m, compared to a £(265)m charge in the prior year.

We recognised a £(982)m non-cash net impairment charge on non-current assets, primarily property, driven mainly by a significant increase in discount rates as a result of macroeconomic factors. The majority of the charge (£(626)m) was booked in the first half the year, with an additional amount charged in the second half as discount rates further increased.

We recognised a £(138)m restructuring provision related to the Save to Invest programme which includes changes made to our store management structures and the closure of our remaining UK counters.

We generated a £91m profit on the disposal of properties in the year, including the sale of our Middlewich distribution centre in the UK, and the disposal of 17 mall properties and a retail park in Central Europe.

Amortisation of acquired intangible assets is excluded from our headline performance measures. We incurred a charge of £(76)m in the year, which relates to the intangible assets that were recognised as a result of our merger with Booker in March 2018.

In the prior year, we recognised litigation costs of £(193)m in adjusting items, relating to proceedings issued against us by two claimant law firms in relation to the overstatement of expected profits announced in 2014. The cash flow related to these claims was also settled in the prior year. Given the legal timeframe for bringing a claim has now elapsed, no further related claims can be brought by shareholders.

Further detail on adjusting items can be found in Note 3, starting on page 26, with additional information relating to the non-cash net impairment charge in Note 12, starting on page 31.

Joint ventures and associates:

Our share of post-tax profits from joint ventures and associates was £8m, compared to £15m in the prior year, primarily due to a reduction in profits from UK property joint ventures.

As announced within our interim results, we completed the buyback of our partner’s stake in The Tesco Dorney Limited Partnership property joint venture in October 2022, bringing back seven large stores into full ownership. This results in annual cash rental savings of c.£31m and has a broadly neutral impact on net debt, as a £(0.4)bn increase in borrowings is offset by a £0.4bn reduction in lease liabilities.

Following this transaction, we have five UK property joint ventures still in place, from a peak of 13 structures in 2015. These five remaining structures contain properties worth £3.0bn and debt of £2.0bn, with £2.0bn of associated lease liabilities on our balance sheet. The three largest remaining property JVs are with the Tesco Pension Scheme.

Net interest on medium-term notes, loans and bonds was £(231)m, up £(23)m. The combined impact of debt acquired through the acquisition of property partnerships and increased interest rates on floating rate debt was largely offset by the benefit of debt refinanced at a lower coupon in the prior year and the buyback of a portion of secured debt in November 2022.

Other interest receivable totalled £42m, up £72m year-on-year due to higher interest income on our cash balances and short-term deposits.

Finance charges payable on lease liabilities reduced by £32m year-on-year. This was driven by the derecognition of £385m of lease liabilities relating to the buyback of The Tesco Dorney Limited Partnership mentioned above and £355m of lease liabilities related to the buyback of The Tesco Sarum Limited Partnership in December 2021.

The non-cash fair value remeasurement charge of £(51)m primarily relates to the mark-to-market movement on inflation-linked swaps, driven by an increase in discount rates. These swaps eliminate the impact of future inflation on the Group’s cash flow in relation to historical sale and leaseback property transactions.

Net pension finance income of £80m was driven by the IAS 19 pension surplus as at the end of the 2021/22 financial year, compared to a charge of £(22)m last year when the scheme was in an opening deficit position.

Further detail on finance income and costs can be found in Note 4 on page 27, as well as further detail on the adjusting items in Note 3 on page 26.

Tax on adjusted Group profit was £(442)m, £60m lower than last year, reflecting a reduction in retail operating profit and a one-off charge in the prior year related to the revaluation of deferred tax following the decision to increase the corporation tax rate in the UK from 19% to 25% from April 2023. Adjusting items resulted in a £195m tax credit, driven predominantly by taxable deductions relating to the higher impairment charge.

The effective tax rate on adjusted Group profit was 21.3%, higher than the current UK statutory rate of 19%, primarily due to the depreciation of assets which do not qualify for tax relief.

We expect our effective tax rate to be around 26% in FY 23/24 following the increase in the UK corporation tax rate on 1 April 2023.

Earnings per share:

	FY 22/23	FY 21/22	YoY change
Adjusted diluted EPS	21.85p	21.86p	(0.0)%
Statutory diluted EPS	10.08p	19.64p	(48.7)%
Statutory basic EPS	10.17p	19.86p	(48.8)%

Adjusted diluted EPS was 21.85p, in line with last year, as the impact of reduced adjusted operating profit was offset by lower finance costs and tax charges year-on-year, and the benefit of our share buyback programme.

Statutory diluted earnings per share was 10.08p, (48.7)% lower year-on-year due to an increase in adjusting items, principally a higher net impairment charge on non-current assets.

Dividend:

We propose to pay a final dividend of 7.05 pence per ordinary share, taking the full year dividend to 10.90 pence per ordinary share, in line with last year. This includes the payment of an interim dividend of 3.85 pence per ordinary share in November 2022.

The proposed final dividend was approved by the Board of Directors on 12 April 2023 and is subject to the approval of shareholders at this year’s Annual General Meeting. The final dividend will be paid on 23 June 2023 to shareholders who are on the register of members at close of business on 12 May 2023 (the Record Date). Shareholders may elect to reinvest their dividend in the Dividend Reinvestment Plan (DRIP). The last date for receipt of DRIP elections and revocations will be 2 June 2023.

Summary of total indebtedness (excludes Tesco Bank):

Total indebtedness was £(10,793)m, broadly in line with last year as increases in net debt and the IAS 19 pension deficit were largely offset by a reduction in lease liabilities. Net debt before lease liabilities increased by £(205)m year-on-year to £(2,775)m, driven by the impact of fair value remeasurement of net derivatives and the purchase of a portion of the secured debt of our property joint ventures, in order to reduce our ongoing net interest cost.

Lease liabilities were £(7,718)m, down £228m year-on-year, primarily due to the derecognition of £385m of lease liabilities following the purchase of our partner’s stake in The Tesco Dorney Limited Partnership. This was partially offset by an increase in lease liabilities as a result of higher rent payments this year due to the effect of RPI inflation and the lease back of 17 stores situated in the mall properties sold in Central Europe.

We now carry an IAS 19 pension deficit, totalling £(300)m (post-tax), which includes £(157)m relating to the main scheme and £(143)m related to other Group pension schemes. The main scheme was in a surplus of £2.4bn (post tax) in the prior year and was therefore disregarded in total indebtedness as only pension schemes which are in a net deficit position are included. The movement in the main scheme was driven by movements in discount rates and gilt yields.

The accounting surplus/deficit does not drive contributions to the pension schemes and can be volatile. As disclosed within our interim results, we have agreed the actuarial pension valuation as at 31 March 2022 with the Tesco Plc Pension Scheme Trustee at a surplus of £0.9bn. It was also agreed with the Trustee that no pension deficit contributions are expected to be required ahead of the next triennial valuation in 2025.

We had strong levels of liquidity at the end of the year of £2.7bn and our £2.5bn committed facility remained undrawn. We refinanced the facility in November 2022 for an initial three-year term. The rate of interest payable on this facility continues to be linked to three of our sustainability commitments.

Our net debt to EBITDA ratio was 2.6 times at the end of the year, up from 2.5 times in the prior year end and around the middle of our targeted range of 2.8 to 2.3 times. The year-on-year increase was driven by a reduction in retail EBITDA. The total indebtedness ratio was 2.7 times compared to 2.5 times last year end.

Fixed charge cover was 3.5 times this year, which was stable year-on-year, as a reduction in retail EBITDA offset lower net finance costs and lease interest payments.

Summary retail free cash flow:

We delivered strong retail free cash flow of £2,133m, significantly ahead of our target range of between £1.4bn and £1.8bn, driven by another strong working capital performance. The year-on-year reduction of £(144)m was primarily driven by lower retail adjusted operating profit and an increase in capital expenditure, partially offset by lower tax and net interest payments.

Our total working capital inflow was £468m, driven primarily by higher trade payable balances due to cost price inflation in addition to good working capital management.

Net interest paid was lower year-on-year due to higher interest received as a result of higher interest rates on cash balances and lower interest relating to lease liabilities as a result of the buyback of the property partnerships mentioned above.

Total retail cash tax paid in the year was £(107)m, compared to £(195)m last year. The reduction reflects lower retail adjusted operating profits year-on-year and the impact of tax allowable deductions relating to adjusting items, primarily the impairment charge and fair value remeasurements. We continue to benefit from a super-deduction allowance on certain capital investments and we received in-year tax relief of £121m in relation to the £2.5bn one-off pension contribution made in 2021 which is required to be spread over four years for tax purposes. FY 23/24 will be the final year in which we receive this pension-related tax relief. In the Spring Budget 2023, the UK Government announced that ‘full expensing’ relief on certain capital investments would be available from 1 April 2023 through to 31 March 2026, and we expect this to have a broadly similar cash tax impact as the super-deduction allowance that it replaces.

The net cash outflow of £(86)m for the purchase of our own shares comprises a £(134)m purchase of shares to offset dilution from share scheme issuance, offset by £48m proceeds received from colleagues in relation to those schemes. The lower outflow compared to last year was driven by the timing of purchases to satisfy FY 23/24 maturities.

The net cash impact of acquisitions and disposals was £(281)m, of which c.£(200)m related to the purchase of a portion of the secured debt of our property joint ventures, in order to reduce our ongoing net interest cost.

We generated £266m of proceeds from property transactions, including the sale of 17 malls and one retail park in Central Europe and our Distribution Centre in Middlewich in the UK. This was partially offset by the purchase of our partner’s stake in The Tesco Dorney Limited Partnership in October 2022.

Capital expenditure and space:

Capital expenditure (capex) shown in the table above reflects expenditure on ongoing business activities across the Group, excluding property buybacks.

Our capital expenditure for the year was £1,235m, £134m higher year-on-year, which primarily relates to simplification projects within our UK stores and the opening of convenience stores across both the UK and Ireland. We opened our fifth and sixth UFCs in Rutherglen, Glasgow in May 2022 and Bar Hill, Cambridge in January 2023.

In the UK, we opened two new superstores, at Freshwater & Cinderford, 18 new One Stop stores and a further 50 Tesco Express Stores, taking our total number of Tesco Express stores to 1,998 at the end of the financial year. We opened our 2,000th Express store in Cambridge in March, after the year end. In the Republic of Ireland, we opened four new Tesco Express stores and converted the nine Joyce’s stores we acquired in June last year.

In Central Europe, we opened seven new small format stores and refreshed 35 large stores in the year, right sizing our selling space, to ensure our offer remains relevant for customers. A further 56 store refreshes are planned this year.

Statutory capital expenditure for the year was £1.5bn.

Further details of current and forecast space can be found in the supplementary information starting on page 43.

The estimated market value of our fully owned property as at the year end reduced by £(0.9)bn to £17.2bn due to the weakening of the UK property investment market in the last six months. The market value represents a surplus of £0.8bn over the net book value (NBV).

Our Group freehold property ownership percentage was 60%, an increase of 2% year-on-year. The completion of the purchase of our partner’s 50% stake in The Tesco Dorney Limited Partnership in October brought back into full ownership seven sites, contributing a 1% increase in the percentage of fully owned properties in the UK & ROI. We also repurchased the Tesco Extra stores in Mansfield and Melton Mowbray in the UK.

In Central Europe, the increase in the market value of fully owned property reflects the assets that were held for sale last year, which were not sold, coming back into the ‘Property – fully owned’ balance. In the year we realised £203m of proceeds from the completed sale of 17 malls and one retail park.

A webcast including a live Q&A will be held today at 9.00am for investors and analysts and will be available on our website at www.tescoplc.com/prelims2023. This will be available for playback after the event. All presentation materials, including a transcript, will be made available on our website.

We will report our Q1 Trading statement on 16 June 2023.