Tesco plc (LON:TSCO) has announced its interim results 2023/24.
WINNING WITH CUSTOMERS BY INVESTING IN VALUE AND QUALITY.
| Performance highlights2,3: | H1 23/24 | H1 22/231 | Change at actual rates | Change at constant rates | |
| Group sales (exc. VAT, exc. fuel)4 | £30,749m | £28,241m | 8.9% | 8.4% | |
| Adjusted operating profit5 | £1,482m | £1,300m | 14.0% | 13.9% | |
| – Retail | £1,417m | £1,248m | 13.5% | 13.5% | |
| – Tesco Bank | £65m | £52m | 25.0% | 25.0% | |
| Retail free cash flow6 | £1,368m | £1,283m | 6.6% | ||
| Net debt3,6 | £(9,888)m | £(10,044)m | 1.6% | ||
| Adjusted diluted EPS5 | 12.26p | 10.50p | 16.8% | ||
| Interim dividend per share | 3.85p | 3.85p | – | ||
| Statutory measures3: | |||||
| Revenue (exc. VAT, inc. fuel) | £34,149m | £32,519m | 5.0% | ||
| Operating profit | £1,482m | £721m | 105.5% | ||
| Profit before tax | £1,217m | £396m | 207.3% | ||
| Retail cash generated from operating activities | £2,068m | £2,038m | 1.5% | ||
| Diluted EPS | 12.83p | 3.27p | 292.4% | ||
Ken Murphy, Chief Executive:
“We know how challenging it is for many households across the country, as they continue to grapple with ongoing cost of living pressures. We are committed to doing everything we can to drive down food bills and Tesco is now consistently the cheapest full-line grocer.
Our investments in value, and in improving more than 1,100 own brand products from pasta to fresh fish, are helping us to offer outstanding quality at great prices, all underpinned by market-leading availability. Customers are responding well, contributing to market share gains in store and online. We’re seeing the results at both ends of the basket, with strong growth in our Finest range as shoppers look to save by treating themselves at home, voting with their feet as they switch from premium retailers to Tesco.
This relentless focus on customers, combined with significant cost reductions from our Save to Invest programme, has driven our strong performance in the first half of the year. Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year. We are in a strong position to keep investing for customers, and will continue to lower prices wherever we can – doing everything in our power to make sure customers can have a fantastic, affordable Christmas by shopping at Tesco.”
Delivered strong financial performance driven by relentless focus on value for customers:
| • | Strong sales across the Group, with Retail LFL7 sales up 7.8%; inflation fell across the half, with volume and sales mix trends ahead of expectations: | |
| – | UK & ROI LFL sales up 8.4%, including UK up 8.7%, ROI up 6.9% and Booker up 7.5% | |
| – | C.Europe LFL sales up 0.9% reflecting strength of LY base and market volume contraction due to sustained high inflation | |
| • | Retail adjusted operating profit5 £1,417m, up 13.5% at constant rates, including Save to Invest delivery of c.£290m | |
| – | UK & ROI adjusted operating profit £1,371m, up 17.2%, with accelerated cost savings and a resilient volume performance offsetting significant cost pressures | |
| – | Central Europe adjusted operating profit £46m, down (41.8)% due to a significant decline in Hungary driven by the impact of currency devaluation on input costs and regulatory actions; Slovakia and Czech Republic performing well | |
| • | Tesco Bank adjusted operating profit £65m, up 25.0%, primarily driven by strong income growth; £250m special dividend returned to the Group reflecting the strength of Bank’s balance sheet | |
| • | Strong retail free cash flow6 £1,368m, including a positive working capital inflow of £368m | |
| • | Net debt3,6 improved by £605m since year-end due to strong cash flow & Bank special dividend; net debt/EBITDA ratio 2.3x | |
| • | Interim dividend per share of 3.85p, in line with our interim dividend policy at 35% of prior year full year dividend | |
Statutory profit performance reflects prior year impairment charge:
| • | Statutory revenue £34.1bn, up 5.0% at actual rates, with fuel sales down (20.5)% due to lower retail prices |
| • | Statutory operating profit £1,482m, up 105.5% and profit before tax £1,217m up 207.3%, primarily reflecting last year’s £(626)m non-cash impairment charge, with no charge in the first half of the current year, and strong trading performance |
Footnotes can be found on page 4
Continuing to offer customers great value, underpinned by focus on quality:
| • | Consistently the cheapest of the full-line grocers across the half, with our powerful combination of Aldi Price Match on more than 650 lines, over a thousand Low Everyday Prices locked to January 2024 and exclusive Clubcard Prices deals |
| • | Prices cut on c.2,500 products by the end of the half, from bread to broccoli, with average saving of c.12% |
| • | Clubcard Prices on over 8,000 products across the store, saving customers up to c.£390 per year |
| • | Investment in quality and product innovation, launching 335 brand new products and reformulating 1,150 |
| • | Net switching gains from premium retailers for 13 consecutive periods; further strengthened Finest offer leading to both sales and volume growth; launched more than 150 brand new Finest products |
| • | Introduced more affordable own brand products in Express stores; savings of up to 40% vs. the products they replaced |
| • | Strong market share performance: UK up +30bps, with gains in both stores and online; ROI market share up +70bps |
| • | Market-leading availability, up +7ppts YoY; Brand NPS +2pts YoY, driven by improvements in range & shopping experience |
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 investment in pay and new wellbeing services for colleagues, including launch of virtual GP appointments |
| • | Enhanced sourcing capabilities, working with suppliers to unlock savings for customers; #1 in Advantage supplier survey for eighth consecutive year |
| • | Launched Stronger Starts grants programme to help 5,300 schools give children a healthier, stronger start in life |
| • | One of the first companies globally to validate ambitious net-zero science-based targets on all GHG emissions, including Scope 3; introduced 500th electric home delivery van into fleet |
CAPITAL RETURN PROGRAMME.
In April this year we announced our commitment to buy back a total of £750m worth of shares by April 2024. We purchased £503m worth of shares in the first half and will purchase the remaining shares by April.
Since launching our ongoing capital return programme in October 2021, we have now purchased a total of almost £1.6bn worth of shares. We continue to 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.
OUTLOOK.
Looking forward, we will continue to prioritise investment in our customer offer, working with our supplier partners to reduce prices wherever we can whilst delivering the outstanding quality our customers expect.
This relentless focus on customers, combined with significant cost reductions from our Save to Invest programme, resulted in a strong performance in the first half of the year which means we now expect to deliver between £2.6bn and £2.7bn retail adjusted operating profit for the 2023/24 financial year. We also now expect to generate retail free cash flow of between £1.8bn and £2.0bn this year, ahead of our medium-term guidance range of £1.4bn to £1.8bn.
We continue to expect Bank adjusted operating profit of between £130m and £160m.
STRATEGIC PRIORITIES.
We remain focused on delivering on our four strategic priorities. We are committed to supporting our customers with great quality, value and convenience, whilst ensuring we reward them for their loyalty. Our brilliant colleagues, unrivalled reach and strong supplier relationships mean we can serve our customers whenever, wherever, and however they need us. Our priorities guide us to drive top-line growth, grow profit and generate cash, and in doing so, deliver for all of our stakeholders.
We have made further progress against our strategic priorities during the half:
1) Magnetic Value for Customers – Re-defining value to become the customer’s favourite
| • | Further strengthened our market-leading combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices, enabling us to be the cheapest of the full-line grocers across the half |
| • | Led the way on passing on savings to customers, applying new capabilities developed within our sourcing team to capture cost price reductions ahead of the market |
| • | Continued to elevate the importance of quality and innovation within our product range, improving our competitiveness and performance against premium retailers |
| • | Further improved our convenience offering, increasing the number of own brand products in Tesco Express, driving up fresh participation in One Stop and increasing sales of Jack’s to Booker’s retailer customers |
| • | Locked prices on 650 essential Booker catering products over key summer trading period; 700 now locked to Christmas |
| • | Continued commitment to healthy, affordable diets; committed to not sell HFSS products on volume-led promotions; Better Baskets supports our commitment to achieve 65% healthy volume sales by 2025 |
2) I Love my Tesco Clubcard – Creating a competitive advantage through our powerful digital capability
| • | Customers benefiting from Clubcard across the Group; Clubcard sales penetration up in all businesses: UK 80%, ROI 80%, Central Europe 85%, Mobile 86% and Bank 67% |
| • | World-class Tesco app with 16m users across the Group (12.8m in UK, 0.8m in ROI and 2.5m in CE) |
| • | 7.5m UK customers using digital Clubcard at till, up 62% YoY; 15.4m UK customers opting into e-statements, up 57% YoY |
| • | 86m personalised coupons issued to nearly 6m customers this half; trialling a broader range of personalisation to support in-store shopping experience via Scan as You Shop |
| • | Expanding digital platform; added >750 in-store screens; >300 suppliers using our online sponsored search functionality |
3) Easily the Most Convenient – Serving customers wherever, whenever and however they want to be served
| • | Online performance continues to outpace market, share up +71bps YoY; switching gains from online competitors |
| • | Strengthened online availability to 97.6%; number of ‘perfect orders’ up +12ppts YoY |
| • | Opened a further three UFCs since February, adding 1m order capacity per year; now at nine UFCs in total |
| • | Tesco Whoosh now in 1,414 stores, making rapid delivery available to c.60% of population; now offering larger baskets |
| • | Launched ‘Chef Central’ in Booker, offering multi-site national and regional customers the ability to offer standardised menus through a defined product range, with great value products delivered directly to their doors |
| • | Opened 33 stores across the Group (16 Express & 11 One Stop stores in UK, one new superstore in ROI and five new stores in C.Europe); working with 143 net new Booker retail partners |
| • | Introduced 500th electric customer home delivery van; fleet to be fully electric in the UK by 2030 |
4) Save to Invest – Significant opportunities to simplify, become more productive and reduce costs
| • | Another strong Save to Invest performance, delivering c.£290m in the half, with a target to deliver a total of c.£600m by year-end, contributing to at least £1.1bn cumulative savings between February 2022 February 2024 |
| • | Making progress across all areas: goods & services not for resale, property, operations and central overheads |
| • | Optimised management structures launched in over 800 large stores, including introduction of 1,700 Shift Leader roles |
| • | Continued streamlining of Express checkouts, with increased proportion of self-service, upgraded colleague-operated checkouts and additional accessible service desks |
| • | End-to-end review of promotional replenishment to strengthen availability and deliver efficiency gains |
| • | Further energy consumption initiatives delivered in the half, including upgraded LED lighting |
GROUP REVIEW OF PERFORMANCE.
| 26 weeks ended 26 August 20232,3 | H1 23/24 | H1 22/231 | Change atactual rates | Change at constant rates | ||||||
| Sales (exc. VAT, exc. Fuel)4 | £30,749m | £28,241m | 8.9% | 8.4% | ||||||
| Fuel | £3,400m | £4,278m | (20.5)% | (20.6)% | ||||||
| Revenue (exc. VAT, inc. fuel) | £34,149m | £32,519m | 5.0% | 4.6% | ||||||
| Adjusted operating profit5 | £1,482m | £1,300m | 14.0% | 13.9% | ||||||
| Adjusting items | – | £(579)m | ||||||||
| Statutory operating profit | £1,482m | £721m | 105.5% | |||||||
| Net finance costs | £(269)m | £(327)m | ||||||||
| Joint ventures and associates | £4m | £2m | ||||||||
| Statutory profit before tax | £1,217m | £396m | 207.3% | |||||||
| Group tax | £(288)m | £(144)m | ||||||||
| Statutory profit after tax | £929m | £252m | 268.7% | |||||||
| Adjusted diluted EPS5 | 12.26p | 10.50p | 16.8% | |||||||
| Statutory diluted EPS | 12.83p | 3.27p | 292.4% | |||||||
| Interim dividend per share | 3.85p | 3.85p | – | |||||||
| Net debt3,6 | £(9,888)m | £(10,044)m | 1.6% | |||||||
| Retail free cash flow6 | £1,368m | £1,283m | 6.6% | |||||||
| Capex8 | £523m | £448m | 16.7% | |||||||
Group sales4 increased by 8.4% at constant rates, with growth across all segments. The impact of inflation was evident across all markets, although eased across the half as we worked hard to ensure that savings from falling global commodity prices were passed onto customers. Customer demand held up well in response to our ongoing focus on offering great value and quality and sales volumes were stronger than we had anticipated. Group revenue increased by 4.6% at constant rates, including a (20.6)% decline in fuel sales, primarily due to lower selling prices year-on-year.
Group adjusted operating profit5 increased by 13.9% at constant rates, with Save to Invest contributing a further c.£290m of cost savings in the half. We effectively managed the inflationary pressures in our cost base and customer demand was resilient as we invested further in value.
Group statutory operating profit increased by 105.5% year-on-year, primarily due to a £(626)m non-cash impairment charge in the prior year driven by an increase in discount rates, combined with the strong trading performance mentioned above. Discount rates have remained largely stable since February, and there was no impairment charge or release in the first half.
Net finance costs decreased by £58m year-on-year primarily due to fair value remeasurements related to the mark-to-market movement on index-linked swaps, which led to a £28m credit this year compared to a £(75)m charge in the prior year.
The higher tax charge this year was mainly driven by the increase in UK corporation tax rates effective from April, in addition to higher retail operating profits.
Our adjusted diluted EPS5 increased by 16.8%, due to higher retail operating profits and the ongoing benefit from our share buyback programme. We have announced an interim dividend of 3.85 pence per ordinary share, in line with last year and our interim policy to pay 35% of the prior full-year dividend.
We generated £1,368m of retail free cash flow6, including a working capital inflow of £368m. Net debt3,6 reduced by £605m since the prior year end, driven by strong retail free cash flow and a £250m special dividend from the Bank, partially offset by the cash returned to shareholders via both our ongoing share buyback programme and final dividend. The net debt/EBITDA ratio was 2.3 times, compared to 2.6 times as at 25 February 2023.
Further commentary on these metrics can be found below and a full income statement can be found on page 16.
Notes:
1. Comparatives have been restated for the adoption of IFRS 17 Insurance Contracts. Refer to Notes 1 and 20 for further details.
2. The Group has defined and outlined the purpose of its alternative performance measures, including its performance highlights, in the Glossary starting on page 46.
3. All measures apart from Net debt are shown on a continuing operations basis unless otherwise stated. Further information on Net debt can be found in Note 18 on page 41.
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. Like-for-like 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).
8. Capex excludes additions arising from business combinations, property buybacks (typically stores) and store purchases. Refer to page 46 for further details.
Segmental review of performance:
Sales performance:
(exc. VAT, exc. Fuel)1,4
| Sales(£m) | LFL sales change | Total sales change atactual rates | Total sales change at constant rates | ||
| – UK | 21,811 | 8.7% | 9.1% | 9.1% | |
| – ROI | 1,398 | 6.9% | 13.0% | 10.0% | |
| – Booker | 4,704 | 7.5% | 6.9% | 6.9% | |
| UK & ROI | 27,913 | 8.4% | 8.9% | 8.8% | |
| Central Europe | 2,134 | 0.9% | 6.7% | 1.4% | |
| Retail | 30,047 | 7.8% | 8.7% | 8.2% | |
| Bank | 702 | 16.5% | 16.5% | ||
| Group sales | 30,749 | 8.9% | 8.4% | ||
| Fuel | 3,400 | (20.6)% | (20.5)% | (20.6)% | |
| Group revenue | 34,149 | 5.0% | 4.6% |
Further information on sales performance is included in the appendices starting on page 53.
Adjusted operating profit1,5 performance:
| Profit (£m) | ||||||
| Change at actual rates | Change at constant rates | Margin % at actual rates | Margin % change at actual rates | |||
| UK & ROI | 1,371 | 17.3% | 17.2% | 4.4% | 47 bps | |
| Central Europe | 46 | (41.8)% | (41.8)% | 2.1% | (163) bps | |
| Retail | 1,417 | 13.5% | 13.5% | 4.2% | 33 bps | |
| Bank | 65 | 25.0% | 25.0% | 9.3% | 64 bps | |
| Group | 1,482 | 14.0% | 13.9% | 4.3% | 34 bps | |
Further information on operating profit performance is included in Note 2 starting on page 23.
UK & ROI overview:
In the UK, Republic of Ireland (ROI) and Booker, like-for-like sales increased by 8.4%. Sales growth was stronger in the first quarter at 8.8%, followed by growth of 8.0% in the second quarter as we traded over exceptionally warm weather last year. Inflation gradually eased during the half as we cut prices across everyday grocery lines.
UK & ROI adjusted operating profit was £1,371m, up 17.2% at constant rates, driven by the ongoing acceleration of our Save to Invest programme, a resilient volume performance across the segment and a continued strong contribution from Booker.
Adjusted operating margin was 4.4%, 47bps higher year-on-year, reflecting the cumulative effect of accelerating our Save to Invest delivery over the past twelve months. Our current year operating margin has now recovered to levels similar to those seen before the pandemic.
UK – Championing value and quality, with strong execution for customers, leading to market share gains:
Like-for-like sales grew by 8.7% in the half, driven by a strong performance across all formats and channels. Price inflation fell gradually across the half, as we worked hard to pass on savings for customers as input cost inflation eased. Volumes and sales mix performance improved into the second quarter. Sales growth was higher in the first quarter at 9.0%, before falling slightly in the second quarter to 8.4% as we traded over exceptionally warm weather and the Platinum Jubilee celebrations in the prior year.
We were consistently the cheapest of the full-line grocers across the half, with our price position improving even further this year. Throughout the half, we continued to build on our powerful combination of Aldi Price Match, Clubcard Prices and our commitment to Low Everyday Prices, which we recently extended, with prices locked on over 1,000 products until January 2024. We were first to market with price cuts on key ranges such as milk, pasta and cooking oil in June, and last month we extended our ‘Price Cuts’ campaign to support families by cutting the price of frequently purchased food and baby products including nappies. By the end of the first half, c.2,500 products were on average c.12% cheaper than at the start of the year. We have market-leading capabilities in commodity forecasting and purchasing, which allows us to work in close partnership with our supplier partners to be first to market with the best prices possible for customers.
Overall market share grew by +30bps year-on-year to 27.2%, with a particularly strong performance in our online business. We saw switching gains across six consecutive periods, with thirteen consecutive periods of net gains from premium retailers as our customers sought to treat themselves. Finest sales were a particular highlight, with volumes up 4.1% in the half.
Food sales were particularly strong, growing by 10.6% as we continued to innovate our ranges to offer customers even better-quality products at a great price. We launched 335 new products in the first half, including our Finest Summer Selection and Asian ready meal ranges, and reformulated and improved 1,150 own brand products, including the relaunch of our fresh fish and pasta ranges. These relaunches contributed towards market share gains in the ‘dinner for tonight’ mission. We were recognised as The International Wine Challenge’s ‘Wine Supermarket of the Year’ for the first time in eleven years, reflecting our efforts to enhance our premium wine offering. We launched our premium lunch time meal deal in the first quarter, with strong feedback on the quality of the products; 31% of customers who bought into the deal were new to a meal deal offer of any sort.
Home and Clothing sales, which account for around 7% of total UK sales, declined by (4.8)%, which primarily reflects the impact of strategic ranging decisions, including exiting and reducing low returning categories such as large electricals and adult footwear. Excluding these impacts, sales were broadly flat. We outperformed the rest of the market in Clothing across the half and further improved our value perception against our key competitors. We will launch our Paperchase range in 120 stores in November, with great quality products which reflect the heritage of the Paperchase brand.
Sales grew across large and convenience store formats, by 9.3% and 5.1% respectively. In our large stores, we tailored our trade plan to offer customers market-leading deals over key seasonal events, leading to an increase in price satisfaction year-on-year. We supported families through the school holidays by once again offering free kids’ meals in our cafés to Clubcard holders with any purchase. Convenience sales, which include a higher proportion of food-on-the-go, were impacted by poorer weather this year lapping exceptionally warm weather last year. Our city-centre Tesco Express stores performed particularly well, with like-for-like growth of c.7.5%.
Online sales grew by 10.0%, as we further increased the proportion of ‘perfect order’ deliveries, meaning on time with full availability. Online market share grew by +71bps year-on-year, with customer satisfaction scores up +7pts. Online sales participation remains stable at 13.0% of UK sales, which is 4ppts higher than pre-pandemic, driven by strong customer retention.
| Online performance | H123/24 | One-year change |
| Sales inc. VAT | £3.0bn | 10.0% |
| Orders per week | 1.18m | 4.2% |
| Basket size | £98 | 5.2% |
| Online % of UK total sales | 13.0% | 0.1ppts |
We opened our seventh and eighth Urban Fulfilment Centres (UFCs) in the half in Gallions Reach and King’s Lynn, and in September we opened our ninth UFC in Coventry, which completes our opening plan for the current year. We rolled out ‘Tesco Whoosh’ – our rapid delivery service – to over 400 further stores taking the total number to 1,414 stores. On average, we offer 2,800 products, with some of our larger stores offering an even wider range. Average delivery times improved year-on-year to around 25 minutes, with customer satisfaction scores up 8.9ppts year-on-year.
ROI – New space contributes to market share gains; strengthening our value proposition:
ROI sales grew by 10.0% at constant rates in the first half, with a contribution from new stores of 3.1%, which includes the nine Joyce’s stores we acquired in June last year. We opened one new superstore, in Adamstown, and we continue to look for opportunities to bring Tesco to more communities in the market. Like-for-like sales grew by 6.9% in the half, including volume growth in the second quarter.
We delivered consistent market share gains, with an increase of +70bps year-on-year. We have seen nine periods of consecutive switching gains.
Food sales growth was particularly strong at 8.9% and we lowered the price of over 700 essential products through our ‘Price Cuts’ campaign, leading to a steady decline in inflation across the half. Non-food sales declined by (4.5)%, primarily driven by the cooler, wetter weather over the summer and a slight contraction in discretionary spending. We continue to lead the market on ‘Reward’ with good engagement on Clubcard Prices, driving a 14.8ppts improvement year-on-year in Clubcard sales penetration to 80%.
BOOKER – Evolving the offer to deliver further growth across both retail and catering:
| Sales£m | LFL | |
| Total Retail | 2,587 | 6.0% |
| Retail | 1,647 | 14.2% |
| Tobacco | 940 | (5.9)% |
| Total Catering | 1,973 | 9.1% |
| Catering | 1,194 | 11.6% |
| Best Food Logistics | 779 | 5.4% |
| Total Booker* | 4,704 | 7.5% |
* Total Booker also includes small business sales of £144m
Booker delivered like-for-like sales growth of 7.5%, with further growth across both retail and catering, despite a challenging trading environment.
Retail sales grew by 14.2% excluding tobacco, driven by a further 143 net new retail partners and our continued focus on price, choice, and service. Growth was particularly strong in our entry level ranges at +20% year-on-year, with c.40,000 of our retailer customers now having purchased Jack’s branded products. Tobacco like-for-like sales declined by (5.9)% overall, driven by a general market contraction.
Catering sales were also strong, increasing by 9.1% in the half, with customers responding well to the strength of our offer, including a significant step forward in availability year-on-year. We further supported customers by adapting our ranges to offer great menu choice at fantastic prices, and by locking the price on 650 essential products over the peak summer trading period. Our ‘On-Trade’ club, which launched in May, now offers almost 6,000 licensed customers access to discounted prices on 95 of our most popular products across drinks, snacks and essential food products, supporting them to offset the cost headwinds they currently face. We have a further 45,000 customers registered with our ‘Fast Food’ and ‘Just Eat’ clubs, accessing similar, exclusive discounts.
In July, we launched ‘Chef Central’, which is a new concept, offering multi-site national and regional customers the ability to offer standardised menus through a defined product range, with great value products delivered directly to their doors. We will utilise our existing Booker and Best Food Logistics infrastructure to expand into this new customer segment, delivering true incremental growth.
We sold the Ritter-Courivaud business, which supplied premium caterers, for up-front cash consideration of £15m, in June.
CENTRAL EUROPE – Volumes challenged by sustained high market inflation; local regulatory actions impacting profit:
Like-for-like sales grew by 0.9%, reflecting the impact of government stimulus in Hungary being scaled back and a general volume contraction in the market due to inflationary pressures, which continue to be felt to a greater extent in Central Europe. Inflation eased across the second quarter as commodity prices started to fall, particularly in fresh food categories.
Food sales increased by 1.9% in the first half, as we cut the price of over a thousand products and introduced new, great value promotions through Clubcard Prices. Non-food sales declined by (4.6)%, mainly driven by a reduction in discretionary spending across the market. In response to a customer need for great value family essentials, we launched a new ‘Basics’ kids and baby clothing range, which is performing well and receiving strong feedback from customers.
Customer NPS improved in all markets, with particularly strong growth in Slovakia and Czech Republic. We are ranked first in all three markets for ‘Reward’ and our Clubcard digital subscriber base continues to grow, increasing by 25% since the year end, to 2.5 million customers.
Central Europe adjusted operating profit was £46m, a reduction of (41.8)% year-on-year at constant rates, primarily driven by external factors facing our business in Hungary. Consumers in Hungary have experienced significantly higher inflation than those in any of our other markets for a sustained period of time, which is putting downward pressure on volumes. Local regulatory actions, such as price caps and mandatory promotions on everyday grocery products remain in place and impede our ability to recover the impact of currency devaluation, which puts pressure on our input and operating costs.
TESCO BANK – Growth across new and existing customers; special dividend paid to the Group:
| H1 23/24 | H1 22/231 | YoY change | |
| Revenue | £702m | £603m | 16.5% |
| Adjusted operating profit | £65m | £52m | 25.0% |
| Lending to customers | £7.4bn | £6.7bn | 10.0% |
| Customer deposits | £6.3bn | £5.5bn | 14.8% |
| Net interest margin | 4.7% | 4.7% | (0.0)ppts |
| Total capital ratio | 20.4% | 25.5% | (5.1)ppts |
Revenue grew by 16.5%, driven by solid growth in our credit cards business due to higher balances and stronger yields. The insurance business also performed strongly, with high levels of renewals and growth in new business volumes, owing to our competitive pricing.
Tesco Bank adjusted operating profit was £65m, an increase of 25.0% year-on-year, primarily driven by higher income across credits cards and money services. The impact from impairment charges was lower this year due mainly to an improvement in the economic outlook.
Tesco Bank paid a one-off special dividend of £250m to the Group in the first half, reflecting the strength of the Bank’s balance sheet and capital ratios. Tesco Bank’s ordinary dividend policy is expected to remain unchanged. The total capital ratio at the end of the half was 20.4%, which was (5.1)ppts lower than last year due to the return of excess capital to the Group. The Bank’s balance sheet remains strong, and we continue to have sufficient capital and liquidity to absorb changes in both regulatory and funding requirements.
We launched Clubcard Prices in loans and travel money in the first half, giving Clubcard customers access to exclusive rates, with Clubcard penetration now at 67%. Tesco Bank was recognised as both ‘Best Car Insurance Provider’ and ‘Best Home Insurance Provider’ at the YourMoney Personal Finance Awards in April and as ‘Best Card Provider’ at the Moneyfacts Awards in July.
Adjusting items in statutory operating profit:
| H1 23/24 £m | H1 22/23 £m | |
| Net impairment loss on non-current assets | – | (626) |
| Property transactions | 24 | 81 |
| Amortisation of acquired intangible assets | (37) | (38) |
| Other* | 13 | 4 |
| Total adjusting items in statutory operating profit | – | (579) |
* Refer to Note 3 for detailed split of adjusting items.
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. Net adjusting items in statutory operating profit in the first half were nil, compared to a charge in the prior year of £(579)m.
In the prior year we recognised a £(626)m non-cash net impairment charge on non-current assets, primarily driven by an increase in discount rates last year due to macroeconomic factors. Discount rates have remained largely stable since February, and there was no impairment charge or release in the first half.
Property transactions of £24m relate to £8m of properties sold in the period and a £16m gain arising from the remeasurement of assets held for sale, subsequently reclassified to property, plant and equipment (as detailed in Note 3 on page 29). In the prior year we recognised an adjusting credit of £81m related to the profit generated on the disposal of 17 mall properties and a retail park in Central Europe and associated store sale and leasebacks.
Amortisation of acquired intangible assets is excluded from our headline performance measures. We incurred a charge of £(37)m in the first half, which primarily relates to the intangible assets that were recognised as a result of our merger with Booker in March 2018.
Further detail on adjusting items can be found in Note 3, starting on page 29.
Net finance costs:
| H1 23/24£m | H1 22/231£m | |
| Interest on medium term notes, loans and bonds | (160) | (105) |
| Net other interest receivable | 60 | 4 |
| Net finance expenses from insurance contracts | (4) | (2) |
| Finance charges payable on lease liabilities | (183) | (189) |
| Net finance costs before adjusting items | (287) | (292) |
| Fair value remeasurements of financial instruments | 28 | (75) |
| Net pension finance income / (costs) | (10) | 40 |
| Net finance costs | (269) | (327) |
Net finance costs before adjusting items were £(287)m, £5m lower year-on-year as the impact of higher interest income on cash, short-term deposits and money market funds offset higher net interest on debt. Net interest on medium term notes, loans and bonds was up £(55)m driven by the impact of new debt issuance at the start of the year (ahead of an existing debt maturity in October 2023) and higher floating rates of interest. Finance charges payable on lease liabilities totalled £(183)m, a reduction of £6m year-on-year, as lease renewals and rent reviews were offset by the reducing nature of our total lease liability.
Within adjusting items, fair value remeasurements of financial instruments led to an income of £28m compared to costs of £(75)m in the prior year, largely driven by non-cash mark-to-market gains on index-linked swaps and other derivatives. The index-linked swaps eliminate the impact of future inflation on the Group’s cash flow in relation to historical sale and leaseback property transactions. This was partially offset by net pension finance costs of £(10)m compared to income of £40m in the prior year, due to the change in balance sheet position of the IAS 19 pension deficit at year end, compared to an opening surplus in the prior year.
Further detail on finance income and costs can be found in Note 4 on page 30, as well as further detail on the adjusting items in Note 3 on page 29.
Group tax:
| H1 23/24£m | H1 22/231£m | |
| Tax on adjusted profit | (311) | (211) |
| Tax on adjusting items | 23 | 67 |
| Tax on profit | (288) | (144) |
Tax on adjusted Group profit was £(311)m, £(100)m higher than last year, reflecting an increase in the UK corporation tax rate from 19% to 25%, effective from 1 April 2023, and higher levels of retail operating profit year-on-year. The £23m credit in tax on adjusting items relates to the release of a tax provision, following a settlement relating to our exit from the Gainland associate in China in FY20. The £67m adjusting items credit in the prior year predominately related to a taxable deduction on the higher impairment charge.
Our effective tax rate on adjusted Group profit was 25.9% in the half, which is higher than the current UK statutory rate, primarily due to the depreciation of assets which do not quality for tax relief. We expect our effective tax rate to be around 26% in the current year.
Earnings per share:
| H1 23/24 | H1 22/231 | YoY change | |
| Adjusted diluted EPS | 12.26p | 10.50p | 16.8% |
| Statutory diluted EPS | 12.83p | 3.27p | 292.4% |
| Statutory basic EPS | 12.93p | 3.30p | 291.8% |
Adjusted diluted EPS was 12.26p, 16.8% higher year-on-year due to an increase in retail operating profit and the ongoing benefit of our share buyback programme, partially offset by a higher tax charge as a result of the increase in the UK corporation tax rate.
Statutory diluted earnings per share was 12.83p, an increase of 292.4% year-on-year, primarily due to a significant reduction in adjusting items driven by the £(626)m impairment charge on non-current assets in the prior year.
Dividend:
The interim dividend has been set at 3.85 pence per ordinary share, in line with our policy of setting the interim dividend at 35% of the prior full-year dividend.
The interim dividend will be paid on 24 November 2023 to shareholders who are on the register of members at close of business on 13 October 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 3 November 2023.
Summary of total indebtedness (excludes Tesco Bank):
| Aug-23£m | Feb-23£m | Movement£m | ||
| Net debt before lease liabilities | (2,200) | (2,775) | 575 | |
| Lease liabilities | (7,688) | (7,718) | 30 | |
| Net debt | (9,888) | (10,493) | 605 | |
| Pension deficit, IAS 19 basis (post-tax) | (150) | (300) | 150 | |
| Total indebtedness | (10,038) | (10,793) | 755 | |
| Net debt / EBITDA ratio | 2.3x | 2.6x | ||
| Total indebtedness ratio | 2.4x | 2.7x | ||
Net debt was £(9,888)m, a reduction of £605m versus year end, predominately driven by strong retail free cash flow of £1,368m and the receipt of a £250m special dividend from Tesco Bank, which more than offset the cash outflows relating to our ongoing share buyback programme of £(503)m and last year’s final dividend of £(509)m. Lease liabilities were down £30m versus year end, with the impact of lease renewals and rent reviews in the half offset by the reducing nature of our overall lease liability.
Total indebtedness was £(10,038)m, a reduction of £755m versus year end. We continue to carry an IAS 19 pension deficit, totalling £(150)m (post-tax), which includes £(37)m relating to the main scheme and £(113)m relating to other Group pension schemes. The reduction in the main scheme deficit since the year end was driven by movements in discount rates and gilt yields. This accounting deficit does not drive contributions to the pension schemes and can be volatile. Based on the triennial valuation in March 2022, it was agreed with the Trustees that no pension deficit contributions are expected to be required ahead of the next triennial valuation in 2025. The scheme remained in a funding surplus as at 26 August 2023.
We had strong levels of liquidity at the end of the first half of £3.8bn and our £2.5bn committed facility remained undrawn. Our committed facility is in place until at least November 2025, with two remaining one-year extension options available.
Our net debt to EBITDA ratio was 2.3 times at the end of the first half, down from 2.6 times at year end and within our targeted range of 2.8 to 2.3 times. The year-on-year reduction was driven by an increase in retail EBITDA and a decrease in net debt before lease liabilities. The total indebtedness ratio was 2.4 times, compared to 2.7 times at year end.
Fixed charge cover was 3.6 times at the end of the first half, which has improved since the year end, primarily due to an increase in retail EBITDA.
Summary retail free cash flow:
The following table reconciles Group adjusted operating profit to retail free cash flow. Further details are included in Note 2 starting on page 23.
| H1 23/24£m | H1 22/231£m | |
| Adjusted operating profit | 1,482 | 1,300 |
| Less: Tesco Bank adjusted operating (profit) / loss | (65) | (52) |
| Retail adjusted operating profit | 1,417 | 1,248 |
| Add back: Depreciation and amortisation | 790 | 784 |
| Other reconciling items | 18 | 10 |
| Pension deficit contribution | (13) | (12) |
| Decrease in working capital | 368 | 390 |
| Retail cash generated from operations before adjusting items | 2,580 | 2,420 |
| Cash capex | (595) | (507) |
| Net interest | (273) | (294) |
| – Interest related to net debt before lease liabilities | (91) | (106) |
| – Interest related to lease liabilities | (182) | (188) |
| Tax paid | (38) | (45) |
| Dividends received | 6 | 5 |
| Repayments of obligations under leases | (306) | (292) |
| Own shares purchased for share schemes | (6) | (4) |
| Retail free cash flow | 1,368 | 1,283 |
| Memo (not included in Retail free cash flow): | ||
| – Special dividend received from Tesco Bank | 250 | – |
| – Net acquisitions and disposals | 7 | (77) |
| – Property buybacks, store purchases, and disposal proceeds | (3) | 301 |
| – Cash impact of adjusting items | (87) | (31) |
Strong retail free cash flow of £1,368m was £85m higher than last year, driven by higher retail adjusted operating profit, which was partially offset by higher cash capex spend.
The working capital inflow of £368m reflects the strong sales performance in the half, leading to higher trade balances.
Interest paid related to net debt before lease liabilities of £(91)m was £15m lower year-on-year, driven by higher levels of interest received on short-term cash deposits. Interest relating to lease liabilities was £(182)m, down £6m year-on-year, primarily due to a reduction in our overall lease liability.
Within the memo lines shown, a £(304)m reduction from proceeds from property transactions year-on-year is driven by disposals in the prior year, including 17 malls and one retail park in Central Europe, excess land surrounding our New Malden store, and our Distribution Centre in Middlewich in the UK. Within the half there was no cash impact from store purchases.
The cash impact of adjusting items was £(87)m, driven by operational restructuring changes as part of the multi-year ‘Save to Invest’ programme. This relates to activity announced at the end of the prior financial year.
Capital expenditure and space:
| UK & ROI | Central Europe | Tesco Bank | Group | |||||
| H1 23/24 | H1 22/23 | H1 23/24 | H1 22/23 | H1 23/24 | H1 22/23 | H1 23/24 | H1 22/23 | |
| Capex | £465m | £389m | £43m | £36m | £15m | £23m | £523m | £448m |
| Openings (k sq ft) | 81 | 243 | 49 | 16 | – | – | 130 | 259 |
| Closures (k sq ft) | (117) | (229) | (14) | (22) | – | – | (131) | (251) |
| Repurposed (k sq ft) | – | 10 | (149) | (259) | – | – | (149) | (249) |
| Net space change (k sq ft) | (36) | 24 | (114) | (265) | – | – | (150) | (241) |
‘Retail Selling Space’ is defined as net space in store adjusted to exclude checkouts, space behind checkouts, customer service desks and customer toilets. The data above excludes space relating to franchise stores. A full breakdown of space by segment is included in the appendices starting on page 53.
Capital expenditure (capex) shown in the table above reflects expenditure on ongoing business activities across the Group, excluding property buybacks.
Our capital expenditure in the first half was £523m, £75m higher year-on-year, reflecting a flatter profile of capital investment across the year which brings more spend into the first half, and an increase in spend on our store refresh programme, dotcom vehicles and the expansion of Booker’s distribution capacity.
We continue to invest in our store opening programmes, with sixteen Tesco Express stores and eleven One Stop stores opened in the first half in the UK & ROI. We also opened two UFCs within the half and since the end of the half, we have opened our ninth UFC. We expect to open a further two Superstores, c.40 Tesco Express stores and c.25 One Stop stores in the UK in the second half of the year. In Ireland, we opened one superstore, in Adamstown and we will open a further eight Tesco Express stores in the second half.
In Central Europe, we opened five new stores and refreshed twenty-two of our stores this year.
We now expect full year capital expenditure of c.£1.3bn, a small increase year-on-year principally driven by the pace of our refresh programme, a small number of additional openings and investment in our digital platform.
Statutory capital expenditure for the first half was £0.6bn.
Further details of current and forecast space can be found in the appendices starting on page 53.
This document is available at www.tescoplc.com/interims2023.
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/interims2023. 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 Q3 & Christmas Trading statement on 11 January 2024.
