Interim Results

TESCO PLC 21 September 1999 TESCO PLC INTERIM STATEMENT OF RESULTS 24 WEEKS ENDED 14 AUGUST 1999 Terry Leahy, Chief Executive, comments: The Tesco business in our UK core, non-food and overseas has achieved excellent results in a competitive first-half where we have reinforced our position as the UK's leading retailer. Looking forward, our UK business is well positioned to achieve continued growth. Over 36% of our group space will be overseas by the end of next year. As a consequence, we expect sales growth to move to higher levels than in recent years. Our expectations are that average earnings growth is likely to reflect this, particularly as our international business achieves economic scale. - GROUP SALES UP 9.9% TO £9.1bn - GROUP PROFIT BEFORE TAX* UP 8.1% to £401m - ADJUSTED DILUTED EPS* UP 9.5% TO 4.26p - DIVIDEND PER SHARE UP 7.2% TO 1.34p - UK LIKE-FOR-LIKE SALES UP 4.1% INCLUDING VOLUME GROWTH OF 3.0% - SALES FROM THE REST OF EUROPE UP 18.1% TO £633m - ASIA SALES UP SIGNIFICANTLY TO £195m - 80,000 CUSTOMERS ALREADY USE TESCO E-COMMERCE * Excluding net profit/(loss) on disposal of fixed assets, integration costs, goodwill amortisation and profit share. RESULTS Group sales including VAT increased by 9.9% to £9,112m (1998 - £8,288m). Group profit before tax rose by 8.1% to £401m. This excludes the net profit/loss on disposal of fixed assets, goodwill amortisation, restated integration costs and profit share that total £20m (1998 - £44m). Including these items, profit before tax increased 16.5%. UK sales (excluding property development sales) grew by 7.3% to £8,284m (1998 - £7,722m) of which 4.1% came from existing stores, including volume growth of 3.0% and inflation of only 1.1%. This inflation is entirely attributable to duty rises in petrol, alcohol and tobacco. Excluding these we have experienced deflation in prices in recent months. New stores contributed a further 3.7% to total sales growth before store closures of 0.5%. We have seen competitive trading conditions in the first half-year. In this environment Tesco continues to perform well above the market and is one of very few major UK retailers to deliver continued profit growth. UK operating profit was 8.1% higher at £426m (1998 - £394m) and after accounting for profit share of £18m (1998 - £17m) the operating margin was held at 5.3%. In the Rest of Europe total sales rose by 18% to £633m (1998 - £536m) and contributed an operating profit of £10m. The profit movement over last year reflects the continuing cost of opening new hypermarkets in Central Europe. Within this, retail sales in the Republic of Ireland at constant exchange rates were ahead 6%. We have now re-branded 36 stores and our customers continue to benefit from the extended range, improved service and better value. In Central Europe total sales at constant exchange rates were up 69%. This represents strong growth from our increasing number of hypermarkets in the region. We opened two new hypermarkets in the first half and will open a further nine by the year-end adding a total of 1.3m sq. ft. this year. On 23 March 1999 we announced we had formed a partnership with the Samsung Corporation to develop hypermarkets in South Korea. Tesco has now invested a total of £138m, prior to costs, for an 81% controlling interest. In the 8 weeks to 30 June the two acquired stores contributed £34m to group sales. Our Lotus business in Thailand now comprises 14 hypermarkets and has shown strong growth in the first half. We will open 3 further stores by the year- end adding over 300,000 sq. ft. Together our Asian businesses made a small loss of £(1)m (1998 £(1)m) in the first half. However, we anticipate Thailand moving into profit next year as our development programme gathers pace. Profit share has historically been charged at the year-end when a detailed assessment of actual results could be made. This year, for the first time, in line with the new accounting standard FRS12, £18m has been charged to UK profits in the first half and last year has been restated to reflect a charge of £17m. Group profit before tax (prior to integration costs property profits, goodwill amortisation and profit share) rose by 8.1% to £401m (1998 - £371m). Our total share of profits from joint ventures was £5m for the first half compared to £2m last year. Within this, Tesco Personal Finance has progressed further. We have increased the offer for our customers and in the first half incurred a small loss of £(3)m. We are on target with our original business plan and aim to break even towards the end of this year. Other joint ventures contributed an operating profit of £8m. Net interest payable was £39m (1998 - £39m). Interest on our additional borrowings was offset by lower interest rates. Corporation tax has been charged at an effective rate of 28% (1998 H1 - 30%). Prior to accounting for the net profit/(loss) on disposal of fixed assets, integration costs and goodwill amortisation, our underlying tax rate was 28.2% (1998 H1 - 29.5%). Adjusted diluted earnings per share (excluding the net profit/(loss) on disposal of fixed assets, integration costs, goodwill amortised and profit share) increased by 9.5% to 4.26p (1998 - 3.89p). Dividend The Board has declared an interim net dividend of 1.34p. This represents an increase of 7.2%. The interim dividend will be paid on 1 December 1999 to shareholders on the Register of Members at the close of business on 1 October 1999. Shareholders will continue to have the right to receive the interim dividend in the form of fully paid ordinary shares instead of cash and forms of election will be dispatched to shareholders on 15 October 1999. Capital Expenditure Group capital expenditure was £532m (1998 - £465m) with £364m in the UK, including £213m on new stores and £56m on extensions and refits. Total overseas capital expenditure was £168m including £61m in Asia. In the current year, supported by our strong cash-flows, we will increase capital expenditure to around £1.5bn (1998 - £1.1bn). Change in Net Debt Net debt at the half-year increased by £87m to £1,807m (February 1999 - £1,720m). With the increase in shareholders funds, gearing at the half- year remained static at 39% (February 1999 - 39%). Net debt for the year- end is now forecast to be £2.4bn (February 1999 - £1.7bn). Year 2000 Tesco has a dedicated team which has been working on the year 2000 issue for over three years with the specific objective of ensuring business continuity. We have made the necessary changes and re-tested all our business critical computer systems. In addition we are continuing to work with our suppliers to ensure product supply and continuity of services. The estimated final cost of this project over 3 years is £30m. Strategy We have a strong Core UK Food Business founded on an obsession with customers that is at the heart of all we do. Our business is innovative and well managed, and has continued to grow market share whatever the conditions. In the last decade we have moved to clear market leadership and increased our market share by 5.7% from 9.7% to 15.4% - an increase more than three times greater than the next best. We are working to be as strong in Non-food as we are in food. We have made great headway in this market where we have a market share of 3%. We still have a lot of scope for further growth and expect to double market share over the next 4 years. We are developing Overseas where we can be a leading player and can achieve higher returns by introducing our own brand of retail skills and customer focus. Our overseas development is both large and fast moving. By the end of next year (2000/01) we will have 226 stores overseas, a total of 10m sq. ft. representing 36% of group space. We have recognised for some time that retailing would become an international industry. This is why we have been investing overseas at pace for a number of years. The consolidation process is only just beginning. We thrive in competitive and changing markets wherever we operate and we are on our way to being one of the major international retailers. Core UK Business It has been a competitive six months for the industry. During the half-year we achieved total like-for-like sales of 4.1% which included strong volume growth of 3.0%. These results have been achieved in a highly competitive market where we have seen flat consumer spending and low inflation turning recently to deflation. Our UK business remains focused on getting cheaper, delivering still better value and providing more choice for our customers. In the first half year we have been active in all these areas. As part of our long-term strategy of reducing prices, we have invested significantly again, - an annualised investment of £130m in the first half. As a result of this Tesco leads on value in the UK. In real terms Tesco prices have fallen by 6% in the last 3 years and we are unique in showing our prices on the Internet, allowing customers to compare with other retailers. Despite price cuts we have held our operating margin due to a combination of real volume increase and savings from our change programmes. We plan to deliver around £100m in savings this year from these programmes, and will deliver more going forward. The three key programmes (Supply Chain, Future and Build for the Future) remain critical to our UK strategy. The customer expects lower prices, first class service and wider choice. In addition to cutting prices, we have improved product availability, developed and grown our non-foods business, extended trading hours, improved Clubcard and increased service at the checkout. Internet & Homeshopping Having listened to customers, we have extended our internet homeshopping service. We now serve 80,000 customers from 50 stores. By the end of this year the service will be available in 100 stores and have an annualised turnover of £125m. The Tesco ISP currently has 350,000 subscribers which will increase as we further market and develop the Tesco site. We have information about Tesco Personal Finance on the site and savers will soon be able to perform transactions on-line. Through our Grattan joint venture we are launching further catalogues which will also be available on-line. In the Autumn we will start selling books from our site, offering over 1 million titles. We still have further plans for the service which we see as a good opportunity for growth and one that we intend will make money. Non-Food In a target non-food market of £75bn p.a. our business has grown by 15% in the first half. We have been busy bringing real value to non-food through ranges such as mobile phones where we sold over £3.5m of phones and accessories in the first week of our recent promotion, and films and batteries where volumes increased by over 30% following our price cuts. Our non-food strategy will deliver further sales and earnings growth and a rapid increase in market share. Our customers want the convenience of non-food from us, we can sell non-food cheaper than high street competitors, our stores and sites can provide the space, we can utilise our hypermarket expertise and the lessons learned from our international business, and we have good management systems and logistics. Through our largest store format, Extra, we are developing hypermarkets in the UK and we currently have six. By this year-end we will have eight, increasing to 14 by the end of next year representing 1.2m sq. ft. We have developed a world-wide hypermarket format with a common layout, operations and systems over-laid with local marketing and services. This will be reflected in the UK at Newcastle, our latest Extra opening in October, which devotes 50% of its space to non-food. Our extension programme enables us to provide a full non-food offering in many stores. This year we will add 40 non-food worlds to give us 90 by the year-end. In summary for non-food, our market share is now 3% and we expect non-food to be a significant contributor to sales and profit growth going forward. This year in the UK we will add a total of 1m sq. ft. through extensions and the opening of 34 stores. Overseas One key part of our strategy is to access growth internationally in markets where we can develop a leading position and add value to local retailing. In Ireland, a developed market, we have achieved this through acquisition and in the developing markets of Central Europe and Asia we are achieving this through our hypermarket development strategy. Ireland The business here continues to make progress. Like-for-like sales have risen 6% in the first half. The programme of store conversions and re-branding is continuing. We have now converted 36 stores, and expect to have converted 47 by the year-end, and a further 20 stores next year. These stores continue to perform well, customers like the extended ranges, improved service and even better value. We made an important first move towards improving our supply chain network with the opening of our Tallaght ambient depot last year. Currently central distribution handles 35% of products and this will build up to 95% over the next 3 years, with the addition of a composite fresh food warehouse opening in 2001. This centralisation programme has taken time to gain momentum but the benefits to the stores in terms of availability and the financial benefits over the next 3 years will be substantial, as they were in the UK. Next year we plan to open 4 new stores with a number of sites in progress for future years. Developing markets Five years ago our research identified two regions, Central Europe and Asia, covering eight countries for our potential international development. We are now on the ground in seven of these countries with strong development programmes. Since opening up in Central Europe, we have rapidly developed the capability to build and operate a competitive hypermarket, which allows us now to build a substantial business. Our first two hypermarkets opened in Central Europe in 1997, by the end of this year we will have 19 hypermarkets in the region increasing to 33 by the end of next year. Central Europe In Central Europe our lead country is Hungary where we have six hypermarkets. We plan to open a further three this year and four next year including a large store in Budapest. In Hungary:- - Opening sales are on or above budget, - The Polus store in its third year grew sales by nearly 20%, - The Fogarasi store in its second year grew sales by nearly 40%, - Non-food participation is increasing to 30-40% on average, - Operating cost ratios are moving in the right direction, - At store level the contribution is increasing, - Head office costs as a percentage of sales are reducing as overall sales grow; and - Stores are on track to achieve their 15% - 20% return target in year 4. Hungary is where we are most advanced and we are pleased it will move from loss into profit next year. As our programme develops in the other Central European countries we expect them to follow a similar pattern of sales, profits and returns and the region as a whole will move through break even into profit next year. Asia We have also moved forward strongly in South East Asia as the economies there continue their recovery. In March we announced our partnership with Samsung to develop the Homeplus hypermarket business in South Korea. We have recently confirmed that we will develop hypermarkets in Taiwan. In Asia, assisted by acquisitions, we operated 14 hypermarkets in 1998. This will be 19 by the end of 1999 and 30 by the end of next year. Thailand In Thailand, we currently operate fourteen stores. We will open three more stores by the end of this year and six stores next year, of which five are in the Bangkok area. We are on track with our stated plan to double our number of stores within three years of our acquisition of Lotus. This will take us to a market leading position. We are adding value to the operation in terms of store layouts, category management, own label and developments in the supply chain including the introduction of composite distribution for fresh foods. Our stores in Thailand are competing well against local and international competitors. These initiatives will mean that having purchased a business that was losing money we expect to break even this year and move into profit next year. One of the major benefits from our Thai business is the strong, experienced management and excellent hypermarket systems which we can now use to add value to our other companies in Asia. South Korea We have bought the market leader in South Korea in terms of customer appeal. We are excited by the prospects in this country where there is a broad constituency of affluent consumers in a recovering economy. The South Korean stores are some of the best in our portfolio with sales densities around the same level as the UK. Korea has only around 25 hypermarkets for a population of 46m people, an excellent infrastructure, and sensible planning regulations. We will move from opening five stores in the year 2000 to a large scale store development programme of around ten openings per annum. South Korea should move into profit in 2001. Taiwan We are moving ahead in Taiwan, the economy least affected by the Asian crisis, with our hypermarket development programme. Our senior management team has been on the ground for 18 months and the full team is now being formed. We have identified six sites and will open our first stores in Taiwan early in the year 2001. In addition we continue to research Malaysia. Conclusion The core UK business has performed well in a competitive first half-year, where we have seen strong volume growth. Non-food continues to grow and gain rapid market share. We are already well positioned against our main competitors in both Central Europe and Asia and over 36% of our group space will be overseas by the end of next year. Overall our sales growth will be moving to higher levels than in recent years. Our expectations are that our average earnings growth is likely to reflect this, particularly as our international business achieves economic scale. Contacts Press Andrew Coker Office 01992 646739 Mobile 07801 236483 Analysts Steve Butler Office 01992 644800 Mobile 07801 235819 This document is available via the Internet at http:/www.tesco.co.uk TESCO PLC GROUP PROFIT AND LOSS ACCOUNT (Unaudited) Note Total Total Increase/ Restated (Decrease) 1999 1998 24 weeks ended 14 August 1999 £m £m % Sales at net selling prices 2 9,112 8,288 +9.9 Turnover excluding value added tax 2 8,423 7,676 +9.7 Operating expenses - Normal operating expenses (7,988) (7,268) - Employee profit sharing 4 (18) (17) - Integration costs (3) (21) - Goodwill amortisation (3) - Operating profit 3 411 370 +11.1 Net profit/(loss) on disposal of fixed assets 4 (6) Share of operating profit of joint 5 2 ventures Profit on ordinary activities before interest 420 366 +14.8 Net interest payable (39) (39) Profit on ordinary activities before taxation 381 327 +16.5 Profit before integration costs, net profit/(loss) on disposal of fixed assets, goodwill amortisation and employee profit share 401 371 +8.1 Goodwill amortisation (3) - Integration costs (3) (21) Net profit/(loss) on disposal of fixed assets 4 (6) Profit Share (18) (17) Tax on profit on ordinary activities (107) (98) Profit on ordinary activities after 274 229 +19.7 tax Minority interests - - Profit for the financial period 274 229 +19.7 Dividends (90) (83) Retained profit for the financial 184 146 period Pence Pence Earnings per share 5 4.10 3.46 Diluted earnings per share 4.04 3.40 Adjusted diluted earnings per share 4.26 3.89 +9.5 (excluding net profit/(loss) on disposal of fixed assets, goodwill amortisation and employee profit share) Dividend per share 1.34 1.25 +7.2 TESCO PLC CONSOLIDATED GROUP BALANCE SHEET (Unaudited) 14 Aug 27 Feb 1999 1999 NOTE £m £m Fixed assets Intangible assets 114 112 Tangible assets 7,491 7,105 Investments 114 102 Investments in Joint Ventures 244 234 7,963 7,553 Current assets Stocks 707 667 Debtors 166 151 Investments 221 201 Cash at bank and in hand 128 127 1,222 1,146 Creditors: falling due within one (3,088) (3,075) year Net current liabilities (1,866) (1,929) Total assets less current 6,097 5,624 liabilities Creditors: falling due after more than one year (1,489) (1,230) Provisions for liabilities and (17) (17) charges Total Net Assets 4,591 4,377 Capital and reserves Called up share capital 339 339 Share premium account 1,598 1,577 Other reserves 40 40 Profit and loss account 2,587 2,426 Equity shareholders' funds 4,564 4,382 Minority interests 27 (5) Total capital employed 4,591 4,377 TESCO PLC GROUP STATEMENT OF TOTAL RECOGNISED GAINS & LOSSES (Unaudited) 1999 1998 (Restated) £m £m Profit for the financial period 274 229 Loss on foreign currency net investments (21) (2) Total recognised gains and losses relating to the financial period 253 227 RECONCILIATION OF MOVEMENT IN SHAREHOLDER'S FUNDS (Unaudited) 1999 1998 (Restated) £m £m Profit for the financial period 274 229 Interim dividend (90) (83) 184 146 Loss on foreign currency net (21) (2) investments New share capital subscribed less 5 13 expenses Payment of dividends by shares in lieu 14 12 of cash Net addition to shareholders' funds 182 169 Opening shareholders' funds at 4,382 3,903 February Closing shareholders' funds at August 4,564 4,072 TESCO PLC GROUP CASHFLOW STATEMENT (Unaudited) 1999 1998 24 weeks ended 14 August 1999 NOTE £m £m Net cash inflow from operating activities 6 734 559 Returns on investments and servicing of finance Interest received 30 9 Interest paid (66) (40) Interest element of finance lease rental - - payments Net cash outflow from returns on investments and servicing of finance (36) (31) Taxation Corporation tax paid (3) (17) Capital expenditure and financial investment Payments to acquire tangible fixed assets (543) (450) Receipts from sale of tangible fixed assets 5 48 Investment in ESOP (14) - Net cash outflow from capital expenditure and financial investment (509) (445) Acquisitions Purchase of subsidiary undertakings (61) (183) Net cash acquired with subsidiary - 2 Purchase of interests in Joint Ventures (11) (28) Net cash outflow from acquisitions (72) (209) Equity dividend paid (177) (166) Cash outflow before use of liquid resources and financing (63) (309) Management of liquid resources (Increase)/decrease in short term deposits (22) 121 TESCO PLC GROUP CASHFLOW STATEMENT (Unaudited) - continued 1999 1998 24 weeks ended 14 August 1999 NOTE £m £m Financing Ordinary shares issued for cash 9 13 Increase in other loans 90 354 Capital element of finance leases rental (3) (2) payments Net cash inflow from financing 96 365 Increase in cash in the period 11 177 Reconciliation of net Cashflow to movement in net debt Increase in cash in the period 11 177 Cash inflow from increase in debt and lease Financing (118) (352) Cash used to increase/(decrease) liquid resources 22 (121) Amortisation of 4% unsecured deep discount loan stock (2) (2) Loan acquired on acquisition - (19) Movement in net debt in the period (87) (317) Net debt at 27 February 1999 7 (1,720) (1,191) Net debt at 14 August 1999 7 (1,807) (1,508) TESCO PLC NOTES TO THE ACCOUNTS The figures for the 52 weeks ended 27 February 1999 have been extracted from the accounts which have been filed with the Registrar of Companies and which contain an unqualified audit report and did not include a statement under Section 237(2) or (3) of the Companies Act 1985. The accounts for the 24 weeks ended 14 August 1999 were approved by the directors on 20 September 1999. Note 1 Accounting policies These accounts have been prepared using the accounting policies set out in the Annual Report and Financial Statements 1999. Note 2 Group turnover analysis: 24 weeks 1999 24 weeks 1998 (Restated) Sales Sales ex. Sales Sales inc. VAT £m inc. ex. VAT VAT VAT £m £m £m Food Retailing - UK 8,284 7,669 7,722 7,160 Food Retailing - Rest of Europe 633 573 536 488 Food Retailing - Asia 195 181 30 28 Total Group 9,112 8,423 8,288 7,676 Note 3 Operating profit analysis: 24 weeks 24 weeks 1999 1998 (Restated) £m £m Food Retailing - UK 426 394 UK Profit Share (18) (17) Total UK 408 377 Food Retailing - Rest of Europe 10 15 Food Retailing - Asia (1) (1) Total Operations 417 391 Integration Costs (3) (21) Goodwill Amortisation (3) - 411 370 UK Operating Margin 5.3% 5.3% Profits for 1998 have been restated in line with Financial Reporting Standard 12, 'provisions, contingent liabilities and contingent assets', to reflect the change in the employee profit sharing of £17m and integration costs incurred in the period of £21m. These charges in 1999 are £18m and £3m respectively. Note 4 Employee Profit sharing This represents a proportion of the amount expected to be allocated to the trustees of the profit sharing scheme and is based on the UK profit after interest, before net profit/(loss) on disposal of fixed assets and taxation. Note 5 Earnings per share and diluted earnings per share Earnings per share and diluted earnings per share have been calculated in accordance with Financial Reporting Standard 14, 'Earnings per Share'. The standard required that earnings should be based on the net profit attributable to ordinary shareholders. The calculation for earnings, including integration costs, net profit/(loss) on disposal of fixed assets, goodwill amortisation and employee profit sharing is based on the profit for the period of £274m (1998 - £229m). For the purpose of calculating earnings per share, the number of shares is the weighted average number of shares in issue during the 24 weeks of 6,678m (1998 - 6,609m). 24 weeks to 24 weeks to 14 August 1999 15 August 1998 Million Million Weighted average number of dilutive share options 106 119 Weighted average number of shares in issue in the period 6,678 6,609 Total number of shares for calculating diluted earnings per share 6,784 6,728 Note 6 Reconciliation of operating profit to net cash inflow from operating activities 1999 1998 £m £m £m £m Operating profit 411 370 Depreciation and amortisation 195 171 Increase in stock (42) (23) Increase in debtors (7) (26) Increase in trade creditors 175 88 Increase/(Decrease) in other creditors 2 (21) Decrease in working capital 128 18 Net cash inflow from operating activities 734 559 Note 7 Analysis of changes in net debt At Cash Other Exchange At 27 Feb Flow non cash differences 14 Aug 1999 changes 1999 £m £m £m £m £m Cash at bank and in hand 127 2 - (1) 128 Overdrafts (31) 9 - - (22) 96 11 - (1) 106 Money market investments and deposits 201 22 - (2) 221 Bank and other loans (780) 142 (2) 2 (638) Finance leases (19) 2 - - (17) Debt due within one year (799) 144 (2) 2 (655) Bank and other loans (1,210) (232) - 1 (1,441) Finance Leases (8) (30) - - (38) Debt due after one year (1,218) (262) - 1 (1,479) (1,720) (85) (2) - (1,807) Note 8 Acquisition Effective 1 May 1999 Tesco acquired a 51% controlling interest in a newly incorporated company, Samsung Tesco Ltd, for a cash consideration of £81m and incurred fees of £4m. Subsequently the company paid £57m to increase its holding in Samsung Tesco Co. Ltd to 81% on the 30 June 1999. Net assets acquired amounted to £138m. The impact of this acquisition on the results for the half-year was immaterial. REVIEW REPORT BY THE AUDITORS TO THE BOARD OF DIRECTORS OF TESCO PLC Independent Review Report to Tesco PLC Introduction We have been instructed by the company to review the financial information set out on pages 8-15 and we have read the other information contained in the interim report and considered whether it contains any apparent misstatements or material inconsistencies with the financial information. Directors' responsibilities The interim report, including the financial information contained therein, is the responsibility of, and has been approved by the directors. The Listing Rules of the London Stock Exchange require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of group management and applying analytical procedures to the financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review we are not aware of any material modifications that should be made to the financial information as presented for the 24 weeks ended 14 August 1999. PricewaterhouseCoopers Registered Auditors Southwark Towers 32 London Bridge Street London SE1 9SY 20 September 1999

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