# Tesco achieves a strong six months, outperforming the market

- Link: https://www.directorstalkinterviews.com/tesco-achieves-a-strong-six-months-outperforming-the-market/4121026600
- Published: 2021-10-06T07:21:48+01:00
- Author: Amilia Stone

**[Tesco PLC](https://www.directorstalkinterviews.com/ftse-company/tesco-plc/tsco.l)**(
LON:TSCO) has announced its interim results for 2021/22.

**A strong first half leading to an upgrade in full year profit expectations:**

·    Elevated sales continued into first half; Group Retail 1-yr LFL^(7) sales growth
includes UK market outperformance and sharp recovery of Booker catering; 2-yr LFL
reflects strong performance throughout pandemic across all businesses.

·    Total adjusted retail operating profit^(4) £1,386m, +16.6% at constant rates

·   UK & ROI adjusted operating profit £1,318m, +16.5% due to higher sales and lower
COVID-19 costs, part offset by YoY effect of last year’s £249m business rates relief(
repaid in H2 last year)

·   Central Europe adjusted operating profit £68m, +18.6% due to lower COVID-19 
costs & higher YoY mall income

·    Bank adjusted operating profit £72m, returning to profit following last year’s
increase in potential bad debt provision

·    Retail free cash flow^(5) £1,543m, +93.6% inc. higher profit, lower pension
contribution & c.£400m working capital phasing

·    Net debt^(2,5) reduced by +£1.7bn since February reflecting strong cash flow

·    Adjusted diluted EPS^(6) 11.22p, +54.0% reflecting higher retail profits and
return to profitability for Tesco Bank

·    Interim dividend of 3.20p, in line with prior year; aligned to policy at 35%
of last year’s full year dividend

·    Strong first half performance leading to increased full year profit expectations:
adjusted retail operating profit now expected to be between £2.5bn and £2.6bn

**Strengthening our customer proposition:**

·    Grown UK market share; Customer satisfaction improving across all areas

·    ‘Aldi Price Match’ expanded to c.650 products, Clubcard Prices now in Express
stores and unbeatable Low Everyday Prices relaunched on 1,600 products

·    Strengthened digital platform: online LFL sales +2.3% (2-yr LFL: +74.1%) with
market share maintained; now over 20m Clubcard households including 6.6m app users;
on-demand grocery delivery trials progressing well

·    Group net zero own operations climate goal accelerated to 2035; new 2050 scope
3 target announced; soft plastic recycling now in all UK large stores; ambitious
health commitments launched across UK, Central Europe & Booker

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

·    Strategic priorities and multi-year performance framework set out

·    Aim to drive top and bottom line growth and generate between £1.4bn and £1.8bn
retail free cash flow per year

·    Capital allocation framework refreshed

·    £500m share buyback announced

Detail on footnotes can be found on page 5.

> **Ken Murphy, Chief Executive:**
> “We’ve had a strong six months; sales and profit have grown ahead of expectations,
> and we’ve outperformed the market.  This was a strong team effort and I would 
> particularly like to recognise and thank our colleagues who continue to do an 
> incredible job in difficult times.  I’m really pleased with our progress as we
> increased customer satisfaction and grew market share leading to a strong financial
> performance.  With various different challenges currently affecting the industry,
> the resilience of our supply chain and the depth of our supplier partnerships 
> has once again been shown to be a key asset.
> Against a backdrop of profound change, Tesco has many unique advantages.  The 
> scale and reach of our store estate and online operations are unmatched in the
> UK.  Our ability to reward loyalty through Clubcard enhances our relationship 
> with customers.  Our world-class food retail expertise combined with our strong
> supplier partnerships ensures we can offer our customers great value and quality,
> removing reasons to shop elsewhere.  Together, these strengths mean that Tesco
> can anticipate and respond to changes in the market, meeting customers’ needs 
> better than anyone.
> Today, we are sharing the strategic priorities that will enable us to build on
> these advantages to stay competitive, accelerate growth and generate between £
> 1.4bn and £1.8bn retail free cash flow per year.  These priorities will ensure
> we do the basics brilliantly, operate as efficiently as possible and grow our 
> business by building unbeatable digital, convenience and loyalty platforms.
> We are committed to creating value for all stakeholders in our business.  Our 
> commitments to the communities we serve and society more broadly are reflected
> in our new purpose: serving customers, communities and the planet a little better
> every day.  For shareholders, our strong performance to date and our confidence
> in our ability to generate cash in the coming years has enabled us to announce
> the start of a buyback programme that will balance the maintenance of a strong
> capital structure with returning surplus cash.”

**OUTLOOK****.**

As a result of our strong first half performance, we have increased our adjusted
retail operating profit expectations for this financial year to between £2.5bn and
£2.6bn.  Although we do not yet know how the external environment and consumer behaviour
will evolve in the second half, we have assumed that some of the elevated sales 
fall away and that we will continue to invest in our customer offer.

We now expect Tesco Bank to deliver adjusted operating profit of at least £120m 
for this financial year.  This expectation remains highly dependent on the economic
outlook.

**CAPITAL ALLOCATION AND LAUNCH OF ONGOING SHARE BUYBACK PROGRAMME.**

We have conducted a detailed review of our capital allocation framework, focusing
in particular on the appropriateness of our leverage target, on the application 
of our dividend policy and on our ability to return surplus cash to shareholders.
This review has resulted in two changes.

First, we will use a simpler measure of Net debt*/EBITDA when assessing leverage
for the purpose of capital allocation targeting a range of 2.8 to 2.3 times, consistent
with a solid investment grade credit rating.  The inclusion of the IAS 19 pension
deficit within the total indebtedness ratio used previously created material volatility
which could not be accurately predicted and has no bearing on our near-term cash
obligations or our long-term, unwavering commitment to our pension scheme members.

Second, we are confirming that it is our intention to pay a progressive dividend–
i.e. we will aim to grow the dividend per share each year, broadly targeting a pay-
out of around 50% of earnings.

Capital expenditure will remain between £0.9bn and £1.2bn per year.

Our refreshed capital allocation framework is as follows:

Following our strong first half performance, our leverage ratio stands at 2.7 times.
We are therefore announcing the start of an ongoing share buyback programme, with
the first tranche of £500m in shares to be repurchased by no later than October 
2022.  We will provide an update on our progress alongside our preliminary results
in April 2022.

* For the avoidance of doubt, Net debt is inclusive of IFRS 16 lease obligations.
A full definition can be found in the glossary on page 64.

**CREATING VALUE IN A DYNAMIC MARKET.**

The retail sector is undergoing significant change.  Customers are faced with an
increasing range of choices as to where, how and when to shop, with the COVID-19
pandemic accelerating a number of profound shifts in consumer behaviour.  The competitive
environment has changed materially, with a particular emphasis on value and greater
importance placed on fuller-service offerings such as grocery home delivery.  Consumers
and other stakeholders are also placing greater importance on environmental and 
social considerations which sometimes require significant change at an industry,
national or even global level.

We believe we can thrive against this backdrop.  Tesco has a uniquely strong position
in terms of reach, capability and market share, built up through decades of focusing
on meeting our customers’ needs.  We are hugely proud of the capability and commitment
of our team of nearly 360,000 colleagues, serving millions of customers across the
Group.  We have market-leading positions in every channel and format in our core
UK retail and wholesale markets, and through Clubcard, dunnhumby and over 40 million
transactions every week, we have the insight to be able to understand and anticipate
customers’ changing needs.  We have the broadest, most compelling product range 
and strong relationships with our supplier partners, together with efficient, well-
invested supply chain, distribution and fulfilment infrastructure.

**MULTI-YEAR PERFORMANCE FRAMEWORK.**

Combined, these capabilities will allow us to create sustainable, long-term value
for every Tesco stakeholder.  Today, we are sharing the framework we will use to
guide our actions and track our progress over the coming years:

Specifically, we are seeking to:

·      Drive top-line growth, underpinned by:

·      Increasing customer satisfaction relative to the market

·      Growing or at least maintaining our core UK market share

·      Grow our absolute profits whilst maintaining sector-leading margins through:

·      Leveraging our assets efficiently across all channels

·      Accessing new revenue streams across our digital platform

·      Targeting productivity initiatives to at least offset inflation

·      In doing so, generate between £1.4bn and £1.8bn retail free cash flow per
year

We are confident that this will enable us to maintain a strong and efficient balance
sheet, invest for growth and deliver improved returns for our shareholders.

Our progress against each of the measures is unlikely to be linear.  For example,
our near-term performance will likely reflect the annualisation of our exceptionally
strong top-line performance through the COVID-19 period, which could result in a
temporary reduction in sales.

Delivery against the framework will be enabled by four strategic priorities:

**STRATEGIC PRIORITIES.**

1) Magnetic value for customers

Value is much broader than just price – we see it as the intersection of price, 
quality and, increasingly, [sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news).
We want to make high quality, healthy and sustainably-sourced food available and
affordable to everyone, and in doing so, remove reasons for customers to want or
need to shop anywhere else.

Clearly, price will remain a critical part of this and we will maintain the competitiveness
we have established through Aldi Price Match, Low Everyday Prices and Clubcard Prices.

The quality of our products is already high.  We will seek further improvements 
by continuing to innovate with our supplier partners.  We will leverage the strength
of Tesco Finest* as part of a renewed focus on premium products and further refine
our supply chain to ensure that the quality of everything we sell is protected all
the way from farm (or factory) to fork.

We aim be the easiest place to shop for healthy and sustainable foods.  We are working
hard to reduce the environmental impact of both our own and our supplier partners’
operations, including through continuing to remove, reduce, reuse and recycle packaging
wherever we can.  We are also committed to continuing to make a positive contribution
to the communities we operate in.

2) I love my Tesco Clubcard

We have created one of the leading digital retail platforms in the UK.  The combination
of Clubcard – used by more than 20 million households in the UK alone – with our
online grocery business, our nearly seven million regular app users and dunnhumby’s
analytical expertise creates a powerful digital capability.  It gives us the ability
to manage vast amounts of data, gain unique insights and respond quickly and effectively.
When this is brought together with our unrivalled physical network, it gives us 
a competitive advantage that is hard to replicate.

For customers, we will use this advantage to provide a much richer experience, personalising
their offer to a much greater degree and responding to their changing needs in real
time.  They will be able to choose how, when and where they shop with us – across
our full range of products and services – and how they earn and use the rewards 
they accumulate.  We will use all of the assets we have – and critically, Clubcard–
to ensure that the more customers use Tesco, the more useful Tesco becomes to them–
a powerful virtuous circle.

Clubcard, and our digital platform more broadly, will also be at the heart of a 
reinvention of our supplier strategy.  It gives us the ability to access incremental
income streams by providing suppliers with the opportunity to market their products
in more targeted ways such as advertising on our grocery home shopping website or
offering a tailored range of additional products direct to specific customers. 

3) Easily the most convenient

To be ‘convenient’ now means serving customers wherever, whenever and however they
want to be served.  We believe we can do that better than anyone by leveraging our
existing reach and strong network.  We will continue to adapt our existing estate
whilst seeking out capital-light growth in the two key growth channels: online and
convenience.

We have already evolved our well-located large store estate to provide the backbone
of our online grocery business.  Our annual online sales have already exceeded £
6bn, boosted by increased demand as a result of the COVID-19 pandemic.  We plan 
to continue this growth whilst constantly innovating to improve efficiency, for 
example through the roll-out of urban fulfilment centres (UFCs) and continued improvements
in our existing manual picking and delivery operations.

We also have a strong presence in the second fastest growing food retail channel–
convenience – with the combination of our 1,941 fully-owned Express convenience 
stores, our 710 owned and 233 franchised One Stop stores and our wholesale relationship
with c.90,000 Booker retail customers.  This gives us a strong platform from which
to accelerate growth through capital-light opportunities to open new space and continuing
to add new franchisees and symbol store operators, leaving us well-placed to benefit
from the continuing trend towards more frequent top-up shopping.

Our strong presence across all channels positions us well to serve the increasing
demand for more immediate grocery delivery services.  We are continuing to test 
and learn from various trials of new, on-demand services, such as our own Tesco 
Whoosh platform and One Stop’s trial partnership with Deliveroo.  Our UFC programme
also provides the capability for a large basket on-demand offer, potentially enabling
customers to collect their full weekly or fortnightly shop within minutes of placing
an order.

4) Save to invest

Cost efficiency is a deep-seated principle within Tesco that has been brought back
to the fore in recent years, enabling us to regain our competitiveness and rebuild
the financial strength of the business.

As we look forward, we see significant further opportunities to simplify, become
more productive and reduce costs.  As a minimum, we are seeking to offset the impact
of cost inflation on our business each year.  In addition, we believe we can create
additional headroom that will allow us to fund investments in competitiveness and
growth, supporting the other three strategic priorities.

Having conducted a detailed review, we have identified c.£1bn of gross savings through
simplification across areas such as goods not for resale, improved productivity,
optimisation of our delivery network and central overheads.

We expect to deliver these savings over the next three years.  Whilst our intention
is to do this predominantly through incremental changes to existing operations, 
we will continually review opportunities to accelerate our plans and highlight any
exceptional costs which could be incurred as a result.

We will provide an update on progress against our performance framework and these
four strategic priorities at our interim and preliminary results each year.

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