Tesco Regulatory News (TSCO)

Wednesday 8 April 2020

COVID-19 UPDATE AND  PRELIMINARY RESULTS 2019/20

This is Part 1 of 2 of the Preliminary Results 2019/20

Our priority in dealing with the exceptional challenges posed by COVID-19 is to ensure the safety of our customers and colleagues, support our suppliers and maintain the availability of food. In every region we are working closely with the government and public health authorities to ensure we are supporting wherever we can and following all the relevant guidelines.

The specific challenges across the Group are three-fold, and most keenly felt in the UK. First, the significant change in buying behaviour of our customers. Second, the impact of the virus on our colleagues and thirdly, helping the more vulnerable in society, as defined by the UK Government.

In the first few weeks of the crisis, significant panic buying (c.30% uplift in the UK) cleared the supply chain of certain items. This has now stabilised across the Group and more normal sales volumes are being experienced. The size and nature of our workforce means we have experienced a significant absence of colleagues. Full colleague sickness support is in place and in the last two weeks alone, we recruited more than 45,000 colleagues in the UK.

Whilst we have already stepped up our capacity on Grocery Home Shopping by more than 20%, and will continue to increase this, there is simply not enough capacity to supply the whole market. Between 85% and 90% of all food bought will require a visit to a store and here significant changes to the store environment have been implemented to maximise safety for colleagues and customers. We will continue to try and prioritise home delivery for the most vulnerable in society as defined by the UK Government.

"COVID-19 has shown how critical the food supply chain is to the UK and I'm very proud of the way Tesco, as indeed the whole UK food industry, has stepped forward.

In this time of crisis we have focused on four things; food for all, safety for everyone, supporting our colleagues and supporting our communities.

Initial panic buying has subsided and service levels are returning to normal. There are significant extra costs in feeding the nation at the moment but these are partially offset by the UK Business rates relief.

Tesco is a business that rises to a challenge and this will be no different. I would like to thank colleagues for their unbelievable commitment and customers for their help and understanding. Together, we can do this."

Food for all

· introduced a restriction of three items per customer on every product line; now removed on majority of products as stock levels stabilise

· introduced special hours in stores for NHS workers, and more vulnerable and elderly customers

· expanded Grocery Home Shopping capacity by +20% in the last two weeks, adding 145,000 slots

· working with Government to prioritise delivery slots for vulnerable people without a support network  

· temporarily closed all cafes, phone shops, meat, fish, deli counters and salad bars

· asked our office colleagues to volunteer for shifts in stores where they can

· working closely with supplier partners to simplify our range to get more of the most popular products on shelves

· focusing on simple pricing for single products, removing many multi-buy promotions

Safety for everyone

· introduced social distancing measures in stores; filmed a new advertisement with colleagues summarising them

· created one-way aisles and 'one-in, one-out' system to help limit flow

· using directional floor markings to help everyone keep a safe distance

· installing protective screens at the front and back of our checkouts

· enhanced cleaning routines and new cleaning stations in stores

· inviting customers that can, to pay at the checkout by card

Supporting our colleagues

· colleagues ill with COVID-19 or in isolation receiving full pay from their first day of absence

· fully paid absence for 12 weeks for colleagues who are over 70, vulnerable or pregnant

· paying a 10% bonus on the hourly rate for hours worked to colleagues across stores, distribution centres and customer engagement centres

· range of policies to support parents during school closures, including new school closure leave policy

· more than 45,000 new colleagues have joined Tesco since 20 March, including pickers and drivers

· colleague discount increased to 15% from 6 April to 7 May

Supporting our communities

· we will continue our ongoing donations of £3m of food every month through our Community Food Connection scheme and distribution centres  

· a further £15m of food to be donated to FareShare and the Trussell Trust over the next 12 weeks and a further £1m donation between the two organisations

· focusing £2m funding from Bags of Help community donation scheme to charities helping the most vulnerable

· building on our partnership with the British Red Cross, donating £2m to help with extra costs in supporting people in need

· over £1m of funding in stores so they can support causes in their local neighbourhood

· donating food for 1m free meal parcels for front-line NHS workers, supporting 'SaluteTheNHS.org' initiative

· constructing our first dedicated NHS Nightingale Hospital pop-up store, at the NEC in Birmingham

COVID-19 is having a material impact on the operations of our business and we are incurring significant additional costs, particularly in payroll as we recruit additional colleagues to meet demand and cover the work of those colleagues who are absent and being paid.

Whilst the full financial impact of the crisis for 2020/21 is impossible to predict with a high degree of certainty, we have considered a range of scenarios to understand potential outcomes on our business and plan appropriately. Dependent on the scenario, the estimated impact on our retail cost lines is between c.£(650)m and c.£(925)m including significant cost increases in payroll, distribution and store expenses.

At this stage it would not be prudent to provide financial guidance for 2020/21, however if customer behaviour were to return to normal by August it is likely that the additional cost headwinds incurred in our retail operations would be largely offset by the benefits of food volume increases, twelve months' business rates relief in the UK and prudent operations management.

Tesco Bank, which operates as a stand-alone regulated entity, is expected to be impacted by a reduction in income from all its activities, including credit cards, loans and travel money. This expected decrease in income, in addition to provisions for potential bad debts, is likely to result in a loss for the Bank in the year ending February 2021. Notwithstanding this, the Bank's capital ratios (Tier 1 ratio: 20.6% and Total ratio: 23.1% as at 29 February 2020) and liquidity are expected to remain strong.

Up to date information on our response to COVID-19 can be found on our website at www.tescoplc.com/covid-19.

Preliminary Results 2019/20

TURNAROUND COMPLETE - WELL-PLACED TO SERVE ALL OF OUR STAKEHOLDERS

For UK & ROI our reported statutory performance is for the 53 weeks ended 29 February 2020. For all other operations, these results are for the calendar year ended 29 February 2020. To aid comparability, headline results are shown on a 52 week basis. A reconciliation between statutory results and headline alternative performance measures is shown on page 4.

Customer satisfaction

· Shopping trip satisfaction improved across all formats; brand net promoter score +7 points year-on-year8

· Brand perception further improved across range, quality and value9

· 'Aldi Price Match' launched in March across hundreds of Tesco and branded products

Cash profitability

· Retail operating profit before exceptional items and amortisation of acquired intangibles10 of £2,766m, +14.9%, margin 4.4%;

- Strong performance in UK & ROI and Asia, partly offset by disruption impact of transformation in Central Europe

- UK & ROI £2,184m, +16.9%, margin 4.2% 

- Central Europe £156m, (29.4)%, margin 2.8% 

- Asia £426m, +33.5%, margin 8.2%

· Bank operating profit before exceptional items £193m, (3.0)%

· Cumulative Booker synergies £207m, delivered a year ahead of target; acquisition of Best Food Logistics in early March

· Group operating margin4 of 4.64% (+56bps); Retail EBITDA10 up 8.8% to £4.7bn

Cash flow

· Retail free cash flow5 of £2,063m, including CE property disposals of £167m and £277m from sale of China joint venture11

· Final dividend 6.50p, reflecting strength of last year's performance and our robust liquidity and balance sheet; full-year dividend of 9.15p representing a pay-out ratio of 50%

· Net debt5 of £(12.1)bn, down £1.1bn year-on-year

Proposed sale of businesses in Thailand and Malaysia12

· Consideration of $10.6bn (c.£8.2bn) on a cash and debt free basis, conditional on shareholder and regulatory approval

· Plan to return c.£5bn to shareholders via a special dividend; £2.5bn one-off pension contribution to eliminate funding deficit

· Completion of sale expected 2H 2020; Thailand and Malaysia to be treated as discontinued for 2020/21 financial year

"Over the last five years we have focused on serving customers better, re-engaging our colleagues, completely resetting our relationships with our suppliers and as a result we have been able to add value for our shareholders.

These endeavours put us in a strong operational and financial position to deal with the challenges of COVID-19.

I would like to thank Tesco colleagues for their contribution to this turnaround journey and for their unbelievable commitment as we face into the COVID-19 crisis. Their contribution continues to be immense."

Key segmental results:

A full Group income statement can be found on page 28.

Notes

1. Last year figures restated for adoption of IFRS 16.

2. The Group has defined and outlined the purpose of its alternative performance measures, including its headline measures, in the Glossary starting on page 117.

3. Group sales exclude VAT and fuel. Sales growth shown on a comparable days basis for Central Europe and Asia. Booker consolidated from 5 March 2018 and therefore includes 9 additional days in FY 2019/20 vs. FY 2018/19. The 9 additional days of Booker sales in the current year contributed 0.2% to Group sales growth in the year. Further detail can be found in the supplementary information starting on page 114.

4. Excludes amortisation of acquired intangibles and excludes exceptional items by virtue of their size and nature in order to reflect management's view of underlying performance.

5. Net debt and retail free cash flow exclude the impact of Tesco Bank in order to provide further analysis of the retail cash flow statement. Net debt also includes lease liabilities following the adoption of IFRS 16. Net debt excluding lease liabilities was £(2.6)bn, down £0.2bn year-on-year.

6. Headline 'diluted earnings per share' and 'adjusted Group profit before tax' measures exclude exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments. Full details of the diluted earnings per share measure can be found in Note 9, starting on page 54.

7. Statutory diluted earnings per share includes the impact of a net post-tax charge of £(593)m in respect of exceptional items. More detail can be found in Note 4 on page 48.

8. BASIS Global Brand Tracker. Based on your most recent experience, how likely is it that you would recommend Tesco to a friend or colleague?

9. Reflects year-on-year change in YouGov Brand UK perception measures of range, quality and value.

10. Retail figure i.e. excludes the impact of Tesco Bank.

11. On 28 February 2020 we completed the sale of our 20% share in Gain Land to a subsidiary of China Resources Holdings. The disposal resulted in net cash proceeds of £277m.

12. On 9 March 2020 we announced the proposed sale of our businesses in Thailand and Malaysia to a combination of CP Group entities. Completion of the disposal, which is conditional on

 shareholder approval and customary regulatory approvals in Thailand and Malaysia, is expected during the second half of 2020. Thailand and Malaysia will be treated as discontinued operations for the 2020/21 financial year. All guidance and forward looking statements throughout this statement are on a continuing operations basis.

13. 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 foreign exchange rates).

14. Capex is shown excluding property buybacks. Statutory capital expenditure (including property buybacks) for the 53 weeks ended 29 February 2020 was £2.1bn (LY £1.2bn).

At our Capital Markets Day in June 2019, we set out further opportunities available to the Group in terms of selective growth, innovation and enabling technology. These opportunities will enable us to continue to create long-term and sustainable value for all our key stakeholders.

Customers

· Price: 'Aldi Price Match' campaign launched in March 2020 across hundreds of Tesco and branded products

· Stores: opened 18 Express stores in the UK and converted 54 One Stop to Express, allowing a wider fresh food offer

· Online: taking steps to double online capacity in the UK; first Urban Fulfilment Centre planned in West Bromwich Extra as part of a programme to open more than 25 over the next three years

· Loyalty: Clubcard Plus launched in November; retention rate 90%+; basket size uplift exceeding expectations

· Booker: leveraging Tesco network, including roll out of 'Top up at Tesco'1; re-launched Booker.co.uk in January

· Simplify to serve: continued focus on improving customer service whilst reducing operating costs; including right-sizing 545 large stores in Central Europe and rolling out a new Express proposition to 51 stores in Asia

Colleagues

· 82% of colleagues recommended Tesco as a great place to work in January 2020 survey; 10% higher vs. peers2

· First stage of a 10.45% increase for hourly paid store colleagues completed in September 2019

· All large stores using new Scheduler tool, optimising 300 million colleague hours per year

· 81% of colleagues agree there is an inclusive culture; five long-standing executive-sponsored inclusion networks

· 10,000+ young people developing employability and life skills through partnership with Prince's Trust

· Continued partnership with Mind, the mental health charity; colleagues completed over 170,000 hours of mental health e-learning

Supplier partners

· Overall Group supplier satisfaction reached its highest score to date of 77.8%, +1.6% pts. vs 1H 2019/20

· Booker's acquisition of Best Food Logistics completed as planned in early March 2020 for a nominal consideration

· Carrefour alliance; 24 global agreements in place; more opportunity in own brand and goods & services not for resale

· Working together with suppliers to reduce packaging

- Replaced plastic-wrapped multipacks with plastic-free multibuys on Tesco and branded tinned food

- Loose fruit and vegetables price matched to pre-packed products

- Fresh flowers being transitioned to paper packaging

Shareholders

· Announced final dividend of 6.50p per share, reflecting the strength of last year's performance and our robust liquidity and balance sheet; full-year dividend of 9.15p per share with pay-out ratio of 50%

· Proposed sale of Thailand & Malaysia businesses for c.£8.2bn3; releasing material value, allowing us to further simplify and focus the business, and to return significant value to shareholders

· Cumulative Booker synergies delivered one year ahead of target at £207m

· Task Force on Climate-related Financial Disclosures: signatory since 2017; phase one scenario analysis completed; informing business continuity planning; phase two scenario analysis in 2020/21

· Zero-carbon business by 2050; roadmap to 100% renewable electricity, with plans to fit solar panels to 187 stores

1. 'Top up at Tesco' allows Booker catering customers to use their reward card at a Tesco till.

2. Measurement is against a benchmark composed of global retail companies.

3. c.£8.2bn consideration is on a cash and debt free basis.

In March we announced that we had agreed to sell our businesses in Thailand and Malaysia to a combination of CP Group entities12, following inbound interest and a detailed strategic review. Consideration for the disposal represents an enterprise value of $10.6bn (c.£8.2bn) on a cash and debt free basis. Following completion of the disposal, we intend to return c.£5bn to shareholders via a special dividend and further de-risk the business by reducing indebtedness through a £2.5bn pension contribution, which is expected to eliminate the funding deficit.

The disposal was unanimously agreed by the Board to be in the best interests of all stakeholders and completion is expected in the second half of 2020, conditional on shareholder and regulatory approval. As the disposal is a Class 1 transaction under the Listing Rules, the completion is conditional on shareholder approval at a General Meeting. Shortly after completion, there will then be a separate General Meeting to seek shareholder approval for the return of proceeds and associated share consolidation. The disposal will further simplify the Group, enabling a stronger focus on driving cash generation and returns to shareholders from our retail businesses in the UK and Ireland and in Central Europe.

All comparative figures included within this announcement have been restated for IFRS 16, the financial reporting standard on accounting for leases introduced by the International Accounting Standards Board, effective for accounting periods beginning on or after 1 January 2019. As previously indicated, we have adopted the standard fully retrospectively. Further detail on this can be found in Note 1 starting on page 34.

For UK & ROI our reported statutory performance is for the 53 weeks ended 29 February 2020. For all other operations, these results are for the calendar year ended 29 February 2020. To aid comparability, headline results are shown on a 52 week comparable basis, with additional disclosure provided to explain the impact of week 53 on the statutory measures. Reconciliations between statutory results and headline alternative performance measures are shown in the glossary starting on page 117 of this statement.

Sales:

1. UK & ROI consists of Tesco UK, ROI and Booker. Booker consolidated from 5 March 2018.

2. Central Europe consists of Czech Republic, Hungary, Poland and Slovakia.

3. Asia consists of Thailand and Malaysia.

4. Sales change shown on a comparable days basis for Central Europe and Asia. Based on statutory accounting dates, Group sales grew by 0.8% at constant exchange rates and by 1.1% at actual exchange rates.

Group sales declined by (0.7)% at actual exchange rates, including a 0.3% foreign exchange translation benefit due to the depreciation of Sterling. In the UK and the Republic of Ireland (ROI) total sales increased by 0.1% at actual exchange rates, against a backdrop of subdued market growth.

In the UK, we continued our Centenary celebrations offering significant savings to customers through our '100 Years of Great Value' events, and introduced exclusive Clubcard Prices for our 19 million Clubcard holders. We have further strengthened our value proposition with the launch of our 'Aldi Price Match campaign' in March 2020, price matching to Aldi on hundreds of Tesco and branded products.

The customer reaction to the launch of Clubcard Plus in November has been encouraging. For a £7.99 monthly subscription, customers can benefit from 10% off 2 big shops in-store as well as savings on popular Tesco brands and double data on Tesco Mobile. Subscribers can also apply for a Clubcard Plus credit card from Tesco Bank with no foreign exchange fees abroad5.

Our fresh food volumes outperformed the market by 0.5%6 supported by strong performance in our 'food to go' offer. We continue to improve our overall product mix, making our general merchandise offer more relevant by focusing on categories that are complementary to our food offer such as Home and Cook. In the coming year we are planning to rebalance space further, in particular by augmenting our F&F clothing offer in a number of our large stores.

Our online grocery customer service ratings all improved year-on-year. Following a strong sales performance in the first half, a slower rate of growth in the second half of the year reflected our decision to maintain a sustainable approach to incentivising new customers in a highly competitive environment. We are taking steps to increase our online capacity to align to the long-term growth in customer demand in this channel, with our first Urban Fulfilment Centre planned in our West Bromwich Extra store. This year we will also increase the number of vans and trial unmanned Click & Collect sites to further support order growth.

5. Subject to status.

6. Data is for the 52-weeks ending 22 February 2020 and is sourced from IRI Retail AdvantageTM, global insight providers to the retail industry. Aldi and Lidl do not submit data to IRI and are therefore excluded from their market definition.

In November we announced we will become the first UK retailer to remove plastic-wrapped tinned multipacks from all stores and replace them with plastic-free multibuys, eliminating 67 million pieces of plastic. This forms part of our commitment to remove one billion pieces of plastic from our own brand products by the end of 2020.

Booker sales grew (on a comparable days basis) by 3.8% excluding tobacco (2.9% including tobacco) despite a challenging market in both wholesale and retail, with small business confidence remaining low. The continued focus on customer service was recognised in November when Booker was named 'Best National Wholesaler' for overall customer satisfaction1. The acquisition of Best Food Logistics in early March 2020 will provide more customers with the benefits of the sourcing capabilities of the wider Tesco business.

In ROI sales grew by 0.8% at constant exchange rates, and we saw particularly strong sales growth in core fresh food, including bakery and produce, as customers responded well to the continued investment in our 'You won't pay more' value campaign.

In Central Europe we have undertaken a significant transformation, fundamentally changing our approach in Poland and re-sizing, simplifying and improving the relevance of our businesses in the Czech Republic, Hungary and Slovakia. Sales fell by (10.1)% at constant exchange rates, reflecting disruption from the actions we have taken including the rationalisation of our general merchandise offer, making our customer offer more relevant and compelling. Across the region we right-sized 545 hypermarkets, closed 28 stores and, in Poland, completed the transition to a two-format model (compact hypermarkets and supermarkets). We also invested to improve the shopping trip for customers, focusing on availability, which improved by 1% and our key 'Star lines' products which saw like-for-like growth of 20%.

In Asia sales grew by 6.7% at actual rates and by 0.1% at constant rates. In Thailand, our new Express proposition roll out and large store re-invention programme are both progressing well and as part of our innovation in store formats we now have two of our 'ultra convenient' E-Pop stores in the Bangkok region. We have simplified our fresh food offer, with more competitive prices and our 'Food Love Stories' campaign has further improved customer quality perceptions. The simplification of our general merchandise ranges impacted our headline sales by c.(1)% in the year. In Malaysia, we increased our market share, opening two new small stores following favourable legislation changes, with plans for a further four openings in 2020/21. Across the region we are building trust with customers through our focus on reducing food waste and plastic usage.

Group statutory revenue of £64.8bn grew by 1.3% year-on-year and includes fuel sales of £7.4bn. Further information on sales performance is included in the supplementary information starting on page 114 of this statement.

1. HIM annual Wholesale Tracking programme.

Operating profit before exceptional items and amortisation of acquired intangibles:

Group operating profit before exceptional items and amortisation of acquired intangibles of £2,959m grew by 13.5% at actual exchange rates. Retail operating profit before exceptional items and amortisation of acquired intangibles of £2,766m increased by 14.9% year-on-year (at actual exchange rates) following strong performance in UK & ROI and Asia, partly offset by the impact of disruption as we transform our business in Central Europe to improve long-term profitability in the region.

UK & ROI operating profit before exceptional items and amortisation of acquired intangibles grew by 16.9% at actual rates to £2,184m, with operating margin up 59 basis points year-on-year. The increase in profitability was driven by the actions we have taken to improve product mix, and cost savings through further refinements to our operating model including changes to our in-store counters offer and simplification of stock control processes.

We have now delivered cumulative synergies (comprising the in-year benefit of new initiatives combined with the carry forward of prior year activity) of £207m from the Booker merger, exceeding our c.£200m target a year earlier than planned. Whilst we still see many opportunities to deliver further synergies, these will no longer be considered separately to our overall UK & ROI performance. In the period the challenge of a weak market in both the wholesale and catering sectors was exacerbated by the effect of the clearance of excess stock that had been built up in anticipation of Brexit disruption. Despite these challenges Booker's profit growth (including synergies) outperformed the industry as a whole.

In Central Europe operating profit before exceptional items was £156m, (29.4)% lower year-on-year. The actions described above to simplify our operations resulted in significant sales disruption and stock clearance costs, particularly in the second half of the year. In addition, performance reflected investments to improve the competitiveness of our offer, in particular our key 'Star lines' products, over 600 everyday items which we have made available to customers at market-leading prices. Excluding a £(13)m provision made in the first half in respect of potential historic VAT liabilities, the change in operating profit was (23.5)%.

In Asia, we saw a strong increase in profitability, with growth of 33.5% at actual exchange rates and 24.8% at constant exchange rates. We accelerated our cost savings initiatives in Thailand, including a more efficient distribution operation and more focused, more effective marketing activity. In addition, we benefited from the flow through of prior year initiatives. We continued to optimise the mix of our product ranges as we focus on sustainable, profitable ranges in general merchandise. Performance also included a £24m benefit as a result of changes to how property tax is levied on businesses in Thailand.

In 2020/21, Asia will be treated as a discontinued operation following the announcement on 9 March 2020 of the proposed sale of our businesses in Thailand and Malaysia1.

Further information on operating profit performance is included in Note 2, starting on page 42 of this statement.

1. Completion of the disposal is subject to shareholder and regulatory approval.

Exceptional items and amortisation of acquired intangibles in statutory operating profit:

Exceptional items are excluded from our headline performance measures by virtue of their size and nature in order to reflect management's view of the underlying performance of the Group.

This year, total exceptional items resulted in a net cost of £(375)m, compared to a net credit of £120m in the prior year. This year-on-year movement is principally due to provision releases and net impairment reversals in the base, as well as the accounting impact of obtaining full control of one of our property joint ventures (Tesco Atrato Limited) through the acquisition of our partner's 50% stake in September 2019. All of these significant movements are non-cash.

Exceptional restructuring and redundancy costs of £(107)m include a £(51)m charge relating to the simplification of our store operating model in the UK and a £(43)m charge relating to the transformation we have undertaken in Central Europe.

Exceptional net profits on property transactions of £44m have arisen from property disposals within the UK (£18m) and Central Europe (£26m).

We have incurred a £(23)m exceptional charge relating to Booker integration costs, bringing costs to date to £(38)m.

The acquisition of our partner's stake in Tesco Atrato Limited results in the Group taking on the joint venture's external debt in addition to its freehold assets (15 stores and two distribution centres). The exceptional charge of £(136)m represents the net effect of the de-recognition of the previously held IFRS 16 lease liabilities and right of use assets, and the impairment of the acquired assets (further detail can be found in Note 33 on page 91 of this statement).

As announced at the half year, the impairment charge of £(47)m relating to our Trent Hypermarket joint venture relates to reduced profit expectations due to investments in the competitiveness of our offer and reduced store expansion plans.

Other exceptional items include a profit of £37m on the disposal of our 20% share in Gain Land in China, and a £(22)m charge relating to corporate activity, which includes costs relating to the proposed sale of our businesses in Thailand and Malaysia in addition to other Group projects.

Tesco Bank recognised a £(56)m exceptional accelerated depreciation charge following the decision to close our current account business to new customers. Also, as announced at the half year, Tesco Bank recognised an additional £(45)m provision for customer redress due to an unexpectedly high number of claims received in the weeks prior to the 29 August deadline in respect of Payment Protection Insurance.

Net exceptional items of £(33)m in week 53 comprise a £(44)m charge relating to further changes to our UK store operating model and £11m of net profits on property transactions in the UK.

Further detail on exceptional items can be found in Note 4 on page 48 of this statement.

Amortisation of acquired intangible assets is also excluded from our headline performance measures. The £(78)m charge primarily relates to our merger with Booker in March 2018, which resulted in the recognition of goodwill of £3,093m and a £755m intangible asset. 

Joint ventures and associates:

Our share of post-tax profits from joint ventures and associates before exceptional items was £26m, an increase of £5m year-on-year primarily due to a reduced level of losses from Gain Land, our former associate in China.

Exceptional items of £(8)m comprise a £(12)m charge for land penalties arising in our 20% share of Gain Land, and in Tesco Bank, an exceptional gain of £4m in our insurance joint venture, Tesco Underwriting, reflecting a revision to the Ogden compensation tables which are used to calculate future losses in personal injury and fatal accident claims.

Following the sale of our 20% share in Gain Land and proposed sale of our business in Thailand, which is inclusive of our 25% share of the Tesco Lotus Retail Growth Freehold and Leasehold Property Fund (TLGF), our share of post-tax profits from JVs and associates will primarily relate to our UK property joint ventures. In 2019/20 TLGF contributed £26m to profit.

Finance income and finance costs:

The following table sets out the components of net finance costs.

Net finance costs before exceptional charges, net pension finance costs and fair value remeasurements of financial instruments reduced by £76m year-on-year to £(746)m, mainly driven by a reduction in net interest payable following debt maturities, bond tenders and new debt issued at a significantly lower rate of interest. In addition, finance charges payable on lease liabilities reduced by £26m year-on-year due to ongoing lease utilisation and the buyback of 21 leasehold properties in the year.

Fair value remeasurements of financial instruments increased by £73m year-on-year driven by a fall in inflation expectations impacting the new index-linked swaps, which offset those put in place as part of historical sale and leaseback property transactions. The swaps were restructured to eliminate the impact of future inflation on the Group's cash flow in relation to these property transactions. Fair value remeasurements also includes £(65)m primarily relating to the premium paid on the repurchase on long-dated bonds (LY: £(121)m).

Net pension finance costs decreased by £18m year-on-year, primarily due to a lower opening pension deficit. For the 2020/21 financial year, net pension finance costs are expected to be no more than c.£55m. The exact cost will depend on the timing of the one-off pension contribution of £2.5bn, described above.

The exceptional charge of £(180)m included in net finance costs relates to actions taken to remove inflation risk from the historical sale and leaseback property transactions. The charge, which is non-cash, relates to the revaluation of credit risk associated with the historical swaps, described above, over a shorter timeframe.

An exceptional credit of £29m relates to a fair value remeasurement as part of the sale of Tesco Bank's mortgage book that was completed in September.

Further detail on finance income and costs can be found in Note 5 on page 50, as well as further detail on the exceptional items in Note 4 on page 48.

Group tax:

Tax on Group profit before exceptional items and amortisation of acquired intangibles was £(430)m, £33m higher than last year due to increased profitability. This year's charge also includes a credit arising from closing a number of issues relating to prior years across the Group. Group cash tax paid in the year was £340m, including £207m of corporate tax paid in the UK.

Following the reversal of the enacted 2% reduction in the rate of UK corporation tax from 1 April 2020, we now expect the Group's effective tax rate to be around 21% in the medium term. For the 2020/21 financial year we expect an effective tax rate of c.24% as a result of a one-off rate change impact from revaluing deferred tax from 17% to 19%.

As previously announced, following changes to the timing of UK corporation tax payments, in common with other large UK companies we will have two additional quarterly cash payments in the 2021 fiscal year. This change effectively moves from payment of around half the tax liability after the financial year-end to full payment in-year, and is expected to create a one-off additional cash outflow in the first half of our 2020/21 financial year.

As part of the use of proceeds from the proposed sale of our businesses in Thailand and Malaysia, we will make a £2.5bn one-off contribution into the UK defined benefit pension scheme. As the Group will receive tax relief on this contribution, it is anticipated that the level of cash tax payable will be reduced by c.£120m in the year of payment and c.£60m per annum in the following three years.

On a statutory basis, the total tax charge is £(380)m which includes a £53m credit relating to exceptional items.

Earnings per share:

Our diluted earnings per share before exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments was 17.92p, 27.9% higher year-on-year, due to our improved profit performance.

Statutory basic earnings per share from continuing operations were 9.60p, (26.9)% lower year-on-year, primarily reflecting the change in the level of exceptional items year-on-year.

Dividend:

Reflecting the strength of our performance last year and given our robust liquidity and balance sheet, we propose to pay a final dividend of 6.50 pence per ordinary share. This takes the total dividend for the year to 9.15 pence per ordinary share, up 58.6% year-on-year, including the payment of an interim dividend of 2.65 pence per ordinary share in November 2019. This represents a full-year dividend pay-out ratio of 50% on a 53 week basis.

We expect to maintain a full-year dividend pay-out ratio of 50% going forward and from 2020/21 our interim dividend will be set at 35% of the prior year full-year dividend.

The proposed final dividend was approved by the Board of Directors on 7 April 2020 and is subject to the approval of shareholders at this year's Annual General Meeting. The final dividend will be paid on 3 July 2020 to shareholders who are on the register of members at close of business on 22 May 2020 (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 12 June 2020.

Summary of total indebtedness1:

1. Total indebtedness is defined in the glossary, starting on page 117.

Total indebtedness was £14,674m, down £868m year-on-year driven by a reduction in our lease liabilities and underlying net debt, partly offset by an increase in the pension deficit.

Our lease liabilities decreased by £943m year-on-year, principally reflecting the purchase of our partner's 50% stake in the Tesco Atrato Limited property joint venture. The acquisition, which is treated as an asset acquisition, increases our freehold property ownership and borrowings, replacing associated right of use assets and lease liabilities. In addition, our lease liabilities reduced due to capital repayments made in the year and the buyback of a number of other leasehold properties.

On an IAS 19 basis, our pension deficit increased by £(235)m to £(2.6)bn. An increase in the measurement of scheme liabilities due to a fall in corporate bond yields was largely offset by strong asset performance, including that of our liability-driven investment portfolio, in addition to continued deficit contributions and the application of the latest actuarial assumptions.

As part of the use of proceeds from the proposed sale of our businesses in Thailand and Malaysia, we have reached agreement with the Trustees to make a £2.5bn one-off contribution into the Scheme. This, along with other measures, is expected to eliminate the funding deficit and significantly reduce the prospect of having to make further pension deficit contributions in the future.

The agreement with the Trustees also covers the key principles of the triennial scheme valuation, which will now be calculated as at 31 December 2019. The Trustees will aim to conclude the valuation as soon as is reasonably possible.

Further information on the Group's pension liability is available in Note 29 which begins on page 83.

Our key credit metrics, which are fixed charge cover and total indebtedness/EBITDA, have further improved since the end of the last financial year, from 3.0 to 3.4 times and from 3.6 to 3.1 times respectively. We are now targeting leverage of c.2.5 times.

Summary retail cash flow:

1. Booker integration costs were previously included within 'Other'.

Retail free cash flow increased by £1,174m year-on-year to £2,063m, reflecting a strong increase in cash profitability, a decrease in working capital and the contribution from the sale of our share in Gain Land.

We generated a net working capital inflow of £163m. This improvement is lower than initially planned, and includes the reversal of the £(210)m impact seen in the second half of last year primarily relating to our decision to delay the implementation of a new general ledger system. Our planned progress was held back by the timing of non-trade related payments, the deleveraging effect of lower sales in Central Europe and the continued prioritisation of securing availability for customers ahead of potential Brexit deadlines. These factors were partly offset by a refinement of payment terms with our largest suppliers.

The £(240)m impact shown in the table above in working capital relating to week 53 is primarily driven by the timing of a fuel payment.

Cash capital expenditure was £142m lower year-on-year as we maintain our disciplined approach to capital investment.

An £80m reduction in cash interest principally relates to debt maturities and bond tenders at a significantly lower rate of interest. Cash interest also includes the interest element of lease rental payments, which reduced by £26m year-on-year as leases were utilised and we bought back a number of other leasehold properties.

Retail cash tax paid in the year was £271m, a decrease of £31m year-on-year. The decrease year-on-year was due to IFRS 16 transitional adjustments and a higher charge for fair value remeasurements in the period, which are both eligible for cash tax relief.

We generated £258m of property proceeds including £167m from the sale of properties in Central Europe, mainly in Poland. We utilised £172m of cash primarily for the buyback of our Blandford, Chesterfield and High Wycombe stores, which will result in an annual cash rental saving of £8m.

We purchased £149m of shares in the market following our commitment to offset any dilution from the issuance of new shares to satisfy the requirements of share schemes. Going forward we continue to expect to utilise c.£150m a year, with the precise amount depending on performance and market conditions.

The increase in repayments of obligations under leases of £27m is largely offset by a corresponding decrease within the interest element of lease rental payments included in net interest.

As previously announced, we will make a £0.3bn pension deficit contribution in the 2020/21 financial year, which in addition to the proposed one-off £2.5bn contribution in the second half of 2020, is expected to eliminate the funding deficit and significantly reduce the prospect of having to make further deficit contributions in the future, releasing c.£260m of annual free cash flow.

Capital expenditure and space1:

1. 'Retail Selling Space' is defined as net space in store adjusted to exclude checkouts, space behind checkouts, customer service desks and customer toilets. Supplementary information starting on page 114 provides a full breakdown of space by segment.

Group capital expenditure shown in the table above reflects expenditure on ongoing business activities across the Group. Our capital expenditure for the year was £1.1bn, broadly level on the prior year, and was primarily focused on store maintenance and refits.

In the UK & ROI spend has related to the maintenance of our stores in addition to 18 new Express store openings and our temporary replacement store in Kennington. We also opened five Jack's stores in the UK, bringing the total to twelve.

In Central Europe, our programme to address unproductive selling space by either refitting, downsizing or repurposing stores is now largely complete. In Poland we moved to a two-format model, which involved closing or re-sizing all hypermarkets to our better performing compact hypermarket format. The total space reduction in Central Europe was c.3 million sq. ft. with c.2.1 million sq. ft. of this within Poland.

In Asia we opened two new stores in Malaysia, following favourable legislation changes and a further 54 new stores in Thailand, primarily in our Express format.

Following the proposed sale of our businesses in Thailand and Malaysia, in future years we expect our annual Group capital expenditure to be within a range of £0.9bn to £1.2bn.

Statutory capital expenditure of £2.1bn includes £914m relating to the acquisition of full control of the Tesco Atrato Limited partnership (comprising 15 stores and two distribution centres) and £136m relating to the buyback of a number of other leasehold properties in the year.

Further details of current and forecast space can be found in the supplementary information starting on page 114.

Property

1. Stores, malls, investment property, offices, distribution centres, fixtures and fittings and work-in-progress. Excludes joint ventures. Last year numbers restated for adoption of IFRS 16.

2. Property, plant and equipment excluding vehicles.

3. Excludes fixtures and fittings.

The estimated market value of our fully owned property as at the year end increased by £0.4bn to £21.7bn. The market value of £21.7bn represents a surplus of £2.8bn over the net book value (NBV).

Our Group freehold property ownership percentage, by value, has increased by 2% year-on-year. In September we completed the purchase of our partner's 50% stake in the Tesco Atrato Limited property joint venture, which includes 15 stores and two distribution centres. This acquisition increased our percentage of fully owned property in UK & ROI by c.2% and will lead to an annualised cash rental saving of £41m. The repurchasing of three large stores in the UK also supported an improvement in the percentage of fully owned property, in addition to an annualised cash rental saving of £8m.

In Central Europe, we released £167m of value through the disposal of 58 properties in the year as part of the significant transformation of the business that we are undertaking. This has resulted in a year-on-year decrease in the market value of our fully owned property in Central Europe, to £2.7bn.

Tesco Bank:

Tesco Bank focuses on providing simple banking and insurance products to a broad range of Tesco customers. Tesco Bank sales were impacted by our decision to exit the mortgage market in September, which also drove the decline in lending to customers. The insurance market remains highly competitive and we continue to focus our investment on retention of existing customers. This year we have also invested in the customer experience through a number of initiatives, including the launch of the Clubcard Plus Credit Card, and a new Student Shopper Card as part of our Gift Card range. In addition, we upgraded the Tesco Mobile app to allow customers to purchase foreign currency and we rolled out our click and collect service to more stores.

Operating profit before exceptional items decreased by (3.0)% year-on-year to £193m. Our insurance income decreased as we focused on competitive pricing, however we delivered increased income from our loans portfolio in line with increased lending to customers, and higher income from our Gift Cards and Travel Money. The significant cost savings made this year include lower fraud costs resulting from the Bank's continued focus on improved technology and safeguarding our customers, and lower ATM maintenance costs as a result of optimisation efficiencies. This has contributed to the cost:income ratio improving by 1.9% pts year-on-year.

In February we stopped accepting new applications for personal current accounts, as part of our repositioning of Tesco Bank to focus on the right products and services for Tesco customers. This resulted in an exceptional charge of £(56)m relating to accelerated depreciation of intangible and fixed assets. Total exceptional items within statutory operating profit relating to Tesco Bank were £(119)m and further detail can be found in Note 4 on page 48 of this statement.

An income statement for Tesco Bank can be found in the supplementary information on page 116 of this statement. Balance sheet and cash flow detail for Tesco Bank can be found within Note 2 starting on page 42 of this statement. Tesco Bank's full year results are also published today and are available at https://bank.tescoplc.com.

This document is available at www.tescoplc.com/prelims2020

A live webcast will be held today at 8.30am for investors and analysts and will be available on our website at www.tescoplc.com/prelims2020. This will include all Q&A and will also be available for playback after the event. All presentation materials, including a transcript, will be made available on our website.

We will report our 1Q Trading Statement on Friday 26 June 2020.

This document may contain forward-looking statements that may or may not prove accurate. For example, statements regarding expected revenue growth and operating margins, market trends and our product pipeline are forward-looking statements. Phrases such as "aim", "plan", "intend", "should", "anticipate", "well-placed", "believe", "estimate", "expect", "target", "consider" and similar expressions are generally intended to identify forward-looking statements. Forward-looking statements involve known and unknown risks, uncertainties and other important factors that could cause actual results to differ materially from what is expressed or implied by the statements. Any forward-looking statement is based on information available to Tesco as of the date of the statement. All written or oral forward-looking statements attributable to Tesco are qualified by this caution. Tesco does not undertake any obligation to update or revise any forward-looking statement to reflect any change in circumstance.

Independent auditor's report to the members of Tesco PLC

Report on the audit of the financial statements

In our opinion:

- the financial statements of Tesco PLC (the 'Parent Company') and its subsidiaries (the 'Group') give a true and fair view of the state of the Group's and of the Parent Company's affairs as at 29 February 2020 and of the Group's profit for the year then ended;

- the Group financial statements have been properly prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union;

- the Parent Company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted Accounting Practice, including Financial Reporting Standard 101 "Reduced Disclosure Framework"; and

- the financial statements have been prepared in accordance with the requirements of the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation.

We have audited the financial statements which comprise:

- the Group income statement;

- the Group statement of comprehensive income;

- the Group and Parent Company balance sheets;

- the Group and Parent Company statements of changes in equity;

- the Group cash flow statement; and

- the related Notes 1 to 37 of the Group financial statements and Notes 1 to 17 of the Parent Company financial statements.

The financial reporting framework that has been applied in the preparation of the Group financial statements is applicable law and IFRSs as adopted by the European Union. The financial reporting framework that has been applied in the preparation of the Parent Company financial statements is applicable law and United Kingdom Accounting Standards, including FRS 101 "Reduced Disclosure Framework" (United Kingdom Generally Accepted Accounting Practice).

We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities under those standards are further described in the auditor's responsibilities for the audit of the financial statements section of our report.

We are independent of the Group and the Parent Company in accordance with the ethical requirements that are relevant to our audit of the financial statements in the UK, including the Financial Reporting Council's (the 'FRC's') Ethical Standard as applied to listed public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We confirm that the non-audit services prohibited by the FRC's Ethical Standard were not provided to the Group or the Parent Company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Summary of our audit approach

The key audit matters that we identified in the current year were:

Newly identified:

- proposed disposal of the Asia business;

Similar level of risk:

- store impairment review;

- recognition of commercial income;

- pension obligation valuation;

- contingent liabilities;

- presentation of the Group's income statement;

- Tesco Bank loan impairment; and

- retail technology environment, including IT security.

We have considered a number of benchmarks and determined that it is appropriate to base materiality on profit before tax before exceptional items and amortisation of acquired intangibles. The materiality that we used for the Group financial statements was £85m (2018/19: £80m) which equates to 4.3% (2018/19: 5.1% restated) of profit before tax before exceptional items and amortisation of acquired intangibles. Refer to page 97 for further details of exceptional items and amortisation of acquired intangibles.

Our audit scoping provides full scope audit coverage of 96% (2018/19: 95%) of revenue and 92% (2018/19: 94% restated) of net assets.

Our 2019/20 report includes a new key audit matter relating to the proposed disposal of the Asia business.

We no longer report the following as key audit matters:

- Booker IFRS 3 acquisition accounting judgements and presentation of results - as the related judgements were concluded upon in 2018/19; and

- IFRS 16 presentation and disclosure key audit matter - as the key estimates and judgements underpinning management's IFRS 16 impact assessment and related transition disclosures were concluded upon in 2018/19.

There are no other significant changes in our approach except for changes in key audit matters as described above.

Conclusions relating to going concern, principal risks and viability statement

We have reviewed the directors' statement on page 68 to the financial statements about whether they considered it appropriate to adopt the going concern basis of accounting in preparing them and their identification of any material uncertainties to the Group's and company's ability to continue to do so over a period of at least twelve months from the date of approval of the financial statements.

We considered as part of our risk assessment the nature of the group, its business model and related risks including where relevant the impact of the Covid-19 pandemic and Brexit, the requirements of the applicable financial reporting framework and the system of internal control. We evaluated the directors' assessment of the Group's ability to continue as a going concern, including challenging the underlying data and key assumptions used to make the assessment, and evaluated the directors' plans for future actions in relation to their going concern assessment.

We are required to state whether we have anything material to add or draw attention to in relation to that statement required by Listing Rule 9.8.6R(3) and report if the statement is materially inconsistent with our knowledge obtained in the audit.

Going concern is the basis of preparation of the financial statements that assumes an entity will remain in operation for a period of at least 12 months from the date of approval of the financial statements.

We confirm that we have nothing material to report, add or draw attention to in respect of these matters.

Based solely on reading the directors' statements and considering whether they were consistent with the knowledge we obtained in the course of the audit, including the knowledge obtained in the evaluation of the directors' assessment of the Group's and the company's ability to continue as a going concern, we are required to state whether we have anything material to add or draw attention to in relation to:

- the disclosures on pages 13 to 18 that describe the principal risks, procedures to identify emerging risks, and an explanation of how these are being managed or mitigated;

- the directors' confirmation on page 13 that they have carried out a robust assessment of the principal and emerging risks facing the Group, including those that would threaten its business model, future performance, solvency or liquidity; or

- the directors' explanation on page 18 as to how they have assessed the prospects of the Group, over what period they have done so and why they consider that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.

We are also required to report whether the directors' statement relating to the prospects of the Group required by Listing Rule 9.8.6R(3) is materially inconsistent with our knowledge obtained in the audit.

Viability means the ability of the Group to continue over the time horizon considered appropriate by the directors.

We confirm that we have nothing material to report, add or draw attention to in respect of these matters.

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial statements of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the audit; and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.

Our application of materiality

Materiality

We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Performance materiality 

We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected misstatements exceed the materiality for the financial statements as a whole. Group performance materiality was set at 66% of Group materiality for the 2019/20 audit (2018/19: 70%). As we continue to be unable to rely on internal controls in the retail business we have used a lower percentage of materiality to determine our performance materiality for 2019/20. In determining performance materiality, we have also considered the uncorrected misstatements identified in the previous period.

Error reporting threshold

We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £4.25m (2018/19: £4m) for the Group and the Parent Company, as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

An overview of the scope of our audit

Identification and scoping of components

Our Group audit was scoped by obtaining an understanding of the Group and its environment, including Group-wide controls, and assessing the risks of material misstatement at the Group level. The Group has subsidiary grocery retail operations in eight countries, together with interests in a number of other businesses both in the UK and internationally.

The Group's accounting process is structured around local finance functions and is further supported by a shared service centre in Bengaluru, India which provides accounting and administrative support for the Group's core retail operations. Each local finance function reports into the central Group finance function based at the Group's head office. Based on our assessment of the Group, we focused our Group audit scope primarily on the audit work on eight significant retail locations (UK, Booker, Republic of Ireland, Czech Republic, Hungary, Poland, Slovakia and Thailand) and Tesco Bank. The operations in Czech Republic, Hungary, Poland and Slovakia are managed as one combined business. All of these were subject to a full audit and represent 96% (2018/19: 95%) of the Group's revenue, 92% (2018/19: 93%) restated of profit before tax and 92% (2018/19: 94% restated) of net assets.

In addition, three other businesses (Malaysia, dunnhumby and Tesco Mobile) were subject to specific audit procedures on material account balances, where the extent of our testing was based on our assessment of the risks of material misstatement and of the size of the Group's operations at those locations. The three businesses accounted for 2% (2018/19: 3%) of the Group's revenue, 8% (2018/19: 3% restated) of profit before tax and 6% (2018/19: 6% restated) of net assets.

At the Group level we also tested the consolidation process and carried out analytical procedures to confirm our conclusion that there were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to audit or audit of specified account balances.

The most significant component of the Group is its retail business in the UK. As such, there is extensive interaction between the Group and UK audit team to ensure an appropriate level of direction and supervision in this audit work. During the course of our audit, the UK audit team visited 52 (2018/19: 50) retail stores in the UK to attend either inventory counts or in order to complete store control visits, and 5 (2018/19: 4) distribution centre inventory counts.

The Group audit team visited 7 (2018/19: 7) of the 8 (2018/19: 8) significant locations set out above, in addition to Tesco Bank and the Group's shared service centre in Bengaluru, with the Group audit partner visiting 5 (2018/19: 3) of these locations. We also had a dedicated audit partner of the audit team focused on overseeing the role of the component audit teams located outside of the UK and the Republic of Ireland, ensuring that we applied a consistent audit approach to the operations in the Group's international business.

The audit visits by the Group audit team were timed to enable us to be involved during the planning and risk assessment process in addition to the execution of detailed audit procedures. During our visits, we attended key meetings with component management and auditors, and reviewed detailed component auditor work papers.

Subsequent to the travel restrictions being put in place as a result of the Covid-19 pandemic, we arranged for the component audit files to be reviewed remotely and held regular calls with the local teams to discuss the results and resolve any queries.

In addition, all key component audit teams were represented during a centralised two-day planning meeting led by the Group audit team and held in the UK prior to the commencement of our detailed audit work. The purpose of this planning meeting was to provide a good level of understanding of the Group's businesses, its core strategy and a discussion of the significant risks and workshops on our planned audit approach. Group management also attended part of the meeting to support these planning activities.

Other information

The directors are responsible for the other information. The other information comprises the information included in the annual report, other than the financial statements and our auditor's report thereon.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in our report, we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material misstatement in the financial statements or a material misstatement of the other information. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

In this context, matters that we are specifically required to report to you as uncorrected material misstatements of the other information include where we conclude that:

- Fair, balanced and understandable - the statement given by the directors that they consider the annual report and financial statements taken as a whole is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group's position and performance, business model and strategy, is materially inconsistent with our knowledge obtained in the audit; or

- Audit committee reporting - the section describing the work of the Audit Committee does not appropriately address matters communicated by us to the Audit Committee; or

- Directors' statement of compliance with the UK Corporate Governance Code - the parts of the directors' statement required under the Listing Rules relating to the company's compliance with the UK Corporate Governance Code containing provisions specified for review by the auditor in accordance with Listing Rule 9.8.10R(2) do not properly disclose a departure from a relevant provision of the UK Corporate Governance Code.

We have nothing to report in respect of these matters.

Responsibilities of directors

As explained more fully in the directors' responsibilities statement, the directors are responsible for the preparation of the financial statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the Group's and the Parent Company's ability to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of accounting unless the directors either intend to liquidate the Group or the Parent Company or to cease operations, or have no realistic alternative but to do so.

Auditor's responsibilities for the audit of the financial statements

Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor's report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements.

Details of the extent to which the audit was considered capable of detecting irregularities, including fraud and non-compliance with laws and regulations are set out below.

A further description of our responsibilities for the audit of the financial statements is located on the FRC's website at: www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor's report.

Extent to which the audit was considered capable of detecting irregularities, including fraud

We identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, and then design and perform audit procedures responsive to those risks, including obtaining audit evidence that is sufficient and appropriate to provide a basis for our opinion.

Identifying and assessing potential risks related to irregularities

In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non-compliance with laws and regulations, we have considered the following:

- the nature of the industry and sector, control environment and business performance including the design of the Group's remuneration policies, key drivers for directors' remuneration, bonus levels and performance targets;

- results of our enquiries of management, the Group's Internal Audit function, the Group's Security function, the Group's Compliance Officer, the Group's General Counsel and the Audit Committee, about their own identification and assessment of the risks of irregularities;

- any matters we identified having obtained and reviewed the Group's documentation of their policies and procedures relating to:

- identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non- compliance;

- detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;

- the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations including the Group's controls relating to Group's ongoing compliance with the Groceries Supplier Code of Practice (GSCOP) requirements;

- the matters discussed among the audit engagement team including significant component audit teams and involving relevant internal specialists, including IT, tax, valuations and pensions actuarial specialists regarding how and where fraud might occur in the financial statements and any potential indicators of fraud.

As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud and identified the greatest potential for fraud in the following areas: timing of recognition of commercial income, posting of unusual journals and complex transactions and manipulating the Group's alternative performance profit measures and other key performance indicators to meet remuneration targets and externally communicated targets. In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of management override.

We also obtained an understanding of the legal and regulatory frameworks that the Group operates in, focusing on provisions of those laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements. The key laws and regulations we considered in this context included Group's ongoing compliance with the GSCOP, UK Companies Act, Listing Rules, employment law, health and safety, pensions legislation and tax legislation.

In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements but compliance with which may be fundamental to the Group's ability to operate or to avoid a material penalty.

Audit response to risks identified

As a result of performing the above, we identified presentation of the Group's income statement, accounting for the UK customer loyalty scheme and recognition of commercial income as key audit matters related to the potential risk of fraud. The key audit matters section of our report explains the matters in more detail and also describes the specific procedures we performed in response to those key audit matters. In relation to accounting for the UK customer loyalty scheme, which is not a key audit matter, our procedures included:

- obtaining an understanding of relevant controls relating to the UK customer loyalty scheme;

- re-calculating the average fair value of unredeemed points and assessing the appropriateness of the methodology applied;

- agreeing the inputs to the UK loyalty scheme calculation, recalculating the year end accrual and assessing whether the redemption percentages used in the calculation were reasonable; and

- assessing that the accounting entries have been recorded in accordance with IFRS 15: Revenue.

In addition to the above, our procedures to respond to risks identified included the following:

- reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions of relevant laws and regulations described as having a direct effect on the financial statements;

- enquiring of management, the Audit Committee and in-house legal counsel concerning actual and potential litigation and claims;

- performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material misstatement due to fraud;

- reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence with HMRC; and

- in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including internal specialists and significant component audit teams, and remained alert to any indications of fraud or non-compliance with laws and regulations throughout the audit.

Report on other legal and regulatory requirements

Opinions on other matters prescribed by the Companies Act 2006

In our opinion the part of the directors' remuneration report to be audited has been properly prepared in accordance with the Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

- the information given in the strategic report and the directors' report for the financial year for which the financial statements are prepared is consistent with the financial statements; and

- the strategic report and the directors' report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the Group and the Parent Company and their environment obtained in the course of the audit, we have not identified any material misstatements in the strategic report or the directors' report.

Matters on which we are required to report by exception

Adequacy of explanations received and accounting records

Under the Companies Act 2006 we are required to report to you if, in our opinion:

- we have not received all the information and explanations we require for our audit; or

- adequate accounting records have not been kept by the Parent Company, or returns adequate for our audit have not been received from branches not visited by us; or

- the Parent Company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Directors' remuneration

Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors' remuneration have not been made or the part of the directors' remuneration report to be audited is not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

Other matters

Auditor tenure

Following the recommendation of the Audit Committee, we were appointed by the Group's shareholders on 26 June 2015 to audit the financial statements for the year ended 27 February 2016 and subsequent financial periods. The period of total uninterrupted engagement including previous renewals and reappointments of the firm is five years, covering the years ending 27 February 2016 to 29 February 2020.

Consistency of the audit report with the additional report to the Audit Committee

Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).

Use of our report

This report is made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for this report, or for the opinions we have formed.

Simon Letts (Senior statutory auditor)

For and on behalf of Deloitte LLP Statutory Auditor

London, United Kingdom

7 April 2020

The notes on pages 34 to 99 form part of these financial statements.

* Restated for the adoption of IFRS 16 and reclassification of profits/(losses) arising on property-related items as explained in Note 1 and Note 37.

The notes on pages 34 to 99 form part of these financial statements.

* Restated for the adoption of IFRS 16 and reclassification of profits/(losses) arising on property-related items as explained in Note 1 and Note 37.

The notes on pages 34 to 99 form part of these financial statements.

* Restated for the adoption of IFRS 16 as explained in Note 1 and Note 37.

Dave Lewis

Alan Stewart

Directors

The financial statements on pages 28 to 99 were approved and authorised for issue by the Directors on 7 April 2020.

Group statement of changes in equity