Tesco Regulatory News (TSCO)

STRONG H1 OUTPERFORMANCE LEADING TO INCREASED FY PROFIT OUTLOOK.

STRATEGIC PRIORITIES SET OUT; SHARE BUYBACK PROGRAMME ANNOUNCED.

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

· Elevated sales continued into first half; Group Retail 1-yr LFL7 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 profit4 £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 flow5 £1,543m, +93.6% inc. higher profit, lower pension contribution & c.£400m working capital phasing

· Net debt2,5 reduced by +£1.7bn since February reflecting strong cash flow

· Adjusted diluted EPS6 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:

1. Reinvest in business and customer offer

2. Maintain a solid investment grade balance sheet

3. Pay a progressive dividend

4. Consider inorganic growth opportunities that may arise

5. Return surplus cash to shareholders

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. 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.

Group review of performance.

We have made two changes to the Alternative Performance Measures (APMs) above:

· We have renamed our operating profit and EPS APMs. Profit has changed from 'Group operating profit before exceptional items and amortisation of acquired intangibles' to 'Adjusted operating profit'. EPS has changed from 'Diluted EPS before exceptional and other items' to 'Adjusted diluted EPS'. The definitions are unchanged and this has no impact on the current or previously reported figures.

· We have amended the definition of our Retail free cash flow APM in order to provide a more consistent and predictable view of free cash flow generated by the core retail operation. It now excludes cash flows from business acquisitions and disposals, investments in joint ventures and associates, cash flows from the sale or buyback of property, and other exceptional cash flows.

More detail on these changes can be found in the Glossary on page 62.

Group sales3 increased by +3.0% at constant rates with a strong performance across all regions as we continued to benefit from elevated sales as a result of the COVID-19 pandemic. Revenue increased by +6.3% at constant rates including growth of +49.3% in fuel sales reflecting a significant recovery in travel driven by the easing of Government restrictions early in the half. Fuel sales remained below pre-pandemic levels with two-year like-for-like sales down by (11.3)%.

Group adjusted operating profit4 grew by +41.0% at constant rates, reflecting sustained strong UK sales, a reduction in COVID-19 related costs in our retail businesses and a return to profitability in Tesco Bank. These benefits were partially offset by the year-on-year effect of £(249)m UK Government business rates relief included in the prior year. Statutory operating profit grew by +29.5%, impacted by the settlement of historic shareholder litigation claims, reported within exceptional items.

Finance income and finance costs reduced year-on-year due to fair value remeasurements related to the mark-to-market movement on inflation-linked swaps, which were a £180m credit this year compared to a £(108)m debit last year. The change in our share of joint ventures and associates was principally due to profit from Tesco Underwriting being recognised within Tesco Bank operating profit following its full acquisition in May. The first half tax rate was broadly stable year-on-year with the increase in tax charge primarily reflecting higher levels of operating profit.

Our adjusted diluted EPS6 rose by +54.0% reflecting the increase in profitability. We have announced an interim dividend in line with last year and aligned to our policy of setting the interim dividend at 35% of the prior year full-year dividend.

Net debt2,5 reduced since the beginning of the financial year primarily driven by strong free cash flow generation. Retail free cash flow5 increased by £0.7bn year-on-year due to higher retail operating profits, the elimination of UK pension contributions (following the £2.5bn one-off contribution last year from the Asia disposal proceeds) and a c.£400m working capital phasing benefit. These benefits were partly offset by a small increase in capital expenditure.

Further commentary on all of these metrics can be found below and a full income statement can be found on page 17.

Notes:

1. The Group has defined and outlined the purpose of its alternative performance measures, including its headline measures, in the Glossary starting on page 62.

2. All measures apart from net debt are shown on a continuing operations basis unless otherwise stated. Further details on discontinued operations can be found in Note 6, starting on page 40.

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

4. 'Adjusted' operating profit excludes exceptional items and amortisation of acquired intangibles. 'Adjusted' EPS excludes exceptional items, amortisation of acquired intangibles, net pension finance costs and fair value remeasurements of financial instruments.

5. Net debt and retail free cash flow exclude Tesco Bank. In addition, we have amended the definition of our Retail free cash flow APM in order to provide a more consistent and predictable view of free cash flow generated by the core retail operation. For more detail, see page 64 in the Glossary.

6. The share base used in adjusted diluted EPS in the prior year is restated to capture the full impact of the share consolidation which followed the sale of our businesses in Thailand and Malaysia, as if it took place at the start of the 2020/21 financial year. As such, this metric is presented on a basis other than in accordance with IAS33. Please see page 65 for a reconciliation to diluted adjusted EPS.

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

8. Capex is shown excluding property buybacks. Statutory capital expenditure (including property buybacks) for the 26 weeks ended 28 August 2021 was £0.5bn (LY £0.5bn).

Segmental review of performance:

Sales performance: 

(exc. VAT, exc. fuel)2

Further information on sales performance is included in Appendices 1 to 3 (starting on page 70).

Adjusted operating profit4 performance:

Further information on operating profit performance is included in Note 2 (starting on page 25).

UK & ROI overview:

In the UK & Republic of Ireland (ROI), two-year like-for-like sales increased by 9.1% with all areas - UK, ROI and Booker - making a strong contribution. One-year like-for-like sales grew by +2.4% driven by a sharp recovery in our Booker catering business and growth in the UK business as we outperformed the rest of the market.

UK & ROI adjusted operating profit was £1,318m, up +16.5% at constant rates due to higher sales and lower COVID-19 costs offset by the year-on-year effect of £(249)m UK Government business rates relief included in the prior year. In December 2020 we made the decision to forgo this relief, which was repaid in the second half of the prior year.

In the UK, we continue to incur COVID-19 related costs, which totalled £(122)m in the first half - significantly less than the £(533)m costs incurred in the first half of last year. This year's costs primarily related to colleague absence, maintaining a safe environment in stores for colleagues and customers and additional costs in relation to elevated online sales. Our best estimate remains for around £(220)m COVID-19 related costs to be incurred this year.

Operating margin was up 40 basis points versus last year at constant rates as the benefit from lower COVID-19 related costs, a recovery in Booker catering and a greater participation in higher-margin non-food sales was partially offset by an increase in margin-dilutive fuel sales and the impact of UK Government business rates relief in the prior year.

UK - continued strong performance with growth on top of exceptional sales last year:

In the UK, sales grew ahead of expectations and we outperformed the market as customer satisfaction improved across all key areas. Two-year like-for-like sales grew by +8.9% driven by a strong customer proposition on top of the benefit of customers continuing to eat more meals at home than prior to the pandemic.

One-year like-for-like sales were up +0.5% in the first quarter with a strong contribution from general merchandise and clothing. Like-for-like sales accelerated in the second quarter to +2.0% as comparatives softened due to the easing of COVID-19 restrictions in the summer of 2020. As industry supply chains came under increasing pressure, we were able to leverage our strong supplier relationships and distribution capability to maintain good levels of availability for customers, contributing to our market outperformance. Events such as the delayed Euro 2020 Football Championship and 'stay-cations' also contributed to our growth in the current year.

We continued to expand our value proposition and customers responded well, with our value perception improving by 170 basis points year-on-year. In April, we re-launched 'Low Everyday Prices,' offering unbeatable value on c.1,600 products and giving customers the confidence that the core lines they buy will always be competitively priced. We rolled out Clubcard Prices to Express stores in May and extended the range of promotions covered by the scheme to include meal deals and other multi-product promotions. As a result, across all stores, Clubcard sales penetration increased by 14 percentage points year-on-year to 70%. In September, we added c.100 own-label products to Aldi Price Match, taking the total to c.650. Overall, promotional participation was held at c.23% across the half as we prioritised those offers which are most meaningful to customers.

Customers continued to shop less frequently and with considerably larger baskets than before the pandemic. As we continued to prioritise the safety of our customers, large stores performed well with two-year like-for-like sales up 4.3%.

In our online business, two-year like-for-like sales were up +74.1% with over 700,000 more customers now shopping with us compared to pre-pandemic levels. Online one-year like-for-like sales grew by 2.3% as we traded over the significant ramp up in capacity last year and as customers gained confidence in returning to physical stores. Sales were supported by the opening of 75 more Click & Collect locations and the re-opening of our Delivery Saver offering from April. We have included the table below to aid understanding of our online performance:

We opened our second Urban Fulfilment Centre (UFC) in Lakeside in May, which will have capacity at maturity to process 1,000 orders per day. We are encouraged by the performance of our first two UFCs, where pick rates are up to four times higher than store-based picking. We expect to have five UFC's operational by April next year with our third UFC in Bradford due to open in January.

We are testing and learning from on-demand trials within our UK business including 'Tesco Whoosh' - our 60 minute delivery service, which is already in over 50 Express stores, with more being added every week. This service offers 1,700 of our most popular products, including fresh food, everyday essentials and household products and is available 7am-10pm, every day.

Convenience store two-year like-for-like sales were down (2.0)%, with a stronger performance at the end of the half as footfall in our city centre Express stores continued to recover. One-year like-for-like convenience store sales were down (5.0)%, as we traded over a particularly strong performance in neighbourhood locations last year. In May, we re-branded the majority of our Metro stores as Express stores, reflecting that customers were principally using them to buy food for that day.

Two-year like-for-like food sales increased by +8.7% including a benefit from customers eating more meals at home. On a one-year basis, the effects of customer stockpiling last year resulted in a decline in food sales of (2.1)% in the first quarter although this recovered to growth of +0.7% in the second quarter. Plant-based foods continue to grow strongly including our Plant Chef products which grew by 52% as we made targeted price investments and further expanded our range. We continue to innovate with exciting new products to inspire customers such as our Finest* meal kits - re-creating the restaurant experience at home - and new ranges such as Beautifully Balanced - helping customers eat more of their '5-a-day' fruit and vegetable portions. General merchandise and clothing sales grew sharply due to increased demand versus the prior year when customers were prioritising spend in essential categories. Having reappraised our non-food offer through the pandemic, customers are now shopping it more frequently.

We rolled out soft plastic recycling facilities across all of our large UK stores and launched an innovative Reuse proposition in ten stores as we continue to tackle plastic pollution. Over the Summer, our 'Buy One to Help a Child' campaign - duringwhich we gave a donation for every piece of fruit and vegetables purchased across our stores and online - enabling FareShare to provide 3m meals-worth of food to help charities and community groups.

We are continuing to drive action on climate change in support of our net zero ambition, including new renewable electricity generation projects, the continued roll out of EV charge points and sustainability-linked supply chain financing. We have further strengthened our climate ambitions, accelerating our Group own operations net zero target to 2035 to be in line with the UK and launching a new goal to be net zero across our entire value chain (i.e. including scope 3 emissions) by 2050, aligned to a 1.5-degree pathway. We were delighted to be awarded the Prince of Wales's Terra Carta Seal in recognition of our commitment to and momentum towards a climate and Nature-positive future.

ROI - sales decline reflects exceptionally strong performance LY; two-year LFL sales +12.2%: 

Two-year like-for-like sales in ROI grew by +12.2% with a strong performance across all categories and channels. One-year like-for-like sales declined by (6.1)% in the first quarter reflecting the impact of stockpiling in the prior year which was particularly marked due to earlier and stricter lockdown restrictions than in the UK. In the second quarter, one-year like-for-like sales grew by +1.2% including the benefit of a strong clothing performance and seasonal events such as Back to School, gardening and Father's Day.

Our market-leading online business continued to perform exceptionally well with like-for-like sales growth of 74.8% on a two-year basis and +10.8% on a one-year basis. Online sales now represent c.8% of total ROI sales.

We launched Clubcard Prices Events in April, giving our Clubcard customers access to exclusive deals. We also focused on making shopping easier for customers, including rolling out 'Scan As You Shop' to all large stores.

In July, our shortened payment terms for over 200 of our small Irish food and drink suppliers were further extended until February 2022.

Booker - sharp recovery in catering sales in the half:

* Total Booker also include small business sales of £121m

Overall, two-year like-for-like sales growth in Booker was +9.1% driven by the expansion of our retail business. One-year like-for-like growth of +11.0% was driven by a sharp recovery in demand from catering customers.

Two-year retail like-for-like sales were up +19.4% as we expanded our ranges and invested in price on key product lines. One-year retail like-for-like sales were down (2.8)% reflecting an increase in the number of customers shopping closer to home last year through the initial stages of the COVID-19 pandemic. The increase in tobacco sales reflects increased domestic purchases due to the impact of travel restrictions on duty-free sales.

Two-year catering like-for-like sales fell by (11.6)% due to government restrictions in place at the beginning of the half. By the end of the half, catering sales were ahead of pre-pandemic levels. One-year catering like-for-like sales increased by +54.4% as we adapted our offer to support our hospitality customers as the sector re-opened for outdoor dining from mid-April and for indoor dining from mid-May. The recovery in our catering sales was supported by great prices on key volume lines and market-leading availability as we worked hard to minimise the impact of supply chain challenges due to the shortage of HGV drivers and high numbers of colleagues required to isolate due to COVID-19 notifications. Excluding Best Food Logistics, whose customers were mostly closed for part of last year, catering like-for-like sales grew by +37.5%.

Central Europe - growth across all markets in Q2 following easing of government restrictions:

Like-for-like sales increased by +0.3% on a two-year basis and by +1.4% on a one-year basis, driven by a strong performance in Slovakia and Hungary. Trading conditions were more challenging in the Czech Republic, due to non-food sales restrictions in the first quarter.

All three markets delivered sales growth in the second quarter as customers returned to our large stores following the lifting of COVID-19 restrictions which had encouraged shopping locally. We have market-leading online positions in Slovakia and Hungary and have doubled the size of our total online business over two years.

Central Europe operating profit was £68m, up +18.6% at constant rates reflecting a strong sales performance, a reduction in COVID-19 related costs and a prior year reduction in income caused by temporary mall closures. We incurred a charge of £(16)m in relation to the retail sales tax in Hungary which was introduced in May 2020 - a year-on-year impact of £(6)m.

Tesco Bank - year-on-year profit increase reflecting prior year COVID-19 impact on potential bad debts:

\* The prior period net interest margin has been restated from 5.0% to 4.6%.

Revenue grew by +12.2% reflecting the benefit of the full acquisition of Tesco Underwriting which completed in May. Excluding Tesco Underwriting, revenue declined by (12.2)% principally due to a fall in income from unsecured lending. This was driven by lower credit balances, largely due to lower levels of customer spending, particularly in the second half of last year. We started to see a recovery in credit card spending through the period.

The gradual easing of lockdown measures in the first half drove an increase in ATM income, however the ongoing uncertainty and restrictions on foreign travel continue to significantly impact travel money.

Tesco Bank adjusted operating profit was £72m, including a £12m contribution from Tesco Underwriting, which is fully consolidated following its acquisition in May. The significant year-on-year change was due to last year's increase in the provision for potential bad debts driven by the expected macro-economic impact of COVID-19.

The Bank's balance sheet remains strong and we continue to have sufficient capital and liquidity to absorb changes in both regulatory and funding requirements.

We introduced a number of new products and services for customers in the first half. In March, we launched a trial of Clubcard Pay+ which is an account that comes with a debit card, and is designed to help shoppers pay, save and collect Tesco Clubcard points. In March, we also expanded our offer with the re-launch of travel insurance. Since August, all new and renewing Tesco Bank car and home insurance policies are now being underwritten by Tesco Underwriting following the completion of its acquisition in May.

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

Exceptional items are excluded from our adjusted operating profit performance by virtue of their size and nature to best reflect the underlying performance of the business. Total exceptional items in the half resulted in a charge of £(116)m, compared to a credit of £8m in the prior year.

In September 2020, two claimant law firms issued proceedings against us in relation to the overstatement of expected profit announced in 2014. These claims have now been settled and we have recognised an exceptional charge of £(193)m, with £(105)m paid in July and therefore included in the first half cash flow statement. The remaining amount of £(88)m has been paid in the second half. Given that the legal timeframe for bringing a claim has now elapsed, no further related claims can be brought by shareholders.

Following the sale of Homeplus for £4.2bn in 2015, we received legal claims from the purchasers. Although the majority of the claims were dismissed, some findings of liability were made. On 17 September 2021, a Final Award to the purchasers of £119m in damages, interest and costs was granted. Although not included in the table above as it relates to discontinued operations, this has been recognised as an adjusting post balance sheet event, with an exceptional charge increasing the provision held by £33m. The total cash payment of £119m will be made in the second half.

We received software licence fee income of £19m from services provided to CP Group following the sale of our businesses in Asia.

During the period, the Group recognised a net impairment reversal of £37m. £24m of this related to the anticipated sale of mall sites in Central Europe, recognised immediately prior to their reclassification as held for sale. The remaining net reversal of £13m largely reflects normal fluctuations in store level performance, property fair values and changes in discount rates, as well as any specific store closures.

Further detail on exceptional items can be found in Note 3, starting on page 37 of this statement.

Amortisation of acquired intangible assets is excluded from our headline performance measures. We incurred a charge of £(38)m in the period, which primarily relates to our merger with Booker in March 2018, which resulted in the recognition of goodwill of £3,093m and £755m of intangible assets.

Joint ventures and associates:

Our share of post-tax losses from joint ventures and associates was £(3)m, which includes losses related to our joint venture in India partly offset by the profit generated from UK property joint ventures.

In the prior year, we recognised £13m of post-tax profit from joint ventures and associates, including a £10m contribution from our Tesco Underwriting Ltd joint venture. The year-on-year change was principally due to profit from Tesco Underwriting being recognised within Tesco Bank operating profit following its full acquisition in May.

Net finance costs:

Net interest on medium-term notes and bonds was £(104)m, up £(2)m year-on-year. A reduction in finance costs from bond maturities, tenders and new debt issuances at lower rates of interest was more than offset in the first half by interest payable on the £(453)m debt we acquired with the Tesco Property (No. 2) Partnership in September 2020. This transaction brought twelve stores and two distribution centres back into full ownership, resulting in a £254m reduction in lease liabilities. This contributed just under half of the £22m year-on-year reduction in finance charges payable on lease liabilities shown above.

Net finance costs before net pension finance costs and fair value remeasurements of financial instruments were £(327)m, broadly in line with last year.

A fair value remeasurement credit of £180m primarily related to the mark-to-market movement on inflation linked swaps, driven by the impact of increased expected future inflation rates. These swaps eliminate the impact of future inflation on the Group's cash flow in relation to historical sale and leaseback property transactions.

Net pension finance costs of £(11)m decreased by £17m, primarily driven by a reduction in the pension deficit following the £2.5bn one-off contribution made in the prior year from the proceeds from the sale of our businesses in Thailand and Malaysia. We continue to expect net pension finance costs of £(23)m for the full-year.

In the second half, we will buy back our partner's equity in the Tesco Sarum Limited Partnership property joint venture, which will result in us bringing eleven stores back into full ownership. This will result in annual cash rental savings of c.£30m and a c.£(0.3)bn increase in net debt, due to a c.£(0.7)bn impact on underlying net debt and a c.£0.4bn reduction in lease liabilities. Following this transaction, we will have six UK property JV structures still in place, from a peak of 13 structures in 2015. These six remaining structures contain property worth £3.5bn and debt of £2.6bn, with £2.3bn of associated lease liabilities on our balance sheet. The three largest of our remaining property JVs are with the Tesco Pension fund. We continue to evaluate store buyback opportunities and use capital for this purpose where it is economically attractive.

Further detail on finance income and costs can be found in Note 4 on page 39, as well as further detail on the exceptional items in Note 3 on page 37.

Group tax:

Tax on adjusted Group profit was £(294)m, £(165)m higher than last year, primarily reflecting higher levels of retail operating profit. Following the decision to increase headline corporation tax rates in the UK from April 2023 from 19% to 25%, we also recognised a one-off charge in the first half related to the revaluation of our deferred tax.

The effective tax rate on adjusted Group profit was 22.7%, higher than the current UK statutory rate of 19%, primarily due to depreciation of assets which do not qualify for tax relief. We continue to expect an effective tax rate of c.23% for the current financial year. Following the increase in the UK corporation tax rate expected in 2023, we forecast our effective tax rate to increase to between 26% - 27% over the medium-term.

Earnings per share:

The share base used in adjusted diluted EPS in the prior year is restated to capture the full impact of the share consolidation which followed the sale of our businesses in Thailand and Malaysia, as if it took place at the start of the 2020/21 financial year. As such, this metric is presented on a basis other than in accordance with IAS33. Please see page 65 for a reconciliation to diluted adjusted EPS.

Adjusted diluted EPS was 11.22p (LY: 7.29p), 54.0% higher year-on-year driven by higher profits, as discussed above.

Statutory diluted earnings per share was 10.70p (LY: 4.06p) +163.5% higher year-on-year as the recovery in operating profit more than offset the associated higher tax charge and higher exceptional items and reflecting the share consolidation which took place in February, following the sale of our businesses in Thailand and Malaysia and associated payment of a £5bn special dividend.

Dividend:

The interim dividend has been set at 3.20 pence per ordinary share, in line with the prior year and aligned to our policy of setting the interim dividend at 35% of the prior year full-year dividend. The interim dividend was approved by the Board of Directors on 5 October 2021. It is our intention to pay a progressive dividend going forward - i.e. we will aim to grow the dividend per share each year, broadly targeting a pay-out of around 50% of earnings.

The interim dividend will be paid on 26 November 2021 to shareholders who are on the register of members at close of business on 15 October 2021 (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 5 November 2021.

Summary of total indebtedness:

Total indebtedness at the end of the first half was £(10,677)m, down £2.3bn since the year-end primarily driven by a reduction in underlying net debt from strong free cash flow generation, net of dividends paid as well as a reduction in the IAS 19 pension deficit.

Lease liabilities were £(8,217)m, down by £289m since the year-end, reflecting the de-recognition of leased assets in our Polish business which we disposed of in March. On a continuing operations basis, lease liabilities were broadly in nline with the year-end as rental payments were offset by additions and lease renewals and extensions.

The IAS 19 pension deficit (post-tax) was £(455)m at the end of the first half, reducing from £(1,004)m in February due to a significant increase in pension assets due to a fall in index linked gilt yields and strong equity markets. This increase in assets was only partially offset by an increase in liabilities driven by a fall in corporate bond discount rates as well as a rise in long-term inflation rates. The accounting deficit does not drive contributions to the schemes. The next triennial valuation is on 31 March 2022.

We had a total of £3.3bn of cash liquidity available at the end of the first half. We recently extended our £2.5bn revolving credit facility by one-year, which we put in place in September last year for a three-year period and we have the option to extend this for a further year. The rate of interest payable on this facility is linked to three of our ESG commitments. As we delivered these ESG targets last year, we secured the corresponding margin reduction in the half. We continue to optimise our debt portfolio and earlier this week, we pre-paid £375m of debt which carried a high rate of interest generating an initial annual saving of £19m.

Our net debt to EBITDA ratio was 2.7 times, compared to 3.3 times at the prior year-end, reflecting a reduction in underlying net debt as a result of continued strong free cash flow generation and an increase in retail EBITDA as operating profits recover following the adverse impact from COVID-19 in the prior year. The total indebtedness ratio was 2.8 times, compared to 3.6 times at the prior year end.

Fixed charge cover was 3.1 times at the end of the first half, up from 2.9 times at the prior year-end, driven by a reduction in net finance costs, lease interest payments, principal lease payments and by a recovery in retail EBITDA.

Summary retail cash flow:

To provide a better view of operational cash performance, we have updated our definition of our retail free cash flow APM to exclude cashflows related to acquisitions & disposals, property transactions and exceptional cash items. We will continue to fully disclose these lines but they will not form part of the retail free cash flow headline APM going forward.

The following table reconciles Group adjusted operating profit to retail free cash flow. Further details are included in Note 2, starting on page 25.

Retail free cash flow increased by £746m year-on-year to £1,543m, driven by higher retail operating profits, a reduction in the pension contribution and a working capital phasing benefit partially offset by higher capex spend.

Following a £2.5bn one-off contribution towards the pension deficit in the prior year using the proceeds from the sale of our businesses in Thailand and Malaysia, UK pension contributions were eliminated. The pension outflow of £(11)m in the first half mainly relates to our scheme in Booker. We expect an annual benefit of c.£260m in retail free cash flow as a result of lower pension deficit contributions.

Our total working capital inflow was £556m, driven mainly by a significant recovery in fuel sales and the recovery of Booker's catering business on top of the usual Booker seasonal sales peak. We expect a total working capital unwind of around £400m in the second half, as this seasonal benefit reverses and based on our expectation that some of the elevated sales we have seen in the first half in the UK fall away.

Cash capex increased by £(126)m year-on-year including an impact from delayed store development in the prior year as a result of COVID-19.

Interest paid related to net debt (exc. lease liabilities) of £(107)m was £(16)m higher year-on-year as the benefit of bond buybacks and refinancing at lower rates of interest was more than offset by the impact of borrowings acquired as part of The Tesco Property (No. 2) Limited Partnership from September 2020. Interest paid related to lease liabilities decreased by £21m year-on-year primarily due to a corresponding reduction in the total lease liability.

Cash tax paid in the half was £(49)m, compared to £(125)m last year. The reduction in cash tax paid reflects the utilisation of prior-year tax losses and a benefit from the super-deduction allowance on certain capital investments, which was introduced in the Chancellor's budget in March 2021. We continue to receive tax relief in relation to the £2.5bn one-off pension contribution made in the prior year. This amounted to £60m in the half, in line with last year, and is expected to total £120m for the full-year.

We purchased £(55)m of shares in the market to offset the dilution from the issuance of new shares to satisfy the requirements of share schemes. This was £24m lower than the prior year due to a reduced volume of share scheme maturities this year.

As described above, cashflows related to acquisitions & disposals, property transactions and exceptional cash items are now excluded from our simplified definition of free cash flow.

The inflow from acquisitions in the half totalled £117m as we recognised proceeds from the sale of our business in Poland to Salling Group A/S, which completed in March.

We generated a net £72m from property transactions in the half. This included property proceeds of £109m, up £77m year-on-year, primarily from the sale of properties in Poland which were not sold as part of the corporate transaction. We also bought back one Extra store in Bury for £(37)m.

The outflow from exceptional cash items was £(107)m, of which £(105)m related to the settlement of shareholder litigation claims during the period, as mentioned above.

Capital expenditure and space:

'Retail Selling Space' is defined as net space in store adjusted to exclude checkouts, space behind checkouts, customer service desks and customer toilets. Appendix 5 (p.73) provides a full breakdown of space by segment.

Capital expenditure shown in the table above reflects expenditure on ongoing business activities across the Group.

Our capital expenditure for the half was £448m, £74m higher year-on-year, primarily due to higher spend on in-store maintenance and the opening of new stores. We expect full year capital expenditure to be in line with our £0.9bn to £1.2bn guidance range.

Statutory capital expenditure of £485m includes £37m relating to the buyback of one UK Extra store in Bury.

Further details of current and forecast space can be found in Appendix 5 starting on page 72.

Contacts:

Investor Relations: Chris Griffith 01707 940 900

Sarah Titterington 01707 940 693

Media: Christine Heffernan 0330 678 0639

Nick Claydon, Teneo 07974 982 547

This document is available at www.tescoplc.com/interims2021 

A webcast including a live Q&A will be held today at 9.00am for investors and analysts and will be available on our website at www.tescoplc.com/interims2021. This will be available for playback after the event. All presentation materials, including a transcript, will be made available on our website.

We will report our Q3 and Christmas Trading statement on Thursday 13 January 2022.

Additional Disclosures.

Principal Risks and Uncertainties.

As with any business, effective risk management and controls are critical to successfully achieving the Group's strategy. Tesco has an established risk management process to identify, assess and monitor the principal risks faced by the business. A robust review of those risks that the Group believe could seriously affect its performance, future prospects, reputation or its ability to deliver against its priorities, is performed on a regular basis. This review includes an assessment of emerging and principal risks we believe would threaten the Group's business model, future performance, solvency or liquidity. The Tesco Board has overall responsibility for risk management and internal controls within the context of achieving the Group's objectives. At the Group level each principal risk has an Executive Owner. The Group Chief Executive has overall accountability for the control and management of risk.

The principal risks and uncertainties faced by the Group remain those as set out on pages 31 to 37 of our Annual Report and Financial Statements 2021: Brexit; COVID-19; data security and data privacy; health and safety; climate change; responsible sourcing and supply chain; competition and markets; transformation; political, regulatory and compliance; technology; people; customer; brand, reputation and trust; Tesco Bank; and liquidity. There have been no significant changes to the description of the principal risks, key controls and mitigating factors currently expected for the remaining six months of the year.

Statement of Directors' Responsibilities.

The Directors are responsible for preparing the Interim Results for the 26 week period ended 28 August 2021 in accordance with applicable law, regulations and accounting standards. Each of the Directors confirm that to the best of their knowledge the condensed consolidated interim financial statements have been prepared in accordance with IAS 34: 'Interim Financial Reporting', as adopted by the European Union and that the interim management report includes a true and fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

· an indication of the important events that have occurred during the first 26 weeks of the financial year and their impact on the condensed consolidated interim financial statements, and a description of the principal risks and uncertainties for the remainder of the financial year; and

· material related party transactions in the first 26 weeks of the year and any material changes in the related party transactions described in the last annual report.

The Directors of Tesco PLC are listed on pages 42 to 46 of the Tesco PLC Annual Report and Financial Statements 2021. As previously announced, Alan Stewart retired as Chief Financial Officer on 30 April 2021 and was succeeded by Imran Nawaz.

A list of current directors is maintained on the Tesco PLC website at: www.tescoplc.com.

By order of the Board

Directors

John Allan - Non-executive Chairman

Ken Murphy - Group Chief Executive Officer

Imran Nawaz - Chief Financial Officer

Melissa Bethell*

Bertrand Bodson*

Thierry Garnier*

Stewart Gilliland*

Steve Golsby*

Byron Grote*

Simon Patterson*

Alison Platt*

Lindsey Pownall*

Karen Whitworth*

*Non-executive Directors

Robert Welch, Company Secretary

5 October 2021

This announcement contains inside information which is disclosed in accordance with the Market Abuse Regulations.

Disclaimer.

Certain statements made in this document are forward-looking statements. 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 are based on current expectations and assumptions and are subject to a number of known and unknown risks, uncertainties and other important factors that could cause actual results or events to differ materially from what is expressed or implied by those statements. Many factors may cause actual results, performance or achievements of Tesco to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Important factors that could cause actual results, performance or achievements of Tesco to differ materially from the expectations of Tesco include, among other things, general business and economic conditions globally, industry trends, competition, changes in government and other regulation and policy, including in relation to the environment, health and safety and taxation, labour relations and work stoppages, interest rates and currency fluctuations, changes in its business strategy, political and economic uncertainty, including as a result of global pandemics. As such, undue reliance should not be placed on forward-looking 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. Other than in accordance with legal and regulatory obligations, Tesco undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

The notes on pages 24 to 61 form part of this condensed consolidated financial information. 

The notes on pages 24 to 61 form part of this condensed consolidated financial information.

* Refer to Note 1 for further details regarding the prior year restatement and changes in presentation of the balance sheet.

The notes on pages 24 to 61 form part of this condensed consolidated financial information.

These unaudited condensed consolidated interim financial statements for the 26 weeks ended 28 August 2021 were approved by the Board on 5 October 2021.

The notes on pages 24 to 61 form part of this condensed consolidated financial information.

The notes on pages 24 to 61 form part of this condensed consolidated financial information.

(a)  Refer to footnotes on the next page.

The notes on pages 24 to 61 form part of this condensed consolidated financial information.

(a) Refer to Note 1 for further details regarding the prior period restatement.

(b) Refer to Note 1 for further details regarding the primary financial statements presentation.

The notes on pages 24 to 61 form part of this condensed consolidated financial information.

These unaudited condensed consolidated interim financial statements have been prepared in accordance with the Disclosure Guidance and Transparency Rules of the UK Financial Conduct Authority, and with IAS 34 'Interim Financial Reporting' under UK-adopted international accounting standards. Unless otherwise stated, the accounting policies applied, and the judgements, estimates and assumptions made in applying these policies, are consistent with those used in preparing the Annual Report and Financial Statements 2021. The financial period represents the 26 weeks ended 28 August 2021 (prior financial period 26 weeks ended 29 August 2020, prior financial year 52 weeks ended 27 February 2021).

These condensed consolidated interim financial statements for the current period and prior financial periods do not constitute statutory accounts as defined in section 434 of the Companies Act 2006. A copy of the statutory accounts for the prior financial year has been filed with the Registrar of Companies. The auditor's report on those accounts was not qualified, did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying the report and did not contain statements under section 498(2) or (3) of the Companies Act 2006.

The Directors consider that the Group has adequate resources to continue in operational existence for the foreseeable future and have concluded that there are no material uncertainties relating to going concern. The Directors have therefore continued to adopt the going concern basis in preparing the condensed consolidated interim financial statements. Further information on the Group's strong liquidity position is given in the Group review of performance, Summary of total indebtedness section.

Prior period restatement

Consistent with the Annual Report and Financial Statements 2021, the condensed consolidated interim financial statements include a prior period restatement for the 26 weeks ended 29 August 2020 in relation to notional cash pooling arrangements where the intention to net settle cannot be clearly demonstrated.

The Group has corrected prior period comparatives by grossing up cash and overdraft balances that had previously been offset on the balance sheet. The impact on the 29 August 2020 balance sheet is an increase in both cash and overdraft balances of £918m. All overdrafts including those subject to cash pooling arrangements are considered an integral part of the Group's cash management and so the cash flow statement has been restated to include all overdrafts in cash and cash equivalents on the cash flow statement. Previously, only overdrafts that were offset on the balance sheet were also included within cash and cash equivalents on the cash flow statement. The impact on the 29 August 2020 cash flow statement is to decrease cash and cash equivalent balances at the beginning of the period and at the end of the period by £377m and £452m respectively. There is no impact on the comparative period income statement, net debt or Total indebtedness.

Primary financial statements presentation

'Financial assets at fair value through other comprehensive income' and 'Investment securities at amortised cost' are now reported in 'Other investments' on the balance sheet, with further detail given in Note 13.

On 4 May 2021, the Group acquired control over Tesco Underwriting Limited, an insurance business which was previously a joint venture. The following new line items are added to the balance sheet: 'Reinsurance assets' and 'Insurance contract provisions'. In the income statement, gross insurance income is reported within 'Revenue' and insurance premium income ceded to reinsurers and net insurance claims are reported within 'Cost of sales'. Further detail is given in Note 16.

Cash inflows and outflows on other investments and derivative financial instruments previously presented on a net basis in the Group cash flow statement have been reassessed and are now reported separately, including for prior periods. Comparative net (investments in)/proceeds from sale of other investments of £202m are presented on a gross basis as proceeds from sale of other investments of £202m and purchase of other investments of £nil. Comparative net cash flows from derivative financial instruments of £(224)m are presented on a gross basis as cash inflows from derivative financial instruments of £334m and cash outflows from derivative financial instruments of £(558)m. There is no impact on net cash generated from operating, investing, or financing activities, and no impact on net debt or Total indebtedness.

Accounting policies

The Group has applied the following accounting policies in relation to the Tesco Underwriting insurance business:

Insurance income

Gross written premiums comprise premiums on contracts entered into during the year, irrespective of whether they relate in whole or in part to a later accounting period, and exclude tax and levies. An estimate is made at the balance sheet date to recognise retrospective adjustments to premiums. The earned portion of premiums received is recognised as revenue. Premiums are earned from the date of attachment of risk, over the indemnity period, based on the pattern of risks underwritten.

Net insurance claims

Claims and claims handling expenses are recognised as incurred, based on the estimated cost of settling all liabilities arising on events occurring up to the balance sheet date.

Classification of insurance contracts