Tesco 2012 Annual Report Download

Download and view the complete annual report

Please find the complete 2012 Tesco annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 158

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152
  • 153
  • 154
  • 155
  • 156
  • 157
  • 158

Annual Report
and Financial
Statements
2012

Table of contents

  • Page 1
    Annual Report and Financial Statements 2012

  • Page 2
    ...Stores +10.5% +21.8% Employees Stores +7.3% Employees 300,373 2,979 Market position Multiple formats include Loyalty scheme dotcom 1st Hypermarkets, superstores, supermarkets, convenience Clubcard - around 16 million active members First grocery home shopping service 1997 117,015 Market position...

  • Page 3
    ... growth± Trading profit growth +0.4% Stores +27.3% Employees +17.7% Stores +13.6% (36.4)% Employees Baseline profit growth 1,351 5,056 Market position Loyalty scheme 185 A West Coast start-up business Friends of Fresh & Easy - two-thirds of a million active members 2,818 Insurance Savings...

  • Page 4
    ...* Strategy in action* Business model* PERFORMANCE REVIEW 29 33 Key performance indicators* Financial review * GOVERNANCE 38 40 48 50 64 Board of Directors Principal risks and uncertainties* General information* Directors' report on corporate governance Directors' remuneration report 142 Tesco PLC...

  • Page 5
    ..., community leaders and to customers. This is the broader context of our business to which we need continuously to relate, openly, honestly and constructively for the long-term benefit of our business. Third, I have been impressed by the skills, commitment and values held by the people who work at...

  • Page 6
    ...year dividend up 2.1% to 14.76p. The fact that in a year when economic headwinds have been evident in practically every part of the globe our business increased sales, profits, return on capital and dividends speaks for its overall resilience. 2 Tesco PLC Annual Report and Financial Statements 2012

  • Page 7
    ... STRATEGIC REVIEW Chief Executive's review PERFORMANCE REVIEW Strategy in action GOVERNANCE Business model FINANCIAL STATEMENTS Chief Executive's review Building for the future Philip in conversation with Ellen and Jobe at the Tesco Extra store in Baldock "My first year as Chief Executive...

  • Page 8
    ... year. The decisions we have taken during the year have had an impact on our financial performance. We decided to forego some short-term profit to re-invest in the long-term health of the business, with a clear focus on improving the shopping trip for customers. The UK business clearly did not meet...

  • Page 9
    ...existing stores to reach profitability before we step up the rate of new store openings. We can then reach sufficient scale to cover our substantial central overhead costs and we anticipate that we will reach the break-even point during 2013/14. Tesco PLC Annual Report and Financial Statements 2012...

  • Page 10
    ... developing the potential we see in financial services. We have delivered good business growth in the year with revenue up 14%, driven by a good performance in the insurance business. The Bank's profit figure includes several accounting adjustments, so we measure business performance using baseline...

  • Page 11
    ... role that our brands play in attracting customers and as we start to leverage our expertise in brand management across our markets. Our state-of-the-art, zero-carbon training academy in South Korea, to train staff from across the Tesco Group Tesco PLC Annual Report and Financial Statements 2012...

  • Page 12
    ... Executive's review To build our team so that we create more value Strengthening our management This time last year we were in the early days of some of our new management structures. I had just introduced a matrix structure throughout Tesco with CEOs for each of our key business areas - the UK...

  • Page 13
    ...improve the shopping trip in the UK, our exciting innovations online, what we mean by Group skill and scale, our businesses in newer markets, the progress of Tesco Bank over the last three years and our team's extraordinary response to the flooding in Thailand. Tesco PLC Annual Report and Financial...

  • Page 14
    ..., the Fruit and Veg team can focus on fresh produce, improving product availability and presentation for customers. We are also increasing the number of staff across the whole of fresh food - meat, produce and chilled convenience foods. 10 Tesco PLC Annual Report and Financial Statements 2012

  • Page 15
    ...action GOVERNANCE Business model FINANCIAL STATEMENTS Quality and innovation We are reviewing and refreshing our entire range of over 8,000 Tesco brand products starting with the relaunch of Tesco Value as Everyday Value, with quality improvements to hundreds of products. Helping customers manage...

  • Page 16
    ... on the great success of our new Extra format in Europe to make sure that our UK Extras continue to meet our customers' changing needs, as they increasingly combine shopping in store and online. Future investment In the last few years, both convenience and online shopping have been growing rapidly...

  • Page 17
    ...REVIEW Strategy in action GOVERNANCE Business model FINANCIAL STATEMENTS Click & Collect As the option of ordering online and picking up in store continues to grow in popularity, our stores are ideal collection points. We will add 700 new collection points for Tesco Direct orders in the next year...

  • Page 18
    ... fulfil over 80% of London orders from our dotcom-only stores, providing our customers with our total food range - more than can be offered from any one store. 14 Tesco PLC Annual Report and Financial Statements 2012 Scan here to see how we're developing our online offer, or visit www.tescoplc.com...

  • Page 19
    OVERVIEW STRATEGIC REVIEW Chief Executive's review PERFORMANCE REVIEW Strategy in action GOVERNANCE Business model FINANCIAL STATEMENTS Click & Collect Click & Collect is a key component of our multi-channel offering. Our store and distribution networks mean we can give customers the ...

  • Page 20
    ... to develop the UK scheme in the late 1990s, we have been able to introduce a loyalty scheme to each of our markets for a fraction of the cost. By Group scale, we mean using the size of the Tesco business to benefit our customers by lowering prices, improving quality, and sourcing new and different...

  • Page 21
    ... services At year end, we had 47 of our Extra format stores internationally. These stores offer customers a whole range of services, such as photo shops, opticians and phone shops, for relatively low investment as they use existing hypermarket space and customer footfall. Retail financial services...

  • Page 22
    ... for 250 of our own-brand products, with hundreds more to follow in the coming year. Our Shenyang Extra store has benefited from the success of our new format in Europe, with the senior team trained in our Extra store in Bratislava, Slovakia. 18 Tesco PLC Annual Report and Financial Statements 2012

  • Page 23
    ...of personal service Customers can see and feel the quality of our loose fresh produce Friends loyalty card thanks our customers for shopping with Fresh & Easy Welcoming customers with new fresh ranges: flowers, fresh bread and coffee to go Tesco PLC Annual Report and Financial Statements 2012 19

  • Page 24
    ...solely on meeting their banking and insurance needs. Over the last three years, we have built a strong team with experience and expertise, growing dramatically from 300 to 2,800 people. In terms of systems and IT, our new platforms have enabled some significant customer service improvements. Instant...

  • Page 25
    ... STRATEGIC REVIEW Chief Executive's review PERFORMANCE REVIEW Strategy in action GOVERNANCE Business model FINANCIAL STATEMENTS Transaction services: Our transaction services - ATMs and travel bureaux - offer customers convenience while they are on the go. Both saw strong growth in the year...

  • Page 26
    ...as the floods are a reminder of the strength of local communities and how people turn to them in times of need. They are also a reminder of the importance of providing customers with good quality, safe, affordable food, whenever they need it. 22 Tesco PLC Annual Report and Financial Statements 2012

  • Page 27
    ... eight million packets of noodles and our global suppliers helped to secure canned fish, eggs and UHT milk. We used our stores as donation centres for customers who wanted to support flood victims and contributed almost £500,000 of essential products. For our staff affected, we provided financial...

  • Page 28
    Business model Our strategy is put into action through our business model. At its heart is our core purpose: 'To create value for customers to earn their lifetime loyalty'. 24 Tesco PLC Annual Report and Financial Statements 2012

  • Page 29
    ...STRATEGIC REVIEW Chief Executive's review PERFORMANCE REVIEW Strategy in action GOVERNANCE Business model FINANCIAL STATEMENTS Business model -- Core activities -- The virtuous volume circle -- Enablers Building the Tesco brand Sell more Innovating our offer Insight Develop economies of scale...

  • Page 30
    ... is centred on investing develop our distribution networks to minimise the mileage needed to in the shopping trip so that customers will reward us by buying more get products to store in perfect condition. We also use transport other than lorries such as our four train services in the UK, which save...

  • Page 31
    ...built on customers' trust in the Tesco brand to offer good value, simple solutions and great customer service; and our recruitment and retention of great staff depends on our reputation for customer service and offering good jobs and careers. Tesco PLC Annual Report and Financial Statements 2012 27

  • Page 32
    ... review section then takes you through the financial performance of each of our business segments in the year. More detailed definitions for our Group performance and Group financial KPIs can be found in the glossary on the inside back cover. 28 Tesco PLC Annual Report and Financial Statements 2012

  • Page 33
    ... in Tesco shares, as a percentage of the 06/07 share price. Performance Returns reduced reflecting the effect on our share price of our decision to invest significantly in the customer offer in the UK. 01/02 03/04 05/06 07/08 09/10 11/12 Tesco PLC Annual Report and Financial Statements 2012 29

  • Page 34
    ...or excellent. With our UK Plan, we aim FOCUS to improve customers' shopping FOR 2012/13 experiences from reasonable to good and from good to excellent. Growth in UK online sales 76% +10% Definition The year-on-year sales growth from total tesco.com and online telecoms. Performance We are pleased...

  • Page 35
    ... growth. By contrast, trading profit fell 36%, impacted by the increase in a provision for claims from historic sales of PPI; and the unwinding of the fair value provision, an accounting adjustment made at the time of acquisition in 2008. Tesco PLC Annual Report and Financial Statements 2012...

  • Page 36
    ... training for their next role. Performance We exceeded our 5.6% target this year, demonstrating our commitment to supporting and developing our people so that they are able to advance their careers. 90% in the UK 5.9% across the Group 32 Tesco PLC Annual Report and Financial Statements 2012

  • Page 37
    ..., acted decisively to address the underperformance in our home market. These actions will make Tesco better for our customers and are supported by a financial strategy that will also make Tesco better for shareholders. Segmental results UK UK results 2011/12 2011/12 Growth UK sales UK revenue...

  • Page 38
    ...UK business. The combined revenue and capital investment involved in these initiatives will exceed £1 billion, supported by a significant reset to the level of UK margins in order to give us the financial resources we need to make comprehensive improvements for customers. Asia†Asia results 2011...

  • Page 39
    ... on new savings and loans business during the final stages of systems migration. As we put more than three years of transition behind us, the Bank is well placed to deliver good growth, starting in the coming year. Trading profit was impacted by a number of factors. The unwind of the fair value...

  • Page 40
    ... The level of capital work-in-progress ('WIP') on the UK balance sheet now stands at around £2 billion. Building out stores faster than we acquire new sites will be a key contributor to UK space growth over the next few years, and will reduce this level of WIP. The completion of mixed use schemes...

  • Page 41
    ...Board of Directors Principal risks and uncertainties General information Corporate governance Directors' remuneration report All of our business activities take place within a governance framework, which supports our culture and our core Values: 'No one tries harder for customers' and 'Treat people...

  • Page 42
    ... before holding a number of roles in commercial and marketing. In 1994 he was appointed Stores Director and a year later promoted to Regional Managing Director, before joining the Tesco PLC Board as Supply Chain Director and a year later adding Information Technology to his responsibilities...

  • Page 43
    ...to the Board of Tesco Bank as a Non-executive Director. He was Group Executive Director of Standard Chartered PLC until his retirement in April 2010. He was also responsible for the Group's risk and special asset management function. He is Senior Independent Director and Chairman of the Remuneration...

  • Page 44
    ... to maintain an optimum level of investment in capital, revenue or people and thus is limited in its ability to serve customers and grow š Operational threats reviewed regularly by Board, Executive Committee, UK Trading Group and various operational committees š Governance committees, including...

  • Page 45
    ... business developments š Pay, pension and share plan arrangements help us to attract and retain good people š Diversification and pursuit of growth in emerging markets under our strategy is reducing reliance on limited business areas š Regular review of strategic matters by Board and Executive...

  • Page 46
    ...IT systems and innovations to improve business efficiency and customers' shopping experience š Information Security Committee meets regularly to review the development and implementation of IT policies š Regular review of strategy, risks and financial performance by Board and Executive Committee...

  • Page 47
    ... STRATEGIC REVIEW Principal risks and uncertainties PERFORMANCE REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Principal risks Change from 2010/11 Key controls and mitigating factors Product safety Failures could damage customer...

  • Page 48
    ... 44 Tesco PLC Annual Report and Financial Statements 2012 š There is strong programme governance in place with a tiered committee structure headed by the Bank's Executive-level Project Assessment Committee ('PAC') š The Bank operates standard project management disciplines which are employed to...

  • Page 49
    ... pre-determined limits š Risk appetite and a suite of risk policies are in place to manage risk in TU š The Bank's Insurance Risk function provides independent oversight of TU which is appropriate to the Bank's role as key shareholder Tesco PLC Annual Report and Financial Statements 2012 45

  • Page 50
    ... performance management, retention and succession planning Market risk Market risk is defined as the risk that the value of the Bank's assets, liabilities, income or costs might vary due to changes in the value of financial market prices; this includes interest rates, foreign exchange rates, credit...

  • Page 51
    ... REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Financial risks review The main financial risks faced by the Group relate to the availability of funds to meet business needs, fluctuations in interest and foreign exchange rates...

  • Page 52
    ... of the Group through a variety of voluntary schemes, principally the Tesco employee profit-sharing scheme (Shares in Success), the savings-related share option scheme (Save As You Earn) and the partnership share plan (Buy As You Earn). 48 Tesco PLC Annual Report and Financial Statements 2012

  • Page 53
    ...suppliers operate. Tesco PLC is a holding company and therefore has no trade creditors on its Balance Sheet. Compliance with the Groceries (Supply Chain Practices) Market Investigation Order 2009 and the Groceries Supply Code of Practice ('Code') The Code came into force on 4 February 2010 in the UK...

  • Page 54
    ... 51 51 Governance structures Compliance with the UK Corporate Governance Code MANAGEMENT OF THE GROUP 59 60 62 62 62 Executive Committee Risk management and internal controls including Tesco Bank Whistle-blowing Anti-corruption Code of Business Conduct DIRECTORS AND BOARD RESPONSIBILITIES 52 52...

  • Page 55
    ... Non-executive Directors. Compliance with the UK Corporate Governance Code The UK Corporate Governance Code (the 'Code') sets out the main principles and specific provisions on how companies should be directed and controlled to follow good governance practice. The rules of the Financial Services...

  • Page 56
    Corporate governance Board composition and independence As at 25 February 2012, the Board of Tesco PLC comprised the Nonexecutive Chairman, Sir Richard Broadbent, six Executive Directors and seven independent Non-executive Directors. Sir Terry Leahy retired as Group CEO on 2 March 2011 and was ...

  • Page 57
    ... REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Length of service of each Non-executive Director Non-executive Director Date of appointment Years in post at 2012 AGM Diversity At Tesco, we are proud to be a diverse business...

  • Page 58
    ... training focusing, inter alia, on recent corporate governance developments, risk reporting by Tesco Bank and the challenges and opportunities offered by the internet. Further training in a number of key areas is planned for the coming year. 54 Tesco PLC Annual Report and Financial Statements 2012

  • Page 59
    ... Executive Directors (at date of Annual Report) Sir Terry Leahy (Retired 2 March 2011) David Potts (Stepped down 7 December 2011) Richard Brasher (Stepped down 15 March 2012) 0 7 8 0 6 8 6 6 8 8 8 8 8 8 7 7 8 8 4 8 8 8 8 8 8 8 4 8 8 8 7 8 8 8 Board attendance The Board held eight scheduled meetings...

  • Page 60
    ... competently. It also reviews the Board's composition, structure and size, to assist the ongoing development me. of the Board over time." Sir Richard Broadbent Nominations Committee Chairman Nominations Committee members Number of possible meetings attended Actual meetings attended Members Sir...

  • Page 61
    ... REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Remuneration Committee Remuneration Committee "The Remuneration Committee assesses executive remuneration arrangements which are used to attract, retain and motivate senior management...

  • Page 62
    ...WdZ š ?JYedjhebi$ Audit Committee members Members (all independent Non-executive Directors) Number of possible meetings attended Actual meetings attended Ken Hydon (Chairman) Gareth Bullock Patrick Cescau Ken Hanna 5 5 5 5 5 5 5 5 58 Tesco PLC Annual Report and Financial Statements 2012

  • Page 63
    ... general management roles. 7 Ken Towle Online Food and Internet Retailing Director - Ken Towle joined Tesco in 1985 and has held a number of roles including various UK operations roles and President and CEO of Tesco China. 5 6 1 2 3 4 7 Tesco PLC Annual Report and Financial Statements 2012 59

  • Page 64
    ..., Internet Retailing, People Matters, Property Strategy, Sustainability and Technology. These subcommittees have as members an appropriate mixture of Executive Directors and senior management from relevant functions. Key to delivering effective risk management is ensuring that our people have a good...

  • Page 65
    ...uncertainties PERFORMANCE REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report oversee the Finance Risk Register. The Board assesses significant social, environmental and ethical ('SEE') risks to the Group's short and long-term value, and...

  • Page 66
    ... and any practices that endanger our staff, customers or the environment. During the year 2011/12 the majority of the calls related to personnel issues, which is common in most businesses, with a number of security issues also raised. 62 Tesco PLC Annual Report and Financial Statements 2012

  • Page 67
    ... of the Group and its strategy, as well as new developments within the business. Our outgoing and incoming Chairmen also met with a number of our leading shareholders to discuss the Group's strategy and a range of governance matters. Tesco PLC Annual Report and Financial Statements 2012 63

  • Page 68
    ... and a performance share plan) and by reducing the number of performance measures. Executives are now incentivised to achieve underlying profit growth and strategic objectives over an annual period and to deliver sustained earnings and return on capital performance in the long term. We have also...

  • Page 69
    ... information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report As announced in January 2012, our plan for 2012/13 is to substantially increase investment in the shopping trip - particularly in the UK. Consequently we anticipate minimal Group trading profit growth...

  • Page 70
    ...our all-employee schemes and we delivered over 26 million shares in 2011 under our Shares In Success Plan, a plan which awards free shares to all UK employees based on Company performance. When determining Executive remuneration arrangements the Committee takes into account pay conditions throughout...

  • Page 71
    ... REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Remuneration policy for Executive Directors At a glance summary of Executive Directors' remuneration for 2012/13 Element Link to strategy/performance measures CEO Other Directors...

  • Page 72
    Directors' remuneration report Fixed remuneration for 2012/13 Salary and pension Base salary Policy Benchmarking group Relationship to all employee pay š Base pay is designed to attract and retain talented individuals. š It is set to reflect individual capability, responsibilities and market-...

  • Page 73
    ... notice to a sum based on salary and benefits only. This was reflected in the new service contract for Philip Clarke on his appointment to CEO. The service agreements are available to shareholders to view on request from the Company Secretary. Tesco PLC Annual Report and Financial Statements 2012 69

  • Page 74
    ...sales growth 2. UK return on capital employed 3. Customer experience 4. Group internet sales 5. Group employee satisfaction 6. Group CO2 reduction Link to strategy - These measures contain a mix of financial, strategic and corporate responsibility targets and were selected to incentivise sustainable...

  • Page 75
    ... REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report As announced in January 2012, our plan for 2012/13 is to substantially increase investment in the delivery of an even better shopping trip for customers - particularly in the UK...

  • Page 76
    ... is 338.4p per share. At the year end the share price was 318.2p and the share options granted in 2009 were therefore underwater. No value will be delivered to Executives unless the share price increases significantly above this level. 0% 72 Tesco PLC Annual Report and Financial Statements 2012

  • Page 77
    ... account factors including: - the level of ROCE achieved; - the expected ROCE for additional and existing capital investment; - whether capital spend was in line with strategic objectives and balanced short-term and long-term investment needs; and - the level of sales and underlying profit growth...

  • Page 78
    ... established and broad-based comparator group of retail and non-retail companies. Feb 08 Feb 09 Feb 10 Feb 11 Feb 12 For further details in relation to the numbers set out in the charts above please see the Five year record on page 152. 74 Tesco PLC Annual Report and Financial Statements 2012

  • Page 79
    ...the share price on 25 February 2012. 8 AllowanceÃ...

  • Page 80
    ...available to shareholders to view from the Company Secretary upon request. š Review of performance - The Chairman meets with each Nonexecutive Director separately to review individual performance. š Reappointment policy - In line with the UK Corporate Governance Code, all Non-executive Directors...

  • Page 81
    ... relation to the remuneration arrangements for Tesco Bank employees, with the aim of encouraging consistency with Group remuneration policy, but it does not make decisions in relation to, or direct, how remuneration is managed within Tesco Bank. Tesco PLC Annual Report and Financial Statements 2012...

  • Page 82
    ..._h[Yjeh":h[mCWjj^[mi=hekfH[ckd[hWj_ed Director) and Corporate Secretariat and Finance functions. Terms of reference Available from the Company Secretary upon request or can be viewed at www.tescoplc.com/plc/ir/corpgov/boardprocess. 78 Tesco PLC Annual Report and Financial Statements 2012

  • Page 83
    ... UK Corporate Governance Code, Schedule 8 of the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008 and the Financial Services Authority Listing Rules. This report also complies with disclosures required by the Directors' Remuneration Report Regulations 2002. Details...

  • Page 84
    Remuneration report Tables 1-10 are audited information Table 1 Directors' emoluments Fixed emoluments Performance related emoluments Short-term cash £000 Short-term deferred shares £000 Total 2011/12 £000 Total 2010/11 £000 Salary £000 Benefits £000 2 Executive Directors Richard Brasher ...

  • Page 85
    ... information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Table 3 Gains on share options and share options held by Directors and not exercised at 25 February 2012 Executive Share Option Scheme (1994) and (1996) and Discretionary Share Option Plan (2004) Date...

  • Page 86
    ...exercised at 25 February 2012 Savings-related share option scheme (1981) As at 26 February 2011 Options granted in year Options exercised in year Options lapsed in year As at 25 February 2012 Exercise price (pence) Value realisable 2011/12 £000 Value realisable 2010/11 £000 Date of grant Richard...

  • Page 87
    ... PERFORMANCE REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Table 5 Long Term Performance Share Plan Date of award/ grant Share price on award date (pence) As at 26 February 2011 Shares awarded/ options granted in year Shares...

  • Page 88
    Remuneration report Table 6 Group New Business Incentive Plan Date of award/ grant As at 27 February 2010 Shares awarded in year Options exercised/ shares released in year As at 26 February 2011 Date from which exercisable Expiry date Sir Terry Leahy 14.11.2007 2,773,919 112,819 - 2,886,738...

  • Page 89
    ... PERFORMANCE REVIEW General information GOVERNANCE Corporate governance FINANCIAL STATEMENTS Directors' remuneration report Table 8 Executive Incentive Plan Date of award/ grant Share price on award (pence) As at 26 February 2011 Shares awarded/ options granted Shares released/ options exercised...

  • Page 90
    ... and 1 May 2012, 445 shares were purchased by Executive Directors as part of the Buy As You Earn scheme. Buy As You Earn is an HMRC approved share purchase scheme under which employees invest up to a limit of £110 on a four-weekly basis to buy shares in Tesco PLC at the market value. In addition...

  • Page 91
    ... financial KPI definitions. 142 Tesco PLC - Parent Company balance sheet 143 Notes to the Parent Company financial statements 151 Independent auditors' report to the members of Tesco PLC 152 Five year record IBC Financial calendar IBC Glossary Tesco PLC Annual Report and Financial Statements 2012...

  • Page 92
    ... in other jurisdictions. The Directors have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Group and of the Company and to prevent and detect fraud and other irregularities. 88 Tesco PLC Annual Report and Financial Statements 2012

  • Page 93
    ... of the UK Corporate Governance Code specified for our review; and š certain elements of the report to shareholders by the Board on Directors' remuneration. Other matter We have reported separately on the Parent Company financial statements of Tesco PLC for the 52 weeks ended 25 February 2012 and...

  • Page 94
    ... weeks 2012 £m 52 weeks 2011* £m Profit before tax from continuing operations Adjustments for: IAS 32 and IAS 39 'Financial Instruments' - fair value remeasurements IAS 19 'Employee Benefits' - non-cash Group Income Statement charge for pensions IAS 17 'Leases' - impact of annual uplifts in rent...

  • Page 95
    ... REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Group statement of comprehensive income Year ended 25 February 2012 Change in fair value of available-for-sale financial assets and investments Currency translation differences Actuarial (losses)/gains on defined benefit pension schemes...

  • Page 96
    .... Philip Clarke Laurie McIlwee Directors The financial statements on pages 90 to 141 were authorised for issue by the Directors on 4 May 2012 and are subject to the approval of the shareholders at the Annual General Meeting on 29 June 2012. 92 Tesco PLC Annual Report and Financial Statements 2012

  • Page 97
    ... earnings £m Noncontrolling interests £m Total equity £m Total £m At 26 February 2011 Profit for the year Other comprehensive income Change in fair value of available-for-sale financial assets and investments Currency translation differences Actuarial losses on defined benefit pension schemes...

  • Page 98
    ...) in Retail short-term investments (Decrease)/increase in Retail joint venture loan receivables Other non-cash movements Elimination of other Tesco Bank non-cash movements (Increase)/decrease in net debt for the year Opening net debt Closing net debt note 52 weeks 2012 £m 52 weeks 2011* £m 30...

  • Page 99
    ... the financial year, the Board approved a plan to dispose of its operations in Japan which is consistent with the Group's long-term strategic priority to drive growth and improve returns by focusing on its larger businesses in the region. In accordance with IFRS 5 'Non-current Assets Held for Sale...

  • Page 100
    ... of returns, discounts/offers and value added taxes. Provision of services Revenue from the provision of services is recognised when the service is provided and the revenue can be measured reliably, based on the terms of the contract. Where the Group acts as an agent selling goods or services, only...

  • Page 101
    ... comprise goods and properties held for resale and properties held for, or in the course of, development with a view to sell. Inventories are valued at the lower of cost and fair value less costs to sell using the weighted average cost basis. Tesco PLC Annual Report and Financial Statements 2012 97

  • Page 102
    ... amortised over the lease term. For sale and operating leasebacks, generally the assets are sold at fair value, and accordingly the profit or loss from the sale is recognised immediately in the Group Income Statement. Post-employment and similar obligations For defined benefit plans, obligations are...

  • Page 103
    ... cost using the effective interest rate method, less provision for impairment. Investments Investments are recognised at trade date. Investments are classified as either held for trading or available-for-sale, and are recognised at fair value. For available-for-sale investments, gains and losses...

  • Page 104
    ... of classification depends on the entity's business model and the contractual cash flow characteristics of the financial asset. š IFRS 10 'Consolidated financial statements' is effective from periods commencing on or after 1 January 2013. It builds on existing principles by identifying the concept...

  • Page 105
    ..., the reported results reflect the movement in fair value of related derivatives due to changes in foreign exchange and interest rates. In addition, at each year end, any gain or loss accruing on open contracts is recognised in the Group Income Statement for the financial year, regardless...

  • Page 106
    ... ('US') š Retail banking and insurance services through Tesco Bank in the UK. The CODM uses trading profit, as reviewed at monthly Executive Committee meetings, as the key measure of the segments' results as it reflects the segments' underlying trading performance for the financial year under...

  • Page 107
    ... 2012 £m 2011* £m Trading profit Adjustments: Profit/losses arising on property-related items IAS 19 'Employee Benefits' - non-cash Group Income Statement charge for pensions IAS 17 'Leases' - impact of annual uplifts in rent and rent-free periods IFRS 3 'Business Combinations' - intangible asset...

  • Page 108
    ... Group financial statements Note 2 Segmental reporting continued Other segment information Tesco Bank £m Total continuing operations Year ended 25 February 2012 Capital expenditure (including acquisitions through business combinations): Property, plant and equipment Investment property Goodwill...

  • Page 109
    ... See Note 1 Accounting policies for details of reclassifications. Note 4 Employment costs, including Directors' remuneration Continuing operations Wages and salaries Social security costs Post-employment defined benefits (Note 26) Post-employment defined contributions (Note 26) Share-based payments...

  • Page 110
    ... Net pension finance income (Note 26) IAS 32 and IAS 39 'Financial Instruments' - fair value remeasurements Total finance income Finance costs Interest payable on short-term bank loans and overdrafts repayable within five years Finance charges payable under finance leases and hire purchase contracts...

  • Page 111
    ...1 (1,137) * Property-related items include deferred tax liability on rolled over gains of £361m (2011: £335m) and deferred tax assets on capital losses of £71m (2011: £70m). The remaining balance relates to accelerated tax depreciation. Tesco PLC Annual Report and Financial Statements 2012 107

  • Page 112
    ... Loss per share impact from discontinued operations Basic Diluted * Including operating lease expense of £27m (2011: £32m). 436 (539) (23) (1) (1) (128) (14) (142) 476 (541) (36) (5) - (106) - (106) (1.77p) (1.76p) (1.33p) (1.31p) 108 Tesco PLC Annual Report and Financial Statements 2012

  • Page 113
    ... been included as a liability as at 25 February 2012, in accordance with IAS 10 'Events After the Balance Sheet Date'. It will be paid on 6 July 2012 to shareholders who are on the Register of members at close of business on 27 April 2012. Tesco PLC Annual Report and Financial Statements 2012 109

  • Page 114
    ...share £m 2011* pence/share Profit from continuing operations (Diluted) Adjustments for: IAS 32 and IAS 39 'Financial Instruments' - fair value remeasurements IAS 19 'Employee Benefits' - non-cash Group Income Statement charge for pensions IAS 17 'Leases' - impact of annual uplifts in rent and rent...

  • Page 115
    OVERVIEW STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Note 10 Goodwill and other intangible assets Internally generated development costs £m Pharmacy and software licences £m Other intangible assets £m Goodwill £m Total £m Cost At 26 February 2011 Foreign currency...

  • Page 116
    ... are reviewed by the Board. The key assumptions for the value in use calculations are those regarding discount rates, growth rates and expected changes in margins. Management estimate discount rates using pre-tax rates that reflect the current market assessment of the time value of money and the...

  • Page 117
    ... and buildings comprises: 2012 £m 2011 £m Freehold Long leasehold - 50 years or more Short leasehold - less than 50 years Net carrying value (e) Construction in progress does not include land. 19,016 676 2,118 21,810 18,094 677 2,003 20,774 Tesco PLC Annual Report and Financial Statements 2012...

  • Page 118
    ... to stores performing below forecasted trading levels. The reversal of previous impairment losses arose principally due to improvements in stores' performances over the last year, which increased the net present value of future cash flows. 114 Tesco PLC Annual Report and Financial Statements 2012

  • Page 119
    OVERVIEW STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Note 12 Investment property 2012 £m 2011 £m Cost At beginning of the year Foreign currency translation Additions Acquisitions through business combinations Reclassification Classified as held for sale Disposals At ...

  • Page 120
    ... * Held by the Parent Company (all other principal subsidiaries are held by an intermediate subsidiary). The accounting period ends of the joint ventures consolidated in these financial statements range from 31 December 2011 to 29 February 2012. Accounting period end dates differ from those of...

  • Page 121
    ...Royal Bank of Scotland Insurance Group Limited). This loan has no interest receivable and no fixed repayment date. Available-for-sale financial assets comprise investments in bonds with varied maturities of which £158m (2011: £32m) is current. Tesco PLC Annual Report and Financial Statements 2012...

  • Page 122
    ... to six months past due Over six months past due 194 114 107 415 114 13 17 144 No receivables have been renegotiated in the current or prior financial years. * See Note 1 Accounting policies for details of reclassifications. 118 Tesco PLC Annual Report and Financial Statements 2012

  • Page 123
    OVERVIEW STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Note 17 Loans and advances to customers Tesco Bank has loans and advances to customers. 2012 £m 2011 £m Non-current Current 1,901 2,502 4,403 2,127 2,514 4,641 The maturity of these loans and advances is as ...

  • Page 124
    ... equivalents 2012 £m 2011* £m Cash at bank and in hand Short-term deposits Certificates of deposit Loans and advances to banks Cash and cash equivalents Cash of £1,243m (2011: £1,022m) held on money market funds is classed as short-term investments. * See Note 1 Accounting policies for details...

  • Page 125
    OVERVIEW STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Note 20 Borrowings Current Par value Maturity year 2012 £m 2011 £m Bank loans and overdrafts Loan from joint ventures (Note 28) 3.875% MTN LIBOR + 0.5% Bond - Tesco Bank 5.625% MTN Other MTNs Finance leases (Note 34...

  • Page 126
    ... Limited. This option was exercised during the financial year. Gains and losses accumulated in equity are included in the Group Income Statement on disposal of the overseas operations. Financial instruments not qualifying for hedge accounting The Group's policy is not to use derivatives for trading...

  • Page 127
    ... foreign currency contracts Total financial assets Liabilities Short-term borrowings: Amortised cost Bonds in fair value hedge relationships Long-term borrowings: Amortised cost Bonds in fair value hedge relationships Finance leases (Group as lessee - Note 34) Customer deposits - Tesco Bank Deposits...

  • Page 128
    ... 2012 and 26 February 2011 are as follows: Loans and receivables/ other financial liabilities £m Fair value through profit or loss £m At 25 February 2012 Cash and cash equivalents Loans and advances to customers - Tesco Bank Short-term investments Other investments - Tesco Bank Joint venture...

  • Page 129
    ... market data (that is, unobservable inputs) (Level 3). At 25 February 2012 Assets Available-for-sale financial assets Derivative financial instruments: Interest rate swaps and similar instruments Cross currency swaps Index-linked swaps Forward foreign currency contracts Total assets Liabilities...

  • Page 130
    ... 2011, net debt was managed using derivative instruments to hedge interest rate risk as follows: Fixed £m Floating £m 2012 Total £m Fixed £m Floating £m 2011* Total £m Cash and cash equivalents Loans and advances to customers - Tesco Bank Short-term investments Other investments Joint venture...

  • Page 131
    ... hedges. š Loans to non-UK subsidiaries are hedged via foreign currency transactions and borrowings in matching currencies. These are not formally designated as hedges as gains and losses on hedges and hedged loans will naturally offset. Tesco PLC Annual Report and Financial Statements 2012 127

  • Page 132
    ... maturing debt in 2012/13 totalling £1,358m (2011: £125m). The Group borrows centrally and locally, using a variety of capital market instruments and borrowing facilities to meet the Group's business requirements of each local business. 128 Tesco PLC Annual Report and Financial Statements 2012

  • Page 133
    ... 7,422 During the financial year, there was a change in the methodology which Tesco Bank uses to measure the customer risk in relation to outstanding loan balances. As a result this has revised the categorisation of some customer accounts since the prior year end in terms of asset quality grading...

  • Page 134
    .... The balance is classified as current at the year end. The British Bankers Association initiated a judicial review on 24 January 2011 in relation to the regulation of PPI sales practices. The Group did not participate in this action and continued to deal with customer complaints in line with the...

  • Page 135
    ...share over the three dealing days immediately preceding the offer date. ii) The Irish Savings-related Share Option Scheme (2000) permits the grant to Irish employees of options in respect of ordinary shares linked to a building society/bank save-as-you-earn contract for a term of three or five years...

  • Page 136
    ...return on capital employed over the seven-year plan. The following tables reconcile the number of share options outstanding and the weighted average exercise price ('WAEP'): For the year ended 25 February 2012 Savings-related share option scheme Options WAEP Irish savings-related share option scheme...

  • Page 137
    ...employed in the US business over the seven-year plan. The Executive Directors participate in short-term and long-term bonus schemes designed to align their interests with those of shareholders. Full details of these schemes can be found in the Directors' Remuneration Report. The fair value of shares...

  • Page 138
    ... date and a member reaching age 65 at the same date +25 years: 2012 years 2011 years Retiring at reporting date at age 65: Retiring at reporting date +25 years at age 65: Male Female Male Female 21.8 23.6 24.2 26.1 21.7 23.5 24.1 26.0 134 Tesco PLC Annual Report and Financial Statements 2012

  • Page 139
    ... STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Note 26 Post-employment benefits continued Rates of return on scheme assets The assets in the defined benefit pension schemes and the expected nominal rates of return are as follow: Long-term rate of return % 2012 Market value...

  • Page 140
    ...-employment benefits other than pensions The Company operates a scheme offering post-employment healthcare benefits. The cost of providing these benefits has been accounted for on a similar basis to that used for defined benefit pension schemes. The liability as at 25 February 2012 of £11m (2011...

  • Page 141
    ...: 2012 £m 2011 £m Salaries and short-term benefits Pensions Share-based payments 13 4 9 26 10 3 27 40 Of the total remuneration to key management personnel, £6m (2011: £nil) is due to Executive Committee members who are not on the PLC Board. Tesco PLC Annual Report and Financial Statements...

  • Page 142
    ... with Tesco Bank during the financial year were as follows: Credit card and personal loan balances Number of key management personnel £m Saving deposit accounts Number of key management personnel £m At 25 February 2012 At 26 February 2011 12 7 - - 13 10 2 1 Note 29 Reconciliation of profit...

  • Page 143
    ... commitments At 25 February 2012, there were commitments for capital expenditure contracted for, but not provided for of £1,599m (2011: £1,719m), principally relating to the store development programme. Contingent liabilities For details of assets held under finance leases, which are pledged as...

  • Page 144
    Notes to the Group financial statements Note 33 Capital resources The following table shows the composition of regulatory capital resources of Tesco Personal Finance PLC ('TPF'), being the regulated entity, at the balance sheet date: 2012 £m 2011 £m Tier 1 capital: Shareholders' funds and non-...

  • Page 145
    ...price of the Initial Public Offering of Tesco Lotus Retail Growth Freehold and Leasehold Property ('TLGF'). Tesco Lotus subscribed for 25% of the available units in TLGF. The units commenced trading on the Stock Exchange of Thailand on 19 March 2012. Tesco PLC Annual Report and Financial Statements...

  • Page 146
    ... 14 Directors The Parent Company financial statements on pages 142 to 150 were authorised for issue by the Directors on 4 May 2012 and are subject to the approval of the shareholders at the Annual General Meeting on 29 June 2012. Tesco PLC Registered number 00445790 142 Tesco PLC Annual Report and...

  • Page 147
    ... at the exchange rates prevailing at the balance sheet date of the financial year. Share-based payments The fair value of employee share option plans is calculated at the grant date using the Black-Scholes model. The resulting cost is charged to the Parent Company Profit and Loss Account over the...

  • Page 148
    ... hedged item affects the Parent Company Profit and Loss Account. If a forecasted hedged transaction is no longer expected to occur, the net cumulative gain or loss recognised in equity is transferred to the Company Profit and Loss Account. 144 Tesco PLC Annual Report and Financial Statements 2012

  • Page 149
    ... of the Company and Group financial statements 0.7 0.6 Note 3 Employment costs, including Directors' remuneration 2012 £m 2011 £m Wages and salaries Social security costs Pension costs Share-based payment expense 16 2 1 7 26 14 2 1 26 43 The average number of employees (all Directors of the...

  • Page 150
    ... Financial instruments £m Other timing differences £m Total £m At 26 February 2011 Charge to the Profit and Loss Account for the year At 25 February 2012 8 (2) 6 (2) - (2) 6 (2) 4 Note 7 Current asset investments 2012 £m 2011 £m Short-term investments Short-term deposits and cash at bank...

  • Page 151
    OVERVIEW STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Note 9 Borrowings Par value Maturity year 2012 £m 2011 £m Bank loans and overdrafts Loans from joint ventures 3.875% MTN 5.625% MTN 5% MTN 2.0% MTN 5.125% MTN 4% RPI MTN* 5.875% MTN 2.7% MTN 5.5% USD Bond 3.455% MTN...

  • Page 152
    ... Executive Directors. For further information on these schemes, including the valuation models and assumptions used, see Note 25 in the Group financial statements. Share option schemes The number of options and WAEP of share option schemes relating to the Company employees are: Savings-related share...

  • Page 153
    ... 6.74 Share bonus schemes The number and WAFV of share bonuses awarded during the financial year relating to the Company employees are: Shares number 2012 WAFV pence Shares number 2011 WAFV pence Shares in Success Executive Incentive Scheme Performance Share Plan US Long-Term Incentive Plan 5,045...

  • Page 154
    ... Parent Company financial statements Note 13 Called up share capital continued Between 26 February 2012 and 13 April 2012, options over 2,779,741 ordinary shares have been exercised under the terms of the Savings-related Share Option Scheme (1981) and the Irish Savings-related Share Option Scheme...

  • Page 155
    OVERVIEW STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS Independent auditors' report to the members of Tesco PLC We have audited the Parent Company financial statements of Tesco PLC for the 52 weeks ended 25 February 2012 which comprise the Parent Company balance sheet and ...

  • Page 156
    ... operations Underlying diluted earnings per share - continuing operations Dividend per share5 Return on capital employed ('ROCE')4 Total shareholder return4 Net debt (£m) Enterprise value 9 (£m) Retail statistics Number of stores Total sales area - 000 sq ft11 Average employees Average full-time...

  • Page 157
    ...excluding assets acquired under business combinations). Capex % of sales: capital expenditure as defined above, divided by Group sales including VAT and excluding IFRIC 13. Constant tax rate: using the prior year's effective tax rate. EBITDAR: operating profit before depreciation, amortisation, rent...

  • Page 158
    Tesco PLC Tesco House Delamare Road Cheshunt Hertfordshire EN8 9SL www.tescoplc.com/ar2012