Tesco plc Annual Report and Financial Statements 2012

Financial review
“Our financial strategy of capital discipline
and restraint supports a more sustainable
level of growth, which focuses on getting
more out of the businesses we currently
have, benefits from less capital-intensive
forms of investment and applies higher
hurdle rates to new opportunities.”
Looking forward
Capital expenditure
Our future plans include a reduced level of Group capital expenditure:
down to £3.3 billion in 2012/13 and, beyond that, comfortably less than
5% of sales. This reflects our movement into a new phase of growth
for the Group, moving beyond the diversification and expansion phase,
to a phase where the allocation of capital is based on the balance of
growth and returns that each investment can deliver.
Capital allocation
Our plans lead to further significant changes in our capital allocation
for the Group. Having already started some of this work in the UK,
we are seeing higher returns on the new space that we have opened
as a result.
Across the Group more of our capital is going into smaller, higherreturning
store formats.
We will be investing less overall capital in our UK business, as we
reduce the net new space opening programme by 38% in the coming
year, and focus store openings on smaller stores, and on food more
than non-food.
Within the overall UK spend, we will be spending much more on
the refresh of our existing stores, increasing our investment to over
£200 million, in addition to an increase in our online investment to
around £150 million.
Capital work-in-progress
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 within the WIP balance will also play a significant
role in bringing it down to a more appropriate level, although the
construction phase on these schemes will add to the WIP balance in
2012/13, followed by a rapid reduction thereafter. In some instances,
we may also dispose of standalone sites that do not meet our new,
more rigorous returns hurdles.
36 Tesco PLC Annual Report and Financial Statements 2012
Cash
This financial strategy means an increasingly cash generative outlook
for Tesco in the next few years, with an overall reduction in Group
capital expenditure, a return to growth in the cash contribution from
the UK business, the international businesses making an increasingly
positive contribution and a return to strong cash inflows from
working capital.
Cash inflows from decrease in retail working capital
£708m
08/09
£611m
£357m
£66m
09/10 10/11 11/12
average annual cash inflow
from decrease in retail working
capital (08/09 to 11/12)
In line with our financial strategy, working capital management will result in a return
to strong cash inflows from working capital in the coming years.
Returns
Capital restraint and improved cash generation both result in an
improving ROCE. Last year, we laid out our commitment to improve
ROCE to 14.6% by 2014/15. Our investment plans in the UK make
it likely that we will see a small reduction in 2012/13. However, we
described a number of significant opportunities to increase returns
last year, such as driving growth in the Bank, benefiting from regional
scale in Central Europe and moving the US to profitability, as well
as the structural benefit of maturing international businesses. These
opportunities still exist and indeed our decision to divest the Japanese
business has already made a contribution.
Our financial strategy of capital discipline and restraint supports a more
sustainable level of growth, which focuses on getting more out of the
businesses we currently have, benefits from less capital-intensive forms
of investment and applies higher hurdle rates to new opportunities.
This in turn drives higher returns and a higher level of cash generation.
In supporting the plans that make Tesco better for customers, I believe
this financial strategy is also better for shareholders.