Tesco plc Annual Report and Financial Statements 2012

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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.
OVERVIEW Board of Directors Governance IN THIS SECTION 38 Board of Directors 40 Principal risks and uncertainties 42 General information 50 Corporate governance 64 Directors’ remuneration report STRATEGIC REVIEW PERFORMANCE REVIEW GOVERNANCE FINANCIAL STATEMENTS 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 how we like to be treated.’ This section starts with the Board because governance is built on the Board’s active and committed engagement. You will find further sections on risks to our strategy and how we manage them, on our approach to corporate governance and on executive remuneration. Tesco PLC Annual Report and Financial Statements 2012 37
Page 1 and 2: Annual Report and Financial Stateme
Page 3 and 4: Trading profit £529m 14% of Group
Page 5 and 6: OVERVIEW Chairman’s statement Cha
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OVERVIEW Note 1 Accounting policies
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OVERVIEW Note 2 Segmental reporting
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OVERVIEW Note 3 Income and expenses
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OVERVIEW Note 6 Taxation continued
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OVERVIEW Note 10 Goodwill and other
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OVERVIEW Note 13 Group entities con
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OVERVIEW Note 17 Loans and advances
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OVERVIEW Note 20 Borrowings Current
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OVERVIEW Note 21 Financial instrume
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OVERVIEW Note 25 Share-based paymen
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OVERVIEW Note 34 Leasing commitment
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OVERVIEW Note 2 Auditor remuneratio
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OVERVIEW Note 9 Borrowings STRATEGI
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Financial calendar Financial year e
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Tesco plc Annual Report and Financial Statements 2012

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