Preliminary Results 2021/22

Preliminary Results 2021/22

CHAMPIONING GREAT VALUE FOR CUSTOMERS DELIVERS STRONG PERFORMANCE.

Strong sales and profit performance leading to retail free cash flow ahead of expectations:

· Strong sales throughout the year; Retail 1-yr LFL8 sales growth includes UK market outperformance and sharp recovery in Booker; 2-yr LFL reflects strong performance throughout the pandemic across all businesses:

· Total retail adjusted operating profit5 £2,649m, +35.8% at constant rates

− UK & ROI adjusted operating profit £2,481m, +35.4% due to higher sales and lower COVID-19 costs

− C. Europe adjusted operating profit £168m, +41.1% due to lower COVID-19 costs & higher YoY mall income

· Bank adjusted operating profit £176m, returning to profit following last year's increase in potential bad debt provision

· Statutory revenue £61.3bn, +6.0% and statutory operating profit £2,560m, +65.5%; driven by strong sales, reduced COVID-19 costs and a return to profitability in Tesco Bank

· Retail free cashflow6 £2,277m, +69.9% from higher profit, lower pension contribution9 & higher working capital inflow

· Net debt2,6 reduced by +£1.4bn since last year driven by strong cash flow; net debt ratio down to 2.5x

· Adjusted diluted EPS5,7 21.86p, +88.8%; statutory diluted EPS 19.64p, +252.0%; reflecting higher profits

· Proposed final dividend of 7.70pps to take full year dividend to 10.90pps - up +19.1% YoY

Strengthening our customer proposition:

· Market share gains in UK, ROI & C.Europe; including +30bps to 27.7% in UK, outperforming on value and volume

· Highest Brand NPS to date; Brand index further improved +9bps YoY (+63bps vs competitor average)

· Aldi Price Match extended to c.650 lines, all promotions now on Clubcard Prices, re-launched 1,600 Low Everyday Prices

· Value perception: outperformed market by 91bps; Quality perception: +11bps vs market decline of (32)bps

· UK online share +142bps to 34.8%; 9.0m digital Clubcard app users; 'Tesco Whoosh' now in over 200 stores

Creating long-term, sustainable value for all Tesco stakeholders:

· Substantial new pay deals agreed for hourly paid colleagues; additional thank you payment announced

· Group supplier viewpoint survey reached highest ever score of 86.4% (+1.4% pts YoY)

· Donated 53m meals through food redistribution programmes and 3m meals through 'Buy One to Help a Child' campaign

· Ambitious targets for net zero (2035: own operations, 2050: scope 3); first UK-wide soft plastic recycling network

· Multi-year performance & capital allocation frameworks set out, underpinned by four strategic priorities

· £300m capital returned to date through share buyback programme; committing to a further £750m by April 2023

Detail on financial footnotes can be found on page 4. Other data sources are referenced on page 15.

Ken Murphy, Chief Executive:

"Before reflecting on business performance, I want to say that the entire Tesco family is thinking of all the people affected by the war in Ukraine. The impact is particularly close to home for our colleagues in Central Europe, who are supporting with logistics and donations of food and clothing, as well as helping to transport donations to the Red Cross at the Ukrainian border. Combining our own donations and matching those of customers, together we have raised almost £4m to support the vital work of the Red Cross, as well as more than £500k for humanitarian organisations in Central Europe. We continue to offer support to those in Ukraine however we can.

Over the last year, we delivered a strong performance across the Group, growing share in every part of our business. We did this by staying focused on our customers and doing the right thing for our colleagues, our supplier partners and the communities we serve. I want to thank all of our colleagues who did a brilliant job navigating the ongoing pandemic, dealing with the supply chain challenges in the industry and tackling the onset of increasing inflation.

In October, we shared the four strategic priorities that will help us to stay competitive, accelerate our growth and ensure that we can sustainably generate strong levels of retail free cash flow. We have already made good progress: our value perception is the strongest it has been for many years; we are building deeper relationships with more customers through the digitisation of Clubcard; and we are serving more customers wherever, whenever and however they want through more convenience stores, more than 100 new Click & Collect sites and the launch of Tesco Whoosh.

Tesco is at its best when it puts customers first - it's what we did during the pandemic and it is what we will continue to do now. Clearly, the external environment has become more challenging in recent months. Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check - working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs. Through our powerful combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices, we are making more products more affordable, in more places than anyone else.

We are confident that taking this approach will enable us to deliver on the multi-year performance framework we shared in October, driving sustainable growth and generating strong retail free cash flow. This confidence, and our strong performance to date is reflected in the increased pace and scale of our capital return programme, with a commitment to repurchase shares worth £750m over the next twelve months."

OUTLOOK.

We are running the business to generate sustainable value for all stakeholders and will continue to champion great value for customers at a time when they are facing increasing pressure on household budgets.

Given the significant uncertainties in the external environment, we believe it is appropriate to provide profit guidance in the form of a wider than usual range. Our guidance for the 2022/23 financial year is therefore for retail adjusted operating profit of between £2.4bn and £2.6bn. Three main factors are likely to influence our actual performance:

- the extent of further normalisation in customer behaviour as we come out of the pandemic

- the level of cost inflation that we experience and our ability to partially offset it through accelerating Save to Invest

- the investment required to maintain the strength of our price position relative to the market

We expect Bank adjusted operating profit of c.£120m to £160m.

Our focus on cash flow remains unchanged and we expect another strong retail free cash flow performance within our £1.4bn to £1.8bn range.

CAPITAL RETURN PROGRAMME.

To date, we have purchased £300m worth of Tesco shares as part of our ongoing share buyback programme.

Reflecting our strong retail free cash flow to date and confidence in our ability to sustainably generate retail free cash flow within our guidance range of £1.4bn to £1.8bn going forwards, we are pleased to confirm a commitment to buy back a total of £750m worth of shares over the next twelve months. This means that by April 2023 we will have bought back a cumulative £1.05bn worth of shares since the start of the programme.

Going forward, we plan to announce any new forward commitments regarding our capital return programme as part of our preliminary results each April.

STRATEGIC UPDATE.

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 345,000 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.

In October, we refreshed our capital allocation framework and shared a new multi-year performance framework to guide our actions and track our progress over the coming years. We shared four strategic priorities which will help drive top-line growth, grow our absolute profits and 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.

We have already made good progress:

1) Magnetic value for customers - Re-defining value to become the customer's favourite

· Strongest UK price position in six years with shelf price index improved by +70bps YoY, achieved through:

- Aldi Price Match increased to c.650 lines; Aldi Price Match products feature in 99% of large baskets

- Re-launched Low Everyday Prices on 1,600 lines, with a particular emphasis on household and health & beauty

- 100% of promotions now on Clubcard Prices, including our iconic £3 meal deal

· Value perception outperformed market by 91bps; Quality perception +11bps vs market decline of (32)bps

· Brand index further improved +9bps (vs competitor decline of (54)bps) on top of an exceptionally strong performance last year; 2-yr Brand index +413bps vs competitor average +132bps

· Continuing to offer healthier choices through reformulation, with 7.7bn more calories removed

· Removed 1.6bn pieces of plastic to date; UK's first nationwide soft plastic recycling network rolled out from March 2021

· Launched first electric HGVs in UK, with pilot in Hungary & Czech Republic; EV charging points now in 500 UK stores

2) I love my Tesco Clubcard - Creating a competitive advantage through our powerful digital capability

· Continuing to drive Clubcard penetration +390bps YoY: Clubcard Prices launched in Tesco Express stores (May), Tesco Mobile (September) and Tesco Bank (October); also rolled out in ROI and launched Clubcard events in Central Europe

· Number of customers accessing Clubcard via app now at 9.0m, with more than half of customers now receiving e-statements; Clubcard households reached over 20m

· In-app personalised digital summary of customers' experience and value with Tesco trialled with one million customers

· dunnhumby leveraging insights from >800m customers with team of >500 data scientists; new CEO started Jan 2022

3) Easily the most convenient - Serving customers wherever, whenever and however they want to be served

· Online sales remain significantly ahead of pre-COVID levels; market share +142bps to 34.8%; orders held at c.1.2m/wk

· Four UFCs with pick rates around four times higher than store-based picking; added 102 new Click & Collect sites

· 'Tesco Whoosh' superfast delivery service now available from >200 stores, rolling out to 600 stores this year

· Simplified our offering, transitioned 89 Metro's to Express; opened 40 Express stores and 283 Booker retail partners

· Announced intention in November to acquire ten Joyce's Supermarkets in Republic of Ireland, subject to CCPC approval

4) Save to invest - Significant opportunities to simplify, become more productive and reduce costs

· New three-year savings plan underway, with target of c.£1bn through four streams - goods & services not for resale (GSNFR), property, store and distribution operations, and central overheads

· Announced removal of counters in 317 stores in February, repurposing space to better reflect customers' needs

· Announced the closure of Jack's format; six stores converted to superstores & seven due to close in FY22/23

· Simpler supplier arrangements and improved procurement processes underway for goods & services not for resale

Group review of performance.

Group sales4 increased by +3.0% at constant rates, with growth across all regions on top of exceptionally strong sales last year. Revenue increased by +6.4% at constant rates including fuel sales growth of +48.1% as customers travelled more following the easing of government restrictions.  Whilst two-year like-for-like fuel sales growth was negative at (6.4)%, this primarily reflects lower demand in the first half, with fuel sales ahead of pre-pandemic levels by the end of the year.

Group adjusted operating profit5 grew by +58.9% at constant rates, reflecting the strong sales performance across the retail businesses, a reduction in COVID-19 related costs and a return to profitability in Tesco Bank. These benefits were partially offset by inflationary pressures in the cost base, particularly in distribution costs. Group statutory operating profit, which includes adjusting items related to the costs of historical shareholder litigation claims, grew by +65.5%.

Finance income and finance costs reduced year-on-year primarily due to fair value remeasurement gains related to the mark-to-market movement on inflation-linked swaps, which were a £123m benefit this year compared to a £(214)m charge in the prior year. The reduction in our share of profit from 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 increase in tax this year primarily reflects higher levels of both retail and Tesco Bank operating profit, in addition to the revaluation of deferred tax relating to the announced change in the UK corporation tax rate from 19% to 25%, effective 1 April 2023.

Our adjusted diluted EPS5,7 rose by +88.8%, reflecting the increase in retail and Tesco Bank operating profit and a reduction in net finance costs. We have proposed a final dividend of 7.70 pence per ordinary share, taking the full-year dividend to 10.90 pence per ordinary share, an increase of 19.1% year-on-year.

Net debt2,6 reduced by £1.4bn year-on-year, primarily driven by strong free cash flow generation. Retail free cash flow6 increased by £0.9bn 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 working capital benefit from higher sales. These benefits were partly offset by an increase in capital expenditure. The net debt/ EBITDA ratio was 2.5 times at the year-end, compared to 3.3 times last year.

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 performance highlights, in the Glossary starting on page 58. During the year, the operating profit and EPS APMs were renamed. 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. The Retail free cash flow APM was amended in order to provide a more consistent and predictable view of free cash flow generated by the Group's retail operation. 'Exceptional items and amortisation of acquired intangibles' within operating profit, along with net pension finance costs, fair value remeasurements of financial instruments, and the tax impact of such items (below operating profit), are now called 'Adjusting items'. The policy for determining adjusting items, and the items adjusted for, are unchanged from the prior year and hence there is no impact on previously reported APMs.

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 34.

3. The Group has changed its accounting policy for property buybacks in light of an evolution of accepted practice in relation to the application of IFRS 16 'Leases' to such transactions. Comparatives have been restated for this change in accounting policy (see Note 1 on page 23 for further details).

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

5. Adjusted operating profit and Adjusted diluted EPS exclude Adjusting items as noted in footnote 1.

6. Net debt and retail free cash flow exclude Tesco Bank.

7. The share base used in Adjusted diluted EPS in the prior year is adjusted 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, Adjusted diluted EPS (adjusted for share consolidation) is presented on a basis other than in accordance with IAS 33. Please see page 61 for a reconciliation to Adjusted diluted EPS.

8. 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).

9. UK pension contributions were eliminated following the £2.5bn one-off contribution made to the scheme in the prior year from the proceeds from the sale of our businesses in Thailand and Malaysia.

10.Capex excludes additions arising from business combinations and buybacks of properties (typically stores), as well as additions relating to decommissioning provisions and similar items.

Segmental review of performance:

Sales performance: 

(exc. VAT, exc. fuel)4

Further information on sales performance is included in the supplementary information starting on page 55.

Adjusted operating profit5 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), one-year like-for-like sales increased by +2.2% on top of exceptional growth last year, driven by a sharp recovery in Booker catering sales, strong non-food sales in the UK & ROI and sustained market outperformance in the UK. Two-year like-for-like sales increased by +8.8% with all businesses growing versus pre-pandemic levels.

UK & ROI adjusted operating profit was £2,481m, up +35.4% at constant rates as higher sales volumes and lower COVID-19 costs year-on-year offset underlying operating cost inflation.

In the UK, we continued to incur COVID-19 related costs, primarily relating to colleague absence for those colleagues who were sick or self-isolating and additional costs related to sustained elevated online sales. Total COVID-19 related costs were £(220)m, significantly less than the £(892)m incurred last year. Our assumption for the current year is that we will incur a significantly lower level of COVID-19 costs as colleague absence rates return to pre-pandemic levels. Around £(80)m of residual costs will remain, relating to increased online demand, however we do not plan to report these separately going forwards.

Adjusted operating margin was up +94 basis points versus last year. Our core UK business benefited from strong growth in higher margin clothing sales, including an increase in full price sales from 77% last year to 86% this year, and Booker profitability recovered as catering demand increased following the reopening of the hospitality sector. Lower COVID-19 related costs were partly offset by our investments in value and service. We were able to more than offset inflationary pressures in the cost base this year with cost savings related to further simplifying our operating model.

UK - strong market outperformance, with sales growth on a one-year and two-year basis:

One-year like-for-like sales grew by +0.4%, including growth of +1.2% in the first half before sales declined by (0.5)% in the second half as we traded over elevated demand during the second and third national lockdowns in the prior year. First half growth was driven by non-food and increased levels of discretionary spend compared to last year, when footfall in stores was lower and customers prioritised spending on food during the first national lockdown. In the second half, food sales declined as customers were able to return to eating more out of home, and reflected very strong comparators last year, including double-digit growth in the fourth quarter.

We sought to mitigate as much price inflation as possible, ending the year with our strongest relative price position in over six years. Our ongoing value investments and a higher promotional participation meant we saw sales deflation for the year as a whole, but with inflation increasing during the second half of the year, as the grocery market faced significant cost pressures.

Two-year like-for-like sales grew by +8.2%, with growth both in stores and online, and in food and non-food. Average basket sizes across the business remained higher than pre-pandemic levels, partially offset by fewer shopping trips.

Our relentless focus on providing customers with great value and service resulted in consistent outperformance against the market throughout the year. Our UK market share reached its highest level in over four years and we saw 23 consecutive periods of net switching gains. We gained market share in the year on both a value and volume basis, with volume growing ahead of value as we did everything we could to minimise inflation for our customers. We have market leading two-year improvements in brand index (+413bps), value (+483bps) and quality (+385bps) perception. During the year we extended Clubcard Prices to all Express stores, increasing Clubcard sales penetration by +21%pts year-on-year in those stores. Clubcard penetration in Large stores was 86%, increasing by +7%pts year-on-year.

Online one-year like-for-like sales declined by (6.5)% as some customers chose to return to shopping in our stores as the pandemic eased. Online sales participation was 14% across the full year, with a peak during the first quarter of 15.5%. Two-year like-for-like sales grew by +66.1% and sales participation in online was 5% higher than before the pandemic, driven by both a sustained increase in orders and higher basket sizes. We have added £2.3 billion of online sales and fulfilled an average of over 1.2 million customer orders per week versus 0.7 million pre-pandemic.

We have included the table below to aid understanding of our online performance:

We opened three Urban Fulfilment Centres (UFCs) in the year, including Lakeside in the first half and Bradford and Horwich in the second half, taking the total number to four, with pick rates around four times higher than store-based picking. The fifth UFC is expected to open next month, in Rutherglen.

Following encouraging initial trials, we expanded 'Tesco Whoosh' - our 60-minute delivery service - from 50 stores in the first half to over 200 stores by the end of the year. We offer customers over 1,700 products, including fresh food, and delivery slots are available between 7am and 10pm, every day. We plan to roll the service out to 600 stores over the coming year. In October, we launched a pilot with Gorillas in our Thornton Heath store in London, offering customers grocery deliveries within ten minutes on a range of 2,000 products.

Convenience one-year like-for-like sales declined by (0.8)%, with a decline in the first half partially offset by growth of +4.0% in the second half as footfall in city centres recovered. Growth was particularly strong in our 'on-the go' stores and in 'food to go' and 'food for tonight' ranges, where sales grew by +34.9% and +21.6% respectively. Sales in our stores in neighbourhood locations declined following very high levels of demand last year as customers shopped closer to home.

Non-food sales growth was particularly strong this year, driven mainly by Clothing +19.4% as customers spent more time shopping our ranges in-store and we responded to changing customer demand in our ranges. Growth was particularly strong in Womenswear and Kids, and benefited from a re-balancing of space between Clothing and General Merchandise, now completed in 116 of our large stores, making Clothing more of a destination shop and making our food-adjacent General Merchandise ranges simpler and easier to shop. Food sales were marginally behind last year, down (0.4)%, driven mainly by lower demand in those categories which benefited from elevated levels of in-home consumption last year, including meat, fish & poultry, and grocery. Demand for plant-based products continues to grow at pace, with sales of plant-based meat alternatives growing by 130% since our 2018 baseline. We expanded our plant-based ranges further in the year, launching an additional 173 products, including our Wicked Kitchen meal deal in January. On a two-year basis, total UK like-for-like sales grew across all categories, with a particularly strong contribution from food. Sales in Finest* ranges grew by +25% on a two-year basis as customers treated themselves at home.

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 waste. We removed an additional 600 million pieces of plastic from our packaging this year, taking the cumulative total pieces of plastic removed over the past two years to 1.6 billion. We removed a further 7.7 billion calories from our own brand ranges as part of our work towards achieving 65% of our sales from healthy products by 2025. Our 'Buy One to Help a Child' campaign - where we gave a donation for every piece of fruit and vegetables purchased across our stores and online - provided FareShare with 3 million meals-worth of food to help charities and community groups.

In September, we announced accelerated climate ambitions, bringing forward our Group own operations net zero target to 2035. We also launched a new goal to be net zero across our entire value chain by 2050, aligned to a 1.5-degree pathway. We continued to roll out electric online delivery vans, set up new renewable energy projects and launched our first two electric HGVs in our distribution operations this year. We also launched our sustainability-linked supply-chain financing programme and issued our second sustainability-linked bond. In November, 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 - one-year LFL (2.9)% reflecting higher demand last year; +10.6% growth on a two-year basis:

One-year like-for-like sales declined by (2.9)% as we traded over exceptional COVID-19 demand last year. The COVID-19 impact was particularly strong in ROI as the restrictions on hospitality were in place for a longer period than in the UK. Despite the exceptionally strong comparative, ROI like-for-like sales grew by +0.3% over Christmas and we gained market share in the fourth quarter. Two-year like-for-like sales grew by +10.6%, reflecting a significant benefit from retained levels of higher in-home consumption.

Our online business grew by +3.1% on a one-year basis and now represents 8% of our sales. We have maintained a leading position, with a market share of 59%. We expanded our online offering further this year, rolling out an additional 37 Click & Collect locations and increasing our total slot capacity by 69%.

We launched Aldi Price Match in ROI in January, with hundreds of products matched. We have started to roll out Clubcard Prices, following successful Clubcard Prices Events. We also focused on making shopping easier for customers, including rolling out 'Scan As You Shop' to all large stores.

We announced an intention to acquire ten Joyce's Supermarkets in Galway in November. The acquisition is subject to the approval of the Competition and Consumer Protection Commission (CCPC).

Booker - strong sales growth on both a one-year and two-year basis:

* Total Booker also include small business sales of £238m

Booker delivered double-digit like-for-like sales growth on both a one-year and two-year basis. One-year growth of +15.3% was driven by a sharp recovery in catering sales as hospitality outlets re-opened, with a strong contribution from Best Food Logistics, the majority of whose customers are fast-service restaurants. Two-year catering sales declined by (1.6)% in total, impacted by the phased re-opening of the hospitality sector in the first half. In the second half catering sales were ahead of pre-pandemic levels, with growth of +9.6% supported by strong execution and competitive pricing.

In the retail business, one-year like-for-like sales grew +0.7%, primarily due to inflation in tobacco driven by annual duty increases. Retail sales excluding tobacco were marginally lower than last year as we lapped a strong uplift in neighbourhood-based convenience stores as customers shopped closer to home. Despite supply chain challenges, we delivered a resilient performance and gained new customers. Two-year retail like-for-like sales grew +19.3% driven by strong customer retention.

Central Europe - growth across all channels and categories on a one-year and two-year like-for-like basis:

Like-for-like sales grew by +2.9% on a one-year basis and by +2.5% on a two-year basis, with growth across all channels and categories. Growth was particularly strong in Slovakia and Hungary, and in our compact hypermarket and supermarket formats as customer footfall improved and we were able to offer our full range following non-food selling restrictions last year. Trading conditions were more challenging in the Czech Republic, due to non-food sales restrictions in the first quarter.

Non-food sales grew by +13.3%, with strong growth in both Clothing and General Merchandise. We saw a particularly positive customer response to our seasonal events. Food sales grew by +1.0%.

Customer NPS improved significantly across all markets year-on-year, driven by improvements in the shopping trip, with scores almost doubling by the end of the year for the region as a whole. We continued to strengthen our value proposition in the region, including the launch of Clubcard Prices Events in Slovakia and Hungary. Clubcard penetration increased during these events as customers accessed market-leading prices. Following the success of these initial events, we will expand Clubcard Prices to all markets and categories in the current year.

Central Europe adjusted operating profit was £168m, an increase of +41.1% at constant rates. Adjusted operating profit growth was driven by strong sales, lower COVID-19 related costs and higher margins from more full-priced non-food sales.

We have agreed the sale of 17 malls and one retail park in Central Europe. The transaction is expected to complete in the first half of the current year, generating proceeds of c.£200m and resulting in a c.£(12)m impact to adjusted operating profit in the current year, driven by a reduction in mall income. We will continue to operate the Tesco hypermarkets in the malls on a long-term leasehold basis.

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

1. The prior period net interest margin has been restated from 5.2% to 4.7%.

2. The prior period total capital ratio has been restated from 28.4% to 28.5%.

Revenue grew by +25.4%, due to the benefit of the full acquisition of Tesco Underwriting which completed in May 2021. Revenue excluding Tesco Underwriting declined by (9.4)%, primarily as a result of lower income from unsecured lending due to lower average balances as customers paid down their debt during the pandemic, or increased savings buffers which reduced the need for new credit. We did however see a strong recovery in credit card customers' spending levels and in new business unsecured lending volumes.

ATM transactions increased by 13.6% year-on-year as cash usage recovered post-lockdown. Travel money continued to be impacted by the pandemic and international travel restrictions, although we saw an encouraging increase in demand at the end of the year as restrictions eased.

Tesco Bank adjusted operating profit was £176m, including a £13m contribution from Tesco Underwriting being fully consolidated. The significant recovery reflects the charge last year related to an increase in the provision for potential bad debts which accounted for the anticipated macroeconomic impact from COVID-19. We released part of this provision in the second half as the macroeconomic outlook improved and customer defaults remained low. We then recognised a separate provision in the second half to reflect the increased risk associated with cost of living pressures.

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. In recognition of the sharp recovery in profitability in the year, the Bank paid a dividend of £87m to the Group. This comprises the typical annual £50m dividend for the 21/22 financial year and a catch-up of £37m in relation to the reduced payment of £13m in the prior year.

Tesco Bank won 'Best Overall Provider' at the 2021 YourMoney Awards, in recognition of the quality of our customer service and competitive pricing of our products. We introduced a number of new products and services for customers this year including Clubcard Pay+ in January. 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 being underwritten by Tesco Underwriting following the completion of its acquisition in May.

Adjusting items in statutory operating profit:

Adjusting items are excluded from our adjusted operating profit performance by virtue of their size and nature to provide a helpful alternative perspective of the year-on-year performance of the Group's ongoing trading business. Total adjusting items in statutory operating profit in the year resulted in a charge of £(265)m, compared to a charge of £(241)m 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 adjusting charge of £(193)m. The settlement of these claims was paid in full in the year, £(105)m in the first half and £(88)m in the second half. This cash outflow is presented within adjusting cash items. Given that the legal timeframe for bringing a claim has now elapsed, no further related claims can be brought by shareholders.

We recognised an adjusting credit of £128m related to the profit generated on disposal of properties in the year. The majority of the property profits recognised related to the sale of our Fenny Lock distribution centre which generated proceeds of £146m and a £103m profit on disposal.

During the period, the Group recognised a net impairment charge of £(115)m on non-current assets. This includes £(62)m required as a result of the Group's acquisition of our partner's stake in The Tesco Sarum Limited Partnership joint venture which brought into full ownership eleven stores. The remaining charge largely reflects normal fluctuations in store level performance, property fair values and changes in discount rates, as well as any specific store closures.

Amortisation of acquired intangible assets is excluded from our headline performance measures. We incurred a charge of £(76)m in the period, which primarily relates to our merger with Booker in March 2018, which resulted in the recognition of £755m of intangible assets.

Restructuring provisions of £(44)m were recognised in the second half, relating to operational restructuring changes announced in February 2022 as part of our 'Save to Invest' programme.

We received software licence fee income of £26m from services provided to CP Group following the sale of our businesses in Asia.

Further detail on adjusting items can be found in Note 3, starting on page 31.

Joint ventures and associates:

Our share of post-tax profits from joint ventures and associates was £15m, compared to £26m in the prior year. The year-on-year reduction was primarily due to profits from Tesco Underwriting Limited now being recognised in Tesco Bank adjusted operating profit following its full acquisition in May 2021 and a reduction in profits generated by our Trent Hypermarket Limited joint venture in India due to the adverse trading impacts of COVID-19 in the year.

Net finance costs:

Net interest on medium term notes, loans and bonds was £(208)m, down £10m year-on-year. The reduction in finance costs from bond maturities, tenders and new debt issuances at lower rates of interest was largely offset by interest payable on the £(453)m of net debt we acquired with The Tesco Property (No. 2) Partnership in September 2020 and with the £(585)m of debt acquired with The Tesco Sarum Limited Partnership in December 2021. The acquisition of The Tesco Sarum Limited Partnership brings into full ownership eleven stores and resulted in a reduction in the lease liability of £355m.

The de-recognition of lease liabilities related to these property buybacks and the reducing nature of our total lease liability over time is the primary driver of the £41m reduction in finance charges payable on lease liabilities year-on-year.

A non-cash fair value remeasurement credit of £123m primarily related to the mark-to-market movement on inflation-linked swaps, driven by the impact of an increase in 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 £(22)m decreased by £21m, 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 expect net pension finance income of £79m in the current year as a result of the closing IAS 19 pension surplus.

In February, we exercised the option to buy back our partner's equity in the Tesco Dorney Limited Partnership property joint venture. We expect the transaction to complete towards the end of our 2022/23 financial year, bringing seven large 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, comprising a c.£(0.7)bn impact on borrowings, partially offset by a c.£0.4bn reduction in lease liabilities. Following this transaction, we will have five UK property JV structures still in place, from a peak of 13 structures in 2015. These five remaining structures contain property worth £3.2bn and debt of £2.1bn, with £1.9bn of associated lease liabilities on our balance sheet. The three largest of our remaining property JVs are with the Tesco Pension fund.

Further detail on finance income and costs can be found in Note 4 on page 32, as well as further detail on the adjusting items in Note 3 on page 31.

Group tax:

Tax on adjusted Group profit was £(502)m, £(253)m higher than last year, reflecting higher levels of both retail and Tesco Bank operating profit, in addition to a one-off charge related to the revaluation of deferred tax, following the announced increase in the corporation tax rate in the UK from 19% to 25%, effective 1 April 2023.

The effective tax rate on adjusted Group profit was 22.8%, higher than the current UK statutory rate of 19%, primarily due to the revaluation of deferred tax. The banking surcharge levied on Tesco Bank profit and depreciation of assets which do not qualify for tax relief also increased the tax rate.

We expect an adjusted effective tax rate of between 21% and 22% in the current financial year. We forecast our adjusted effective tax rate to increase to around 26% from our 2023/24 financial year driven by the increase in the UK corporation tax rate in April 2023. Further detail on Group tax can be found in Note 5 on page 32.

Total Group cash tax paid in the year was £(199)m on a continuing operations basis, which included £(152)m of tax paid in the UK. Tax paid in the year was £(29)m higher than in the prior year, primarily due to higher levels of retail and Tesco Bank operating profit. This was partly offset by prior-year tax losses and a benefit from the super-deduction allowance on certain capital investments, introduced in the Chancellor's budget in March 2021, along with £120m in relation to the £2.5bn one-off pension contribution made in the prior year, the relief for which is required to be spread over four years for tax purposes.

Earnings per share:

The share base used in Adjusted diluted EPS in the prior year is adjusted 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, Adjusted diluted EPS (adjusted for share consolidation) is presented on a basis other than in accordance with IAS 33. Please see page 61 for a reconciliation to Adjusted diluted EPS.

Adjusted diluted EPS was 21.86p (LY: 11.58p), +88.8% higher year-on-year as the recovery in retail and Tesco Bank profits, the drivers of which are described more fully in the segmental review of performance section above, more than offset the higher tax charge.

Statutory diluted earnings per share was 19.64p (LY: 5.58p) +252.0% higher year-on-year. In addition to the recovery in adjusted operating profit, we saw a significant reduction in the net finance charge due to an offsetting credit from fair value remeasurement of financial instruments, the drivers of which are described in the net finance costs section. These benefits more than offset a higher charge related to adjusting items and a higher tax charge in year, driven by higher adjusted operating profit.

Discontinued operations:

We completed the sale of our business in Poland to Salling Group A/S in March 2021, generating proceeds of £122m and a loss on disposal of £(23)m.

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. An adjusting charge increasing the provision held by £33m was recognised in the year, with the total cash payment of £119m made in the second half.

Further information on discontinued operations is included in Note 6, starting on page 34.

Dividend:

Last year we held the full-year dividend in line with the 2019/20 financial year to recognise the strong cash generation of the business, despite the significant operating profit impact from the COVID-19 pandemic. This represented an exception to our dividend policy and resulted in a dividend per share which exceeded 50% of adjusted diluted EPS.

We propose to pay a final dividend of 7.70 pence per ordinary share, taking the full-year dividend to 10.90 pence per ordinary share, including the payment of an interim dividend of 3.20 pence per ordinary share in November 2021. This year's final dividend is +19.1% higher than last year, reflecting the increase in retail and Tesco Bank adjusted operating profit and the impact from last year's policy exception. It is our intention to pay a progressive dividend going forward - i.e. we aim to grow the dividend per share each year, broadly targeting a pay-out of around 50% of earnings.

The proposed final dividend was approved by the Board of Directors on 12 April 2022 and is subject to the approval of shareholders at this year's Annual General Meeting. The final dividend will be paid on 24 June 2022 to shareholders who are on the register of members at close of business on 20 May 2022 (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 7 June 2022.

Summary of total indebtedness (excludes Tesco Bank):

Total indebtedness was £(10,758)m, down £2,201m year-on-year primarily driven by strong free cash flow generation leading to a reduction in net debt, net of dividends paid and a £762m reduction in the IAS 19 pension deficit.

Lease liabilities were £(7,946)m, down £560m year-on-year largely due to the de-recognition of £355m relating to the eleven stores we took back into full ownership following the purchase of our partner's stake in The Tesco Sarum Limited Partnership. We also de-recognised £120m of lease liabilities relating to our Polish business following the sale of the business to Salling Group A/S in March 2021.

The acquisition of our partner's stake in The Tesco Sarum Limited Partnership increased net debt by c.£(300)m, including £(585)m of borrowings acquired and £(64)m of derivatives, net of a reduction in the related lease liabilities.

Pension liabilities significantly decreased during the year, primarily due to an increase in discount rates driven by higher corporate bond yields, partially offset by underlying market movements in inflation rates and gilts. The pension assets increased year-on-year due to strong investment returns. As a result, we carried a net IAS 19 pension surplus (post-tax) at the end of the year of £2,121m, compared to a net deficit of £(1,004)m last year. The Group IAS 19 pension surplus is disregarded in total indebtedness and only pension schemes which are in a net deficit position are considered.

We had strong levels of liquidity at the end of the year of £3.0 billion and our £2.5 billion committed facility remained undrawn. Our committed facility currently matures in September 2024 and we have the option to extend this by a further year. The rate of interest payable on this facility is linked to three of our sustainability commitments. As we delivered these sustainability targets, we achieved the corresponding margin reduction in the year. In October, we issued our second sustainability-linked bond, raising £400m at a low rate of interest. This was issued to refinance a bond which was approaching maturity and the refinancing will result in an annual interest saving of £18m.

Our net debt to EBITDA ratio was 2.5 times, down from 3.3 times at the prior year-end and within our targeted range of 2.8 to 2.3 times. The year-on-year improvement represents both an increase in our retail EBITDA due to higher sales and lower COVID-19 costs, and a reduction in net debt before lease liabilities driven by strong free cash flow generation. The total indebtedness ratio was 2.5 times compared to 3.6 times last year.

Fixed charge cover was 3.5 times this year, compared to 2.9 times last year, reflecting a reduction in net finance costs, lease interest payments, lease principal payments and higher retail EBITDA.

Summary retail cash flow:

Our retail free cash flow APM definition was updated at the interim results this year to provide a better view of operational cash performance and excludes cashflows related to acquisitions & disposals, property transactions and adjusting cash items. We continue to fully disclose these lines but they do not form part of the retail free cash flow headline APM.

The following table reconciles Group adjusted operating profit to retail free cash flow. Further details are included on page 62.

Retail free cash flow increased by +£937m year-on-year to £2,277m, driven by higher retail adjusted operating profit, a reduction in the pension contribution, a benefit from lower working capital and an increase in the dividend received from Tesco Bank following its return to profitability this year.

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. We expect an annual benefit of c.£260m in retail free cash flow as a result of lower pension deficit contributions. The pension cash outflow of £(19)m in the year mainly relates to Booker pension scheme.

Our total working capital inflow was £501m, driven by the sharp recovery in fuel volumes and Booker's catering business in the first half as travel and hospitality sector restrictions were significantly fewer than at the end of the prior year. In the second half, working capital was broadly neutral, as the seasonal unwind we would normally see following peak trading over the summer was offset by strong UK sales and higher fuel payables due to both higher volumes and cost price inflation.

Cash capex increased by £(148)m year-on-year as we opened more stores in the UK than in the prior year as a result of COVID-19 and continued to expand our online proposition across the UK & ROI businesses.

Interest paid related to net debt (exc. lease liabilities) of £(239)m was £(13)m higher year-on-year. 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 and The Tesco Sarum Limited Partnership from December 2021. Interest paid related to lease liabilities decreased by £42m year-on-year primarily due to a reduction in the total lease liability following the de-recognition of the liabilities related to these properties.

Cash tax paid in the year was £(195)m, compared to £(161)m last year. The increase reflects higher retail adjusted operating profits year-on-year, which was partially offset by 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 also continue to receive tax relief in relation to the £2.5bn one-off pension contribution made in the prior year. This amounted to £120m for the full-year.

We saw a net cash outflow of £(144)m related to the purchase of our own shares, which includes £(191)m of shares purchased in the market to offset the dilution from the issuance of new shares to satisfy the requirements of share schemes and a £47m cash inflow related to proceeds from colleague share saving schemes. The net impact was £(78)m higher than the prior year, driven by the phasing of purchases to satisfy current year maturities. This will lead to a significant reduction in the net spend in the current year.

Cashflows related to acquisitions & disposals, property transactions and adjusting cash items are now excluded from our simplified definition of retail free cash flow.

The inflow from disposals in the year of £122m includes the proceeds from the sale of our business in Poland to Salling Group A/S, which completed in March 2021.

We generated a net £228m from property transactions, which includes £308m generated from the sale of properties, net of an outflow of £(80)m related to property buybacks. We disposed of our Fenny Lock distribution centre in the second half for proceeds of £146m and generated £109m from the sale of properties in Poland which were not included in the corporate transaction with Salling Group A/S. We bought back one Extra store in Bury for £(37)m and paid cash consideration of £(43)m to buy back a full stake in The Tesco Sarum Limited Partnership.

The cash impact of adjusting items was £(316)m, of which £(312)m related to the settlement of shareholder litigation claims and a legal claim from the purchasers of our Homeplus business during the period.

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. The supplementary information (p.55) provides a full breakdown of space by segment.

Capital expenditure (capex) shown in the table above reflects expenditure on ongoing business activities across the Group, excluding property buybacks.

Our capital expenditure for the year was £1,101m, +£86m higher year-on-year, which primarily relates to the ongoing investment in our online proposition, and the opening of new Tesco Express and One Stop stores in the UK. We opened a further three UFCs in the UK and rolled out more delivery vans and an additional 37 Click & Collect sites in ROI. We also purchased an additional 20 electric delivery vans and two electric HGVs in the UK as we continue to work to reduce emissions from our own operations.

We opened two superstores in the UK, with sites in Mablethorpe and Wolverhampton, and a further 21 Tesco Express sites, which was slightly fewer than expected. We expect to open 65 Tesco Express stores in the current year.

We expect 2022/23 full year capital expenditure to be at the top end of our £0.9bn to £1.2bn guidance range.

Statutory capital expenditure of £1.8bn includes £0.6bn relating to the buyback of one UK Extra store in Bury and The Tesco Sarum Limited Partnership property joint venture referred to above.

Further details of current and forecast space can be found in the supplementary information starting on page 55.

Property:

1. Stores, malls, investment property, offices, distribution centres, fixtures and fittings and work-in-progress. Excludes joint ventures.

2. Property, plant and equipment excluding vehicles.

3. Excludes fixtures and fittings.

The estimated market value of our fully owned property as at the year-end increased by £0.2bn to £18.1bn. The market value of £18.1bn represents a surplus of £1.6bn over the net book value (NBV).

Our Group freehold property ownership percentage, by value was in-line with the prior year at 58%. In December, we completed the purchase of our partner's 50% stake in The Tesco Sarum Limited Partnership, bringing back into full ownership seven sites. This acquisition contributed to a 1% increase in the percentage of fully owned properties in the UK & ROI and will deliver an annual cash rental saving of c.£30m. We also repurchased one Extra store in the UK.

In Central Europe, the reduction in the market value of fully owned property year-on-year reflects the reclassification of a number of mall properties which are held for sale. In the year, we released £109m of proceeds through the disposal of properties in Poland which were not included as part of the corporate sale.

Contacts:

This document is available at www.tescoplc.com/prelims2022.

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/prelims2022. 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 Q1 Trading statement on Friday 17th June 2022.

Information contained within this announcement includes inside information as defined in Article 7 of the Market Abuse Regulation No. 596/2014. This announcement is being released on behalf of Tesco PLC by Robert Welch, Company Secretary.

Sources:

UK market share based on Kantar Total Tesco year-on-year market share gains of Grocers Total Till Roll on 12 week rolling basis to 20 February 2022.

UK online market share based on Kantar Total Tesco year-on-year market share gains of Total Till Roll online channel on 12 week rolling basis to 20 February 2022.

ROI online market share based on Kantar ROI Total Tesco market share of Total Till Roll online channel on 12 week rolling basis to 20 February 2022.

Brand Index, Value perception and Quality perception based on YouGov 12 week rolling basis to 27 February 2022. 'Market' consists of Sainsbury's, Morrisons, Asda, Aldi, Lidl, Waitrose, M&S, Co-op & Iceland.

Price index is calculated using the single retail selling price of each item, including price cut promotions across Q4; the index is weighted by sales and market share to reflect customer importance and competitor size. Competitor set consists of Sainsbury's, Morrison's, Asda, Aldi & Lidl.

YoY Clubcard sales penetration is based on Large, Express and All stores from February 2021 to February 2022.

UK Express store openings include 19 One Stop conversions.

Number of new Booker retail partners shown net of openings and closures.

Disclaimer.

Certain statements made in this document are forward-looking statements. For example, statements regarding future financial performance, 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.

Group income statement

(a) Comparatives have been restated due to a change in accounting policy. Refer to Note 1 for further details.

(b) 'Exceptional items and amortisation of acquired intangibles' have been renamed 'Adjusting items'. Refer to Note 1 for further details.

The notes on pages 23 to 54 form part of this condensed consolidated financial information.

Group statement of comprehensive income/(loss)

* Comparatives have been restated due to a change in accounting policy. Refer to Note 1 for further details.

The notes on pages 23 to 54 form part of this condensed consolidated financial information.

Group balance sheet

(a) Comparatives have been restated due to a change in accounting policy. Refer to Note 1 for further details.

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

The notes on pages 23 to 54 form part of this condensed consolidated financial information.

Group statement of changes in equity

* Comparatives have been restated due to a change in accounting policy. Refer to Note 1 for further details.

The notes on pages 23 to 54 form part of this condensed consolidated financial information.

* Comparatives have been restated due to a change in accounting policy. Refer to Note 1 for further details.

The notes on pages 23 to 54 form part of this condensed consolidated financial information.

Group cash flow statement

(a) Comparatives have been restated due to a change in accounting policy. Refer to Note 1 for further details.

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

The notes on pages 23 to 54 form part of this condensed consolidated financial information.

Notes

Note 1 Basis of preparation

This preliminary consolidated financial information has been prepared in accordance with the Disclosure and Transparency Rules of the UK Financial Conduct Authority, and the principles of UK-adopted IFRS. 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 Group financial statements 2022, which are the same as those used in preparing the Annual Report and Group financial statements 2021, except as noted below. The financial year represents the 52 weeks ended 26 February 2022 (prior financial year 52 weeks ended 27 February 2021). This preliminary consolidated financial information does not constitute statutory consolidated financial statements for the 52 weeks ended 26 February 2022 as defined under section 434 of the Companies Act 2006.

The Annual Report and Group financial statements for the 52 weeks ended 26 February 2022 were approved by the Board of Directors on 12 April 2022. The report of the auditor on those Group financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006. The Annual Report and Group financial statements for 2022 will be filed with the Registrar in due course.

The Annual Report and Group financial statements for the 52 weeks ended 27 February 2021 were approved by the Board of Directors on 13 April 2021. The report of the auditor on those Group financial statements was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under section 498 of the Companies Act 2006.

The Directors have, at the time of approving the financial statements, a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future, which reflects a period of 18 months from the date of approval of the financial statements, and have concluded that there are no material uncertainties relating to going concern. Thus they continue to adopt the going concern basis of accounting in preparing the financial statements. Further information on the Group's strong liquidity position is given in the Summary of total indebtedness section.

Adoption of new IFRSs

The Group early-adopted 'interest rate benchmark reform' phase 2 amendments in the prior year. The Group has elected not to apply the exemption granted in the 'COVID-19-related rent concessions beyond 30 June 2021' amendment to IFRS 16, 'Leases', as the Group has not received material COVID-19-related rent concessions as a lessee.

Other standards, interpretations and amendments effective in the current financial year have not had a material impact on the Group financial statements.

The Group has not applied any other standards, interpretations or amendments that have been issued but are not yet effective. The impact of the following is still under assessment:

- IFRS 17 'Insurance contracts', which will become effective in the Group financial statements for the financial year ending 24 February 2024, subject to UK endorsement. IFRS 17 is expected to have an impact on the Group's subsidiary, Tesco Underwriting Limited (TU), which provides the insurance underwriting service for a number of the Group's general insurance products. An IFRS 17 project team has been established and work is well progressed on the design and build of reporting systems and processes for reporting under IFRS 17. It is expected that the simplified premium allocation approach will be applied to all material insurance and reinsurance contract groups. During the next financial year, parallel reporting for the comparative period will be established. Until the impact assessment is complete, it is not practical to provide an estimate of the financial impact of adopting IFRS 17.

Other standards, interpretations and amendments issued but not yet effective are not expected to have a material impact on the Group financial statements.

Change in accounting policy

The Group has changed its accounting policy for property buybacks in light of an evolution of accepted practice in relation to the application of IFRS 16 'Leases' to such transactions. Property buybacks outside of a corporate wrapper are now viewed as the modification of a lease to include a purchase option, followed by the immediate exercise of that purchase option. Applying lease modification accounting to property buybacks results in the lease liability being settled and the right of use asset forming part of the cost of the property, plant and equipment acquired, and no gain or loss being recognised in the income statement from the property buyback. Previously, they were treated as an immediate lease termination followed by a property purchase. As a result of the change in accounting policy, there is no longer an immediate income statement impact of such transactions, and the cost of the property, plant and equipment acquired is reduced accordingly.

Property buybacks inside a corporate wrapper (such as a special purpose vehicle or joint venture structure) that do not meet the definition of a business combination continue to be treated as asset acquisitions. The Group has changed its policy for such asset acquisitions to include in the cost of the asset acquisition the carrying values of pre-existing lease contracts and previously held interests, and no gain or loss is recognised in the income statement from the property buyback. Previously, pre-existing equity interests were remeasured to fair value by analogy to IFRS 3 'Business combinations' and surrendered as part of the cost of acquiring the underlying property and pre-existing lease contracts were treated as terminated, with any resulting gain or loss recognised in the income statement. This change in accounting policy for property buybacks inside a corporate wrapper means that the same accounting treatment is applied for all buybacks, consistent with the economics of such transactions being similar. The Group therefore believes that this approach is reliable and more relevant.

The impact on the 29 February 2020 balance sheet is to decrease property, plant and equipment by £77m, and decrease both net assets and retained earnings by £77m. The impact on the 27 February 2021 balance sheet is to decrease property, plant and equipment by £266m, and decrease both net assets and retained earnings by £266m. In the comparative period income statement, cost of sales increases and gross profit/(loss), operating profit/(loss), profit before tax, profit for the year from continuing operations and profit for the year all decrease by £189m, of which £162m relates to adjusting items. Basic and diluted EPS decrease by 1.96 pence. There is no impact on operating, investing or financing cash flows, Net debt or Total indebtedness.

Primary financial statements presentation

'Exceptional items and amortisation of acquired intangibles' within operating profit, along with net pension finance costs, fair value remeasurements of financial instruments, and the tax impact of such items (below operating profit), are now called 'Adjusting items', and are presented on the face of the income statement in the 'Adjusting items' column. The policy for determining adjusting items, and the items adjusted for, are unchanged from the prior year hence there is no impact on previously reported alternative performance measures from this change in presentation. Further detail on adjusting items is given in the 'Critical accounting judgements' section of this note. 

'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.

On 4 May 2021, the Group acquired control over Tesco Underwriting Limited (TU), 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 14.

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 £116m are presented on a gross basis as proceeds from sale of other investments of £201m and purchase of other investments of £(85)m. Comparative net cash flows from derivative financial instruments of £(580)m are presented on a gross basis as cash inflows from derivative financial instruments of £1,696m and cash outflows from derivative financial instruments of £(2,276)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

Insurance

Prior to the acquisition of TU on 4 May 2021, the Group generated commission from the sale and service of motor and home insurance policies underwritten by TU. Following the acquisition, these amounts represent intercompany transactions which are fully eliminated in the Group income statement. The Group also generated commission from the sale and service of motor and home insurance policies underwritten by a third-party underwriter until August 2021 when the Group brought in-house the writing of home and motor insurance policies which were previously underwritten through its broker panel. Commission was based on commission rates which were independent of the profitability of underlying insurance policies. Similar commission income is also generated from the sale of white label insurance products underwritten by other third-party providers. This commission income is recognised on a net basis as such policies are sold.

In the case of some commission income on insurance policies managed and underwritten by a third party, the Group recognises commission income from policy renewals as such policies are sold. This is when the Group has satisfied all of its performance obligations in relation to the policy sold and it is considered highly probable that a significant reversal in the amount of revenue recognised will not occur in future periods. This calculation takes into account both estimates of future renewal volumes and renewal commission rates. A contract asset is recognised in relation to this revenue. This is unwound over the remainder of the contract with the customer, in this case being the third-party insurance provider.

The end policyholders have the right to cancel an insurance policy at any time. Therefore, a contract liability is recognised for the amount of any expected refunds due and the revenue recognised in relation to these sales is reduced accordingly. This contract refund liability is estimated using prior experience of customer refunds. The appropriateness of the assumptions used in this calculation is reassessed at each reporting date.

Classification of insurance contracts

Contracts under which the Group accepts significant insurance risk from another party (the policyholder) by agreeing to compensate the policyholder or other beneficiary if a specified uncertain future event (the insured event) adversely affects the policyholder or other beneficiary are classified as insurance contracts. These contracts remain insurance contracts until all rights and obligations are extinguished or expire. Insurance contracts may also transfer some financial risk.