P3 Notes

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We delivered modest profit growth in a challenging economic
environment, with a strong international performance largely offset by a reduction in UK profits. Whilst the year gave us many things to be proud of, overall it was not the most pleasing performance. My team and I are resolved to get Tesco back to winning, particularly at home. Group sales increased by 7.4% to £72 billion, while Group trading profit was up 1.3% on last year and underlying profit before tax rose to £3.9 billion, an increase of 1.6%. Group capital expenditure in the year was £3.8 billion. Group return on capital employed (‘ROCE’) increased – to 13.3% (last year 12.9%).

The Board has proposed a final dividend of 10.13p per share, taking the full year dividend to 14.76p, which is an increase of 2.1% on last 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 our own expectations in the year and, partly as a result of this, we decided to accelerate our plan to make improvements which has meant a necessary reset to expectations for our growth in 2012/13 as well. This acceleration and reset were announced with our Christmas trading update in January. Despite this significant re-investment programme, we remain

committed to driving higher returns for shareholders. Although our investment plans in the UK make achieving our ROCE target more challenging in the short term, we still expect to deliver a ROCE of 14.6% by 2014/15, with broadly based growth from

around the Group.
Strategic update
In last year’s Annual Report, I set out an evolution of our strategy into seven parts:
To grow the UK core;
To be an outstanding international retailer in stores
and online;
To be as strong in everything we sell as we are in food;
To grow retail services in all our markets;
To put our responsibilities to the communities we serve
at the heart of what we do;
To be a creator of highly valued brands; and
To build our team so that we create more value.
This strategy remains as relevant now as it did a year ago and I’m pleased to be able to update you on the progress we have made on each of these strategic objectives. I also set out immediate management priorities for the business last year – keeping the UK strong and growing; becoming outstanding internationally, not just successful; becoming a multi-channel retailer wherever we trade; delivering on the potential of retail services; applying Group skill and scale; and delivering higher returns. You will see how these priorities have shaped our actions through the year.

To grow the UK core
The deli counter in our Hertford Superstore has a flat glass front, bright lighting and warmer, more engaging signage
In the UK, high petrol prices and falling real incomes affected customers’ discretionary spending in the year. The combination of disappointing sales in the second half of the year and our decision to increase investment into the shopping trip meant that our UK performance was weaker than planned. Sales grew by 6.2%, supported by excellent new store performance, but trading profit declined by (1.0)%.

The issue we are addressing is that the shopping trip just hasn’t been improving fast enough and our standards haven’t been as consistent as our customers have come to expect. As a result, we are taking action to improve each aspect of the customer offer. This will involve significant revenue and capital investment in a comprehensive plan encompassing six key areas.

The UK Plan – Building a Better Tesco
Our Plan for the UK business has six elements:
Service & Staff: helping our people deliver great service by investment in recruitment, training and equipment, dedicated to particular departments such as produce so that our customers notice the change....
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