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212584_TESCO_REP_COVER 1/5/08 19:33 Page 1Tesco PLCAnnual Report and Financial Statements 2008Every Little HelpsMore than theweekly shopwww.tesco.com/annualreport08Annual Report and Financial Statements 2008212584_TESCO_REP_COVER 1/5/08 19:33 Page 2Tesco PLCContentsTesco House More than theDelamare Road Cheshunt Hertfordshire EN8 9SLweekly shopFinancial highlights1Most people know something about Tesco. After all, we are the UK’s largestChief Executive’s statement2grocer and we’ve been serving customersfor the best part of a century. What youThe use of the FSC logo identifiesReport of the Directors 3might not know, is that Tesco is also theproducts which contain wood from> Business Review3world’s third largest grocery retailer withwell-managed forests certified inaccordance with the rules of the> General information 18operations in 12 international markets,Forest Stewardship Council.> Corporate governance20employing over 440,000 people andPrinted on 100% recycled paperserving millions of customers every week. with FSC certification. All pulps areDirectors’ remuneration report25Elemental Chlorine Free (ECF) andthe manufacturing mill is accreditedWe’re not simply about providing greatwith the ISO 14001 standard forFinancial statements 39quality food at affordable prices.environmental management.> Statement of Directors’ Printed by CTD using an alcohol-responsibilities40We provide more choice than ever to free process. The printing inks are made with non-hazardous> Independent auditors’ report more customers, whether it’s through vegetable oil from renewablesources. Over 90% of solvents andto the members of Tesco PLC41our expanding international operations,developers are recycled for further> Group income statement42innovative retailing services or our growinguse and recycling initiatives are inplace for all other waste associated> Group statement of recognised non-food offer. It doesn’t matter howwith this production. CTD are FSCincome and expense43people choose to shop with us or what and ISO 14001 certified with strictprocedures in place to safeguard the> Group balance sheet44they choose to buy, our core purposeenvironment through all processes. > Group cash flow statement45remains the same – to create value forDesigned and produced by> Reconciliation of net cash flowcustomers to earn their lifetime loyalty.35 Communications.to movement in net debt note45> Notes to the Group financial We are also playing our part in tacklingstatements46some of the social and environmental> Five year record96challenges we all face by putting> Tesco PLC – Parent Companycommunity at the heart of what we do.financial statements98> Independent auditors’ report From carrots to computers, from to the members of Tesco PLC108banking to broadband, from Shanghai to San Diego. We are……more than the weekly shop.Go online!How to find out more online▼Every year, more and more Cover: Kana and sonEvery year, more and more information is available information is available for ourfor our shareholders, staff and customers.Tesco Express, Tokyo, Japanshareholders, staff and customers.▼ Back Cover: Normanwww.tesco.com/annualreport08www.tesco.com/annualreport08Fresh & Easy, Compton, California, USA212584_TESCO_REP_P1_17 1/5/08 19:34 Page 1Financial highlightsGrowth on 200711.1%11.8%Group sales (including VAT)Underlying Group profitbefore tax5.7%20.8%Group profit before taxUnderlying diluted earnings (15.3% growth excluding last year’s exceptional items; principally the Pensions A-Day credit)per share*14.2%13.1%Diluted earnings per shareDividend per share20082007Group sales (£m) (including value added tax)51,77346,611Group revenue (£m) (excluding value added tax)47,29842,641Underlying Group profit before tax (£m)†2,8462,545Group profit before tax (£m)2,8032,653Underlying diluted earnings per share (p)27.0222.36Diluted earnings per share (p)26.6123.31Dividend per share (p)10.909.64Group enterprise value (£m) (market capitalisation plus net debt)37,65640,469Return on capital employed12.9%§12.6%‡* 13.1% growth on a normalised 28.9% tax rate.† Adjusted for IAS 32, IAS 39, the net difference between the IAS 19 Income Statement charge and ‘normal’ cash contributions for pensions and IAS 17 ‘Leases’ – impact of annual uplifts in rent andrent-free periods. In 2007 adjustment was also made for pensions adjustment – Finance Act 2006 and impairment of the Gerrards Cross site.§ Using a ‘normalised’ tax rate before start-up costs in the US and Tesco Direct, and excludes the impact of foreign exchange in equity and our acquisition of a majority share of Dobbies‡ Including the one-off gain from Pensions A-Day, ROCE in 2007 was 13.6%.Tesco PLC Annual Report and Financial Statements 20081212584_TESCO_REP_P1_17 1/5/08 19:34 Page 2Chief Executive’s statementStrong growth across the GroupElsewhere in Services, Tesco Personal Finance (TPF), which celebrates itsThe breadth of the Group and the strength of our business modeltenth anniversary this year, has got back to a faster rate of growth, driven byhave enabled Tesco to deliver another year of double-digit sales,a strong sequence of new product launches and a 20% rise in online sales.profit and earnings per share growth.TPF has also weathered a difficult financial services market well – withfalling bad debts and credit card arrears. But for the impact of last year’sThese results demonstrate that Tesco has again made strong progress.floods on household insurance claims, we would have seen strong profitSales, profits and returns have grown well, the growth has been broadlygrowth from TPF.based and we are delivering on our commitments to shareholders.Our work with communities and the environment has also seen Tesco I believe these numbers also clearly show that our new businesses aremake encouraging progress. To make sure this work gets the right focus coming of age, after years of patient investment. I am pleased about thatand priority in the business, we made an important change in 2007 bybecause the breadth this gives the Group, combined with the strength ofadding it to our four-part strategy for growth – so making Communityour business model, means that we are able to cope well with changingthe fifth element. As the first change of any kind to Tesco’s strategymarket conditions and at the same time make the necessary investment in more than a decade, this represents a very significant commitment. in our future growth – in the United States, China and Tesco Direct.More detail about our initiatives in this area can be found elsewhere in this report, in our separate Corporate Responsibility Review and on ourInternational is an important part of this. It now makes more than £700mwebsite (www.tesco.com/crreview08).of trading profit, which is about the same as the whole of Tesco did adecade ago, and it contributed over half of the growth in Group tradingWe are making strides towards a revolution in green consumption byprofit in the year. We have built a new Tesco in the last ten years, servingincentivising the environmental option and making it affordable. We do notmarkets with hundreds of millions of customers – and I believe its growthstart from the position that it is a choice between growing or being green;prospects are even better than the original’s were back then.that somehow we will give up a bit of potency in the focus of the businessin pursuing these things. My strong belief is that this is not the case, andWe saw excellent progress across the international business. Sales andthat being green will be a good way to grow and add value for shareholdersprofits grew well, returns rose again but the most striking improvementswhilst discharging our responsibilities to other stakeholders. That is whycame in the strengthening positions we have in our chosen markets. Tesco has taken a lead on these matters.We added over six and a half million square feet of new selling spaceoverseas in the year – over three times as much as in the UK. Our focus onSome key milestones passed this year included the early achievement combining this organic growth with selective acquisitions is also delivering –of our target to reduce the number of free carrier bags issued to in Poland, the Czech Republic and Malaysia – with more to come.UK customers by 25% in a little over 12 months – saving well overone billion bags, far more than any other retailer. We are on track to saveOur international business now has the scale, the competitiveness and two billion this year. We have also halved our energy use per square foot the momentum it needs to be a key driver of our growth for the long-term –of selling space since 2000, two years ahead of target. We have investedbecause our operations in most of these markets can be two, three or more£25m in creating a Sustainable Consumption Institute at the Universitytimes larger than they are today.of Manchester, bringing together world-leading experts from variousdisciplines. The Institute will help lead the way to a low-carbon economyWe have made solid progress in the UK. It hasn’t been an easy year for ourand society. We plan to begin a programme of carbon labelling of ourcore business – recovering competitors and cautious consumers made salesproducts in the early weeks of the current year, using our experience ofgrowth harder to come by. But with strong productivity, mix and marginputting clear, useful information in front of customers to help them makecontrol, we delivered good results and after a slower end to the year, weinformed decisions about the CO2 implications of their product choices.have come into the new financial year on better form, trading ahead of the industry and a little ahead of our planned performance range.In summary:> Tesco is about growth and we are confident of sustaining strong growthI believe we are entering the kind of market conditions where Tesco’sin the future;strengths stand out; where customers will be looking to us to help them> we do this by following the customer; as they change, we changecope with higher bills for mortgages and fuel as well as higher taxes. > and this means our growth is broadly based, as our new businesses comeAs always, our focus will therefore be on improving their shopping trip –through to scale and profitability;whether it’s in lower prices, shorter queues at checkouts or healthier> it also means we can carry the costs of investing now in the new productsproducts to feed the family. Customers recognise the improvements and businesses which will drive our long-term growth;we are making.> at the same time we can deliver improving returns and tangible benefitsfor shareholders;Whilst we have seen pleasing progress in Non-Food, this has been against> we are meeting our responsibilities to other stakeholders by playing ana background of more subdued consumer spending in some productinnovative part in tackling some of the social and environmentalcategories. Nevertheless, sales grew faster than the core business,challenges we all face;profitability was strong and we saw good market share gains. Our core> we have delivered strong results by making shopping better forgeneral merchandise categories, which are less sensitive to the economiccustomers; andcycle, grew well and we saw robust growth in newer areas such as> Tesco is equipped to cope with changing market conditions and, whilstelectricals, furniture and DIY, helped in part by an excellent first full yearthe current global economic background is a concern, of trading in Tesco Direct, our online and catalogue non-food business.we begin the new financial year with confidence.Our Services businesses had another good year – again demonstrating thegrowing breadth of the Group – supported by our increasing strength as a leading internet retailer. Dotcom was on excellent form, with sales in ouronline business again up by over 30%. Tesco Telecoms performed well,driven by a very good performance in Tesco Mobile, our joint venture withTerry LeahyO2, which moved into profit for the first time in the year.Chief ExecutiveTo view the full announcement visit:Tesco PLC Annual Report and 2Financial Statements 2008www.tesco.com/annualreport08/presentations212584_TESCO_REP_P1_17 1/5/08 19:34 Page 3Report of the DirectorsThe Directors present their Annual Report to shareholders on the affairs Markets served and business modelof the Group and Company, together with the audited financial statementsTesco’s growth, driven by this strategy, has been predominantly organic of the Company for the year ended 23 February 2008.and we have used our skills and knowledge in understanding customers,property development, supply chain management, new productBusiness Reviewdevelopment, store formatting and how to localise our offer – to createstrong business models in our chosen markets. Where we do not have all the required skills ourselves to be successful, we regularly partner withThis Business Review analyses the performance of the Tesco Group in existing businesses – and these relationships have formed the basis ofthe financial year ended 23 February 2008. It also explains other aspects some of our most successful operations – for example with Samsung inof the Group’s markets, results and operations, including strategy and South Korea and with the Royal Bank of Scotland in Tesco Personal Finance.risk management.The UK grocery retail market remains our largest source of revenue,Long-term strategyrepresenting some 46% of last year’s £51.8bn of sales. International Tesco has a well-established and consistent strategy for growth, which retail sales – from our 12 markets in Europe, Asia and the United States,has allowed us to strengthen our core UK business and drive expansion comprise a further 19% of Group revenues and non-food (in a varietyinto new markets. The rationale for the strategy is to broaden the scope of categories from health and beauty to electronics) accounts for most of the business to enable it to deliver strong sustainable long-term growth of the remainder. Our services businesses – not least in financial servicesby following the customer into large expanding markets at home – such and telecoms – have comparatively small revenue streams because some as financial services, non-food and telecoms – and new markets abroad,of the most important of them are joint-ventures but they are increasinglyinitially in Central Europe and Asia, and now also in the United States. material to our earnings base.The strategy to diversify the business was laid down in 1997 and has beenAt the core of Tesco’s business model is a focus on trying to improve whatthe foundation of Tesco’s success in recent years. The new businesses whichwe do for customers. We aim to make their shopping experience as easyhave been created and developed over the last decade as part of this strategyas possible, lower prices where we can to help them spend less, give themnow have scale, they are competitive and profitable – in fact, the Internationalmore choice about how they shop – in small stores, large stores or online,business alone makes about the same profit as the entire Group did aand seek to bring simplicity and value to sometimes complicated markets.decade ago.And we aim to be a good neighbour in the communities we serve, beresponsible, fair and honest in our dealings and give customers theThe Group has continued to make progress with this strategy, which nowinformation and products they need to make greener choices. We are has five elements, reflecting our four established areas of focus, and alsoalso an inclusive business – everyone is welcome at Tesco.Tesco’s long-term commitments on community and environment.Because we are a discounter, underpinning this approach is a relentlessThe objectives of the strategy are:attitude to being the lowest cost provider of goods and services in our> to grow the core UK business;chosen sectors – and this combination of qualities is the reason we have> to become a successful international retailer;been successful in some of the world’s most competitive markets. We have> to be as strong in non-food as in food; recognised skills and proprietory systems in key areas which help us deliver> to develop retailing services – such as Tesco Personal Finance, a low cost model – particularly in customer relationship management, just-Telecoms and tesco.com; andin-time supply chain and distribution, property development and store> to put community at the heart of what we do.formatting. In some of our newer markets – such as telecoms or financialservices, our willingness to partner with established businesses has given In 2007/8, Tesco has again delivered a strong performance, with all parts us access to their existing investment in systems and infrastructure andof the strategy contributing. We have sustained good growth in the UK andenabled Tesco to develop competitive, profitable business models quicklycoped well with the challenges of poor weather, recovering competitors,and, at the same time, limit our own investment and risk in the early years.and a deteriorating consumer background. In our international operationswe have also made excellent progress, completing a large programme ofnew store openings and overcome difficult conditions in some of our largestmarkets. We have also begun operations on the west coast of the UnitedStates with our Fresh & Easy stores.Sales growth contribution by region146%In non-food, more customers are choosing to shop with us even in a period 1 UKof more cautious consumer spending and we have seen good growth from 2 AsiaTesco Direct, which extends our reach in selling a broad range of products3 3 Europe29%on the internet and via a catalogue. Our retailing services have deliveredanother good year, with tesco.com sustaining its rapid growth, TescoPersonal Finance making progress in challenging markets and Telecoms2continuing to build its customer base strongly and moving into profitability.25%Finally, we are making strides towards a revolution in green consumption,having reduced carrier bag use by over one billion – more than any otherretailer and are on target to sell ten million energy efficient lightbulbs in a year as part of the Climate Group’s ‘Together’ campaign.Profit growth contribution by region150% 1 UK 2 Asia3 3 Europe29%221%Tesco PLC Annual Report and Financial Statements 20083212584_TESCO_REP_P1_17 1/5/08 19:34 Page 4Business Review continuedGroup performanceThis year’s results represent very good progress across the Group and have been achieved by investing to improve the shopping experience for customersin our businesses in the UK and around the world. We have been able to deliver another solid sales performance, and through good cost control andproductivity improvements, we have grown profits slightly faster than revenue – and thereby improved returns for shareholders. These improvements havebeen achieved whilst continuing to invest in the long term – in the people, assets, processes and systems, which will enable Tesco to sustain its success inthe future.Results These results are for the 52 weeks ended 23 February 2008, compared with the same period ending in February 2007. Results from our businessin China are consolidated in the full-year results for the first time.Group sales, including VAT, increased by 11.1% to £51.8bn (last year £46.6bn). At constant exchange rates, sales increased by 10.4%.In April 2006, with our Preliminary Results for 2005/6, and following our transition to IFRS, we introduced an underlying profit measure, which excludesthe impact of the non-cash elements of IAS 19, IAS 32 and IAS 39 (principally pension costs and the marking to market of financial instruments). Withthese Results, the underlying profit measure also excludes the impact of the non-cash element of IAS 17 ‘Leases’, relating to the impact of annual upliftsin rent and rent free periods. Underlying profit before tax rose to £2,846m in the year (last year £2,545m), an increase of 11.8%. With our Interim Results for 2006/7, we began reporting segmental trading profit, which excludes property profits and, as our underlying profit measure does, excludes the non-cash element of the IAS 19 pension charge and now also excludes the non-cash element of the IAS 17 lease charge.Group trading profits were £2,751m (last year £2,478m), up 11.0% on last year and Group trading margin, at 5.8%, was unchanged on last year.Group operating profit rose by 5.4% to £2,791m (last year £2,648m). Within this, total net Group property profits were £188m in the year (last year£139m, including asset disposals within joint ventures), comprising £186m in the UK and £2m in International. Group profit before tax increased 5.7% to £2,803m (last year £2,653m). Excluding last year’s exceptional items; principally the Pensions A-Day credit, Group profit before tax rose 15.3% andGroup operating profit rose 15.1%.Group results Actual ratesActual ratesConstantGroup sales (inc. VAT)£51,773m11.1%10.4%Group profit before tax£2,803m5.7%5.1%Group operating profit£2,791m5.4%4.8%Group underlying profit before tax£2,846m11.8%11.2%Group trading profit£2,751m11.0%10.4%Trading margin 5.8%––International Our International business delivered a very strong performance, contributing 54% of the growth in Group sales and 50% of the growth in Group trading profit. Underlying margins improved whilst reported margins were diluted slightly by the consolidation of our business in China for thefirst time, following the increase in our shareholding to 90% in December 2006.Total International sales grew strongly – by 25.3% at actual exchange rates to £13.8bn (last year £11.0bn) and by 22.5% at constant exchange rates.China contributed £702m to sales, representing 6.4 percentage points of the year’s total International growth at actual rates. Excluding China, totalinternational sales grew by 19.0% at actual rates and by 15.7% at constant rates. Like-for-like sales in International grew by 2.0%, with net new spacecontributing the remaining 20.5%.933,72975,9551,7741468,18946,6113,263,821,6,41043,137134658,7202,7111,27511,03140,40437,07051,77133,55710,4802,3182,36581445,40332,8177,55937,9494415866,68127,58035,58011532,6572,22,11129,5111,8771,8971,9881,77926,876,54923,29224,19125,90327,7852904050607080405060708040506*0708Number of storesGroup space 000 sq ftSales performance £m International International International UK UK UK* Including 60 weeks International.Tesco PLC Annual Report and 4Financial Statements 2008www.tesco.com/annualreport08212584_TESCO_REP_P1_17 1/5/08 19:34 Page 5International contributed £701m to trading profit in the year (last year £564m), up 24.3% after charging £5m of integration costs and initial operatinglosses, principally related to the Leader Price stores which were acquired in late 2006. International margins rose by 15 basis points excluding the impact of consolidating the China business. At constant exchange rates, International trading profit grew by 22.2%. International EBITDA* rose to £1,051m.International results Actual ratesActual ratesConstantInternational sales (inc. VAT)£13,824m25.3%22.5%International trading profit£701m24.3%22.2%Trading margin5.6%––US segmental reporting of sales and trading results within International will begin with our Interim Results in September. For these preliminary results,sales and start-up losses in the United States are reported in our UK segment. In Asia, sales grew by 27.2% at actual exchange rates and by 30.9% at constant rates to £6.0bn (last year £4.7bn). Excluding China, Asia sales grewby 12.3% and 15.1% at constant exchange rates. Trading profit increased by 23.6% at actual rates and by 26.8% at constant rates to £304m (last year£246m). Excluding China, trading margins rose in Asia, to 5.8% driven by strong performances in South Korea, Thailand and Malaysia. China made asmall trading profit in the year.Asia results Actual ratesActual ratesConstantAsia sales (inc. VAT)£5,988m27.2%30.9%Asia trading profit£304m23.6%26.8%Trading margin5.5%––In Europe, sales rose by 23.9% at actual rates and by 16.1% at constant rates to £7.8bn (last year £6.3bn). Trading profit increased by 24.8% at actualrates to £397m (last year £318m) and by 18.6% at constant rates. Trading margins increased by six basis points. Central Europe overall delivered strong growth. Despite the subdued economy in Hungary, our business delivered a pleasing increase in profit andresumed positive growth in like-for-like sales last summer. Excellent performances in Turkey and Ireland were held back by planned commissioning costsfor new large central distribution centres, both of which opened in the first half.Europe results Actual ratesActual ratesConstantEurope sales (inc. VAT)£7,836m23.9%16.1%Europe trading profit£397m24.8%18.6%Trading margin5.8%––UK Our core business performed well in challenging market conditions. UK sales increased by 6.7% to £37.9bn (last year £35.6bn) with like-for-like growthof 3.9% (including volume of 2.0%) and 2.8% from net new stores. Excluding petrol, like-for-like sales grew by 3.5%. In our stores, we saw modest inflation of 1.2% for the year as a whole, with our continued investment in lowering prices for customers being offset by thestrength of market prices for commodities and some seasonal fresh foods. Further rises in commodity food prices in the second half saw inflation rise tojust over 2% in our fourth quarter with food price inflation being offset by continuing deflation in non-food categories.The pattern of our trading during the year was unusual. Unseasonal summer weather impacted growth in the first half, and a combination of recoveringcompetitors and more subdued customer demand in some non-food product categories, held back sales progress in the second half.Increased productivity and good expense control enabled us to maintain solid margins and deliver good profit growth despite these challenges, whilst alsoabsorbing initial operating losses totalling around £90m on Tesco Direct and on establishing our operations in the US. Even after these additional costs,UK trading profit rose 7.1% to £2,050m, with trading margins at 5.9%, slightly up on last year.UK results 2007/8GrowthUK sales (inc. VAT)£37,949m6.7%UK trading profit£2,050m7.1%Trading margin5.9%–* EBITDA is calculated by adding back depreciation and amortisation charges of £357m to International operating profit of £694m.Tesco PLC Annual Report and Financial Statements 20085212584_TESCO_REP_P1_17 1/5/08 19:34 Page 6Business Review continuedJoint ventures and associates Our share of profit (net of tax andCash flow and Balance Sheet Group capital expenditure (excludinginterest) for the year was £75m, a decrease of £31m compared with lastacquisitions) rose to £3.9bn (last year £3.0bn); higher than the £3.5bnyear. Driving this decrease was a £47m property profit last year, principallyforecast at our Interim Results. This increase was attributable to thereflecting profit realised on the sale of the Weston Favell store to a thirdpurchase of a small number of UK trading stores from a competitor,party. Excluding these property-related items, profits from joint venturesinvestment in new mixed-use development schemes during the second rose by £16m.half and higher International capital expenditure. Tesco Personal Finance (TPF) profit was £128m, of which our share wasUK capital expenditure was £2.5bn (last year £1.9bn), including £987m £64m. This was after absorbing £31m of higher household insurance claimson new stores, £457m on extensions and refits and approximately £200mlinked to last summer’s flooding in Yorkshire and the Midlands. Tesco’s sharerelating to our US operations, slightly below the guidance we gave lastof the cost of higher claims linked to these events was £11m (after interestNovember. Total International capital expenditure rose to £1.4bn (last yearand tax) in the year as a whole. £1.1bn) comprising £0.7bn in Asia and £0.7bn in Europe. Underlying growth in the business was therefore encouraging, with the We expect Group capital expenditure to rise this year, driven largely by thenew management team demonstrating that there remains significantexpansion of our International business, to around £4.2bn. This growth growth potential for TPF within the financial services sector, particularlywill primarily arise from the increased scale of our investment in freeholdamongst loyal Tesco customers, as we build our portfolio of products. shopping centre developments in China. The change in the status of ourTPF is well-provisioned for bad and doubtful debts – which are down year-investment in China to a subsidiary, means that such developments will on-year and we also continue to see improving trends in credit card arrears.now be fully funded directly from Tesco’s balance sheet.Finance costs and tax Net finance costs were £63m (last year £126m),Cash flow from operating activities, including an improvement of £194mreflecting favourable movements in the non-cash IFRS elements of thewithin working capital, totalled £4.1bn (last year £3.5bn). Net borrowingsinterest charge. The interest charge, excluding IFRS adjustments androse to £6.2bn at the year end (last year £4.9bn). £0.6bn of this increase finance income, rose 18%.is attributable to the effect of unfavourable currency movements on ourInternational balance sheet hedging (Sterling has depreciated by 11.5%Total Group tax has been charged at an effective rate of 24.0% (last against the currencies of the countries in which we operate). A furtheryear 29.1%). This reduction in tax rate is primarily due to a one-off tax£0.3bn relates to acquisitions, including our share of Dobbies Gardenreimbursement, reflecting settlement of prior year tax items with HMRC. Centres PLC. Gearing was 52%.We have also benefited from an adjustment of deferred tax balances as aresult of the lowering of the rate of UK corporation tax from 30% to 28%Pensions Our award-winning defined-benefit pension scheme is anwith effect from 1 April 2008. We expect the effective tax rate for theimportant part of our competitive package of pay and benefits, which helpscurrent year to be around 27.5%.Tesco recruit and retain the best people. We manage and fund our schemeon an actuarial valuation basis and, as at December 2007, the scheme wasUnderlying diluted earnings per share increased by 20.8% to 27.02pestimated to be broadly fully funded. As at February 2008, under the IAS 19(last year 22.36p), benefiting from the significantly lower than normalmethodology of pension liability valuation, the Group pension deficit on aeffective tax rate for the year and from the elimination of earnings post-tax basis was £603m.dilution linked to new share issuance, resulting from our share buy-backprogramme. On a normalised 28.9% tax rate basis, underlying dilutedReturn on capital employed In January 2004, we said that we had earnings per share rose by 13.1%.an aspiration to increase our post-tax return on capital employed (ROCE) of 10.2% in the 2002/3 financial year by 200 basis points over five years Dividend The Board has proposed a final dividend of 7.70p per share on then current plans. In April 2006, we renewed our commitment to(last year 6.83p). This represents an increase of 12.7%, and takes the full-increasing our post-tax return on capital employed (ROCE) by a furtheryear increase in dividend to 13.1%. This increase in dividend is in line with200 basis points, having exceeded our 2004 aspiration early. the growth in underlying diluted earnings per share, which are inclusive of net property profits, using our normalised tax rate of 28.9%. GoingROCE rose to 12.9% in the year, using a normalised tax rate, before forward, we intend to continue to grow annual dividends broadly in linestart-up costs on the US and Tesco Direct and the impact of foreignwith underlying diluted earnings per share growth.exchange equity and our acquisition of a majority share in Dobbies (last year ROCE was 12.6%, excluding the Pensions A-Day credit). The final dividend will be paid on 4 July 2008 to shareholders on This represents a good performance and we remain on track to deliverthe Register of Members at the close of business on 25 April 2008.our targeted ROCE improvement in the years ahead as these Shareholders have the opportunity to elect to reinvest their cash investments mature.dividend and purchase existing Tesco shares in the Company through a Dividend Reinvestment Plan. This scheme replaced the scrip dividend at the time of the Interim Results in 2006 and was introduced to reducedilution from new share issuance and improve earnings per share.Tesco PLC Annual Report and 6Financial Statements 2008www.tesco.com/annualreport08212584_TESCO_REP_P1_17 1/5/08 19:34 Page 7Current tradingKey performance indicators (KPIs)We have seen a strong start to the new financial year across the Group. We operate a balanced scorecard approach to managing the businessIn the UK, our planned investments in strengthening further our offer forthat is known internally within the Group as our ‘Steering Wheel’. Thiscustomers, involving our latest round of price cuts and the introduction unites the Group’s resources and in particular focuses the efforts of ourof stronger promotions – and at the same time continuing to improvestaff around our customers, people, operations, finance and the community.availability and service standards – have gone well. UK like-for-like salesIts prime focus is as a management tool for the company so that there isgrowth, excluding petrol, was over 4% in the first five weeks of the newappropriate balance in the trade-offs that need to be made all the timeyear. This figure is adjusted for the different timing of Easter this year and between the main levers of management – such as operations measures,is a little ahead of our planned performance range (of between 3% andfinancial measures or delivery of customer metrics. 4%) for the year as a whole. Within this, inflation was under 1.5%.It therefore enables the business to be operated and monitored on aInternational sales progress has also been pleasing. Sales growth wasbalanced basis with due regard to the needs of all stakeholders. For thestrong – 19% at actual rates in the first five weeks. Overall, growthowners of the business, it is simply based around the philosophy that ifmoderated only slightly compared with last year despite passing thewe look after customers well and operate efficiently and effectively thenanniversary of the acquisition of both Leader Price in Poland and theshareholders’ interests will always be best served by the inevitable outputsmajority holding in our business in China. Total Group sales increased of those – growth in sales, profits and returns.by 13% in the same period.Releasing value from propertyOur £5bn-plus programme of releasing value from property through asequence of joint ventures and other transactions and return significantcash to shareholders over five years, both through enhanced dividends and share buy-backs, is on track. The two transactions completed in 2007 delivered aggregate proceeds of £1.2bn. The first of these deals, with the British Airways Pension Fund,was completed at the end of the 2006/7 financial year. A second, largerjoint venture transaction was completed with The British Land CompanyPLC in March 2007 and our reported first half property profits largelyreflected the significant book profit on this transaction. We completed athird such deal in February 2008 – with Prudential plc – on a 4.8% yield,realising proceeds of £207m. The premium to book value on thistransaction was 66%. Whilst yields have increased modestly in recent months, appetite forTesco’s property and covenant remains strong, and if market conditions remain conducive, we expect to be able to complete further transactions on attractive terms in the months ahead. We are currently in discussion with potential counterparties. Proceeds will continue to be used to fundexpansion and our share buy-back programme – which has alreadyre-purchased Tesco shares worth over £1.1bn.The net book value of our fixed assets is £19.8bn, most of it in our freeholdstore portfolio – even after recent property divestments linked to our £5bnprogramme. We estimate the current market value of these assets to be£31bn, representing a 57% premium to book value.Tesco PLC Annual Report and Financial Statements 20087212584_TESCO_REP_P1_17 1/5/08 19:34 Page 8Business Review continued2008*2007Sales growthChange in Group sales over the year (including value added tax)11.1%10.9%UK sales growth6.7%9.0%International sales growth 25.3%17.9%International sales growth (at constant exchange rates)22.5%17.4%Profit before tax£2,803£2,653mUnderlying profit before tax£2,846£2,545mTrading marginUK trading margin5.9%5.9%International trading margin5.6%§5.7%Trading margin is calculated from the trading profit expressed as a percentage of Group revenue (sales excluding value added tax).It is a measure of profit generation from sales and is a comparable performance measure with other companies. This is how much we made from trade in our stores, taking account of the cost of the products sold, wages and salaries, expenses associated with running the stores, depots and head office, and the cost of depreciation of the assets used to generate the profits. Trading profit is stated after adjusting operating profit for the impact of IAS 19, IAS 32 and IAS 39 (principally pension costs and the marking to market of financial instruments). It also excludes the non-cash elements of IAS 17 ‘Leases’, relating to the impact of annual uplifts in rents and rent-free periods. Net cash inflow/(outflow)£801m £(265)mNet cash inflow is the cash received less cash spent during the financial period, after financing activities. Capital expenditure£3.9bn£3.0bnThis is the amount invested in purchasing fixed assets.UK£2.5bn£1.9bnInternational£1.4bn£1.1bnNet borrowings and gearingNet borrowings £6.2bn£4.9bn*Gearing52%46%Return on capital employed (ROCE)12.9%‡12.6%†ROCE is calculated as profit before interest less tax divided by the average of net assets plus net debt plus dividend creditor less net assets held for sale. ROCE is a relative profit measurement that not only incorporates the funds shareholders have invested, but also funds invested by banks and other lenders, and therefore shows the productivity of the assets of the Group. Underlying diluted earnings per share27.02p22.36pUnderlying diluted earnings per share is the calculation of profit after tax and minority interest divided by the diluted weighted average number of shares in issue during the year. It is the amount which could be paid out on each share if the Company decided to distribute all its profits as dividends instead of retaining some for future expansion. * The measurement of net debt has been revised to include loans receivable from joint ventures. Going forward net debt will be stated inclusive of the loan receivables from joint ventures.§ International margins rose by 15 basis points excluding the impact of consolidating the China business.‡ Using a ‘normalised’ tax rate before start-up costs in the US and Tesco Direct, and excludes the impact of foreign exchange in equity and our acquisition of a majority share of Dobbies.† Including the one-off gain from Pensions A-Day, ROCE was 13.6%.Tesco PLC Annual Report and 8Financial Statements 2008www.tesco.com/annualreport08