UK-based supermarket giant Tesco PLC (Tesco) has announced a “significant reduction” in UK trading profit for the year ended 28 February 2015, which it says is the result of difficult trading conditions and an ‘erosion in competitiveness’.

Tesco reported that its Group trading profit was £1.4 billion, which it said was in line with expectations. The Company said that UK like-for-like sales volumes were up for first time in over four years, driven by better availability, service and pricing. Like-for-like sales performance improved to 1 per cent in the fourth quarter. It reported a significant reduction in UK trading profit, as previously announced.

Tesco reported £7 billion in one-off charges, predominantly non-cash charges. It said this included a £4.7 billion fixed asset impairment, reflecting challenging industry conditions and profit decline.

“It has been a very difficult year for Tesco,” said David Lewis, Tesco Chief Executive.

“The results we have published today reflect a deterioration in the market and, more significantly, an erosion of our competitiveness over recent years,” Mr Lewis said. “We have faced into this reality, sought to draw a line under the past and begun to rebuild, and already we are beginning to see early encouraging signs from what we’ve done so far,” he said.

‘Tough trading conditions’ in overseas markets

Tesco said it faced “tough trading conditions” in its overseas markets, especially in Korea. It also saw a “disappointing” performance in Europe.

‘Transformation’ program making progress

Tesco reported that its ‘transformation program’, outlined in January 2015, was “progressing well”, and that its portfolio review was ongoing.

“Over the last six months we have put customers back at the centre of everything we do,” Mr Lewis said. “By focusing on the fundamentals of availability, service and targeted price reductions, we have seen a steady increase in footfall, transactions and, most significantly, volumes. More customers are buying more things at Tesco,” he said.

“We are making deep changes to the way we organise and run our business, with a simpler, more agile office team, more colleagues serving customers and a new approach to the way we work with suppliers,” Mr Lewis said. “I do not underestimate how difficult some of these changes have been for the team and I thank everyone for their professionalism and contribution at this time of great change,” he said.

Mr Lewis said the market was “still challenging” and Tesco was not expecting any let up in the months ahead.

“When you add to this the fundamental changes we are making to our business and our offer, it is likely to lead to an increased level of volatility in short-term performance,” Mr Lewis said. “Our clear priority – and the one that will deliver sustainable value for our shareholders – is to improve consistently for customers. The changes we have made and will continue to make put us in a stronger position to do this,” he said.

Update on priorities

Tesco said its performance in the first half of the year was “not competitive enough” in the face of challenging market and trading conditions. On 23 October 2014, the Company set out three key priorities. Tesco said the progress it has made against these priorities includes:

1. Regaining competitiveness in core UK business:

• 4,652 net additional customer-facing roles in stores since September
• more space for the top 1,000 lines in each store, increasing availability, particularly in peak trading
• improved pricing on hundreds of branded products in January, with further price cuts on essential products such as butter, bread and ham in March
• a new commercial approach, with a planned review of each of our product ranges over an 18-month period, to simplify, further improve availability and set lower, more stable prices
• met with over 100 suppliers, creating new business plans to drive volume growth through a more focused range and create cost efficiencies throughout the whole supply chain
• restructuring of UK office and store management largely complete
• majority of initial annual cost savings of £250m available for reinvestment in 2015/16; further £150m savings identified across the Group
• on track to close Cheshunt and move head office to Welwyn Garden City in 2016
• closure of 43 unprofitable stores completed earlier this month
• Matt Davies takes up role as UK CEO on 11 May 2015, earlier than originally anticipated

2. Protecting and strengthening the balance sheet:

• decision not to pay a final dividend for 2014/15
• capital expenditure budget for 2015/16 confirmed as no more than £1bn
• funding plan agreed with pension trustees to close actuarial deficit
• consultation launched with colleagues to replace the defined benefit pension scheme with a defined contribution scheme
• all three Blinkbox businesses (movies, music and books) and Tesco Broadband sold or closed
• review of strategic options for dunnhumby business well-advanced; portfolio review ongoing
• exited plans to build out 49 stores; significant reduction to our store building programme
• thorough review of Group’s property portfolio, with impairment charge of £(4.7)bn ensuring impact of challenging industry conditions and profit decline are reflected on balance sheet
• asset swap completed in March with British Land to regain sole ownership of 21 superstores

3. Rebuilding trust and transparency:

• progress towards re-establishing trust in our pricing policy
• simpler performance measures launched – sharp reduction in the number of targets
• new Code of Conduct launched in February, with comprehensive training for 30,000 colleagues; ‘Protector Line’ in place across all markets
• increased focus on building longer-term, mutually beneficial partnerships with its suppliers; ‘Supplier Helpline’ launched last month
• simplification of commercial income underway; new guidelines launched
• improved stock routines in place and a comprehensive review of our property portfolio
• increased disclosure, including additional detail on property valuation and ownership
• new national charity partnership launched with Diabetes UK and the British Heart Foundation
• extended ‘Eat Happy Project’ to work with The Scout Association and The Children’s Food Trust

Outlook

Over the next 12 months Tesco said it would continue to focus on its three priorities:

• regaining competitiveness in the UK business;
• protecting and strengthening the balance sheet;
• and rebuilding trust and transparency in the business and the brand.

Tesco said it was already making “good progress” on its initiatives and on the basis of actions already undertaken it said these initiatives would deliver significant cost savings in 2015/16. The immediate priority for these and any other savings delivered is reinvestment in the customer offer in order to further restore UK competitiveness.