Tesco PLC – Annual report – 26 February 2022
Longer term viability statement
Assessing the Group’s longer-term prospects and viability
The Directors have based their assessment of viability on the Group’s current long-term plan, which is updated and approved annually by the Board. The plan delivers the Group’s purpose of ‘serving our customers, communities and planet a little better every day’ and is underpinned by a clear strategic focus on creating sustainable, long-term value for every Tesco stakeholder.
The Group conducts an annual strategic planning process, comprising a comprehensive reassessment of progress against the Group’s strategic objectives, alongside an evaluation of the longer-term opportunities and risks in each market in which the Group operates. The consideration of risks, particularly principal and emerging risks, is an important input to this process. Further information about principal risks and uncertainties can be found on pages 31 to 37.
The Group’s strategic plan and viability statement are both considered over a three-year period, as this time horizon most appropriately reflects the dynamic and changing retail environment in which the Group operates.
Long-term planning process
The long-term planning process builds from the Group’s current position and considers the evolution of the strategic objectives over the next three years. Three years is selected as the Group’s planning horizon and viability period based on the pace of change in both the competitive landscape and customer shopping behaviours within the retail sector. Three years is also used as the time period in the Group’s capital investment hurdles.
During the year, the Group announced a new multi-year performance framework which will guide management’s actions over the coming years. The framework outlines the objectives of the business: to drive top-line growth, to grow absolute profits while maintaining sector-leading margins throughout and to generate stable Retail free cash flow each year. The delivery of these objectives will enable the Group to maintain a strong balance sheet, invest for growth and deliver improved returns for shareholders. The Group also announced the strategic drivers which would enable the delivery of these objectives, refreshed its capital allocation framework and commenced an ongoing share buyback programme.
The Group continues to invest in delivering great value to help customers in increasingly challenging times, supported by:
- a strategic focus on driving growth and continued focus on cost reduction from simplification of the operating model;
- a clear set of financial priorities to deliver cash profit, free cash flow and earnings per share growth, underpinned by a robust capital allocation framework; and
- a diversified business portfolio covering retail, wholesale, banking and data science.
Refer to the Group Chief Executive’s review on pages 10 to 12 and the Financial review on pages 23 to 30 for further detail regarding the Group’s strategic and financial progress.
The following factors are considered both in the formulation of the Group’s strategic plan, and in the longer-term assessment of the Group’s prospects:
- the principal risks and uncertainties faced by the Group, as well as emerging risks as they are identified, and the Group’s response to these;
- the prevailing economic climate and global economy, competitor activity, market dynamics and changing customer behaviours;
- any structural changes in how customers shop, additional costs incurred by the Group and potential macroeconomic consequences of rising unemployment and inflation due to events such as the COVID-19 pandemic and global supply challenges;
- opportunities for further cost reduction through operational simplification and leveraging technology; and
- the resilience afforded by the Group’s operational scale.
Assessing the Group’s viability
The viability of the Group has been assessed, considering the Group’s current financial position, including external funding in place over the assessment period, and after modelling the impact of certain scenarios arising from the Group’s principal risks outlined on pages 31 to 37.
Four ‘severe but plausible’ scenarios, without considering controls or risk mitigants already in place, have been modelled which address the principal risks that the Group has assessed would have the most direct and material impact on the Group. None of these scenarios, either individually or in aggregate, threaten the viability of the Group. The scenarios described are also used as the basis for the risk-weighted cash flows which are included in our impairment of non-current assets analysis. For more information, please refer to Note 15 on pages 149 to 152.
We expect to be able to refinance external debt and renew committed facilities as they become due, which is the assumption made in the viability scenario modelling. Our committed facilities remain undrawn as at the end of the financial year. Please refer to Note 24 on page 158 for further details on our debt profile, including maturity dates. The scenarios above are hypothetical and purposefully severe with the aim of creating outcomes that could threaten the viability of the Group. In the case of these scenarios arising, various options are available to the Group in order to maintain liquidity to continue in operation, such as: (i) accessing new external funding early; (ii) reducing shareholder returns; (iii) short-term cost reduction actions; and (iv) reducing capital expenditure. None of these mitigating actions is assumed in our current scenario modelling.
Based on these severe but plausible scenarios, the Directors have a reasonable expectation that the Company will continue in operation and meet its liabilities as they fall due over the three-year period considered.