UK Corporate governance, viability statement, including stress testing for Brexit, cyber attack and COVID-19

Tesco PLC – Annual report – 29 February 2020

Industry: retail

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 shoppers a little better every day’ and is underpinned by a clear strategic focus on driving sustainable and profitable growth through innovation and technology.

The Group conducts an annual strategic planning process, comprising a comprehensive reassessment of progress against the Group’s strategic objectives alongside a careful evaluation of the longer-term opportunities and risks in each market in which the Group operates. The process for assessing the principal and emerging risks in each market is an important input to this process. The Group’s strategic planning and viability statement are considered over a three-year period, as this 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. As part of this process, a longer-term assessment of the prospects of the Group is also considered.

Current position
The Group has delivered on every part of the turnaround plan outlined in 2016 and continues the transformation of the business at pace, supported by:
– A strategic focus on driving growth across the Group through innovation and technology.
– 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.
– A diversified portfolio of businesses covering retail, wholesaling, banking and data science.

Refer to the Group Chief Executive’s review on page 3 and the Financial review from page 7 for further detail regarding the Group’s strategic and financial progress.

Longer-term prospects
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 (such as climate change), and the Group’s response to these.
– The prevailing economic climate and global economy, competitor activity, market dynamics and changing customer behaviours.
– The potential short- and longer-term economic impact of Brexit.
– How the Group can best position itself to take advantage of the rapidly evolving retail market and structural shifts in how customers shop.
– Opportunities for further cost reduction through operational simplification and leveraging technology.
– The resilience afforded by the Group’s operational scale.

Assessing the Group’s viability
The viability of the Group has been assessed, taking into account 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 13 to 18.

Four ‘severe but plausible’ scenarios have been modelled that 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 Company.

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These scenarios assumed that external debt is repaid as it becomes due and committed facilities renewed as they become due. The scenarios above are hypothetical and purposefully severe with the aim of creating outcomes that have the ability to 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 so as to continue in operation such as: (i) accessing new external funding early; (ii) more radical short-term cost reduction actions; and (iii) reducing capital expenditure. None of these actions are assumed in our current scenario modelling.

Viability statement
Based on these severe but plausible scenarios, the Directors have a reasonable expectation that the Group will continue in operation and meet its liabilities as they fall due over the three-year period considered.