Tesco PLC – Annual report – 23 February 2019
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 strategic plan, which is updated and approved annually by the Board and delivers the Group’s purpose of ‘serving shoppers a little better every day’ underpinned by the six strategic drivers (detailed on pages 14 and 15).
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 both considered over a three-year period, as this horizon most appropriately reflects the dynamic and changing retail environment in which the Group operates.
Strategic planning process.
The strategic 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.
Significant progress has been made by the Group against the strategic objectives announced in October 2016, including:
– Broad-based progress made in key customer, supplier and colleague metrics;
– Strong profit growth and free cash generation reflect the Group’s focus on delivering cost savings and profitable sales growth;
– A clear strategy focusing on customer satisfaction, cash profitability, free cash flow and earnings growth;
– Synergies realised from the Booker merger completed in March 2018 are tracking ahead of plan; and
– The Group has operations across a diversified set of geographies and business areas (Retail, Banking and Customer Data Science).
Refer to the Group Chief Executive’s review on page 3 and the financial review on page 18 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, and how these can be addressed;
– 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;
– The structural challenges facing retail and how the Group can best position itself to address these;
– The value opportunities presented by further cost reduction through operational simplification and untapped growth potential across the Group; and
– The resilience afforded by the Group’s operational scale.
Assessing the Group’s viability.
The viability of the Company has been assessed, taking into account the Company’s current financial position, including external funding in place over the assessment period, and after modelling the impact of certain scenarios arising from the principal risks, which have the greatest potential impact on viability in that period.
Four scenarios have been modelled, considered severe but plausible, that encompass these identified risks. None of these scenarios individually threaten the viability of the Company, therefore the compound impact of these scenarios has been evaluated as the most severe stress scenario.
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.
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.