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Annual Report and Financial Statements 2017

Serving shoppers a little better every day.

Tesco PLC Annual Report and Financial Statem ents 2017

Welcome to our annual report

Strategic report: Tesco at a glance 1 Introduction 2 Chairman’s statement 3 Group Chief Executive’s statement 4 The six strategic drivers 6 Our business model 11 Key performance indicators 12 Financial review 14 Environmental and social review 20 Principal risks and uncertainties 26 Corporate governance 32 Financial statements 79 Other information 166

Find out more online We have produced a number of short videos that are available at www.tescoplc.com/ar2017 and are featured within our report this year, as indicated by the video screen icon.

As a leading retailer, with 460,000 colleagues, we serve millions of customers every week, in our stores and online.

(a) Reported on a continuing operations basis. (b) Excludes the net debt of Tesco Bank. (c) Includes franchise stores.

Alternative Performance Measures Measures with this symbol are defined in the Alternative Performance Measures section of the Annual Report on pages 170 to 172.

£49.9bn∆ (a) Group sales (exc. VAT, exc. fuel) (2015/16: £47.9bn)

£55.9bn(a) Statutory revenue (exc. VAT, inc. fuel) (2015/16: £53.9bn)

£1,280m∆ (a) Group operating profit before exceptional items (2015/16: £985m)

£1,017m(a) Operating profit (2015/16: £1,072m)

£145m(a) Statutory profit before tax (2015/16: £202m)

7.90p∆ (a) Diluted earnings per share before exceptional items and net pension finance costs (2015/16: 5.61p)

0.81p(a) Statutory diluted EPS (2015/16: 3.22p)

£(3.7)bn∆ (b) Net debt (2015/16: £(5.1)bn)

6,809(a),(c) Shops around the world (2015/16: 6,733)

79m(a) Shopping trips per week (2015/16: 78m)

23m Meals donated through our food surplus redistribution work and Neighbourhood Food Collection

460,000(a) Colleagues at year end (2015/16: 471,000)

1Tesco PLC Annual Report and Financial Statements 2017

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Tesco at a glance

We believe we have made another year of strong progress at Tesco.

Having focused on our three turnaround priorities, we are competitive in the UK again, our balance sheet is more secure, and we continue to rebuild trust by operating with transparency. At the same time, feedback from our customers, colleagues, supplier partners and shareholders continues to improve.

We have stabilised our business, and now we are rebuilding profitability.

But there is much more we want to do. We must keep listening and innovating; we want to offer truly helpful service; and we need to keep unlocking the power and potential of our colleagues.

So we have shared our plans to do that. Our six strategic drivers are not new; they have been guiding our efforts throughout much of the last three years. But taken together, they set a clear direction. Our intention is to become even more competitive for customers, simpler for colleagues, and an even better partner for suppliers, while creating long-term value for our shareholders.

At the centre of everything is our purpose: to serve shoppers a little better every day. If we keep putting the customer at the heart of our business, and ask ourselves how we can help serve them a little better every day, we can build on the momentum we are showing.

There is still work to do, but this year’s performance has demonstrated that every little help really can make a big difference at Tesco.

Serving shoppers a little better every day.

Tesco PLC Annual Report and Financial Statements 20172

Introduction

This year has been a significant one for Tesco, where, against a challenging external environment, we have continued to make progress against our purpose: to serve shoppers a little better every day. I am grateful to the management team and Tesco colleagues for all that they have done to deliver this.

In October, we shared our plans to create long-term value for stakeholders, and in November, Dave Lewis and the management team invited investors, supplier partners and analysts to Tesco’s offices in Welwyn Garden City to hear more about the six strategic drivers at the heart of those plans.

This report sets out the progress we are making against each of those drivers and tells the story of how we are building on the strong foundations we laid down in the last few years.

Although the business has continued to make significant progress this year, across many of our markets we continue to face a challenging operating environment. In the UK, business rates in particular continue to be a considerable burden, and are the biggest tax we have paid this year.

John Allan Non-executive Chairman

Building on strong foundations.

“ I am very pleased to report another strong year of improvement at Tesco.”

We welcome the fact that the UK Government has committed to reviewing the tax framework and look forward to working with them on this.

In terms of the Board’s support for Tesco’s agenda, we have focused on three areas:

1. corporate governance; 2. helping the business to benefit from

the expertise of our Board; and 3. exploring opportunities for future

growth.

Throughout the year, we have continued to focus on strengthened corporate governance. In July, we appointed a new Non-executive Director, Steve Golsby, who brings a deep knowledge of Asia – in particular Thailand, our largest international market.

In January, we were pleased that Deanna Oppenheimer accepted the Board’s invitation to become Senior Independent Director. Deanna has a wealth of experience, and succeeds Richard Cousins, who decided to step down from the Board. I would like to thank Richard for his strong contributions to Board deliberations and wish him well for the future.

Our emphasis on strong governance also extends to issues we have faced within our business.

Last November, our Tesco Bank debit cards were the subject of an online fraudulent attack. We acted quickly to ensure customers’ accounts were protected and there was no data loss or breach of systems.

Shortly after the end of our 2016/17 financial year, we announced that our subsidiary business, Tesco Stores Limited, had reached an agreement on a Deferred Prosecution Agreement in relation to historic accounting practices, and that we had agreed with the UK Financial Conduct Authority to a finding of market abuse. This brings towards a close a challenging time in Tesco’s history. The Board will continue to support Dave and the management team in their efforts to restore trust in the Tesco business and brand.

Our second focus has been helping the business to benefit from the expertise of our Board. We have had in-depth reviews of our six strategic drivers and risk management, and we have supported the leadership team on talent development and corporate responsibility.

Throughout the year, the Board has considered how Tesco can continue to create long-term value for our stakeholders. That included completing a portfolio review. As a result, we have sold Kipa, our retail business in Turkey; garden centre chain Dobbies; Euphorium bakery; Giraffe restaurants; and Harris + Hoole coffee shops.

All of these businesses have different strengths and potential, but the sales have allowed Tesco’s management team to focus on the areas where Tesco can build on its core competencies and unique strengths to create future growth.

This focus has allowed us to announce, in January, a proposed merger with Booker Group. This merger builds on Tesco’s core strength as a food business and allows both Tesco and Booker to unlock growth in the UK food market in a way that neither would be able to do alone – in particular by focusing on the fast-growing ‘out of home’ and ‘on the go’ food markets, to create the UK’s leading food business.

Reflecting our improved performance and the Board’s confidence in Tesco’s future prospects, I am pleased to confirm that we intend to recommence paying dividends in respect of the 2017/18 financial year. We expect dividends to grow progressively from that financial year.

We are conscious that the Tesco turnaround is a significant project, but I am confident that with the clear plans and superb talent we have in Dave and the whole Tesco team, there is a huge amount of potential to create sustainable, long-term value for all our stakeholders.

John Allan Non-executive Chairman

Watch our videos Visit www.tescoplc.com/ar2017 to hear more from John Allan.

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Chairman’s statement

Whilst our business continues to face significant external challenges, such as the increasing burden of business rates, National Living Wage and the Apprenticeship Levy in the UK, and greater competitive intensity in Poland, we are making good progress. The energy and commitment of our 460,000 colleagues has enabled us to make further significant improvements to the way we serve our customers, and we have done this at the same time as increasing operating profit before exceptional items by 30% for the Group.

In October 2014, we set out our three turnaround priorities and, in 2016, we shared the detail of the six strategic drivers which are driving our medium- and long-term decisions. This Annual Report gives a high-level overview of those six drivers.

The strategic drivers are designed to create sustainable value for our four stakeholders in our business: customers, colleagues, supplier partners, and our shareholders.

Customers At the heart of everything we do are our customers. In every decision we take, and every plan we develop, we ask ourselves one simple question: will

it help serve shoppers a little better every day? In the year, we’ve done a lot to strengthen our customer offer. We’re continuing to see a sustained improvement in the feedback we’re getting from customers on price, service, quality and availability.

We continuously innovate to serve our customers better, and this year we have developed 2,422 new products with our supplier partners, as well as reformulating hundreds more products to make them healthier. We’ve also made shopping easier for parents by offering free fruit for children in our large stores.

Our prices are lower, with a typical basket of products in the UK costing 6% less than in September 2014. We’ve also made our offer simpler, for example by cutting multi-buy promotions by a further 24%. At the same time, we have worked hard to remove reasons for customers to shop elsewhere by introducing seven exclusive fresh food brands, alongside our existing Brand Guarantee.

Colleagues Every day, our colleagues go the extra mile to help our customers and it is really encouraging to see this coming through in customer feedback, with a continued increase in ratings of colleague helpfulness through the year.

Dave Lewis Group Chief Executive

“ In every decision, we ask ourselves: how will this help serve shoppers a little better?”

Tesco PLC Annual Report and Financial Statements 20174

Group Chief Executive’s statement

A strong performance.

This has been achieved while at the same time changing the way we serve our customers across our channels, as shopping habits change.

Many colleagues have been impacted by the changes we have made to management structures and shift routines, including the move from night-time to day-time replenishment. This makes the feedback from customers even more humbling, and a credit to the unwavering commitment of our colleagues in serving shoppers a little better every day.

Creating opportunities for colleagues to get on has been a big focus and will continue to be as our business evolves. This year 4,000 colleagues have been promoted or moved to broader roles across the business. We have welcomed over 100 graduates and supported 1,200 apprenticeships and work placements.

Supplier partners Strong partnerships with our suppliers mean we can serve our customers better, invest in innovation and grow our businesses together for the long term.

This year we have relaunched our online Supplier Network, which now has over 5,000 members. Reflecting the strength of our partnerships, for the first time we topped the independent supplier survey run by Advantage in October, and our own internal Supplier Viewpoint survey shows that 77% of suppliers are positive about their relationship with us. We were also pleased to be recognised by supply chain body GS1 UK, for leading the industry in supporting small British suppliers.

Shareholders In order to share more fully our investment case, we have set out more detail on our medium-term ambitions. In particular, we shared our ambition to deliver a Group operating margin of between 3.5% – 4.0% by our 2019/20 financial year, and we have made good progress towards that ambition this year, with a step up from 1.8% to 2.3% in Group operating margin before exceptionals.

We have also announced our intention to recommence paying dividends in respect of the 2017/18 financial year, to return value to shareholders in a way which is sustainable for our business.

Governance Following the year-end, we announced a Deferred Prosecution Agreement with the UK Serious Fraud Office in relation to historic accounting practices, and an agreement with the UK Financial Conduct Authority to a finding of market abuse. Over the last two and a half years, we have fully cooperated with this investigation, while at the same time taking steps to transform our business. What happened in 2014 is a huge source of regret for all of us, and we are determined to maintain and strengthen the changes we have been making to rebuild trust in our business and brand.

As well as bringing this matter towards a conclusion, we have made good progress on wider issues of corporate responsibility. We have made a commitment that by the end of 2017, no

food that is safe for human consumption will go to waste from our UK retail operations – and this year we have seen a 148% increase in the amount of surplus food donated to people in need.

Future growth In January, we announced a proposed merger with Booker Group, to create the UK’s leading food business. Bringing together the complementary skills of retail and wholesale businesses will allow us to unlock new opportunities and to better serve customers with a wide range of high-quality affordable food where they want it, when they want it.

I’d like to thank all of my colleagues for everything they have done for our customers and our business this year. We have been through some tough years in rebuilding our business, and I’m continually grateful for everything they do. Our goal now is to go even further together. Over the last year we have turned a corner but, as always, we have more to do. We will keep putting the customer at the heart of the business, and we will continue to work openly and transparently with our supplier partners, our colleagues and every shareholder in our business.

We will continue to strive to serve our shoppers a little better every day.

Dave Lewis Group Chief Executive

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Our six strategic drivers set out the plans and aspirations which will create long-term value for all of our stakeholders.

The six strategic drivers.

1 .

4 .

2 .

5 .

3 .

6 . Maximise the mix to achieve a 3.5% – 4.0% Group margin Building sustainable profitability across our businesses, channels and product ranges.

A differentiated brand A strong brand creates long-term value. Our purpose, to serve shoppers a little better every day, is at the heart of what our brand stands for.

Maximise value from property

Our property strategy is about releasing value from our estate, and repurposing space to enhance our customer offer.

Reduce operating costs by £1.5bn We have undertaken a thorough review of our entire cost base, to identify further opportunities for meaningful savings.

Innovation

Our innovation strategy is driven by expertise and insight in our three differentiating capabilities: Product, Channel and Customer.

Generate £9bn cash from operations Cash is the lifeblood of our business, and we have set a three-year target to generate £9bn of cumulative retail cash from operations.

7Tesco PLC Annual Report and Financial Statements 2017

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Reduce operating costs by £1.5bn We’ve identified £1.5bn of potential savings for the years to 2019/20, with particular opportunities to simplify the way we run our stores, modernise our distribution and fulfilment networks, and more efficiently procure goods and services not for resale. This year we have generated £455m of cost savings, of which £226m contributes to our £1.5bn target.

Goods not for resale – c.£500m In our day-to-day operations we purchase a wide range of goods and services not for resale, covering everything from marketing to haulage and consumables. Consolidating our spend with our most important supplier partners has allowed us to make substantial savings – for example by reducing our number of haulage partners in Central Europe from 10 down to three, working across the region.

Logistics and distribution – c.£450m Improving stock flow and increasing the efficiency of our supply chains reduces our costs, and also helps us get products to customers faster – so they benefit from fresher food too. As part of this work, we’re changing our distribution network – announcing the closure of our distribution centres in Welham Green and Chesterfield – to ensure that the way we distribute food and goods within our business is as simple and cost-effective as possible.

Store operating model – c.£550m Continuing to improve service in store is our absolute priority, and by recalibrating the way we serve customers we have identified opportunities to increase customer satisfaction while also reducing costs. In our UK stores, we have worked with colleagues to ensure that we schedule hours for when our customers need them most, reducing our night operations and moving replenishment to the daytime.

A differentiated brand We are on a journey to rebuild trust in our brand, and we have made significant progress. As the brand strengthens, we invest more in those things that make the Tesco brand and experience unique.

Our opportunity is to differentiate through our products and services – with great quality at affordable prices, and a unique Tesco offer – and through customer experience, for example by simplifying our systems for ordering online, and delivering consistently great service in store.

With our Brand Guarantee, customers don’t have to worry about the price of branded products – which they could get from other retailers – and our own-label products become the point of differentiation, with a unique and helpful offer which gives customers a reason to choose Tesco.

We take pride in the quality of our food, and that’s reflected in our ‘Food Love Stories brought to you by Tesco’ campaign, which aims to set out our food quality credentials and celebrate the passion and care that goes into the meals we all love.

1 .

2 .

The six strategic drivers continued

Tesco PLC Annual Report and Financial Statements 20178

Our world-class store ordering systems have allowed us to simplify back- room procedures in stores – increasing the amount of stock that goes straight from a delivery onto shelves. This ensures great availability for customers, while also reducing the residual stockholding in store and allowing our colleagues to more efficiently manage stock by only handling a product once.

Our 88,000 square feet store in Surat Thani was too large, with an overly-broad range that made the shopping trip harder for customers. We took out around 20% of the retail space, creating room for tenants such as Boots and KFC. These bring new income and attract more customers, with a halo effect on our core retail offer and a resulting increase in retail sales density.

Maximise the mix to achieve a 3.5% – 4.0% Group margin

By improving profitability and optimising working capital, we will generate positive cash from our retail operations.

Cash from operations is the biggest contributor to free cash flow, but working capital is a significant opportunity – with better forecasting, and a tighter assortment of products in our distribution centres, we can reduce stock holding and drive working capital benefits.

We are also focused on capital discipline to improve free cash flow and have set rigorous hurdle rates for capital allocation, with a focus on payback periods and maximising returns, in order to balance longer-term investments with projects that will more quickly deliver cash.

Maximising the mix means looking at the full picture of everything we do to ensure we are delivering great service for our customers, and driving growth in areas which deliver sustainable profits – in order to achieve a 3.5% – 4.0% Group operating margin by our 2019/20 financial year.

We serve shoppers through a wide range of channels and services. To ensure we can deliver these sustainably, we work hard to build long-term profitability – by investing in new areas, and by improving the economics of more recent channels, such as Grocery Home Shopping. We follow this approach in all parts of our business, from choosing how we allocate space in our large stores, to looking at the promotional mix we offer to our online customers.

Generate £9bn cash from operations

4 .

3 .

9Tesco PLC Annual Report and Financial Statements 2017

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We have innovated in our ranges, bringing customers great quality meat and produce at affordable prices through our exclusive fresh food brands. Our innovative Free From range also includes many of the products our customers miss most – like our award-winning Free From Garlic Baguette. In March 2017, we were named Free From Retailer of the Year for the third year running.

Maximise value from property We have a significant property portfolio, combining both freehold and leasehold assets. We look closely at opportunities to insulate the business from future rental increases, by carefully optimising our freehold and leasehold mix. Repurposing space – in our stores, malls or car parks – allows us to improve sales densities in our larger stores, while also improving our offer for customers. In the UK we have worked with other leading brands to open 49 concessions in our stores this year, with partners including Arcadia Group and Holland & Barrett. We are also exploring opportunities to release value by selling ‘air rights’ above a small number of our stores in urban areas – working with a developer to build residential properties above or alongside our stores, without capital investment from Tesco.

Innovation

By listening to shoppers, and looking at broader customer trends, we can drive innovation in both the products we sell, and the channels through which we sell them.

Innovation touches everything we do, from the launch of our PayQwiq digital wallet, making the checkout process easier for customers, to our work on reformulation – taking hundreds of tonnes of salt, sugar and fat out of our own-label products to help customers live healthier lives.

The strength of the partnerships we have with our suppliers plays an important role in innovation. By building our businesses together, we also give suppliers the confidence to invest in innovative products and solutions for the benefit of our mutual customers.

5 .

6 .

The six strategic drivers continued

Tesco PLC Annual Report and Financial Statements 201710

Our business is organised around the three pillars of Customers, Product and Channels. We place customers at the centre of everything we do to deliver our purpose – serving shoppers a little better every day.

Customers, Product, Channels.

Reinvest Our focus is always on making Tesco the best it can be for our customers.

The better a job we do for customers, the more we will improve sales; the more

our sales improve, the more we can reinvest in further improving the shopping trip.

Customers Tesco exists to serve

customers – listening to them and acting on what is most

important to deliver the best possible shopping trip.

Product We build close and mutually-beneficial

relationships with our supplier partners, to source the best-possible products

that meet and anticipate customers’ needs.

Channels To bring the best products

to customers we work through a range of channels – from small shops to large

shops, and our growing online business.

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Our business model

+1.1% 2015/16 2016/17

2015/16 2016/17

+24.9% 2015/16 2016/17

2015/16 2016/17

+9.1% 2015/16 2016/17

2015/16 2016/17

We have six simple key performance measures for the whole business.

Our Big 6 KPIs.

Sales

Profit

Cash flow

£49.9bn∆ Group sales (exc. VAT, exc. fuel)(a) (2015/16: £47.9bn)

Increasing volume is key to the success of our business model and both volumes and transactions are increasing as customers are buying more products, more often at Tesco.

£1,280m∆ Group operating profit before exceptional items(a) (2015/16: £985m)

If we continue to deliver a better shopping trip for customers, building more value into our offer, we will achieve a stronger financial position.

£2,279m∆ Retail cash generated from operations(b) (2015/16: £2,088m)

Strong operating cash flow is needed to keep the business running and allows us to reinvest. These positive figures show our financial position is improving.

Alternative Performance Measures Measures with this symbol are defined in the Alternative Performance Measures section of the Annual Report on pages 170 to 172.

Tesco PLC Annual Report and Financial Statements 201712

Key performance indicators

+5pts 2015/16 2016/17

2015/16 2016/17

+2pts 2015/16 2016/17

2015/16 2016/17

+7pts 2015/16 2016/17

2015/16 2016/17

Customers recommend us and come back time and again

Colleagues recommend us as a great place to work and shop

We build trusted partnerships

7pts Group Net Promoter Score(c) (2015/16: 2pts)

By putting customers first and making them our main focus, more shoppers are choosing to shop at Tesco. Customer feedback continues to improve, reflecting our work to strengthen our offer.

83% Great place to work(d) (2015/16: 81%)

48pts Great place to shop(c) (2015/16: 41pts)

Every day our colleagues go the extra mile. Despite changes to the way we serve our customers across our channels, our colleagues remain focused on serving shoppers a little better every day.

77% Group supplier satisfaction(e) (2015/16: 70%)

We are committed to strong partnerships with our suppliers, built on open, fair and transparent relationships.

(a) Reported on a continuing operations basis (excludes Turkey and Korea). Growth is at a constant exchange rate, on a comparable days basis. (b) Reported on a continuing operations basis (excludes Turkey and Korea). Growth is at an actual exchange rate, on a comparable days basis. (c) Net Promoter Score (NPS) equals ‘fans’ (those scoring 9–10 out of 10) minus ‘critics’ (those scoring 0–6) on an 11 point scale question of 0–10. (d) Based on our internal ‘What Matters To You?’ survey. Chart shows the movement in ‘Great place to work’. (e) Based on the question “Overall, how satisfied are you with your experience of working with Tesco?” in our Supplier Viewpoint Survey.

13Tesco PLC Annual Report and Financial Statements 2017

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Group results 2016/17

52 weeks ended 25 February 2017 On a continuing operations basis 2016/17 2015/16

Year-on- year change

(Constant exchange

rates)

Year-on- year change

(Actual exchange

rates) Group sales (exc. VAT, exc. fuel)(a) £49,867m £47,859m 1.1% 4.3% Fuel £6,050m £6,074m (1.0)% (0.4)% Revenue (exc. VAT, inc. fuel) £55,917m £53,933m 0.8% 3.7%

Group operating profit before exceptional items(b) £1,280m £985m 24.9% 29.9% UK & ROI(c) £803m £503m 57.7% 59.6% International £320m £320m (12.5)% 0.0% Tesco Bank £157m £162m (3.1)% (3.1)%

Include exceptional items £(263)m £87m Group operating profit £1,017m £1,072m (11.8)% (5.1)%

Group profit before tax before exceptional items and net pension finance costs £842m £490m 71.8%

Group statutory profit before tax £145m £202m (28.2)%

Diluted EPS before exceptional items 6.75p 4.05p Diluted EPS before exceptional items and net pension finance costs 7.90p 5.61p Diluted EPS 0.81p 3.22p Basic EPS 0.81p 3.24p

Capex(d) £1.2bn £1.0bn Net debt(e),(f) £(3.7)bn £(5.1)bn Cash generated from retail operations(e) £2.3bn £2.1bn (a) Group sales exclude VAT and fuel. Sales growth shown on a comparable days basis. (b) Excludes exceptional items by virtue of their size and nature in order to reflect management’s view of the performance of the Group. (c) The elimination of intercompany transactions between continuing operations and the discontinued Turkey operation, as required by IFRS 5 and IFRS 10,

has resulted in a reduction to the prior period UK & ROI operating profit of £(2)m. (d) Capex is shown excluding property buybacks. (e) Net debt and retail operating cash flow exclude the impact of Tesco Bank, in order to provide further analysis of the retail cash flow statement. (f) Net debt includes both continuing and discontinued operations.

The definition and purpose of the Group’s Alternative Performance Measures, which includes like-for-like sales, are defined on pages 170 to 172. A detailed analysis of discontinued operations can be found in Note 7.

This was a strong performance for Tesco where we delivered results ahead of expectations. We grew sales, excluding VAT, excluding fuel, by 1.1% at constant rates and we saw positive volume growth in both the UK & ROI and International segments. Group operating profit before exceptional items was £1,280m, up 29.9% on last year as we continue to rebuild profitability whilst investing in the customer offer. Our statutory profit before tax was down (28.2)% to £145m including £(263)m of exceptional costs. We generated retail operating cash flow of £2.3bn, up 9.1% on last year, including a £387m improvement (pre-exceptionals) in working capital, and we also reduced net debt (excluding Tesco Bank) by 27% to £(3.7)bn.

Now that our business has stabilised we have also shared more detail about our clear plans for the coming years. We are well-placed to deliver our ambition of a Group operating margin of 3.5% – 4.0% by the 2019/20 financial year. This ambition is underpinned by six strategic drivers, including the £1.5bn operating cost reductions which we are on track to secure over the next three years.

Reflecting our improved performance and confidence in future prospects, the Board has reviewed our dividend policy. We intend to recommence paying dividends in respect of the financial year 2017/18. We expect dividends to grow progressively from that financial year with the aim of achieving a target cover of around two times earnings per share over the medium term.

“ This was a strong performance for Tesco where we delivered results ahead of expectations.”

Visit www.tescoplc.com/ar2017 to find PDF and Excel downloads of our financial statements.

Alan Stewart Chief Financial Officer

Tesco PLC Annual Report and Financial Statements 201714

Profit recovery continues. Financial review

International like-for-like sales performance(a)

16/17 1Q

16/17 2Q

16/17 3Q

16/17 4Q

3.0% 2.1%

0.6%

(0.3)% (a) Exc. VAT, exc. fuel.

UK & ROI like-for-like sales performance(a)

16/17 1Q

16/17 2Q

16/17 3Q

16/17 4Q

0.3%

0.9%

1.7%

0.6%

(a) Exc. VAT, exc. fuel.

In the UK and the Republic of Ireland (ROI), we have now seen five consecutive quarters of like-for-like sales growth. In the UK, volumes grew 1.6% and transactions grew 1.7% as we continued to make fundamental improvements to all aspects of our offer. We saw annual positive like-for-like growth for the first time in seven years and outperformed the market across all categories on a volume basis. Volume outperformance was particularly strong in fresh food, where the exclusive brands we launched in March 2016 have helped to significantly strengthen our value proposition.

Significant product cost deflation in the first half of the year eased in the second half. In collaboration with our supplier partners, we have worked hard to minimise the impact of emerging inflationary cost pressures. Despite some inflation in a number of categories, the price of a typical customer basket remains around 6% cheaper than in September 2014 and promotional participation has fallen to 32% as we made a conscious decision to focus our investments on sustainable improvements rather than on short-term couponing and promotions. We achieved improvements in all key customer metrics, including colleague helpfulness and availability, where performance reached record levels.

In the Republic of Ireland, like-for-like sales fell by (0.1)% as we continued to invest in lowering prices. We have a leading position in the market in volume terms and have further grown volume share by making improvements across our customer offer, with a focus on fresh produce, meat and bakery.

Our full-year UK & ROI operating profit before exceptional items was £803m, up 60% on last year, with margin growth of 68 basis points year-on-year. This improvement includes the impact of investments we have made in all aspects of our offer, particularly in lowering core prices and in the quality and price of the exclusive fresh food brands which we launched in March 2016. These investments enabled us to drive volume growth, generating positive operational leverage. In addition to managing costs more effectively year-on-year, we are also optimising the mix of our offer across channels and products. For example, within our beers, wines and spirits category we have focused on improving the relevance and profitability of our offer by broadening our range of speciality beers, increasing the prominence of own brand products and maintaining a strong, stable core price position in an extremely promotional market.

International

On a continuing operations basis 2016/17 2015/16

Year-on-year change

(Constant exchange

rates)

Year-on-year change (Actual

exchange rates)

Sales (exc. VAT, exc. fuel) £11,163m £9,715m 2.1% 15.2% Like-for-like sales (exc. VAT, exc. fuel) 1.3% 2.0% Statutory revenue (exc. VAT, inc. fuel) £11,381m £9,898m Statutory revenue includes: fuel £218m £183m Operating profit before exceptional items £320m £320m (12.5)% 0.0% Operating profit margin before exceptional items 2.81% 3.23% (46)bp (42)bp Operating profit £421m £314m

International sales grew by 2.1% at constant exchange rates, including a 0.8% new store contribution driven by store openings in Thailand which more than offset the impact of store closures, primarily in Europe. International sales growth weakened in the second half due to an increasingly competitive environment in Europe, particularly Poland, and as we annualised a strong performance last year in Asia.

In the year, we grew like-for-like sales strongly in Thailand as we invested in both lowering prices and improving our fresh food proposition. We grew market share and were pleased to retain our number one position for customers for brand and trust(a). In Malaysia, top-line sales growth was held back by weak consumer spending across the market and a trend away from large stores towards convenience shopping, where we are currently under-represented.

In Central Europe, like-for-like sales grew in all markets apart from Poland which remains intensely competitive. Positive volume growth in the region was driven by a strong performance in fresh food where we improved quality and inspired customers with new ranges and events.

Segmental results UK & ROI

On a continuing operations basis 2016/17 2015/16

Year-on-year change

(Constant exchange

rates)

Year-on-year change (Actual

exchange rates)

Sales (exc. VAT, exc. fuel) £37,692m £37,189m 0.6% 1.4% Like-for-like sales (exc. VAT, exc. fuel) 0.9% (0.7)% Statutory revenue (exc. VAT, inc. fuel) £43,524m £43,080m Statutory revenue includes: fuel £5,832m £5,891m Operating profit before exceptional items £803m £503m 57.7% 59.6% Operating profit margin before exceptional items 1.84% 1.17% 67bp 68bp Operating profit £519m £597m

(a) According to BASIS Global Brand Image tracker, February 2017.

15Tesco PLC Annual Report and Financial Statements 2017

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Segmental results continued In a highly competitive environment, international operating profit before exceptional items was £320m, flat year-on-year at actual exchange rates and down by (12.5)% at constant exchange rates. Whilst we continued to invest in our offer in all of our markets, our response to intense competition in Poland weighed on profitability in Central Europe. We continued to focus on improving our store economics across the region, including simplifying management structures, reducing store administration and closing unprofitable store counters. We also opened a new distribution centre at Poznań in Poland, reducing transport costs for the country by 20%. From April 2017, we have separated the management of our international business, creating two new Executive Committee roles leading Asia and Central Europe, giving greater focus to each region.

The introduction of a new retail tax in Poland remains suspended pending the outcome of the European Commission’s investigation. We continue to be cautious about potential legislative changes in our European markets.

Tesco Bank

2016/17 2015/16 Year-on-year

change Revenue £1,012m £955m 6.0% Operating profit before exceptional items £157m £162m (3.1)% Operating profit £77m £161m (52.2)% Lending to customers £9,961m £8,542m 16.6% Customer deposits £8,463m £7,397m 14.4% Net interest margin 4.0% 4.2% (0.2)% Risk asset ratio 20.0% 20.0% –

Tesco Bank continues to provide a simple and transparent product offer to serve the banking and insurance needs of Tesco customers. Active customer account numbers grew by 3.5%, with particularly strong growth in current accounts. We have continued to improve our customer offer by introducing a new premium credit card, simplifying the loan application process by introducing digital signatures, giving interest rate guarantees on current accounts for new and existing customers and through a national roll-out of PayQwiq to all large stores, a digital wallet app that allows customers to pay with their phone in our shops.

Operating profit before exceptional items reduced by (3.1)% to £157m. This decline was due to the full year effect of the introduction of European Commission caps on interchange income which first came into effect in December 2015. Adjusting for this impact, we saw strong profit growth driven primarily by lending income. Exceptional items of £(80)m relating to Tesco Bank include an increase in the provision for customer redress and a restructuring charge. Risk-weighted assets have risen in line with lending and the Core Tier 1 ratio has improved to 16.7%. The balance sheet remains strong and well-positioned to support future lending growth from both a liquidity and capital perspective.

Exceptional items in operating profit 2016/17 2015/16

Net impairment of non-current assets and onerous lease provisions £(6)m £(423)m Net restructuring and redundancy costs £(199)m £(126)m Provision for customer redress £(45)m – Interchange settlement £57m – Property transactions £165m £156m Provision for SFO and FCA obligations £(235)m – Past service credit and associated costs arising on UK defined benefit pension scheme closure – £480m Total exceptional items in operating profit £(263)m £87m

Exceptional items are excluded from our headline performance measures by virtue of their size and nature, in order to reflect management’s view of the performance of the Group. In the current year, the net effect of exceptional items on operating profit is £(263)m.

Our annual impairment testing resulted in a net charge of £(6)m. This comprises a net £103m provision release relating to property, a net increase of £(56)m in onerous lease provisions and a net £(53)m impairment charge in goodwill and intangible assets, principally relating to dunnhumby subsidiary, Sociomantic.

Net restructuring and redundancy charges of £(199)m relate principally to changes to our distribution network and store colleague structures and working practices in the UK & ROI, and also includes a £(35)m charge relating to Tesco Bank business simplification.

The provision for customer redress of £(45)m was recognised in Tesco Bank in the first half, following updated guidance published by the Financial Conduct Authority, proposing an extension to the Payment Protection Insurance settlement deadline which is now set at August 2019.

Exceptional items include a credit of £57m in relation to a legal settlement in respect of interchange fees.

Tesco PLC Annual Report and Financial Statements 201716

Financial review continued

We generated net profits (pre-tax) of £165m from property transactions in the year, of which £91m related to the sale of the Letňany Shopping Mall and Liberec Forum Shopping Centre in the Czech Republic. We also sold a number of properties and development sites in the UK & ROI business.

An exceptional charge of £(235)m has been recorded as an adjusting post balance sheet event, following judicial approval on 10 April 2017 of a Deferred Prosecution Agreement between Tesco Stores Limited and the UK Serious Fraud Office regarding historic accounting practices and an agreement with the UK Financial Conduct Authority of a finding of market abuse in relation to the Tesco PLC trading statement announced on 29 August 2014.

Joint ventures and associates, interest and tax Joint ventures and associates Losses from joint ventures and associates before exceptional items increased by £(9)m to £(30)m, due to lower profits recognised in our UK property joint ventures. After exceptional items, including an impairment of investment property within Gain Land, our associate in China, and an adjustment in insurance reserves in Tesco Underwriting, our share of post-tax losses from joint ventures and associates rose to £(107)m from £(21)m last year.

Finance income and costs 2016/17 2015/16

Interest receivable and similar income £48m £29m IAS 32 and 39 ‘Financial instruments’ – fair value remeasurements £61m – Finance income £109m £29m Interest payable £(523)m £(490)m Capitalised interest £6m £6m IAS 32 and 39 ‘Financial instruments’ – fair value remeasurements – £(19)m IAS 19 net pension finance costs £(113)m £(155)m Finance costs £(630)m £(658)m Exceptional charge: Translation of Korea proceeds £(244)m £(220)m Statutory finance costs £(874)m £(878)m

Finance income rose to £109m, mainly due to the favourable effect of marking-to-market financial instruments. These are non-cash adjustments driven by changes in the market’s assessment of credit and debt risk.

Interest payable increased to £(523)m due to debt acquired as part of our February 2016 agreement to regain sole ownership of 49 stores and two distribution centres. The impact of this was partially offset by a £26m reduction in interest following the repayment of debt in the year.

Net pension finance costs of £(113)m reduced in line with the reduction in the opening IAS 19 pension deficit at the start of the 2016/17 financial year. Net pension finance costs are calculated by multiplying the opening net deficit by the opening discount rate each year. For 2017/18, they are expected to increase to c.£(165)m.

An exceptional non-cash loss of £(244)m arose on the translation of the proceeds from the sale of our Homeplus business in Korea which were held in GBP money market funds in a non-Sterling denominated subsidiary. This does not represent any economic cost to the Group.

Group tax Tax on profit before exceptional items was £(185)m with an effective rate of tax for the Group of 25%. This tax rate is higher than the UK statutory rate primarily due to the impact of the 8% supplementary tax surcharge on bank profits, introduced in January 2016, and depreciation of assets that does not qualify for tax relief. The tax rate benefited from the impact on deferred tax of the expected reduction in the UK corporation tax rate from 18% to 17% in 2020.

On a statutory basis, including an exceptional credit of £98m principally relating to a lower book value than tax value of property disposals and tax relief on exceptional impairment and restructuring costs, the tax charge was £(87)m.

The effective tax rate on profit before exceptional items for the 2017/18 financial year is expected to be similar to this year, at around 25%.

Earnings per share (on a continuing operations basis) Diluted earnings per share before exceptional items and net pension finance costs were 7.90p, 41% higher year-on-year principally due to our stronger profit performance. Statutory basic earnings per share from continuing operations were 0.81p, lower than last year driven by higher net exceptional costs.

17Tesco PLC Annual Report and Financial Statements 2017

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Summary of total indebtedness 2016/17 2015/16 Movement

Net debt (excludes Tesco Bank) £(3,729)m £(5,110)m £1,381m Discounted operating lease commitments £(7,440)m £(7,814)m £374m Pension deficit, IAS 19 basis (post-tax) £(5,504)m £(2,612)m £(2,892)m Total indebtedness £(16,673)m £(15,536)m £(1,137)m

Net debt (excluding Tesco Bank) reduced by £1.4bn to £(3.7)bn, as our retail operating cash flow and property and business disposal proceeds were greater than capital expenditure and other charges.

We have a strong funding and liquidity profile underpinned by £4.4bn committed facilities and our key credit metrics (fixed charge cover, net debt/EBITDA and total indebtedness ratio) have improved over the year.

Discounted operating lease commitments The reduction in discounted operating lease commitments includes a benefit from the buybacks we have completed in the UK. In the year, we regained sole ownership of 16 superstores from a number of different vendors, resulting in an annual rent saving of £22m.

Pension The IAS 19 pension deficit measure, which relates to our closed UK defined benefit scheme, increased by £(2.9)bn to £(5.5)bn due to the reduction in bond yields. Despite this increase in the IAS 19 measure of our liabilities, the actual pension payments that are payable to members in the future have not changed.

During the year, we completed a de-risking programme which has reduced the future volatility of the scheme’s long-term funding.

At the last triennial valuation, the Trustee and the Company agreed a long-term funding plan where the Company is paying contributions of £270m a year to the UK defined benefit scheme. The next triennial actuarial valuation is effective as at 31 March 2017 and work is already underway. The Trustee is aiming to conclude the valuation as soon as is reasonably possible.

Summary retail cash flow 2016/17 2015/16

Cash flow from continuing operations excluding working capital £1,695m £2,033m (Increase)/decrease in working capital

underlying decrease in working capital £387m £377m impact from exceptional items £197m £(91)m cash impact of new approach to supplier payments – £(231)m

Cash generated from operations – continuing operations £2,279m £2,088m Cash generated from operations – discontinued operations £(1)m £493m Cash generated from operations £2,278m £2,581m Interest paid £(518)m £(422)m Corporation tax (paid)/received £(64)m £125m Net cash generated from retail operating activities £1,696m £2,284m Cash capital expenditure £(1,328)m £(1,004)m Free cash flow £368m £1,280m Other investing activities £1,620m £543m Net cash (used in)/from financing activities and intra-Group funding and intercompany transactions £(1,342)m £(854)m Net increase in cash and cash equivalents £646m £969m Include/(exclude) cash movements in debt items £1,114m £4,219m Fair value and other non-cash movements £(379)m £(1,817)m Movement in net debt £1,381m £3,371m

On an underlying basis, working capital improved by £387m driven by growing sales volumes, initiatives to reduce stockholding and the timing effect of a fuel payment. The reported total reduction in working capital also includes the net impact of exceptional items.

Excluding working capital, we generated £1.7bn of cash from continuing retail operations. The decrease of £(0.3)bn on the previous year primarily reflects the payment of a turnaround bonus to colleagues in cash rather than shares and higher net exceptional costs than last year.

Interest paid was £(96)m higher than last year due to the debt acquired as part of our February 2016 agreement to regain sole ownership of 49 stores and two distribution centres. The impact of this was partially offset by £1.2bn of debt we redeemed in September 2016 and a further £0.7bn of debt we redeemed in January 2017.

The cash tax outflow of £(64)m reflects payments by our international businesses which more than offset a refund of taxes already paid in the UK, as we continue to agree and close historic enquiries into tax returns.

Cash movements of £1.1bn in debt items primarily reflect the redemption of three medium-term notes on their maturity.

Tesco PLC Annual Report and Financial Statements 201718

Financial review continued

Capital expenditure 2016/17 2015/16

UK & ROI £731m £676m International £403m £254m Tesco Bank £46m £40m Group £1,180m £970m

Capital expenditure (excluding buybacks) of £1.2bn was £0.2bn higher than last year reflecting our planned increase in spend to refresh more than 200 stores in the UK and to accelerate the store opening programme in Thailand. We now expect Group capital expenditure to be around £1.25bn in 2017/18. This is around £250m below our original estimate, as we continue to focus on capital spend that delivers attractive returns and move more of our planned technology spend to cloud-based services.

There was a net reduction of (2.2)m square feet, which includes (1.7)m square feet related to the disposal of Dobbies garden centres with the balance being net closures of space. In Asia we opened 114 stores, primarily in our convenience format in Thailand. In Europe we closed 23 stores.

This year we repurposed just over 1.0m square feet across the Group, improving the ease and relevance of the shopping trip for customers. This included 0.5m square feet in Thailand repurposed for new and existing partners, including five new branches of Decathlon Sports, exclusive in the market to Tesco Lotus, and four new cinemas. In the UK, we repurposed 0.1m square feet in 14 stores, introducing brands such as Miss Selfridge, Wallis and Holland & Barrett.

Property 2016/17 2015/16

UK & ROI International Group UK & ROI International Group Property(a) – fully owned

Estimated market value £13.1bn £6.7bn £19.9bn £13.3bn £6.4bn £19.7bn Net book value(b) £12.6bn £5.1bn £17.8bn £12.6bn £5.0bn £17.6bn

% net selling space owned 52% 74% 63% 52% 71% 61% % total property owned – by value(c) 50% 78% 57% 47% 75% 54% (a) Stores, malls, investment property, offices, distribution centres, fixtures and fittings and work-in-progress. Excludes joint ventures. (b) Property, plant and equipment excluding vehicles. (c) Excludes fixtures and fittings.

The estimated market value of our fully owned property has increased by £0.2bn to £19.9bn, retaining a surplus of £2.1bn over the net book value, as the repurchase of 16 stores in the UK and a foreign exchange translation effect more than offset the impact of the sale of Turkey and Dobbies garden centres. Our Group freehold property ownership percentage, by value, has increased from 54% to 57% year-on-year, driven by both the UK & ROI and International. In International, the effect of the sale of our business in Turkey more than offset the impact of the sale of two large freehold shopping centres in the Czech Republic on the mix of freehold to leasehold.

In April 2017, we regained ownership of a further seven large stores in the UK with a freehold valuation of £219m in a transaction with British Land. Including the effect of this transaction, we have now increased our proportion of freehold ownership by value in the UK & ROI to 51%, up by 10% over two years. The repurchase of stores to date has resulted in an annualised saving of £152m rent, predominantly in relation to fixed-uplift and index-linked rental agreements. The Group operating lease charge reduced by 9% in the year to £1.0bn. We continue to seek opportunities to further reduce our exposure to index-linked and fixed-uplift rent inflation where the economics are attractive.

Looking ahead We made good progress over the last year, further strengthening our customer offer and delivering an improvement in profitability a little ahead of expectations.

We are confident in the plans we have shared and in the progress we will make this year, including further steps towards reducing our costs by £1.5bn, generating £9bn retail cash from operations and improving Group operating margin to between 3.5% and 4.0% by 2019/20. With a much more competitive offer and supplier partnerships as strong as they have ever been, we are much better positioned to navigate challenging market conditions.

In January, we announced that we had agreed the terms of a proposed merger with Booker, focused on unlocking new growth, particularly in the faster-growing ‘out of home’ food market. We are continuing to engage as planned with the Competition and Markets Authority in advance of seeking shareholder approval for the transaction, anticipated in late 2017/early 2018.

Alan Stewart Chief Financial Officer

19Tesco PLC Annual Report and Financial Statements 2017

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Our approach

As one of the world’s leading food retailers, we are very aware of the impact we can have in society and on the environment. Across the Group our actions are guided by our third value, ‘every little help makes a big difference’, reminding us of the positive impact we can have on colleagues, suppliers and wider society by making small, incremental changes.

Our Social and Environmental plan naturally puts food at its heart. It serves to make sure we tread lightly when we source, supply and sell food, and use our extensive local presence and strong supply chain network to make a positive difference to the environment and society. Our plan contains a series of little helps to make it easier to eat healthier; grow our suppliers’ businesses sustainably; help to halve global food waste by 2030; and add value to local communities.