TESCO
PLC
INTERIM RESULTS AND MANAGEMENT REPORT 2008/9

TESCO MAKES GOOD
PROGRESS IN TOUGH MARKETS

26
weeks ended 23 August 2008

H1
2008/9

Comparable*
Growth vs H1 2007/8
Group sales
(inc. VAT)
£28.1bn
14.1%*
Group revenue
(exc. VAT)
£25.6bn
13.8%*
Group trading
profit
£1,367m
9.4%
Underlying
profit before tax
£1,453m
10.3%
Group profit
before tax
£1,435m
11.3%
Underlying
diluted earnings per share
13.28p
11.6%
Diluted
earnings per share
13.12p
12.6%
Dividend per
share
3.57p
11.6%

HIGHLIGHTS

·                    
14.1%* increase in Group sales

·                    
10.3% growth in underlying profit before tax, 9.4%
increase in Group trading profit (13.4% and 12.7% growth
respectively, before start-up losses in United States (US))

·                    
11.6% increase in underlying diluted earnings per share; 11.6%
increase in interim dividend to 3.57p

·                    
Strategy delivers good progress in challenging markets:
-         
International sales up 26.8%*; trading profit up 27.7% before
US;
International
space planned to increase over 25% this year
-          Core UK
sales up 9.7% (6.9% ex-petrol); trading profit up 8.6%
-          UK Non-food
sales up 4% - with good market share gains and solid margins;
-          Tesco.com
sales up 20.5%, profit up 21.4% (including Tesco Direct, which is
trading well);
Tesco Personal
Finance (TPF) makes £71m profit (our share £35.5m, up
34%);
-         
Over 40% reduction in single-use carrier bags
achieved – on track for 50% in 2009

·                    
Homever acquisition in Korea given regulatory clearance –
with completion expected as planned in October and acquisition of
50% of TPF from Royal Bank of Scotland Group plc on track for
November completion

·                    
£5bn-plus property funding programme progressing well
– with sale of £605m property assets in the first half
and net profit from property-related items of £159m

·                    
On track to create up to 30,000 new jobs this
year

Terry Leahy,
Chief Executive, commented:
“Tesco is
at its’ best in tough markets - responding to the changing
needs of customers - and that’s why we have been able to make
good progress this year, despite facing into powerful economic
headwinds and carrying planned start-up losses in the US.  Our
business is strong, broadly-based, increasingly international and,
I believe, well-placed not just to cope with the challenges which
lie ahead but also to grasp the growth opportunities open to us by
continuing to invest in our strategy.”

* Sales growth
reported on a consistent basis (six months versus six months) for
China. On a statutory basis, Group sales and revenue grew by 13.5%
and 13.3% respectively.
RESULTS

Group.  These results are for the 26 weeks ended 23
August 2008, compared with the same period in 2007. They include
full segmental reporting of sales and trading losses for our
business in the United States (US) for the first time –
within International. Last year’s UK trading profits have
been adjusted to reflect this change as the US was previously
reported within the UK.

Group sales,
including VAT, increased by 14.1%* to £28.1bn (last year
£24.6bn*). At constant exchange rates, sales increased by
10.5%. These growth rates include sales in China on a consistent
(six month versus six month) basis, compared to statutory results
in the prior year which included seven months following China
becoming a majority-owned subsidiary in December 2006.

In April 2006, with our Preliminary Results for
2005/6, and following our transition to IFRS, we introduced an
underlying profit measure, which excludes the impact of the
volatile non-cash elements of IAS 19, IAS 32 and IAS 39
(principally pension costs and the marking to market of financial
instruments).  The underlying profit measure also excludes the
impact of the non-cash element of IAS 17, relating to annual
uplifts in rents and rent-free periods. Underlying profit before
tax rose to £1,453m in the first half (last year
£1,317m), an increase of 10.3%.

With our Interim Results for 2006/7, we also
began reporting segmental trading profit, which excludes property
profits and, as our underlying profit measure does, excludes the
non-cash element of the IAS 19 pension charge and now also excludes
the non-cash element of the IAS 17 lease charge. Group trading
profits were £1,367m (last year £1,249m), up 9.4%. This
was after planned initial trading losses of £60m in our US
business.

Group operating profit rose by 13.1% to
£1,480m (last year £1,309m). Total net Group property
profits were £159m in the first half (last year
£119m).

Group Results

Actual rates
Constant
Group sales
(inc. VAT)
£28,094m
14.1%*
10.5%*
Group profit
before tax
£1,435m
11.3%
8.9%
Group operating
profit
£1,480m
13.1%
10.7%
Group underlying
profit before tax
£1,453m
10.3%
8.0%
Group trading
profit
£1,367m
9.4%
7.0%
Trading
margin
5.3%
-
-

International. 
Total international sales grew strongly – by
26.8%* at actual exchange rates (also on a consistent, six month
basis for sales in China) and by 12.6%* at constant exchange rates,
to £8.0bn (last year £6.3bn*).  The inclusion of
sales in the US for the first time added £76m and 1.2
percentage points to overall growth in International. Like-for-like
sales in International grew by 1.0% in the first half, with net new
space contributing the remaining 11.6%.

Second quarter sales in International grew by
29.0% at actual rates and by 13.3% at constant rates, a similar
rate of growth to the first quarter, helped by favourable exchange
rate movements in Europe. The phasing of this year’s opening
programme will be more weighted towards the second half of the year
than usual.

* Sales growth reported on a consistent basis (six months versus
six months) for China.
International contributed £346m to trading
profit in the first half (last year £271m), an increase of
27.7%, before the £60m of planned initial trading losses in
the US. On this basis, margins improved by 10 basis points. At
constant exchange rates, international trading profit (before US
losses) grew by 15.9%.

International
Results

Actual rates
Constant

£m
%ch.
%ch.
International
sales (inc. VAT) – inc. US
£7,979m
26.8%*
12.6%*
International
sales (inc. VAT) – ex. US
£7,903m
25.6%*
11.4%*
International
trading profit – inc. US
£286m
12.6%
0.4%
International
trading profit – ex. US
£346m
27.7%
15.9%
Trading margin
– inc. US
4.0%
-
-
Trading margin
– ex. US
4.9%
-
-

In Asia, sales
grew by 16.0% at actual exchange rates and by 14.8% at constant
rates on a consistent (six month versus six month) basis for China
sales, to £3.2bn (last year £2.7bn*). Trading profit
increased by 16.9% at actual rates and by 18.5% at constant rates
to £145m (last year £124m).

Trading margins were stable in Asia despite
rapid sales growth in China, where we made a small loss in the
first half as a result of planned growth in overhead as we
establish our operations and supply hubs in China’s main
economic regions. Elsewhere we saw strong performances in Thailand,
Malaysia and Korea (where reported growth was held back by an
unfavourable exchange rate).

AsiaResults

Actual rates
Constant

£m
%ch.
%ch.
Asia sales (inc.
VAT)
£3,171m
16.0%*
14.8%*
Asia trading
profit
£145m
16.9%
18.5%
Trading
margin
4.9%
-
-
In Europe,
sales rose by 33.0% at actual rates to £4.7bn (last year
£3.6bn) and by 8.7% at constant rates. Growth at actual rates
benefited from strongly favourable exchange rate movements in all
markets and constant rates growth was held back by the timing of
new store openings, with the phasing of new stores more strongly
weighted this year towards the second half. Like-for-like growth in
Central Europe remained positive despite emerging pressures on
consumer spending, particularly from rising fuel costs. Trading
profit increased by 36.7% at actual rates to £201m (last year
£147m), and by 13.6% at constant rates. Trading margins
overall rose in Europe by 14 basis points, helped by solid
performances in most of our markets.

EuropeResults

Actual rates
Constant

£m
%ch.
%ch.
Europe sales
(inc. VAT)
£4,732m
33.0%
8.7%
Europe trading
profit
£201m
36.7%
13.6%
Trading
margin
4.9%
-
-

A segmental report on the United States
is included in International for the first time with these results.
US sales and initial trading losses were previously reported within
the UK segment. Fresh & Easy had no stores trading during the
first half of last year so comparatives are available only in
respect of start-up losses in 2007/8. US sales were £76m in
the first half and trading losses were

* Sales growth reported on a consistent basis (six months versus
six months) for China.

£60m, (last year US trading losses were
£17m). These planned losses reflect the fact that the US
business – which has been trading for nine months – has
been built with the necessary infrastructure in place from the
beginning to support hundreds of stores. At this stage, it is
therefore operating with high overhead and other costs in relation
to the scale of the business, whilst also trading from immature
stores.

United
StatesResults

Actual rates
Constant

£m
%ch.
%ch.
US sales (inc.
VAT)
£76m
-
-
US trading
profit/ (loss)
£(60)m
-
-
Trading
margin
n/a
-
-
UK.
  UK sales increased by 9.7% to
£20.1bn (last year £18.3bn), comprising  growth
from like-for-like stores of 6.7% and 3.0% from net new stores.
Excluding petrol, like-for-like sales grew by 3.7%, with growth of
3.5% in the first quarter and 4.0% in the second quarter. Inflation
strengthened during the first half, with our continued investment
in lowering prices for customers and deflation in non-food being
more than offset by the rises in market prices for some commodities
and seasonal fresh foods. We expect inflation to slowly subside
through the second half.
Food sales have remained solid during the first
half, despite emerging evidence of consumers trading down in some
product categories to help relieve stretched household budgets.
Non-food growth has slowed but has remained positive and our
performance against the overall market is strong. Petrol
participation has risen as a result of high oil prices and a
stronger US dollar.
Good control of expenses and increased
productivity have enabled us to deliver solid margins and profit
growth despite these challenges - as well as rising fuel and
utility costs - whilst also absorbing initial trading losses on
Tesco Direct. Even after these additional costs, UK trading profit
rose 8.6%, with trading margins at 5.9%, stable on last
year.

UKResults

£m
%ch.
UK sales (inc.
VAT)
£20,115m
9.7%
UK trading
profit
£1,081m
8.6%
Trading
margin
5.9%
-
Joint Ventures and
Associates.  Our share of profit
(net of tax and interest) for the first half was £43m, an
increase of 34.4% (last year £32m). Property joint ventures
made a profit of £4m (last year £2m profit). Tesco
Personal Finance (TPF) profit was £71m, of which our share
was £35.5m, up 34% on last year. We expect the acquisition of
the 50% of TPF owned by the Royal Bank of Scotland to be completed
as planned, in November. For the time being it will retain its
December year-end.
Finance costs and tax.
Net finance costs were £88m (last year
£52m). Excluding the impacts of IAS 19, IAS 32 and IAS 39,
the underlying interest charge rose 35%, in line with the movement
in net debt.  Total Group tax has been charged at an effective
rate of 27.5% (last year 27.2%).
Underlying diluted earnings per
share increased by 11.6% to
13.28p (last year 11.90p), benefiting from our share buy-back
programme which eliminated earnings dilution from new shares
issued.
Dividend. The
Board has proposed an interim dividend of 3.57p per share (last
year 3.20p). This represents an increase of 11.6%, consistent with
our policy of growing dividends broadly in line with underlying
diluted earnings per share.
The interim dividend will be paid on 19
December 2008 to shareholders on the Register of Members at the
close of business on 10 October 2008. Shareholders have the
opportunity to elect to reinvest their cash dividend and purchase
existing Tesco shares in the Company through a Dividend
Reinvestment Plan.
Cash Flow and
Balance Sheet.
Group capital
expenditure (excluding acquisitions) rose to £2.5bn in the
first half (last year £1.6bn). UK capital expenditure was
£1.5bn (last year £0.9bn). Half of this increase
(£0.3bn) relates to mixed-use development schemes which
include large Tesco Extra hypermarkets as anchor stores and in
which our initial outlay will be offset by substantial future
capital receipts.  Of the remaining £0.3bn increase in
UK capital expenditure, the majority relates to the purchase of a
further 15 trading stores from competitors and increased investment
in energy-saving capital projects with a rapid pay-back period.
This year, a
significantly higher proportion than usual of the annual UK capital
expenditure budget was spent in the first half. Planned capital
expenditure during the second half will be less than half the level
of the first half.
Total international
capital expenditure rose to £1.0bn (last year £0.7bn);
comprising £0.4bn in Asia, £0.5bn in Europe and
£0.1bn in the US, in part as a consequence of exchange rate
movements versus last year.
Cash flow from operating activities, including
an improvement of £195m within working capital,
totalled £2.2bn.
Overall, the Group had a net cash outflow
of £22m during the first half, leaving
net borrowings of £7.4bn at the half year
end. Gearing was 61%.
We
are about to complete the planned acquisition of the Homever stores
in Korea for a consideration of just under £1bn and we expect
to complete the acquisition of Royal Bank of Scotland plc’s
50% shareholding in TPF for a similar amount in the next few weeks.
At the time of the announcement of the TPF acquisition, we
indicated an objective to return Group net borrowings, after these
additional expenditures, to around £8bn by the end of this
financial year. This will be achieved through a combination of
further property divestments, a review of the phasing of our share
buy-back programme, improved working capital and lower levels of
capital expenditure during the second half.
Our award-winning
defined-benefit pension scheme is an important part of our
competitive package of pay and benefits which helps Tesco recruit
and retain the best people.  As at August 2008, under the IAS
19 methodology of pension liability valuation, the scheme had a
deficit on a post-tax basis of £1,053m up from £603m at
February 2008.  This increase was mainly due to a significant
increase in the rate of price inflation implied by the Bank of
England yield curve and a reduction in the yield on corporate
bonds.  This movement has partially reversed in recent weeks
and as a result, our current IFRS deficit has since reduced to
£680m.
We
manage and fund our scheme on an actuarial valuation basis. As part
of a regular triennial independent valuation, the Trustees are
currently reviewing the funding of the scheme; we expect the
results of this review will show a relatively small
deficit.
RELEASING
VALUE FROM PROPERTY
As announced in April
2006, we plan to release cash from property through a sequence of
joint ventures and other transactions, in the UK and
internationally and return significant value to shareholders, both
through enhanced dividends (through the growth in underlying
earnings per share, which includes property profits) and share
buy-backs.
During this programme
to date, pension funds, property companies and other investors have
purchased Tesco assets with an aggregate value of £2.0bn,
representing strong progress towards our objective to release in
excess of £5bn of funds from property over five years. Our
recent divestment of properties, including 13 Tesco stores and one
distribution centre, for a total of £605m in cash, at average
rental yields of around 5.0%, which was announced last month
indicates that this programme remains on track.
We are in discussion
with potential partners with the objective of continuing our
property divestment programme. Appetite for Tesco’s property
and covenant has remained robust and we are looking to complete
further transactions in the months ahead. Proceeds for the
remainder of this year will principally be used to pay down
debt.
STRATEGY
We have continued to make good progress with
our strategy, which has five elements, reflecting our four
established areas of focus, and also Tesco’s long term
commitments on community and environment:
-                                                        
become an international retailer
-                                                        
maintain a strong core UK business
-                                                        
to be as strong in non-food as in
food
-                                                        
develop retailing services
-                                                        
and put community at the heart of what we
do
We do this by keeping our focus on trying to
improve what we do for customers. We try to make their shopping
experience as easy as possible, lower prices where we can to help
them spend less – particularly now when household budgets are
stretched, give them more choice about how they shop – in
small stores, large stores or on-line, and seek to bring simplicity
and value to sometimes complicated markets. And we aim to be a good
neighbour in the communities we serve, be responsible, fair and
honest in our dealings and give customers the information and
products they need to make greener choices.
INTERNATIONAL
Despite challenging
economic conditions and political uncertainty in some markets our
international businesses have delivered another good performance.
Sales growth has been strong and profits have again grown faster
than sales in our established countries as we benefit from
improving market positions, maturing assets, more efficient supply
chains and lower overheads. We are still in our first year of
trading in the US and we are pleased with the early performance of
Fresh & Easy.
Our focus on organic growth in selling space
continues as we build out our networks. We added 2.8m square
feet of space in 162 new stores in the first half and at the end of
August, our international operations were trading from 1,772
stores, including 525 hypermarkets, with a total of 49,072m square
feet of selling space. New space growth,
particularly in Europe made a lower contribution to sales growth in
the first half than it will for the year as a whole given the late
phasing of new store openings this year.
As well as organic expansion, and building on
our successful acquisitions in Czech Republic and Poland two years
ago, we have just received regulatory clearance for the purchase of
36 very large Homever hypermarkets in Korea, most of them former
Carrefour stores, in a £1bn transaction we announced in May.
This acquisition, when fully integrated into Homeplus, has the
potential to transform our already substantial and successful
business in Korea into a retailer capable of challenging for market
leadership in one of the world’s largest economies. The
stores will add some 50% to our existing space in Korea, much of it
in the Seoul metropolitan area, and a further 1.3m square feet of
shopping mall space.
For the year as a whole we are planning to
add approaching 12m square feet of space in International,
representing growth of over 25%.
Asia.
Despite unhelpful trading conditions in our two
largest markets – Korea and Thailand – and the
short-term costs involved in building the platform for more rapid
expansion in China, we have made good progress in Asia.
Last month, we announced our intention to
enter the market in India, complementing our entries into
China and the US, and giving us access to another of the most
important economies of the world.  After several years
studying the market and identifying suitable partners, we plan to
develop a wholesale cash & carry business, based in Mumbai,
offering a comprehensive range of great value fresh food, grocery
and non-food products to small retailers, restaurants, kirana
stores and other business owners. We will invest in building a
modern supply chain for this operation. At the same time, we have
also entered into a fee-based franchise agreement with Trent, the
retail arm of the Tata Group, one of India’s most respected
companies, to provide expertise and technical support to Star
Bazaar, its hypermarket business. Star Bazaar will also be a
customer of the cash & carry business.
·                    
In China, where we trade currently from
58 hypermarkets and 4 Express stores, we are equipping the business
with the resources it needs to expand more quickly in the
country’s main economic areas – developing operational
and supply hubs in the key regions. Our Shanghai and Eastern fresh
food DC, which is now fully commissioned, has increased
significantly the proportion of directly-sourced fresh food into
our business, improving quality and value for customers. These
investments produced a small planned loss in the first half,
although sales growth, including a pleasing like-for-like
performance, was strong.
·                    
In Japan, whilst the retailing
environment remains challenging, we are encouraged by the
performance of our new Express stores which, after patient
development, are proving an attractive proposition for customers.
We opened our first 24 hour Express at Okubo in Tokyo during the
first half, bringing the total to eight and we are very optimistic
for the future of Express in Japan. Our discount convenience
supermarkets, which operate as Tsurukame, are also popular with
customers and we also opened three more of these in the first half.
As we strengthen the team, we expect to deliver strong growth in
Japan going forward.
·                    
Despite a subdued consumer economy in
Korea, Homeplus continued to deliver good growth in market
share, sales and profit. Following completion of our acquisition of
the Homever stores, we will shortly begin the integration and
conversion of the stores. This will involve integration costs of
around £16m this year, and similar amounts for the following
two financial years. This acquisition gives us access to the
equivalent of three years organic expansion and we plan to reduce
future store development in areas where Homever stores currently
trade. We will open our first Green Store in Korea next
month.
·                    
Our business in Malaysia delivered an
excellent first half performance, despite the impact of high fuel
and commodity food prices on consumer confidence. The business
invested heavily in reducing prices for customers –
particularly in fresh foods. Profitability improved as the benefits
of a strong store opening programme – we now have 23 stores
trading – and the full benefits of the Makro acquisition in
2006 came through. Looking forward, we have a strong store
development pipeline to sustain our growth.
·                    
Tesco Lotus in Thailand has coped well
with continued uncertainty in the political and business
environment. Sales have grown well, helped by substantial price
investment and promotions, combined with a strong new store
programme across our range of formats. Profitability has also
improved, supported by excellent growth in productivity. We now
have a strong blend of formats, with particularly good growth
coming from our Express and Talad stores, which have now moved into
profitability. Our third Community Mall is now trading and customer
response has been outstanding.
Europe. Our
European businesses, helped in part by the weakness of Sterling,
have delivered excellent growth and very good results, despite the
less favourable economic conditions prevailing in a number of
markets during recent months. In Central Europe, last year’s
very warm summer weather also provided a demanding comparative but
our strong market positions, growing capability in pan-European
sourcing and the flexibility of our multi-format approach have
provided a solid underpinning to our performance.
·                    
In Czech Republic our business made good
progress although growth was slower than in recent years as a
result of subdued consumer spending and increased cross-border
shopping arising from the significant appreciation of the Czech
Koruna against the Euro. Despite this tougher environment we
continue to improve performance and grow our market share. We
opened our 100th store in first half and have a strong opening
programme for the rest of the year which includes a number of new
Express stores in Prague.
·                    
In a still difficult market in Hungary
our business continued to deliver solid performance, helped by good
cost control and an improving sales mix – driven particularly
by strong fresh food and clothing growth. A strong new store
opening programme will add over 10% to our sales area, mostly in
hypermarkets, during the second half.
·                    
Polanddelivered
very strong first half results – meeting the challenges of
rising costs and competitive markets very effectively. The business
made significant investments in staff wage rates and lower prices
for customers, funded by solid like-for-like growth, a strong sales
mix and good growth from our small format stores. During the first
half, we opened one large hypermarket and eight compact hypers, as
well as a further four 1k stores – a format which is trading
particularly well.
·                    
Tesco Ireland produced a strong first
half performance, with good progress in all areas of the business
despite the effects of a slowing economy on consumer confidence and
spending. Overall growth remained ahead of the market, including a
positive contribution from like-for-like sales. Seven new stores
opened in the first half and they are trading well, and our
large new distribution centre at Donabate is now fully operational.
We have made significant investment in lowering prices for
customers, including the introduction of our new Cash Savers
discount range, which covers 1,000 products.
·                    
Although overall economic growth in Slovakia slowed in the
first half, it remained robust and our business continued to make
very good progress. We remain the clear market leader in the
country and saw strong market share growth in the first half. Our
first Express store in Bratislava will open during the second
half.
·                    
In Turkey, a fast pace of growth in our
business was maintained, despite a weaker economic background,
driven by a rapid store opening programme, as we develop our
network across the country. Our first hypermarket in Istanbul began
trading last month and we are very encouraged by its’ early
sales performance. We have seen good growth in our Express stores,
which we have now begun to open outside Izmir, bringing the total
to 58 and we also opened our first 1k stores in Turkey during the
first half. Own brand sales have increased rapidly and now
represent 19% of sales, up from 15% last year.
United
States.  The early progress of
Fresh & Easy, just nine months after the first store opened, is
very encouraging. Customer response to our combination of fresh,
wholesome food at very competitive prices in neighbourhood
locations has been extremely positive. With the number of stores
now at almost 90 and growing rapidly, feedback from new as well as
regular shoppers continues to surpass our expectations.
Sales densities are building well, with the
average running at $11 per square foot per week, which is already
substantially higher than the US supermarket industry average. Our
best stores are now running at more than $25 per square foot and
the stores opened since the Spring are averaging sales densities
close to $13 per square foot per week.
The modest adjustments we made to the store
format and offer in response to initial customer feedback – a
warmer in-store ambience, the introduction of a small number of
promotions, more prominent point-of-sale material and some new
products – have proved popular with customers. Our Riverside
DC and kitchen operations are coping well with growing volumes
– with the capacity in place to serve hundreds of stores.
Fresh foods and Fresh & Easy own brand products, which
represent 60% and 72% of sales respectively, have been particularly
well-received by customers.
Site acquisition for our 10,000 square foot
neighbourhood stores has made further good progress, helped by
availability of suitable leasehold property and the rate of new
openings is gradually accelerating to the pace we require. We have
secured a significant number of sites in Northern California, and
whilst we are continuing to incur costs in preparing for this next
stage of expansion, no decision has been made on its’ precise
timing.

CORE
UK
In the core UK business, Tesco has coped well
with the effects of cautious consumers and recovering competitors
to deliver very solid progress in the first half by working hard to
improve the shopping trip for customers. The re-setting of the
business, to meet the changing priorities of customers as they seek
help with making already stretched household budgets go further, is
progressing well.
UK sales grew by
9.7% in the first half, including petrol, and by 6.9% excluding
petrol. Within this, like-for-like sales excluding petrol increased
by 3.7% for the first half as a whole. This rate of growth is well
within our planned range of performance for the year. We saw growth
of 3.5% in the first quarter and an increase to 4.0% in the second
quarter.
Every Little
Helps.  We have continued to
invest in the things that matter for customers, delivering
broadly-based improvements to the shopping trip during the first
half:
·                    
Our price position is strong. With many
consumers becoming more focused on value we have increased our
investment in price and promotions compared with last year to help
customers spend less. As part of this, we have focused more of our
increased promotional activity on money-off deals, rather than on
multi-buys. Our Price Check survey, which compares 10,000 prices
against our leading competitors weekly, shows that our price
position has improved again so far this year (for more information
see www.tesco.com).
·                    
Given the household budget pressures we know
many of our customers are experiencing we are adapting our product
offer to meet their changing priorities. Two weeks ago we
introduced the biggest change to our grocery ranges for more than a
decade, with the launch of almost 400 ‘Discount Brands at
Tesco’ products. There are 34 new brands, covering most
categories, and these will match discounter ranges in addition to
550 other products which are price-matched. The new range is higher
in price and quality than Tesco Value. Customer response so far has
been very pleasing.
·                    
Service in our stores has improved with over 26
million more customers than last year receiving our one-in-front
promise during the first half - by reducing queues at our checkouts
through the use of improved technology including faster, more
accurate scanners and checkout cameras which enable us continually
to track queue lengths. We have also introduced more self-service
checkouts, which are very popular with customers and these now
account for 20% of all transactions.
·                    
On-shelf
availability, which we measure using our in-store picking of
tesco.com orders, has improved again and more customers are able to
buy everything they want when they shop at Tesco.
Step-Change. 
We delivered strong efficiency savings in the first half –
and we are on track to deliver, as planned, £450m in the year
as a whole through the Step-Change programme, which brings together
many initiatives to make what we do better for customers, simpler
for staff and cheaper for Tesco. Most of these savings are
re-invested to improve our offer for customers.
New
Space.  We opened a total of
772,000 square feet of new sales area, of which 139,000 square feet
was in store extensions, principally for Extra. This was a lower
proportion of the opening programme than last year and reflects the
priority of converting the stores we acquired from Somerfield and
Kwik Save at the end of last year. We opened another three Extra
hypermarkets, compared with six in last year’s first half,
bringing the total to 169, with a further four planned by the end
of the year. We opened 12 superstores and 44 new Express
stores.
NON-FOOD
Our general merchandise business has held up
well in an increasingly difficult market. Because our customers
recognise the quality, breadth and value of our offer, Tesco
non-food sales have been less affected than most other
retailers’ in the current economic climate and we have
continued to see market share gains.
We have made significant investment in
lowering prices for customers, and with careful management of mix,
costs and inventory we have maintained solid margins and
profitability but sales have slowed, with growth in the UK of 4%
during the first half, compared with 8% growth in the second half
of last year.
Total UK non-food sales increased to
£4.1bn (reported within UK sales). Including £1.7bn in
International, where growth was stronger, Group non-food sales grew
7.3% to £5.8bn.
Despite subdued markets, in the UK we saw
good growth in electricals (up over 9%), with particularly strong
performances in computing, cameras and white goods. Entertainment
sales were also robust, helped by the strength of the games market.
Toys (up 12%) and DIY sales (up 17%) also delivered good
growth.
In a difficult clothing sector, our Cherokee
and Florence & Fred brands did well and we outperformed
significantly a falling market. International clothing sales rose
18%, reflecting the success of our brands in Central
Europe.
Tesco Direct.
Our latest catalogue, which was launched this
month, demonstrates the growing strength of our offer. Initial
customer response has been very positive with order volumes up
significantly on last season. We now have 12,000 products on-line
and around 7,000 in the catalogue. As well as wider ranges, Tesco
Direct provides customers with the choice of ordering on-line, by
phone or in selected stores and the option to pick-up items from
some stores is proving very popular. We now have desks in 233
stores – and these are taking a rising proportion of
orders.
Sales are growing steadily, in line with our
expectations and the progressive development of the offer. First
half start-up costs and initial operating losses on Direct are
consistent with our original guidance of a £20m trading loss
for the full financial year.
Homeplus. 
Our latest Homeplus store – at Cribbs Causeway in Bristol -
which makes around 60% of the current Tesco Direct offer available
to customers from stock, has opened well and the overall
performance of our trial non-food stores – we now have eight
units trading - has been encouraging. Our most recent stores -
trading from 50,000 square feet – have continued to trade
well and we are on-track to extend the trial to a total of 10
further stores in the months ahead – with two more, at
Edinburgh and Nottingham, opening before Christmas.
Dobbies.
Having acquired the minority interest in
Dobbies, we are pushing on with our plans to accelerate the
expansion of the business towards a national network of garden
centres.  Two new stores – at Sandyholm and Southport
– opened in the first half. Sales rose by over 12% during the
first half and the business saw strong summer trading despite a wet
August.
RETAILING SERVICES
Our efforts to bring simplicity and value to
sometimes complicated markets are behind the success of our
Retailing Services businesses. Also underpinning this element of
our strategy in its early stages is a strong economic model, based
around leveraging existing assets – either our own or a
partner’s - so that we can simultaneously price our services
competitively for customers and also achieve high returns for
shareholders.
These businesses – principally Tesco
Personal Finance, tesco.com, Tesco Telecoms and dunnhumby –
have now become substantial contributors to Group sales and profits
and they offer the potential to become even more material in the
future as they accelerate their rate of growth. At the announcement
in July of our intention to acquire the remaining 50% of Tesco
Personal Finance (TPF) owned by Royal Bank of Scotland Group plc
(RBS) for just under £1bn, we set a target to grow the
aggregate profit contribution from Retailing Services to £1bn
over the next few years (from its current level of just under
£400m). Andrew Higginson, Group Finance and Strategy
Director, will move across to become Chief Executive of Retailing
Services to drive this growth.
At the time of the announcement, we also
committed to memorandum disclosure of Retailing Services
results.  In the first half, Retailing Services sales
were £1.7bn, up 16.4% on last year and profits were
£200m, up 26.5%.
Tesco Personal
Finance has delivered a very
strong performance in the first half, increasing profits by 34% in
a challenging financial services market. Profit, net of interest
and tax, is £71m (last year £53m) of which
Tesco’s share is £35.5m. Sales growth has been good
driven by product innovation and segmentation. tescocompare.com,
our aggregator website, added home, van and motorcycle insurance as
well as mortgages to its coverage and will shortly include
utilities. Value, Standard and Finest home insurance lines were
also successfully launched as well as a pre-pay Travelmoney
card.
Our overall bad
debt experience has been stable so far this year, with TPF’s
credit card arrears rate currently running at less than half the
industry average. Discussions with the Financial Services Authority
in relation to our acquisition of RBS’ 50% shareholding in
TPF are ongoing and we expect to be able to complete the
transaction and assume full ownership, as planned, in
November.
tesco.com sales
continue to grow strongly, up over 20% in the first half to
£902 million. Profit also rose
strongly - by 21% on a comparable basis to £48m. In the
grocery business, orders rose by more than 10% to over 7.5 million
and service levels continued to improve. Tesco Direct sales grew
strongly, helped by substantial rises in average order value and
customer numbers. Our international on-line grocery businesses also
grew well – with dotcom in Korea growing by over 90% and
Ireland by over 65%.

We will be opening our second dot.com-only store
– which will fulfill on-line grocery orders for customers in
most of Kent, in Aylesford next month. The first, in Croydon, grew
like-for-like sales by 29% in the first half, and its sales are now
running at well over £1m per week.

Last year we began giving our dot.com customers
the option of a bag-free delivery. This has proved very successful
- with almost half of customers now taking this option. Not only
does this help us reduce the number of carrier bags we use, but it
also makes the picking process in our stores more
efficient.

Tesco Telecoms
has seen steady growth in the first half. Tesco
Mobile has remained the number one pre-pay provider for overall
customer satisfaction and was the only major operator to grow its
customer base in the first half. Our branded telecoms hardware
business (landlines, branded mobiles, accessories etc.) has
continued to grow very strongly in the
first half as Tesco becomes a popular choice for buying telephones
and accessories.
COMMUNITY, ENVIRONMENT AND CORPORATE
RESPONSIBILITY
Actively supporting our local
communities.  We play a positive
role in our local communities and work hard to be a good
neighbour.

In July, we were one of only 21 companies to be
awarded a BitC Community Mark in recognition of our commitment to
communities.

We are on track to hit our target of raising
£2.5m for our Charity of the Year, Marie Curie. We raised
over £500,000 in a single weekend this spring through a Great
Daffodil Appeal, our most successful national collection to
date.

We announced in June that Sports for Schools
& Clubs and Computers for Schools will be combined to create a
massive new voucher collection scheme. It will be launched at the
beginning of next year and will run for an extended period. In
response to feedback from schools, we will be extending the
products we offer into other areas of the curriculum such as health
and art.

We opened our first store with a Community
Centre in Malaysia this August, based on the great success of our
Culture Centre format in Korea. Members of the local community can
come together in these dedicated areas in-store for activities such
as cooking classes, Taekwondo, line dancing and health
checks.

Caring for the environment. 
Our environmental programme was
recognised at the Business in the
Community Awards for Excellence 2008 when
it won the Barclays Environmental
Leadership Award.

Through our unique Green Clubcard scheme, we
have saved over two billion carrier bags since August 2006, and
usage is 40% down on the same period two years
ago.This July,
Tesco
Malaysia
became the first country outside the UK to
launch Green Clubcard points to help customers use
fewer carrier bags, issuing over 14,000 points in the first week of
the reward scheme.

This summer, we began selling a new range of
reusable shopping bags, designed exclusively for Tesco by Cath
Kidston. A donation of 50p from each bag sold goes to Marie Curie,
Tesco's Charity of the Year.

One of the
world’s leading thinkers on energy, sustainable development
and climate change has been appointed Director General of the
Sustainable Consumption Institute (SCI) – a body which is
Tesco-funded - at The University of Manchester. Professor Mohan
Munasinghe will lead the SCI to help deliver a revolution in green
consumption through providing world class and authoritative
research in this area. He started the role this month. The Sri
Lankan-born academic is Vice Chair of the Intergovernmental Panel
on Climate Change (IPCC), the world’s leading scientific
body tasked with evaluating the risk of climate change caused by
human activity.

In April, we
launched a trial of product carbon labels on 20 own-brand products
in UK stores. In September we extended that trial to stores in
Ireland. The label appears on products in four categories: washing
detergent, potatoes, orange juice and light bulbs.  Over half
our customers say that the carbon footprint of a product
could/would influence their decision to purchase.

We met our target to get 10m energy efficient
light bulbs into our customers' homes.

We continue to develop our new environmental
format store, and will open the first of these in the UK early in
2009. We have opened our third energy efficient store in
August in Lubartow, Poland. The store is
powered by solar panels, wind turbines, a ground heat exchanger and
recovers heat from freezers and chillers.
Our first eco store opened in Japan at the end
of August. Initiatives include solar car park lights, a low
energy refrigeration system and dimmable lighting.
In Thailand we opened
our second green store this August. The store saves up to 30%
energy compared to a conventional store and recycles its raw
vegetable waste and used cooking oil into biofuels.

Giving customers healthy
choices.  Over 3,000 UK primary
schools with more than 749,000 children took part in the Tesco
Great School run in June. We are waiting to hear whether we have
broken the World Record for the greatest simultaneous walk or
run.

In Thailand, our Get Healthy with Tesco Lotus
aerobic competition concluded with the national finals in June. In
the competition, more than 2.3m people took part with 151 aerobic
teams across 25 provinces. We also launched ‘Running for
Life’ in the Czech Republic and Slovakia, as well as our
second ‘Walk for Life’ in Malaysia, both to raise funds
for cancer research.

In China, four Tesco
and Everton summer soccer camps were
held during August for employees’ children and kids from
special schools in Shanghai. A National Basketball contest launched
earlier this month will also help staff get active. In
Malaysia our 5km ‘Walk for
Life’ attracted over 4,000 participants, raising
more than RM100,000 (£14,300) for the
National Cancer Council’s (MAKNA) cancer research
fund.

Through the FA Tesco Skills Programme in the UK
over 400,000 children aged 5 - 11 have taken part in the skills
coaching sessions we have run in Schools, Clubs and after school
Skills Centres. This summer we are giving kids the chance to
perfect their skills at the Free Skills
Roadshow, which is visiting stores and town centres across
England. There is also a chance for them to win a coaching
session with England stars Frank Lampard and Kelly
Smith.

Looking ahead

·                                
Our ethical trading programme already compares
well with our competitors but we are planning further work to
ensure we always trade fairly. Our plans include helping to improve
labour standards at farms and factories and working with experts to
help poorly performing suppliers to improve.
·                                
By October, we will have Community Champions in
the Czech Republic as well as the UK and China.
·                                
By the end of this financial year, we will have
opened at least one Environmental Store in each of the countries in
which we operate
·                                
We will open the first recycling centre outside
our Warszawa store in Poland this September. The centre will accept
all types of materials from batteries to larger home
appliances.

CONTACTS
Investor Relations:    Steve
Webb                                        
01992 644800
Press:          
Jonathan
Church                                            
01992 644645         
Angus Maitland – The Maitland Consultancy 0207 379
5151
This document is available via the internet at
[www.tesco.com/investor]A meeting
for investors and analysts will be held today at 9.00am at the
Royal Bank of Scotland, 280 Bishopsgate, London EC2 4RB. Access
will be by invitation
only.
An Interim Results interview with Sir Terry Leahy is available now
to download in video, audio and transcript form at
[www.tesco.com/corporate].

ADDITIONAL DISCLOSURES:

Risks and Uncertainties

As with any business, risk
assessment and the implementation of mitigating actions and
controls are vital to successfully achieving the Group’s
strategy. The Tesco Board has overall responsibility for risk
management and internal control within the context of achieving the
Group’s objectives. The key risks and mitigating factors have
not changed from those previously reported, namely:

·                                
Business and financial
strategy, including Group Treasury risk
·                                
Operational threats and
performance risk in the business, as well as competition and
consolidation
·                                
People capabilities,
reputational and environmental risks
·                                
Product safety, health and
safety risks, ethical risks in the supply chain, fraud and
compliance
·                                
Property and non-food
risks
·                                
IT systems and
infrastructure
·                                
Regulatory and political
environment, activism and terrorism
·                                
Pension risks, joint
venture governance and partnerships
·                                
Funding and liquidity,
interest rate and foreign currency risk management
·                                
Credit risk, Tesco
Personal Finance (TPF) and insurance

For greater detail on
these risks and mitigating factors, please refer to our 2008 Annual
Report.

Statement of Directors’
Responsibilities

The Directors confirm that to the best of their
knowledge this half-year press release has been prepared in
accordance with the Disclosure and Transparency Rules of the UK
Financial Services Authority and International Financial Reporting
Standards (IFRS), as adopted by the European Union (EU). The
accounting policies applied are consistent with those described in
the Annual Report 2008. The condensed financial statements and
interim management report contained herein give a true and fair
view of the assets, liabilities, financial position and profit and
loss of the Group.

The interim management report contained herein
includes a fair review of the information required by DTR 4.2.7 R
and 4.2.8 R.

The Directors of Tesco PLC are as set out
below.

The Board

Directors
David
Reid*                                        
Rodney Chase* CBE
Chairman                                             
Deputy Chairman
Sir Terry
Leahy                                   
Richard Brasher
Chief Executive
Philip
Clarke                                       
Andrew Higginson
Tim Mason    
                                     
Lucy Neville-Rolfe CMG
David
Potts                                        
Charles Allen* CBE
Karen
Cook*                                      
E Mervyn Davies* CBE
Dr Harald
Einsmann*                          
Ken Hydon*
* Non-executive Directors

Company Secretary
Jonathan Lloyd

TESCO
PLC
GROUP INCOME STATEMENT unaudited
26
weeks ended 23 August 2008

2008

2007
Increase

Notes
£m

£m

%

Continuing
operations

2
25,638

22,631

13.3

Cost of sales

(23,846)

(21,017)

1,792

1,614

11.0

Administrative
expenses

(471)

(424)

Profit arising on
property-related items

159

119

2
1,480

1,309

13.1

Share of post-tax profits of
joint ventures and associates

43

32

Finance
income

40

52

Finance costs

(128)

(104)

Profit before
tax

1,435

1,289

11.3

Taxation
3
(395)

(351)

Profit for the
period

1,040

938

10.9

Attributable
to:

Equity holders of the
parent

1,038

936

Minority
interests

2

2

1,040

938

Earnings per share

Basic
5
13.22p

11.83p

11.7

Diluted
5
13.12p

11.65p

12.6

Proposed interim dividend per
share
4
3.57p

3.20p

11.6

Non-GAAP measure:
underlying profit before tax
1
£m

£m

Profit before
tax

1,435

1,289

11.3

Adjustments
for:

IAS 32 and IAS 39
‘Financial Instruments’ - Fair value
remeasurements

(17)

(7)

IAS 19 Income Statement
charge for pensions
7
192

190

‘Normal’ cash
contributions for pensions
7
(168)

(155)

IAS 17 ‘Leases’
– impact of annual uplifts in rent and rent-free
periods

11

-

Underlying profit before
tax

1,453

1,317

10.3

Underlying diluted earnings
per share
5
13.28p

11.90p

11.6

The
notes on pages 23 to 33 form part of this Interim
Report.
TESCO
PLC
GROUP STATEMENT OF RECOGNISED INCOME AND EXPENSE
unaudited
26
weeks ended 23 August 2008

2008

2007

Notes
£m

£m

Loss on revaluation of
available-for-sale investments

(2)

(2)
Foreign currency translation
differences

177

(27)
Total (loss)/gain on defined
benefit pension schemes
7
(601)

250
Gains/(losses) on cash flow
hedges:

-
Net fair value gains/(losses)

23

23
-
Reclassified and reported in the Income Statement

9

(12)
Tax on items taken directly
to equity

245

(105)

(149)

127
Profit for the
period

1,040

938
10
891

1,065

Attributable
to:

Equity holders of the
parent

889

1,063
Minority
interests

2

2

891

1,065

TESCO
PLC
GROUP BALANCE SHEET unaudited
As
at 23 August 2008

23 August
2008
23 February
2008
25 August
2007

Notes
£m
£m
£m

Non-current
assets

Goodwill and other intangible
assets
6
2,483
2,336
2,141
Property, plant and
equipment
6
21,956
19,787
18,161
Investment
property
6
1,239
1,112
924
Investments in joint ventures
and associates

306
305
363

2
4
6

304
216
-
Deferred tax
assets

104
104
28

26,394
23,864
21,623

Inventories

2,603
2,430
2,091
Trade and other
receivables

2,049
1,311
1,213
Derivative financial
instruments

184
97
98
Current tax
assets

6
6
6
Short-term
investments

-
360
-
Cash and cash
equivalents

1,806
1,788
1,389

6,648
5,992
4,797
Non-current assets classified
as held for sale

21
308
13

6,669
6,300
4,810

Trade and other
payables

(8,082)
(7,277)
(6,647)
Financial
liabilities

- Borrowings
9
(3,642)
(2,084)
(1,937)
- Derivative financial
instruments and other liabilities

(356)
(443)
(96)
Current tax
liabilities

(534)
(455)
(574)
Provisions

(4)
(4)
(4)

(12,618)
(10,263)
(9,258)

Net current
liabilities

(5,949)
(3,963)
(4,448)

Non-current
liabilities

Financial
liabilities

- Borrowings
9
(5,734)
(5,972)
(4,588)
- Derivative financial
instruments and other liabilities

(284)
(322)
(390)
Post-employment benefit
obligations
7
(1,463)
(838)
(736)
Other non-current
payables

(35)
(42)
(30)
Deferred tax
liabilities

(717)
(802)
(651)
Provisions

(62)
(23)
(26)

(8,295)
(7,999)
(6,421)

Net
assets

12,150
11,902
10,754

TESCO
PLC
GROUP BALANCE SHEET unaudited (continued)
As
at 23 August 2008

23 August
2008
23 February
2008
25 August
2007

Notes
£m
£m
£m

Equity

Share capital

393
393
394
Share premium
account

4,556
4,511
4,425
Other
reserves

40
40
40
Retained
earnings

7,101
6,871
5,836
Equity attributable to
equity holders of the parent

12,090
11,815
10,695
Minority
interests

60
87
59
Total
equity
10
12,150
11,902
10,754

TESCO
PLC
GROUP CASH FLOW STATEMENT unaudited
26
weeks ended 23 August 2008

2008

2007

Notes
£m

£m

Cash generated from
operations
8
2,206

1,916
Interest paid

(256)

(155)
Corporation tax
paid

(164)

(202)
Net cash from operating
activities

1,786

1,559

Acquisition of subsidiaries,
net of cash acquired

(51)

(100)

(2,512)

(1,580)

679

761

(83)

(67)

3

2
Increase in loans to joint
ventures

(139)

(26)
Invested in joint ventures
and associates

(5)

(60)
Proceeds from sale of
short-term investments

360

-
Dividends
received

44

39
Interest
received

11

29

(1,693)

(1,002)

Proceeds from issue of
ordinary share capital

46

50
Increase in
borrowings

1,966

1,421
Repayment of
borrowings

(1,237)

(711)
New finance
leases

-

119
Repayments of obligations
under finance leases

(24)

(20)
Receipts of finance lease
receivables

5

4
Dividends
paid

(603)

(541)
Dividends paid to minority
interests

(3)

-
Own shares
purchased

(265)

(534)
Net cash used in financing
activities

(115)

(212)

Net (decrease)/increase in
cash and cash equivalents

(22)

345

Cash and cash equivalents
at the beginning of the period

1,788

1,042
Effect of foreign exchange
rate changes

40

2
Cash and cash equivalents
at the end of the period

1,806

1,389

Reconciliation of net cash flow to movement in net debt
unaudited
26
weeks ended 23 August 2008

Notes
2008
£m

2007
£m
Net (decrease)/increase in
cash and cash equivalents

(22)

345
Net cash inflow from debt and
lease financing

(710)

(813)
Short-term
investments

(360)

-
Movement in joint venture
loan receivables

139

-
Other non-cash
movements

(313)

3
Increase in net debt in the
period

(1,266)

(465)
Opening net
debt

(6,182)

(5,024)
Adjustment for joint venture
loan
receivables
[1]

-

163
Adjusted opening net
debt

(6,182)

(4,861)
Closing net
debt
9
(7,448)

(5,326)

NB:
The reconciliation of net cash flow to movement in net debt is not
a primary statement and does not form part of the cash flow
statement.

[1] The measurement of net debt was revised in the
year ended 23 February 2008 to include loans receivable from joint
ventures.  Going forward net debt will be stated inclusive of
the loan receivables from joint ventures.

Notes to the interim
report
This Interim Report (including the
condensed financial statements) for the 26 weeks ended 23 August
2008 was approved by the Directors on 29 September 2008.

This Interim Report has been
prepared in accordance with the Disclosure and Transparency Rules
of the UK Financial Services Authority and International Financial
Reporting Standards (IFRS) and International Financial Reporting
Interpretation Committee (IFRIC) interpretations, as endorsed by
the European Union (EU). The accounting policies applied are
consistent with those described in the Annual Report and Financial
Statements 2008. The Interim Report has been prepared in accordance
with IAS 34 ‘Interim Financial Reporting’ and should be
read in conjunction with the Annual Report and Financial Statements
2008.

This Interim Report is not
audited and does not constitute statutory financial statements as
defined in section 240 of the Companies Act 1985. Comparative
figures for the year ended 23 February 2008 have been extracted
from the Group Financial Statements, on which the auditors gave an
unqualified opinion and did not include a statement under section
237(2) or (3) of the Companies Act 1985. The Annual Report and
Financial Statements for the year ended 23 February 2008 have been
filed with the Registrar of Companies.

Use of non-GAAP profit
measures

Underlying profit before
tax

The Directors
believe that underlying profit before tax and underlying diluted
earnings per share measures provide additional useful information
for shareholders on underlying trends and performance.  These
measures are used for internal performance analysis. 
Underlying profit is not defined by IFRS and therefore may not be
directly comparable with other companies’ adjusted profit
measures.  It is not intended to be a substitute for, or
superior to, IFRS measurements of profit.

The adjustments
made to reported profit before tax are:
§                                
IAS 32 and IAS 39 ‘Financial Instruments’ – fair
value remeasurements – under IAS 32 and IAS 39, the Group
applies hedge accounting to its various hedge relationships
(principally interest rate swaps, cross currency swaps and forward
exchange contracts and options) when it is allowed under the rules
of IAS 39 and practical to do so.  Sometimes, the Group is
unable to apply hedge accounting to the arrangements, but continues
to enter into these arrangements as they provide certainty or
active management of the exchange rates and interest rates
applicable to the Group.  The Group believes these
arrangements remain effective and economically and commercially
viable hedges despite the inability to apply hedge accounting.

Where hedge
accounting is not applied to certain hedging arrangements, the
reported results reflect the movement in fair value of related
derivatives due to changes in foreign exchange and interest
rates.  In addition, at each period end, any gain or loss
accruing on open contracts is recognised in the Group Income
Statement for the period, regardless of the expected outcome of the
hedging contract on termination.  This may mean that the Group
Income Statement charge is highly volatile, whilst the resulting
cash flows may not be as volatile.  The underlying profit
measure removes this volatility to help better identify underlying
business performance.

§                                
IAS 19 Income Statement charge for pensions - Under IAS 19
‘Employee Benefits’, the cost of providing pension
benefits in the future is discounted to a present value at the
corporate bond yield rates applicable on the last day of the
previous financial year.  Corporate bond yield rates vary over
time which in turn creates volatility in the Group Income Statement
and Group Balance Sheet. IAS 19 also increases the charge for young
pension schemes, such as Tesco’s, by requiring the use of
rates which do not take into account the future expected returns on
the assets held in the pension scheme which will fund pension
liabilities as they fall due.  The sum of these two effects
makes the IAS 19 charge disproportionately higher and more volatile
than the cash contributions the Group is required to make in order
to fund all future liabilities.

Use of non-GAAP
profit measures (continued)

Underlying profit before tax
(continued)

Therefore, within
underlying profit we have included the ‘normal’ cash
contributions for pensions but excluded the volatile element of IAS
19 to represent what the group believes to be a fairer measure of
the cost of providing post-employment benefits.

§                                
IAS17 ‘Leases’ – impact of annual uplifts in rent
and rent-free periods – The amount charged to the Group
Income Statement in respect of operating lease costs and incentives
is expected to increase significantly as the Group expands its
International business. The leases have been structured in a way to
increase annual lease costs as the businesses expand. IAS 17
‘Leases’ requires the total cost of a lease to be
recognised on a straight-line basis over the term of the lease,
irrespective of the actual timing of the cost. The impact of this
treatment in the interim period ending 23 August 2008 was an
adverse charge of £11m to the Group Income Statement after
deducting the impact of this straight-line treatment recognised as
rental income within share of post-tax profits of joint ventures
and associates. The comparatives have not been revised to reflect
this as the amounts in the prior period are broadly similar and are
considered immaterial.

§                                
Exceptional items – due to their significance and special
nature, certain other items which do not reflect the Group’s
underlying performance are excluded from underlying profit. 
These gains or losses can have a significant impact on both
absolute profit and profit trends, consequently, they are excluded
from the underlying profit of the Group.  In the Interim
periods for 2007/8 and 2008/9 there are no such exceptional
items.

Segmental trading
profit

Segmental trading
profit is an adjusted measure of operating profit, which measures
the performance
of each geographical segment before exceptional items,
profit/(loss) arising on property-related items, impact on leases
of annual uplifts in rent and rent-free periods and replaces the
IAS 19 pension charge with the ‘normal’ cash
contributions for pensions.

NOTE 2 
Segmental analysis

The
Board has determined that the primary segmental reporting format is
geographical, based on the Group’s management and internal
reporting structure.

In
2007/8, the UK reporting segment included the start-up costs for
establishing the operations in the United States of America (US),
which were not material. The results of the US business have been
reported as a separate reporting segment within International in
our Interim Results for 2008/9. The comparatives have been
reclassed* to reflect the US as a separate segment. The impact of
this is to transfer a loss of £17m from the UK segment to the
US segment.

The
Rest of Europe reporting segment includes the Republic of Ireland,
Hungary, Poland, the Czech Republic, Slovakia and Turkey.  The
Asia reporting segment includes Thailand, South Korea, Malaysia,
China and Japan.

26 weeks ended 23 August
2008
26 weeks ended 25 August
2007

Sales including
VAT
Revenue excluding
VAT
Operating profit/
(loss)
Sales including
VAT
Revenue excluding
VAT
Operating
profit/
(loss)*

£m
£m
£m
£m
£m
£m
Continuing
operations

UK
20,115
18,471
1,207
18,329
16,854
1,058
Rest of Europe
4,732
4,144
199
3,558
3,121
147
Asia
3,171
2,948
139
2,862
2,656
121
United States
76
75
(65)
-
-
(17)

28,094
25,638
1,480
24,749
22,631
1,309
Share of post-tax profit of joint
ventures and associates
43

32
Net finance costs

(88)

(52)
Profit before tax

1,435

1,289
Taxation

(395)

(351)
Profit for the
period
1,040

938

The Group’s
activities are, to some extent, subject to seasonal
fluctuations.  Tesco generally experiences an increase in
sales in the fourth quarter of the year due to holiday
periods.  Our sales are also influenced by seasonal weather
conditions which can contribute towards higher sales in the summer
months.
NOTE 2 
Segmental analysis (continued)

26 weeks
ended
23 August
2008
26 weeks
ended
25 August 2007
(restated)

UK
Rest of
Europe
Asia
United
States
Total
UK
Rest of
Europe
Asia
United
States
Total

£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
Operating
profit/(loss)
1,207
199
139
(65)
1,480
1,058
147
121
(17)
1,309
Adjustments:

(Profit)/loss arising on property-related items
(164)
1
3
1
(159)
(121)
-
2
-
(119)

IAS 19
Income Statement charge for pensions
192
2
5
-
199
207
2
5
-
214

‘Normal’ cash contributions for pensions
(162)
(1)
(5)
-
(168)
(149)
(2)
(4)
-
(155)

IAS 17
‘Leases’ – impact of annual uplifts in rent and
rent-free periods
8
-
3
4
15
-
-
-
-
-

Trading
profit/(loss)
1,081
201
145
(60)
1,367
995
147
124
(17)
1,249

Trading
margin
5.9%
4.9%
4.9%
n/a
5.3%
5.9%
4.7%
4.7%
n/a
5.5%

2008
Pence/share
2007
Pence/share
2008
£m
2007
£m
Amounts recognised as
distributions to equity holders in the period:

Final dividend for the prior financial year
7.70
6.83
603
541

Proposed interim dividend for the current financial year
3.57
3.20
281
252

The proposed
interim dividend was approved by the Board on 29 September 2008 but
has not been included as a liability as at 23 August 2008, in
accordance with IAS 10 ‘Events after the balance sheet
date’.

NOTE 5 
Earnings per share and diluted earnings per share

Basic earnings per
share amounts are calculated by dividing the profit attributable to
equity holders of the parent by the weighted average number of
ordinary shares in issue during the period.

Diluted earnings per
share amounts are calculated by dividing the profit attributable to
equity holders of the parent by the weighted average number of
ordinary shares in issue during the period (adjusted for the
effects of dilutive options).

The dilution effect
is calculated on the full exercise of all ordinary share options
granted by the Group, including performance-based options which the
Group considers to have been earned.

All operations are
continuing for the periods presented.

2008
2007

Basic
Potentially
dilutive share options
Diluted
Basic
Potentially
dilutive share options
Diluted
Profit
(£m)
1,038
-
1,038
936
-
936
Weighted average
number of shares (millions)
7,853
60
7,913
7,911
121
8,032
Earnings per share
(pence)
13.22
(0.10)
13.12
11.83
(0.18)
11.65

There have been
no transactions involving ordinary shares between the reporting
date and the date of approval of this interim consolidated
financial information which would significantly change the earnings
per share calculations shown above.

Reconciliation
of non-GAAP underlying diluted earnings per share

2008

2007

£m
pence/share
£m
pence/share
Profit

Earnings from
operations

1,038
13.12
936
11.65
Adjustments
for:

IAS 32 and IAS 39
‘Financial Instruments’
- Fair value
remeasurements

(17)
(0.22)
(7)
(0.09)
IAS 19 Income
Statement change for pensions

192
2.42
190
2.37
‘Normal’ cash contributions for pensions

(168)
(2.12)
(155)
(1.93)
IAS17 ‘Leases’
– impact of annual uplifts in rent and rent-free
periods

11
0.14
-
-
Tax effect of
adjustments at the effective rate of tax
(2008 –
27.5%; 2007 – 27.2%)

(5)
(0.06)
(8)
(0.10)
Underlying
earnings from operations

1,051
13.28
956
11.90
NOTE 5 
Earnings per share and diluted earnings per share
(continued)

Underlying
diluted earnings per share reconciliation

2008
%
2008
£m
2007
%
2007
£m
Underlying
profit before tax

1,453

1,317
Effective tax
rate

27.5
(400)
27.2
(359)
Minority
interests

(2)

(2)
Total

1,051

956

Underlying
diluted earnings per share (pence)

13.28p

11.90p

NOTE 6 
Capital expenditure

In the 26 weeks
ended 23 August 2008, there were additions to property, plant and
equipment, investment property and other intangible assets of
£2,527m (last year £1,787m). These were no additions
through business combinations (last year £137m). There were
disposals of property, plant and equipment, investment property and
other intangible assets of £459m (last year £135m);
non-current assets classified as held for sale (as at 23 February
2008) of £1m were also disposed of, with £286m
transferred back to property, plant and equipment. Commitments for
capital expenditure contracted for, but not provided, at 23 August
2008 were £1,905m (last year £1,801m).

NOTE 7 
Post-employment benefits
Pensions

The
Group operates a variety of post-employment benefit arrangements
covering both funded and unfunded defined benefit schemes and
funded defined contribution schemes.  The most significant of
these are funded defined benefit pension schemes for the
Group’s employees in the UK and the Republic of Ireland.

Principal Assumptions

The
valuations used for IAS 19 have been based on the most recent
actuarial valuations and updated by Watson Wyatt Limited to take
account of the requirements of IAS 19 in order to assess the
liabilities of the schemes as at 23 August 2008. The major
assumptions, on a weighted average basis, used by the actuaries
were as detailed below. At 23 August 2008, the mortality
assumptions remain consistent with those disclosed in the
Group’s Annual Report and Financial Statements 2008. At 25
August 2007, the mortality assumptions were consistent with those
disclosed in the Group’s Annual Report and Financial
Statements 2007.

23 August
2008
%
23
February
2008
%
25 August
2007
%
Rate of increase in
salaries
5.1
5.0
4.7
Rate of increase in pensions in
payment
3.6
3.5
3.2
Rate of increase in deferred
pensions
3.8
3.5
3.2
Rate of increase in career average
benefits
3.8
3.5
3.2
Discount rate
6.2
6.4
5.8
Price inflation
3.8
3.5
3.2

NOTE 7
Post-employment benefits (continued)
Movement in the deficit during the period

The
movement in the deficit during the period was as follows:

26 weeks
ended
23 August
2008
£m
52 weeks
ended
23 February
2008
£m
26 weeks
ended
25 August
2007
£m
Deficit in schemes at the
beginning of the period
(838)
(950)
(950)
Current service
cost
(199)
(461)
(214)
Other finance
income
7
47
24
Contributions by
employer
168
340
155
Foreign currency translation
differences
-
1
-
Actuarial
(loss)/gain
(601)
186
250
Acquisitions
-
(1)
(1)
Deficit in schemes at the end
of the period
(1,463)
(838)
(736)

2008
£m
2007
£m
Profit
before tax
1,435
1,289
Net
finance costs
88
52
Share
of post-tax profits of joint ventures and associates
(43)
(32)
Operating profit
1,480
1,309
Depreciation and amortisation
553
474
Profit
arising on property-related items
(159)
(119)
Profit
arising on sale of non property-related items
(2)
-
Adjustment for non-cash element of pensions charge
31
59
Share-based payments
108
104
Increase in inventories
(82)
(138)
Increase in trade and other receivables
(506)
(115)
Increase in trade and other payables
783
342
Decrease in working capital
195
89
Cash generated from operations
2,206
1,916

At 23
February
2008
Cash flow
Other
non-cash
movements
At 23
August
2008

£m
£m
£m
£m
Cash
and cash equivalents
1,788
(22)
40
1,806
Short-term investments
360
(360)
-
-
Finance lease receivables
5
(5)
-
-
Joint
venture loan receivables
173
139
(38)
274
Derivative financial instruments
313
(53)
228
488
Cash and receivables
2,639
(301)
230
2,568
Bank
and other borrowings
(2,033)
(1,211)
(350)
(3,594)
Finance lease payables
(51)
24
(21)
(48)
Derivative financial instruments
(443)
483
(396)
(356)
Debt due within one year
(2,527)
(704)
(767)
(3,998)
Bank
and other borrowings
(5,757)
-
218
(5,539)
Finance lease payables
(215)
-
20
(195)
Derivative financial instruments
(322)
52
(14)
(284)
Debt due after one year
(6,294)
52
224
(6,018)

(6,182)
(953)
(313)
(7,448)

Borrowings reconciliation

2008
2007

£m
£m
Borrowings:

At the
beginning of the period
8,056
5,700
Increase in borrowings
2,046
1,038
Acquisition of subsidiaries
-
87
Decrease in borrowings
(726)
(300)
At the
end of the period
9,376
6,525

NOTE 10
Reconciliation of movements in equity

Share capital
Share premium
Other reserves
Retained earnings
Total equity attributable to equity holders of the
parent
Minority interests
Total
equity

£m
£m
£m
£m
£m
£m
£m
At 24
February 2008
393
4,511
40
6,871
11,815
87
11,902
Total
recognised income and expense for the period
-
-
-
889
889
2
891
Share-based payments
-
-
-
108
108
-
108
Purchase of minority interest
-
-
-
-
-
(26)
(26)
Dividends paid to minority interests
-
-
-
-
-
(3)
(3)
New
share capital subscribed less expenses
1
45
-
-
46
-
46
Share buy-backs
(1)
-
-
1
-
-
-
Purchase of treasury shares
-
-
-
(165)
(165)
-
(165)
Equity dividends authorised in the
period
-
-
-
(603)
(603)
-
(603)
At 23 August 2008
393
4,556
40
7,101
12,090
60
12,150

Shares with an
associated cost of £144m have been granted to satisfy
obligations relating to executive share incentive and profit
sharing schemes. This results in a nil movement in retained
earnings as it is a movement within the reserve.

Share capital
Share premium
Other reserves
Retained earnings
Total equity attributable to equity holders of the
parent
Minority interests
Total
equity

£m
£m
£m
£m
£m
£m
£m
At 25
February 2007
397
4,376
40
5,693
10,506
65
10,571
Total
recognised income and expense for the period
-
-
-
1,063
1,063
2
1,065
Share-based payments
-
-
-
104
104
-
104
Purchase of minority interest
-
-
-
47
47
(27)
20
Minority interest on acquisition of subsidiaries
-
-
-
-
-
19
19
New
share capital subscribed less expenses
1
49
-
-
50
-
50
Share buy-backs
(4)
-
-
(418)
(422)
-
(422)
Purchase of treasury shares
-
-
-
(112)
(112)
-
(112)
Equity dividends authorised in the
period
-
-
-
(541)
(541)
-
(541)
At
25 August 2007
394
4,425
40
5,836
10,695
59
10,754

Shares with an
associated cost of £81m have been granted to satisfy
obligations relating to executive share incentive and profit
sharing schemes. This results in a nil movement in retained
earnings as it is a movement within the reserve.

NOTE 11 
Business Combinations

On 31 July 2008,
the Group completed the acquisition of the remaining 34.5% of the
share capital of Dobbies Garden Centres PLC
(‘Dobbies’), a 21 store retailer in the United Kingdom,
for total consideration of £43m.

This resulted in
additional goodwill of £18m arising on acquisition in the
current half year, based on Dobbies’ net assets of
£77m.

NOTE 12
Commitments and contingencies

Commitments

On
28 July 2008, Tesco announced that terms had been agreed to take
full ownership of Tesco Personal Finance (TPF) in a deal worth
£950m, which is subject to approval by the Financial Services
Authority.

On
14 May 2008, Tesco announced the acquisition, subject to the usual
regulatory approvals, of 36 Homever stores in South Korea from the
E-Land Group, for total consideration of £958 million,
including existing debt (see note 14).

Contingent
liabilities

There are a number of contingent liabilities
that arise in the normal course of business which if realised are
not expected to result in a material liability to the Group. The
Group recognises provisions for liabilities when it is more likely
than not that a settlement will be required and the value of such a
payment can be reliably measured.

NOTE 13
Related party transactions

Transactions between the Company and its
subsidiaries, which are related parties, have been eliminated on
consolidation and are not disclosed in this note. Transactions
between the Group and its joint ventures and associates are
disclosed as follows:

i)                                                       
Trading transactions

Sales to related parties
Purchases from related parties
Amounts owed by related parties
Amounts owed to related parties

2008
2007
2008
2007
2008
2007
2008
2007

£m
£m
£m
£m
£m
£m
£m
£m
Joint
ventures
79
70
146
127
51
2
10
20
Associates
-
-
579
333
-
-
166
93

Sales to related parties consist of
services/management fees and loan interest.

Purchases from related parties include
£90m (last year £76m) of rentals payable to the
Group’s joint ventures, including those joint ventures formed
as part of the sale and leaseback programme.

ii)                                                      
Non-trading transactions

Sale and leaseback of assets
Loans to related parties
Loans from related parties
Injections of equity funding

2008
2007
2008
2007
2008
2007
2008
2007

£m
£m
£m
£m
£m
£m
£m
£m

Joint
ventures
266
652
274
190
21
10
1
60

Associates
-
-
-
-
-
-
-
-

Transactions between the Group and the
Group’s pension plans are disclosed in note 7.

A number of the Group’s subsidiaries are
members of one or more partnerships to whom the provisions of the
Partnerships and Unlimited Companies (Accounts) Regulations 1993
(‘Regulations’) apply. The accounts for those
partnerships have been consolidated into these accounts pursuant to
Regulation 7 of the Regulations.

On 15 August 2008, the Group formed a property
joint venture with the Universities Superannuation Scheme. The
limited partnership contains 4 superstores which have been sold
from and leased back to Tesco. The Group sold assets for net
proceeds of £222m to the joint venture which had a net book
value of £136m. The Group’s share of the profit
realised from this transaction is included within profit arising on
property-related items in 2008. Another smaller transaction with BP
Pension Trustees was completed in June 2008 where £44m of
assets were transferred.

On 20 March 2007, the Group formed a property
joint venture with The British Land Company PLC. The limited
partnership contains 21 superstores which have been sold from and
leased back to Tesco. The Group sold assets for net proceeds of
£652m to the joint venture which had a net book value of
approximately £350m. The Group’s share of the profit
realised from this transaction is included within profit arising on
property-related items in 2007.

NOTE 14 Events
after the Balance Sheet date

On 17
September 2008, regulatory approval was received in relation to the
Group’s proposed acquisition of 36 Homever stores in South
Korea for £958m, announced on 14 May 2008. The acquisition is
expected to complete on or around 30 September 2008.

On 12
September 2008, the Group issued two fixed rate Euro bonds:
€1,500m paying interest at 5.625%, maturing in 2012;
€1,500m paying interest at 5.875%, maturing in 2016.  On
29 September 2008, the Group issued a fixed rate Swiss Franc bond
of CHF250m paying interest at 3.75%, maturing in 2011.
Independent review report to Tesco
PLC

Introduction
We have been engaged by the company to review
the condensed set of financial statements in the press release for
the 26 weeks ended 23 August 2008, which comprises the Group Income
Statement, Group Balance Sheet, Group Statement of Recognised
Income and Expense, Group Cash Flow Statement and related notes. We
have read the other information contained in the press release and
considered whether it contains any apparent misstatements or
material inconsistencies with the information in the condensed set
of financial statements.

Directors’
responsibilities
The half-year press release is the
responsibility of, and has been approved by, the directors. The
directors are responsible for preparing the press release in
accordance with the Disclosure and Transparency Rules of the United
Kingdom's Financial Services Authority.

The annual financial statements of the group are
prepared in accordance with IFRS as adopted by the European Union.
The condensed set of financial statements included in this press
release has been prepared in accordance with International
Accounting Standard 34, "Interim Financial Reporting", as adopted
by the European Union.

Our responsibility
Our responsibility is to express to the company
a conclusion on the condensed set of financial statements in the
press release based on our review. This report, including the
conclusion, has been prepared for and only for the company for the
purpose of the Disclosure and Transparency Rules of the Financial
Services Authority and for no other purpose. We do not, in
producing this report, accept or assume responsibility for any
other purpose or to any other person to whom this report is shown
or into whose hands it may come save where expressly agreed by our
prior consent in writing.

Scope of review
We conducted our review in accordance with
International Standard on Review Engagements (UK and Ireland) 2410,
‘Review of Interim Financial Information Performed by the
Independent Auditor of the Entity’ issued by the Auditing
Practices Board for use in the United Kingdom. A review of interim
financial information consists of making enquiries, primarily of
persons responsible for financial and accounting matters, and
applying analytical and other review procedures. A review is
substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK and Ireland) and
consequently does not enable us to obtain assurance that we would
become aware of all significant matters that might be identified in
an audit. Accordingly, we do not express an audit
opinion.

Conclusion
Based on our review, nothing has come to our
attention that causes us to believe that the condensed set of
financial statements in the press release for the 26 weeks ended 23
August 2008 is not prepared, in all material respects, in
accordance with International Accounting Standard 34 as adopted by
the European Union and the Disclosure and Transparency Rules of the
United Kingdom's Financial Services Authority.

PricewaterhouseCoopers LLP
Chartered Accountants
29 September 2008
London

Notes:
(a)      The
maintenance and integrity of the Tesco PLC website is the
responsibility of the directors; the work carried out by the
auditors does not involve consideration of these matters and,
accordingly, the auditors accept no responsibility for any changes
that may have occurred to the condensed financial statements since
they were initially presented on the website.

(b)      Legislation in
the United Kingdom governing the preparation and dissemination of
condensed financial statements may differ from legislation in other
jurisdictions.

Investor information

Registrar and shareholding
enquiries
If you have any administrative
enquiries about your holding of Tesco PLC shares (other than ADRs)
please contact:
Equiniti Limited, Aspect House, Spencer
Road,
Lancing, West Sussex, BN99
6DA
Telephone 0871 384 2977

Consolidated tax
vouchers
If your dividend is paid directly into
your bank or building society account you will receive one tax
voucher each year. The consolidated tax voucher will be sent to you
in December at the time that the interim dividend is paid and will
cover both dividend payments in the tax year. This will help you to
complete your tax return. This does not affect your dividends or
the tax that you pay in any way. If you would prefer to receive a
tax voucher with each dividend payment rather than one consolidated
tax voucher each tax year, please call our shareholder helpline on
0871 384 2977. If your dividend is not currently paid directly to
your bank or building society account and you would like to benefit
from this service please contact Equiniti on 0871 384 2977 and they
will be pleased to arrange this for you. By choosing to receive
your dividends in this way you can avoid the risk of cheques
getting lost in the post and ensure you receive your dividends on
the payment day. Note: Consolidated Tax Vouchers are not available
to institutional shareholders.

Tesco website
The Directors are responsible for the
maintenance and integrity of the financial information on our
website. This information has been prepared under relevant
accounting standards and legislation. Tesco information, including
this press release is available on our website:
www.tesco.com.

Electronic
communications
You can register for Shareview, a free
online share information and dealing service operated by Equiniti.
Once you have registered you can:
• check your
shareholding
• access shareholder
information
• elect to receive information
electronically, getting quick access to these important documents
and helping to save the environment by reducing the amount of paper
used
• vote on the resolutions at the
Annual General Meeting.

To register, log on to
www.shareview.co.uk and
click on ‘register’. Your rights as a shareholder will
not be affected in any way. If you have any questions about the
service, please call 0871 384 2977.

Security reminder

Under the Companies Act 1985 we are
obliged to hold the names and addresses of all shareholders on a
register of members and give a copy of this list to the Registrar
of Companies every year. The Registrar of Companies makes this list
available to anyone who requests it and many companies use this
information to market their services. We are aware that some of our
shareholders have received unsolicited calls or correspondence from
companies concerning investment matters. Tesco has no relationship
with and does not endorse any of the services offered by these
companies. Details of any facilities that we endorse are included
in our communications. If you are concerned about any direct
mailing or telephone calls purporting to be from Tesco, please
contact us by writing to the Company Secretary, Tesco House,
Delamare Road, Cheshunt, Hertfordshire EN8 9SL or by calling us on
01992 632222.

Customer services
Tesco Customer Services
Freepost SC02298
Dundee
DD1 9NF
Telephone 0800 505555

Investor relations
Investor Relations
Department
Tesco PLC, Tesco House, Delamare
Road,
Cheshunt
, Hertfordshire EN8 9SL
Telephone 01992 646484

Secretary and registered
office
Mr Jonathan Lloyd
Tesco PLC, Tesco House, Delamare
Road,
Cheshunt
, Hertfordshire EN8 9SL
Telephone 01992 632222

Financial
Calendar

2008

Interim dividend: ex-dividend
date
8
October
Interim dividend: record
date
10
October
19
December
2009

28
February
21 April
29 April
1 May
3 July
10
July

View the full
announcement as a PDF

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