Tesco PLC (LON:TSCO) said it has decided not to accept its £585mln of business rates relief, which the government offered all retailers to cope with the effects of the coronavirus pandemic.
The FTSE 100-listed supermarkets group said in a statement on Wednesday the 12-month rates holiday was “a game-changer and allowed us to ensure customers got access to the essentials they needed” when the virus initially made its way to the UK.
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As the grocery industry faced panic buying and pressure on its supply chain, Tesco said the decision to offer the rates relief “meant that we had the immediate confidence, in the face of significant uncertainty, to invest in colleagues, and support our customers and suppliers”.
Hiring extra staff and providing extra customer protection measures to deal with the COVID-19 situation is estimated to cost the company a total of £725mln this year, it calculated at the time of its interim results, though it still made over £1bn of profit in the first half of the year and for the full year expects profits to be little changed from last year.
Moreover, Tesco wants to return around £5bn of capital to shareholders next year once it completes the £8.2bn sale of its Thai and Malaysian operations.
“While business rates relief was a critical support at a time of significant uncertainty, some of the potential risks we faced are now behind us,” said chief executive Ken Murphy said
Chairman John Allan added: “The board has agreed unanimously that we should repay the rates relief we have received. We are financially strong enough to be able to return this to the public, and we are conscious of our responsibilities to society.
“We firmly believe now that this is the right thing to do, and we hope this will enable additional support to those businesses and communities who need it.”
Excluding the repayment, Tesco’s guidance was unchanged: retail operating profit before exceptional items for 2020/21 is expected to be at least at the same level as 2019/20 on a continuing operations basis.
Tesco shares fell 1% 226.2p by mid-morning.
City broker Shore Capital said it was “a surprise”, an “unjustified move in the big scheme of things” and “a hostile move for shareholders”, with undoubted read-across to other supermarket groups such as J Sainsbury PLC (LON:SBRY) and Wm Morrisons Supermarkets PLC (LON:MRW), and a “dangerous precedent”.
While the accounting treatment of the repayment process is yet to be determined, analysts at UBS said if the company makes a decision to treat rates relief as exceptional, it is also likely treat costs as exceptional.
“However, from a cash perspective, we would expect a negative impact of £535m in FY21 and £50m in the FY22 financial year, though clearly the latter has not been incurred yet.”
—Adds shares and broker comment–