All,

Tesco released their full year preliminary results to 29th February, but more importantly they provided some initial updates on the sales progression and the increased costs associated with Covid-19. They were reluctant to discuss increase in sales, but focused on the cost impact of Covid-19. We have included in the email some slides from Tesco’s presentation but in summary:

- Cost increases are not fully compensated by the Rates Holidays enjoyed in England and Scotland (Wales rates are still payable),

- For Iceland, a proportional increase in costs, as % of sales (7%) would result in increased costs of £46-66m increase in costs, which would be offset, firstly by the waiver of rates c. £40m and secondly the increase in Sales experienced by Iceland over the “lock-down” period.

- Tesco commented that strong correlation between affluence of an area and level of stockpiling. This will mean the level of stockpiling at Iceland will be lower than at other grocery stores given the socio-demographics of Iceland’s customers.

- Using Tesco’s projection of sales growth over the coming weeks, we estimate the growth in Iceland sales to be 10% in the months of lock-down, with GP at 20% (our internal model).

Overall, the impact of Covid-19 will be positive to Iceland. Sales will increase by £100-160m with a corresponding £20-30m uplift in Gross Profit. This coupled with the removal of business rates will more than compensate Iceland for additional costs incurred due to extra staffing distribution costs etc.

Tesco split out their additional costs by cost items, so instead of taking a blanket percentage (% of sales, as above) we can try calculate on a per cost item basis:

Payroll costs:

Based of sales figures at Iceland been 7% of Tesco, Iceland costs would be £20-28m increase in wages. However, Iceland staffing levels are significantly lower than Tesco - £9.20 of sales per £1 of wage bill versus £2.20 at Tesco, therefore any impact is likely to be significantly lower. Using relevant figures for staffing levels, Iceland cost increase could be as low as £4-5m. We estimate twice that as new staff wouldn’t be as efficient as current levels.

Distribution Costs:

This is likely to be higher than Tesco on a pro-rata basis. Tesco sells on average £13m per store, Iceland £3m per store. So Distribution costs are likely to be proportionally higher than simply as a percentage of sales. Iceland have 1/3 of the number of stores than Tesco (albeit sq. footage will be significantly lower). We don’t have a existing cost number for distribution for either Iceland or Tesco, but it would be safe to imagine Iceland’s distribution costs per sales is higher than Tesco and any increase is going to be proportionally higher. Based of sales, Iceland’s cost should be £9.5-12.5m. Difficult to gauge how much higher, but using 2x to give £19-25m range.

Store Expenses:

This isn’t a necessary expense. The expenses above have to be incurred but store markings etc are unlikely to be as significant at Iceland as at Tesco. But given that Iceland has c. 1,016 stores versus Tesco 3,431 stores, the relatively higher number of stores (versus the sales relativity) we are happy using 7% as a basis for the costs. £5-6m. We can’t see the justification for the step change in store expenses for LT restrictions and don’t have a step change in Iceland’s projections.

Property:

Given the relatively higher number of stores, again the costs should be higher than the 7% implied by relative sales levels. At 10%, costs would be £6-8m.

Other:

In the absence of better data, we are using 10% again = £7m.

Sales Increase:

Increased sales is based on 10% increase in the months of lock-down, at Gross Profit margin of 20%.

The uplift in sales is difficult to guage but Kantar numbers quoted 30% increase for Iceland for the 4 weeks in March. Tesco shows this number to reduce subsequently, by at least 50%, so increase in sales could be as high as 15% for each month of lock-down. Tesco did warn that once lock down ends, they will see a reduction in sales, as the unwind of the stock-piling (beans on toast for everyone) will occur.

We calculate Gross Profit, after taking out wages and rent from the reported numbers provided by Iceland. This results is a c.20% margin,

In summary: