Tesco shares up as profits fall over signs of recovery
Shares in the group, which is recovering from the toughest downturn in its history, rose 18p to 207p and supermarket rival Morrisons also gained on the news.
This was despite half-year profits dropping by more than a quarter after the group cut prices in a bid to stem the flow of customers to discounters Aldi and Lidl.
Advertisement
Hide AdAdvertisement
Hide AdTesco’s price cuts have resonated with customers, resulting in a third quarter in a row of sales growth as its turnaround gathers pace.
The group posted a 28 per cent fall in bottom line pre-tax profits to £71m for the six months to August 27 following the sector’s fierce price war.
Its fightback against the discounters helped UK like-for-like sales rise 0.9 per cent in the second quarter.
Chief executive Dave Lewis outlined plans to slash costs by £1.5bn to help get profits back on track. Mr Lewis said savings will be made across the company’s distribution system and store operating model.
Advertisement
Hide AdAdvertisement
Hide AdMr Lewis admitted there would be some “trimming” to headcount, but refused to be drawn on numbers. He said Tesco is consulting affected staff, some of whom may be put through a “selective redundancy” process if appropriate redeployments cannot be agreed, but he stressed the number of staff affected would be “numerically tiny - completely tiny in the scheme of Tesco”.
Tesco outlined ambitious plans to deliver a group operating margin of between 3.5 per cent and 4.0 per cent by its 2019/20 financial year. It made a 2.18 per cent operating margin in the first half.
Mr Lewis is leading a recovery at the retailer after its sales, profits and asset values took a hammering after an accounting scandal. Changing shopping habits as people turn away from big supermarkets to convenience stores and online shopping plus the rise of German discounters Aldi and Lidl have also taken their toll.
Falling food prices and a ballooning pension deficit have also caused problems, but Mr Lewis has stabilised the business and returned in to health thanks to a focus on lower prices, streamlined ranges, better quality products and improved customer service.
Advertisement
Hide AdAdvertisement
Hide AdTesco said it would not increase the size of the annual £270m pension top-up payments agreed last year, despite its pension deficit ballooning to £5.9bn, up from £2.6bn in February, due to the collapse in bond yields following the EU referendum result.
The company, which has more than a 28 per cent share of the British grocery market, reported a 60 per cent rise in underlying operating profitsof £596m for the six months to August 27, which was at the top end of analysts’ forecasts.
It said it was on track to deliver profits of £1.2bn for the full year, broadly in line with market expectations, after the recovery in its sales at British stores strengthened in the second quarter.
Mr Lewis said Tesco’s recovery is gaining traction, but he cautioned that the market remains “challenging and uncertain”.
Advertisement
Hide AdAdvertisement
Hide AdOn an underlying basis, UK and Ireland first-half earnings more than doubled to £389m from £164m a year earlier.
The group said it is yet to see an impact from Brexit or the falling pound on the business, despite its impact on its pension deficit.
Retail analysts at Bernstein said it was a “fantastic set of results for Tesco, delivering on all aspects of the UK recovery”.
The figures mark a turnaround after a torrid couple of years, when it posted the biggest loss in its history and was hit by a £326m accounting scandal.
Advertisement
Hide AdAdvertisement
Hide AdMr Lewis said that these latest results are “just the start” of the group’s recovery and confirmed that the food price deflation that has been weighing on the grocery sector is unlikely to ease off any time soon.
Mr Lewis, who took over from Philip Clarke in 2014, outlined a three-year target to improve the group’s profit margin, which has been under pressure amid the supermarket price war.
He said there would be further investment in the group and on keeping everyday prices low.