Tesco Reports Better-Than-Expected Annual Profits And First Sales Growth In 7 Years

Tesco said today that its turnaround plan was ahead of schedule after revealing that its underlying profits had broken through the £1bn mark, driven by improved performance in its core UK business where full year sales have risen for the first time in seven years.

For the year ended 25 February 2017, the group’s operating profit before exceptional items jumped 30% to a slightly better-than-expected £1.28bn on group turnover (exc. fuel) up 4.3% to £49.9bn. Group operating margin climbed from 1.8% to 2.3% with the Tesco saying it was on track to hit its target of 3.5-4.0% by 2019/20.

However, statutory pre-tax profit fell 28.2% to £145m due to £235m of exceptional charges to cover payments to the Financial Conduct Authority and Serious Fraud Office relating to its historic accounting scandal.

In its UK & ROI division, operating profits surged 60% to £803m on turnover up 1.4% to £37.7bn. In the UK, like-for-like sales climbed by 0.9% – the chain’s first full-year growth since its 2009/10 financial year. Like-for-like food sales rose 1.3% with performance boosted by its ‘Farm brands’ fresh food range, which now features in two thirds of customer baskets. Like-for-like sales in Ireland edged down 0.1%, dragged down by poor fourth quarter.

Chief Executive Dave Lewis commented: “We are ahead of where we expected to be at this stage, having made good progress on all six of the strategic drivers we shared in October. We are confident that we can build on this strong performance in the year ahead, making further progress towards our medium-term ambitions.”

Meanwhile, amid concerns that the falling pound and rising commodity costs will force the major multiples to raise prices, Lewis said that Tesco was determined to keep its prices low. He admitted there was some pressure in terms of pricing but said: “The last place we would go is to consider raising prices, we would only do that after exhausting every other option.” Lewis revealed that some customers were starting to shift spending to fresh food and everyday essentials rather than luxuries.

Lewis also stressed that management was “completely focused and committed” to reviving its UK business, in a move aimed at allaying investor concerns that its proposed £3.7bn takeover of Booker will be a distraction. Lewis added: “Our proposed merger with Booker will bring together two complementary businesses, driving additional value for shareholders by realising substantial synergies and enabling us to access the faster growing ‘out of home’ food market.”

Commenting on the results, John Ibbotson from industry consultancy Retail Vision said the group’s core UK market was “starting to fire on all cylinders,” adding: “But there’s a long way to go yet, especially with inflation likely to rise further and competition in the core UK market extreme.

“Remember that the old Tesco made profits of £3.8bn in 2011, a peak it may never again scale. Tesco is on the right track but sustainable improved profitability is not guaranteed.”

He said that that the Booker deal, if it goes ahead, could prove decisive. “It will help Tesco to keep costs and prices down for longer than its rivals, increase its margins, gain more exposure to the growing ‘out-of-home’ food market and grow all-important market share. The Booker deal is all about short-term pain for long-term gain.”

NAM Implications:
  • With its legal issues behind it, and supplier relationships improved, it is best for suppliers to take Tesco at face value and invest in their return to growth…
  • The Tesco-Booker deal will be distracting ref. competition issues, and no doubt the market will eventually reshape to accommodate change in competitor profile.
  • Key for NAMs will be to optimise the highly competitive UK market conditions working with a Tesco that is probably the better placed of the mults in maintaining its current share.
  • Given the circumstances, suppliers should insist on a fair share of joint–risk and reward in the years ahead…