Tesco hailed its turnaround today after reporting a jump in annual profits, boosted by cost cuts, its Booker acquisition and improved sales performance in its core business.
The group’s statutory pre-tax profit climbed 28.8% to £1.67bn – well ahead of the market’s expectations – on revenue up 11.2% to £63.9bn.
Underlying operating profits in its core UK business surged 45.1% to £1.54bn, buoyed by a £196m contribution from Booker and synergies of £79m. The group also made cost savings of £532m during the year, with savings of £1.4bn to date. In January, Tesco announced that thousands jobs would be affected in a restructuring of its store and head office functions as part of its drive to make its operations more efficient.
Like-for-like sales in its domestic retail business rose 1.7% after performance picked up in the final 12 weeks of the year (+1.7%) after a lacklustre third quarter (+0.7%). Sales at Booker climbed 11.1% over the year but growth slowed to 4.3% in the final quarter.
The group outlined that hundreds of thousands more shoppers were now using Tesco after its success in improving brand perception around quality and value. Tesco rolled out eight new ‘Exclusively at Tesco’ brands during the year and relaunched 10,000 of its own brand products.
The group has also been testing Booker-sourced ‘bulk buys’ in 70 Tesco stores. It said today that a wider roll-out was planned for the year ahead. It added that the joining up of the two businesses would also give Booker customers more choice and lower prices.
Amid recent reports that Tesco’s new Jack’s format was having limited success in attracting shoppers away from Aldi and Lidl, the group stressed today that it had seen a “strong response” to the launch of the discount chain. Following an opening last week, the group now has nine Jack’s outlets. Tesco revealed today that 71,000 sq. ft. of new Jack’s space would be coming this year – working out at seven new stores if they are similar in size to the existing ones.
Meanwhile, in Ireland, Tesco’s like-for-like sales increased 1.3% despite recording slight falls in the final two quarters of the year amid the competitive trading conditions. However, the group stressed it was growing volumes across all food categories.
Performance in its Central Europe and Asia division remained disappointing with annual like-for-like sales falls of 2.3% and 6.2%. However, profits in Central Europe jumped 56.3% to £186m, helped by cost reductions and an improved profit mix.
Chief Executive Dave Lewis stated that the group was on track to meet the “vast majority” of the turnaround goals he set when he was appointed following the accounting scandal. As well as refocusing the business on its core grocery operations, he planned to save £1.5bn in costs by 2020 and achieve a group operating margin of between 3.5% and 4% by 2020. “I’m very confident that we will complete the journey in 2019/2020,” he said today.
“I’m delighted with the broad-based improvement across the business. We have restored our competitiveness for customers – including through the introduction of ‘Exclusively at Tesco’ – and rebuilt a sustainable base of profitability. The full year margin of 3.45% represents clear progress and the second half level of 3.79%, even before the benefit of Booker, puts us comfortably in the aspirational range we set four years ago.”
Alongside the results, Lewis confirmed that Tesco has been building stock of non-perishable goods ahead of a possible no-deal exit from the EU. However, he added that Tesco had not seen any “discernible change in behaviour” from customers during the period of Brexit uncertainty, with no evidence of stockpiling from customers.
Shares in Tesco rose nearly 1% in early trading having risen by 12% over the past year.
Julie Palmer, a partner at Begbies Traynor, commented: “Dave Lewis has rebuilt the brand since its accounting scandal in 2014, helping to reduce costs by improving efficiencies in distribution and procurement while investing in new areas, including the acquisition of Booker last year.
“It hasn’t all been plain sailing though as discounted stores Aldi and Lidl have both encroached on Tesco’s dominance in recent years, and if the merger of Sainsbury’s and Asda goes ahead it will undoubtedly leave the resulting company at the forefront of the supermarket wars.”
NAM Implications:
- From a NAMs-eye-view, Tesco are well on the way back, with a pre-tax margin of 2.6% to boot.
- Given their GSCOP compliance, they are also better to deal with…
- …and given the continuing growth of the discounters…
- …together with the albeit unlikely merger of Sainsbury’s and Asda.
- Tesco should be in the market for closer collaboration with suppliers that can meet their standards…
