Alongside the surprise news that its Chief Executive will step down next year, Tesco revealed that it had hit its key margin target ahead of schedule despite its sales performance weakening.
Over the six months to 26 August, the group’s operating profit before exceptional items surged 25.4% to £1.41bn on turnover up 0.6% to £31.91bn. Back in 2016, CEO Dave Lewis set out a target to deliver a group operating profit margin of 3.5% to 4.0% for the 2019/20 full year. On a comparable basis (pre-IFRS 16 and excluding Booker), Tesco has now achieved this ambition six months ahead of plan, delivering a margin of 3.73% for the last 12 months.
In its core UK & Ireland division, underlying operating profit jumped 28.4% to £1.09bn, with margin growth of 90 basis points year-on-year. Tesco attributed the strong increase in profitability to an improved product mix and cost savings of £127m, mostly generated from changes to its store operating model.
However, total sales in its UK business slipped 0.9% to £18.15bn, with like-for-likes turning negative for first time in a number of years, down 0.3%. Tesco blamed a subdued market hit by weak consumer confidence and tough comparisons with the same period last year which was boosted by a summer heatwave, the football World Cup, and Royal Wedding.
The group highlighted the success of programmes to simplify its operations, such as removing in-store food counters and making its Metro and Express store operations more efficient.
Meanwhile, despite recent rumours that its new Jack’s discount format is not performing to expectations, the group revealed today that it plans to open another three of the stores by February next year.
Tesco also announced plans to increase rate of expansion of its Express format in the UK, opening 150 stores over the next three years, whilst doubling its online capacity. Four new superstores will also be built.
And it will launch an enhanced loyalty scheme called Clubcard Plus in the UK before the end of 2019.
At Booker, total comparative sales grew by 3.6% (excluding tobacco) to £3.13bn, despite lapping strong growth last year driven by contract wins and favourable weather. Like-for-like sales rose 2.4%. Tesco said its ‘Joining Forces’ programme for the wholesaler was continuing to deliver benefits, with synergies of £54m generated in the half and on target to hit £140m by the year end.
It was announced today that Booker was acquiring Best Food Logistics (formerly Bidvest Logistics) from South Africa’s Bidcorp for an undisclosed amount. The deal will add £1.1bn in foodservice sales to Booker’s operation.
Best Food Logistics distributes food to customers including Pret a Manger, KFC and Burger King. The deal is subject to several conditions, including approval from the Competition & Markets Authority (CMA), which is expected to take several months.
In Ireland, total sales grew by 0.5% to £1.14bn, with like-for-likes edging up 0.1%. Tesco highlighted that it had seen strong sales growth in core fresh food, including bakery and produce, as customers responded well to its ‘You won’t pay more’ value campaign.
Despite moves to improve its performance in Central Europe, the unit’s headline figures remained weak with operating profit falling 16% on total sales down 7% (-3.1% like-for-like).
Lewis, who will leave Tesco next summer, commented: “Despite challenging external conditions we have delivered a very good start to the year. I’m very pleased to say that we have now delivered every element of the turnaround plan and from this position of strength, the transformation of our business continues at pace.
“The Capital Markets Day in June laid out many opportunities for further, profitable growth and I’m delighted to share today the plans to step up our store opening programme, to increase our online capacity, the introduction of Clubcard Plus in the UK and the acquisition of Best Food Logistics as the next step in our Booker growth strategy.
“With the turnaround complete and as we begin to implement the next steps of our sustainable growth strategy, now is the right time to plan a smooth and orderly succession. As such, I will step down as Group CEO next summer and pass the baton to Ken Murphy.”
