Tesco raised its full-year profit forecast today after reduced costs related to the pandemic and its strong supply chain helped it deliver better-than-expected first-half results.
Despite widespread talk of food and labour shortages impacting trading in the grocery sector, Tesco saw its like-for-like sales in the UK climb 1.2% over the 26 weeks to 28 August. This followed a 0.5% rise in the first quarter, accelerating to 2% in the second as comparatives softened due to the easing of Covid restrictions in the summer last year.
Tesco stated that as industry supply chains came under pressure, it was able to leverage its supplier relationships and distribution capability to maintain good levels of product availability, contributing to its market outperformance. Events such as Euro 2020 and staycations were also said to have contributed to its robust growth.
The group pointed to its success in improving its value perception to combat the discounters. Tesco rolled out its ‘Low Everyday Prices’ offer to around 1,600 core products in April, extended the Clubcard Prices promotion to its Express stores in May, and added 100 more own-label products to its Aldi Price Match scheme, taking the total to around 650. Tesco revealed that promotional participation was held at 23% across the half-year period as it prioritised those offers “which are most meaningful to customers”.
Its online business in the UK continued to grow (+2.3%), whilst sales in its convenience stores fell 5% against strong performance in neighbourhood locations last year and sites in commuter areas losing trade due to the work from home trend.
At Booker, like-for-like sales surged up 11.0%, driven by a sharp recovery (+54.4%) in demand from its catering customers as the hospitality sector reopened. However, sales to retail customers slipped 2.8% against tough comparatives with last year when consumers shopped more in local convenience stores.
In Ireland, Tesco’s like-for-like sales slipped 2.6% after declining by 6.1% in the first quarter due to the impact of stockpiling in the prior year. However, in the second quarter, like-for-like sales in the country grew by 1.2%, boosted by seasonal events.
Meanwhile, strong performance in Slovakia and Hungary helped Tesco’s Central Europe unit deliver a 1.4% rise in like-for-like sales.
Overall group sales rose 2.6% to £27.3bn with adjusted operating profit for its retail operations climbing a better-than-than expected 16.3% to £1.39bn.
Tesco is now forecasting a full-year retail operating profit of £2.5-2.6bn, having previously forecast a similar outcome to 2019-20, when it made £2.3bn.
“We’ve had a strong six months; sales and profit have grown ahead of expectations, and we’ve outperformed the market,” said Chief Executive Ken Murphy.
“With various different challenges currently affecting the industry, the resilience of our supply chain and the depth of our supplier partnerships has once again been shown to be a key asset.”
However, speaking with journalists this morning, Murphy warned that there “will be bumps in the road in the run-up to Christmas. We’re seeing our share of challenges.” But he did also stress that Tesco was “in good shape for Christmas”.
Analyst Sophie Lund-Yates, from investment platform Hargreaves Lansdown, commented: “Tesco’s enormous scale means it is weathering the supply chain crisis better than others. It is times like these when being the biggest fish in the pond really counts.
“The size of Tesco’s distribution network also can’t be overstated, which again gives the group the flexibility to deliver the goods at scale.”
Meanwhile, Julie Palmer, partner at Begbies Traynor, said likely price rises, along with the HGV driver shortage, pointed to the future looking “more uncertain” for Tesco.
“The supermarket has already warned the UK government that the shortage of lorry drivers could cause severe disruption to deliveries, causing panic buying in the run-up to Christmas,” she said.
“While this may push up sales temporarily, it also means chaos when stock runs out and rising costs for the supermarket which it may struggle to pass on to its customers in a competitive market.
“Add supply chain disruption, an energy crisis, wage inflation and a lack of workers to the basket, Tesco has considerable headwinds in the final quarter of the year.”
Tesco also announced today that its strong performance had enabled it to cut net debt by £1.7bn since February. As a result, it could afford to buy back shares, with the first £500m to be bought by October 2022.
The retailer’s boss denied the move was designed to boost its share price to ward off a private equity bid in the wake of CD&R’s takeover of Morrisons.
“This isn’t defensive by any means, this is completely as far as we’re concerned part of business as usual,” said Murphy.
“This is part of a very clear policy and is the result of the very strong cash flow we’ve generated and we’ve spoken to shareholders for some time about the possibility of buybacks when our debt ratios and our cash flow permitted.”
Murphy added: “We would never speculate on any form of activity in the market from a private equity perspective.”
NAM Implications:
- ‘UK’s biggest player was able to leverage its supplier relationships and distribution capability to maintain good levels of product availability…
- …events such as Euro 2020 and staycations helped.’
- The key for suppliers is to compare their Tesco performance by format, geography and category.
- Rest assured that Tesco’s ‘bumps in the road’ will be less than those of rivals.
- After all, every little helps… (to ward off PE predators…)
