Tesco showing signs of wholesale progress
LAST week saw the UK’s biggest supermarket chain report full year results.
Operating profit before exceptional items rose 24.9 per cent to £1.3billion, helped by higher margins and a 1.1 per cent rise in group sales, to £49.9billion.
However, a £235million exceptional charge, relating to fines for the accounting practices which resulted in the 2014 accounting scandal, ensured reported profits are down on last year.
Performance was strong in the UK and Ireland, still the biggest contributor to group profit. A first full year of UK like-forlike sales growth since 2009/10 and an improvement in margins, up from 1.16 per cent to 1.84 per cent, helped underlying operating profits here grow 60 per cent to £803million. Group net debt fell by £1.4billion, and customer service metrics continue to move in the right direction. The progress CEO Dave Lewis has made since taking over in 2014 is impressive.
However, fourth quarter UK like-for-like sales growth of 0.6 per cent is below what the group had reported earlier in the year.
Recent data from Kantar Worldpanel shows Tesco losing market share, with Aldi and Lidl continuing their march up the leader board. These pressures have led both Sainsbury’s and Tesco to take something of a step into the unknown. Sainsbury’s bought Argos, and Tesco has unveiled plans to acquire Booker Group.
Booker is the UK’s largest cash and carry business. Recently, one of the major concerns about Tesco has been the debt hanging over the group, so a £3.7billion acquisition may raise eyebrows. However, the majority of the deal is being financed by the issuance of new shares, and Booker has cash on the balance sheet.
There should be some easy wins, such as savings in distribution and corporate costs. But the deal clearly comes with risks. In any case, the acquisition may not complete for another 12 months, and the grocery business remains Tesco’s bread and butter.
While improving sales and transaction numbers have given it the confidence to say it will restore the dividend in 2017/18, there are still plenty of challenges ahead. For now at least, Tesco remains a work in progress.
“This article is designed for investors who make their own decisions without advice, if unsure whether an investment is right for you, you should seek advice. Shares can rise and fall in value so you could get back less than you invest.”