Tesco’s half-year results are a mixed bag
WEDNESDAY saw Tesco release disappointing half-year numbers.
The shares had enjoyed a strong run over the last year, but a fall of 8.6 per cent brought investors back down to earth with a bump. That came despite underlying operating profits rising 23.9 per cent to £933million and the dividend jumping 67 per cent to 1.67p per share.
Simply put, investors wanted to see quicker progress in the turnaround.
The group has a large operation in Thailand, and price cuts and lower sales here saw profits tumble 29 per cent to £100m.
Tighter Sunday trading laws in Poland also dented numbers, dragging European profits down 3.3 per cent to £59m. That ensured group profits came in behind prior expectations. In contrast to its international operations, the UK delivered some strong numbers.
Despite wider conditions remaining tough, sales momentum in Tesco’s home markets improved over the half. The three months ending August 31 was Tesco’s 11th consecutive quarter of like-for-like sales growth. Profit margins also continued to climb.
This underlying progress was boosted by the profits from recently acquired wholesaler Booker, helping UK & Ireland profits rise 48 per cent to £685m. However, frustratingly for Tesco, the potential merger between Sainsbury’s and Asda means there could be another challenge waiting in the wings.
That combination would see Tesco usurped as market leader, and Sainsbury’s says it would use the increased scale to lower prices by up to 10 per cent. That raises the prospect of another price war.
To counter this threat, Tesco is launching a new discount chain, Jack’s, and is teaming up with French giant Carrefour in a joint supply arrangement. If Tesco can crack the discount market, the rewards will be vast, but the torrid time Sainsbury’s had with Netto shows building a value brand is easier said than done.
With the dividend now restored, at least shareholders will be paid to wait and see if Tesco can make good on its plans. Investors can expect a yield of 3.4 per cent next year. “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.”