Tesco regains financial health

Tesco’s annual results, due out on Wednesday, are expected to show the recovery at Britain’s biggest retailer is picking up steam, potentially giving a boost to its stuttering campaign to win investor backing for a takeover of wholesaler Booker.

Tesco is forecast to report a 33% rise in its key profit measure for its 2016-17 financial year, with a strong performance in its home market slightly offset by weakness abroad, partly reflecting tough trading conditions in Thailand.

The supermarket group needs the results to impress after two of its biggest shareholders urged it in March to drop a £3.7bn agreed cash and shares offer for Booker. They argue Tesco is overpaying and the deal is a distraction from its turnaround plan.

Tesco, whose shares have fallen 6% in 2017, remains committed to a deal it believes will provide a new avenue of growth when its recovery is secured.

“Tesco needs to show that its volume-based recovery is on track and that progress is being made towards its margin aspiration of 3.5% to 4% by 2019-20,” said HSBC analyst David McCarthy, who has a “buy” rating on the stock.

That plan is predicated on sales rising and operating costs being cut by £1.5bn through efficiencies in Tesco’s stores and distribution network, as well as from procurement savings.

For the year to February 25 2017, analysts are on average forecasting group operating profit before exceptional items of £1.26bn, according to Reuters data, up from £944m in 2015-16. Tesco itself has forecast “at least” £1.2bn. Analysts also expect progress on Tesco’s net debt, which is forecast to fall to about £4.3bn.

After Tesco’s sales, profit and asset values were hammered by changing shopping habits, the rise of German discounters Aldi and Lidl and an accounting scandal, the firm has been fighting back under CE Dave Lewis.

He took over the reins in September 2014 shortly before the uncovering of accounting missteps plunged the group into the worst crisis in its near 100year history.

Lewis stabilised the business and got it growing again with a focus on lower prices, new and streamlined product ranges and better customer service. He has also sought to improve relationships with suppliers.