Tesco bucks the retail trend with 28pc increase in profit
Chief’s recovery strategy reaping rewards
BRITAIN’S BIGGEST retailer Tesco bucked a grim start to the year for the retail sector with a 28 per cent jump in operating profits after a year of strong progress.
The results underline chief executive Dave Lewis’s recovery strategy of lowering prices and streamlining product ranges.
Tesco confirmed its mediumterm savings and profit targets and said the integration of wholesaler Booker, which it bought for £3.7bn last month, is well underway.
Following the deal, Tesco will provide food to restaurants, bars and smaller grocers and £200m of annual synergies are targeted within three years.
Tesco’s results are in sharp contrast to the majority of the retail sector as brutal trading conditions have forced Toys R Us UK, electricals group Maplin and drinks wholesaler Conviviality into administration. Fashion retailer New Look and floor coverings firm Carpetright have had to close stores.
Tesco remains the largest of Britain’s supermarkets by a clear margin, having a market share of 27.6 per cent, according to the latest Kantar Worldpanel figures. It is also the fastest growing of Britain’s big four supermarkets along side Bradford-based Morrisons.
Mr Lewis said: “With three years under our belt Tesco is growing again, recovering profitability and generating significant cash.
“The merger with Booker allows us to build on this trajectory.”
Tesco’s shares have risen 13 per cent over the last year and are close to a three-year high. However, they remain below the 230p they were at when Mr Lewis joined in September 2014.
This reflects caution about the ongoing challenge of the discounters and online players.
“Whilst we take some comfort from what it is we have done, we are very clear that there’s more to do,” said Mr Lewis. “It’s definitely not job done.” Tesco reported a 28.4 per cent jump in underlying operating profits to £1.64bn for the year to February 24.
Group sales rose 2.3 per cent to £51bn.
The outcome was helped by a strong end to the year in the UK, with fourth quarter like-for-like sales up 2.3 per cent – a ninth straight quarter of growth.
The group also announced its first end of year dividend since 2014, with a final payout of 2p, giving a 3p full year dividend for shareholders.
On a bottom line basis, pre-tax profits leapt to £1.3bn from £145m after one-off costs weighed on the previous year’s result.
Tesco’s full-year results showed general merchandise and non-food sales remained under pressure over the year, falling by 0.4 per cent amid a tough retail market, although shopper demand remained robust for food, with sales up 2.9 per cent.
Tesco said market conditions have remained challenging with continued cost price inflation.
It said it has worked hard with its supplier partners to mitigate price increases wherever possible and it made a significant investment in the first half to hold back inflation and protect customers.
Inflation has eased back over the year, down by 0.8 per cent for food ranges according to the group, but it said pressure on prices remains.
“Our job is to minimise that,” Mr Lewis said.
He said UK consumers had been resilient, but added it had been “difficult for a while and those challenges remain”.
There was also a hit from the ‘Beast from the East’ after the group’s financial year end, which saw some stores close and deliveries affected.
Mr Lewis said the chain recovered quickly, adding there was unlikely to be a material impact on performance.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Tesco is enjoying a renaissance, and its turnaround plan is literally paying dividends to shareholders.
“The outlook is now looking more positive for the grocery sector after a pretty challenging year in 2017.
“The inflationary squeeze looks to be easing on consumer purses, as is the exchange rate pressure on the cost of stocking shelves.”