Despite growth, Tesco cautious on its recovery

Tesco, Britain’s biggest retailer, said its recovery was gaining pace but warned a supermarket price war meant profit growth would be hard to deliver this year.

The company, hammered by an accounting scandal and the rise of German discount chains, yesterday reported a first rise in underlying annual profit growth in four years and its first quarter of underlying UK sales growth for over three years. But it said there was much more work to do.

Shares in Tesco — which controls 28% of Britain’s grocery market and controls about a quarter of the market in the Republic — have risen 31% so far this year on recovery hopes. Its shares fell almost 6% yesterday.

“We feel like we stabilised the business. We don’t feel that we’re in the crisis that, being candid, we were 16 months ago,” chief executive Dave Lewis told reporters.

“More customers are buying more things more often at Tesco,” he said, highlighting fourth quarter UK volume growth of 3.3% and a 2.8% rise in customer transactions. However, Mr Lewis warned that profit improvement “won’t be a smooth line” as Tesco cuts prices and invests in the quality of its products to help protect its leading position in Britain.

Sales at British stores open over a year rose 0.9% in the 13 weeks to February 27, the final quarter of its financial year, building on growth over its six-week Christmas trading period.

Tesco also reported a full-year operating profit before one-off items of £944 million (€1.17 billion), ahead of analysts’ expectations of £932m and the £940m it made in 2014-15. That is a far cry from the trading profit of £3.97bn that Tesco generated in 2011-12 when it could seemingly do little wrong.

Sales, profit, and asset values at Tesco have been hammered by changes to shopping habits and the rise of German discounters Aldi and Lidl, while the accounting scandal severely dented its reputation.

Tesco said price cuts in a “challenging, deflationary, and uncertain market” would impact the pace of profit growth in the 2016-17 financial year, particularly in the first half. Prior to yesterday’s update, the consensus forecast for operating profit before one-off items in 2016-17 was £1.25bn.

A former Unilever executive, Mr Lewis has impressed investors with his decisive steps since replacing sacked predecessor Phil Clarke in September 2014.

He is trying to revive Tesco with a focus on lower prices, streamlined product ranges, and new simplified relationships with suppliers, the root cause of the accounting issues that are the subject of a criminal investigation by Britain’s Serious Fraud Office.

Analyst Clive Black at Shore Capital, who has a “hold” rating on Tesco shares, said Mr Lewis deserved “considerable credit for steering this near retail shipwreck to calmer waters, where the group’s ‘engineers’, can and are now making progress.”

* Reuters