Tesco shares rise 4% as it raises full-year profit forecast 

Chief executive said he anticipated food inflation would continue to fall in the second half

Tesco chief executive Ken Murphy said he anticipated food inflation, which hit its highest level since 1977 in March at more than 19%, would continue to fall in the second half.

Shares in Tesco rose more than 4% after the supermarket group raised its annual profit forecast, as food inflation eased, adding to momentum ahead of its key Christmas trading period.

After reporting better-than expected first half results, Tesco chief executive Ken Murphy said he anticipated food inflation, which hit its highest level since 1977 in March at more than 19%, would continue to fall in the second half.

He told reporters that the consumer in Britain - its main market - was in "reasonable health", given near full employment. "Our sense is that our customers are broadly a little more optimistic than they were this time last year," he said. "People are determined to enjoy Christmas this year," he said, noting that Tesco, which has a 27% share of Britain's grocery market, was buying in more turkeys this year in anticipation of more festive gatherings. In Ireland, Tesco competes with Dunnes and SuperValu as a top 3 supermarket in terms of sales.  

The annual rate of food price inflation fell in Britain for a fifth month in a row to just under 10% in September, according to industry data, with food prices down for the first time in more than two years in month-on-month terms. In Ireland, grocery price inflation fell for the fourth successive month to 11.5%, according to market researcher Kantar, which had said the latest reading is the lowest since September 2022. 

Tesco holds 22.6% of the market in the Republic after growing its share faster than its rivals, which include Lidl and Aldi. 

Tesco cut the prices on 2,500 products in the first half, while its overall inflation was "behind the market". In Britain, to better compete with discount retailers Aldi and Lidl, Tesco took out £290m of costs in the period. It is also matching Aldi's prices on hundreds of key items and providing offers through its Clubcard loyalty scheme.

It has also benefited from consumers looking to save money by cooking and entertaining at home rather than dining out, boosting sales of its "Finest" premium range.

Shares in Tesco, which are already up 16% this year. 

It said it now expects 2023/24 retail adjusted operating profit to be between £2.6bn (€3bn) and £2.7bn, up from a previous forecast of about £2.5bn. In the first half, Tesco's retail adjusted operating profit was £1.42bn, ahead of analysts' average forecast of £1.35bn. UK like-for-like sales were up 8.4% in the second quarter, after rising 9% in the first quarter.

Tesco also raised its guidance for annual free cash flow, maintained its interim dividend and said it bought back £503m of shares in the first half. One top 40 investor said Tesco's defensive attributes - strong cash generation and a dividend yield above 4% - made it an attractive stock despite not having the most exciting growth story. Tesco has long been the dominant grocer in the UK but has had a turbulent past decade following an ill-fated expansion spree. While pushing abroad, the retailer took its eye off its home market, opening the door for Aldi and Lidl to attract shoppers hunting for bargains. Tesco Ireland chief Natasha Adams said price cuts and Clubcard sales were delivering for the business.  

• Reuters, Irish Examiner, Bloomberg