Tesco profits slide 63%
The retailer is navigating a price war with competitors
Tesco half-year profits unveiled this week more than halved, collapsing by 63.9% to £413 million (from £1.1 billion in 2021) due mainly to a non-cash £626 million impairment charge. Shares fell to a six-year low of 199.6p, down 4.5% on Wednesday.
Operating profits fell by 43.6% to £736 million from £1.3 billion the previous year. The grocery giant also blamed “post-pandemic normalisation” for the profits slide, following a reduction in sales volumes year-on-year, inflationary cost hikes and its own investment in its customer offering.
A £626 million non-cash charge from the impact of rising discount rates on the value of Tesco’s store estate was the main culprit for the fall in profits, however.
Total revenues rose 6.7% to £32.5bn, boosted by strong growth in fuel sales. Retail like-for-like sales rose 3.2% during the period, with online sales still 50% above pre-Covid levels.
Tesco: Cost of living crisis bites
The supermarket chain is navigating a price war as the economic downturn hits customers. “We know our customers are facing a tough time and watching every penny to make ends meet,” chief executive Ken Murphy told investors. “That’s why we’re working relentlessly to keep the cost of the weekly shop as affordable as possible, with our powerful combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices, together covering more than 8,000 products, week in, week out.”
Murphy says that customers are “seeking out the quality and value” of Tesco’s own brand ranges as they try to save money. Indeed, sales of the company’s Finest range are up 13% year-on-year as customers prefer to dine in instead of eating out.
He adds that the company is inflating prices “a little bit less and a little bit later” to retain customers.
However, he warns that “cost inflation remains significant” and that it is too early to second-guess customer behaviour as macro-economic trends play out.
Meanwhile, the company has made £500 million of savings in its cost cutting programme and is targeting £1 billion in cost cuts by February 2024. Its staff, however, have received a pay increase.
Tesco cuts earnings guidance
The supermarket chain also trimmed its earnings guidance for the full-year, saying that profits will now come in at the lower end of the previous range given. Tesco now expects full-year retail adjusted operating profit of between £2.4 billion and £2.5 billion. However, it upgraded full-year retail free cash flow expectations to at least £1.8 billion. Net debt also fell by £500,000.
Management raised the interim dividend by 20.3% to 3.85p and said that so far it had returned £450 million to investors via its share buyback programme and plans to return a further £300 million by April 2023.
“Tesco has to try to offer attractive prices to stave off the threat from Aldi and Lidl and while it can rely on its purchasing power to some extent, it is still having to sacrifice margins to meet this challenge,” said AJ Bell investment director Russ Mould. “The uncertainty is palpable in the company’s outlook and inevitably this will make the market rather nervous.”
However, analysts at broker Barclays reiterated their buy recommendation on the shares this week and have a price target of 325p.
The shares are down 25% this year to 199.6p and are trading at six-year lows. Nevertheless, the company looks better placed than many in its sector to weather the cost of living crisis storm, making the shares a long-term buy.
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