Tesco posts strong results ahead of market expectations

UK retail giant Tesco remains confident it can meet its turnaround targets as it posts strong full year results ahead of expectations.

Booker CEO Charles Wilson with Tesco CEO Dave Lewis

The UK’s largest supermarket reported group sales up 11.5% to £56.9 billion, with like for sales in the UK and Republic of Ireland up 2.9%. Within this, Tesco saw a rise of 1.7%, with the newly acquired Booker business up 11.1%.

Group operating profit rose 34% to £2,206 million with the UK and Republic of Ireland seeing £1,537m, (a rise of 45.1%), with Booker contributing £196m Booker versus £185m last year.

So far it has made savings of £1.4 billion to date towards its £1.5 billion target, and announced it would be paying a dividend of 5.77p per ordinary share.

Chief executive Dave Lewis said the company had met the “vast majority” of the company’s turnaround goals over the last four years and had built a “sustainable base of profitability”.

“I’m very confident that we will complete the journey in 2019/20,” he said.

He added that he was “delighted’ with the broad-based improvement across the business and restored competitiveness for its customers.

“The full year margin of 3.45% represents clear progress and the second half level of 3.79%, even before the benefit of Booker, puts us comfortably in the aspirational range we set four years ago,” he said.

“Whilst the market remains uncertain, our performance to date is strong, leaving us well-positioned to invest in our competitiveness as we continue to celebrate 100 years of great value for customers. We remain comfortable with consensus profit expectations for 2019/20. We are continuing to focus on customer satisfaction, cash profitability, free cash flow and earnings growth.

It reported strong growth in all of its store formats, but noted the strength of its One Stop convenience channel, while online sales grew 2.8%, despite the close of Tesco Direct.

The results didn’t mention the axing of its standalone wine website, Tesco Wine by the Case, which was closed in October 2018 due to lack of profitability.

The grocer also recorded 149,000 more customers shopped at Tesco over the year and noted it had been named as the most improved supplier for third year running by the Grocery Code Adjudicator Survey in June 2018.

More information about ‘untapped value opportunities’ for the retailer will be released in June, it noted.

Shore Capital analyst Clive Black said the financial year had been “productive… but not a bed of roses”.

“Looking into FY2020, challenges remain not the least of which is the comparatives in the first half for the UK business, an industrywide situation. That said if the UK Commissions and Mergers Authority does indeed kill off the attempted merger of Sainsbury-Asda then the mood music around Tesco UK from investors may be better than it could have reasonably been expected,” he said.

Fund manager Freddie Lait, CEO of Latitude Investment Management said the most exciting aspect of Tesco’s financial position lay in getting its pension under control, ensuring neutral debt levels are keeping cash flow high.

“Over the next few years it is likely that Tesco will be one of the highest dividend payers in the FTSE and may even instigate a share buy back,” he said.