The City gave a thumbs-up to Tesco this week in the wake of a double-digit jump in profits, driven by easing price inflation and continued market share gains.
Group-wide sales at the UK’s biggest supermarket – excluding VAT and fuel – rose 7.4% to £61.5bn in the 52 weeks to 24 February 2024, while group retail like-for-like sales were up 6.8%.
Like-for-like retail sales for Tesco in the UK were up 7.7% and 6.8% in the Republic of Ireland, while its Booker division grew 5.4%. That growth was partly mitigated by weaker 0.2% organic growth in central Europe amid a more “challenging trading environment”.
Tesco said its performance was boosted by the gradual fall of inflation throughout the year. The supermarket had been “working hard” to cut prices across everyday grocery lines in response to falling global commodity prices, it added.
Overall revenues at Tesco increased 4.4% in the year to £68.2bn as a 17% decline in fuel sales dragged on the top line. However, adjusted operating profits jumped 12.8% to £2.82bn, as retail profits rose 11% to £2.76bn and profits from the bank shot up 213% to £69m.
Pre-tax profits soared 160% to £2.3bn due to comparisons with the previous year, when the group was hit by a one-off impairment charge of almost £1bn. Tesco also reduced net debt by £729m to £9.8bn thanks to strong cashflow and a special dividend of £250m from its banking arm.
Broker Jefferies commented: “Today’s finals confirm further progress by the UK leader, with an in-line EBIT delivery as strong UK market share progress is confirmed… Investors remain overly focused on disinflation risks and not enough on the structural tailwinds coming from a more constrained competitor set.”
Bernstein welcomed the “boring, but good” strong set of results, noting: “Tesco remains a strong operator with a strong track record of market share gains, industry leading margins and strong cash return.
“It’s now a cleaner story with the disposal of bank operation, while maintaining leadership in online, retail and wholesale channels.”
AJ Bell cautioned that Tesco’s successful focus on price should not come at the cost of quality: “The next big test will be the period when interest rates are cut. Consumers feeling more confident about their finances might feel they want to treat themselves – Tesco needs to ensure that situation results in shoppers buying more products at its stores rather than trading up to rivals.”
Tesco shares ended Wednesday up 3.3% at 297p, wiping out seven consecutive days of losses, but fell back to 282.1p by Thursday lunchtime. They have fallen back 3.9% since the start of 2024.
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