Tesco Extra

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Profits at Tesco fell back in the first half as customers faced “a tough time” but rising food prices helped Britain’s biggest supermarket grow sales.

CEO Ken Murphy said shoppers were “watching every penny to make ends meet” but warned cost inflation remained “significant” as the group moved into the second half of its financial year.

Tesco stuck to its full-year profits guidance of between £2.4bn and £2.5bn but said the figure would be towards the lower end of the range, which it previously set at between £2.4bn and £2.6bn.

Revenues, excluding VAT and fuel, in the 26 weeks to 27 August increased 3.1% to £28.2bn, with a 3.2% rise on a like-for-like basis. Fuel sales soared 38.4% to £4.3bn, pushing total group revenues up 6.7% to £32.5bn.

Growth accelerated in the second quarter as higher prices kicked in, but Murphy emphasised that Tesco had stuck to its strategy to inflate “a little bit less and a little bit later, with the supermarket’s price position getting “even more competitive” thanks to its Aldi Price macth, Low Everyday Prices and Clubcard Prices.

A 2.7% rise in like-for-like sales in the UK & Ireland was mostly driven by a 13.9% jump at Booker, particularly from the catering side of the operation, while Central European sales also increased 10.4% in the half.

However, despite the top-line improvement, adjusting operating profits fell 9.8% to £1.3bn as volumes normalised from elevated pandemic levels and non-food sales slumped 6%. Tesco also said it saw significant cost inflation and some impact from a step up in own-label sales as customers took steps to manage the pressure on household budgets.

An acceleration of its ‘Save to Invest’ programme - with £500m of savings expected this year - strong Booker sales and a reduction in Covid-related costs helped mitigate the fall in profits.

Pre-tax profits fell 63.9% to £413m following a £626m non-current asset impairment charge.

Murphy said: “Customers are seeking out the quality and value of our own brand ranges as they work to make their money go further, whether they are switching from branded products, between categories or cutting back on eating out.

“As we look to the second half, cost inflation remains significant, and it is too early to predict how customers will adapt to ongoing changes in the market. Despite these uncertainties, our priorities are clear. We have the right long-term strategy and we will continue to balance the needs of all of our stakeholders.

“Most importantly, we will stay focused on delivering value for our customers and supporting them in every way we can.”

Alongside its results, Tesco also announced a new price-lock commitment, freezing the prices of more than a thousand everyday products until 2023 as part of the Low Everyday Prices campaign.

It also revealed a second hourly-pay increase this year for staff, with basic hourly rate of pay set to increase a further 20p to £10.30 (or £10.98 in London), and a doubling of our colleague discount to support them this Christmas.

“We know times are tough for many customers right now, particularly as we head into the winter months,” Murphy said.

“We hope this extended price-lock commitment gives our customers the certainty of knowing that over a thousand household favourites will stay at the same great price for months to come – helping them budget when they need it most.”

Tesco increased its interim dividend by 20.3% to 3.9p per share.

Shares were also up 1% to 212.1p as markets opened this morning despite the pressure on profits. The stock remains 28% down so far this year.

Morning update

The FTSE 100 fell back 0.6% to 7,046.31pts this morning following yesterday’s rally.

Early risers along with Tesco included Marston’s, up 1.2% to 36.1p, Nichols, up 1.1% to 1,116.8p and Ocado, up 1% to 512.2p.

Fallers so far included Bakkavor, down 6% to 86.5p, Deliveroo, down 3.8% to 89.4p, Kerry Group, down 3.2% to €92.18, Naked Wines, down 3.1% to 82.7p, and Science in Sport, down 3% to 16p.

Yesterday in the City

The FTSE 100 staged a partial recovery yesterday, with the index climbing 2.6% to 7,086.46pts.

Greggs, a member of the FTSE 250, soared 10.3% to 1,900.5p after its sales held up despite the cost of living crisis. The high street baker posted 15% growth in the third quarter.

Most fmcg stocks registered increases yesterday, with the biggest risers being shares that have recently suffered big drops, including Ocado, up 6.3% to 495p, Fevertree, up 5.6% to 891.5p, Deliveroo, up 5.5% to 93.6p, Just Eat Takeaway, up 8% to 1,430.6p, and THG, up 6.6% to 39p.

In Europe, shares of HelloFresh and Delivery Hero also soared, up by 7.3% to €23.80 and 8.5% to €40.56 respectively.

Virgin Wines UK (-2%) and Wynnstay Group (-1%) were among the few stocks in the red.