Tesco profits halved amid ‘incredibly tough year’ for consumers

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Tesco’s full-year profits have more than halved as lower sales volumes, cost inflation and writedowns of its property and assets due to economic conditions take effect.

The supermarket giant posted statutory profit before tax of £1bn in the year to 26 February, down 51% from just over £2bn in the previous year.

Group adjusted operating profit decreased by a more modest 7.1% at constant rates, primarily reflecting the impact of lower year-on-year volumes, the ongoing investment in its customer offer and significant operating cost inflation.

Tesco said these factors were partially offset by a “very strong” Booker catering recovery and the acceleration of its Save to Invest programme, which delivered in excess of £550m of savings in the year.

However, group statutory operating profit reduced by 40.4% year on year due to a sharp increase in adjusting items, with the key driver being a £982m non-cash impairment charge on non-current assets – primarily property – mainly due to an increase in interest rates.

Group sales increased by 5.3% at constant rates at £57.7bn, driven by strong sales performance in all segments as volumes held up relatively well despite cost of living pressures and some further post-pandemic normalisation.

CEO Ken Murphy said: “It’s been an incredibly tough year for many of our customers, and we have been determined to do everything we can to help.

“Our results reflect our continued investment in delivering great value and quality for our customers, whilst at the same time looking after our colleagues. This is despite unprecedented levels of inflation in the prices we have paid our suppliers for their products, and the cost of running our own operations. I am very proud of the way the Tesco team has responded to these challenges and would like to thank every colleague for the contribution they have made.

“The resilience and agility that we have developed over the last few years has created a sustainable competitive advantage that leaves us well-placed to deal with any challenges that may arise. It has enabled us to deliver another strong performance across the group, whilst continuing to make strategic progress.”

Overall retail like-for-like sales were up 5.1%, with statutory revenue up 7.2% to £65.7bn and including fuel sales up 23.3%.

UK & ROI like-for-like sales were up 4.7%, including UK up 3.3%, ROI up 3.3% and Booker up 12% in the period.

UK like-for-like sales grew by 3.3%, with particularly strong growth of 7.2% across the six-week Christmas trading period.

In the first half, like-for-like sales grew by 0.7%, reflecting reduced year-on-year volumes due to higher levels of in-home consumption in the prior year, with growth accelerating in the second half, with like-for-like sales of 6%, driven by rising levels of general market inflation and strong demand in the fourth quarter, particularly during the key Christmas trading period.

Food sales grew by 4.6% for the full year, with own brand volume participation increasing.

Finest sales were up 6.8% and sales of entry price and Exclusively at Tesco ranges were up 5.9%.

Tesco said it maintained a strong market share at 27.3% and were the only full-line grocer to grow share versus pre-pandemic.

Non-food sales declined by 4.5% as the group traded over strong sales in home and clothing categories last year.

Online Tesco UK sales declined by 5.4%, in line with overall normalisation in the market.

Central Europe like-for-like sales were up 10.4%.

Tesco said it would continue to prioritise investment in our customer offer while doing “everything we can” to offset the impact of ongoing elevated cost inflation.

It expects to be able to deliver a broadly flat level of retail adjusted operating profit in 2023/24 and retail free cash flow within its target range of £1.4bn to £1.8bn.

Murphy added: “We continue to target growth through making Tesco the most convenient place to shop. This year we have opened 91 stores across the Group and are serving over 450 net new Booker retail partners. Booker delivered its strongest year ever, helped by an outstanding catering performance as even more customers benefited from its unbeatable choice, price and service. Our acquisition of nine Joyce’s stores in the Republic of Ireland and, more recently, the Paperchase brand in the UK signals our appetite to find new, value-creating growth opportunities in our core markets.

“I am really confident that by investing to give customers the best possible value and continuing to look after our colleagues, we will create further significant value for every stakeholder in Tesco.”

Tesco shares are up 2.1% on the news to 273p.

Morning update

Sports nutrition specialist Science in Sport will continue to trade as an independent listed firm, following a strategic review that could have resulted in the sale of the business.

It launched a strategic review last year after being hit by increased input costs, resulting in a share price that “failed to recognise the inherent value of its premium brands and strong market position”.

However, following the review, the board has concluded that shareholders’ interests are best served by seeking to maximise value through focusing on accelerating the profitable growth of the business under an ambitious growth and efficiency plan.

The group’s board said it retained a high level of confidence that the business model, operational and marketing assets and strategy will provide long term profitable growth in global markets.

To deliver increased profitable growth in the long run, the company has completed its investment in a state-of-the-art fully integrated supply chain facility including warehousing, manufacturing, distribution, and administrative offices in Blackburn.

The cost benefits of the facility are now being delivered and are expected to provide operational leverage and expansion capacity over the foreseeable future to boost global growth.

Meanwhile, trading in the year to date indicates that the business is responding well to the new plan, with growth across both different geographies and sales channels, price increases, and lower costs attributed to the recently commissioned manufacturing and distribution facility, all contributing to improved profitability.

The group has had a good start to the year with Q1 revenue of £15.6m delivering growth of 2.3% compared to the prior year.

While January and February were affected by Amazon global destocking and Covid in China, momentum is gathering, as evidenced by a record March revenue of £7.2m (up from £6.4m last year) and current trading performance in April.

Q1 trading contribution margin was 20.9% (up from 13.7%), delivering a significant improvement over the comparative period, because of the implementation of the growth plan.

Science in Sport shares have gained 5.9% this morning to 9p.

Beauty group PZ Cussons has posted like-for-like revenue growth of 6.2% in its third quarter, driven by price/mix improvements.

Reported revenue growth was 13.5%, reflecting the full period contribution of Childs Farm, which was acquired in March 2022, as well as favourable foreign exchange movements.

Year to date, revenue has grown by 6.1% over the first three quarters on a like-for-like basis.

Regionally, performance in Europe and the Americas improved significantly in Q3, with like-for-like sales up 9.9%.

It said this was a result of its strategic focus on innovation and marketing, with particularly strong performances from St. Tropez US and the combined Imperial Leather and Cussons Creations portfolio.

However, Carex revenue declined in Q3 reflecting the reduction in the UK Hand Hygiene category more broadly.

Childs Farm is performing as expected and is on track for double-digit revenue growth in 2023, on a pro-forma basis.

Asia Pacific like-for-like growth of 1% has been driven by strong growth in Australia. Africa was up 7.7% and trading in line with expectations, despite disrupted demand in Nigeria in February due to bank note changes and the elections.

For the rest of the year, it continues to expect 2023 adjusted profit before tax to be at least in line with current market expectations. This includes a 3%-4% benefit, compared to 2022, due to the translation of results of its overseas operations.

CEO Jonathan Myers said: “We have delivered another quarter of mid-single digit revenue growth, in line with our longer-term ambition. This represents a sixth consecutive quarter of growth, with the business underpinned by the strength and depth of our portfolio and our ongoing strategy to invest behind our brands, build internal capabilities and serve consumers better.

“As anticipated, performance has strengthened in Europe & the Americas, with a return to revenue growth and a marked improvement in profitability in the quarter. As a result, we remain confident in delivering against FY23 expectations and that further strategic progress will be made in the balance of FY23 and into FY24.”

Tobacco group Imperial Brands said it was on track to meet full-year guidance as it benefits from robust tobacco pricing and stable aggregate market share across key markets.

On combustibles, it said focused investment in our priority combustible markets continues to support the stabilisation of market share. It is consolidating the strong gains achieved last year with aggregate share in its top-five markets at the half year expected to be at a similar level to the prior period.

In next generation products (NGP), the group has delivered a step-up in product and market launches.

First-half NGP revenues are expected to be ahead of the prior period, driven by strong growth in Europe, more than offsetting declines in the US, driven by uncertainty caused by the marketing denial order for MyBlu.

Excluding the impact of its exit from Russia last year, first-half group net revenue is expected to be at a similar level to last year at constant currency, with strong combustible pricing offset by temporarily increased volume declines against a prior period which benefited from Covid-related changes in buying patterns.

It expects a stronger net revenue performance in the second half, supported by a normalisation of volume trends and price increases taken during the first half.

Overall it said it remained on track to deliver full-year results in line with expectations and guidance of low single-digit constant currency net revenue growth.

Over the next three years, the group continues to expect operating profit growth to accelerate to a mid-single digit CAGR at constant currency.

Finally, spirits group Distil has posted a sharp drop in sales in its fourth quarter to the end of March 2023.

The group posted a drop in volumes of 40% and a revenue decrease of 37% amid a 66% cut back of spend on advertising and promotions.

Therefore, unaudited full-year revenue sits slightly below market expectations at £1.3m, while its full-year loss before tax is higher at £0.7m.

Executive chairman Don Goulding said: “Quarterly performance was suppressed due to reduced promotional activity in UK major grocery as a result of the transition away from distributor management.

“The quarter also saw us lapping particularly strong export sales last year, as we opened significant new markets and saw the benefit of associated pipe-fill sales.”

“Despite this, the outlook for the coming financial year is positive. Q4 delivered the strongest revenues of the financial year, indicating that we are successfully rebuilding following the business remodel in the first half of the year.

“It has been a transitional year for the business – there was a bigger job to be done than anticipated due to larger volumes of stock available in the trade than reported, however we are now through the issues that this has caused in previous quarters, and trading well with direct customers. We are confident that we will continue to build on this success and begin to see the benefits of the remodel from Q1 FY23/24.

“The business is well positioned to build and grow value for customers, shareholders, and other stakeholders in the next financial year and beyond. Market guidance for FY23/24 will be issued at the time of our final results announcement in June.”

On the markets this morning, the FTSE 100 has edged up 0.1% to 7,832.5pts.

Risers include PZ Cussons, up 3.7% to 194.2p, Premier Foods, up 2.7% to 122.2p, and Kerry Group, up 2.6% to €97.06.

Fallers include Britvic, down 1.7% to 886.5p, Imperial Brands, down 1.4% to 1,852p and Virgin Wines, down 1.3% to 39p.

Yesterday in the City

The FTSE 100 rose another 0.5% yesterday to close at 7,824.8pts.

Risers included Kerry Group, up 4.1% to €95.35, Science in Sport, up 3% to 8.5p, WH Smith, up 1.8% to 1,512p, Britvic, up 1% to 902p, Greencore, up 0.9% to 80.5p, McBride, up 0.8% to 31p and Reckitt Benckiser, up 0.8% to 6,244p.

Fallers yesterday include SSP Group, down 3.2% to 245.8p, Just Eat Takeaway.com, down 3.1% to 1,303p, Ocado Group, down 2.7% to 510p, Domino’s Pizza Group, down 2.4% to 280.4p, C&C Group, down 1.6% to 152.4p and Hotel Chocolat, down 1.4% to 182.5p.