Tesco declared its turnaround “firmly on track” this week after posting a 27.3% jump in group operating profit before exceptional items and its seventh consecutive quarter of sales growth - but received a more muted reception from the City.
The UK’s biggest supermarket announced a 3.3% jump in group sales for the first six months of 2017, driven by a 2.2% rise in UK like-for-likes over that period. Group operating profits of £759m were comfortably ahead of market expectations and operating margins rose from 2.2% to 2.7% and are “on track” to hit 3.5%-4% by 2019/20.
Retail Vision’s John Ibbotson called the “barnstorming results” a “huge achievement and a shot across the bows to the brand’s would-be obituary writers”. Broker Shore Capital called the figures “welcome news for Tesco’s shareholders and the whole sector, noting still high levels of what we deem to be misplaced shorting”.
The shares initially rose 2.3% up to 194.4p to hit their highest level since April, but subsequently fell back to end trading 3.3% at 183.9p.
So what turned market sentiment against what, on the surface, were more solid Tesco results? Firstly, Tesco had risen in the days leading up to Wednesday’s announcement - the shares were up 1.8% on Tuesday and by more than 13% over the previous three months - meaning there was likely to have been a measure of profit taking after the further Wednesday morning bump.
But there were worries over the apparent slowing of its UK sales progress in the second quarter. The quarterly like-for-like growth of 2.1% was below consensus estimates of about 2.5%. And this growth was almost entirely driven by market inflation as transaction growth was just 0.4% and volumes rose by a modest 0.3%. Additionally, there are concerns margin improvement is slowing in the UK. Jefferies estimated UK margins expanded by 21bps excl property profits in the first half - a slowing trend from the 30bp improvement in the second half of last year and the 104bp jump in the first half of 2016. The broker said: “Tesco’s interims will do little to change sharply divided views. The lack of recent appreciable progress in UK margins means that the range of future profit outcomes remains wide. In the very near-term, slowing UK sales may give doubters the upper hand.”
Elsewhere, Greggs again surged past City expectations to post third-quarter sales growth of 8.6% and a like-for-like sales jump of 5% despite tough annual comparatives. Greggs shares rose 1.4% to 1,267p on Tuesday and the stock hit an all-time share price high of 1,304p on Thursday to take its 2017 gains to 32%. Shore Capital said the results provided “further evidence of the potency of the Greggs food-to-go offer”, but the broker cautioned the sales jump had “come at a cost” as improved availability required higher wastage levels.