Underlying performance
Tesco PLC’s (LON:TSCO) underlying performance does seem to be back on track, although it’s still a long way from posting the £4bn+ in operating profits it did only five years ago.
The retailer beat expectations as it posted an underlying profit – which excludes various one-offs – of £1.28bn for the first-half, a 30% increase on the £985mln it reported last year.
Much of that growth came from its home market in the UK, which has been losing customers in recent years to German discounters Aldi and Lidl.
READ: Tesco delivers better than expected results ...
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Underlying earnings jumped 60% in the UK and Ireland to £803mln, while Tesco reversed eight years of sales declines in its home market with like-for-likes up 0.9% across the year.
That was marred slightly by weakness abroad, particularly in Thailand.
Margins
CEO Dave Lewis has previously said that he wants Tesco to generate between 3.5p and 4p in operating profit for every £1 customers spend in-store and online by 2020.
Last year it earned 2.3p which wasn’t a drastic year-on-year improvement, so the boss has his work cut out.
Tesco has stepped up its efforts to make the business more efficient though and only last week announced it would be looking to reduce the number of night shift workers on its books by cutting the opening hours of several 24-hour stores.
The company has also been helped by the recent food prices trend coming to an end which allowed it to pass on cost increases in some of its products to the consumer.
It did warn that pricing pressures are likely to continue while inflation remains high and sterling weak, which might concern investors.
Pension deficit
One of the biggest surprises was the rise in Tesco's pension deficit which rocketed to £5.5bn, up from £2.6bn a year earlier. Analysts had been looking for something nearer to £5bn.
Much of that was down to the reduction in bond yields post-Brexit, and increasing inflation and continuing low interest rates will serve to magnify the deficit.
Tesco also faces the prospect of a rise in contributions as its triennial scheme valuation falls this year which, given the double-whammy of high inflation and low interest rates, is rather inconvenient for the retailer.
Booker deal
Back in January, Tesco revealed it had agreed a £3.7bn deal to acquire Budgens’ convenience stores owner and cash and carry group, Booker PLC (LON:BOK).
READ: Tesco committed to Booker deal despite opposition ...
Since then, two significant investors – Schroders and Artisan Partners, among others – have expressed concerns that the deal isn’t good value and could de-rail Tesco’s recent recovery.
For its part, Tesco wants to tighten its grip on the near-£200bn UK food market and repeated today that it intends to acquire Booker in order “to enable access to [a] larger, faster-growing market opportunity”.
The supermarket added that the deal will also realise “substantial” synergies and bring additional value to shareholders.