Tesco PLC (LON:TSCO) saw its shares top the blue-chip gainers board on Wednesday after the retail giant saw its underlying operating profit jump by almost a third last year as the turnaround under Dave Lewis continues.
Group operating profit before exceptional items for the 12 months ended 24 February rose 28.4% to £1.64bn (FY17: £1.28bn), thanks to a rise in both sales and margins.
The divi is back
Total sales – which includes Tesco’s smaller international businesses – grew 2.33% to £51.0bn in the year, while the group operating margin rose 57 basis points to 2.9% leaving it “well on track” to reach its 3.5-4.0% target by 2019/20.
The Hertfordshire-based group stopped paying a dividend in the wake of the 2014 accounting scandal but it has returned to making payments this year.
It will pay shareholders a final dividend of 2p a share which, when combined with the interim dividend, gives a full-year payout of 3p. Tesco said the move to return to being a dividend-paying company “reflects [the] improved performance and board confidence”.
‘Another year of strong progress’
“This has been another year of strong progress, with the ninth consecutive quarter of growth,” said chief executive Lewis.
“More people are choosing to shop at Tesco and our brand is stronger, as customers recognise improvements in both quality and value.
“We have further improved profitability, with Group operating margin reaching 3.0% in the second half. We are generating significant levels of cash and net debt is down by almost £6bn over the last three years.
He concluded: “All of this puts us firmly on track to deliver our medium-term ambitions and create long-term value for every stakeholder in Tesco.”
UK & Ireland the star performer
Tesco’s core UK & Ireland market – which accounts for almost two-thirds of group profits – was the standout performer, delivering like-for-like sales growth of 2.3%.
That’s now two consecutive years of full-year sales growth in the UK & Ireland, where it had been losing customers to German discounters Aldi and Lidl.
The performance is another sign that sector conditions in its home market are improving and inflation headwinds easing.
Although food price inflation in the UK has been slowing in recent months, a basket of groceries is still more expensive than the prior year which is always a welcome respite for the low-margin supermarkets.
Like-for-sales were much more subdued in Tesco’s international markets though, with Central Europe registering growth of only 0.3%, while like-for-likes in Asia fell by 10% as the company withdrew from some of its unprofitable operations in Thailand.
Pension deficit back under control
Tesco – which is still recovering from the 2014 accounting scandal – posted a similarly decent set of results this time last year, but the share price reaction was far from positive.
One of the issues back then was the firm’s pension deficit which had swelled to £5.5bn.
That has been lowered by almost £2.8bn this time around due to a 22% surge in retail operating cash flow which is now up to £2.8bn. Net debt has also been reduced by over £1bn to £2.6bn.
Booker synergies ‘on track’
Away from the results, investors have also been waiting with baited breath to hear how Booker is settling in after Tesco completed the £3.7bn takeover of the Budgens owner last month.
When it was trying to convince shareholders to back the deal, Tesco said it was targeting around £200mln of annual savings.
In today’s results, the company reaffirmed its commitment to delivering on these promises, stating it is “on track” to achieve the pre-tax synergies of £200mln, with around £60mln of savings expected this year.
“I am delighted to have completed our merger with Booker, and we are moving quickly to deliver synergies and access new growth, making the most of the complementary skills in our combined business,” said Lewis.
Still a way to go
While Lewis is understandably happy with the performance last year, there is still much work for Tesco to do. Indeed, only six years ago, profits topped £4bn so there’s still a way to go to get back to those kind of numbers.
Tesco has been holding its own against the competition recently as well, but the likes of Aldi and Lidl are unlikely to go away any time soon, while Amazon.com Inc’s (NASDAQ:AMZN) purchase of Whole Foods suggests it has the grocery sphere firmly in its sights.
“The outlook is now looking more positive for the grocery sector after a pretty challenging year in 2017,” said Hargreaves Lansdown analyst Laith Khalaf.
“The inflationary squeeze looks to be easing on consumer purses, as is the exchange rate pressure on the cost of stocking shelves.
“Indeed Tesco has done well to increase its margins significantly despite the headwinds from a weaker pound. The target of boosting margins to 3.5 - 4% by 2019/20 now looks to be bobbing within reach.
Khalaf adds: “Competition in the grocery market is still fierce [though], with the discounters Aldi and Lidl piling on the pressure, alongside the likes of Morrison and Sainsbury.
“It’s also hard not to glance at the periphery of the market, and see Amazon limbering up with the purchase of Whole Foods and online grocery trials in selected UK postcodes.”
In late afternoon trading, Tesco shares were up 6.2% to 223.4p.
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