Tesco PLC (LON:TSCO) reported a weaker-than-expected rise in first-half profit, hit by poor performances in Europe and Asia, sending shares in Britain's largest retailer backwards.
The British supermarket group on Wednesday reported a 24.4% rise in headline operating profit to £933mln in the 26 weeks to August 25 - below analysts' expectations of around £990mln. Sales rose 12.8% to £28.3bn and the company upped the interim dividend to 1.67p per share from 1.00p a year ago and said that net debt had been reduced by 4.1% to £3.13bn.
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The retailer said UK and Ireland like-for-like sales for the half-year rose 3.8%, strengthening from 3.5% in the first quarter to 4.2% in the second quarter. First-half operating profit in its home markets jumped 47.6% to £685mln, thanks to a £97mln boost from recently acquired wholesaler Booker.
However, first-half profit in central Europe and Asia fell 3.3% and 29.1%, respectively, while underlying first-half sales in Europe dipped 1.5% and fell 6.9% in Asia.
European sales were hit by the impact of Sunday trading regulations while its Asian performance was knocked by the impact of bulk selling and the introduction of government-issued welfare cards in Thailand, Tesco said.
"We have made a good start to the year. The step up in the second quarter is driven mainly by the UK and Ireland and delivers our eleventh consecutive quarter of growth,” CEO Dave Lewis, who has been spearheading Tesco's recovery since 2014, said in a statement
“We are firmly on track to deliver our medium-term ambitions and are continuing to improve the quality and value of our offer for customers in all of our markets. In doing so, we are well-positioned to deliver strong, sustainable returns for shareholders,” he continued, adding that he expected the combined effects of sales deleverage, price investment and the renegotiation of promotional investments in Thailand to impact its second half as it repositions the business for growth in a competitive market.
The company had a busy period. It completed its merger with Booker in March and said it was “delighted” with its performance so far. It also announced a strategic alliance with Carrefour in July which goes live this month. The group expects synergies associated with the Booker merger to generate a benefit of at least £60mln this year, growing to a cumulative £140mln in 2019/20 and around £200mln by 2020/21.
Tesco is also now more than half-way through the biggest own brand re-launch in its near 100-year history, including a “significant investment” in over 300 new 'Exclusively at Tesco' products at what it called "market-leading prices". The supermarket group re-launched 5,038 of 10,000 own brand products and eight new 'Exclusively at Tesco' brands, as well as launching the 'Jack's' budget chain of stores during the period.
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The UK’s largest supermarket group achieved £241mln of cost savings during the period and said it was “firmly on track” to deliver the medium-term ambitions set out in October 2016 to reduce our costs by £1.5bn, to generate £9bn of retail cash from operations and to improve Group operating margins to between 3.5% and 4.0% by 2019/20.
"We believe that the market will be a little disappointed by the Asia outcome today but in the big scheme of things, amortisation noted, Tesco appears to be broadly on-track with its medium-term plan and we reiterate our ongoing 'Buy' stance," Shore Capital retail analyst Clive Black said in a note to clients.
Shares in the retailer were 4.8% down at 223.90p in early trade.
-- Updates to recast intro, adds detail, analyst comment and shares --