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Tesco warns coronavirus shopping boost will be "largely offset" by extra costs

The FTSE 100 grocery group will pay a final dividend for last year and expects to pay £5bn more to shareholders once it completes the sale of its last Asian businesses

Tesco PLC -
Tesco customers following social distancing guidelines

Tesco PLC (LON:TSCO) has said if everything is back to usual levels by August, with coronavirus (COVID-19) panic buying subsiding and “returning to normal”, the effect would be to offset the “significant extra costs” incurred in dealing with the crisis as the food retail giant revealed full-year 2019/20 results. 

While other large corporations have been paring back their payouts, the FTSE 100-listed group said it will pay a final dividend of 6.5p for the past year, with plans to return around £5bn of the proceeds from the US$10.7bn (£8.2bn) sale of its Thai and Malaysian businesses expected to complete in the second half.

NEW: Tesco downgraded as analysts realise corona “more of a headache” for supermarkets

“COVID-19 has shown how critical the food supply chain is to the UK and I'm very proud of the way Tesco, as indeed the whole UK food industry, has stepped forward,” said chief executive Dave Lewis in the results statement.

Lewis, who is planning to step down this autumn, said there were “significant extra costs in feeding the nation” through the coronavirus crisis from increases in payroll from offering staff a coronavirus bonus and recruiting more than 45,000 workers, distribution and general store expenses.

These costs would amount to £650mln for a 12-week lockdown up to £925mln for a 20-week scenario to mid-August.

The first few weeks of the crisis panic buying drove around a 30% uplift in sales volumes, as has been hinted at in industry data, but if customer behaviour returns to normal by August, Tesco expects the additional costs would be “partly offset” by the government’s offer of a UK business rates holiday, with the company confirming its rates bill at £585mln, and overall “largely offset” by the benefits of food volume increases and its own “prudent operations management”.

The UK lockdown is expected to result in a loss for Tesco Bank.

For its results to February 29, 2020, the group reported total sales of £56.5bn, down 0.7% on the previous year, with underlying operating profits up 13.5% to £3bn. Statutory profit before tax fell 18.7% to £1.3bn.

Net debt stood at £12.1bn at the year-end. Tesco said £2.5bn of the Asian disposal proceed will be used to eliminate its pension funding deficit.

Tesco shares fell 4% to 216.1p on Wednesday.

Independent retail analyst Nick Bubb said: "Tesco has firmly knocked on the head the idea that it has been coining it of late, by flagging that it has had to massively its UK operating costs and will suffer a loss-making year for the Tesco Bank (which made £193m in profit last year)."

Analyst Bruno Monteyne at Bernstein was mostly impressed: "Markets must have been pricing in major negative surprises (given how shares traded YTD), but none of those fears came out (e.g. no cut to divi, no major blow up in pension deficit, Asia deal and pay out still on track."

Tesco was also downgraded by Shore Capital as analysts downgraded their forecasts for pre-tax profits for the year to February 2021 to “probably flat” for retail and then taken into negative territory by the loss from the banking business, initially estimating this will be “a swing of circa £200m-plus in trading profit”.

The results, said Russ Mould, investment director at AJ Bell, are a reminder that the panic buying at supermarkets has significant costs as well as benefits.

“Growth is only really relevant if it is profitable,” he said, “and the 30% surge in sales in recent weeks may have been more of a headache than the boost it might superficially have appeared to be.”

 --Adds share price and broker comments--

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Price: 231.00555 GBX

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