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Tesco sales and profits surge as supermarket demand blots out coronavirus costs

While COVID-19 led to £533mln of extra UK costs, much higher sales volumes and the government’s business rates relief meant underlying retail profit still rose

Tesco PLC -

Tesco PLC (LON:TSCO) hiked its dividend 21% after reporting strong sales, profits and cashflow as the first half of the year as the grocery sector saw record demand due to the coronavirus pandemic. 

The UK market leader said the £8.2bn disposal of its business in Thailand and Malaysia was “progressing well’ and is expected to complete before the end of December, triggering a potential £5bn return of capital to shareholders. 

New chief executive Ken Murphy, who started last week, will be joined in April by a new chief financial officer poached from Tate & Lyle, Imran Nawaz, the FTSE 100 group also revealed.

REACTION: Look past Tesco's window dressing and its pandemic profits are clear

As for the results for the 26 weeks from March 1 to August 29, group sales increased 6.6% to £26.7bn, with UK and Ireland like-for-like sales up 7.2%, wholesale arm Booker up 2.2% and Central Europe down 0.9%.

With COVID-19 leading to £533mln of extra UK costs, much higher sales volumes and the government’s business rates relief meant Tesco still increased underlying retail operating profit 4.4% to £1.2bn.

But with Tesco Bank continuing to struggle, with sales down 31% and an operating loss of £155mln, core group profit plunged 15.6% to just over £1bn.

For the group as a whole, statutory profit before tax were up 29% to £551mln and with cash flow stable compared to last year. Tesco lifted the interim dividend 20.8% to 3.20p.

For the full year, Murphy said retail operating profit is expected to be “at least the same level as 2019/20 on a continuing operations basis”, which was £2.8bn.

Having been in the job for such a short time there was little insight from the new boss apart from to say: “Tesco is a great business with many strategic advantages. I'm excited by the range of opportunities we have to use those advantages to create further value for our customers and, in doing so, create value for all of our other stakeholders.”

The shares were up 2% to 220.1p in early trade on Wednesday, but were heading into the red just after noon, down 16% since the start of the year.

Analysts at UBS said LFL sales growth was in line with expectations but underlying profits (EBIT) from the retail business and bank were better than the City consensus.

UK and Ireland profit margins were better than assumed, "pointing to operating leverage in the business" given the £533mln COVID costs versus business rates relief of £249mln. 

Richard Hunter at Interactive Investor said: "Panic buying earlier in the year at the height of lockdown did not result in an automatic boost for the supermarkets which many had assumed, even with the bonus of business rates relief."

He noted that Tesco’s Covid-19 costs for the half-year came in at £533mln, largely due to the employment of extra staff to cope with the additional volumes and payment of sick pay to a significant number of employees, with its estimate for the full year now standing at £725mln versus the £840mln that it had been expecting at its first quarter results. 

It was far from a supermarket sweep, said Susannah Streeter, senior investment and markets analyst, at Hargreaves Lansdown, pointing to the fall in core profits and bank loss. 

"Tesco says despite significant uncertainties ahead, it now expects retail operating profits for the current year to be at least the same level as last year.

"But Tesco will have a fight on its hands, given the intense competition in the grocery sector. Tesco is still leading the supermarket pack, a position it cemented partly by stealing customers from Aldi, for the first time in a decade, as customers chose to do bigger shops less frequently during lockdown and opted for online delivery slots. Now Aldi is making a bigger move into digital grocery sales those new customers could switch back over coming months."

   --Adds share price and broker comment--

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Price: 226.5 GBX

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