Tesco PLC (LSE:TSCO) delivered profits and dividends bang in line with expectations and committed to another £750mln share buyback by April 2023, but made guarded comments about the outlook for costs and prices.
The shares fell 5.5% to 255.76p in early trading.
Acknowledging the significant external uncertainties, the grocer said it provided a wider than usual guidance range for the new financial year, with retail adjusted operating profit expected to decline 7-14% to between £2.4bn and £2.6bn.
Three main factors seen as likely to influence the actual performance this year are the level of cost inflation and how much of this can be “partially offset”, how much investment in price positioning and promotions is needed to maintain market share, and the extent to which consumers return to pre-pandemic habits.
“Clearly, the external environment has become more challenging in recent months,” said chief executive Ken Murphy.
With household budgets under pressure, Murphy said the supermarket group was “laser-focused on keeping the cost of the weekly shop in check” and claimed that Tesco is “making more products more affordable, in more places than anyone else”.
Meanwhile, the latest inflation figures from the Office for National Statistics showed food and drink inflation rose to 5.9% from 5.1%, its highest rate since September 2011, showing that Tesco and its fellow supermarkets were passing on more of the recent surge in producer prices.
For the 52 weeks ended 26 February 2022, Tesco's revenues came to £54.8bn, up 2.5% on the year before.
Adjusted operating profit of £2.8bn, up 58%, was exactly in line with the average analyst forecast, as Tesco Bank returned to profitability. Excluding the bank, profits for the retail business were up 35% to £2.6bn thanks to lower Covid costs.
A final dividend of 7.7p per share meant the total dividend was hiked 19% to 10.9p as retail cash flow surged 70% higher to £2.3bn, thanks to a lower pension contribution and higher working capital inflow, also allowing net debt to be cut 12% to £10.5bn.
Analyst Clive Black at broker Shore Capital said the "resolute but more guarded" outlook statement would result in 4-5% downgrades to earnings per share for the new financial year.
Saying last year's results were good and represented a small beat to his forecasts, he added: "However, perhaps the more important element of the update is Tesco's commentary around rapidly evolving food markets and so the context within which it sees both its own business and the wider ecosystem operating."
The broker downgraded its stance on Tesco's shares to 'hold' from 'buy', with Black noting that "retaining a more positive stance feels like pushing water up a hill".
** Update: adds shares and broker comment **