- Volume growth and market share gains
- Net debt down 2.1% to £9.7 billion
- Interim dividend upped 10.4%
The UK’s biggest grocery chain Tesco (TSCO) raised its full-year 2025 earnings guidance after delivering better-than-expected volume growth and a near-10% uplift in profit for the half ended 24 August.
Chief executive Ken Murphy insisted his charge is ‘in good shape’ ahead of Christmas and Britain’s biggest retailer demonstrated confidence in its festive prospects by bumping up the interim dividend by 10.4% to 4.25p.
But following a strong run into the results, and with the magnitude of the guidance raise falling short of expectations, the stock market reaction was muted with Tesco’s shares edging 1.9% higher to 361.5p in early dealings.
MODEST UPGRADE
For the year to February 2025, the FTSE 100 company now expects to generate ‘around £2.9 billion’ in retail adjusted operating profit, an upgrade on prior guidance of ‘at least £2.8 billion’.
Tesco continues to expect to generate retail free cash flow within its £1.4 billion to £1.8 billion medium-term guidance range.
The grocery goliath’s confidence follows a first half of volume growth and further market share gains, with adjusted operating profit in the retail business rising 9.7% to £1.56 billion on group sales up 3.5% to the best part of £31.5 billion.
In the UK, Tesco’s market share now stands at 27.8%, the highest level since January 2022, boosted by a particularly strong performance from its large stores.
Despite a tough 7.8% comparative, retail like-for-like sales rose by 2.9% including a 4.7% increase in the core UK business, although the Booker wholesale division saw a 1.9% like-for-like sales decline due to ongoing challenges in the tobacco market and some weakness in the fast-food sector.
In the process of disposing of its Bank interests, Tesco purchased £575 million worth of shares in the half and is on track to complete its £1 billion buyback by April 2025.
AS COMPETITIVE AS EVER
Murphy explained that Tesco has lowered prices ‘on thousands of lines, launched or improved over 860 products in partnership with our suppliers and growers’ and is ‘as competitive as we have ever been’ as a result.
‘As we approach the Christmas season, we are looking forward to sharing the quality of our festive food with customers, and can’t wait for them to taste it,’ he enthused.
Begbies Traynor’s (BEG:AIM) Julie Palmer highlighted Tesco’s ‘uncanny ability to respond to consumer trends and drive volumes’ and said the retailer has invested heavily into its online business, enabling it to increase customer satisfaction and sales ahead of expectations despite a soft consumer backdrop.
‘Tesco’s relentless focus on value is clearly keeping it one step ahead of the competition,’ explained Palmer.
‘With initiatives like Aldi Price Match and Tesco Clubcard, it is no surprise its brand perception continues to improve. On today’s evidence the discounters should be studying Tesco’s strategy, to work out how they could improve their own offering and potentially challenge its dominant position as the country's leading grocer.’
AJ Bell investment director Russ Mould added: ‘The challenge put forward by the German discounters hasn’t gone away, but Tesco has managed to absorb it in a way which other mid-market groceries outfits like Asda and Morrisons have found more difficult. The growing appetite for its Finest range also suggests it may be starting to appeal to shoppers who previously would have frequented higher-end rivals.’
DISCLAIMER: Financial services company AJ Bell referenced in this article owns Shares magazine. The author of this article (James Crux) and the editor (Ian Conway) own shares in AJ Bell.
