Shares in supermarket giant Tesco (TSCO) gained 2.2% to 218p after the firm delivered a solid set of first half results showing it was fighting back against the discounters and promised a £5 billion cash return early next year.
Retail sales for the six months to the end of August were up 6.5% on a like-for-like basis across the group with sales in the UK and Ireland up 7.2%, despite a sharp fall in fuel sales due to lockdown.
STRONG SALES GROWTH
In the UK, food sales rose more than 9% as the company moved quickly to more than double its online delivery slots to 1.5 million per week, and the ‘Aldi Price Match’ campaign launched in March saw the firm gain customers from the German discounter for the first time in a decade.
Although customers visited stores less, the average spend per basket in-store rose 56% which was around three times the uplift the company had anticipated, helped by the Clubcard Plus programme.
At the same time, the price match campaign and the broader switch to ‘everyday low prices’ meant that promotional offers such as buy-one-get-one-free dropped from 30% to 22% of sales.
According to new chief executive Ken Murphy, who took over at the start of this month, the price move is strategic rather than tactical and Tesco is committed to ‘investing in value for customers’ going forward.
The Booker wholesale business turned is a respectable performance, with overall sales up 11% and like-for-like sales up 2.2% as a 22% increase in retail revenues offset a 12% slump in sales to the catering industry due to the shutdown of many restaurants during the half year. Sales were also helped by increased utilisation of the Booker fleet to fulfil ‘click & collect’ orders and benefit of the Best Food Logistics acquisition.
SECOND HALF OUTLOOK
Tesco Bank reported an operating loss of £155 million due to lower customer activity and a large provision for potential loan losses, but the outlook for the second half is for losses of no more than £45 million.
For the group as a whole, finance director Alan Stewart said he expected ‘a broadly even balance to the year’ in terms first half and second half profitability, and for full year retail operating profits to be ‘at least the same level as 2019/20 on a continuing operations basis’, which seems conservative given the amount of costs the firm has already absorbed in the first half in response to the Covid crisis, which are likely to be non-recurring.
There was further positive news for shareholders on dividends, with the ordinary payout ratio set to rise to 50% of earnings for the full year and £5 billion of the £8 billion net proceeds from the sale of the Asian business expected to be paid out in the form of a special dividend early next year.
EXPERT VIEWS
Amisha Chohan, analyst at Quilter Cheviot, observed: ‘The last decade was all about the growth in discounters such as Aldi and Lidl. This decade, we believe it will be about the growth in online grocery. Tesco is focussed on improving efficiencies to enhance margins.’
Clive Black of Shore Capital welcomed the results and the interim dividend declaration, retaining his buy recommendation despite the shares being ‘dull as dishwater in recent months.’
As a key supplier Shares spoke with flagged, most of today’s gains were achieved under its former chief executive. ‘Dave (Lewis) got a lot right, plus he had a lot of one-off cash boosts. Ken will need to make money through good old-fashioned shop-keeping.’
