- Grocery sales top forecasts
- Value and Finest ranges selling well
- Christmas could prompt a further upgrade
Supermarket giant Tesco (TSCO) lifted investor spirits with a strong first-half trading update, which managed to avoid any suggestion of profiteering in the midst of the cost-of-living crisis.
The shares added 3% to 267p, taking their gains for the year to more than 18%, handily outpacing the FTSE 100, which has eked out just a 0.2% advance so far.
FOCUS ON VALUE PAYING OFF
In contrast to the first quarter, where gains were largely driven by pricing, the second quarter came in ahead of forecasts thanks to better-than-expected volume sales and an improved product mix, with retail revenue up 7.8% on a like-for like basis to £30 billion.
In the UK, first-half food sales grew by 10.6% driven principally by the Aldi Price Match, Clubcard Prices and Low Everyday Prices campaigns which kept prices low, but the Finest range also performed strongly resulting in sales gains ‘at both ends of the basket’ as chief executive Ken Murphy put it.
Murphy described current pricing in the grocery market as ‘rational’, with all players reducing prices as food inflation and commodity prices fell during the half.
In Ireland, like-for-like sales grew by 6.9% with new stores including nine Joyce’s outlets acquired last year and a new superstore in Adamstown adding a further 3.1% growth.
Booker, which serves the convenience-store and catering markets, beat expectations with 14% growth in retail sales excluding tobacco and 9.1% growth in catering sales.
The only weak spot was home and clothing sales, which were down 4.8% in the UK and 4.5% in Ireland, but this was mainly due to the decision to exit low-returning categories like footwear and electrical goods, as on an ongoing basis sales were flat.
STRONG FINANCIAL PERFORMANCE
Adjusted first-half operating profit grew 14% to £1.48 billion, helped by £290 million of cost savings due to the firm’s Save To Invest programme which helped offset rising wage and energy bills.
Moreover, thanks to the non-recurrence of last year’s one-off charge of £622 million, which was due to an increase in discount rates, together with a £250 million special dividend from Tesco Bank, net profits rose nearly 270% to £929 million despite a doubling in corporation tax payments.
After the gains made in the first half, the firm raised its outlook for full-year retail adjusted operating profit from ‘flat on last year’, or roughly £2.5 billion, to between £2.6 billion and £2.7 billion, as well as raising its retail free cash flow forecast for the full year to between £1.8 billion and £2 billion against its medium-term guidance of £1.4 billion to £1.8 billion.
When pressed by analysts on the possibility of a further upgrade when Tesco releases its post-Christmas trading update, chief finance officer Imran Nawaz left the door open by saying the latest guidance was ‘an honest assessment’ of where the firm saw profits landing at the year-end but that it expected to put in a strong third-quarter performance.
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