- Last year’s earnings top estimates
- This year’s guidance disappoints
- Shares fall from recent highs
The much-awaited full-year 2024/25 earnings update from supermarket giant Tesco (TSCO) ended up being something of a let-down after the firm beat forecasts but warned operating profit for the coming year would be lower due to the ‘competitive intensity’ of the UK market.
The shares, which recently hit multi-year highs, dropped as much as 27p or 8% to 310p before recovering to 318p for a loss of 6% following the conference call, although that still made them the worst performers in the FTSE 100.
WINNING MARKET SHARE…
For the year to the end of February 2025, Tesco posted group sales excluding VAT and fuel of £63.64 billion, up 3.5% on the previous period, driven by LFL growth of 3.1% across the group and 4% in the UK.
Group operating profit was £3.13 billion, up 10.8% and ahead of the company-compiled consensus of £3.075 billion, while free cash flow was £1.75 billion, again ahead of market forecasts and the firm’s own guidance.
The company returned £1.9 billion to shareholders last year in the form of dividends and buybacks and announced a further £1.45 billion buyback for the year to February 2026, including £700 million of proceeds from the sale of Tesco Bank.
Chief executive Ken Murphy attributed the strong results to the firm’s relentless focus on value, its highest grocery market share in almost a decade and increased customer satisfaction scores.
In terms of the outlook, Murphy said: ‘Building on our strong financial performance, robust balance sheet and positive momentum, we are setting ourselves up for the year ahead with the flexibility to continue to win in a highly competitive market.’
… COMES AT A COST
Acknowledging there had been ‘a further increase in the competitive intensity of the UK market’ in the last few months, Murphy told analysts he was ‘determined to win’ in the battle for sales.
In order to lure more shoppers through the doors, Tesco will divert a greater proportion of its 2025/26 profit to schemes such as successful Aldi Price Match and Clubcard Prices to deliver Murphy’s number one strategic goal of ‘magnetic value for customers’.
That means operating profit for 2025/2026 is likely to be between £2.7 billion and £3 billion, or as much as 14% lower than last year depending on how much ‘firepower’ the firm needs to respond to current market conditions.
Frederick Wild at Jefferies suggested this year ‘likely represents the moment of peak pressure’ on profits and by being flexible with its guidance Tesco is giving itself room for manoeuvre.
Clive Black at Shore Capital described the firm’s approach as ‘a little more on the front foot than we had expected’ and penciled in a 6% to 9% downgrade to his current-year operating profit number.
