Groceries goliath Tesco (TSCO) is in fine fettle, as confirmed by half year results revealing a step up in second quarter (Q2) performance driven by the core UK & Ireland business.
Like-for-like sales grew 4.2% in the UK & Ireland in Q2, accelerating from 3.5% in the first quarter and marking an eleventh quarter straight of sales growth. Encouragingly, results for the half ended 25 August show sales, profits, dividends and debt all heading in the right direction (up, up, up and down).
WERE EXPECTATIONS TOO HIGH?
But shares in Britain’s biggest retailer are taking a tumble, off 6.4% to 220.2p, reflecting disappointment on various performance metrics and the elevated expectations ahead of the results.
With a boost from acquired wholesaler Booker, operating profit (before exceptionals and amortisation) is up 23.9% to £933m, yet this is below Shore Capital’s £981m forecast with weak trading in Central Europe and Asia crimping progress.
Furthermore, the operating margin of 2.94%, up 29 basis points year on year, also represents a miss. Amid cut-throat industry competition, bears argue Tesco’s return on sales isn’t moving higher as quickly as hoped. Nevertheless, Tesco insists it remains on track to improve the operating margin to between 3.5% and 4% by 2019/20.
ASIAN PROFITS PAIN
Also causing jitters is the cautious guidance for Asia, where half year operating profits slumped the best part of 30% to £100m.
‘In Thailand, the combined effects of sales deleverage, price investment and renegotiation of promotional investment as we reposition our offer have impacted Asian profits in the first half,’ explains the retail titan. ‘We expect this impact to continue in the second half as we maintain our investment in price in order to position the business for growth in a competitive and challenging market.’
‘DRASTIC DAVE’S’ TAKE
Nicknamed ‘Drastic Dave’ for his bold strategic decision making and willingness to slash costs, chief executive officer (CEO) Dave Lewis (pictured below) believes that Tesco has ‘made a good start to the year.’
He recently launched a completely new store format called Jack’s designed to take the grocery retail fight to the discounters, such as Aldi and Lidl.
He is also fairly content with progress elsewhere. 'We completed our merger with Booker in March and are delighted with performance so far. We announced a strategic alliance with Carrefour in July which goes live this month. And we are now more than half-way through the biggest own brand re-launch in our nearly 100-year history, including a significant investment in over 300 new “Exclusively at Tesco” products at market-leading prices.’
WHAT THE EXPERTS ARE SAYING
Shore Capital’s Clive Black believes ‘that the market will be a little disappointed by the Asia outcome today but in the big scheme of things, amortisation noted, Tesco appears to be broadly on-track with its medium-term plan and we reiterate our ongoing “Buy” stance.'
Russ Mould, investment director at AJ Bell, says ‘Tesco’s recovery continues to head in the right direction judging by its half year results which show growth in sales, pre-tax profit, margins and the dividend. At first glance it looks like a good performance, yet the recovery is far from complete and Tesco has slipped up in a few areas.
‘The supermarket only delivered £933m operating profits before exceptional items versus analyst forecasts of £978m. Its Thailand and Malaysia operations saw weaker earnings as a result of price cuts and renegotiated terms on promotional activities.
‘Every little helps, as Tesco used to say, and shareholders don’t want to see any slip-up as the business regains strength to fight off tough competition.
‘Chief executive Dave Lewis won’t be resting on his laurels with regards to the operating profit miss but in the grander scheme of things, today’s results are no reason to panic about overall performance.
‘Strategically the acquisition of Booker looks to have been a good move, the enlarged group has regained credibility with the market, earnings are heading in the right direction and the launch of Jack’s shows that Tesco is feeling confident enough to try new innovative ideas.'
