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Every little helps as Tesco beats across the board

Tesco announced an annual profit of £1.3 billion this morning, comfortably ahead of the £1.1 billion expected. 

The rise in profit was helped by its nine consecutive increases in quarterly revenue. Strong sales, combined with cost reductions, have helped Tesco report solid numbers in a challenging retail environment.

Tesco’s acquisition of Booker Group is expected to produce synergies of £60 million in the first year, and an additional £80 million next year. Cost-cutting is already aggressive, and when the synergies come on stream it will make the company even more competitive. A final dividend of 2p was revealed, bringing the total dividend to 3p – its first annual dividend in nearly four years. Tesco stated they remain ‘firmly on track’ to achieve their medium-term ambitions.

The commercial side of the business is strong, and so is the balance sheet. Net debt was trimmed by 26.3% and the pension deficit was reduced to 2015 levels. The improvement in the pension position was largely down to an increase in corporate bond yields – so the figures are good, but not as good as they seem on the surface. It is impressive to see the trading side of the business was ramped up at a time when the core financial health of the business was improved too.

The deep-discount retailers like Aldi and Lidl continue to make inroads into the British grocery sector. And the ‘big four’ (Tesco, Sainsbury’s, Marks and Spencer and Morrisons) are being shaken up by it. Aldi is now the fifth-biggest food retailer in the UK, as it has a larger market share than Co-op and Waitrose. The latest figures from Kantar showed that in the 12 weeks to March, Aldi and Lidl saw revenues rise by 10.7% and 10.3% respectively. Tesco and Morrisons performed the best of the big four, as both posted a 2.4% jump in sales. This gives us an indication of how quickly the discounters are growing relative to the well-established names.

There have been some interesting developments in the food sector as a result of the rapid expansion of Aldi and Lidl. Last month, Tesco completed its takeover of Booker Group. The deal means Tesco will move into the wholesale industry, which will secure their supply chain, reduce costs and diversify the business. The Tesco and Booker tie-up echoes the Morrisons and McColls merger, whereby Morrisons will act as a wholesaler to the convenience-store chain.

Of the major players in UK supermarket sector, Sainsbury’s was the first to move away from the grocery sector when it acquired Argos in 2016. The parent company has branched out into general retail and uses Argos stores as delivery points.

Morrisons were last of the big four to introduce online delivery, and they paid the price for it. An agreement with Ocado and Amazon Prime, however, is helping Morrisons to make up the lost ground. The company is managing to adapt to the new climate, where the stark alternative is to be left well behind the curve.

Wages in the UK are starting to tick up at a faster rate, while the inflation rate has slipped a little. This could take some pressure off the ‘squeezed middle’, and we might see the sector as a whole benefit from the increased purchasing power.

The disappointing services sector figures from the UK in March were blamed on the poor weather, but according to the British Retail Consortium-KPMG retail sales monitor, UK retail sales rose by 1.4% in March on a same-store-basis, and that easily topped the 0.3% forecast. The British retail sector may be in better shape than initially thought.

Tesco’s share price has been rising since June 2016, and even though the figures this morning were good, the acid test will be if the stock can clear and hold above 220p – a significant level in recent years.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.


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