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Tesco share price: profits beat expectations, but rising costs offset increased sales

Tesco share price: profits beat expectations, but rising costs offset increased sales

Even its position as one of the few businesses still open in the current lockdown situation, and keeping the nation fed, hasn’t spared Tesco's share price in the latest stock market sell-off, which has seen billions knocked off company valuations.  

For Tesco, 2019 had been a decent year anyway, consolidating around its core competencies of selling groceries, as well as being a key supplier to pubs, restaurants, and independent convenience stores, by way of its Booker acquisition, so the 10% Tesco share price decline since February needs to be set in context of a rise of 14% since the beginning of 2019.

One of the few winners of the market turmoil of the past few weeks have been the supermarkets, their shelves stripped bare by shoppers' panic buying as the coronavirus pandemic swept across the UK, with pasta, paracetamols and toilet rolls flying off the shelves faster than they could be put there.

Tesco focuses on core business

With competition from Aldi and Lidl eating away at its margins, outgoing CEO Dave Lewis took the decision to focus on the core business, bolstering the balance sheet by selling off its mortgage book to Lloyds for £3.7bn, as well as announcing the disposal of its Thai and Malaysia business for $10.8bn, with £5bn of that set to be paid out to shareholders by way of a special dividend.

There was some speculation that management might face pressure to rethink this payment, given the current environment around paying dividends. It appears that management have decided to proceed, given this deal took place before the pandemic crisis hit. Management may have to field some difficult questions about this, given the tax breaks being given to the sector. Some £2.5bn is also being paid into the company pension scheme to eliminate the deficit.

To mitigate any criticism that might come its way over the intention to pay the dividend, the first part of this morning’s statement is given over to a list of actions the company is taking to support its customers, the communities it operates in, and its staff, who will receive a 10% bonus on the hourly rate of hours worked across the business.

Tesco reports solid annual figures

Today’s full-year numbers point to a business that is doing well, despite a disappointing Q4, and the numbers don't include the recent pandemic sales surge, but nonetheless show a business in decent shape. Operating profit came in at £2.52bn, a decline of 4.9% from last year, despite an increase in revenue of 1.3% to £64.8bn. On a pre-tax basis, profit came in at £1.96bn, better than estimates of £1.94bn. However, its operations in central Europe acted as a significant drag on the numbers, declining 10.1%,  

In line with a lot of businesses, Tesco declined to offer any guidance on what the current tax year was likely to look like revenue and profit-wise citing the increased uncertainty over consumer behaviour. Management also pointed to the challenges the business faced including the incurring of additional costs, as they recruit extra numbers to meet demand and cover absences, which has been estimated to be in the region of between £650m and £925m.

Despite any criticism coming its way, and in light of the tax breaks being afforded to the sector by chancellor of the exchequer, Rishi Sunak, who has suspended business rates, there have been calls for supermarkets to hand back their tax breaks due to the fact they have managed to remain open, unlike their general retail rivals.  

It is true that Tesco and its peers have benefited from their unique role in keeping the UK economy ticking over, as it works through the lockdown of the country, however this hasn’t come without risks to its staff who come into contact with the public on a daily basis, with all the challenges that entails in keeping the shelves fully stocked.

Record-high grocery sales

According to the most recent Kantar numbers, in March, supermarkets had their biggest month on record for grocery sales, however pressure on its staff has also increased. In a separate report by Nielsen, sales of frozen food in the sector soared by 84%, while the sale of beer, wine and spirits also rose sharply, as bars and restaurants were ordered to close.

Tesco's sales grew 5.5% last month, while independent retailers, of which Tesco’s Booker operation is a supplier, saw collective sales growth of 16.1%, as the whole food sector reported its best collective gains since October 2018. Tesco's share price has opened lower in early trading this morning, down almost 5%.


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