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“Every little helps” as Tesco lifts guidance

When Tesco reported in June the supermarket said it was optimistic it would be able to deliver the same level of adjusted operating profit as last year, despite the ongoing pressure on its margins, while keeping retail free cash flow in the region of £1.4bn to £1.8bn. Today’s H1 numbers has seen the supermarket raise this guidance, pushing the shares higher in early trading.

In September, the UK’s number 1 supermarket announced it was freezing up to 1,000 items until next year as it looks to maintain the gap to its rivals. Supermarkets are also having to contend with a “shrinkage” epidemic as incidents of shoplifting soar.

Today’s H1 numbers have seen the UK’s number 1 supermarket report an 8.9% increase in total group sales to £30.75bn, and a 14% rise in adjusted operating profit of £1.48bn, comfortably beating forecasts of £1.42bn.

Statutory profits for H1 after tax rose to £929m, a decent increase on last year’s £252m, though this was impacted by a -£579m impairment charge which dragged the H1 number lower.

The increase in profits has been driven by a laser-like focus on costs with the supermarket saying it remains on target to cut £600m of costs by year end.

All areas of the business appear to be performing well, with the UK and Ireland business leading the way with an 8.4% increase in like for like sales.

The Booker business also performed well with a 7.5% increase in sales to £4.7bn, with the only laggard being the Central European business which saw a 0.9% gain in like for like sales.

The improvement has been driven predominantly by the grocery business which saw a 10.6% increase while clothing sales fell by -4.8%, with Tesco saying that they had improved their market share by 30bps to 27.2%, with the online business also performing well, with a 10% rise in sales which rose to £3bn.

Not surprisingly given how high inflation has been over the past 12 months, the value of the average basket size rose by 5.2% to £98, however this is still well below underlying food price inflation which serves to indicate that the supermarket is absorbing some of the costs of higher prices.

Tesco went on to say that food price inflation has been easing and they expect it to continue to do so over the second half.

They went on to raise their expectations for full year profit to between £2.6bn and £2.7bn while expecting to generate retail FCF of between £1.8bn and £2bn, up from their previous estimate of between £1.4bn and £1.8bn. 

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