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Tesco delivers but warns on outlook

Tesco shelves

In the last 12 months the Tesco share price has stood out as meeting the challenges facing the wider sector, as the UK economy faces the biggest cost of living squeeze in recent memory.

Tesco share price slides

Tesco's share price has seen some decent gains from a year ago, however since the peaks in January shares have slipped back on concerns over rising costs and slimmer margins, and the shares are down over 5% in early trading following the release of today's annual figures.

In Q3, Tesco was able to grow group sales by 2.4% on a like-for-like basis, compared to a year ago. UK retail, unlike most of its peers, saw an increase of 0.2%, and though this was below expectations of 0.6%, this was still an impressive performance when compared to the tough comparatives of last year, and on a two year basis this was higher by 6.9%.

Its Booker operation stood out with an in excess of 16% increase in sales on both a one and two year basis, as the reopening of restaurants, cinemas, bars, and catering helped to boost the numbers, despite the disruption of December, and could also be a key contributor in Q4 as the UK’s number one food retailer reinforces its position at the top of the UK food chain.

As we look at today's full-year results, the UK’s number one food retailer saw group sales excluding fuel rise 2.5% to £54.77bn, while adjusted operating profit beat expectations, coming in at £2.83bn, a rise of 58.9%. Free cash flow surged by almost 70% to £2.28bn. Including fuel sales, group revenues rose 6% to £61.34bn, with fuel sales rising 48% as people moved about more relative to 2020 when a lot of the population was locked down.

Today’s numbers have been an impressive performance across the board, with UK retail seeing a 0.4% rise in like-for-like sales, while the reopening of the hospitality sector helped its Booker operation grow like-for-like sales by 15.3%. 

Cautious outlook

Although good news for shareholders, with Tesco undertaking to pay a final dividend of 7.7p a share, management were cautious about the outlook going forward. For 2023 adjusted operating profits are expected to come in between £2.4bn to £2.6bn, a modest decline on today’s numbers. This shouldn’t come across as too surprising when you consider today’s CPI number showed that inflation surged in March to 7%, and we haven’t even taken into consideration the various price and tax rises that are expected to hit consumers' wallets in April.

Tesco has pledged to continue its Aldi price match scheme and extend it to 650 lines, along with various Clubcard promotions. This determination will in turn keep pressure on margins, with the likes of Aldi and Lidl likely to keep the pressure on the whole sector, with Tesco's peers of Sainsbury's, Asda and Morrisons facing similar challenges.

Tesco has already pledged to increase staff wages in its efforts to retain service levels, raising salaries by 6%, while rising fuel prices are likely to increase the costs of maintaining its delivery and logistics operations. The supermarket is also undergoing a three-year cost-saving programme, as it looks to cut £1bn by repurposing space in store, closing its Jack’s brand, and improving its procurement processes.

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