5th Oct 2022 14:34
(Alliance News) - Tesco PLC's shares were coming under pressure in London on Wednesday, with investors unhappy with its interim update - showing the firm is struggling to cope with cost inflation.
Shares were down 2.8% at 204.03 pence, taking the total drop in 2022 to 31%.
AJ Bell investment director Russ Mould said Tesco is "not immune" to the cost-of-living crisis in the UK.
"In an environment where consumers are being assailed from all sides by mounting energy bills, rising interest rates and higher costs for all manner of goods and services you are much better off selling essential staples than discretionary items," he said.
"Tesco has to try and offer attractive prices to stave off the competitive threat from the German discounters Aldi and Lidl and while it can rely on its purchasing power to some extent, it is still having to sacrifice margins to meet this challenge."
Tesco reported steady growth in interim trading, but profit was stung by a "hefty impairment charge", which is the cost of some price reductions due to increased competition from low-budget grocers Aldi and Lidl.
For the 26 weeks ended August 27, the supermarket said revenue rose 6.7% to GBP32.46 billion from GBP30.42 billion the year before.
Fuel sales surged 39% to GBP4.28 billion from GBP3.09 billion. Excluding fuel sales and VAT, revenue rose 3.1%.
Pretax profit, however, shrunk 64% to just GBP413 million from GBP1.14 billion.
It recognised a GBP626 million non-cash non-current asset impairment charge "related to an increase in discount rates this year", it explained.
Richard Hunter, head of Markets at interactive investor, said: "These are tough times for many, and Tesco is not alone in feeling the resultant strain.
"As the pressure increases on an increasingly cost-conscious and cash-strapped consumer, the notoriously competitive sector in which Tesco operates has moved up another gear. Against that backdrop Tesco is suffering rather less than most of its competitors. Its focus on offerings such as the Aldi Price Match, Low Everyday Prices and Clubcard Prices have maintained its dominant market share."
He noted Tesco's retail sales have grown by 3.2% on a like-for-like basis, and by 12% compared to pre-pandemic levels - which "underlines" the progress the grocer has made.
In the first half, adjusted operating profit of its retail unit fell 10% to GBP1.25 billion from GBP1.39 billion.
"Inevitably, the wider economic backdrop is leaving its mark and Tesco recognises the uncertainty of the remainder of the year in a cautious outlook statement. While the company is maintaining full-year profits guidance, albeit at the lower end of the previously announced range, the emerging cost of living crisis and the well reported pressures of inflation are taking a toll," Hunter added.
The grocer proposed an interim dividend of 3.85 pence per share, a 20% increase from 3.20p a year before.
"We saw significant cost inflation and some impact from a step up in own brand sales versus branded ranges as customers took steps to manage the pressure on their household budgets," Tesco said.
It said the acceleration of its Save to Invest programme contributed to the improved performance. It maintains annual profit guidance provided in April, "albeit towards the lower end".
For financial 2023, Tesco has previously guided for retail adjusted operating profit between GBP2.4 billion and GBP2.6 billion - which would be below the GBP2.65 billion registered in financial 2022.
Matt Britzman, equity analyst at Hargreaves Lansdown, said: "Supermarkets are no strangers to dealing with cost-of-living pressures, there's been an all-out price war in the industry for some years now. Amongst the larger players, Tesco's arguably been one of the standout businesses in the battle against low-cost outfits but pressures on consumer spending can only build for so long before something must give.
"That pain's slowly starting to feed into performance, as shopping behaviours continue to normalise from bumper levels seen over the pandemic and inflation keeps costs high – that’s meant full year profit guidance got a slight downgrade toward the bottom end of the previous range."
AJ Bell's Mould said the market is "feeling nervous" due to the uncertain outlook offered by the supermarket.
"On the plus side, Tesco is entering a difficult period with a decent market position and solid balance sheet," he continued. "However, it is hard to see the coming months as anything other than extremely difficult, with cost inflation affected not only by higher energy and labour costs but also the cost of importing goods from overseas thanks to lower sterling."
By Paul McGowan; [email protected]
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