10th Apr 2024 09:47
(Alliance News) - Tesco PLC cemented its position as the UK's pre-eminent grocer, analysts on Wednesday said, after reporting that profit skyrocketed in its latest financial year as inflationary pressures reduced substantially.
Sophie Lund-Yates, lead equity analyst, Hargreaves Lansdown said: "Tesco has shown once again that it deserves its best-in-class crown," with the supermarket "seeing volumes pick up once more, which is a saving grace as inflation tempers."
Shares in Tesco rose 0.9% to 290.10 pence on Tuesday morning in London.
On Wednesday, The Hertfordshire-based supermarket chain said pretax profit surged to GBP2.29 billion in the financial year ended February 24, from GBP882 million a year prior.
Revenue climbed 4.4% to GBP68.19 billion from GBP65.32 billion. Cost of sales increased slower, by 2.1% to GBP62.84 billion from GBP61.52 billion.
The company announced a final dividend of 8.25 pence per share, bringing the total to 12.10p, up 11% from 10.90p paid for financial 2023.
On the back of the results, Tesco announced a new GBP1.0 billion share buyback programme to be conducted over the next 12 months, including GBP250 million funded by the special dividend paid to the group by Tesco Bank in August 2023.
Retail free cash flow totalled GBP2.06 billion, down 3% from GBP2.13 billion the year prior.
Chief Executive Ken Murphy said: "Inflationary pressures have lessened substantially, however we are conscious that things are still difficult for many customers, so we have worked hard to reduce prices and have now been the cheapest full-line grocer for well over a year."
Looking ahead, Tesco expects to generate retail free cash flow within its guidance range of GBP1.4 billion to GBP1.8 billion for the current financial year 2025, at least 13% lower than GBP2.06 billion generated for financial 2024.
Furthermore, the firm anticipates retail adjusted operating profit of at least GBP2.8 billion for financial 2025, up from GBP2.76 billion reported for financial 2024, which was 11% higher than GBP2.49 billion a year prior.
Citi retail analyst Nick Coulter highlighted a strong performance in the UK and the Republic of Ireland which delivered gains in both volume and value share, and absolute volume growth in the second half.
He said this came as Tesco continued to "drive value" into its customer proposition through the Aldi Price Match, Clubcard Prices and Low Everyday Prices.
He noted more "challenging" conditions in Europe where earnings before interest and tax of GBP90 million came in below consensus expectations of GBP115 million.
"We expect the quality of Tesco earnings and its continued FCF generation to be supportive to the shares," Coulter said.
Citi has a 'buy' rating on Tesco.
Richard Hunter, head of markets at interactive investor said the results cemented Tesco's position as the "pre-eminent grocer of the British aisles."
"Its appetite for lowering prices for customers is enabled by its sheer scale and strength, falling food inflation, and a significant cost reduction. In turn, this creates something of a virtuous circle, with more customers attracted by the likes of the group’s Aldi Price Match, Low Everyday Prices and Clubcard Prices."
"At the same time, it has also honed its upper end offering, with its Finest range continuing to take market share from its rivals."
Meanwhile, Hunter noted the hub of the business continues to "flex its muscles in a "notoriously competitive environment."
Retail like-for-like sales grew by 6.8%, including an increase of 7.7% in the UK, and the value and volume of market share increased once more to stand at 27.6% (and 34% for the online business), putting clear distance between its size and that of its nearest competitors, Hunter pointed out.
Hunter explained that following the sale of the majority of Tesco Bank to Barclays there was an additional special dividend of GBP250 million, while retail free cash flow of almost GBP2.1 billion enabled further moves to be made in strengthening the financial position.
Net debt was reduced to GBP9.76 billion from GBP10.49 billion to in the period, with shareholder returns also seeing the benefit, as Tesco announced a new share buyback programme of GBP1 billion and an increase to the dividend giving a projected yield of 4.2%, he pointed out.
Hunter described the group’s outlook as "cautiously positive, which even at this early stage sets the scene for outperformance as the year progresses."
"Given its position, it can be difficult for the group to continue to exceed expectations, but Tesco is showing few signs of fatigue as its presence weighs heavily on competitors," Hunter suggested.
By Jeremy Cutler, Alliance News reporter
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