13th Apr 2023 10:43
(Alliance News) - Robust inflationary pressures in the UK ate into Tesco PLC's annual profit, the grocer reported on Thursday, despite boasting a consensus-topping revenue figure.
For the year ended February 25, revenue - excluding VAT but including fuel - rose 7.2% to GBP65.76 billion from GBP61.34 billion. The figure topped company-compiled consensus of GBP65.72 billion.
However, Tesco reported pretax profit of GBP1.00 billion, down 51% from GBP2.03 billion the year prior.
Adjusted operating profit fell 6.9% to GBP2.63 billion from GBP2.83 billion. It topped company-compiled consensus of GBP2.61 billion.
"Holding on to customers in a cost-of-living crisis is no joke, even for a company with the scale and purchasing power of Tesco. The company is having to take a hit on profit and margins to keep the tills ringing and customers heading through its doors," said Russ Mould, investment director at AJ Bell.
"This hit is even more acute because Tesco is itself exposed to higher labour and energy costs. Online groceries, which finally started to make a positive contribution during the pandemic will also be heavily impacted by smaller basket sizes as the costs for Tesco of delivering the goods don't change in proportion to the amount ordered."
Retail adjusted operating profit fell 6.1% to GBP2.49 billion from GBP2.65 billion. The figure landed at the top end of its GBP2.4 billion and GBP2.5 billion guidance range.
AJ Bell's Mould suggested that Tesco seemed to be making the calculation that it can absorb some pain now to maintain "and even improve" its market share, particularly from discounters like Aldi and Lidl, hoping to emerge in a stronger position once the economic outlook starts to pick up.
"What Tesco doesn't want to be drawn into is a race to the bottom on prices, which cuts margins right to the bone for a prolonged period. For now, this is the tricky tightrope the supermarket must walk, while rewarding investors for their patience with steady dividends," the AJ Bell analyst cautioned.
Tesco maintained its yearly dividend and once again announced a GBP750 million share buyback on Thursday. Tesco declared a final dividend of 7.05 pence per share, down 8.4% from 7.70p. Its full-year payout was maintained at 10.90p per share, however.
Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown, said that investors in Tesco will be watching margins closely.
"It was only a few years ago when we saw prolonged single digit margins in the grocery sector as there was a race to the bottom on prices," she said. "Limiting a repeat of that will depend on when consumer resilience bounces back. Food costs may struggle to come down until energy prices temper, which could slow progress on that front."
For Lund-Yates, Aldi price matches and other similar campaigns were a stark reminder of how stiff competition is within the UK supermarket sector. "By some trains of thinking, if you're having to name your competitor, they've already won," she added.
Tesco said it is "proud" of its annual performance, and has a strategy in place "to keep winning". The firm said it maintained its "strong" UK grocery market share at 27.3%. It is the "only full-line grocer to grow share versus pre-pandemic", it said.
Looking ahead, Tesco said it expects a "broadly flat" retail adjusted operating profit in the new financial year. It expects retail free cash flow within its GBP1.4 billion to GBP1.8 billion target range. At best, this would be a 16% fall from GBP2.13 billion in financial 2023.
Darren Shirley and Clive Black, research analysts at Shore Capital, said they will reflect on the results and Shore Capital's forecasts, but noted that with a "small pretax profit beat", which gives Tesco a higher base, and "smoke signals to the potential for a flat FY24", they see "scope for a modest nudge up" to their pretax profit and earnings per share estimates.
"So, in tough markets set against a challenging UK consumer backdrop in particular, we see Tesco toughing it out well," they concluded.
Shares in Tesco were 2.2% higher at 273.20 pence on Thursday morning in London. Over the past 12-months, the stock is up 3.0%.
By Heather Rydings, Alliance News senior economics reporter
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