Tesco: Supermarket giant’s profit beats City expectations but ‘trolley wars’ hit outlook
Supermarket giant Tesco has beaten profit expectations as it continues to speed ahead in the competitive UK grocery market, but it warned that high competition will affect profit next year.
Tesco shares slumped more than seven per cent in early deals.
The UK’s biggest supermarket told markets this morning that group adjusted operating profit rose 10.9 per cent at constant rates, to £3.13bn.
Analysts had expected group adjusted operating profit of £3.07bn for the year to February.
Life-for-like sales rose 3.1 per cent, with sales in the UK up four per cent year on year.
Tesco has seen strong growth under current boss Ken Murphy, particularly through its Clubcard loyalty programme and Aldi price match scheme.
Industry experts also predicted revenue of around £70bn for the year, citing stronger sales volumes from shoppers.
Tesco just missed this target, reporting £69.9bn in revenue, up 2.5 per cent on the year before. Post-tax profit rose to £1.6bn, up 36.7 per cent year on year.
“We have invested in bringing great prices to our customers throughout the year. Our continued focus on value and quality, coupled with market-leading availability, has contributed to another year of increased customer satisfaction and our highest market share for nearly a decade,” CEO Ken Murphy said.
Tesco’s market share rose by 0.67 per cent to 28.3 per cent, reaching its highest level since 2016.
Tesco expects lower profit next year amid ‘trolley wars’
The supermarket expects group adjusted operating profit of between £2.7bn and £3bn next year, a drop on this year’s profit.
“In the last few months, we have seen a further increase in the competitive intensity of the UK market.
“We are committed to ensuring that customers get the best value in the market by shopping at Tesco and we see further opportunities to protect and strengthen our competitiveness,” the company said.
Tesco’s share price has been under pressure from fears of a price war between the major UK supermarkets.
Asda, which has seen a declining market share over the past year, recently made waves by talking of the ‘war chest’ he had to spend on turning around the grocer.
It sparked a sell off in listed grocer Tesco and Sainsburys, with billions of pounds wiped off their stock market value.
“Away from the US tariff backdrop, Tesco has a price war of its own to fight,” Dan Lane, lead analyst at Robinhood UK, said.
“With Asda ready to flirt with some pyrrhic pain in the short term, it’s unlikely to overtake Tesco’s 28 per cent market share but denting it could well be on the cards.
“Pricing pressures are clearly surfacing and might just get worse over the summer before they get better,” Lane said.
John Moore, senior investment manager at RBC Brewin Dolphin, said: “This is another set of strong results across the board for Tesco.
“The UK supermarket sector has long been highly competitive, but there are indications that is intensifying – most notably with Tesco expecting operating profits to be lower next year, well below expectations.
“Nonetheless, a further share buyback and double-digit increase to this year’s dividend suggest management is confident of navigating the challenges that may lie ahead. With a solid balance sheet, clear strategy, and coherent proposition, Tesco is in as good a position as it can be to do so.”
‘Inflationary headwinds’
Alongside some of the UK’s biggest retailers, the supermarket warned the Treasury in February that hundreds of thousands of jobs are at risk in the retail sector due to unsustainable cost hikes this year.
“Despite inflationary headwinds, we are committed to ensuring customers get the best possible value by shopping at Tesco, and see further opportunities to strengthen our competitiveness,” Murphy added.
Tesco will have to pay an extra £235m a year due to the change in employers’ national insurance contributions (NICs) announced last year. The higher tax came into force at the beginning of the month.
The company, like other retailers, also faces higher costs from increased business rates and an increase in the minimum wage.