Tesco share price falls despite taking the fight to supermarket rivals with rising revenues
Tesco aimed to cement its status as the UK’s largest supermarket today with rising revenue and operating margins as it fights off competition from merging rivals and cheaper competitors.
However, shares fell more than seven per cent in morning trading as the retailer missed a key profit metric.
The figures
The retail giant posted a 13 per cent year-on-year rise in group sales to £28.3bn for the first half of its financial year, while revenue including fuel grew 12 per cent to £31.7bn.
Group operating profit grew 24.4 per cent, but only to £944m, missing analyst expectations of £978m.
Read more: Aldi may drop prices to compete with Tesco challenger Jack's
Pre-tax profit ticked up two per cent to £564m for the period.
Basic earnings per share fell from 5.13p last year to 4.37p for this period, but Tesco hiked up its dividend per share by 67 per cent to £1.67.
UK and Ireland like-for-like sales grew 3.8 per cent over the first half of the year, and were up 4.2 per cent in the second quarter, a combination of growth of around 2.5 per cent in Tesco sales and almost a 15 per cent hike in sales of Booker, which Tesco bought in March for £4bn. The wholesaler contributed £97m of profit.
Why it’s interesting
Tesco reported the results at a time when its retail operation faces pressure on all sides. While the giant has a 27.4 per cent market share, an impending merger between Sainsbury’s and Asda would give them 30.7 per cent.
Meanwhile boss Dave Lewis last month launched Jack’s, a budget chain competitor to Aldi and Lidl, with 10-15 stores opening over the next six months. Aldi, however, had already vowed that Jack’s won’t beat its prices, while announcing an expansion that would bring its UK presence to 1,200 stores by 2025.
Tesco was also hit with a £16.4m fine for a cyber attack on its banking arm, but the bank still managed to boost revenue by six per cent to £89m.
The supermarket is midway through a business rebrand, and most of the way through launching its ‘Exclusively at Tesco’ range of products. However, this didn’t stop like-for-like sales in central Europe and Asia both dipping, falling 1.5 per cent in Europe as Poland implemented a ban on Sunday trading.
But its purchase of Booker in March delivered £16m in synergies in the first half, and is on track to save Tesco £60m by the end of the year.
What Tesco said
Chief executive Dave Lewis said:
"We have made a good start to the year. The step up in the second quarter is driven mainly by the UK & Republic of Ireland and delivers our eleventh consecutive quarter of growth.
“At the same time, we have made further strategic progress. We completed our merger with Booker in March and are delighted with performance so far. We announced a strategic alliance with Carrefour in July which goes live this month. And we are now more than half-way through the biggest own brand re-launch in our nearly 100-year history, including a significant investment in over 300 new ‘Exclusively at Tesco’ products at market-leading prices.
“We are firmly on track to deliver our medium-term ambitions and are continuing to improve the quality and value of our offer for customers in all of our markets. In doing so, we are well-positioned to deliver strong, sustainable returns for shareholders."
Read more: Bumper summer and Booker buyout set to boost Tesco profits
What analysts said
Richard Lim, chief executive of Retail Economics, said: “These are solid results which have no doubt been buoyed by the extraordinarily hot summer.
“The unwavering focus on cost reduction, productivity improvements and the expansion of own-label underlie the retailer's solid performance. While the integration of Booker remains in embryonic stages, there is still considerable upside to come. And with the launch of Jack’s, the newly formed group is taking the fight right to the heartland of the discounters.”