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Tesco half-year profits down by 55 per cent

Kit Klarenberg
Written By:
Kit Klarenberg

Shares in Tesco fell by 3 per cent in early trading after the supermarket giant reported another fall in profits.

Profits for the first half of the financial year were £354m, down 55 per cent on the same period last year.

Like-for-like sales in the UK were down 1.1 per cent in the second quarter, an improvement on the first quarter’s 1.5 per cent fall. International sales were up 1 per cent.

Chief executive Dave Lewis said Tesco had achieved an “unprecedented” level of change in its business over the last 12 months, which is “working”.

“The first half results show sustained improvement across a broad range of key indicators.

“In the UK, we continue to improve all aspects of our offer for customers, resulting in volume growth which is allowing us to create a virtuous circle of investment. Our transformation programme in Europe has accelerated growth and reduced operating expenses, and in Asia, we have gained market share in challenging economic conditions.

“We have concluded our portfolio review with the sale of Homeplus, our business in Korea, enabling us to take a significant step forward on our priority of strengthening the balance sheet. Further progress will be driven by continuing to increase the level of cash generated from our retained assets.”

In April, Tesco reported its worst results in history, a statutory pre-tax loss of £6.4bn for the year to the end of February. The supermarket is still under investigation by the Serious Fraud Office (SFO) for overstating profits.

Analyst reaction 

Analyst reaction to the results has been broadly positive.

Russ Mould, investment director at AJ Bell, said the figures “lived down” to low expectations, but he believed the resulting fall in Tesco’s share price did the company a “small disservice”.

“[Tesco’s] market remains very difficult…the statement features no further profit warning or nasty surprises.

“Performance in the UK and Republic of Ireland improved a little while international showed marked improvement. Some may be disappointed by the absence of talk of further asset sales but the stronger showing from the overseas businesses does suggest it could be easier to sell them for a better price in the future.”

Richard Hunter, head of equities at Hargreaves Lansdown, said Tesco looks “much healthier” than a year ago.

“The more obviously positive pockets include the ongoing strengthening of the balance sheet, transactions and volumes holding up well although being pressurised by food price deflation, some international business growth and a renewed focus on cash generation,” he noted.

“The group is changing the way it deals with its pension deficit and lease commitments, while cost-cutting measures and a crimped capital expenditure line are also helpful. Less positively, there is some concern around Tesco retaining its retail data arm in the absence of a willing buyer, while the lack of an interim dividend is prudent but disappointing.

“The somewhat mixed news of progress is reflected in a share price which has dipped 21 per cent over the last six months, yet has managed a 9 per cent gain over the last year. There is clearly much more to be done, but progress to date is laudable and may result in the market consensus of the shares as a strong hold coming under some positive pressure.”

Graham Spooner, investment research analyst at The Share Centre, said the results highlighted the problems the supermarket sector, as well as the group, have had over the past two years.

“The retailer did beat analyst consensus expectations, as operating profits more than halved in what is proving to be a challenging turnaround,” he said.

“The retailer has managed to reduce the rate of falling sales, a mild positive for investors. Furthermore, Tesco highlighted it remains on track to deliver £400m of annual cost savings.

“While fierce price competition and promotions are likely to remain a squeeze on margins, we recommend Tesco as a ‘hold’ for the patient investor. The company’s plans to re-focus its attentions on its core UK market are going to take some time and incur costs. For investors interested in the sector, we recommend Sainsbury’s as a ‘buy’.”