Tesco shares rise despite profits halving

Profits at Tesco halved as inflationary pressures took hold at the supermarket chain and a non-cash impairment charge hit operating profits. The retailer saw full-year pre-tax profits fall by 50.8% to £1 billion (from £2 billion last year). However, the shares rose 2% on the day of results.

Revenues grew by 7.2% to £65.8 million but the company was hit by rising costs, such as increased supplier costs and wage hikes, and a £982 million non-cash impairment charge relating to its property assets. Meanwhile, Tesco has been under pressure to keep costs down for customers and managed to grow market share, boosted by its Aldi price match and Clubcard price programme.

Tesco: tough year ahead

“It’s been an incredibly tough year for many of our customers, and we have been determined to do everything we can to help,” chief executive Ken Murphy told investors. “Our results reflect our continued investment in delivering great value and quality for our customers, whilst at the same time looking after our colleagues. This is despite unprecedented levels of inflation in the prices we have paid our suppliers for their products, and the cost of running our own operations.”

This year will continue to be tough for the retailer, however. In terms of outlook, Tesco says that it expects retail adjusted operating profits to be “broadly flat” in 2023/24, while retail free cash flow is forecast to come in within a target range of £1.4 billion to £1.8 billion. Meanwhile, adjusted operating profit at Tesco Bank is expected to be between £130 million and £160 million.

Tesco: Share buyback programme sign of confidence

Nevertheless, the retailer demonstrated its confidence with a £750 million increase to its share buyback scheme and Murphy expects inflationary pressures to ease. During the period, 91 new stores were opened and online sales remain 60% ahead of pre-pandemic levels.

“We will continue to prioritise investment in our customer offer whilst doing everything we can to offset the impact of ongoing elevated cost inflation,” he added.

Tesco has made £550 million of cost savings so far and says it is on track to generate £1 billion in savings by next February. Meanwhile, the company bought the Paperchase chain in January this year and its products are to be launched in Tesco stores later this year.

Zoe Gillespie, investment manager at RBC Brewin Dolphin said the buyback scheme extension was evidence that the retailer was “in good shape.”
Analysts at brokers Jefferies recently upgraded their price target on Tesco shares to 310p from 260p and maintain a buy recommendation.

At 268.1p, the shares have had a good run since July last year but are still trading below their five-year highs of 304p and the company remains well-positioned among its peers in any downturn.

Take your position on 17,000+ shares with the UK’s No.1 platform.* Learn more about trading or investing in shares with us, or open an account to get started today.
* Best trading platform as awarded at the ADVFN International Financial Awards 2022