Tesco shares volatile as profits soar

Despite some volatility, Tesco (LON: TSCO) shares have been rising since mid-October 2022, and were up by 6% during intraday trading yesterday — though have now fallen back to 283p — after releasing positive full-year results alongside an increased dividend and optimistic future outlook for this financial year.

Remember, past performance is not indicative of future returns.

Tesco share price: full-year results

Tesco reported strong sales performance, with retail like-for-like sales up by 6.8% year-over-year. Statutory revenue rose by 4.4% to £68.2 billion, leaving retail adjusted operating profit up by 10.9% at constant currency rates to £2.8 billion.

However, adjusted operating profit in non-key market Central Europe halved to just £90 million, primarily ‘driven by cost inflation headwinds and regulatory actions in Hungary.’

Statutory operating profit doubled to £2.8 billion, reflecting the £982 million non-cash impairment charge of the prior year compared to the £28 million net release in this year. Meanwhile, net debt fell by £729 million due to strong cash flow and the Bank special dividend of £250 million, leaving Tesco’s net debt/EBITDA ratio at 2.2x.

In terms of shareholder returns, £750 million of shares have been bought back during the financial year, and the retailer proposed a final year dividend of 8.25p, with a full year dividend of 12.1p — an increase of 11% year-over-year.

For context, Tesco has now bought back £1.8 billion of shares since October 2021, and plans to buy back another £1 billion over the next 12 months.

Where next for Tesco shares?

CEO Ken Murphy enthuses that ‘customer perception of the quality of our products is growing ahead of the market and we continue to win customers from premium retailers, with sales of Tesco Finest now exceeding £2bn. We have strong momentum in our business, and are encouraged by signs of improving consumer sentiment.’

For the FY24/25 year, Tesco expects retail adjusted operating profit of at least £2.8 billion, alongside retail free cash flow within a range of £1.4 billion to £1.8 billion. Capital expenditure was £1.3 billion in the year and is expected to rise slightly to £1.4 billion in this year. The FTSE 100 retailer has also previously announced plans to sell the banking operations, which will be completed in H2 2024, generating net £700 million.

The large statutory operating profit drew some ire from Unite general secretary Sharon Graham, who argued that the business was ‘raking in mountains of cash while families struggle to put food on the table because of sky high prices.’ However, Murphy noted ‘we have worked hard to reduce prices and have now been the cheapest full-line grocer for well over a year.’

For context, the Competition and Markets Authority ruled in July 2023 that rising food costs were not driven by weak competition among shops and had not been passed on in full to shoppers. CPI inflation was above 5% for much of 2023, with food inflation specifically into the double digits for much of the year.

Further, 220,000 staff will share a £70 million ‘thank you’ payment, equivalent to 1.5% of annual pay, with a full-time shop worker expected to receive about £300.

Bloomberg Intelligence global retail analyst Charles Allen noted that while the results were ‘broadly in line’ with expectations, they had been ‘just a shade weaker than anticipated.’

While the FTSE 100 business expects to capture a similar retail adjusted operating profit in this financial year, it faces new challenges. The higher minimum wage, in addition to the battle for retail staff, may see costs rise — while slowing inflation could see increasing sales volumes become a higher priority.