Tesco shares rise on return to profit

Shares in Tesco rose 4% to 270.7p on Wednesday after the supermarket giant returned to profit for the half-year. Interim profits recovered to £1.2 billion from £396 million in 2023. Figures last year were hit by a non-cash impairment charge of £626 million.

For the half-year, group revenues rose 5% to £34 billion (from £32.5 billion in the same period last year), while like-for-like UK retail sales increased by 7.8%. Adjusted operating profits for the UK and Ireland rose by 17.2%, despite cost pressures.

Tesco’s ‘relentless focus on the customer’

“Our investments in value, and in improving more than 1,100 own brand products from pasta to fresh fish, are helping us to offer outstanding quality at great prices, all underpinned by market-leading availability,” chief executive Ken Murphy told investors.

“Customers are responding well, contributing to market share gains in store and online. We’re seeing the results at both ends of the basket, with strong growth in our Finest range as shoppers look to save by treating themselves at home, voting with their feet as they switch from premium retailers to Tesco.”

Murphy says that the company’s “relentless focus on customers”, along with its cost cutting programme, boosted its performance in the first half. Meanwhile, food inflation fell during the period and Tesco’s management expects this pressure to continue to abate during the second half of 2023. However, Murphy says he does not expect this to reduce Tesco’s appeal to shoppers as a discount supermarket and hit profitability.

Tesco ups its earnings forecasts

As a sign of confidence, Tesco also raised its earnings guidance for the full-year to adjusted retail operating profits of between £2.6 billion and £2.7 billion. The company also expects to deliver retail free cash flow of between £1.8 billion and £2.0 billion, ahead of its previous guidance of £1.4 billion to £1.8 billion.

During the period, the company’s banking division returned £250 million to the group via a special dividend, as profits there rose by 25% to £65 million. Meanwhile, Tesco is continuing its own £750 million share buyback scheme, with £503 million returned to shareholders in the first half.

Its cost-cutting programme also delivered savings of £290 million in the half, with a target to deliver a total of around £600 million by the end of the year, with cumulative savings expected to reach at least £1.1 billion.

Shares in the supermarket have risen 28% this year but they continue to benefit from Tesco’s appeal in the current cost of living crisis which, despite inflation falling, shows no sign of abating. Its Clubcard offering and Aldi Price Match continue to attract shoppers. Analysts at broker Jefferies think the shares could reach 310p.

Past performance is not a guide to future returns.