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Tesco shares jump as sales continue to recover

Tesco shares jump as sales continue to recover

Shares in the supermarket giant Tesco have jumped 10% after it reported another rise in sales, and said it would hit its full-year profit target.

Like-for-like sales, which strip out the impact of new store openings, grew 1% in the half-year to 27 August, and in the UK they rose by 0.6%.

The firm said it had made “significant progress” in stabilising the business.

The retailer is still recovering from an accounting scandal as well as reporting a record loss last year.

Tesco’s shares were trading up more than 10% at 208.65p by mid-morning, a 14-month high.

‘Ambitious’

“Whilst the market is uncertain, we have made significant progress against the priorities we set out two years ago, stabilising the business and positioning us well for the future,” Mr Lewis said.

In an interview with the BBC he added: “We are winning back shoppers who may have gone elsewhere. You’ll see in the results that 200,000 more people shopped at Tesco than a year ago”.

Sales have now risen for three quarters in a row since its nadir last year, when it struggled with stiff competition from discount retailers, as well as rebuilding trust after the accounting scandal.

Tesco said profit before tax fell 28% to £71m for the half year, mainly due to one-off costs, but the group said it was on track to make £1.2bn in full-year annual operating profit.

Tesco shares jump as sales continue to recover

Mr Lewis also unveiled a new target for the group’s operating margins to be between 3.5% and 4% by the end of its 2019-20 financial year. In the first half of the year margins stood at 2.18%.

It plans to achieve that in part through another £1.5bn of cost reductions through increasing investment in its stores and network distribution.

Richard Hunter from Wilson King Investment described that target as “ambitious”, saying it “would be particularly hard won in such a fiercely competitive industry”.

Lower prices

Prices at the supermarket continue to fall, with goods in a typical customer basket costing 6% less than in September 2014, the company said. It has also reduced multi-buy promotions – down 27% compared with last year.

“The market is tough for big retailers,” Mr Lewis told the BBC, although he added that this was “good news for customers”.

Food prices have been falling for more than two years. Mr Lewis said that while there were “some pressures” coming into the market, in the form of higher commodity prices and the fall in the pound, the company would try to absorb them rather than pass on costs to consumers.

Jasper Lawler from CMC Markets said: “Tesco has invested heavily in reducing prices in the last two years, and has gradually reduced its customer exodus to the discounters Aldi and Lidl.

“Both the German chains are still rapidly gaining market share but less of it is coming from Tesco, with Walmart-owned Asda notably falling out of favour.”

Overall, analysts said the results showed improvement but pointed to the pension deficit, which has doubled in six months, to £5.6bn, as an area of concern.

Tesco shares jump as sales continue to recover

The widening of the deficit is due mainly to ultra-low bond yields, which have increased pension deficits for most companies.

“For now, the ballooning of the deficit is simply a problem on paper, but in March of next year, Tesco undergoes its triennial pension valuation, at which point the deficit might start to harden into a cold hard cash-call for the supermarket,” said Laith Khalaf from Hargreaves Lansdown.

Mr Lawler added that the pension deficit could delay a return to the company paying a dividend.

In order to restore its profitability, Tesco has been selling businesses not related to the main operation – such as the garden centre chain Dobbies, Giraffe restaurants and Harris and Hoole coffee shops.

The accounting scandal has not yet been fully laid to rest. Last month, three former executives were charged with fraud in relation to it, which they deny.

Separately, the company is also facing legal action from a group of investors who claim to have lost £150m due to the supermarket’s 2014 accounting irregularities scandal.

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