Tesco profits slide 28% despite recovery in sales

Tesco profits dropped despite a third consecutive quarter of sales growth. Picture: Graham Smith
Tesco profits dropped despite a third consecutive quarter of sales growth. Picture: Graham Smith
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Supermarket giant Tesco saw pre-tax profits fall sharply in the first half of the year but signs of recovery have continued to emerge as it notched up a third quarter in a row of like-for-like sales growth.

The UK’s biggest grocer also revealed underlying earnings in the period had seen a 60 per cent rise, prompting chief executive Dave Lewis to say that the business is stabilising after a torrid two years. But he cautioned it was “just the start” of the group’s recovery and that the market remains “challenging and uncertain”.

Shares jumped by as much as 13 per cent to their highest level in more than a year as the group revealed a 0.9 per cent rise in UK like-for-like sales in the second quarter.

But the group counted the cost of its fightback amid a fierce supermarket price war, with half-year profits falling by 28.3 per cent to £71 million for the six months to 27 August.

Lewis, who has been leading an overhaul since he took over from Philip Clarke in 2014, outlined aims to slash costs by £1.5 billion over the next three years to help boost margins and return the group to bottom-line profit growth.

READ MORE: Tesco Bank jobs at risk under Edinburgh office move

Around £550m of these savings will come from changes to how its stores operate, including cutting back further on 24-hour trading and restocking store shelves during the day rather than at night. Lewis said the plans were not about cutting jobs.

The half-year figures mark a turnaround after a difficult couple of years, when Tesco posted the biggest loss in its history and was hit by a £326m accounting scandal.

On an underlying basis, Tesco’s UK and Ireland first-half earnings more than doubled to £389m from £164m a year earlier, while group earnings lifted 60.2 per cent to £596m.

Retail analysts at Bernstein said it was a “fantastic set of results for Tesco, delivering on all aspects of the UK recovery”.

They noted Tesco’s UK like-for-like sales by volume and transaction have grown for 21 months straight, showing “the hallmarks of a retail recovery”.

But Laith Khalaf of Hargreaves Lansdown said the group’s pension deficit, which has grown to £5.85bn, was a cause for concern.

“The green shoots of recovery continue to sprout at Tesco, but the mammoth in the room is the pension deficit which has more than doubled in just six months, thanks largely to loose monetary policy pushing bond yields down to exceptionally low levels,” he pointed out.

“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.”

The results come amid a high-profile court case involving three former Tesco executives. Carl Rogberg, Chris Bush, and John Scouler denied charges in relation to the 2014 accounting scandal when they appeared in court last month.

At the group’s Edinburgh-based Tesco Bank operation, statutory operating profits plunged by almost three-quarters to £22m, down from £86m a year earlier, with earnings hit by a £45m increase in customer redress provisions and £22m of restructuring costs.

Tesco Bank, led by chief executive Benny Higgins, said: “This charge reflects an acceleration in the residual amortisation of the group’s insurance platform, redundancy costs and asset impairment related to the business simplification, and property-related costs relating to the early exit from the group’s office in central Edinburgh.

“The group’s insurance platform will be replaced in 2017 with a new platform offering greater functionality for insurance customers. A further charge of approximately £10m, relating primarily to the accelerated software amortisation, is expected in the second half.”

Shares in Tesco finished the day up 9.75 per cent, or 18.4p, at 207.1p.

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