Tesco profits hit by massive Covid bill as online capacity set to double: reaction

Tesco has seen its profits fall by about a fifth after coronavirus costs amounting to the thick end of £1 billion offset buoyant sales.

The UK’s biggest retailer said pre-tax profits slid to £825 million for the 12 months to February, compared with £1.03bn the previous year.

Those earnings were weighed down by almost £900m in Covid-related costs and the supermarket giant’s decision to hand £585m in business rates relief back to governments on both side of the Border.

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It had benefited from a jump in demand for groceries during the pandemic, with more meals eaten at home amid restrictions on the hospitality sector and changes to working habits.

Despite a strong top-line performance, Tesco was hit by expensive physical distancing measures and additional staff costs during the pandemic. Picture: Andrew Milligan/PA Wire
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Group sales excluding fuel increased by 7 per cent to £53.4bn for the year, buoyed by soaring online sales.

Online sales leapt 77 per cent to £6.3bn in the UK as the retailer doubled delivery capacity to meet rising demand from housebound customers.

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Chief executive Ken Murphy said: “Tesco has shown incredible strength and agility throughout the pandemic. By putting our customers and colleagues first, we have built a stronger business.

“While the pandemic is not yet over, we’re well-placed to build on the momentum in our business.

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“We have strengthened our brand, increased customer satisfaction and improved value perception.”

The Edinburgh-based Tesco Bank operation posted a full-year operating loss of £175m, compared with a profit of £193m a year earlier as a result of a £295m goodwill impairment charge.

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The group held the full-year dividend at 9.15p per share.

Donald Brown, senior investment manager at Brewin Dolphin, said: “Tesco’s results reflect the sometimes tricky position that supermarkets found themselves in over the last year.

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“Although they have largely been able to trade through the last 12 months, this has come with significant extra costs; in Tesco’s case, leading to profits dropping by around one-fifth.

“The dividend remaining protected, albeit unchanged from last year, is a positive sign and suggests management are relatively confident in the medium-term outlook.”

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He added: “Tesco Bank remains a drag on performance and Booker will take time to return to pre-pandemic levels of activity, but there is generally good momentum across the business which places Tesco well for the recovery.”

Ross Hindle, an analyst at Third Bridge, noted: “Despite a strong top-line performance, expensive social distancing measures and additional staff meant Tesco incurred £892m in UK Covid-19 related costs.

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“Despite some home delivery hiccups Tesco held onto its market share during the pandemic, and should benefit as the UK economy continues to open up.

“Tesco is also expected to open 25 fulfilment centres over the next three years, doubling its online capacity to three million delivery slots per week, improving the group’s omnichannel presence.”

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Amisha Chohan, equity research analyst at Quilter Cheviot, added: “The next decade for Tesco and the whole retail and supermarket industry is about online.

“The 2010s was all about the growth in discounters, but with these now established Tesco will look to leverage its online capabilities to quash any further growth in the likes of Lidl and Aldi.”

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