Tesco to report a return to financial health
By Zoe Wood - Apr 11th 2017, 10:58
After £6.4bn loss two years ago the supermarket chain is set to announce bigger than expected jump in profits.
Tesco will this week reassure investors that its crisis years are behind it by reporting a bigger than expected jump in annual profits.
The chief executive, Dave Lewis, has alarmed some of the supermarket’s biggest shareholders by mounting a surprise £3.7bn takeover of Booker. But on Wednesday he will be able to provide some reassurance about the company’s financial health, with underlying profits set to exceed the £1.2bn figure penciled in by City analysts.
Macquarie analyst Sreedhar Mahamkali thinks Tesco is on track to bank £1.3bn for the year to the end of February thanks to cost-cutting and a more benign pricing environment after two years of falling food prices came to an end. “We expect a beat and look for a confident outlook,” said Mahamkali.
Last year Tesco made an operating profit of £944m but five years ago that figure was £4bn, which is why some investors are worried the purchase of Booker, the cash and carry company behind the Londis and Budgens convenience stores, will derail its recovery. Last month Schroders and Artisan Partners, which between them own 9% of Tesco, revealed they had both written to the Tesco chairman, John Allan, to ask him to pull out of the deal.
Lewis took the helm at Tesco in 2014 after a string of profit warnings under his predecessor, Philip Clarke. But the subsequent discovery of accounting irregularities forced him to embark on a major restructuring of the business, including the disposal of its South Korean chain Homeplus for £4bn. The shakeup culminated in a £6.4bn loss two years ago after the group slashed the book value of its property and stock.
Tesco is now close to drawing a line under the accounting scandal. Last month the company agreed to pay a fine of £129m to settle the Serious Fraud Office investigation. It also struck a £85m deal with the Financial Conduct Authority to compensate affected shareholders. On Monday Tesco’s lawyers will attend Southwark crown court to seek judicial approval for the deferred prosecution agreement (DPA) reached with the SFO. The proposed DPA relates to false accounting at its subsidiary Tesco Stores Limited between February and September 2014. Agreeing to pay a fine as part of a DPA is not an admission of wrongdoing but enables a company to avoid prosecution.
While analysts believe profits from Tesco’s overseas chains will miss expectations, that will be countered by a recovery in the UK, which is the retailer’s biggest and most lucrative market. The retailer has won back disillusioned British shoppers by focusing on lower prices, improving customer service and making sure its shelves are full. It has also fought back against discounters Aldi and Lidl with the introduction of a budget range of own-label “farm” brands.
Satisfied that the UK’s biggest supermarket chain is no longer in freefall, Lewis has set a target that by 2020 it will earn between 3.5p and 4p of operating profit for every £1 customers spend. The group currently makes 2.2p in the £1. To get there, Lewis is slashing £1.5bn from the company’s running costs by seeking to make its stores and distribution network more efficient. There was evidence of this programme last week when Tesco said 3,000 jobs were at risk as part of a shakeup that involves cutting night shifts for shelf stackers in some of its biggest supermarkets.
On Wednesday investors will also be looking for an update on the retailer’s pension fund after last autumn’s admission the deficit had ballooned to £5.9bn due to the collapse in bond yields after Britain voted to leave the EU. Bernstein analyst Bruno Monteyne estimates that favourable market movements have wiped at least £1bn off that figure. But the scheme will undergo a triennial pension valuation this year that could lead to its trustees asking for more than the £270m a year they already receive to fund the scheme.
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