ii view: Tesco expects a 2021 rebound in profit

Covid costs have dented profit but are not expected to repeat in 2021. We assess prospects. 

Full-year results to 27 February

Chief executive Ken Murphy said:

“While the pandemic is not yet over, we're well-placed to build on the momentum in our business.  We have strengthened our brand, increased customer satisfaction and improved value perception.  We have doubled the size of our online business and through Clubcard, we're building a digital customer platform.  Sustainability is now an integral part of our business strategy and we're doubling down on our efforts to reach net zero.

“Our decision to protect and hold the dividend flat for this financial year demonstrates our commitment to shareholders.  We believe we can create significant further value for them and every stakeholder in our business by continuing to focus on value, loyalty and convenience for customers, underpinned by strong capital discipline."

ii round-up:

Retailing giant Tesco (LSE:TSCO) today reported a near one fifth drop in profit as the extra costs of operating under the pandemic countered increased food sales.

However, looking ahead management does not expect most of the additional virus costs to repeat, with a rebound in profit back to the pre-virus 2019/2020 financial year estimated. 

Tesco shares fell by more than 3% in early UK trading. Shares for rival supermarket operators Sainsbury (LSE:SBRY) and Morrison (LSE:MRW) also retreated marginally.

The likely conservative group forecast for a return to the 2019/2020 profit level fell marginally shy of City estimates.

Total UK virus-related costs for the year to the end of February amounted to £892 million, covering such items as in-store measures, additional staff, and sick pay. 

Stay-at-home dinning under pandemic lockdowns helped UK same store sales rise by 7.7%, while online sales surged by 77% to £6.3 billion. 

Some of the additional sales volumes gained in its core UK market during the pandemic year are expected by management to fall away as virus restrictions ease. 

A final dividend of 5.95p per share leaves the total ordinary dividend for the year unchanged at 9.15p per share.

ii view:

Over recent years, the UK’s biggest supermarket by sales has undergone drastic changes. A previous expansion overseas has now been reversed, with its Asian operations recently sold. Product ranges have been scaled down to aid buying power and competitiveness with the discounters Aldi and Lidl. Former Walgreens executive Ken Murphy is now building on the reset strategy.

As with many retailers, the pandemic has accelerated Tesco’s push online. Due to shop from home demand under the virus, capacity was doubled to 1.5 million slots per week over the financial year. The size of its online business has doubled. 

For investors, outlook uncertainty due to the pandemic cannot be ignored. Stocking up the kitchen cupboards under Covid-19 lockdowns could see a return to more normal buy as you need demand over coming months. And a previous move into banking operations is arguably not the success once hoped for given a £175 million loss this year.

However, a more focused Tesco in both product and geographical terms looks better placed to battle the competition. The retailer’s Clubcard platform continues to give it vital insights into its customers habits while a historic and forecast dividend yield of over 3.5% is not to be overlooked in the current ultra-low interest rate era. In all, and with its strategy firmly reset, we believe Tesco remains deserving of continued shareholder support.

Positives

• Growing online sales 
• Attractive dividend payment (not guaranteed)

Negatives

• Industry competition remains intense
• Tesco Bank loss of £175 million

The average rating of stock market analysts:

Strong 'buy'