ii view: Tesco juggernaut maintains momentum

Full-year results to 24 February

• Revenue up 4.4% to £68.2 billion
• Adjusted operating profit up 12.8% to £2.8 billion
• Net debt down 6.9% to £9.8 billion
• Final dividend of 8.25p per share
• Total full year dividend up 11% to 12.1p per share
• Planning share buybacks for the year ahead of £1 billion, up from £750 million

Guidance:

• Expects retail adjusted operating profit for the year ahead of at least £2.8 billion
• Expects total adjusted operating profit from the retained Tesco Banking business of around £80 million

Chief Executive Ken Murphy said:

“Customers are choosing to shop more at Tesco, which is reflected in growing market share as they respond to the improvements we’ve made to the value and quality of our products. Inflationary pressures have lessened substantially, however we are conscious that things are still difficult for many customers, so we have worked hard to reduce prices and have now been the cheapest full-line grocer for well over a year. 

“We have strong momentum in our business, and are encouraged by signs of improving consumer sentiment. We’re excited about the opportunities ahead, with the right plans to keep winning with customers, as well as a great team to deliver them.”

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ii round-up:

Starting out as a market stall in 1919, Tesco (LSE:TSCO) today employs over 330,000 people across its stores and distribution centres in both the UK, Ireland, and Central Europe. 

In 2017, it purchased UK food wholesaling business Booker, giving it exposure to both restaurants and other food convenience stores and businesses.

Headquartered in Welwyn Garden City, Hertfordshire, a yet to complete part sale of its Tesco Banking business will see the division operate as a partnership with Barclays (LSE:BARC) going forward.

For a round-up of these latest results announced on 10 April, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a stock market value of over £20 billion. Rival retailers include Sainsbury (J) (LSE:SBRY) with a value at around £6 billion and Ocado Group (LSE:OCDO) worth around £2.9 billion. Group strategic focus includes winning with customers, investing in future growth & digital capabilities and balancing the needs of customers, staff, and shareholders via cash returns. The UK & Ireland generate most of its sales, with Central Europe accounting for just over 6% and banking coming in at around 2%. 

For investors, the tough economic backdrop with heightened borrowing costs squeezing customer spending should not be forgotten. Cost pressures generally for businesses including wage demands persist, competitors including discounters Aldi and Lidi are not standing still, while foreign exchange fluctuations can affect the numbers, including a previous currency devaluation for its Central European business.   

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On the upside, market share gains for its key UK and Irish business continue to be made. Its recent banking deal brings in the industry expertise of Barclays while allowing Tesco to concentrate more on its core food offering and reduce its financial exposure. Cost savings are being pursed, group net debt has fallen, while annual capital expenditure is being increased to £1.4 billion from £1.3 billion to help develop AI technology solutions to boost productivity. 

For now, and despite continued risks, a consensus analyst fair value estimate above 325p per share and forecast dividend yield of around 4.5% should be sufficient to keep fans of this retail colossus happy. 

Positives

• Robust UK market share
• Focus on shareholder returns

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy