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Tesco profits tumble by more than half | Tesco profits tumble by more than half |
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Tesco is planning further rounds of price cuts after profits more than halved in the first six months of its financial year. The UK’s biggest retailer made operating profits of £354m, excluding exceptional items and its now offloaded Korean business, in the six months to 29 August, compared with £779m in the same year before. | |
Sales at established stores in the UK slid by 1.1% in the six months to 29 August and the group warned that trading conditions remained challenging. Profits in the UK and Ireland dived 70%, but a 26% fall in profits at Tesco’s international businesses also disappointed the City. Tesco said the fall was largely down to the impact of new tax and Sunday trading laws on its business in Hungary. | |
Dave Lewis, the Tesco chief executive who joined from Unilever just more than a year ago, insisted that the six months to the end of February, the second half of the group’s last financial year, were Tesco’s “year zero”, and that the company was rebuilding from there. | |
He said underlying sales were now rising in Tesco’s Asian and central European operations, while the trend in the UK was improving as Tesco attracted more shoppers who were buying more items on each visit. | |
Lewis said: “We have delivered an unprecedented level of change in our business over the last 12 months and it is working. The first-half results show sustained improvement across a broad range of key indicators.” | |
Underlying sales in the UK had continued to fall as a basket of food from Tesco was now 3% cheaper than a year ago, he said. Tesco said price cuts – as a result of grocery market deflation and its own action – had cost it around £200m over the half year. | |
Lewis said Tesco would continue to cut prices. “I think there is more deflation to come – some we have to do as we invest ourselves and I don’t see the market changing,” he said. The next six months would be significant, he believed, as Tesco would be trading against a period when it boosted sales with heavy promotions and use of discount vouchers, schemes that Lewis said he did not want to repeat. “There is still volatility in our business,” he said. | |
Tesco shares closed up 2.5% at 197p as analysts welcomed better than expected UK trading from from the retailer. | |
Lewis said Tesco had undergone a dramatic transformation in the year since he joined the business. He has cut thousands of jobs, closed loss-making stores and enticed shoppers back with seven waves of price cuts. “Every important part of Tesco has been or is being transformed operationally, culturally or financially,” he said. “A virtuous circle in the UK is starting to work. Every bit of benefit that we get we have invested back in the business.” | |
He said Tesco had dramatically improved the availability of its products and introduced hundreds of new ideas - from super-hot Kimono Dragon chillis to large blackberries that can be eaten as a snack. “When I joined, we were losing customers to every competitor. Now we are net gainers. As we improve our offer, people are coming back to Tesco.” | |
There was a marked improvement at Tesco’s largest stores, which are being hit by changing shopping habits towards buying small amounts at neighbourhood stores. Sales at Tesco Extra sites dropped by 1.1% in the three months to the end of August compared to a 6.3% slide when Lewis arrived at the business. “I look at them as assets and our job in retail is to make them much more worth the trip,” he said. | |
Related: Tesco says national living wage will cost it £500m by 2020 | Related: Tesco says national living wage will cost it £500m by 2020 |
The improvement in trading puts Tesco on track to achieve its target of annual profits on a par with last year. Excluding the Korean business and changes to the way Tesco calculates profit, the retailer is now targeting £950m of full-year operating profit, compared with £1.4bn previously. Lewis said that if there was any sign that Tesco was trading well enough to beat that target, the difference would be invested in improving services, products or prices for customers. | |
Phil Dorrell, of consultants Retail Remedy, said the results showed Tesco was “ready to move from intensive care into the recovery ward”. The group “isn’t cured but it is definitely over the worst”, he added. | Phil Dorrell, of consultants Retail Remedy, said the results showed Tesco was “ready to move from intensive care into the recovery ward”. The group “isn’t cured but it is definitely over the worst”, he added. |
Tesco has had a traumatic year, hit by an accounting scandal and the fierce grocery price war. It has been losing sales to discount retailers such as Aldi and Lidl and last year posted a record £6.4bn loss, one of the biggest in British corporate history. The company was forced to sell off its South Korean business Homeplus for £4bn to alleviate the £8.6bn debt that has reduced its credit rating to junk status. | |
On Wednesday, Lewis said Tesco would not be selling its loyalty card data business, Dunnhumby, which was put on the market as part of the debt reduction plan. Lewis said he wanted to “draw a line” under talk of major restructuring and the company had decided not to offload any other major assets, such as retail operations in eastern Europe or Thailand. | |
Tesco now hopes to rebuild its balance sheet by improving cash generation rather than major asset sales or a rights issue, Lewis said. “We will stay focused on generating better returns from the assets we’ve got.” | |
He did not rule out sales of smaller businesses that no longer fitted with Tesco’s strategy, however, raising speculation that the Dobbies garden centres or Giraffe restaurants businesses could yet be offloaded. |