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Tesco sales rise again as recovery continues Tesco sales overshadowed by £5.9bn pension hole
(about 7 hours later)
Sales at Tesco have risen for a third consecutive quarter in a sign that recovery at Britain’s largest supermarket group is gaining momentum. A pick up in sales at supermarket giant Tesco has been overshadowed by the £5.9bn hole that has opened up in its pension fund.
Like-for-like sales in the UK, excluding those at stores open for less than a year, rose by 0.9% in the second quarter. That was the top end of analysts’ expectations and an improvement on the first quarter, when underlying sales increased by 0.3%. Tesco said that since February its pension deficit had ballooned from £3.2bn to £5.9bn due to the collapse in bond yields after Britain voted to leave the European Union. Its finance director Alan Stewart said it did not have to increase its contributions to the scheme but pensions experts suggested the problem could hinder the resumption of dividend payments to investors.
Shares in the company rose 9% to 206p after the results were announced, making it the FTSE’s biggest riser. The positive sentiment lifted the whole sector, with shares in Sainsbury’s and Morrisons also rising. The grocer’s shares jumped nearly 10% after chief executive Dave Lewis told the City that sales at UK stores had risen 0.9% in the three months to the end of August – the retailer’s third quarter of growth in a row. “These results indicate a business moving out of crisis to one that’s showing real confidence in its recovery,” he said pointing to like-for-like sales growth across the group.
Pre-tax profits for the first half tumbled by 28% to £71m but underlying earnings, excluding one-off items, jumped by 60% to £596m. Pre-tax profits for the six months to the end of August were down 28% at £71m but underlying earnings, excluding one-off items, jumped by 60% to £596m. The retailer is expected to make full year profits of £1.2bn. The shares closed up 18.4p at 207.1p.
The retailer outlined plans to slash costs by a further £1.5bn by 2019-20, including a simplification of stores and a more efficient distribution system. With the business now “extremely stable” Lewis said it was time to “step it up”, setting out a three year plan to rebuild profits which collapsed to a £6.4bn annual loss in 2015.
Dave Lewis, the chief executive, said: “The business is moving out of crisis and gaining real confidence in recovery. We have made further strong progress in the first half, with positive like-for-like sales growth across all parts of the group as we reinvest in our customer offers while rebuilding profitability in a sustainable way.” He set a target that by 2020 it would 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, however, Lewis said the grocer would need to slash a further £1.5bn from its cost by making its stores and distribution network more efficient.
Phil Dorrell, a partner at the consultancy Retail Remedy, said Lewis was right to feel confident. “We are entering the golden quarter for grocery and Tesco will be up against a resurgent Morrisons, a wounded but not down Asda and a Sainsburys armed with Argos. Tesco will have room to push further on price if they need to and a rash of offers lined up ready to deploy. Dave Lewis projects confidence and confident he should be.” Lewis has already made savings of £500m but he insisted the new programme was not about cutting jobs in stores, where the number of staff serving customers has actually increased by 12,000 over the past two years.
The company’s pension deficit ballooned more than expected to £5.9bn from £3.2bn at the end of the previous financial year. Pension deficits have been driven higher by ultra-low bond yields, which are used to calculate liabilities. Laith Khalaf, senior analyst at Hargreaves Lansdown, said for the time being Tesco’s pension deficit was “simply a problem on paper”. Instead, the former Unilever executive has axed thousands of head office and store management roles and while there would be some “trimming”, this time, he said it was “about changing the way we do business”. Tesco said about £550m of the savings would come from making its store operations efficient, looking at areas such as opening hours and re-stocking shelves during the day rather than at night.
Lewis joined Tesco from Unilever in September 2014, tasked with bringing to a halt a three-year sales slide. Within three weeks of his arrival he was engulfed in the biggest crisis in the company’s history when a whistleblower alerted him to an accounting scandal. Surging pension deficits have been highlighted by other big British firms, including John Lewis, Primark owner ABF and the AA.
Tesco suspended four executives when it discovered its profits had been artificially inflated, and the Serious Fraud Office (SFO) launched an investigation into the company. Tesco’s deficit calculation is based on an accounting measure but next year the scheme will undergo a triennial pension valuation, which Richard Farr, managing director at Lincoln Pensions, argues could lead to its trustees asking for more than the £270m per year they already receive to fund the scheme. “It is likely that just when Dave Lewis wants to recommence dividends that trustees will certainly want to increase their own demands,” said Farr.
The retailer made made a £6.4bn annual loss for 2014 – one of the biggest in British corporate history – and Lewis has axed thousands of jobs in an attempt to cut costs. Stewart said it was too early to talk about reinstating payments to shareholders with the last dividend paid in the second half of its 2014-15 financial year.
Last month, the SFO charged three former senior directors at Tesco with fraud in relation to the accounting scandal at the supermarket chain. Carl Rogberg, the former finance director of Tesco UK, Christopher Bush, the former managing director of Tesco UK, and John Scouler, the supermarket group’s former commercial director for food, face up to 10 years in jail if found guilty of fraud by abuse of position and seven years for false accounting. They have pleaded not guilty to both charges. Lewis joined Tesco two years ago and almost immediately was engulfed in the biggest crisis in the company’s history when a whistleblower alerted him to an accounting scandal. Tesco suspended four executives when it discovered its profits had been artificially inflated, and the Serious Fraud Office (SFO) launched an investigation into the company.
Lewis said on Wednesday there were big challenges facing the company when he arrived two years ago. “The business has been objective and open about how it wanted to deal with the challenges. It’s significant that we say today that we feel the business has stabilised,” he said. To revive sales Lewis focused on lower prices, improving customer service and making sure its shelves are full. He also revamped its budget ranges with a new range of own-label “farm” brands to counter Aldi and Lidl.
“It’s a tough market but we have confidence that our relative strength within it will help us to further turnaround the business.” The shake up has seen lapsed customers return to its stores with even its more than 200 out-of-town hypermarkets, which Lewis’s predecessor Philip Clarke stopped short of calling white elephants, enjoying better sales.
John Ibbotson from the consultancy Retail Vision, said while there was still a long way to go, Tesco was making progress. “The slickest thing about Dave Lewis’s approach has been its simplicity: reducing prices to regain competitiveness in the core UK business, rebuilding all-important customer trust and strengthening the balance sheet by selling off non-core operations and stores,” he said. Shore Capital analyst Clive Black said some “understandable excitement” had been generated by Lewis’s new plan to boost profits but the company’s £18bn debt pile, which includes the pension deficit and £7.7bn of store lease commitments, was an issue: “That progress is being made at the operating level is undeniable and commendable ... but you cannot ignore the company’s level of indebtedness.”
“Yes, the turnaround has been slower than some would have liked, but let’s not forget that Tesco’s fall from grace was extreme.”
Ibbotson said the grocer could struggle to reach its previous highs. “While Tesco is back on track and could soon be dominant again, it’s unlikely to be the imperious force it once was. While improving, its profits are significantly lower than they were in its heyday.”