Search Share Prices
Tesco pays out on soaring profits as Lewis turnaround continues
Tesco declared its first year-end dividend since 2014 as it reported a 28% rise in underlying operating profits thanks to improved margins and surging cash generation.
The supermarket giant turned over £57.5bn in the 52 weeks ended 24 February, which was up 2.8% on the prior year or 1.3% if exchange rate benefits are excluded, with like-for-like sales up 2.3% in spite of the drag of a 0.4% decline in general merchandise. City analysts were expecting revenue of £57.66bn, according to FactSet.
Operating profits of £1.64bn fed through to pre-tax profits that rocketed to £1.3bn from £145m the year before, which was well ahead of the average analyst forecast of £1.03bn.
Profits were boosted by property sales, with £290m released from sales of 109 sites, as well as from cost cutting and efficiency improvements pushed across the UK & Ireland stores and head office. This saw group operating margin improve 0.57 percentage points to 2.9% and hit 3.0% in the second half.
Chief executive Dave Lewis, who has led the turnaround of the grocer since its accounting scandal in 2014, said margin was "well on track" to reach his target of 3.5-4.0% in 2019/20.
He said the integration of wholesaler Booker was "moving quickly to deliver synergies and access new growth", giving more detail on how the synergy benefits will reach his expectations of an annual run-rate of £200m at the end of the third year, with £60m in this current year and a cumulative £140m the following one.
"This has been another year of strong progress, with the ninth consecutive quarter of growth," he said. "More people are choosing to shop at Tesco and our brand is stronger, as customers recognise improvements in both quality and value.
He highlighted the generation of £2.8bn of cash, helping to trim net debt by £1.1bn during the year to £2.6bn, with total indebtedness cut by £4.4bn to £12.3bn. It also allowed Tesco to declare its first year-end dividend since 2014 of 2.0p, adding to the 1p at the half year.
Tesco shares were quickly up 3.6% to 217.9p, approaching their 2016 high of 219p, though still almost 20% below the 250p level when Lewis was appointed.
Analysts at Societe Generale said a highlight was the "solid operating performance", with £1.64m group EBIT before exceptionals, 3% above consensus, reflecting margin improvement in all geographies. UK/ROI EBIT before exceptionals at £1.05m is 5% above consensus on £996m, reflecting 50bp EBIT margin improvement versus consensus of 40bp.
"This is a robust performance given the challenging trading environment in the UK due to higher input costs and SG&A cost inflation, particularly wage increases."
Bernstein's Bruno Monteyne said Lewis's claim to be 'on track' to deliver 3.5%-4.0% operating margins "could be one year early", noting operating margin in the second half was 3.0% with 42bps improvement in the UK and the rate of improvement accelerating.
"A similar step up in the UK next year could see Tesco already within the 3.5%-4.0% guidance next year. Management increasingly talking about a focus on cash generation and 'sustainable returns to shareholders' (i.e. think buy-backs/special divis)."
Richard Hunter, head of markets at broker Interactive Investor, said Tesco had moved into "strong recovery mode, showing increasing evidence of a return to its former glories".
Albeit they are increasing from a relatively low base, he was impressed by the strong increase in cash flow and reduction in net debt, and said "the narrowing gap between wage growth and inflation could play into the company's hands by way of a more confident consumer".
"Tesco's decision to discard lesser performing businesses and review its property leasing arrangements also add to the mix, whilst the integration of Booker should lead to cost synergies over the coming quarters, and is subject to high hopes," Hunter said.
Analyst Laith Khalaf at Hargreaves Lansdown called it a "renaissance", noting the dividend payment puts the stock on a yield of around 1.5%, "not a great deal to write home about, but after a three year hiatus investors will be pleased to see the dividend taps flowing again".
Khalaf also noted that while the pension deficit has halved on the company's balance sheet, it will not yield any immediate cash benefit to Tesco, as the company has just been through its triennial pension scheme valuation, and increased contributions kick in this month.
Seeing the outlook as "looking more positive for the grocery sector" after a pretty challenging 2017, with the inflationary squeeze appearing to ease on consumer purses, he said Tesco could not sit on its laurels.
"Competition in the grocery market is still fierce, with the discounters Aldi and Lidl piling on the pressure, alongside the likes of Morrison and Sainsbury. It's also hard not to glance at the periphery of the market, and see Amazon limbering up with the purchase of Whole Foods and online grocery trials in selected UK postcodes."