The Tesco share price has shot up almost 6.5% between yesterday’s close of 209.4 pence a share and reaching 223.4 pence a share in early trading this morning. The jump came after the supermarket giant yesterday posted an almost 800% rise in pre-tax profits over the year up to February 24th 2018. Profits of £1.3 billion were both a huge improvement on the previous periods £145 million total and, crucially, surpassed the £1.2 billion consensus estimate of analysts by £100 million. Overall group sales also improved on the previous year by 2.3% to reach £51 billion.
The strong set of results unveiled by Tesco yesterday are a vindication of extensive restructuring carried out under the watch of chief executive David Lewis, who has held the role since 2014. Over the past few years Lewis has sold off much of the group’s overseas units and streamlined the company’s management structure, saving thousands of salaries. In-store prices have also been cut in a move designed to win back market share from discount competitors such as Lidl and Aldi.
Lewis himself commented that the results show that Tesco is again “firmly on track”. Despite the huge improvement on the previous year, however, profits are still less than half 2012-13’s record-breaking pre-tax £3 billion. While Tesco will hope that the restructuring achieved since Lewis took over may mean profits could again surpass this year’s figures, the cut-throat competition in the UK groceries sector may make that difficult. Discount European competitors Lidl and Aldi have taken significant market share in what was already a highly competitive industry.
A significant driver of Tesco’s success over the past year has been the success of the supermarket’s own brand products. A refresh of 10,000 own brand products including popular budget and ‘Tesco Finest’ branded ready meals helped achieve like-for-like sales growth of 4.2% over the period.
The annual report also detailed last month’s £3.7 billion acquisition of wholesaler Booker. Integration was reported as ‘well underway’ with synergy savings of £60 million expected over the first year, rising to £140 million and £200 million by the end of the second and third years of the tie-up respectively. The wholesaler’s outlets that have been in operation for at least a year saw sales growth of almost 10%. The unit is expected to deliver an operating profit of £195 million before exceptional items for the year ended March 30th.
Tesco’s positive results are in stark contrast to the woes that many retailers in other sectors have suffered over the past year. Established brands such as Toys R Us and electronics chain Maplin have gone into administration.
Numerous clothing brands and restaurant chains are struggling, closing down non-performing sites and renegotiating rents on others as the shift towards e-commerce bites into the viability of many bricks and mortar retail operations. With equities markets seemingly at the end of the strong bull run that has played out over the past several years, capital moving back towards defensive stocks such as consumer staples from higher risk growth companies could benefit Tesco’s share price. This will especially be the case if dividends can be maintained or increased. This year has been the first in five Tesco shareholders have received a dividend. A final dividend of 2p a share will be added to an earlier 1p a share half year payout.