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How Tesco is inching its way back from the brink

Britain's largest supermarket chain is reconnecting with customers, and it seems to be paying off
April 13, 2016

A strong fourth quarter - which included the all-important Christmas trading period - helped Tesco (TSCO) chief executive Dave Lewis report a resilient set of annual results as he continues to bring the supermarket chain back from the brink. For the year as a whole, like-for-like sales were flat, but they rose 1.6 per cent during the fourth quarter. Underlying sales momentum was particularly strong abroad, growing 3.8 per cent during the final quarter, and 4.1 per cent in Europe specifically.

IC TIP: Hold at 189p

Compared to its 2015 full-year results, these numbers read relatively simply. Cash generation from retail operations improved nearly 40 per cent in the past year, and net debt fell by a similar amount following the disposal of the Homeplus business in South Korea last October. In terms of exceptionals, a £480m credit from the closure of its defined benefit pension scheme more than offset property and other impairments, and the scheme's deficit reduced substantially.

With the newfound sales momentum, not to mention improving margins both at home and overseas, it's hardly surprising that the group is back in the black. Even on an adjusted basis, operating profits still rose 1.1 per cent to £944m. Improvements to the cost base, better relationships with suppliers and increasing volumes saw UK and Ireland margin growth of 81 basis points between the first and second halves. Mr Lewis says the grocer is benefiting from better service, a simpler range, record levels of availability and lower and more stable prices. In short, it's his belief that "more customers are buying more things, more often at Tesco".

The Tesco boss is confident that profitability will continue to improve during the current financial year and certainly by the time the group reports its next half-year results, though further investment will be needed. Still, the grocery market remains highly competitive, uncertain and dominated by deflationary trends, he warned.

Analysts at Shore Capital have placed FY2017 forecasts under review, but had expected pre-tax profits of £822m, leading to EPS of 8.1p, compared to 5p in FY2016.

 

TESCO (TSCO)
ORD PRICE:189.2pMARKET VALUE:£15.4bn
TOUCH:189.1-189.2p12-MONTH HIGH:249pLOW: 137p
DIVIDEND YIELD:nilPE RATIO:68
NET ASSET VALUE:106p*NET DEBT:59%**

Year to 27 FebTurnover (£bn)Pre-tax profit (£bn)Earnings per share (p)Dividend per share (p)
201263.94.034.914.76
201363.42.10.414.76
201463.62.312.114.76
201556.9-6.3-69.61.16
201654.40.22.80.00
% change-4---

Ex-div: na

Payment: na

*Includes intangible assets of £2.87bn, or 35p a share

**Excludes net debt of Tesco Bank, but includes continuing and discontinued operations