Tesco's outgoing chief executive Sir Terry Leahy received an ovation from assembled analysts at its half year results presentation. Given that he's still squeezing profit growth from a business that has seen sales quadruple in the 15 years he's been at the group, that applause is well deserved.
Underlying pre-tax profits climbed 14 per cent to £1.79bn, thanks to better than expected property profits of £261m but also because of a particularly strong contribution from its Asian business, which increased trading profits by nearly a third. That offset continuing tough conditions in UK food, where like-for-like sales climbed just 1.2 per cent as a result of a weaker inflationary environment and high petrol prices, which diverted household spending away from the weekly food shop.
However, petrol prices are now beginning to ease, just one of the "economic headwinds" that Sir Terry noted are now becoming "the tailwinds of a global recovery" which have already produced a return to like-for-like sales growth in many markets. "Talking to the customers they have mentally moved into recovery," he said, noting that in the UK, consumers had been trading back up to its Finest ranges. And while economic problems have meant 13 Fresh and Easy stores in the US have been mothballed indefinitely, chief executive designate Philip Clarke said the business was expected to reach breakeven by 2012.
The management team is confident that the recovery trend will continue, which is just as well because economic recovery is one of the key planks of the group's strategy to increase returns on capital by 250 basis points over the next few years, to 14.6 per cent. And the group has plenty of other avenues to hit this target, including maturing international assets which can fund themselves from their own cashflow, the expansion of its global sourcing initiative from non-food into grocery, and the increase of less capital intensive and higher margin retail services. Despite parallel running costs incurred as it switches to new platforms, its banking business reported a 12 per cent increase in trading profits to £129m.
Broker RBS expects adjusted pre-tax profits of £3.8bn and EPS of 35.3p in the year to Feb 2011 (from £2.9bn and 26.3p last year).
| ORD PRICE: | 434p | MARKET VALUE: | £34.8bn | |
| TOUCH: | 434-435p | 12-MONTH HIGH: | 455p | LOW: 368p |
| DIVIDEND YIELD: | 3.1% | PE RATIO: | 14 | |
| NET ASSET VALUE: | 184p* | NET DEBT: | 51% | |
| Half-year to 28 Aug | Turnover (£bn) | Pre-tax profit (£bn) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 27.8 | 1.42 | 13.0 | 3.89 |
| 2010 | 29.8 | 1.60 | 14.8 | 4.37 |
| % change | +7 | +12 | +14 | +12 |
Ex-div:13 Oct Payment:24 Dec *Includes intangible assets of £4.2bn or 53p a share | ||||
