Tesco close to meeting targets

Rebuilding what the group calls “sustainable” profits has largely depended on its ability to expand operating margins. At the end of FY2019, operating margins stood at 3.45 per cent – a decent improvement on FY2018’s 2.95 per cent, leaving the group firmly on track to meet its FY2020 target for an operating margin somewhere in the range of 3.5 per cent to 4 per cent. In fact, split last year’s performance into two halves, and operating margins rose to 3.96 per cent in the latter six months (or 3.79 per cent excluding wholesale business Booker).

Ah, Booker. As much as Tesco’s return to profitability is the result of several self-help measures – including refreshed product ranges, competitive pricing and improved customer service – its acquisition of wholesaler Booker has undeniably catalysed its recovery. Break down last year’s sales figures, for example: an 11.5 per cent improvement in group sales to £56.9bn reflected a 2.9 per cent rise in Tesco’s like-for-like sales across the UK and Ireland, a 1.7 per cent improvement in Tesco UK sales and a whopping 11.1 per cent jump in Booker sales. Thankfully, this helped offset a 2.3 per cent dip in underlying central Europe sales and a 6.2 per cent slump in Asia. Booker also contributed £196m to adjusted operating profits of £1.5bn.

But blooming profits aren’t just the result of better top-line momentum. Indeed, Tesco has kept its eye firmly on costs, delivering £79m-worth of synergies from the Booker deal, leaving it on track to save up to £200m annually by the end of the third year post-completion.

Broker Shore Capital had expected EPS of 17.7p in FY2020, moving up to 20.2p in FY2021, but expects to upgrade these numbers in light of the FY2019 performance.