Britain’s Tesco expects flat annual profit after inflation hit

Britain’s biggest retailer Tesco (TSCO.L) forecast flat profit in its new financial year, stemming the 6.3 per cent decline from 2022/23 when soaring inflation battered customers and suppliers alike.

With a 27 per cent share of Britain’s grocery market, Tesco has navigated the unprecedented financial challenge better than most, using its size to secure better terms from suppliers and retaining customers through a competitive loyalty scheme.

Its sales rose 5.3 per cent to 57.6 billion pounds in the last financial year, driven by inflation hitting a 40-year high of 11.1 per cent in October, but the rising cost of wages, utility bills and goods hit profits, while customers searched for value.

“It’s been an incredibly tough year for many of our customers,” Chief Executive Ken Murphy said in a statement.

Shares in the group rose 2.5 per cent, adding to a 36 per cent rise in the last six months.

“Tesco is continuing to cement its position as the UK’s top supermarket,” Zoe Gillespie, investment manager at RBC Brewin Dolphin, said. “Profits may be down, but that was to be expected from the pressures of the cost-of-living crisis and post-pandemic normalisation in shopping habits.”

Murphy said he expected inflation to moderate through the year, led by falling prices in categories including oils and grains, after it cut the price of milk for the first time since 2020 earlier this week.

He also expects the group to benefit as customers, facing the biggest two-year squeeze in living standards since comparable records started in the 1950s, stay at home.

CONSUMER PRESSURE

Tesco made retail adjusted operating profit of 2.49 billion pounds ($3.11 billion) in the year to Feb. 25 – in line with guidance of 2.4-2.5 billion pounds but down from the 2.65 billion pounds made in 2021/22.

It expects to deliver broadly flat operating profit in 2023/24.

British consumers have been pressured for more than a year by high inflation which has outstripped pay growth for almost all workers.

UK consumer price inflation ran at 10.4 per cent in February, the most recent official data shows. In March, grocery inflation rose to a record 17.5 per cent, while rising utility and mobile phone bills along with higher taxes and interest rates are also hitting household budgets.

Monthly industry data has shown Tesco performing solidly versus its traditional rivals of Sainsbury’s (SBRY.L), Asda and Morrisons, though it is still losing market share to German-owned discounters Aldi and Lidl, who are continuing to open new stores.

A decision by Tesco to take a hit on inflation, rather than pass on all the higher costs to customers, reflects a desire to maintain its market share through the downturn.

Richard Hunter, head of markets at Interactive Investor, said supermarkets needed “to run increasingly hard to stand still” but that Tesco had successfully flexed its financial muscle to keep its competitors at bay.

Tesco is paying a full year dividend of 10.9 pence a share, in line with the previous year, and said it would buy back another 750 million pounds of shares over the next year.

($1 = 0.8012 pounds)