Tesco's share price drops as supermarket misses sales forecasts but beats consensus on profit

 
Catherine Neilan
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Tesco's share price fell 4.7 per cent on the open this morning, despite the supermarket returning to profit and sales growth.

The supermarket was the biggest faller on the FTSE 100 in early trading - and it was dragging some of its rival grocers down with it.

13 April 2016 @ 9:00amTesco (TSCO)

The figures

The troubled supermarket's group sales were up 0.1 per cent for the year to 29 February, to £48.4bn, below consensus forecasts of £55.3bn. Operating profit before exceptionals rose 1.1 per cent to £944m, ahead of the predicted £932m.

Statutory operating profit £1.046bn - having reported a loss of £5.75bn last year.

Net debt has been slashed by 40 per cent to £5.1bn, thanks in part to the sale of Homeplus in Korea.

And Tesco was keen to show momentum is building: UK like-for-likes were up 0.9 per cent in the last quarter of the year, while group like-for-likes were up 1.6 per cent. This was slightly ahead of forecasts.

Crucially for the firm, which has been losing market share, customer satisfaction scores are also heading in the right direction: up five per cent over the course of the year.

Tesco Tesco | mobile image

Why it's interesting

Tesco has been undergoing a major transformation, with Drastic Dave Lewis seeking to undo the problems caused by the previous regime, not least the £260m profits black hole that was revealed in 2014. As part of this he has overseen the sell-off of a number of non-core assets, most recently half of Tesco's stake in ecommerce site Lazada.

Read more: What's next at the checkout for Tesco?

But there have also been fundamental issues with the business - the price wars and regaining ground lost to challengers Aldi and Lidl.

Today the supermarket said it had "achieved what we set out to do", noting there were "improving trends across the group".

What Tesco said

"We have made significant progress against the priorities we set out in October 2014," said Lewis. "We have regained competitiveness in the UK with significantly better service, a simpler range, record levels of availability and lower and more stable prices. Our balance sheet is stronger and we are making good progress in rebuilding trust in Tesco and our investment case.

"Our process of transformation has generated broad-based positive momentum in the UK and internationally. We set out to start rebuilding profitability whilst reinvesting in the customer offer, and we have done this. More customers are buying more things more often at Tesco.

"As a team, we are committed to serving shoppers a little better every day, in what remains a challenging, deflationary and uncertain market. We are confident that the investments we are making are leading to sustainable improvements for customers whilst creating long-term value for our shareholders."

What analysts said

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: "There are tentative signs at Tesco that the oil tanker may be starting to turn, but it’s going to take some time before the vessel is ploughing along in the right direction.

"An uptick in sales in the fourth quarter was much needed, but profits growth is likely to remain muted while the supermarket continues to invest in its pricing proposition... The performance of online and convenience channels were conspicuous by their absence in today’s results, as was any guidance on what to expect going forwards."

While shareholders can see Lewis an co have made improvements in the last year "they are probably scratching their heads about what the plan is from here on in".

Phil Dorrell, partner of consultants Retail Remedy, said: "Lewis has made great strides in getting Tesco closer to its roots, being a good retailer. Selling off peripheral businesses is absolutely needed in order to regain focus on the core Tesco supermarket business and return to growth.

"The elephant in the room is surplus space. Tesco have the biggest space challenge of all the Grocers and have yet to identify anything convincing to fill it with. Investment in price and price perception still needs to be recovered. We are yet to see how Lewis intends to do this. Higher volumes would solve the problem but these are hard to come by in the current market.

"Some may criticise the pace of change at Tesco, but Lewis is now captain of a far steadier ship than the one he took on. Deep change was needed and that is what Lewis has delivered to date."

In short

The beginning of the end of its time of woe is in sight for Tesco - but investors clearly want more from the supermarket before they'll give it a thumbs up.

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