Tesco boosted profits by almost 30 per cent in 2018 as it beat expectations, leading the supermarket to almost double its dividend as its chief executive revealed the supermarket has met the “vast majority” of its turnaround goals since its 2014 accounting scandal.
Pre-tax profits rose 28.8 per cent year on year to £1.67bn for the 12 months to December 2018, while revenue also grew 11.2 per cent to £63.9bn.
Net debt grew nine per cent to £2.86bn after the £4bn purchase of wholesaler Booker while net cashflow shrank 9.8 per cent to £2.5bn.
Diluted earnings per share rose 11.9 per cent to 13.55p while Tesco told investors to expect a final dividend of 4.10p, hiking its full-year dividend by 92.3 per cent to 5.77p.
Why it's interesting
Tesco’s turnaround comes after a turbulent year in which the supermarket giant ceded ground to discounting rivals as competitors engaged in a flurry of activity to get ahead.
Marks & Spencer paid £750m for an online tie-up with Ocado while Sainsbury's pursued an unlikely merger with Asda, but Tesco was busy itself, introducing a new line of stores and buying up wholesaler Booker.
The acquisition last March boosted Tesco's profit margin to 3.96 per cent, from 3.45 per cent in the first half of the year.
The purchase also improved Tesco’s top line as UK like-for-like sales helped push revenue higher, growing 1.7 per cent at Tesco and a whopping 11.1 per cent at Booker.
Tesco shareholder Scottish Investment Trust said the supermarket’s results demonstrate its transformation from a so-called show me stock to actually delivering value.
“These results go some way to fulfilling that request from investors, although the next question playing on investor minds will be ‘what next?’,” said lead fund manager Alasdair McKinnon. “We believe that Tesco is well placed to provide a satisfactory answer.”
“The company still has whatever difficulties Brexit may deliver to contend with, but these will not be Tesco specific,” he added.
Still, Tesco's share price rose just 2.44 per cent on the results to 239.60p.
“Investor applause has limits,” observed Ken Odeluga, market analyst at City Index, suggesting Brexit uncertainty lingers despite the boom in profits.
“Sensitivity to discounters, e-commerce, the economy and regulatory push-back remains. Lewis sees no ‘discernible change in buying behaviour’ from Brexit, whilst Tesco’s own planning to safeguard working capital is ‘proactive’.
“Yet fall-out will be difficult to predict. Lewis accepts assumptions made when setting recovery targets have been upended. Clouds on the outlook haven’t cleared entirely.”
Central Europe like-for-like sales dropped 2.3 per cent year on year, blamed on fewer trading days and a smaller amount of merchandise, while Asian like-for-likes fell 6.2 per cent.
Tesco stuck to its guns for the year ahead after revealing plans to slash up to 9,000 jobs, saying profit expectations are on track and telling investors to look forward to a dividend of around two times earnings.
Meanwhile chief executive Dave Lewis was confident of hitting a margin of between 3.5 per cent and four per cent for the current financial year.
Julie Palmer, partner at Begbies Traynor, said Lewis has successfully rebuilt Tesco’s brand since its 2014 accounting scandal, slashing distribution costs while investing in Booker.
But she warned the supermarket giant, which dominates the sector with a 27.4 per cent market share, is under increasing pressure from discounters Aldi and Lidl despite introducing its own budget store, Jack’s.
If Sainsbury’s Asda merger goes through it would throw the chain back “at the forefront of the supermarket wars,” she warned.
“External threats are also putting pressure on the retailer with continued uncertainty due to Brexit and the turbulent high-street conditions, evidenced by its decision to cut up to 9,000 jobs by shutting the fresh food counters at 90 stores,” Palmer said.
“With Marks & Spencer’s tie up with Ocado and Amazon’s new grocery arm, Amazon Fresh, Dave Lewis will be wary of standing still and instead will want to keep moving.”
John Moore, senior investment manager at Brewin Dolphin, said the scaled-up dividend is evidence that the turnaround of Tesco is finally paying off.
“Like a super tanker, it’s hard to turn such large businesses around – but when you do get positive momentum, it tends to last a long time,” he said.
“While debt is up, this reflects share buy-back and investment in its estate – the underlying trends are more encouraging.
“All in all, the company seems to have its energy and focus back and, if this trend continues, then further growth in earnings and dividends – despite the difficult retail environment – are a real possibility.”
What Tesco said
Chief executive Dave Lewis said: “After four years we have met or are about to meet the vast majority of our turnaround goals. I'm very confident that we will complete the journey in 2019/20.
“I'm delighted with the broad-based improvement across the business. We have restored our competitiveness for customers – including through the introduction of 'Exclusively at Tesco' – and rebuilt a sustainable base of profitability.
“The full year margin of 3.45% represents clear progress and the second half level of 3.79 per cent, even before the benefit of Booker, puts us comfortably in the aspirational range we set four years ago.
“I'm pleased that we are able to accelerate the recovery in the dividend as a result of our continued capital discipline and strong improvement in cash profitability.”