Business World

Sunday 25 September 2016

Tesco shares fall as CEO warns of profit hurdle

Sam Chambers and John Mulligan

Published 14/04/2016 | 02:30

Dave Lewis, Tesco CEO
Dave Lewis, Tesco CEO

Shares in UK retailer Tesco tumbled over 5pc yesterday morning after chief executive Dave Lewis warned that the embattled group probably won't meet analyst estimates for profits this financial year.

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Mr Lewis said it would be a "a significant, significant achievement" to meet analyst estimates for operating profit of £1.25bn (€1.57bn) this year.

Profit growth "won't be smooth, we are in a turnaround", Lewis said after Tesco reported annual earnings that beat analyst estimates.

In his second year in the job, Mr Lewis is working to get the UK's largest retailer back on an even keel, putting an accounting scandal behind the company and fighting back against discounters Aldi and Lidl. Price cuts and a narrower product range contributed to a 0.9pc rise in UK same-store sales in the fourth quarter, the first increase since the end of 2012.

The CEO's comments on this year's earnings outlook may "rein in the market's over-optimism about how quickly trading improvements might translate into meaningful profit improvement", James Collins, an analyst at Stifel, said.

Group sales on a continuing operations basis, and excluding VAT and fuel, were 0.1pc higher at £48.3bn (€60.8bn) on a constant currency basis in the 52 weeks to February 27.

Group operating profit in the period was 1.1pc higher at £944m (€1.18bn) on a constant currency basis. Tesco also slashed its net debt by almost 40p to £5.1bn as it sold its Korean operations. Mr Lewis is working hard to restore Tesco's credit rating from its current junk status.

In Ireland, Tesco said like-for-like sales fell 1.9pc in the latest financial year, but were in positive territory in the fourth quarter for the first time since 2012. Its like-for-like sales in Ireland had slumped 6.3pc in the previous financial year, marking it out as the worst performing of any of the group's units.

Its total sales in Ireland in the 52 weeks ended February 2016 were €2.5bn, down slightly on the €2.54bn it recorded in the previous financial year.

Andrew Yaxley, the chief executive of Tesco Ireland, said that the market here remains "highly competitive".

Tesco is Ireland's second biggest grocery retailer after the Musgrave-controlled Supervalu chain. Dunnes Stores is third biggest.

In a further step to wrest back momentum from the discounters, Mr Lewis is revamping Tesco's budget range of fresh fruit, vegetables and meat. Last month, the retailer rebranded 76 own-label product lines under the banner of fictitious British farm names such as Boswell and Redmere.

The initiative, in addition to price cuts which have reduced the cost of a basket of sample groceries by almost 5pc since Mr Lewis arrived, will constrain profit growth, particularly in the first half of this year, the grocer said.

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