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Middle of the road sounds dreary. But it is sometimes the surest way of getting from A to B. Ask Ken Murphy. Steady Eddie status is working well for Tesco, the business he runs.
The British supermarket group on Wednesday raised its annual profit forecast. A surprisingly resilient first half showed that it can attract shoppers at different ends of the wealth spectrum.
Tesco’s £1.1bn savings programme allowed it to improve margins, even as it competed with budget rival Aldi on price on more than 650 products. Its expanded, slightly posher “Finest” range is also luring shoppers normally loyal to Marks and Spencer or Waitrose.
Adjusted operating profit, excluding contributions from Tesco Bank, rose 13.5 per cent to £1.4bn in the first half. Tesco now expects annual profits to improve from £2.5bn last year to £2.6bn-£2.7bn. Previously, Murphy had cautioned about a “flat” result. Given the key Christmas trading period is still to come, Tesco may yet pull further upgrades out of its shopping bag.
Tesco has, like its peers, passed on increases in its own cost base to UK customers through higher prices. But it has been gaining market share by inflating slower than the rest of the industry. Its share has edged up to 27.2 per cent from 26.9 per cent in the past year, according to Kantar.
Like-for-like revenues in the UK grew 8.7 per cent in the first half. Sales volumes in the first quarter fell but are recovering as easing inflationary pressures improve shoppers’ confidence. Tesco cut £290mn of costs in the first half. That puts it on track for cumulative savings of £1.1bn between February 2022 and 2024.
Notably, retail free cash flow also improved £85mn to £1.4bn. This, plus a £250mn special dividend from Tesco Bank, sent the group’s net debt to ebitda ratio to the bottom of its targeted 2.3-2.8 range. The strong balance sheet will allow plenty of room to increase share buybacks later. Under the current programme, Tesco plans to repurchase £750mn by April.
Shares in UK supermarket retailers have outperformed the wider market this year. Some analysts have raised the prospect of a possible price war in 2024. At least a couple of Tesco’s rivals have limited room to manoeuvre given high levels of leverage.
Cost pressures persist. Even so, steady Tesco looks good value. The group’s valuation, about 12 times forward earnings, still lags behind pre-pandemic levels.
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