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Tesco Plc. 1H18 results: Pressures abroad weigh on profit

The UK’s biggest food retailer, Tesco reported 1H18 results on Wednesday (3 October), which showed that its revenue rose 13% YoY to GBP28.3bn, while revenue including fuel rose 12.0% YoY to GBP31.7bn. Diluted EPS stood at GBp4.37 vs GBp5.13 recorded in 1H17. However, the firm missed first-half profit forecasts as weak trading in Thailand and Poland weighed on the accelerating sales growth the firm saw in its main UK business. Group operating profit came in at GBP944mn – up 24% YoY but below the GBP978mn consensus analysts’ forecasts had expected. Profit fell 29.1% YoY in Asia and by 3.3% YoY in central Europe, partly offsetting the impressive 47.6% YoY growth in the UK and Ireland, where the firm has benefited from its acquisition of wholesaler Booker, vindicating a move which analysts initially balked at.

UK and Ireland like-for-like (LfL) sales grew 3.8% over the first half of the year, and were up 4.2% in 2Q18, a combination of growth of c. 2.5% in Tesco sales (its eleventh straight quarter of growth) and almost a 15% hike in sales of Booker, which Tesco bought in March for GBP4bn. Booker contributed GBP97mn of profit. Meanwhile, in Asia, 2Q18 LfL sales fell 4.8%, reflecting Tesco’s decision to exit non-profitable cash and carry sales in Thailand, the impact of the Thai government issuing welfare cards (which cannot be redeemed in Tesco) and Tesco’s own price cuts. Underlying sales in its Central Europe division fell 2.0%, reflecting weak sales in Poland, where changes to Sunday trading regulations resulted in 13 fewer trading days for the retailer.

CEO David Lewis said the difficulties experienced in Thailand and Poland did not imperil Tesco’s key margin target for the Group to earn between GBp3.5 and GBp4 of operating profit for every pound customers spend by the end of FY19/ FY20.

The company also increased its interim dividend by 67% YoY to GBp1.67/share.

Shares in Tesco, which were up c. 12% YTD prior to the results release, fell c. 8% on Wednesday.




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