London — Britain’s largest supermarket, Tesco, bucked a grim start to the year for the retail sector with a 28% annual profit surge, underlining CE Dave Lewis’s recovery strategy of lower prices and streamlined product ranges.
Tesco’s share price rose to 6.3% on Wednesday after it confirmed its medium-term savings and profit targets and said that the integration of wholesaler Booker, purchased for £4bn in March, was well under way.
The deal will allow Tesco to expand to provide food to restaurants, bars and smaller grocers, while about £200m in annual synergies are targeted within three years. Tesco’s results provided some cheer after Britain’s brutal trading conditions plunged Toys R Us UK, electricals group Maplin and drinks wholesaler Conviviality into administration and forced fashion retailer New Look and floor coverings firm Carpetright to close stores.
Tesco remains the largest of Britain’s supermarkets by a clear margin, having a market share of 27.6%. It is also the fastest-growing of Britain’s "big four" with Morrisons.
Tesco made an operating profit of £1.644bn in the year to February 24, versus guidance of "at least" £1.575bn and £1.28bn made in 2016-17. Group sales rose 2.3% to £51bn.
The outcome was helped by a strong end to the year in its home market, with like-for-like sales in the fourth quarter up 2.3%, a ninth straight quarter of growth. "With three years under our belt Tesco is growing again, recovering profitability and generating significant cash," Lewis told reporters.
"The merger with Booker allows us to build on this trajectory," he said.
Lewis led Tesco’s fight-back after sales and profits were hammered by changing shopping habits, the rise of German discounters Aldi and Lidl and a 2014 accounting scandal that plunged the retailer into the worst crisis yet.
Lewis, who joined shortly before the accounting scandal was uncovered, first stabilised Tesco, then got it growing with a focus on more competitive prices, streamlined product ranges, better customer service and much improved relationships with suppliers.
The Booker purchase is the boldest move yet by Lewis.
It provides Tesco with access to the faster growing catering segment of Britain’s £200bn grocery market.
The group, which competes with Sainsbury’s, Walmart’s Asda and Morrisons, said it was firmly on track to deliver its medium-term targets, which include cost savings of £1.5bn and earning between 3.5p and 4p of operating profit for every pound customers spend by 2019-20. It had a margin of 2.9% in 2017-18.
Bernstein analyst Bruno Monteyne, who has an "outperform" rating on the stock, said Tesco could now achieve the margin target one year early.
Tesco also said it would place an increasing focus on cash generation and "sustainable returns to shareholders", raising the prospect of share buy-backs and special dividends.
The group is paying a final dividend of 2p, giving a full-year payout of 3p. The interim dividend in October was its first in three years.
Tesco’s shares have risen 13% over the last year and are close to a three-year high. They remain below the 230p they were at when Lewis joined in September 2014. That reflects caution among some investors about the ongoing challenge of the discounters and online players.
"Whilst we take some comfort from what it is we have done, we are very clear that there’s more to do," said Lewis.
"It’s definitely not job done," he said.