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City forecasts turnaround in Tesco results but tougher times at Poundland

Published 08/04/2016

Tesco posts its annual results on Wednesday
Tesco posts its annual results on Wednesday

The City expects to see signs of a turnaround at supermarket giant Tesco, but is braced for a slide in profits at discount retailer Poundland.

Tesco is poised to show that its turnaround plan has stemmed losses and has started to build sales when it posts its annual results on Wednesday.

The City expects the UK's largest supermarket to reveal underlying full-year pre-tax profits down 3% to £932 million, a vast improvement on the 68% fall it reported a year ago.

Taking into account a massive writedown on the value of the supermarket's property portfolio, it posted an overall £6.4 billion annual loss, as the group also saw sales collapse at its core UK business.

However, data last week from respected research body Kantar Worldpanel said Tesco improved its sales for the fourth month in a row, adding that sales slipped by just 0.2% in the 12 weeks to March 27.

This comes after the business reported a surprise 1.3% rise in like-for-like sales over the six weeks to January 9, covering the crucial Christmas period.

Analysts said the supermarket's recent performance is a further sign that chief executive Dave Lewis is turning the massive business around, since taking over from previous boss Philip Clarke in September 2014.

The moves marks a welcome improvement after a grim couple of years, with Tesco uncovering a £326 million accounting black hole in autumn 2014 that plunged the group into crisis.

Trading across the sector has been hit amid falling food prices, compounded by a price war sparked by the increasing might of discounters Aldi and Lidl.

Tesco has shut 53 unprofitable stores since the start of its financial year and shelved plans to open a further 49 stores.

Mr Lewis has also cut prices across hundreds of lines, while making a raft of changes such as shutting Tesco's final salary pension scheme, disposing of its loss-making Blinkbox operation selling online videos, and moving its main headquarters from Cheshunt to Welwyn Garden City in a measure expected to save £250 million.

Analysts at Shore Capital said Tesco "is now operating more on the front foot in the UK".

The broker added: "We believe that the major programme of cost reduction set around the mantra of simplification has delivered results that are evident in-store."

Discount retailer Poundland is expected to feel the strain of tougher trading on the high street when it posts a full-year update on Thursday.

Analysts at Shore Capital said it expects Europe's biggest set-price retailer to report annual underlying pre-tax profits down 9.6% to £39.5 million, following lacklustre sales at Christmas.

Shore Capital added after Poundland's "disappointing third-quarter update" it expects high street conditions will "remain challenging", forecasting the retailer will post like-for-like sales ranging between minus 4% and minus 5%.

The West Midlands-based group, which runs 628 stores, said in January it expected annual profits would be at the lower end of its £39.8 million to £45.8 million range, after it said high street footfall was below last year's level over the festive period.

Just last month, Lord Wolfson, the chief executive of fashion bellwether Next warned the year ahead on the high street was set to be the ''toughest we have faced since 2008'' as he cautioned over profits amid fears of a consumer spending slump.

Poundland is also going through a period a rapid change at the moment, following its acquisition of 99p Stores for £55 million, cleared by competition authorities in September.

Poundland boss Jim McCarthy has since admitted that the 99p Stores business was ''in a mess'' when it was handed over.

It said in January it had converted 25 99p Stores to its own branding, and plans to convert the majority of the remaining 227 stores in the acquired chain by the end of April.

The group also said it plans to open 70 new stores in this financial year and 60 the following year.

Shore Capital believes this demanding schedule may have stretched the firm's management.

The analyst said: "The reality to our minds is that within Poundland, central and store management will have been all hands to the pumps on converting the acquired 99p Stores."

Poundland boss Jim McCarthy will also present his last set of results to the City, which will then see him retire after a decade-long tenure at the retailer.

Mr McCarthy, 60, will be replaced by former B&Q chief executive Kevin O'Byrne on July 1, but will remain with the group until his retirement at the firm's annual shareholder meeting in September.

Mr O'Byrne, who headed B&Q in the UK and Ireland until a shake-up by owner Kingfisher last year, will become chief executive designate from April 4.

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