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Tesco says recovery on track despite profits falling by 30%

By Holly Williams

Published 06/10/2016

Tesco has revealed half-year profits dropped by more than a quarter, but notched up a third quarter in a row of sales growth
Tesco has revealed half-year profits dropped by more than a quarter, but notched up a third quarter in a row of sales growth

Northern Ireland's biggest supermarket Tesco has revealed half-year profits dropped by more than a quarter, but notched up a third quarter in a row of sales growth as its turnaround gathers pace.

The group, which has around 50 stores in the province, posted a 28.3% fall in bottom-line pre-tax profits to £71m for the six months to August 26 after being hit amid the sector's fierce price war.

Its fightback against the discounters helped UK like-for-like sales surge by 0.9% in the second quarter.

Chief executive Dave Lewis outlined plans to slash costs by £1.5bn to help get profits back on track.

Tesco has a 34.8% share of grocery spend in Northern Ireland over the last 12 months, which was down 0.2%, according to the latest figures from Kantar Worldpanel.

Mr Lewis said the cost-cutting plans would not affect staff, with savings instead being made across areas including the company's distribution system and store operating model.

He said the group's recovery was gaining traction, but cautioned that the market remains "challenging and uncertain".

Tesco's second-quarter like-for-like sales growth across the UK and Ireland marks a sharp increase on the 0.3% rise seen in the previous three months and comes after a major investment in price cuts.

But Tesco saw its bottom line suffer from the plan to lower prices, including the recent launch of its new Farm Brands range.

On an underlying basis, UK and Ireland first-half earnings more than doubled to £389m from £164m a year earlier, while group earnings lifted 60.2% to £596m.

The group said it was yet to see an impact from Brexit or the falling pound on the business or costs, but revealed the fallout from the referendum result has sent its pension scheme funding gap ballooning by £3.2bn to £5.9bn.

Tesco shares surged by as much as 9% after the group's better-than-expected sales performance.

Retail analysts at Bernstein said it was a "fantastic set of results for Tesco, delivering on all aspects of the UK recovery".

The figures mark a turnaround after a torrid couple of years, when it posted the biggest loss in its history and was hit by a £326m accounting scandal.

Mr Lewis said: "We do believe that, after two years, we are stabilising the business and have seen signs of our competitiveness established in the marketplace."

But he said it was "just the start" of the group's recovery and confirmed the food price deflation that has been weighing on the entire sector was unlikely to ease off any time soon.

Tesco said its planned £1.5bn extra in cost savings would be made over the next three years.

Around £550m of these cuts will come from changes to how its stores operate, including trading hours and introducing a single customer services desk.

It said some £450m of savings will be made across logistics and distribution and about £500m from overheads, such as IT systems.

The group said the cuts will "enable us to further invest in our offer for customers, offset expected inflationary pressures on costs and continue to rebuild profitability".

Mr Lewis, who took over from Philip Clarke in 2014, outlined a three-year target to improve the group's profit margin.

Belfast Telegraph

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