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Tesco warns over pressure on profits despite move back into the black

Published 13/04/2016

Tesco has swung back into the black after unveiling its first quarter of UK sales growth for more than three years, but warned its fightback amid a fierce price war would put profits under pressure.

The UK's biggest supermarket cheered "significant progress" in its turnaround battle as it edged out of the red with bottom-line pre-tax profits of £162 million for the year to February 27.

This compares with losses of £6.3 billion the previous year - the worst in its history and one of the biggest losses in UK corporate history.

But shares fell 3% as it cautioned its investment in price cuts would slow profit improvement, "particularly in the first half".

Chief executive Dave Lewis said the supermarket had been "stabilised" and was no longer in crisis, but he added the group continued to face a "challenging, deflationary and uncertain market".

Tesco's recovery will not be a "straight line", he admitted, and said the job to turn around its fortunes was not yet done.

Its return to annual profit comes after a grim previous year when massive property writedowns sent it slumping more than £6 billion into the red.

On an underlying basis, the latest set of results showed group operating profits of £944 million, up 1.1% on £940 million the previous year, when it reported a 68% slump in trading profits.

It reported a 0.9% rise in UK like-for-like sales in its fourth quarter, which marked its first full quarter of growth since 2013 and follows a bumper Christmas for the group, when it saw a surprise 1.3% jump in sales over the six-week festive season.

Mr Lewis said: "We have made significant progress against the priorities we set out in October 2014."

He added: "We set out to start rebuilding profitability whilst reinvesting in the customer offer, and we have done this. More customers are buying more things more often at Tesco."

Mr Lewis was parachuted in to take over from former chief executive Philip Clarke in September 2014 at a grim time for the chain, with Tesco uncovering a £326 million accounting black hole in autumn 2014 and suffering plunging sales.

Its woes were compounded as trading across the sector was hit by falling food prices, made worse by a price war sparked by the increasing might of discounters Aldi and Lidl.

Retail experts at Shore Capital said it had been a "year of delivery" for Mr Lewis.

They added he "deserves considerable credit for steering this near retail shipwreck to calmer waters".

Under Mr Lewis, Tesco has shut 60 unprofitable stores since the start of its financial year and shelved plans to open a further 49 shops.

He 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.

On Tuesday he kicked off the next expected wave of asset sales by offloading an 8.6% stake in Singaporean online business Lazada to China's ecommerce giant Alibaba for £91 million.

Tesco is also reportedly planning to sell off the Dobbies Garden Centres chain, coffee shop Harris & Hoole and restaurant Giraffe to focus on the main supermarket business, but Mr Lewis declined to comment on the speculation.

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