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Tesco earnings plunge by 70% despite slowdown in sales decline

Published 07/10/2015

A fierce supermarket price war has taken its toll on Tesco profits
A fierce supermarket price war has taken its toll on Tesco profits

Supermarket giant Tesco revealed a 70% plunge in half year earnings for its UK and Ireland business despite seeing an improvement in under-pressure sales.

The chain said like-for-like sales in the UK fell 1.3% in the six months to August 29 - a marked improvement on the 4.6% slide seen a year ago.

But a fierce supermarket price war took its toll on profits, with earnings tumbling to £166 million in the first half, from £543 million a year earlier, while overall group profits dropped 55% to £354 million.

The group said the fall in like-for-like sales in the UK and Ireland improved from 1.5% in the first three months to 1% in the second quarter, but the group warned that price deflation was still hitting sales.

Dave Lewis, chief executive of Tesco, cautioned there was "more deflation to come and I don't see the market changing".

But he added he was "quietly confident" over the group's turnaround, having hit a low point at the end of last year.

The group assured that customers were responding to its overhaul, with transaction numbers rising - up 1.5% in the first half - and sales by volume also ahead, up 1.4%.

Britain's big four supermarkets have been hit by the rising popularity of discounters Aldi and Lidl in recent years, with their share being eaten away by the two chains.

They have fought back by slashing prices, but have paid the price with falling sales and profits coming under pressure.

The new national living wage will add to costs faced by the businesses, with Tesco confirming it will cost it around £500 million to hike its wages to meet the £9 an hour minimum by 2020.

But Mr Lewis said the group already pays more than the £7.20 minimum being brought in under the new living wage plans next April, adding that with all the extra staff benefits taken into account, its hourly pay is closer to £9.

Half-year figures revealed that o n a bottom line basis, costs related to the sale of its Korean business left Tesco nursing net losses of £368 million.

The group also confirmed it was scrapping plans to sell-off its Dunnhumby data analysis business that runs its Clubcard loyalty scheme, which follows reports of poor interest from prospective buyers.

Tesco shares dropped 2% after the half-year report, described as " disappointing on many levels" by Cantor Fitzgerald analyst Mike Dennis.

He estimated that UK stores were loss making at an operative level in the first half and forecast more store closures among Tesco's 3,500-strong UK estate.

But Mr Lewis sought to assure the group was not planning to make a cash call to investors, instead hoping to rely on "self-help" measures to reduce debts and improve profits.

Mr Lewis - who took over at the helm from Philip Clarke last September - has been leading a turnaround to restore the fortunes of the supermarket giant's core UK business.

It 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 also 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.

The group said it was on track to cut annual costs by £400 million a year.

Tesco remained tight-lipped on reports that it is in talks with the Serious Fraud Office (SFO) to settle a criminal probe into its accounting scandal, which plunged the group into crisis last year.

It is understood Tesco and the SFO have been in discussions about the possibility of signing a deferred prosecution agreement after the £326 million accounting black hole emerged last autumn.

Mr Lewis said the group "cannot comment on the ongoing investigation".

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