Tesco Lifts Guidance on Higher Sales Volumes — 2nd Update

By Michael Susin

Tesco raised its profit guidance for fiscal 2025 after price cuts boosted sales volumes in the first half.

The U.K.'s biggest grocer has been cutting prices across a range of products in a bid to lure shoppers to its stores. The company reported a first-half underlying profit that came in ahead of market forecasts and said volume growth exceeded its expectations, paving the way for an increase to its profit outlook for the year ending in February 2025.

Tesco on Thursday said it expects retail adjusted operating profit--the company's preferred metric, which strips out exceptional and other one-off items--in fiscal 2025 of around 2.9 billion pounds ($3.85 billion) compared with the previous target of at least 2.8 billion pounds.

Analysts expect the group's adjusted operating profit to be 2.94 billion pounds, according to a company poll of 14 analysts.

Retail adjusted operating profit was 1.55 billion pounds in the six months to Aug. 24, rising 10% at constant currency. This beat expectations of 1.53 billion pounds, according to estimates provided by LSEG Refinitiv.

Shares rose 3.1% in midday trade in Europe. Since the start of the year, shares have gained more than 25%.

Tesco reported a first-half pretax profit of 1.39 billion pounds compared with 1.16 billion pounds in the same period a year earlier. The company said a target to deliver 500 million pounds in savings this year is on track, with 260 million pounds achieved in the first half.

Revenue rose to 34.77 billion pounds from 33.80 billion pounds, which compares with expectations of 34.74 billion pounds, according to LSEG Refinitiv data.

The company attributed the increase to better-than-expected volume growth, with comparable retail sales up 2.9%. Like-for-like sales grew 4.0% in Tesco's core U.K. market, driven by strong performances across physical stores and online, it said.

The volume increase represents a reversal of trends seen in recent years, when grocers boosted prices--often at the expense of lower sales volumes--in the face of surging costs caused by supply-chain disruptions and the inflationary pressures that followed Russia's invasion of Ukraine.

The update comes at a time food inflation in the U.K. is showing signs of stabilization, having recently fallen to the lowest rate since November 2021, according to the latest report from NielsenIQ and the British Retail Consortium. Nevertheless, consumer confidence remains under pressure, market research firm Kantar said last month.

Tesco has been expanding its share of the U.K. market, which currently stands at 27.8% followed by Sainsbury's and Asda with 15.2% and 13.8% respectively, according to the latest Kantar data.

The company's market-share gains in the U.K. and Ireland show its momentum heading into the key Christmas season, Tesco Chief Executive Ken Murphy said.

Tesco said it expects a higher profit contribution from the banking business it will keep after a sale of most of the operations of Tesco Bank to Barclays. It expects an adjusted operating profit contribution from the retained Tesco Bank business of around 120 million pounds for the full year, up from the previous figure of 80 million pounds.

The sale of the banking operations is due to be completed before the end of the year, with capital mainly returned to shareholders through share buybacks, it added.

The board declared an interim dividend of 4.25 pence a share, up from 3.85 pence a share a year earlier.

Write to Michael Susin at michael.susin@wsj.com

(END) Dow Jones Newswires

October 03, 2024 06:18 ET (10:18 GMT)

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