TESCO has recorded its first annual like-for-like sales growth for seven years, but the supermarket giant’s pre-tax profits fell 28 per cent as it booked a £235m exceptional charge against 2014’s accounting scandal.
The fall in pre-tax profits to £145 million, and ongoing investor concern over Tesco’s planned merger with wholesaler Booker, saw shares fall 5.73 per cent, wiping more than £900m from the group’s market value.
Investors were also spooked by yesterday’s labour market figures, which saw Morrison Supermarkets and J Sainsbury fall 1.7 per cent and 2.7 per cent respectively.
But revenue of £49.9 billion as like-for-likes grew 0.9 per cent shows the turnaround plan put in place by chief executive Dave Lewis is working, with one analyst saying Mr Lewis had turned a “thoroughly demoralised business into one with a clear sense of direction”.
In 2014, Tesco overstated its profit by £326m by booking revenue too early, blaming this on an accounting error. The following year it racked up a £6.3bn loss.
Tesco agreed last month to pay a £129m penalty and compensate affected shareholders with a further £85m.
Without the charge, pre-exceptional operating profit climbed 30 per cent to £1.3bn, above analysts’ expectations.
“We are ahead of where we expected to be at this stage, having made good progress on all six of the strategic drivers we shared in October,” said Mr Lewis. “We are confident that we can build on this strong performance in the year ahead, making further progress towards our medium-term ambitions.”
The group’s pension deficit more than doubled to £5.5bn, with falling interest rates and higher inflation being cited. And net debt at the group fell 27 per cent to £3.7 billion, but this is expected to rise again if the Booker acquisition goes ahead.
That deal has hurdles to face with a number of major investors questioning its merits, and its value. Shareholders are set to vote on the plans late in 2017 or early in 2018.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “With the sands of retail shifting, and Tesco only just starting to turn performance around, big questions hover over the proposed takeover of Booker Group.
“The logic for the deal lies in providing a growth engine for Tesco in the restaurant and hotels foods market, but investors are asking whether Tesco should walk before it starts to run.”
Mr Lewis defended the deal, saying: “Our proposed merger with Booker will bring together two complementary businesses, driving additional value for shareholders by realising substantial synergies and enabling us to access the faster growing ‘out of home’ food market.”
John Ibbotson of Retail Vision, said: “Tesco’s fairy-tale recovery story continues. Dave Lewis has turned a thoroughly demoralised business into one with a clear sense of direction.
“The core UK market is starting to fire on all cylinders, debt is down significantly and the group performance has been marred only by weakness abroad, especially in Thailand. But there’s a long way to go yet, especially with inflation likely to rise further.”
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