TESCO has beaten full year forecasts with a 28 per cent jump in operating profit as a better than expected fourth quarter helped push revenue up 2.3% to £51 billion.
The £1.6bn pre-exceptional operating profit, ahead of Tesco’s £1.5bn guidance, marks a major victory for chief executive Dave Lewis, who was hired in 2014 to turn around an ailing supermarket giant mired in an accounting scandal amid falling sales.
Hailing “another year of the strong progress” which ended with a ninth consecutive quarter of growth, Mr Lewis said: “More people are choosing to shop at Tesco and our brand is stronger, as customers recognise improvements in both quality and value”.
ANALYSIS: Tesco's Dave Lewis won’t be short of suitors as Charles Wilson waits
The UK business grew 2.2% in the year, with consistent strength in its fresh food offer, which outperformed the market in volume terms by 1.7%.
The one drag on the performance was a 0.4% decline in general merchandising sales.
Tesco’s Irish and Central European businesses also saw growth of 2.7% and 0.3% respectively. The only blemish was a 10% decline in sales in Asia, where Tesco has changed its strategy away from unprofitable bulk sales and discount coupons.
Growth in its superstores was up 1.9% on a like-for-like basis, and 2.7% in its convenience estate. Online sales were up 5.1%.
“Market conditions have remained challenging with continued cost price inflation,” said Tesco. “We have worked hard with our supplier partners throughout the year to mitigate price increases wherever possible, and made a significant investment in the first half to further hold back inflation and protect customers.”
Kantar Worldpanel research shows that Tesco’s market share of the grocery market is 27.6%, consistent with the previous year. Its Big Four rivals, Sainsbury, Morrisons and the Walmart-owned Asda all lost share.
ANALYSIS: Tesco's Dave Lewis won’t be short of suitors as Charles Wilson waits
Richard Lim, chief executive of Retail Economics said: “A laser-like focus on the core UK food business continues to deliver impressive gains. Deeper price investment, a more focused range and further asset disposals have slowed the loss of market share and boosted further improvements in profitability.”
There were improvements across the group’s accounts with operating margins improving by 57 base points to 2.9%, in spite of biting food inflation. Net debt was reduced by £1.1bn to £2.6bn, while the group’s pension deficit was reduced by £2.8bn to £2.7bn.
The year saw Tesco complete the acquisition of wholesale group Booker, which gives it the opportunity to enter the restaurant and pub sector. Tesco said it expected to see a £60m synergy benefit in year one, running to a cumulative £140m in year two before delivering annualised savings of £200m by the end of the third year.
Since the deal completed Booker’s chief executive Charles Wilson has replaced Matt Davies as head of Tesco’s UK business.
ANALYSIS: Tesco's Dave Lewis won’t be short of suitors as Charles Wilson waits
The performance has seen the return of a dividend of 3p.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “Overall Dave Lewis will be pleased his strategy is starting to gain traction, with sales and margins heading in the right direction, and the Booker acquisition in the bag.”
Tesco Bank saw revenue grow 3.9% year-on-year to £1.05bn, with pre-exceptional operating profit climbing 10.2% to £173m.
The Edinburgh-based bank, which saw long-term chief executive Bennie Higgins leave to be replaced in December by Gerry Mallon, said lending growth – which climbed 15.7% to £11.5bn – was strong, driven by secured mortgage lending, which now comprises 26% of the lending portfolio. Customer deposits were up 9.2% to £9.2bn.
Shares closed yesterday up 7.2%, sending Tesco to the top of the FTSE 100. That remains 42% down over a five-year period, but up 50% on its January 16 low.
“If Tesco can maintain its momentum in an improving market, there could be more to come,” said Mr Khalaf.
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