Tesco Defies Supply Chain Challenges to Lift Profit Forecast

Tesco Defies Supply Chain Challenges to Lift Profit Forecast
A logo of Tesco is pictured outside a Tesco supermarket in Hatfield, Britain on Oct. 6, 2020. (Peter Cziborra/Reuters)

LONDON—Tesco, Britain’s biggest retailer, raised its full-year earnings forecast on Wednesday after the unmatched scale of its store and online operations helped it outperform rivals in the first half and deliver a better-than-expected 16.6 percent increase in profit.

British retailers are battling supply chain disruptions and labor shortages. Supermarkets also face tough comparisons against record sales during COVID-19 lock-downs.

Tesco, however, increased sales in the period.

“We’ve had a strong six months; sales and profit have grown ahead of expectations, and we’ve outperformed the market,” said Chief Executive Ken Murphy.

“With various different challenges currently affecting the industry, the resilience of our supply chain and the depth of our supplier partnerships has once again been shown to be a key asset.”

The group said on Wednesday the strong performance had enabled it to cut net debt by £1.7 billion ($2.3 billion) since February, and so it could afford to buy back shares, with the first £500 million ($677 million) to be bought by October 2022.

Its shares rose 5 percent in early deals, topping the FTSE 100 index.

Tesco forecast a full-year adjusted retail operating profit of £2.5–£2.66 billion ($3.38–$3.6 billion), having previously forecast a similar outcome to 2019–2020, when it made £2.3 billion ($3.1 billion).

The company, with a 27 percent share of Britain’s grocery market, said it made an adjusted retail operating profit of £1.39 billion ($1.88 billion) in the first half—ahead of analysts’ average forecast of £1.26 billion ($1.7 billion) and £1.19 billion ($1.61 billion) a year earlier.

Group sales rose 2.6 percent to £27.3 billion ($36.9 billion), while UK like-for-like sales climbed 1.2 percent, having risen 0.5 percent in the first quarter.

Recent industry data has shown Tesco outperforming its main rivals—Sainsbury’s, Asda, and Morrisons.

Analysts say Tesco is benefiting from its huge online business, its strategy to match prices at German-owned discounter Aldi on around 650 lines and the success of its ‘Clubcard Prices’ loyalty scheme.

However, Tesco chairman John Allan told ITV last month that supply chain disruption meant food prices in Britain could rise by 5 percent this winter.

Tesco’s share price has climbed about 14.6 percent this year but has under-performed both Sainsbury’s and Morrisons.

Morrisons, which is being taken over by U.S. private equity group Clayton, Dubilier & Rice, is up 61 percent, while Sainsbury’s, also buoyed by takeover speculation, is up 33.5 percent.

Tesco is paying an interim dividend of 3.2 pence ($0.043), in line with the prior year.

By James Davey