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Tesco shares plunge despite sales rise

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Shares in Tesco plunged as much as 6.3 per cent today despite the supermarket giant posting a 23.9 per cent increase in first-half group operating profit before exceptional items to £933m, while the consensus estimate was £992m.

Second-quarter UK like-for-like (LFL) sales rose by 2.5%, and that comfortably topped the forecast of 2.2%. It was the 11th consecutive quarter that LFL UK sales increased, which underlines how far the company has come from the days of profit warnings in the 2012/14 era.

Sales in Central Europe and Asia continue to underperform, but at least the situation in Asia is improving.as second-quarter sales dropped by 4.8%, while there was a 9% drop in the first-quarter.

The retailer continues to cut costs, as expenses have been trimmed by £241 million this year, so far the group has managed to save £1.1 billion, and keep in mind their aim is to save £1.5 billion. The interim dividend is 1.67p, up 67% on a year-on-year basis, and the dividend policy is moving in line with their forecasts. The company confirmed they are ‘well-positioned to deliver strong, sustainable returns for shareholders’, and Dave Lewis, the CEO, said the group is ‘bang on track with our plans’.

David Madden, a CMC market analyst, said: “Tesco had a solid start to the year, as it posted 1.8% growth in LFL group sales in the first-quarter, and that was an improvement on the 1% growth in the same period last year. Tesco’s acquisition of wholesaler Booker is paying off as LFL sales excluding tobacco jumped by 12.4%. The company described the performance of Booker as ‘sparkling’.

“Operations in Central Europe were underwhelming due to regulatory changes in Slovakia – where changes to public holiday opening times resulted in fewer opening days. It is not a major issue in the grand scheme of things as Central Europe only accounts for a small proportion of group revenue.

“The retailer has already strengthened its supply chain by purchasing Booker Group, and this month its tie-up with Carrefour will come into effect, and that will help trim prices for customers and bring down the cost of store fittings and trollies. The move is further proof the company is adapting to the changes in the food retail sector. Amazon have a foothold in the UK through their acquisition of Whole Foods, and Tesco are keeping an eye on costs in order to stay competitive.

“Tesco lunched a new low-cost brand called ‘Jack’s’ to compete with the likes of Lidl and Aldi. A number of stores have been opened, and between 10 and 15 more are in the pipeline. The stores that are open are ‘trading really well’. It is a bold move taking on Aldi and Lidl given the impressive success in the UK and Ireland. Since the most of the major supermarkets have found it difficult taking on the German deep discounters, Jack’s are up against tough competition – Aldi are planning to open 130 new stores in the UK over the next two years.”




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