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Tesco beats annual profit forecast

International Business
Thu, 13 Apr 2017

London: Tesco, Britain’s biggest retailer, beat forecast for annual profit as its recovery gained pace, potentially strengthening the hand of boss Dave Lewis as he seeks investor backing for his plan to buy wholesaler Booker.

Tesco wanted the results, published yesterday, to reinforce its case that it can make a success of buying Booker in a £3.7 billion ($4.6bn) deal which it argues will help drive growth in the medium term.

The supermarket group said its turnaround was ahead of schedule – citing a 30 per cent rise in its key profit measure, a first annual increase in underlying sales in its core UK business for seven years and a 27pc reduction in net debt.

Tesco made an operating profit before exceptional items of £1.28bn in the year to February 25, ahead of analysts’ average forecast of 1.26bn.
Group sales rose 4.3pc to £49.9bn, while net debt was cut to £3.73bn.

UK like-for-like sales increased 0.7pc in its fourth quarter, a fifth straight quarter of growth.

Two of Tesco’s biggest shareholders last month urged it to drop the Booker bid, saying it was overpaying and the deal was a distraction from its turnaround plan.

Lewis said he was positive about the overall reaction he has received from investors, noting that Tesco was paying a multiple of nine times operating profit once £200 million of growth and cost synergies were factored in.

“A nine times multiple for a deal like this is a good deal. The fact that it returns its cost of capital in less than two years is very unusual in a transaction like this,” he said.

Earlier this month analysts at Bernstein surveyed investors and estimated the deal would be approved by 70pc of votes cast.

Lewis dismissed media reports that Tesco chairman John Allan was a reluctant supporter.

“I do smile about it...It was a perfect board process,” Lewis said.

After Tesco’s sales, profit and asset values were hammered by changing shopping habits, the rise of German discounters Aldi and Lidl and an accounting scandal, the company has been fighting back under Lewis.

He stabilised the business, then got it growing again with a focus on lower prices, new and streamlined product ranges, better customer service and improved supplier relationships.

Going for Booker is Lewis’s boldest move yet, believing it will provide Tesco with a new avenue of growth by giving it access to the fast-growing “out of home” food market, given Booker’s role as a distributor to the catering industry.

Tesco and Booker are engaging with Britain’s Competition and Markets Authority, which has yet to formally confirm the start of an investigation which could last for months.