Tesco has hiked its profits expectations this year after strong UK sales and the sharp recovery of Booker boosted its first half performance.
Revenue increased by 6.3% at constant rates including growth of 49.3% in fuel sales due to a significant recovery in travel driven by the easing of Government restrictions early in the half, albeit still below pre-pandemic levels with two-year like-for-like sales down by (11.3)%.
Total like for like retail sales were up 2.3% on a one-year basis and 8.4% on a two-year comparable basis.
In the UK, sales grew ahead of Tesco’s own expectations and the chain outperformed the market as customer satisfaction improved across all key areas. Two-year like-for-like sales grew by 8.9% (with one-year sales up 1.2%) driven by a strong customer proposition on top of the benefit of customers continuing to eat more meals at home than prior to the pandemic.
Tesco said that as industry supply chains came under increasing pressure, it was able to leverage its “strong supplier relationships and distribution capability” to maintain good levels of availability for customers.
Online two-year like-for-like sales were up 74.1% with over 700,000 more customers using its services compared to pre-pandemic levels. Online one-year like-for-like sales grew by 2.3% as it lapped the ramp up in capacity last year and customers returned to physical stores.
Booker recovered strongly during the period, with one year like for like sales up 11% driven by a sharp recovery in demand from catering customers during the period and taking Booker like for like sales up 9.1% on a two-year basis after 2.6% fall last year.
Two-year like-for-like sales in ROI grew by 12.2% with a strong performance across all categories and channels.
The strong sales performance meant group adjusted operating profit grew by 41% at constant rates, helped by a reduction in COVID-19 related costs and a return to profitability in Tesco Bank.
COVID-19 costs totalled £122m in the first half, related to absence, in-store safety measures and additional costs related to fulfilling online sales, and were significantly less than the £533m costs incurred in the first half of last year.
These benefits were partially offset by the year-on-year effect of £249m UK Government business rates relief included in the prior year.
As a result of its strong first half performance, Tesco has increased its adjusted retail operating profit expectations for this financial year to between £2.5bn and £2.6bn.
It stated: “Although we do not yet know how the external environment and consumer behaviour will evolve in the second half, we have assumed that some of the elevated sales fall away and that we will continue to invest in our customer offer.”
Tesco also confirmed it is started a share buyback scheme, with the first tranche of £500m in shares to be repurchased by no later than October 2022. It also committed to paying a “progressive dividend” to shareholders, aiming to grow the dividend per share each year, broadly targeting a pay-out of around 50% of earnings.
The supermarket also laid out a wider strategic growth plan to drive growth and shareholder return over the coming years.
“Our progress against each of the measures is unlikely to be linear. For example, our near-term performance will likely reflect the annualisation of our exceptionally strong top-line performance through the COVID-19 period, which could result in a temporary reduction in sales,” it stated.
CEO Ken Murphy commented: “We’ve had a strong six months; sales and profit have grown ahead of expectations, and we’ve outperformed the market. 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.
“Today, we are sharing the strategic priorities that will enable us to build on these advantages to stay competitive, accelerate growth and generate between £1.4bn and £1.8bn retail free cash flow per year. These priorities will ensure we do the basics brilliantly, operate as efficiently as possible and grow our business by building unbeatable digital, convenience and loyalty platforms.
“We are committed to creating value for all stakeholders in our business. Our commitments to the communities we serve and society more broadly are reflected in our new purpose: serving customers, communities and the planet a little better every day.”
Tesco shares have jumped 4.7% to 265p this morning, their highest level since February.