Tesco reports first-half sales rise of 0.2% in the Republic

Shares in the retailer rose as much as 9.3% as its results beat estimates

5th October, 2016
Tesco shares rose by as much as 9.3%

Tesco has reported first-half sales growth of 0.2 per cent in the Republic, a market the retailer described as "highly competitive", as it delivered overall earnings that beat analysts' estimates, showing that chief executive Dave Lewis’s plan to revive Britain’s biggest grocer is gaining traction.

"Whilst top-line growth in value terms was held back by our continued investment in lower prices, we retain our leading position in the market in volume terms thanks to a strong performance in fresh food," Tesco said.

Irish like-for-like sales in the first quarter were up by 0.3 per cent although second quarter sales growth slowed to 0.1 per cent. The first-half rise of 0.2 per cent compares with a drop of 3.7 per cent in Tesco's sales in the first half of last year and a flat performance in the second half.

Overall, Tesco's operating profit rose 60 per cent to £596 million (€681 million) before one-time items, the company said, a sign that the grocer is recovering from a supermarket price war and an accounting scandal. The shares surged as much as 9.3 per cent, the most in almost two years.

Lewis has brought stability to Tesco by cutting prices, narrowing product ranges and improving customer service amid a price war triggered by discounters Aldi and Lidl. Investor optimism has been tempered by developments outside of the CEO’s control: a new minimum wage is raising costs for the UK’s largest private-sector employer while falling bond yields drove up Tesco’s pension deficit by £3.2 billion to £5.9 billion in the last six months.

“This is a fantastic set of results, delivering on all aspects of the UK recovery," Bruno Monteyne, an analyst at Sanford C. Bernstein, said.

Tesco said it’s targeting an operating margin of between 3.5 per cent and 4 per cent by its 2020 financial year. The margin for the main domestic supermarket business was 1.8 per cent in the first half, shrinking from about 5 per cent two years ago as the grocer has cut prices to keep pace with the discounters.

Lewis’s plan for restoring profitability includes a further £1.5 billion in operating cost savings over the next three years, Tesco said. The retailer will also seek to boost cash generation, maximise sales of higher-margin items and extract value from its property.

First-half profit exceeded the £523 million median estimate of 15 analysts surveyed by Bloomberg News.

In the UK, same-store sales excluding fuel rose for a third straight quarter. The growth of 0.9 per cent beat the analyst estimate for a 0.5 per cent increase.

“Lewis has turned the Tesco tanker around against a backdrop of ruthless competition and broader food price deflation,” John Ibbotson, an analyst at researcher Retail Vision, said by e-mail. “Its competitors will have cast a nervous eye over these latest results.”

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