Tesco’s full-year retail sales rose 4.3% to £66.6bn, ignoring exchange rates. The uplift was driven by growth across all business divisions and regions, as market share reached its highest level in a decade.
Underlying operating profit grew at a slower pace of 0.6% to £3.2bn (£3.2bn expected), due to cost inflation.
Free cash flow was up 11.8% to £2.0bn (£1.7bn expected). Net debt rose 12% to £10.6bn, as the proceeds from last year’s £0.7bn sale of its banking operations have since been returned to shareholders.
For the year ahead, full-year underlying operating profits are expected to be between £3.0-3.3bn. Free cash flow is expected to land between £1.5-2.0bn.
Full-year dividends increased to 14.5p per share, up 5.8%
The shares were up 3.2% in early trading.
Our view
Tesco delivered a strong set of full-year results, beating on profit guidance and free cash flows landing well ahead of market forecasts. However, some cautious guidance in the face of events in the Middle East suppressed market sentiment on the day.
The nation’s largest supermarket saw sales rise across all regions last year. Everyday Low Prices, Clubcard Prices, and Aldi Price Match are just some of the initiatives that are drawing more customers through its doors. That helped Tesco record its highest market share in over a decade.
An expanded Tesco Finest range is also helping it poach customers from more premium supermarkets. And those who already shop at Tesco are treating themselves at home rather than going out, boosting Finest volumes. We view both of these shifts as potentially long-term in nature, meaning there's more juice to be squeezed.
Its enormous scale and strong relationships with suppliers are its key tools in keeping prices down for customers, giving them little reason to look elsewhere. The strategy relies on offering better all-around pricing than the competition, and it has delivered remarkably well. However, alongside rising employment costs, it means profits aren’t growing as quickly as the top line.
Tesco isn't just a retailer, though. It also owns the wholesaler Booker, which offers a different route to growth across the key business streams of catering and retail. Lately, declining tobacco sales here have weighed on businesses’ performance. We expect that trend to continue as the general population becomes more health-conscious. But at around 10% of the group’s underlying operating profit, we’re not too concerned.
The US-Iran conflict is creating greater uncertainty for consumers and the broader economy. Owing to its enormous scale and mass volumes of customer data, Tesco is in a better position than most of the competition when it comes to weathering these headwinds. But with the duration of the conflict an unknown, and consumers’ budgets likely to come under pressure this year regardless, Tesco’s profit guidance points to a small decline at the midpoint.
There’s plenty of free cash flow pumping around the business. That underpins the group's ability to invest in keeping prices competitive, as well as sustain the respectable 3.4% prospective dividend yield and share buyback programme. No dividend is ever guaranteed.
Tesco's reliable revenue streams, market-leading proposition, and income potential make it a best-in-class operator. We like Tesco’s long-term outlook and see room for it to reach the upper end of profit guidance this year. However, the market has recognised these strengths, pushing the valuation above its long-run average, which may limit near-term upside and increase sensitivity to any operational missteps.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Tesco’s management of ESG risk is strong.
The group has a corporate responsibility committee overseeing the group’s social and environmental obligations. It also discloses a substantial amount of ESG-related information in its annual report. However, it has ongoing involvement in controversies related to human rights in supply chains.
Tesco key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment.