Wednesday preview: Tesco targets profit rebound, UK earnings eyed

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Wednesday preview: Tesco targets profit rebound, UK earnings eyed

Tue, 11 April 2017
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Wednesday preview: Tesco targets profit rebound, UK earnings eyed

(ShareCast News) - Tesco will unveil its final results on Wednesday, before a UK labour market update that will be closely watched for evidence of a further squeeze on the UK consumer.
Coming hot on the heels of inflation data, the Office for National Statistics is expected to confirm unemployment for the three months to February remained at the 4.7% rate it reached at the start of the year.

January also saw UK wage growth ease off, which has been a major dampening effect on expectations of a rate rises this year.

Growth in average weekly earnings including bonuses is forecast to retreat to 2.1% from 2.2%, falling well below the rate of inflation confirmed at 2.3% on Tuesday.

Economists at HSBC said it thought the pace of growth has slowed a touch over the first quarter, though PMI surveys suggest job creation has not suffered, so the unemployment rate is likely to be unchanged or could even fall to 4.6%.

RBC Capital Markets noted that the unemployment rate was sitting right on the cusp of 4.7% and 4.8%, so "no one should really be that shocked if it ticked back up to 4.8%".

For average earnings growth, RBC predicted wages including bonuses would not change from 2.2% but a further slowing in growth on the ex-bonus figure to 2.1% from 2.3% should be expected.

"If we do indeed get confirmation of relatively sluggish pay growth whilst inflation is heading toward 3%, it will reinforce the message that the consumer is under pressure."

Tesco results

Tesco, the UK's largest grocery group, will publish final results on Wednesday, having given guidance that group operating profit before exceptionals and tax will be at least £1.2bn, which would beat last year's performance of £944m but a fraction of the £4bn profit recorded six years ago.

HSBC said this was the key number to watch, forecasting £1.3bn and underlying PBT of £875m and EPS of 8.5p, together with further progress on net debt with a reduction to £4.3bn.

Deutsche Bank said it expected Tesco will beat this number, with a 4% outperformance from UK and Ireland stores only partially offset by an international shortfall, which should "be well received by investors", though not by enough for upgrades to 2017/18 consensus.

"While there is no longer any disclosure between Asia and Europe profitability, we believe the decline in profitability stems from Europe, where margins were already low. In fact, we think Europe may have moved to become loss-making as a region, if not in 16/17, then likely in 17/18."

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