Tesco annual profits jump but warns of tougher outlook this year

UK retailer Tesco posted a sharp rise in annual profits on Wednesday, but warned that current-year earnings could fall as inflationary pressures start to hit consumers.

The company said adjusted operating profit rose 35.8% to £2.65bn in the year to February 26. On a pre-tax basis they were up 219% to £2bn. Total group sales rose 3% to £54.8bn.

Tesco forecast 2022-23 adjusted operating profit of £2.4bn - £2.6bn, which it said would be affected by the extent of further normalisation in customer behaviour as the economy emerged from the Covid pandemic, cost inflation and investment needs to stay competitive on price. Shares in the company fell 5% in early trade.

The results came on the day that UK inflation hit a 30-year high of 7% in March and just after a pledge-breaking tax rise by the government took effect on top of a 54% rise in energy prices as Britons face the biggest decline in living standrads since records began.

Inflationary pressures have intensified with Russia's unprovoked invasion and assault on Ukraine, hitting fuel costs and supplies of vital food staples such as wheat.

"Clearly, the external environment has become more challenging in recent months," said Tesco chief executive Ken Murphy.

"Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check."

"Given the significant uncertainties in the external environment, we believe it is appropriate to provide profit guidance in the form of a wider than usual range."

AJ Bell analyst Danni Hewson said the coming months would be challenging for the supermarket chain as it faced inflation and a potential shift in how consumers spend their money.

“There is a real risk that cash-strapped families will cut back on their shopping. Even though we all need to eat and drink, there is a high chance that shopping baskets may not contain as many treats as households have been consuming of late. If everyone cuts back on a few items each week, this loss of income for Tesco will certainly add up."

“If this trend does play out as expected, it won’t just be Tesco feeling the pain. On a two-year basis, Asda, Morrisons, Sainsbury’s and Co-op have all lost market share and these businesses will certainly not want to see further bad news in the form of customers tightening their belts."