Tesco sees flat profit for current year as inflation bites

UK supermarket chain Tesco said it expected to post flat profits this year and announced a £750m share buyback as annual earnings halved last year with inflation battering both customers and company.

The company, Britain’s biggest retailer, said group pre-tax profit halved to £1bn. Retail adjusted operating profit fell 6.3% to £2.49bn, while group sales rose 5.3% to £57.6bn.

“This is despite unprecedented levels of inflation in the prices we have paid our suppliers for their products, and the cost of running our own operations,” said chief executive Ken Murphy.

British households have been squeezed by spiralling inflation, currently at 10.4%, and stagnant pay growth living standards at their lowest since records began in the 1950s. In March, grocery inflation rose to a record 17.5%, according to industry data.

Tesco forecast retail free cash flow within a target range of £1.4 - 1.8bn and adjusted operating profit of £130 - 160m for its bank division. The full year dividend of 10.9p a share was unchanged.

Murphy said he expected some recovery in food sales volumes as inflation eases.

"We're expecting inflation to fall throughout the year but we do expect the total year to still be inflationary, albeit at a much lower rate than in the year just gone," he said. “Some commodity prices are starting to come down but lots are still inflationary. The industry and supply chain have some locked in inflationary pressures through higher energy costs and wage inflation.”

He added that the price of milk, cooking oil and bakery products such as bread were starting to fall but warned that the costs of other commodities, such as rice and protein, were still on the rise, and keep the heat under inflation.

Sophie Lund-Yates, lead equity analyst at Hargreaves Lansdown said: While the group is doing what it can to keep prices low, it’s not lost on consumers that grocery inflation remains one of the most painful areas of overall rising costs at the moment."

"That’s where we’ve seen the rise of the discounters, which although much smaller, have forced the main players to up their game. Aldi price matches and other similar campaigns are a stark reminder of how stiff competition is. By some trains of thinking, if you’re having to name your competitor, they’ve already won."

"Food costs may struggle to come down until energy prices temper, which could slow progress on that front. At the same time, the retail business has over £2bn of free cash pumping through its veins, making Tesco a resilient name in the sector. And, crucially for investors, it means the dividend is still being served.”

Reporting by Frank Prenesti for Sharecast.com