Tesco’s annual results were a tale of contrasting narratives, with stronger than expected trading last year being overwhelmed by a cautious outlook amid soaring inflation and intensifying competition.

Group sales (excluding fuel) rose 2.5% to £54.8bn in the 52 weeks ended 26 February, despite coming up against elevated figures from a year ago, when lockdowns forced restaurants and pubs to close.

UK and ROI one-year like-for-like sales increased 2.2% on top of the “exceptional” growth of the prior year, driven by a sharp recovery in Booker catering sales, strong non-food sales and sustained market outperformance in the UK.

The rise in sales combined with much lower costs associated with Covid safety measures and a return to profitability for its banking operation. This helped pre-tax profits jump by 220% to £2bn, while adjusted operating profits from the retail side of the business increased 35% to £2.6bn.

However, the profitability last year was already partially offset by inflationary pressures in the cost base, particularly in distribution costs.

Meanwhile, Tesco forecast lower retail adjusted operating profits of between £2.4bn and £2.6bn for the current 2022/23 financial year. This expected profit range was both lower than forecast and wider than usual to reflect the “significant uncertainties” in the trading environment and its commitment to maintaining price competitiveness.

Tesco’s shares dropped 3.9% on Wednesday to 259.8p by lunchtime, having fallen as low as 251.6p in early trading, and hit their lowest level since October as the City absorbed its guidance.

AJ Bell said the forecast dip in profits “cast a chill across the supermarket sector”, adding: “The coming months will be challenging for Tesco as it faces higher cost inflation and a potential shift in how consumers spend their money.”

However, Bernstein suggested Tesco’s cautious guidance could be underplaying its underlying market strength. “Net switching gains are positive and share gains are consistent over the last year. Any commentary about reinvesting for the customer should be taken with a pinch of salt, in our view, as a political move to sound cautious given the current consumer environment”

Barclays also suggested that concerns over Tesco’s guidance could be overdone. “We expect that the market will be most focused on that dynamic initially. [But] we continue to think that Tesco is doing the right things for its customers and that this will continue to fuel its market share momentum.”

Tesco shares remain up 12.2% year on year, but have fallen back by more than 11% so far in 2022.

Topics