On the face of it there was plenty to celebrate in the Tesco annual results this week, but despite the return to profitability the City was distinctly underwhelmed. Shares in the retailer plummeted 7.8% to 181p after the supermarket revealed the first rise in quarterly sales for three years.
Tesco bounced back from the loss of £6.4bn a year ago - the largest ever recorded for a UK retailer after huge writedowns in the value of its stores - to book pre-tax profits of £162m in the 12 months to 27 February.
But CEO Dave Lewis’ warning that expectations of a 35% boost to profits in 2017 might be too optimistic was cause for concern for analysts.
Dave McCarthy at HSBC said the cautious outlook overshadowed the progress made as he trimmed earnings forecasts for the next two years by 7% to 9%. “Perceptions around service, availability and price all improved substantially, as did ‘brand health’,” he added. “Unfortunately, all this has been overshadowed by what we believe is excessive caution by the company.”
Bruno Monteyne of Bernstein agreed: “This is a great update from Tesco looking backwards: solid sales and volume growth, and marginally beating consensus. However, the guidance for profits next year is disappointing. Tesco is not really guiding for profit improvements but for profit stagnation.”
Edison Investment Research analyst David Stoddard said the return to profitability was encouraging but operating margins remained “uncomfortably tight”, with a substantial debt burden still in place.
It wasn’t all doom and gloom, however. John Ibbotson, director of retail consultancy Retail Vision, piled praise on the job done by Lewis so far. “Dave Lewis is achieving an extraordinary feat - turning around an oil tanker in a very tight spot. With Tesco hemmed in by ruthless competition and food price deflation, it’s a delicate manoeuvre that requires both skill and vision.
“Yes, the turnaround is painfully slow, but for the Tesco behemoth to have begun its pivot without hitting the rocks is a huge achievement.”
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