September 30, 2016 / 1:58 PM / 10 months ago

Tesco's trading recovery tempered by pensions cloud

3 Min Read

A woman walks past a Tesco supermarket in central London, December 9, 2014.Toby Melville

LONDON (Reuters) - Britain's biggest supermarket group, Tesco (TSCO.L), is expected to report further progress in its recovery next week with a third straight quarter of UK underlying sales growth, although it now faces the burden of a ballooning pension deficit.

The company is forecast to announce a rise in first-half operating profit on Wednesday but will also confirm a significant widening of its pension deficit as a result of falling bond yields following Britain's vote to leave the European Union.

That could delay the resumption of a dividend, unpaid since the second half of its 2014-15 year.

Analysts anticipate a rise of over 2 billion pounds in the gross pension deficit from the 3.2 billion pounds at Tesco's February year end, but say that should not come as a surprise to investors. Surging pension deficits have been highlighted by other big British firms, including John Lewis [JLP.UL], AB Foods (ABF.L) and the AA (AAAA.L), and it should already be factored into Tesco's share price.

After Tesco's sales, profit and asset values were hammered by changing shopping habits, the rise of German discounters Aldi and Lidl and an accounting scandal, the firm has been fighting back under Chief Executive Dave Lewis who took charge two years ago.

He has stabilised the business and started to get it growing again with a focus on lower prices, new and streamlined product ranges and better customer service.

He has also sought to simplify relationships with suppliers, the root cause of the accounting scandal that was uncovered shortly after he arrived and remains the subject of a criminal investigation by Britain's Serious Fraud Office.

Tesco's shares have risen 19 percent this year as Lewis has impressed investors with his decisive action, which also included cutting costs and selling assets as he looks to simplify the company, reduce debt and rid the company of its junk credit rating.

For the 13 weeks to Aug. 27, Tesco's fiscal second quarter, analysts are forecasting sales at UK stores open over a year rose by 0.4 to 1 percent - a third consecutive quarterly rise.

UK like-for-like sales growth was 0.3 percent in the previous quarter.

Analysts are forecasting first half group operating profit in a range of 487 million pounds ($631 million) to 624 million pounds ($809 million), up from 354 million in the same period last year.

Analysts at Tesco's joint house broker Barclays forecast a first half UK operating margin of 1.5 percent, ahead of 0.8 percent in the first half last year, but slightly below the 1.6 percent achieved in the second half of Tesco's 2015-16 year.

The anticipated fall is due to Tesco's major investment in "Farm Brands" - a range of own-label fresh produce, poultry and meat launched by Lewis in March to win back customers from the German discounters.

Editing by Susan Fenton

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