April 13, 2016 / 3:21 PM / 4 years ago

Despite sales growth, UK's Tesco cautions recovery to be bumpy

LONDON (Reuters) - Tesco (TSCO.L), Britain’s biggest retailer, said on Wednesday its recovery was gaining pace but warned a supermarket price war meant profit growth would be hard to deliver this year.

The company, hammered by an accounting scandal and the rise of German discount chains, reported a first rise in underlying annual profit growth in four years and its first quarter of underlying UK sales growth for over three years. But it said there was much more work to do.

“We feel like we stabilized the business. We don’t feel that we’re in the crisis that, being candid, we were 16 months ago,” Chief Executive Dave Lewis told reporters.

“More customers are buying more things more often at Tesco,” he said, highlighting fourth quarter UK volume growth of 3.3 percent and a 2.8 percent rise in customer transactions.

However, Lewis warned that profit improvement “won’t be a smooth line” as Tesco cuts prices and invests in the quality of its products to help protect its leading position in Britain.

Shares in Tesco, which controls 28 percent of Britain’s grocery market, have risen 31 percent so far this year on recovery hopes but fell as much as 5 percent in morning trading.

Sales at British stores open over a year rose 0.9 percent in the 13 weeks to Feb. 27, the final quarter of its financial year, building on growth over its six-week Christmas trading period.

Tesco also reported a full year operating profit before one-off items of 944 million pounds ($1.3 billion), ahead of analysts’ expectations of 932 million pounds and the 940 million pounds it made in 2014-15.

That is a far cry from the trading profit of 3.97 billion pounds that Tesco generated in 2011-12 when it could seemingly do little wrong.

PRICE CUTS

Sales, profit and asset values at Tesco have been hammered by changes to shopping habits and the rise of German discounters Aldi and Lidl, while the accounting scandal severely dented its reputation.

Tesco said price cuts in a “challenging, deflationary and uncertain market” would impact the pace of profit growth in the 2016-17 financial year, particularly in the first half.

Prior to Wednesday’s update, the consensus forecast for operating profit before one-off items in 2016-17 was 1.25 billion pounds.

“If we were to achieve that (consensus) and make all the investments we want to make, that is a significant achievement,” said Lewis.

Former Unilever (ULVR.L) executive Lewis has impressed investors with his decisive steps since replacing sacked predecessor Phil Clarke in September 2014.

He is trying to revive Tesco with a focus on lower prices, streamlined product ranges, better customer service and new simplified relationships with suppliers, the root cause of the accounting issues that are the subject of a criminal investigation by Britain’s Serious Fraud Office.

Lewis has also sold assets including Tesco’s South Korean business, and cut costs, including thousands of jobs, to reduce the firm’s debt burden. Tesco’s net debt now stands at 5.1 billion pounds, down 40 percent year-on-year.

Tesco’s better performance was broad based, with positive and improving underlying sales also achieved in Ireland, continental Europe and Asia and improved sales across all store formats and categories.

File photo of a Tesco supermarket seen at dusk in an 'art deco' style building at Perivale in west London, Britain, January 6, 2015. REUTERS/Toby Melville/Files

While analysts welcomed the return to UK sales growth, they point out that the discounters continue to open stores and take market share and competition with traditional rivals, Sainsbury’s (SBRY.L), Asda (WMT.N) and Morrisons (MRW.L), remains intense.

They also note significant cost pressures from the UK minimum wage, business rates and rental costs and uncertainty regarding Britain’s EU referendum in June.

Analyst Clive Black at Shore Capital, who has a “hold” rating on Tesco shares, said Lewis deserved “considerable credit for steering this near retail ship wreck to calmer waters, where the group’s ‘engineers’, can and are now making progress.”

Editing by Keith Weir

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