April 11, 2018 / 2:35 PM / 5 months ago

Tesco profit surge and Booker boost defy UK retail gloom

LONDON (Reuters) - Britain’s biggest retailer Tesco (TSCO.L) bucked a grim start to the year for the sector with a 28 percent surge in annual profit and a punchy revenue growth target for the newly acquired Booker wholesale business.

Shares in Tesco rose as much as 6.5 percent on Wednesday after it confirmed targets for cost savings, cash generation and profit margins and said the integration of Booker, purchased for 4 billion pounds ($5.7 billion) last month, was well underway.

The deal will see Tesco expand to provide food to restaurants, bars and smaller grocers, while some 200 million pounds of annual synergies are targeted within three years.

Chief Executive Dave Lewis also issued a new target - incremental revenue growth of 2.5 billion pounds from the combined business in the medium term.

He said growth would come from Tesco stores selling Booker goods and vice versa, from new store formats, such as putting Booker’s ‘Chef Central’ professional catering supply business in Tesco stores, and expanded delivery options.

There would also be opportunities in Click & Collect, mobile phones and banking.

Tesco’s results provided some cheer after Britain’s tough trading conditions - where a squeeze on consumer spending has combined with higher costs and more online shopping - plunged Toys R Us UK, electricals group Maplin and drinks wholesaler Conviviality into administration and forced fashion retailer New Look and floor coverings firm Carpetright to close stores.

Tesco remains the largest of Britain’s supermarkets by a clear margin, with a 27.6 percent share, according to industry data. It is also the fastest growing of Britain’s “big four” along with No. 4 Morrisons (MRW.L).

LEWIS TURNAROUND

Tesco made an operating profit of 1.644 billion pounds in the year to Feb. 24 - versus guidance of “at least” 1.575 billion pounds. Group sales rose 2.3 percent to 51 billion pounds.

Grey clouds hang over a Tesco Extra store in New Malden in southwest London, Britain June 4, 2014. REUTERS/Luke MacGregor/File Photo

The outcome was helped by a strong end to the year in Tesco’s home market, with fourth quarter like-for-like sales up 2.3 percent - a ninth straight quarter of growth.

Lewis joined Tesco in September 2014, leading a fightback after sales and profits were hammered by changing shopping habits, the rise of German discounters Aldi and Lidl and an accounting scandal that plunged the retailer into the worst crisis in its near 100-year history.

Lewis, who joined shortly before the scandal was uncovered, first stabilized Tesco, then got it growing with more competitive prices, streamlined product ranges, better customer service and improved supplier relationships. The Booker purchase is his boldest move yet.

“With three years under our belt Tesco is growing again, recovering profitability and generating significant cash,” Lewis told reporters.

“The merger with Booker allows us to build on this trajectory.”

The group, which competes with Sainsbury’s (SBRY.L), Asda (WMT.N) and Morrisons, said it was on track to deliver its targets - cost savings of 1.5 billion pounds, generating 9 billion pounds of retail cash and earning between 3.5 and 4 pence of operating profit for every pound customers spend by 2019-20. It had a margin of 2.9 percent in 2017-18.

Bernstein analyst Bruno Monteyne forecast Tesco could achieve the margin target one year early and raised the prospect of share buy-backs and special dividends.

Tesco is paying a final dividend of 2 pence a share, giving a total payout of 3 pence. An interim dividend in October was its first in three years.

Tesco’s shares have risen 14 percent over the last year but remain below the 230 pence they were at when Lewis joined.

That reflects caution among some investors about the ongoing challenge of the discounters and online players and the fact that Lewis has taken earnings out of the business through disposals such as the South Korean unit.

“We’re very clear there’s more to do,” said Lewis. “It’s definitely not job done.”

Editing by Kate Holto, Alexandra Hudson and Mark Potter

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