Update: Tesco profits slump as Sainsbury’s piles on the pressure

Tesco has reported a 24.5% drop in group pre-tax profits to �1.39bn for the six months to August 24.

Tesco has reported a 24.5% drop in group pre-tax profits to �1.39bn for the six months to August 24. - Credit: PA

Supermarket giant Tesco said today that its turnaround efforts were paying off with improved trading in the UK, but revealed the impact of tough overseas markets and the costs of its overhaul as group profits slumped by a quarter.

Tesco revealed first half group pre-tax profits of £1.39billion, down 24.5% year-on-year with currency effects stripped out after being hit by restructuring costs and steep profit falls across Europe and Asia.

But trading profits in its UK business rose 1.5% to £1.13bn, with like-for-like sales excluding petrol remaining flat in its second quarter after falling 1% in the previous three months.

Rival Sainsbury’s continued to pile on the pressure as it reported like-for-like sales excluding petrol were up 2% in its second quarter.

Tesco also confirmed a deal with China’s largest retailer China Resources Enterprise (CRE) to merge their operations in the country, creating a business with more than 3,100 stores and combined sales of close to £10bn.

It marks a major shift in strategy for the group, bringing to an end its independent business in one of the world’s fastest growing retail markets, and comes after it recently offloaded its loss-making US Fresh & Easy chain as part of a strategy to focus efforts on its UK turnaround.

Philip Clarke, chief executive of Tesco, said: “Despite continuing challenges, we have made further progress on our strategic priorities.

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“Our performance in the UK has strengthened through the half, particularly in our food business, as we have continued our work to Build a Better Tesco,” he added.

The group suffered a 71% tumble in European trading profits to £55million in the first half to August 24 and admitted the hit was worse than expected after conditions worsened in countries such as Ireland, Turkey and Poland.

Profits also fell sharply across Asia, down 12.4% to £314m, excluding China, and Tesco admitted the overseas woes would offset some of the benefit of its UK profits improvement over the full-year.

Mr Clarke said he remained committed to Europe, but stressed the region accounted for less than 15% of group sales.

Tesco said it had reversed sales declines in the UK, where it has been carrying out a £1bn overhaul and revamping stores.

Sales still remained in the red overall in the first half, down 0.5%, as growth in food was held back by troubles in general merchandise, where it has been moving out of less profitable product lines.

Retail experts at Shore Capital Stockbrokers said the European results were “pretty awful”.

In a marked contrast of fortunes, Sainsbury’s beat City expectations with its second-quarter sales increase as its general merchandise and clothing sales continued to grow at more than twice the rate of food.

Like-for-like sales throughout the first half to September 28 rose 1.4% excluding fuel following its 35th consecutive quarter of sales growth.

Sainsbury’s has been the only Big Four supermarket to grow its market share, with the latest Kantar Worldpanel figures showing an increase to 16.6% during the 12 weeks to mid-September from 16.4% a year earlier.

Despite Tesco’s recovery efforts, its slice of UK grocery spending was down from 30.9% to 30.2% in the same Howver, Richard Hunter, head of equities at Hargreaves Lansdown Stockbrokers, said there was scope for further growth at Tesco in the UK as its overhaul gains traction.

“Tesco is spinning the strategic plates and is showing some early signs of success,” he said.

Analysts also praised the group’s merger deal with the China Resources Vanguard chain, which is owned by state-controlled CRE.

It will see Tesco pay around £345m to take a 20% stake in the enlarged group after bringing its 134 stores in the country together with Vanguard’s 2,986 shops across China and Hong Kong. The merger is expected to complete in the first half of next year.

Shore Capital’s analysts said: “We believe it is better to have 20% of something rather than 100% of a business that had it all to prove and may never have fulfilled its originally aspired ambitions.”

It follows just weeks after Tesco announced the sale of its troubled US business to American investment firm Yucaipa Companies, its second withdrawal from an international market in just over a year, having announced in August last year that it was pulling out of Japan.

These decisions mark a reversal of some of former boss Sir Terry Leahy’s ambitious expansion strategy.

Under Mr Clarke’s leadership, Tesco is also scrapping more than 100 major UK store developments and focusing growth on convenience stores and its online offering, while also looking to transform stores into family-friendly retail destinations, snapping up the Giraffe restaurant chain to open them alongside larger stores.

But lower profits on property sales and one-off costs took their toll on first-half group profits.

With the impact of this stripped out, underlying group pre-tax profits fell 8.4% to £1.47 billion on a constant currency basis.

Mr Clarke insisted the group was “feeling positive about the changes we’ve made”.

It is relaunching its premium Finest range next week, while its Hudl tablet hit store shelves last week with the aim of making the computers accessible to a wider market.

Sainsbury’s said its strong performance over the summer had been driven by demand for own-brand ranges.

The UK’s third biggest grocer announced a 2% rise in non-fuel like-for-like sales for the 16 weeks to September 28 and said it was the only major supermarket to be growing market share.

It own-brand offer, which includes Taste the Difference, has continued to grow at twice the rate of sales of branded goods.

Meanwhile, its groceries online business grew by more than 15% in the quarter and is now worth more than £1 billion in annual sales.

The company’s performance also reflected 20% growth for its convenience stores as customers topped up during the warm summer.

Chief executive Justin King said the trend of “savvy shopping” had continued despite encouraging signs on the economy.

He added: “We have delivered strong sales over the quarter, continuing to outperform the market in what remains a tough retail environment.”

The retailer said it opened 31 convenience stores and five new supermarkets in the period, adding 307,000 square feet to the estate.

Its general merchandise and clothing business continues to grow at over twice the rate of food, with its recently relaunched Tu clothing brand now available in nearly 400 stores.

Today’s underlying sales rise was stronger than the rate of 0.8% in the previous quarter and comes despite comparisons with strong trading a year earlier, when it sponsored the Paralympic Games.

George Scott, an analyst at retail consultancy Conlumino, said the chain was seeing “renewed momentum” in the face of intense price rivalry among the “big four” chains and discounters Aldi and Lidl.

He added: “Wider afield, the growing impetus of Waitrose, which has also successfully bridged the value-quality spectrum, will pose threats at both convenience and supermarket levels.”