£285bn profit and Tesco is ‘still the darling’ of retail

Apr 16 2008 by Peter McCusker, The Journal

TESCO’S profit figures show that it is not all doom and gloom in the retail sector after the grocery giant banked an 11.8% rise in annual profits to £2.85bn.

The retail chain said “difficult” trading conditions had failed to halt sales growth, up 3.5% in the UK on a like-for-like basis, excluding petrol.

Trading in the current year so far has also proved resilient, with sales up by more than 4% in the UK on a comparative basis in the first five weeks, according to Tesco.

Shares in Britain’s biggest supermarket rose 4% as the results reassured nervous investors.

There had been fears that Tesco had suffered amid increasing pressure from its three main competitors, with Morrisons and Asda in particular gaining market share.

But while Tesco’s full-year sales growth failed to match up to the 3.9% hike in sales at Sainsbury’s and 4.6% reported by Morrisons, underlying pre-tax profits comfortably met market forecasts.

The group also gave a bullish outlook for its prospects in a consumer spending slowdown.

Sir Terry Leahy, chief executive of Tesco, said: “Consumers are worried, but they’re still spending, it’s just that they’re more careful how they spend.

“At Tesco, there will be more work on value brands and we will be more careful on how we promote stores – we’ll help the consumer spend a little less on their shopping.” He added: “Tesco has seen this trading environment before – it’s an environment in the UK and around the world that we do well in, because we have a good reputation for value.”

Today’s results provide some welcome good news from the retail sector, coming after British Retail Consortium figures reported in The Journal yesterday showed that high street sales in March fell for the first time in nearly two years.

Richard Hunter, head of UK equities at Hargreaves Lansdown Stockbrokers, said Tesco remained the “darling of the sector”.

“Tesco has yet again confounded its doubters, not only with another sparkling set of figures, but also with an upbeat accompanying statement which sets it apart from the crowd.”

However, Tesco said it was not immune to the belt tightening among consumers and described the year to February 23 as “unusual”, with unseasonal weather in the first half and a particularly tough final six months.

It has also been battling against soaring commodity costs in recent months, which it said had seen inflation across its UK stores increase to 2% in the last three months of the year, despite falls in non-food product prices.

But the figure is below the Government’s official rate of inflation, with figures today showing that the Consumer Prices Index remained above target at 2.5% in March.

Tesco also provided a brief glimpse into trading at its US venture Fresh & Easy, which has been at the centre of speculation over trading since launch last November.

Music and film downloads

TESCO is to take on Apple iTunes with the launch of a music and film digital download service.

Tesco Digital will initially offer 3.3 million music tracks when it launches next month, 1.6 million of those in MP3 format.

It plans for all of the site’s music to be compatible with iPods and other MP3 players by the end of the year. The site will later expand to offer downloadable films, TV shows and computer games.

A Tesco spokeswoman said the downloads would be “competitively priced“. Prices would vary depending on the album or single tracks.

The chain launched Tesco.com in 2000, and became the first major British supermarket to enter the music download market in 2004. However the service is currently only available in Windows Media format.

Graham Harris, Tesco’s commercial director, said: “ We’re starting out with a comprehensive music offering, but customers can expect downloadable TV and films as well as games to buy very soon. It really is a case of watch this space.”

The launch is the latest move by Tesco into areas away from its traditional food and clothing market. The company now offers furniture, mobile phones, credit cards, petrol, loans and even mortgages.