Tesco unveils record profits of £2.8bn

9.45am BST update

* Julia Finch, City editor
* guardian.co.uk,
* Tuesday April 15 2008


The Tesco supermarket juggernaut today unveiled record profits of £2.8bn, said the new year had started strongly despite the economic downturn and insisted its new business on the west coast of the US was producing "a promising early performance".

The UK's biggest retailer posted earnings bang in line with City analysts' expectations, with underlying profit up 11.8%. Group sales were ahead 11.1% at nearly £52bn.

Chief executive Sir Terry Leahy said: "The breadth of the group and the strength of our business model have enabled Tesco to deliver another year of double-digit sales, profit and earnings-per-share growth, in challenging market conditions".

The giant retailer, which takes more than £1 of every £8 spent on the UK high street, said the trading outlook was "not all gloom" for value-focused retailers such as Tesco, which could "grow market share in this environment". It said it intended to "trade the business harder to give what help we can to families whose budgets have become increasingly stretched by higher interest rates, fuel costs and taxes".

In recent months, Tesco has been under unusual pressure, with suggestions that its usually smooth-running operations have hit some bumps. But the supermarket group said its entire strategy was delivering "good progress".

In the UK over the past year, the group said it had been faced with "unseasonal summer weather, recovering competitors and a deteriorating non-food market". Nevertheless, it reported total sales up 6.7%, with higher customer numbers and a higher spend per visit.

However, non-food sales, which generate higher profits, have been under pressure. Non-food sales grew 9% to £8.3bn and growth slowed to 8% in the second half. Entertainment, health and beauty and consumer electronics were strong sellers, but clothing sales growth slowed to just 6% over the year, substantially less than half the growth rates of recent years.

The company said its Tesco Direct operation, launched to take on the Argos catalogue operation, was hitting targets.

The chain opened 120 new outlets in the UK last year, bringing the total number of stores to 1,608.

Tesco is under pressure from improving rivals. Sainsbury recently revealed a 4.6% increase in fourth-quarter like-for-like sales, while new market research data shows Wm Morrison is growing faster than major rivals and Asda is increasing its market share.

Tesco, which has nearly a third of the UK grocery market, broke with tradition today and provided an update on its most recent trading, saying like-for-like sales, excluding petrol, in the first five weeks were ahead "over 4%". Inflation accounted for 1.5% of that increase, down from 2% in the final quarter of last year.

"There is inflation but it is more muted than the general headlines would suggest," Leahy told Reuters.

Overseas, Tesco operates 1,600 stores, but has plans to open more than 500 outlets this year. Tesco said: "The performance of our international businesses has been outstanding, with excellent progress in sales, profits and returns."

Tesco insisted its Fresh & Easy chain in the US was performing well, but said it would be opening fewer outlets than planned this year, blaming the local property market in Nevada and Arizona.

Some analysts believe Fresh & Easy, which Tesco spent two years planning and Leahy plans to grow into a chain the size of Tesco in the UK, is seriously missing targets. Mike Dennis of broker Piper Jaffray believes the chain is undershooting targets by 70%. However, Tesco said its research proved that shoppers "like the quality and freshness of our ranges, as well as the prices and the convenient locations of the stores".

Leahy's ambition is to build a chain of 1,000 outlets from Seattle to San Diego. Some 60 stores have been opened, and 200 had been planned for this year. However, Fresh & Easy recently called a three-month halt to store openings while it fine-tuned the new business.

Other international sales, from countries ranging from China and Malaysia to Poland and Ireland, produced 50% of group trading profit. Four new multi-level shopping centres are due to open in China this year. Tesco intends to open more than 11m sq ft of new trading space this year, creating some 30,000 jobs worldwide.

The group said its plan to release £5bn from freehold property and a £3bn share buyback were on track.

The dividend has been increased 13.1% to 10.9p and Tesco shares jumped just over 4% to 407.75p in early trading this morning.