Tesco shares up as profits fall over signs of recovery

Shares in the group, which is recovering from the toughest downturn in its history, rose 18p to 207p and supermarket rival Morrisons also gained on the news.

T​his was despite half-year profits dropp​ing​ by more than a quarter​ after the group cut prices​ in a bid to stem the flow of customers to discounters Aldi and Lidl.

​Tesco’s price cuts have resonated with customers,​ ​resulting in a third quarter in a row of sales growth as its turnaround gathers pace.

The group posted a 28​ per cent​ fall in bottom line pre-tax profits to £71​m for the six months to August 2​7​ ​following the sector’s fierce price war.

Its fightback against the discounters helped UK like-for-like sales ​rise 0.9​ per cent​ in the second quarter.

Chief executive Dave Lewis outlined plans to slash costs by £1.5​bn to help get profits back on track.​ ​Mr Lewis said savings will be made across​​ the company’s distribution system and store operating model​​.

Mr Lewis admitted there would be some “trimming” to headcount, but refused to be drawn on numbers. He said Tesco is consulting affected staff, some of whom may be put through a “selective redundancy” process if appropriate redeployments cannot be agreed, but he stressed the number of staff affected would be “numerically tiny - completely tiny in the scheme of Tesco”.

T​esco outlined ambitious plans to deliver a group operating margin of between 3.5 per​ ​cent and 4.0 per​ ​cent by ​its​ 2019/20 financial year​. It made a 2.18 per cent operating margin in the first half.

​Mr Lewis is leading a recovery at the retailer after its sales, profit​s​ and asset values took a hammering ​after an accounting scandal​. C​hanging shopping habits ​as people turn away from big supermarkets to convenience stores and online shopping ​plus the rise of German discounters Aldi and Lidl​ have also taken their toll​.

Falling food prices and a ballooning pension deficit have ​also caused problems, but ​Mr ​Lewis has stabilised the business and ​returned in to health ​thanks to a focus on lower prices, streamlined ranges, better quality products and improved customer service.

Tesco said it would not increase the size of the annual ​£​270​m pension top-up payments agreed last year, despite its pension deficit ballooning to ​£​5.9​bn, ​up ​from ​£​2.6​bn in February, due to the collapse in bond yields​ following the EU referendum result.​

The company, which has more than ​a ​28 per​ ​cent share of the British grocery market, reported a 60 per​ ​cent rise in ​underlying ​operating profit​s​of ​£​596​m for the six months to August​ 27, ​which was ​at the top end of analysts’ forecasts.

It said it was on track to deliver profit​s​ of ​£​1.2​bn for the full year, broadly in line with market expectations, after the recovery in its sales at British stores strengthened in the second quarter.

​Mr Lewis said ​Tesco’s recovery ​i​s gaining traction, but ​he ​cautioned that the market remains “challenging and uncertain”.

On an underlying basis, UK and Ireland first-half earnings more than doubled to £389​m from £164​m a year earlier​.

The group said it ​i​s yet to see an impact from Brexit or the falling pound on the business, ​despite its impact on its pension deficit.

Retail analysts at Bernstein said it was a “fantastic set of results for Tesco, delivering on all aspects of the UK recovery”.

The figures mark a turnaround after a torrid couple of years, when it posted the biggest loss in its history and was hit by a £326​m accounting scandal.

​Mr Lewis said that these latest results are “just the start” of the group’s recovery and confirmed th​at th​e food price deflation that has been weighing on the ​grocery sector ​i​s unlikely to ease off any time soon.

Mr Lewis, who took over from Philip Clarke in 2014, outlined a three-year target to improve the group’s profit margin, which has been under pressure amid the supermarket price war.

​He said there would​ be further investment in the group and ​on ​keeping everyday prices low.