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Tesco Full-Year Results – What The Analysts Said

Published on Apr 15 2021 8:16 AM in Retail tagged: Trending Posts / Tesco / Barclays / Shore Capital / Moody's / GlobalData / What The Analysts Said / AJ Bell

Tesco Full-Year Results – What The Analysts Said

Tesco has reported a 6.3% increase in group like-for-like sales, including a 7.7% sales gain in its core UK market, in its full year to 27 February.

"While the pandemic is not yet over, we're well-placed to build on the momentum in our business," commented Ken Murphy, Tesco chief executive. "We have strengthened our brand, increased customer satisfaction and improved value perception."

Here's how leading industry analysts viewed its performance:

Roberto Pozzi, Moody's

"Tesco’s leverage increased to an estimated 4.4x in fiscal 2021, from 3.9x in the previous fiscal year, driven by the additional costs related to the pandemic and the decision to repay £585 million of business rates relief.

"Whilst Tesco’s online business is now profitable thanks to its leading market position, the company remains exposed to a very competitive market where discounters will continue to gradually erode the market shares of the 'Big Four'."

Russ Mould, AJ Bell

“Tesco must be frustrated at the fact it has pulled out all the stops to serve the nation during the pandemic, yet earnings have gone into reverse. Falling profit reflects the significant extra costs it has had to stomach to keep shelves stocked, staff and customers safe in-store, and additional capacity to service ferocious online demand.

“There hasn’t been a bigger live stress as that experienced by supermarkets over the past 13 months and Tesco and others will have learned valuable lessons in how to operate under intense pressure.

“That should provide benefits in the longer term, but for now Tesco shareholders will have to make the most of the small bone they’ve been thrown. The supermarket’s decision not to cut the dividend despite falling profits is a small token of its thanks, but some investors will no doubt still feel disappointed.”

Clive Black, Shore Capital

"Tesco’s commences FY2022 in very different shape as an organisation compared to this time last year; with Asia and Poland disposed in FY2021, the Group now comprises the retail businesses in the UK, Ireland & Central Europe, Booker as well as its Bank, the latter of which reported a loss of £175 million.

"Additionally, it is a transformed business from a solvency perspective, especially when compared to the time of former CEO, Dave Lewis’ arrival; Tesco now has modest nonlease debt and a structurally better pension position whilst it chips away at its operating lease exposure, benefiting from the proceeds from not just South-East Asian (£8.2bn) and Polish disposals (£0.5bn) but its investment in China, South Korea and Turkey too.

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"Such an adjusted Group balance sheet, with what we believe is a central aspiration to be a rational and disciplined cash compounder, leads us into the hopefully calm waters of Tesco’s Capital Allocation Framework (CAF), one where we have been working on the basis of an ordinary dividend reflecting cover at 2.0 times (x) (note the reduction in cover for FY2021 with a maintained DPS declared) with ‘surplus’ free cash flow to be applied to ongoing balance sheet maintenance where it makes sense from a financing cost perspective (e.g. bond buy-backs) and a recurring share buyback programme."

James Anstead, Barclays European Food Retail Equity Research

"Tesco has reported a good end to a difficult year – with sales, profit and cash generation all better than our forecast. However, the market's main interest is likely to be on the FY21/22 outlook. Tesco's 'best estimate' at this early stage is for Retail EBIT to recover to a 'similar level' as in 19/20 (ie £2.33bn). VUMA consensus is currently c4% higher than this level (£2.43bn).

"We assume Tesco is incorporating an understandable degree of caution but trim our forecast by c1% (from £2.39bn to £2.37bn). There is no news about a buyback, but Tesco states it remains 'committed to maintaining capital discipline and returning excess capital to shareholders'. Maintaining the FY dividend at last year's level – despite the YoY fall in profit – is a reassuring sign."

Thomas Brereton, GlobalData

“Tesco’s results for the year ending February 2021 – overlapping much of the UK’s year dealing with COVID-19 – show a mixed bag of results, with the strong rise in ex. fuel group sales of 7.1% to £53.4bn (excluding the now discontinued operations in Asia) overshadowed by a 28.1% fall in total operating profit to £1,815m. While profit is distorted by a loss in Tesco’s banking division and a dramatic fall in Central Europe operations, retail profit across core UK & ROI operations still fell 13.5% as COVID-19 costs (including colleague bonuses) reached £892m, and Tesco forewent £535m in business-rates relief.

“A return to higher profitability will be a key focus over the next year. While Tesco expects much of the £892m costs (which predominantly included COVID-19 safeguarding measures and staff bonuses) to fall away as the UK lockdown comes to an end, it has stated that similar costs will be incurred for at least the next quarter (March – May 2021). Tesco’s profit recovery will also be impeded as consumers continue to shop for food online – a less profitable channel for retailers (UK online food and grocery is expected to remain buoyant even after COVID-19 restrictions ease).

“But questions over future profitability aside, Tesco looks well set to meet the challenges facing the grocery market in 2021. In-store promotions (such as Aldi price match) and its powerful 'ClubCard prices' scheme have firmly re-established Tesco as a value leader in the minds of shoppers, which will be crucial as the longer-term economic impact of COVID-19 comes to the fore. And – although not currently a market leader in the space – Tesco is placing much more emphasis on sustainability and reaching various internally set net-zero goals, including being the first retailer to establish a sustainability-linked financial bond."

© 2021 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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