The headline-grabbing news in supermarket chain Tesco’s (LSE: TSCO) full-year results is that underlying profit before tax from continuing operations is down 6.9%, at £3,054 million, compared to a year ago. Underlying diluted earnings per share are down 5% at 32.05p.
Underlying figures are important because they strip out distortions such as those related to property transactions or asset write-downs to give management’s best calculation of the firm’s ‘true’ trading result. Meanwhile, considering results only from continuing operations strips out gains and losses from parts of the business that the company sold or stopped during the year, so that results from discontinued operations don’t skew the picture when making assumptions about forward trading.
The results in context
Although profit is down, as it was last year, there’s better news on some of the firm’s other figures. Revenue and net cash from operations have both held up, which gives investors hope that the company can halt the two-year-old slide in profitability:
| Year to February | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 |
|---|---|---|---|---|---|---|
| Revenue (£m) | 53,898 | 56,910 | 60,455 | 63,916 | 63,406 | 63,557 |
| Net cash from operations (£m) | 3,960 | 4,745 | 4,239 | 4,408 | 2,837 | 3,185 |
| Adjusted earnings per share | 29.06p | 31.8p | 36.45p | 40.31p | 35.97p | 32.05p |
| Dividend per share | 11.96p | 13.05p | 14.46p | 14.76p | 14.76p | 14.76p |
The dividend situation remains grim, with the payout spending three years at the current 14.76- pence-per-share level.
One bright spot is that Tesco Bank’s trading profit is up 1.6% on the year-ago figure. However, the bank contributes just over 5% of the firm’s profits. Tesco’s most important trading area remains the UK delivering 67% of overall trading profits, which are down 3.6%. Asia contributes 21% and is down 6.8%, and Europe delivers 7% with profits there down a gut-wrenching 33%.
Where is Tesco’s mojo?
Profits in all regions are down, so what’s up? Well, directors at all the London-listed supermarket chains have been talking about a sustained period of structural change within the industry. Operators in the middle space, such as Tesco, face ever-increasing competition from the new wave of food discounters such as Lidl and Aldi on the one side, and competition from those focusing on quality, such as Marks and Spencer and Waitrose on the other. Then there’s the mounting threat from internet operators, which are carving away at Tesco’s non-food offerings, a situation that hits its larger stores hard.
Tesco’s battle plan seems to involve retrenchment. The CEO reckons he stopped the firm’s expansion program, the ‘space race’, in preference to refurbishing existing stores. Then there’s a promise to invest £200m to lower prices on consumer staples to attract price-conscious customers. Those seeking quality will find a re-launched Finest range and 8,000 improved products in the core Tesco range.
What now?
Tesco expects the challenging environment to continue but plans to counter the threat by being what it calls ‘the most compelling offer for customers across all its channels.’
Whether an approach based on trying to be all things to everyone will be successful in turning the firm’s profitability around remains to be seen. Meanwhile the shares are well down from the highs achieved during 2010. Today, the forward dividend yield is running at around 5.1% for 2016 with the shares trading on a forward earnings’ multiple of around 10 — a fair price if forward profits firm up.