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Tesco PLC not the basket case it was feared to be

Published: 03:04 16 Apr 2014 EDT

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Tesco’s (LON:TSCO) profits have fallen for the second year in a row, though not as severely as feared.

Group trading profit fell in all regions, though there were a few bright spots, such as a 1.6% increase in profits to £194mln at the banking arm, plus positive sales growth online and in the Tesco Express portfolio.

Group trading profit was down 6.0% year-on-year at actual exchange rates to £3.32bn, with UK profits down 3.6%, Asia down 5.6% and Europe, despite favourable exchange rate movements, down a whopping 27.7%.

Underlying profit before tax tumbled 6.9% to £3.05bn on sales that edged up 0.3% (+0.9% excluding petrol) to £70.89bn.

Online sales were up 11% on the previous year, while like-for-like sales growth in Tesco Express stores was 1.1%.

The final dividend has been maintained at 10.13p, making the dividend for the year to 22 February 14.67p, which is covered 2.1 times by earnings.

Underlying diluted earnings per share (EPS) from continuing operations eased 5.0% from 33.74p to 32.05p. The consensus forecast was for EPS of 29.9p.

Tesco shareholders cowering in fear behind the sofa, hoping for some good news, will be heartened that the company’s refurbishment of its retail estate in its home market is typically generating a sales lift of between 3% and 5%. Shareholders will also be comforted that the £3.32bn trading profit was not as low as some of the more pessimistic forecasts from industry analysts, some of whom had pencilled in a figure of £3bn.

On the other hand, the company said it expects the challenging consumer environment, competitive intensity, and the rapid pace of change in retailing to continue in 2014/15.

“Having strengthened the foundations of our business in the UK, we are now accelerating our growth in new channels and investing in sharper prices, improved quality, stronger ranges and better service. Since setting out these plans just seven weeks ago, we have already made a substantial investment in price, launched Clubcard Fuel Save and re-launched our general merchandise ranges across the business. We are going faster with our work to transform our Extra stores to create more compelling destinations and will complete more than 50 in the first half alone,” said Tesco’s chief executive, Philip Clarke.

Relief that the profits fall was not as bad as expected sent the shares up 4.6% to 299.24p in early trading.

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