LONDON • Even Tesco plc’s vast bulk can’t shield it from the effects of Brexit.
Sales growth at the UK’s biggest retailer slowed in the latest quarter as the company held the line on prices despite an inflationary squeeze from the weak pound, raising concerns about the strength of Tesco’s recovery.
Profits are being bolstered by international operations that were long seen as a distraction.
Tesco’s domestic business “remains fragile” and the company needs to “significantly improve” its sales performance in order to mitigate rising costs, Bryan Garnier analyst Antoine Parison said by email.
The shares fell as much as 4% in London yesterday, while rivals J Sainsbury plc and Wm Morrison Supermarkets plc were down as much as 2.3% and 2% respectively.
The company restored its dividend after three years with none, marking a milestone in its comeback from an accounting scandal in which former executives are on trial in London.
But the results yesterday show that Tesco is not immune to the effects of Brexit even though it can deal with price pressure more easily than some rivals.
The slide in the pound since the UK’s vote to leave the European Union has raised costs for retailers, which have to pay more for imported food as a result.
While Tesco’s first-half (1H) profit £759 million (RM4.26 billion) beat analyst estimates, the results were bolstered by international earnings. Property transactions provided a further boost of £33 million. Domestic same-store sales rose 2.1% in the second quarter, slowing from the previous three months and falling short of analyst expectations.
The UK operating margin was 2.1% in the 1H, well short of the company’s overall target of 3.5% to 4% by 2020.
Overseas operations in markets like Thailand and Poland are providing a crutch due to the weakness of the pound. Adjusted operating profit rose 40% in Asia and more than tripled in central Europe in the 1H.
“Tesco’s overseas operations give them more to work with financially than their rivals who are wholly reliant on the UK,” Bryan Roberts, an analyst at TCC Global, said by phone.
At home, the company has been mending strained relations with sup- pliers, working with them to keep prices down and narrow a gap with WalMart Stores Inc’s Asda and dis- counters Lidl and Aldi.
UK grocery prices have risen more than 3% across the market for six consecutive months, according to Kantar Worldpanel.
Tesco raised prices by about 2% across its range, CEO Dave Lewis said on a call, adding that he expects food inflation to continue at a similar pace in the 2H.
Lewis said he’s comfortable with a consensus estimate for full-year ope- rating profit of £1.5 billion. The company will pay an interim dividend of one penny a share.
“We don’t see any Brexit scenario as posing a risk to our targets,” the CEO said at a press conference. “Tesco is no more exposed to the risks than anybody else.” — Bloomberg