Tesco Outlook Shows Grocer Emerging From Years of Scandal

(Bloomberg) -- Tesco Plc is using its growing buying power to hold down costs, bolstering profitability at the U.K.’s biggest retailer despite Brexit-related consumer jitters.

The supermarket operator said it’s on track to reach a target for an operating margin of 3.5 percent to 4 percent in the current year. After five years under the shadow of a massive accounting scandal, it’s nearing the end of a turnaround plan aimed at cutting operating costs by 1.5 billion pounds ($2 billion).

The shares were up as much as 2.2 percent Wednesday morning in London, helped by an increase in the dividend.

Tesco is bucking the trend among U.K. retailers struggling with the rise of online shopping and the fall in the pound since the vote to leave the European Union three years ago. Department-store owner Debenhams Plc became the latest victim this week, as lenders took over in a debt restructuring deal that wiped out shareholders. For grocers, the growth of discount chains Aldi and Lidl has added to the challenges.

Tesco has responded with cost cuts, saying in January that it would close some of its fresh-food counters, affecting as many as 9,000 employees. The acquisition of wholesaler Booker last year gave the company greater control over supply chains and a new way to reduce prices.

Tough Decisions

“Some of the decisions taken to strengthen the business have been difficult but they’ve been the right ones to ensure that we stay focused on the customer while making the business more sustainable,” Chief Executive Officer Dave Lewis said on a call.

Tesco’s comparable sales for the fourth quarter rose 1.7 percent in the U.K., just below analysts’ estimate of 1.8 percent, in what it described as an “uncertain market.” But the operating profit for the latest 12 months was ahead of expectations.

The company opened eight stores under the new discount label Jack’s last year in a bid to compete with discounters. It’s also offering so-called bulk buys in Tesco stores, selling goods from Booker, and the new acquisition contributed 196 million pounds ($256 million) to the company’s operating profit last year.

As rival J Sainsbury Plc awaits the outcome of a regulatory review of its planned purchase of Walmart Inc.’s Asda, Tesco is pushing ahead with a market share that’s nearly as big as that of its two rivals combined.

“Booker is a big plus but across the board this was a strong year for Britain’s biggest retailer,” Markets.com analyst Neil Wilson said in a note.

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