Tesco Shares Fall as Overseas Weakness Weighs on U.K. Grocer

(Bloomberg) -- Tesco Plc fell as much as 6.3 percent as profit fell short of estimates in the second quarter amid weakness in its Asian and eastern European business. Despite a squeeze from higher fuel prices, the U.K.’s largest grocer said it’s on track to reach its profit-margin goal for 2020.

Key Insights

  • Despite a strong performance in the U.K., Tesco suffered sales declines in its international businesses. Higher fuel costs also weighed on profit, raising concerns among investors despite strong domestic sales growth.
  • Tesco’s U.K. sales beat analyst estimates in the second quarter, and its purchase of wholesaler Booker is paying off: The company said savings from the deal are on track and the new unit boosted profit by 97 million pounds ($126 million).
  • The grocer’s confidence on its profitability goals shows that Tesco continues to emerge from its years in the wilderness after a massive accounting scandal, brutal price competition in the U.K. and cost pressures from Brexit.
  • Tesco is throwing down the gauntlet to J Sainsbury Plc as the rival grocer moves to take over Walmart Inc.’s Asda. Tesco’s new Jack’s discount stores are in their infancy, but the company is cutting prices broadly.

Market Reaction

  • The decline in the shares was the biggest since June. Tesco shares had risen 12 percent this year through Tuesday’s close. After a runup in the spring, they’ve given back gains in recent weeks.

  • 2Q like-for-like U.K. sales +2.5%, estimate +2.2% (Bloomberg News)
  • Asia LFL sales down 4.8% in 2Q
  • 1H adjusted operating profit GBP933 million, estimate GBP992.0 million (BN)
  • Interim dividend per share 1.67p
  • 1H revenue GBP31.73 billion
  • 1H gross sales GBP28.29 billion
  • 1H statutory pretax profit GBP564 million
  • Says "Firmly on Track" to Deliver Medium-Term Ambitions
  • On course toward profit margin of 3.5 percent to 4.0 percent by 2020
  • Sees Booker Synergies Benefit at Least £60M This Yr
  • Statement