Tesco Plans Buyback, Profit Boost as Bidders Circle U.K. Grocers
Tesco Plc plans to buy back shares and boost its profitability, seeking to lift its lackluster stock performance as private equity bidders circle U.K. supermarkets.
Britain’s largest grocer said it will start repurchasing 500 million pounds ($680 million) of shares in October and indicated further buybacks are likely.
Tesco’s stock price has trailed behind rivals as consolidation sweeps the industry. Clayton Dubilier & Rice LLC’s 7 billion-pound offer for smaller rival Wm Morrison Supermarkets Plc has sparked speculation that Tesco or J Sainsbury Plc could become interesting targets.
Even though Britain’s food retailers faced significant costs to run stores safely during lockdowns, they have been winners as the pandemic elevated sales and accelerated changes in shopping habits.
Shares in Tesco gained as much as 5.2% in London Wednesday. They gained 12% from the start of the year to Tuesday. Sainsbury’s gained 37% during that period, while Morrison advanced 66%.
The buyback “isn’t defensive by any means as far as we are concerned,” Chief Executive Officer Ken Murphy said on a call with reporters. He said it is part of “business as usual” given the strength of the grocer’s balance sheet and growth plans, adding “we would never speculate on any private equity activity in the market.”
Murphy, a year into the job, also laid out his growth strategy. He said the grocer will continue to ensure its pricing is keen in Britain’s highly competitive grocery market, where for the past decade the German discounters Aldi and Lidl have been taking market share from bigger rivals. At a time of rising food prices, Tesco said it has identified 1 billion pounds of cost savings over three years to help offset rising cost inflation.
Tesco said a strong first-half performance means it now expects adjusted operating profit of between 2.5 billion pounds and 2.6 billion pounds this fiscal year. The grocer said accelerating growth means it will generate between 1.4 billion and 1.8 billion pounds of free cash flow a year.
First-half comparable U.K. sales rose 1.2%, ahead of expectations, even though the grocer faced tough comparisons with a year earlier when consumers stockpiled canned foods and toilet paper during lockdowns.
Comparable online sales, which have been surging during the pandemic as people switch to buying food over the internet, rose 2.3% during the period and are up 74% over two years. The grocer’s catering division, Booker, also continues to bounce back after pubs and restaurants reopened post-lockdown.
The supermarket operator last returned cash to shareholders in March, paying a special dividend of 5 billion pounds following the sale of its Asian business. The grocer also plans to pay an interim dividend.
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