Tesco Says U.K. Grocery Sales May Slow Down Amid Return to Work

(Bloomberg) --

Tesco Plc said grocery sales growth will probably decelerate this year as pandemic restrictions ease in the U.K. and consumers gradually start returning to offices and eating less at home.

Following a year where stockpiling pumped up grocery sales and consumers had to make more meals for themselves and their children at home, Britain’s biggest supermarket expects a return to more normal behavior this year.

The shares fell as much as 4.4% and stock in rivals J Sainsbury Plc and Wm Morrison Supermarkets Plc also dropped Wednesday.

Britain is slowly easing out of a third lockdown with non-essential shops, pubs and restaurants with outdoor space reopening in England and Wales this week. Indoor hospitality will resume next month. The country is also forging ahead with a world-leading vaccination program, which should speed up the return to workplaces and eating out, potentially undermining supermarkets’ revenue growth.

What Bloomberg Intelligence Says

Tesco’s initial 2021-22 profit guidance looks in-line with consensus, with a recovery at the bank -- which made an adjusted 2020-21 Ebit loss of 175 million pounds -- the big swing factor. The profit rebound may nevertheless disappoint, as it essentially reflects the reality of food retail being low growth -- yet also extremely competitive -- so there’s little prospect of a return to a higher historical margin. Dividends and some capital returns can be expected.

--Charles Allen, BI Senior Retail Analyst

Tesco forecast that lower costs will however allow profit from its grocery business to recover to pre-pandemic levels, in line with analysts’ estimates.

Operating profit was 1.8 billion pounds ($2.5 billion) on an adjusted basis in the year through February. Analysts expected 1.76 billion.

Tesco is being cautious on its outlook, said Amisha Chohan, an analyst at Quilter Cheviot. Chief Executive Officer Ken Murphy “looks to be actively setting the bar low to beat and raise later on in the year.”

Tesco incurred additional costs of about 900 million pounds to operate stores and warehouses safely during the outbreak. The retailer expects only a quarter of those costs to repeat this year, Murphy said on a call with reporters. Tesco’s banking division should also return to profit, which will eliminate another drag on its business.

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