Tesco cements bounce-back with annual profits hike

Tesco has defied mounting gloom on the high street to post a better-than-expected jump in annual profits as revival efforts steer the group back to its former glory.

The UK's biggest supermarket reported a 28.4% leap in underlying operating profits to £1.64 billion for the year to February 24, while bottom line pre-tax profits soared to £1.3 billion from £145 million the previous year.

Tesco notched up like-for-like sales growth of 2.2% in the UK after a 2.3% rise in the final three months - marking more than two years in a row of rising sales.

Dave Lewis is group chief executive of Tesco
Chief executive Dave Lewis has been leading a recovery at the chain (Dominic Lipinski/PA)

The group also announced its first end-of-year dividend since 2014, with a final payout of 2p, giving a 3p full-year divi for shareholders.

Shares surged more than 5% on the profits and dividend cheer.

The results mark yet another step on the road to the supermarket's recovery under chief executive Dave Lewis, who has been embarking on a turnaround since taking the hot seat in 2014.

They also come just a month after the group sealed its £3.7 billion takeover of wholesaler Booker.

Mr Lewis said: "With three years under our belt, Tesco is growing again, recovering profitability and generating significant cash."

He said the Booker deal would help the group "build on this trajectory", but added there was still more work to do, with its profit margins yet to hit target.

"It's definitely not job yet done ... we're very clear that there's more to do," he added.

He confirmed the group was on track to deliver at least £200 million of annual cost savings within three years following the Booker deal - a move which will see the chain expand into supplying food for restaurants, bars and smaller grocers.

The group also gave some insight into the retailer's plans following the Booker takeover, confirming it has started offering Booker catering supply ranges in its Tesco stores, while also opening a Chef Central store in its Bar Hill outlet in Cambridge.

But Mr Lewis refused to comment on speculation the group was looking at launching a discount chain to face off the threat from German players Aldi and Lidl.

Richard Hunter, head of markets at Interactive Investor, said: "Tesco has moved into strong recovery mode, showing increasing evidence of a return to its former glories."

The results offer some welcome cheer for Britain's retail sector, which has been battered in recent months following soaring costs and intense online competition.

The tough trading conditions have claimed the scalp of well-known names such as Toys R Us and Maplin since the start of the year.

Tesco's full-year figures showed general merchandise and non-food sales remained under pressure, falling by 0.4% over the year, although shopper demand remained robust for food, with sales up 2.9% as it sought to keep a lid on price rises.

Tesco said: "Market conditions have remained challenging with continued cost price inflation."

Inflation has eased back over the year, down by 0.8% for food ranges according to the group, but it said pressure on prices remained.

"Our job is to minimise that," Mr Lewis said.

He said UK consumers had been resilient, but added it had been "difficult for a while and those challenges remain".

There was also a hit from the recent snow storms and severe weather after the group's financial year end, which saw some stores close and deliveries affected.

But Mr Lewis said the chain "recovered quickly", adding there was unlikely to be a material impact on performance.

Laith Khalaf, a senior analyst at Hargreaves Lansdown, added: "The outlook is now looking more positive for the grocery sector after a pretty challenging 2017."

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