Tesco posts 11th consecutive sales rise but profit miss rattles the market

As Tesco updates the market, Ian Forrest, explains what it means for investors

Article updated: 3 October 2018 10:00am Author: Ian Forrest

  • Shares drop 5% as profits miss expectations but sales encouragingly rise 2.2%
  • Interim dividend was increased by 67% and CEO acknowledged supermarket was on track to deliver targets set in 2016
  • The Share Centre recommends Tesco as a ‘hold’ for medium risk investors

Tesco reported a further improvement in quarterly sales today, the eleventh in a row, but first half operating profits were below expectations and the shares have dropped 5% in reaction to this news.

“Like-for-like sales rose 2.2% for the company as a whole but investors should appreciate that in the UK and Ireland they accelerated from 3.5% in the first quarter to 3.8% in the second quarter. Sales growth at the wholesaler Booker reached an impressive 15.1% in the second quarter. Moreover, operating profit rose 24% to £933m, but that was some way below the £962m expected by the market.

“Investors will be pleased to hear that the interim dividend was increased by 67% and the chief executive Dave Lewis acknowledged today that the company was on track to deliver the performance targets given in 2016, which include £1.5bn of cost reductions and improving the profit margin to 3.5% to 4.0%.

“While the continued growth in sales is encouraging the profit miss clearly rattled the market today. The company has to cope with strong competition from the discounters Aldi and Lidl, underlined by news on Monday by the former of a wave of new store openings in the pipeline. Tesco is confronting that challenge head on with the recent launch of its own discount stores, Jack’s. The shares have recovered strongly over the past year but investors who believe in the management’s strategy and are willing to be patient may be rewarded further.

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Ian Forrest portrait photo
Ian Forrest

Investment Research Analyst

Ian’s background in investments, financial journalism and research has seen him advising private investors on equities and helping to manage portfolios. His qualifications include the Certificate in Financial Planning and the Chartered Institute for Securities & Investment’s Investment Advice Diploma.