Britain’s biggest retailer Tesco PLC said it would increase investment in its stores and distribution network to boost profitability over the next three years, after reporting first-half results at the top end of expectations.
“Today, we are sharing our ambition to deliver a Group operating margin of between 3.5 percent and 4.0 percent by our 2019/20 financial year,” it said in a statement yesterday, up from 2.18 percent in the first half of the year.
Tesco chief executive Dave Lewis is spearheading a recovery after the growth of German discounters Aldi Einkauf GmbH and Lidl GmbH and an accounting scandal hammered the group’s profitability.
Tesco said it would cut its operating costs by ￡1.5 billion (US$1.9 billion) by improving its distribution network and simplifying its store operations.
Capital expenditure to support the changes will be ￡1.4 billion a year on average, it said, up from the ￡1billion it spent last year.
Tesco reported a 60 percent rise in operating profit before one off items of ￡596 million for the six months to Aug. 27, at the top end of analysts’ forecasts.
It said it was on track to deliver profit of ￡1.2 billion for the full year, broadly in line with market expectations, after the recovery in UK sales strengthened in the second quarter,
However, Tesco said its pension deficit had ballooned to ￡5.9 billion, up from ￡2.6 billion in February due to the collapse in bond yields.
Tesco shares rose more than 7 percent at one point yesterday after touching its highest level in more than one year on the back of the better-than-expected first-half results.
“This is a fantastic set of results, delivering on all aspects of the UK recovery,” Sanford C. Bernstein analyst Bruno Monteyne said by e-mail.
Retail Vision analyst John Ibbotson said Lewis has turned the Tesco tanker around against a backdrop of ruthless competition and broader food price deflation.
“Its competitors will have cast a nervous eye over these latest results,” he said by e-mail.
Additional reporting by Bloomberg
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