Tesco profits drop by more than a quarter but sales growth continues

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Supermarket giant Tesco has revealed half-year profits dropped by more than a quarter, but notched up a third quarter in a row of sales growth as its turnaround gathers pace.

The group posted a 28.3 per cent fall in bottom-line pre-tax profits to £71m for the six months to August 26 after being hit amid the sector’s fierce price war.

Its fightback against the discounters helped UK like-for-like sales surge by 0.9 per cent in the second quarter.

Chief executive Dave Lewis outlined plans to slash costs by £1.5bn to help get profits back on track.

Mr Lewis said the cost-cutting plans would not affect staff, with savings instead being made across areas including the company’s distribution system and store operating model.

He said the group’s recovery was gaining traction, but cautioned that the market remains “challenging and uncertain”.

Tesco’s second-quarter like-for-like sales growth across the UK and Ireland marks a sharp increase on the 0.3 per cent rise seen in the previous three months and comes after a major investment in price cuts.

But Tesco saw its bottom line suffer from the plan to lower prices, including the recent launch of its new Farm Brands range.

On an underlying basis, UK and Ireland first-half earnings more than doubled to £389m from £164m a year earlier, while group earnings lifted 60.2 per cent to £596m.

The group said it was yet to see an impact from Brexit or the falling pound on the business or costs, but revealed the fallout from the referendum result has sent its pension scheme funding gap ballooning by £3.2bn to £5.9bn.

Mr Lewis is spearheading a recovery after the growth of German discounters Aldi and Lidl and an accounting scandal hammered the group’s profitability.

Retail analysts at Bernstein said it was a “fantastic set of results for Tesco, delivering on all aspects of the UK recovery”.

The figures mark a turnaround after a torrid couple of years, when it posted the biggest loss in its history and was hit by a £326m accounting scandal.

Mr Lewis said: “We do believe that, after two years, we are stabilising the business and have seen signs of our competitiveness established in the marketplace.”

But he said it was “just the start” of the group’s recovery and confirmed the food price deflation that has been weighing on the entire sector was unlikely to ease off any time soon.

Phil Dorrell, partner at retail consultants Retail Remedy, said the turnaround at Tesco has been a case of evolution and not significant change.

He said: “It’s good to see that the important business of selling grocery is firmly in focus at Tesco HQ and the accounting sideshow has not distracted Dave Lewis from doing an excellent job.

“Tesco’s offer has not significantly changed, it has just evolved. Range rationalisation and flow of goods on the shop floor are simple changes, well executed.

“Price perception has been helped significantly with the Tesco Farms brands. Media mutterings aside, the customer isn’t feeling misled, they are feeling well provided for with a product that meets price and quality needs.

“The side show of the accounting fraud is just that, a side show. Our advice? Concentrate on the growth of the business and delivering value to the shareholders. The skeleton will soon be buried.

“We are entering the golden quarter for grocery and Tesco will be up against a resurgent Morrisons, a wounded but not down Asda and a Sainsburys armed with Argos. Tesco will have room to push further on price if they need to and a rash of offers lined up ready to deploy.”

The market leading supermarket said it was on track to deliver profit of £1.2bn for the full year, broadly in line with market expectations, after the recovery in sales.

Tesco said however its pension deficit had ballooned to £5.9bn pounds, up from £2.6bn in February due to the collapse in bond yields.