Britain’s Tesco trims profit view as shoppers face costs squeeze

By James Davey

LONDON (Reuters) -Tesco, Britain’s biggest retailer, on Wednesday forecast full-year profit would come in at the lower end of its previous guidance, citing uncertainty over how a worsening cost-of-living crisis will impact consumer spending.

The group, which has a 27% share of Britain’s grocery market, said it now expects retail adjusted operating profit in the full year 2022-2023 of between 2.4 billion pounds and 2.5 billion pounds ($2.7-$2.9 billion).

It had previously forecast 2.4 billion-2.6 billion pounds, down from the 2.65 billion pounds made in 2021-22.

Confidence levels among Britain’s consumers sank to a record low last month as they struggle with higher inflation, even before the government’s mini-budget sowed turmoil in the mortgage market, leading to warnings of a sharp drop in house prices.

Wages are failing to keep pace with inflation, which was 9.9% in August. Consumers are buying less per shopping trip and trading down to cheaper own-label products.

“Significant uncertainties in the external environment still exist, most notably how consumer behaviour continues to evolve,” it said.

Tesco did however upgrade its expectation for full-year retail free cash flow to at least 1.8 billion pounds, and forecast Tesco Bank adjusted operating profit of 120 million to 160 million pounds.

The group reported first-half retail adjusted operating profit of 1.248 billion pounds – down 10% from a pandemic-boosted 1.386 billion pounds last year, and just below analysts’ average forecast of 1.251 billion pounds.

First-half group sales rose 3.1% to 28.178 billion pounds, with UK like-for-like sales up 0.7%, having fallen 1.5% in the first quarter.

In April Tesco and Britain’s No. 2 grocer Sainsbury’s warned of a hit to profits this year as they plough cash into keeping prices competitive to deter customers from switching to German-owned discounters Aldi and Lidl, and face soaring energy and labour costs.

The pound’s recent slump will further increase costs and squeeze already narrow margins.

Tesco’s shares have fallen 28% so far this year, but most analysts still consider it best placed amongst Britain’s major supermarket groups to navigate the downturn due to its huge buying power.

It is benefiting from the popularity of its ‘Clubcard Prices’ loyalty programme, a scheme to price-match Aldi on some products, and the unrivalled scale of its stores and online operations.

Monthly industry data has shown Tesco consistently outperforming its biggest rivals, Sainsbury’s, Asda and Morrisons, on a sales value basis.

Last week Morrisons, the Co-operative and Aldi UK all reported profit falls, while clothing retailer Next warned on the outlook.

Tesco also joined rivals in raising pay for its UK store staff. The minimum hourly rate will rise 20 pence to 10.30 pounds from Nov. 13.

($1 = 0.8744 pounds)

(Reporting by James Davey; Editing by Kate Holton, Paul Sandle and Jan Harvey)