How have Tesco thrived during the supply chain crisis?

Tesco has today posted a ‘strong H1 performance’, despite the ongoing challenges that many retailers are facing due to supply chain challenges.

Trading in the six months time period has been better than expected, with group sales excluding fuel rising 3% to £27. 3bn, ignoring the effect of exchange rates. Tesco said the pandemic is still driving a higher volume of sales. Underlying operating profit rose 41% to £1.5bn.

Full year underlying retail operating profit guidance has been upgraded, and is now expected to come in between £2.5bn and £2.6bn. A £500m share buyback was also announced.

Ken Murphy, CEO of Tesco, comments: ““We’ve had a strong six months; sales and profit have grown ahead of expectations, and we’ve outperformed the market.  This was a strong team effort and I would particularly like to recognise and thank our colleagues who continue to do an incredible job in difficult times.  I’m really pleased with our progress as we increased customer satisfaction and grew market share leading to a strong financial performance.  With various different challenges currently affecting the industry, the resilience of our supply chain and the depth of our supplier partnerships has once again been shown to be a key asset.

“Against a backdrop of profound change, Tesco has many unique advantages.  The scale and reach of our store estate and online operations are unmatched in the UK.  Our ability to reward loyalty through Clubcard enhances our relationship with customers.  Our world-class food retail expertise combined with our strong supplier partnerships ensures we can offer our customers great value and quality, removing reasons to shop elsewhere.  Together, these strengths mean that Tesco can anticipate and respond to changes in the market, meeting customers’ needs better than anyone.

“Today, we are sharing the strategic priorities that will enable us to build on these advantages to stay competitive, accelerate growth and generate between £1.4bn and £1.8bn retail free cash flow per year.  These priorities will ensure we do the basics brilliantly, operate as efficiently as possible and grow our business by building unbeatable digital, convenience and loyalty platforms.”

The shares rose 3.9% following the announcement.

‘Tesco has taken the baton handed to it by the pandemic and is sprinting towards impressive results’

Sophie Lund-Yates, senior equity analyst at Hargreaves Lansdown, comments: “Tesco’s enormous scale means it’s weathering the supply chain crisis better than others- it’s times like these when being the biggest fish in the pond really counts. The mature, deeply rooted nature of its supply relationships have been a key tool in allowing Tesco to keep its shelves well stocked, and outshining competitors in the process. The size of Tesco’s distribution network also can’t be overstated, which again gives the group the flexibility to deliver the goods at scale.

“Sales have also been boosted by staycation trends, which is a tailwind likely to reduce but not fall back all the way over the medium term. Tesco has curated an impressive customer base, helped by its ongoing efforts to appear good value. Its aim is to reduce prices across key items, but also maintain an image of better quality. It’s this mix that is helping with an all-round improved value perception – it’s not just about sticking the cheapest price on goods.

“Online sales are an enormous opportunity. Tesco has taken the baton handed to it by the pandemic and is sprinting towards impressive results. While we have every faith the group can prevail, if demand patterns don’t shakeout exactly as planned, the increased infrastructure to support digital domination will become a drag on profits. A large-scale share buyback indicates Tesco’s confident on its outlook and ability to keep heady levels of cash flowing through the business.”

Walid Koudmani, market analyst at financial brokerage XTB said: “Tesco announced a share buyback programme after strong H1 performance and increased profit outlook. In addition, the retail giant set out its strategic priorities moving forward as it intends to keep growing its customer base with several competitive offerings and by strengthening its digital platform. Today’s results reassure investors by showing positive performance and a clear plan for the future as the economy contends with potential supply shortages.”