Top UK food chain Tesco has today (19 September) shown that it has not yet reached its retailing pinnacle, defying last week's sceptical forecasts by reporting H1 pre-tax profits up by 10.2% to £422m (See /news_detail.asp?art=13110). Operating profits rose 9.6% to £447m and the operating margin was held. The company revealed that it had 1.7m customers and sales also rose by 10.7% to £10.1bn. "We are firing on all cylinders," said CEO Terry Leahy. He explained that there had been "an upward momentum in the second quarter...a little stronger than analysts forecast."

The predominant reason for Tesco's growth lies within its international expansion, where the company said it was creating 20,000 new jobs and 130 new hypermarkets. Total sales outside the UK rose 42% to £1.2bn, increasing group profit by 67% to £15m. Leahy was pleased: "Tesco is moving from being a domestic player to being an international retailer of real scale." Its growth is accelerating, and in Hungary and Thailand the company expects to show profit by the end of 2000. Within two years, 45% of Tesco's retail space will be situated outside the UK.

Within the domestic market, Tesco has been able to increase profit through a food price deflation, currently at about 2%, efficiency programmes, which are expected to result in savings of £150m, and an expansion in products and services. Leahy noted the importance of Tesco's focus on organic food: "Our organic growth strategy is getting us into leading positions and is very successful." The company is also increasing its non-food product range, which is growing faster than the grocery business. It aims to secure a 6% UK non-food market share and sales are expected to reach £5bn within two years. In addition, the personal finance unit, which made losses of £3m in 1999, has finished the first half with a small profit. Industry body IGD now estimates Tesco's leading market share at about 15.6%, and it is giving no signs of slowing down.

A final, important reason for the company's continued growth is its investment in e-retailing, which made Tesco the biggest online grocery service worldwide. Tesco.com was launched in April, and already 60,000 Internet orders are received every week, generating over £5m in sales.

Following today's announcement, share prices gained 0.75p, adding to the 15% rise in stock since the beginning of 2000. Leahy commented that, "in the last 12 months the shares have grown more than any other European retailer," indeed they outperformed UK sector peers by 11%. Credit Lyonnais Securities Europe responded to the results by upgrading the stock from "reduce" to "add," and the analysts predicts that Tesco's full year earnings will rise.

Analysts are waiting for the UK Competition Commission inquiry to be released after next Monday (25 September), but despite the fact that Tesco is an obvious target for any legislative measures, Leahy is not concerned. An interim report revealed that consumers were happy, prices were lowering and profitability was not a problem. "It confirms that this is a very competitive industry," he commented. "I don't believe the Commission will get it wrong and remedies like divestments seem highly unlikely."

Tesco has announced that an interim dividend will be paid of 1.48p per share, an increase of 10.4% on last year's 1.34p.

6 Months Aug. 12:

 
2000
1999
Pretax profit
GBP422 mln
GBP383 mln
Group sales
10.1 bln
9.1 bln
Earnings per share
4.48 p
4.04 p
Dividend a. Diluted
1.48 p
1.34 p