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Tesco chief executive Dave Lewis has been hoping to draw a line under the disastrous period that led it to report one of the biggest losses in UK corporate history in 2015, but the aftershocks are still unsettling investors, with the company dropping to the bottom of the FTSE 100 today after payments related to its accounting scandal dragged down profits.
Shares in the company fell further after their early drop, and were down 3.8 per cent by publication time; here’s four more charts to help illustrate the company’s difficult progress over the last year.
Analysts say Tesco’s problems began when it started making an increasing share of its money from suppliers, rather than shoppers, concocting complex deals to supplement its sales with listing fees and paid-for promotional activity. They suggested the tactic led executives to take their eyes of customers, but Mr Lewis said today that the company has since benefited by simplifying its product range and improving its service.
Total revenues rose 3.7 per cent in the year to February 25, at the top end of analyst forecasts. Importantly, that included a 0.9 per cent increase in same-store sales in the UK, which might not sound impressive, but marked the company’s first like for like growth in seven years.
The higher revenues have yet to benefit its bottom line, however, as payments to settle issues related to its accounting scandal caused pre-tax profit to drop 39 per cent.
At the operating level, annual profits were slightly better than expected, but even without the one-off charges pre-tax profit would still be far below the levels enjoyed before 2014.
Those massive profits enjoyed before 2015 are unlikely to be coming back any time soon. The company says it is on track to improve its profitability in the years ahead, targeting an operating margin of between 3.5 per cent and 4 per cent by the 2019/20 financial year.
That will require around .1.5 percentage points of improvement in the next two years, but will still leave it well below the levels reported before 2015, when it regularly enjoyed margins of more than 5 per cent.
However, profits have been squeezed across the entire UK grocery sector amid low inflation and intense competition; even meeting the lower end of its targets would make it more profitable than its largest local peers. Daniel Ekstein, food retail analyst at UBS, has argued that the market “underappreciates the benefit” of the company’s plans, and thinks it will hit the top end of the margin target.
Bernstein analyst Bruno Monteyne said Tesco’s latest results showed “a solid beat on all parts of the business” over the last year, but one thing that has made little progress in the period is its share price.
The company’s shares have recovered from the nadir hit shortly after the Brexit vote last June, but today’s decline brings them back to almost exactly where they were when it reported its last set of results. Shares have moved less than one per cent since April 12 2016, when Tesco reported its return to profit.