Tesco raises annual profit forecast

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Tesco has upgraded its profit forecast for the year after posting a jump in pre-tax earnings in the first six months, as the grocer managed to keep a lid on costs and cut prices to retain shoppers.

The UK’s largest supermarket group said on Wednesday that it expected to deliver between £2.6bn and £2.7bn retail adjusted operating profit — a measure that excludes profits from Tesco Bank — this financial year after previously forecasting about £2.5bn.

Revenue, including fuel, was up 5 per cent to £34.1bn in the first half, while pre-tax profit rose to £1.2bn from £396mn during the same period last year, when it took a one-off hit of £626mn.

Tesco, similar to its peers, has recently been cutting prices on items such as milk, pasta and bread, as commodity and other input costs come down, as well as matching the German discounter Aldi on prices on items to retain and attract more shoppers to its stores. The grocer said it had cut the price of 2,500 items in the first six months of the year, by an average of 12 per cent.

Chief executive Ken Murphy said Tesco was doing “everything we can to drive down food bills” and it was “the most competitive we’ve ever been”.

He added: “Food inflation fell across the half and while external pressures remain, we expect that it will continue to do so in the second half of the year.”

Murphy warned that higher wages and higher oil prices were “probably here for the medium term”, so it was difficult to predict if grocery bills would ever go back to 2020 levels.

Tesco’s like-for-like sales were up 8.7 per cent, ahead of analysts’ expectations, still largely driven by inflation. It said it expected operating profit margins to be broadly flat year on year.

William Woods, a retail analyst at AllianceBernstein, said that Tesco’s strong results “should be received positively given the concerns around sector profitability amid fears of deflation, which we don’t think is a material risk”.