Tesco reports stronger festive sales but coronavirus costs higher

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Tesco PLC (LON:TSCO) boasted of a market-leading performance from its UK grocery business over the recent festive period, but said it was been hit by continued bank losses and the impact of coronavirus (COVID-19) on its Booker wholesale arm which added another £85mln of costs.

Like-for-like (LFL) retail sales were up 5.6% over the 19 weeks to January 9, 2021, for the FTSE 100 group as a whole, compared to 8.6% for Sainsbury’s third quarter and 7.3% for Morrison’s so far in the fourth.

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But looking at UK retail alone, as Tesco did, the 13 weeks of the third quarter to November 28, 2020, saw LFL growth of 6.7%, accelerating to 8.1% for the six weeks of festive and new year trading to last Saturday.

“Our performance was market-leading for every week of the Christmas period with our simple, great value offer and focus on safety resonating well with customers,” said Tesco chief executive Ken Murphy in the trading statement.

And, to be fair, although the industry has received an almighty boost for food and alcohol demand from pandemic restrictions leading to most restaurants and pubs being shut for large swathes of the past 10 months, supermarkets have on the whole stepped up.

Tesco said it delivered over 7mln online orders over the Christmas period, including 786,000 vulnerable customers given priority access to online slots, with almost £1bn of online sales over the 19-week period, up around 80% on a year ago. It also now has more than 680,000 customers subscribing for deliveries via its Delivery Saver service.

Despite this strong momentum, full-year profit guidance is still only expected to be just above last year’s, the company said, as the elevated sales offset additional COVID-19 costs from the extra lockdowns since October’s update, such as increased staff absence and monitoring whether customers are wearing masks and social distancing properly, with the hit now estimated for the UK to be £810mln, up from £7250mln.

After repaying £585mln of business rates in early December and completing the £8.2bn sale of its Thai and Malaysian businesses just before Christmas, the company said it has made a one-off contribution of £2.5bn to its pension scheme and, once shareholders approve it, will return £5bn via a special dividend followed by a share consolidation just before the end of February.

The shares fell 1% to 239.1p in early trading on Thursday, meaning they were down over 4% over the past 12 months.

It was a “sideways update”, said analysts at broker Shore Capital, adding that Tesco has “done well in the UK supermarket scene but despite the statement of ‘outperforming the market every week’, it has not, we would suggest, however, shot the lights out”. 

The analysts noted that food sales drove the activity in the UK, with a good mix, premium product sales up 14% and general merchandise ahead by 4% as toys, home and electrical did well, suggesting clothing was more muted.

  — Adds share price and broker comment —

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