UK retailer Tesco posted a sharp rise in annual earnings on Wednesday, but warned that current-year earnings could fall as inflationary pressures begin to hit consumers.
The company said adjusted operating profit rose 35.8% to £2.65bn in the year to February 26. On a pre-tax basis, it had risen 219% to £2bn. Total group sales rose 3% to £54.8 billion.
Tesco forecast adjusted operating profit of £2.4bn to £2.6bn for 2022-23, which it said would be affected by the extent of further normalization of customer behavior as the economy emerged from the Covid pandemic, cost inflation and investments must remain competitive on price. Shares of the company fell 5% in early trading.
The findings came the day UK inflation hit a 30-year high of 7% in March and just after a government tax hike took effect on top of a 54% hike in energy prices as Brits face biggest drop. in the standards of living since the beginning of the recordings.
Inflationary pressures intensified with Russia’s unprovoked invasion and assault on Ukraine, hitting fuel costs and the supply of food staples such as wheat.
“Clearly the external environment has become more difficult in recent months,” said Tesco chief executive Ken Murphy.
“In a difficult context for our customers and with household budgets under pressure, we are focusing on controlling the cost of weekly purchases.”
“Given the significant uncertainties in the external environment, we believe it is appropriate to provide earnings guidance in the form of a wider range than usual.”
A.Bell Analyst Danni Hewson said the coming months would be difficult for the supermarket chain as it faced inflation and a potential change in how consumers spend their money.
“There is a real risk that cash-strapped families will reduce their purchases. Even though we all need to eat and drink, chances are that shopping carts won’t contain as many treats as households are consuming lately. If everyone cuts a few items every week, that loss of revenue for Tesco will definitely add up.”
“If this trend unfolds as expected, it won’t just be Tesco that will feel the pain. On a two-year basis, Asda, Morrisons, Sainsbury’s and the Co-op have all lost market share and these companies certainly won’t want to see more bad news in the form of belt-tightening customers.”