Tesco FY profits up 30%; first sales growth since 2009/10

Tesco reported a 29.9% rise in group full year operating profits to £1.28bn as it delivered its first growth in like-for-like sales since 2010.

The figures exclude an exceptional charge of £235m, including a deferred prosecution agreement between Tesco and the UK Serious Fraud Office overstating profits in 2014 and the subsequent fine from the UK Financial Conduct Authority.

Pre-tax profits, which included exceptionals, fell to £145m from £202m a year ago.

Group sales rose 4.3% to £49.9bn, helped by currency headwinds, while profits at the company's UK arm soared 60% to £803m.

The company said it intended to resume dividend payments in 2017/18.

Tesco's final salary pension deficit more than doubled to £5.5bn from £2.6bn in 2016 due to the reduction in bond yields.

The return to sales growth will give a boost to chief executive Dave Lewis's plans to take over Booker, owner of the Budgens and Londis chains. Shareholders have expressed concerns over the £3.7bn deal, with Schroders one of the major opponents.

“We are ahead of where we expected to be at this stage, having made good progress on all six of the strategic drivers we shared in October. We are confident that we can build on this strong performance in the year ahead, making further progress towards our medium-term ambitions,” said Lewis said.

Last month Schroders and Artisan Partners, who hold a combined 9% stake in Tesco, wrote separately to chairman John Allan asking him to withdraw from the deal as it would distract from the company's recovery plan.

Laith Khalaf, senior analyst at Hargreaves Lansdown said the profits had been "diminished" the size of the fines fort mis-stating profits.

"Operationally the company is staging a recovery but it’s not out of the woods just yet. The supermarket is facing the prospect of a rise in pension contributions because its scheme valuation is rather inconveniently taking place now, when interest rates are low and inflation is rising, both of which will serve to magnify the deficit," Khalaf said.

"Imported food inflation is also coming back into the system, which presents a challenge for supermarkets as the sector is so competitive that raising prices risks losing customers to cheaper rivals. That’s particularly the case given the squeeze on household budgets we are likely to see as prices generally rise on the back of weaker sterling and higher commodity prices."

He added that "big questions" still hovered over the Booker takeover, with the logic centering around providing a growth engine for Tesco in the restaurant and hotels foods market.

Khalaf said investors were asking whether Tesco should "walk before it starts to run".

"However, Sainsbury also took a bold step at a precarious time when it took over Home Retail Group, and to date that move has paid off, as Argos has been keeping group sales ticking over," he said.

Analyst John Ibbotson of Retail Vision said the results were "all the more impressive" in the face of cut-price retailers such as Aldi and Lidl

"The core UK market is starting to fire on all cylinders, debt is down significantly and the group performance has been marred only by weakness abroad, especially in Thailand. But there's a long way to go yet, especially with inflation likely to rise further and competition in the core UK market extreme," he said.

"Remember that the old Tesco made profits of £3.8bn in 2011, a peak it may never again scale. Tesco is on the right track but sustainable improved profitability is not guaranteed."

Tesco shares were down 5.32% to 185p at 1342 BST.