TSCDY Tesco PLC (PK)

By Saabira Chaudhuri 

LONDON--Tesco PLC reported a small rise in adjusted profit for the year as the British supermarket giant logged stronger sales in the U.K. but signaled that future profitability will be capped by investment.

Shares fell 3% in morning trading in London as investors reacted to the cautious profit outlook, after Chief Executive Dave Lewis indicated Tesco is unlikely to meet hit current consensus profit figures.

The otherwise mostly in-line results signaled there were some green shoots emerging as Tesco recovers from a tumultuous period in which its reputation was tarnished by an accounting scandal, property values at its biggest stores tumbled, and the grocer bled market share to rivals.

For the year to Feb. 27, Tesco's operating profit excluding one-time items, a figure closely watched by investors, rose 1.1% to GBP944 million ($1.34 billion) from a year earlier. Tesco had guided to a trading profit of GBP940 million to GBP950 million.

Mr. Lewis who became Tesco's CEO in 2014, has moved to cut costs, shed noncore assets and simplify Tesco's range and store operations. A former Unilever PLC executive whose background is in building brands, Mr. Lewis recently unveiled a new range of lower-priced "Farm" brands in a bid to compete directly with discounters Lidl and Aldi.

"It was the first year of transformation," said Mr. Lewis told reporters. "We think we have stabilized the business, we were in a difficult place 16 months ago."

However he warned that for Tesco to achieve market estimates of a trading profit of GBP1.25 billion for the current fiscal year would be "a substantial, substantial achievement," signaling that the grocer is focused on investment, which will impact profitability particularly in the first half of the year.

"We are needing to invest in our business at a time in the cycle when the market is particularly challenging," he said.

Mr. Lewis said Tesco's investment in the new Farm brands was "probably the most significant" he has made so far, but declined to specify how much had been spent.

For the year, Tesco's headline pretax profit was GBP162 million compared with a loss of GBP6.33 billion a year earlier when results were weighed down by huge property write-downs.

Revenue excluding VAT slipped to GBP54.43 billion from GBP56.93 billion a year earlier. Tesco said it had grown like-for-like sales in the U.K. by 0.9% in the fourth quarter, helping overall like-for-like sales grow by 1.6% in the quarter.

Mr. Lewis signaled that Tesco's like-for-like sales could fall going forward, saying "we said this would be a volume led recovery we didn't say it would be a like-for-like led recovery."

The company paid down debt by GBP6.2 billion following the sale of its Korean business in October, leaving it with GBP15.5 billion in debt.

The company's adjusted operating profit margin in the U.K. and Ireland was 1.2%.

Mr. Lewis has been selling certain noncore assets as he continues to focus more energy on the company's key U.K. market. Tesco earlier this week said it had agreed to sell 8.6% of its stake in Asian e-commerce platform Lazada Group SA to Alibaba Group Holding Ltd. for $129 million and recently announced it was shuttering its health business Nutricentre.

Wednesday, Mr. Lewis declined to respond to speculation that the company could sell its gardening center or coffee shop businesses.

Tesco's share of the U.K.'s grocery market share has continued to slip according to a recent survey from Kantar but analysts have pointed to an improving performance with the latest sales decline of 0.2% for the 12 weeks to March 27 marking a sharp rebound from the steep decline Tesco saw in December.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

April 13, 2016 03:32 ET (07:32 GMT)

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