TSCDY Tesco PLC (PK)

By Saabira Chaudhuri 

LONDON-- Tesco PLC shares soared Wednesday as the company's half-year results offered further signs its turnaround plan is bearing fruit, while Britain's largest retailer also announced a cost-cutting plan to improve its margins.

Shares in the retailer were trading 11% higher in recent trading in London.

After losing market share to discounters Aldi and Lidl and suffering a reputational blow in the aftermath of an accounting scandal, Tesco in the two years since Chief Executive Dave Lewis took the helm has poured money into launching more affordable products, simplifying its range and improving its customer service.

It has cut its product range by 23%, lowered regular prices 6% while eliminating 40% of promotions, and added 12,000 more customer-facing employees. It has also sold noncore businesses including its gardening arm, Korean business and coffee-shop stake, and has slashed back-office jobs.

For the first half, operating profit--stripping out large one-time charges--was GBP596 million ($770.4 million), compared with GBP372 million a year earlier. On a statutory basis, Tesco reported a net loss of GBP91 million, compared with a loss of GBP365 million a year earlier, when earnings were hit by large charges.

Revenue, excluding value added taxes, edged up to GBP27.34 billion, from GBP27.23 billion, though the figure came in below the forecast of analysts polled by Thomson Reuters at GBP27.62 billion.

The retailer also reported an improving trend in like-for-like sales across all formats, including its biggest stores, which have suffered in recent years as consumers embraced convenience stores and online shopping.

Tesco is aiming for an operating margin of between 3.5% and 4% by fiscal 2020, it said. As part of this, it will cut operating costs by GBP1.5 billion by improving distribution and simplifying its store operations. The company will spend GBP1.4 billion a year in capital expenditure through fiscal 2020 to drive these changes.

Tesco, which reported an adjusted operating margin of 2.18% for the first half, said it is on track to report adjusted operating profit of GBP1.2 billion for the year.

"This is a fantastic set of results for Tesco, delivering on all aspects of the U.K. recovery and providing solid future margin guidance," said Bernstein analyst Bruno Monteyne.

Not everyone was as enthused.

"The business is caught in the middle, pressured from better priced value players below and more aspirational higher quality players above," said independent retail analyst Richard Hyman. "Tesco needs to go further in developing a clear personality."

Verdict Retail analyst Zoe Mills described the margin target as "highly ambitious."

The company reported that the value of its food sales in the U.K. grew for the first time since 2013 in the second quarter.

Tesco said its U.K. like-for-like sales edged up 0.6% in the first half. Overall, the company's like-for-like sales rose 1%, helped by growth in international markets like Thailand. However, its online sales growth slowed as customers were deterred by the introduction of a GBP2 charge for click-and-collect orders.

Tesco reported its pension deficit had widened by GBP3.2 billion to GBP5.9 billion after corporate yields dropped. Chief Financial Officer Alan Stewart attributed the change to an accounting mechanism but said "there has been no change in the underlying cash which we're going to paying to our pension members."

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

(END) Dow Jones Newswires

October 05, 2016 06:45 ET (10:45 GMT)

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