Britain's largest grocer sees profits soar as inflation falls 4.5%

Britain’s largest grocer said Wednesday it expects to generate at least £2.8 billion ($3.5 billion) of retail adjusted operating profit in the current fiscal year. That’s ahead of the £2.76 billion it reported last year which was in line with previous guidance.

Tesco also announced plans to buy back £1 billion of shares over the next 12 months. A quarter of that will be funded by a dividend the retailer received from Tesco Bank. Earlier this year Tesco agreed to sell much of its banking business to Barclays Plc in a deal releasing £1 billion of cash for the retailer. 

Tesco shares are up slightly in early trading in London. The stock is up more than 8% in the past year. 

As food price inflation starts to ease, supermarkets are trying to keep prices as low as possible to retain shoppers hunting for cheaper alternatives. Tesco has been competing with German discounter Aldi by price matching on many key products.

UK grocery price inflation fell to 4.5% in the four weeks to March 17 — its lowest level since February 2022, according to data from Kantar last month. That comes after an almost 10% minimum wage increase to £11.44 an hour came into effect last week.

Britain has such a competitive grocery market that Tesco sees “threats from all sorts of angles,” according to Chief Executive Officer Ken Murphy.

“The fact that there are 11 national grocers all competing for share means that someone is always coming strong and there are ebbs and flows in the market,” he said on a media call. “I think the key for us is consistency.”

Last year’s results and Tesco’s “typical conservative approach to guidance” confirm further progress by the UK market leader, said James Grzinic, an analyst at Jefferies. 

Imran Nawaz, chief financial officer at Tesco, said its profit forecast may be conservative but it’s still very early in the fiscal year and the grocer will likely upgrade as the year progresses.