Tesco – profits expected lower in 2022 as inflation hits and spending habits are uncertain

Full-year group sales, excluding VAT and fuel, were up 3% to £54.8bn (ignoring the effects of exchange rates) driven by growth across all regions. Reduced Covid costs and a return to profitability for Tesco Bank helped underlying operating profit grow 58.9% to £2.8bn.

The group warned of “significant uncertainties in the external environment”, with 2022 underlying operating profit expected in the range of £2.4bn-£2.6bn.

The board has proposed a final dividend of 7.7p and committed to buying back £750m worth of shares over the next twelve months.

The shares fell 4.6% following the announcement.

Matt Britzman, Equity Analyst at Hargreaves Lansdown:

“Last year’s performance was a strong one, sales growth across the board and a significant reduction in Covid related costs meant profits and cash flow reaped the rewards. For investors, that means an increased dividend and a bumper buyback programme totalling £750m over the next year.

Tesco’s strategy relies on its ability to offer prices that compete with low-cost peers like Aldi and Lidl, and it’s executed on that very well with price match campaigns and a focus on Clubcard rewards. But that doesn’t come cheap, and keeping that proposition alive is going to cost more in the coming year than ever before as inflation hits both Tesco’s own costs and their customers’ wallets. That’s one of the reasons guidance for 2022 has profit coming in lower than what we’ve seen today, and markets haven’t reacted well to the news with shares down 4.6% in early trading.

Longer term though, there’s a lot that’s attractive about Tesco and despite disappointing guidance for next year, cash flows are still expected in the region of £1.4bn-£1.8bn, which is high enough to keep shareholders returns flowing and the balance sheet in good shape.”