Tesco lowers profit sights as British shoppers face winter crunch

© Reuters. FILE PHOTO: A logo of Tesco is pictured outside a Tesco supermarket in Hatfield, Britain October 6, 2020. REUTERS/Peter Cziborra/File Photo GLOBAL BUSINESS WEEK AHEAD

By James Davey

LONDON (Reuters) -Tesco, Britain's biggest retailer, forecast full-year profit at the lower end of its previous guidance, blaming uncertainty over how consumer spending will evolve amid a worsening cost-of-living squeeze.

Confidence among Britain's shoppers sank to a record low last month as they struggle with soaring inflation - even before the government's new economic plan sent mortgage rates surging and sparked fears of a sharp drop in house prices.

Tesco (OTC:TSCDY), which has a 27% share of Britain's grocery market, said on Wednesday customers were continuing to change their shopping habits to save money and reduce waste.

"Our customers are increasingly concerned about household spending and watching every penny to make ends meet," CEO Ken Murphy told reporters.

He said they were making more shopping trips, but with smaller basket sizes, and were shopping less online. They were also buying more own-label goods and frozen foods, which tend to be cheaper than branded or fresh options.

In April, Tesco and Britain's No. 2 grocer Sainsbury's warned of a hit to profits this year as they plough cash into keeping prices competitive to deter customers from switching to German-owned discounters Aldi and Lidl, and face soaring energy and labour costs.

Last month, grocers Morrisons, the Co-operative and Aldi UK all reported profit falls, while clothing retailers Next, Primark, ASOS (LON:ASOS) and Boohoo all warned on profit.

Murphy still expects shoppers to spend this Christmas. "We think it's going to be a Christmas that people are going to want to celebrate, but clearly they're going to want to celebrate it in an affordable way," he said.

That would mean more dining-in and celebrations in the home - bad news for Britain's beleaguered hospitality sector.

Tesco's shares were down 3.6% at 1013 GMT, extending 2022 losses to 30%. Nevertheless, most analysts consider it best placed amongst Britain's major supermarket groups to navigate the downturn due to its huge scale.

"The key question is: are management being conservative or are margins going to be severely pressured? We still think they're conservative," said Bernstein analyst William Woods.

PRICE POSITION

Tesco said it now expects retail adjusted operating profit in its 2022-2023 financial year of 2.4-2.5 billion pounds ($2.7-$2.9 billion). It had previously forecast 2.4-2.6 billion pounds, down from the 2.65 billion made in 2021-22.

First-half retail adjusted operating profit was 1.248 billion pounds - down 10% from a pandemic-boosted 1.386 billion pounds last year, and a fraction below analysts' average forecast of 1.251 billion pounds.

First-half group sales rose 3.1% to 28.178 billion pounds, with UK like-for-like sales up 0.7%, having fallen 1.5% in the first quarter.

Tesco is benefiting from a scheme to price-match Aldi on some products, the popularity of its 'Clubcard Prices' programme and the unrivalled size of its stores and online operations.

Its price position versus Aldi and Lidl is "more competitive than it has ever been," said Murphy, adding the group on Wednesday locked the prices of over 1,000 products until 2023.

Monthly industry data has shown Tesco consistently outperforming its main rivals on a sales value basis.

Tesco also joined rivals in again raising pay for its UK store staff. The minimum hourly rate will rise 20 pence to 10.30 pounds from Nov. 13, equating to an 8% rise this year.

($1 = 0.8744 pounds)