(Bloomberg) —
Tesco Plc will buy back 500 million pounds ($680 million) of stock and raised its profit forecast in an attempt to lift its lagging share price after smaller rival Wm Morrison Supermarkets Plc attracted a private equity bidding war.
Britain’s biggest supermarket operator’s shares have trailed behind rivals as consolidation sweeps the industry. Clayton Dubilier & Rice LLC’s 7 billion-pound offer for Morrison has sparked speculation that Tesco or J Sainsbury Plc could become interesting targets for private equity.
Even though Britain’s supermarkets faced significant costs to run stores safely during lockdowns, they have been winners as the pandemic elevated sales and accelerated changes in shopping habits. The rise in consumers turning to online shopping has also made e-commerce more profitable.
Shares in Tesco gained as much as 4.6% in early trading in London Wednesday. They gained 12% from the start of the year to Tuesday. Sainsbury’s gained 37% during that period, while Morrison advanced 66%. Tesco said the first tranche of shares will be repurchased by October and indicated further buybacks are likely.
Ken Murphy, a year into his job as chief executive officer, also laid out his growth strategy. He said the grocer will continue to ensure its pricing is keen in Britain’s highly competitive grocery market, where for the past decade the German discounters Aldi and Lidl have been taking market share from bigger rivals. At a time of rising food prices, Tesco said it has identified 1 billion pounds of cost savings over three years to help offset rising cost inflation.
Tesco said a strong first-half performance means it now expects adjusted operating profit of between 2.5 billion pounds and 2.6 billion pounds this fiscal year. The grocer said accelerating growth means it will generate between 1.4 billion and 1.8 billion pounds of free cash flow a year.
First-half comparable U.K. sales rose 1.2%, ahead of expectations, even though the grocer faced tough comparisons with a year earlier when consumers stockpiled canned foods and toilet paper during lockdowns.
Comparable online sales, which have been surging during the pandemic as people switch to buying food over the internet, rose 2.3% during the period and are up 74% over two years. The grocer’s catering division, Booker, also continues to bounce back after pubs and restaurants reopened post-lockdown.
The supermarket operator last returned cash to shareholders in March, paying a special dividend of 5 billion pounds following the sale of its Asian business. The grocer also plans to pay an interim dividend.
(Updates with shares)
More stories like this are available on bloomberg.com
©2021 Bloomberg L.P.
