Tesco beats consensus, oil clouds outlook

LONDO - Top retailer Tesco Plc posted an 18.7 per cent rise in first-half profit on Tuesday but the share price slipped as investors took note of an outlook clouded by higher oil prices.

Pretax profit for the 24 weeks to August 13, reported for the first time under IFRS accounting norms, came in at 908 million pounds, beating an average forecast of 886 million pounds in a Reuters poll of 11 analysts.

The share fell 2.1 per cent to stand at 319-1/2 pence by 0845 GMT on an outlook statement that was guarded even by the conservative standards of Chief Executive Terry Leahy.

"It's principally an oil-related cost concern, in terms of our costs for electricity and distribution. But there's also an effect on customer confidence, they're facing higher bills, they've got council tax increases, higher fuel bills and pension costs," Leahy told Reuters in an interview.

Current oil prices suggested actual costs could be as much as 60 million pounds above budget for the year, he said, adding he was not considering raising the group's 3 to 4 per cent UK like-for-like sales target for the time being.

"Not at this time, that's our planning target and if you look at the uncertainty surrounding the consumer this wouldn't be the time to upgrade it," he said.

NOT IMMUNE, JUST BETTER AT COPING

Group sales rose 14.1 per cent to 18.8 billion pounds, a figure that also beat the market consensus forecast of 17.09 billion pounds. In the UK, same-store sales were up 8.2 per cent, or 6.7 per cent excluding fuel.

Price deflation in the UK, excluding fuel, was 2 per cent, reflecting a fierce price war with rivals Asda and J Sainsbury -- a war Tesco appears to be winning as it makes steady gains in market share.

"I don't think they're immune (to the slowdown in consumer spending and higher oil prices). They're just better at coping with it than everyone else" said Freddie George, analyst at Williams de Broe.

But analysts at Seymour Pierce downgraded their recommendation on the stock to "outperform" from "buy" and trimmed their full-year forecast, citing the impact of the new accounting standards and rising costs.

One trader said the share was in a period of consolidation.

"The stock has had a good run over the past six months or so and if it is not going to keep outperforming the rest of the sector by a huge amount, then people are just going to hold off on it," one trader said.

Leahy also told Reuters in an interview that Tesco would not bid for US group Albertsons, countering recent press speculation.

"I've seen the (press) reports but I haven't paid a lot of attention to them, to be honest," Leahy said, adding that the 25.6 per cent growth in international sales -- translating to 17.3 per cent growth at constant currencies -- was enough for the expansive group to be getting on with.

"International margins have been making progress -- we've really sharpened our price position, we've taken on the discounters and made good headway with market share," he said.

RED HERRING

While sales outside Britain -- mostly in central and eastern Europe and Asia -- account for a growing proportion of the total, about 80 per cent of revenue is still generated at home.

Tesco has reaped the benefits of adding a host of non-food ranges like clothing, home entertainment, mobile telephony and even contact lenses to its traditional food and grocery lines.

Home entertainment sales grew by 17 per cent in the first half, with consumer electronics notching up a 20 per cent increase and health and beauty up 11 per cent as Tesco sharpens its competitive challenge to non-food specialists like HMV and Boots.

In the second-quarter, UK like-for-like sales were up 7.6 per cent, or up 6.6 per cent excluding petrol.

Richard Hunter, head of UK equities at brokers Hargreaves Lansdown, said that Leahy's comments on the oil price were something of a red herring.

"The fact remains that Tesco is the darling of the sector and is the best equipped to cope with any slowdown in consumer confidence or the side effects of a higher oil price.

"With its international expansion continuing at a measured pace and with its domination of the UK market unrivalled, it continues to be the pick within a demanding marketplace."

(additional reporting by Mark Potter and Anshuman Daga)

- REUTERS