• H1 group sales up 1.3% to GBP24.4m (US$31.1m)
  • Like-for-like sales edge up 1%
  • Pre-tax profit drops 28.3% to GBP71m
Tesco has set out a new three-year strategy to improve margins and cut costs

Tesco has set out a new three-year strategy to improve margins and cut costs

UK retail giant Tesco says it made "strong progress" in its first half as sales continued to rise but earnings tumbled.

The food and fashion retailer, which has set out a new three-year strategy to improve margins and cut costs, said total sales grew 1.3% to GBP24.4m (US$31.1m) in the six month period, up from GBP23.7m a year earlier. Group like-for-like sales increased 1%, with UK like-for-like sales edging up 0.6%.

In the UK, volumes were up 2.1% on last year, with transactions up 1.6%. In Tesco's international business, volumes grew 3.3%, and transactions 0.3%.

The retailer said it has continued to build "trusted, transparent and long-term relationships" with suppliers, noting that 78% of its UK suppliers are "satisfied" with their experience of working with Tesco – an 18% year-on-year improvement.

Pre-tax profit saw a drop of 28.3% in the first-half to GBP71m from GBP99m a year earlier. The retailer recorded a trading margin of 1.8%, however, up by 134% year-on-year.

"Whilst the market is uncertain, we have made significant progress against the priorities we set out two years ago, stabilising the business and positioning us well for the future," said CEO Dave Lewis. 

Tesco today (5 October) set out a three-year plan to deliver a group operating margin of between 3.5% and 4% by its 2019/20 financial year. The ambition is underpinned by six strategic drivers including a further GBP1.5bn in operating cost reductions. This, it says, will enable it to further invest in its customer offer, offset expected inflationary pressures on costs and continue to rebuild profitability. 

Alongside the cost reductions, Tesco will be looking to further differentiate its brand, continue its focus on strong cash generation, maximise the margin mix from its sales, maximise the value of its property portfolio and continue to innovate in how the group operates the business.

Looking ahead, Lewis said Tesco expects the market to remain "challenging and uncertain", adding the company has "clear plans which will enable us to deliver more value for all of our stakeholders: customers, colleagues, suppliers and shareholders".

Shore Capital analyst Clive Black believes the results represent "demonstrable operational improvement" from the business, with both cash sales and volumes now positive in the UK alongside "much needed" margin accretion. 

However, he warns: "The operations in isolation do not characterise the Tesco investment thesis. The burden of broad level indebtedness and the corresponding high solvency ratios continue to prevent us from taking a more positive view on the group's shares."