Tesco interims

One of the world’s largest retailers.  I have a holding in my income portfolio (epic code: TSCO)

Tesco announced their interim results today and it made for disappointing reading, with every country they operate in showing a like-for-like sales decline for the six months. 

Sales at £31,914m were up 1.9%, but like-for-like sales (incl. VAT) was down -2.0%. Earnings for the continuing businesses was £1,137m down 22.7% and the equivalent EPS at 14.08p down 23.1%. Earnings and EPS for all businesses (including discontinued) were £820m (down 33.6%) and 10.15p (down 34%) respectively.  In the important UK market (69% of group turnover) like-for-like sales declined by -0.5% and -0.9% if petrol is included.

The discontinued businesses included the US operation commented on here  and China where Tesco is combining its 131 stores with China Resources Enterprise, Limited's 2986 stores and contributing £345m for a 20% stake in a JV that will have sales approaching £10bn.

The management have stated that they remain committed to achieving their guidance of mid-single digit trading profit growth in the medium-term and that they have set themselves a sustainable ROCE target of 12-15%.

On a positive note is the average sales uplift in stores that have been part of the refresh programme:



Click on chart to enlarge

 
This trend should help uplift sales in the second-half.

Surprising, for me at least, is the introduction of a tablet device known as the hudl designed and built from scratch by Tesco, that has been receiving a lot of press coverage over the past few days.  This is priced at £119 and is targeted at the 76% of households that do not own a tablet computer.

UK "home shopping" is one of the few growth areas and has increased by almost 13% and they have click & collect in nearly 200 locations.  

The dividend has been maintained at 4.63p and they have stated that future dividend growth will be in line with earnings and they will target an earnings cover of 2x.  I am assuming that this cover target will use continuing business earnings, so that the second half EPS will need to be approximately 15.5p for the management to be comfortable with maintaining the dividend for the full year.  A few analysts have been adjusting their estimates today and are looking for an EPS of around 30p for the full year (15.92p in the second half), which would cover a maintained dividend 2.03x.