Tesco margin and cost targets in focus

Tesco should have a big annual operating profit jump in the bag.

Tesco should have a big annual operating profit jump in the bag.

Tesco is thought to have a solid 27% annual operating profit jump in the bag. It reports 2018 earnings on Wednesday. The update comes after Britain’s largest supermarket outsold high street rivals in a stellar Christmas and maintained a lead against close rivals with 0.5% sales growth over 12 weeks to 24th March, according to researcher Kantar. As such, Tesco is also likely to post a 13th consecutive quarter of sales growth in Q4 2018.

There’s more uncertainty about whether Tesco will achieve a 3.5% to 4% operating margin in 2019/20. It is a long-standing target established by CEO Dave Lewis who took over in September 2014, when Britain’s largest retailer was facing multiple crises. The group’s operating margin was 2.9% at the end of the 2018 financial year. Between 10th August and early-October, its shares fell as much as 15% after Tesco undershot profit expectations at the half-year mark. After rising 25% so far this year, the stock could come unstuck again if investors are disappointed.

The market could also lose patience if the group falls short of savings targets, after outlining a costly headcount reduction programme earlier in the year. The group aims to save £1.5bn in operating costs by the same time as it hopes to hit its margin target. This has culminated in an announcement of up to 9,000 job cuts.

Investors will also scrutinise Tesco’s plans for a possible no-deal Brexit, whilst any update about how its new discount chain, Jack’s, is faring against direct rivals Aldi and Lidl, will be eyed.

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