Tesco faces profit squeeze as inflation threatens spending

Bloomberg

Tesco Plc warned profit will be squeezed this year as the UK’s biggest supermarket chain battles to keep prices low for consumers facing a cost of living crisis. The stock fell to its lowest level in more than six months.
The grocer, along with rivals like Wm Morrison Supermarkets, is grappling with inflation that soared to a 30-year high last month, pinching household budgets even as input costs swell. Chief Executive Officer Ken Murphy pledged to keep costs in check to ensure shoppers don’t defect to discounters like Aldi and Lidl.
“This is a really challenging time for many of our customers facing the biggest increase to the cost of living that we’ve seen in decades,” Murphy said. “We will not allow price to be a reason for customers to shop anywhere else.”
Tesco forecast retail adjusted operating profit of between 2.4 billion pounds ($3.1 billion) and 2.6 billion pounds in the current fiscal year, meaning earnings will show little change at best. The stock fell as much as 7% in London trading.
Clive Black, head of research at Shore Capital, trimmed his earnings estimates for the current year by as much as 5% and changed his recommendation on Tesco shares to hold from buy. “Retaining a positive stance feels like pushing water up a hill,” he wrote in a note.
Not all analysts were so negative. In the current context, Tesco is “well positioned to protect its market share,” said Richard Lim, an analyst at Retail Economics.
He cited the company’s customer loyalty plan and its scale, which offers negotiating power with suppliers.
The retailer controls about 27% of the UK grocery market and employs more than 360,000 people. The rising cost of food and fuel has prompted Tesco to increase staff wages, raising employee pay by almost 6% to retain workers.
During the pandemic, Tesco benefited from more people eating at home and shopping online, leading the grocer to raise its profit forecasts twice in the last financial year.