Tesco PLC (TSCO) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining us today. I'm here in Welwyn with Imran, and in a moment, we'll be delighted to take your questions. Hopefully, you've all had a chance to read the trading update that we published earlier this morning, so I won't go back over the details. We've made good progress in a challenging market, and I want to start by thanking all our colleagues across the group for everything they've done supporting customers and communities day in, day out. Importantly, customers are rewarding us with their loyalty, and we've been able to grow share in every one of our markets. In our core U.K. market, the material and ongoing investment that we have made in the powerful combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices is working. By offering the best possible prices on over 2,000 essential products, along with truly exceptional deals for our Clubcard members, we are helping to ensure that price does not become a reason to shop anywhere else. We know that staying competitive on price is the most important thing we can do for our customers at this time. Although it is difficult to separate it from the significant impact of lapping last year's lockdowns, we are seeing some early indications of changing behavior as a result of the inflationary environment. It is, therefore, even more important that we work with our supplier partners to mitigate as much as inflation as possible. Where it has been passed on, our aim is to ensure it is a little bit less and a little bit later than the rest of the market. Given that our quarter 1 numbers reflect the impact of annualizing last year's lockdowns, we have included the 3-year like-for-like measures to help you understand the longer-term strength of the business. These show that we are materially ahead of pre-pandemic levels with total retail sales up by around 10% versus '19, '20. Although I'm not going to go through all the numbers in detail, I would like to highlight Booker's performance, particularly in catering. While this is partly due to the lockdown effect last year, there is also significant improvement in the underlying strength of the business. Booker has added over 13,000 net new catering customers in the first quarter while continuing to provide exceptional levels of availability and service. Taking it back to the group level at this early stage in the year and given the uncertainties in the external environment, our retail profit guidance remains unchanged at between GBP 2.4 billion and GBP 2.6 billion. Our cash flow guidance also remains unchanged at between GBP 1.4 billion and GBP 1.8 billion. Before I hand over to questions and answers, a quick reminder that if you can keep to 1 or 2 questions initially, that will really help us get around everyone. And with that, I'll hand the call back to the operator.

[Operator Instructions] And our first question comes from the line of Andrew Gwynn of BNP Paribas Exane.

Two questions very quickly. Firstly, just elaborate a little bit more on this changing consumer behavior. I presume that just sort of means shift in mix, shift in rates, but so far, presumably nothing too exceptional on that front. And then the second question connected to that really is, to what extent does changes in the mix? Do they have a significant impact on profit as it create a bit of competitive tension with brands? Is private label a good thing for profitability?

Thank you, Andrew. And I think the emphasis we put here is that early. And the reason for that is that, of course, the lockdown last year makes it really difficult to get a clean read about what's been driven about normalizing behavior of the customer versus a reaction to the inflationary pressures that we are all facing. And so what we are seeing is we are seeing what you'd expect, which is a higher frequency of shop, smaller baskets, a return to shopping in our convenience stores and all of which I think works for Tesco because of its comprehensive kind of channel penetration, whether that be convenience, large stores or online. What we have seen is reasonably early signs that where there is heightened levels of inflation in staples, such as bread and pasta, we are seeing the customer choose the own brand or the entry-level brand variety and to help them manage their overall basket cost. The good news from a Tesco perspective is they're still choosing to shop with Tesco because we're so competitively priced. So overall, it is really early days yet, and these are only early indicators, but we felt it important just to flag it.

On the mix, Andrew...

I'm sorry, just on the profit point, does it have a...

Yes, sure. No problem. Look, I mean, the way I think about it is, first, the key point here for me is the fact that we're able to serve customers looking for value. We have what they're looking for. So that's a positive because that's good for volumes. On the flip side, as we've discussed a few times, there is -- it depends category by category, but clearly, there is some tension that is introduced as customers down-trade. We talked about it a few times, and our job is to continue to find ways to offset that.

The next question comes from the line of Andrew Porteous at HSBC.

A couple from me. I guess the first of those is the gap between yourself and your big 4 peers has been quite stark through the first quarter. You're winning share where they were losing share quite significantly. I'm just wondering if you can put your finger on what it is that's really driving that sort of outperformance of Tesco versus the peers because you could easily have lost share this quarter, it not be the worst thing in the world. And then the second thing was really a question around Booker. Just on the catering side, what sort of levels of inflation are you seeing in -- within the Booker catering business or, I guess, the catering industry more broadly? And are you seeing any impacts from, I guess, some of your catering customers? Are they seeing sort of lower volumes or customers switching away there?

Thanks very much, Andrew. Let me address the second one first. So Booker performed so strongly during the quarter for a couple of reasons. The first clearly is it lapped the lockdown last year. And that's challenging, therefore, to kind of pull apart what's just normalizing kind of eating out behavior and to what extent has that been kind of held back or constrained by inflation, and we find it difficult to pull it apart. What's been interesting for us, though, is that with Booker growing its catering business by 50% during the quarter is that within the catering market, Booker has been a clear winner. And that really is down to the customers it serves. And what we've seen there is that Booker is not only winning new customers, but its best customers are winning in the market overall. And a lot of that's got to -- is down to the fact that the Booker customers in catering are trying to manage their menus and their pricing more effectively than the rest of the market. So they're quite competitively priced, and Booker works very hard to help them manage their menus and their mix to keep that value proposition. That said, overall, we see catering inflation running ahead of retail inflation. In terms of our kind of first quarter performance, it's never one thing. I mean, clearly, our very strong value position is helping a lot. And I think it's less about the fact that we've suddenly made a big play for value. It's more of the fact that we've been consistently good value for some time now. And so the customers learned that it can rely on us. And the other thing is that we have very consciously moved away from high-low stunt deals, multi-buys towards an everyday low pricing model, which means that customers can trust they're going to get a good deal from us, no matter when they shop us as opposed to wondering when we are on or off deal. And we believe that, that's quite a powerful platform. Clearly, Clubcard prices is also helping. And then I would call out the last 2 factors as really, really strong supply chain. So that just -- that availability has been that bit better. We have all the same challenges as the rest of the industry, but we've just been able to probably beat the market on availability by 1 or 2 points. And our shopping experience has been consistently strong. Our store teams and our store leaders, together with supply chain, have done a magnificent job right the way through this quarter.

Our next question comes from the line of Clive Black at Shore Capital.

I just wanted to have a chat about working capital, if possible, because one assumes that with your overall sales level, given where inflation is, that the food volumes are reasonably down. But equally, in the nonfood world, one thinks of Target, maybe 1 or 2 others, there's a lot of stock in the system. And I just wondered on both those counts, if you could give us some color how you see working capital evolving with a quarter in the bank?

Sure. So maybe let's talk about the nonfood element of your question first. So I think important to remember is that general merchandise and clothing combined are actually quite a low penetration of our total sales. Think of that around 10%. So we don't actually have a very high exposure to that. Now clearly, when I look at the first quarter last year, we had disclosed we were growing in almost 20%. This year, in the first quarter, we called it out of the trading statement, we have a decline. General merchandise, mid-single-digit -- sorry, general merchandise with high single digit and clothing mid-single-digit as expected as part of the normalization. We have a good team working on our inventories, making sure we've got the right stock. Clearly, Jubilee, we had a bit more and that sold through. But I think we're overall in a good position on inventories for nonfood. When I look at the overall working capital, what I said in April 9 weeks ago still holds pretty much. We had some favorable inflows from fuel and from -- from fuel recovery as in the volume step-up as well as from the Booker catering. That's going to continue to help us in this first quarter. But clearly, that's going to be lapping that. And we -- I still continue to see a net outflow for the year at this early stage but nothing materially different than what I said to you overall.

Wonderful. And then just by way of further question maybe for Ken, I noticed your Chairman speaking at a CEO's convention yesterday was interesting, but he seemed particularly gloomy on the U.K. consumer. I just wondered, are you aligned with his thinking?

Clive, everyone is entitled to a point of view. I tend not to speculate on future kind of customer trends. We try and stay really close to what the consumer is doing right now, and we focus on responding to that. And that's really worked for us.

Our next question comes from the line of William Woods at Bernstein.

First one is just on pricing in the market. Could you just talk about how you're seeing the pricing landscape in terms of kind of how rational it is moves by different players, and in particular, kind of taking some of the lines out of price match that have been reported? And then secondly, it'd be good just kind of understand current trading and how you see that going, in particular, about the Jubilee weekend and the boost that we get from that.

Great. Thanks very much. Let's start with the Jubilee weekend. Let's start with the good news. I thought it was a fantastic celebration and a bit of a momentous occasion where Britain really came to life. I really thought it was quite a spectacular weekend and one to be proud of for the nation. Clearly, we saw some very interesting spikes in certain product categories. We sold nearly 0.5 million bottles of Prosecco, which is double what we would normally see. The same was true of things like strawberries, cream, scones amazingly, including scone mix, which was one that surprised us. So a lot of people baked their own and there was a lot of street party activity. So it was a really good weekend not only for Tesco but for the country. I think in terms of -- remind me your first question again.

Sorry, question with the [indiscernible] pricing.

So the market is behaving largely rationally. We see that where there is significant cost inflation in commodities, et cetera, we see that the market is behaving largely rationally. And we expect that to continue. I think that we maintain a very strong -- certainly amongst the full line grocers, I think, the strongest value position with over 600 lines included in the Aldi Price Match. And I think there's great consistency in that. Lines may move in and out on a very temporary basis, depending on market conditions. But I think there's a real consistency in that. And that, I think, is something we absolutely plan to stick to. You will see us from time to time take cost price increases up ahead of the market. And I would take certain examples like milk and also our investment in eggs and also some of the commitments we've made to pig farmers, where we see particularly critical moments in the industry where we need to lead and take a step up, in other words, to protect the sustainability of our food supply chain. And that's from time to time where you'll see us do things a little bit differently.

[Operator Instructions] The next question comes from the line of Xavier Le Mené of Bank of America Securities.

So 2, if I may. The first one, I know it's a trading statement, but can you also potentially comment the input cost you're getting and what you've been seeing in the last 3 months? And the second one is about the relationship with the supplier. So how is it going? So do you have a kind of ongoing negotiation? Or do you have a fixed price now for -- with the certain visibility for the next 6 months, for instance?

So for me, did I understand the first question right is our input costs? Is it?

Input costs, yes.

Okay. So look, I'll ask Imran to address that, and I'll take the supplier question. So the suppliers we enjoy a particularly strong relationship with, and that's kind of independently verified, if you like. So you may have seen the recent GCA league table that was published last week by the grocery adjudicator, where we were second from the top of the table and scored incredibly strongly, really on the ethics of how we work with our suppliers. And that's a policy that we have absolutely committed to and have every intent of maintaining no matter how tough times get. The second thing is that we came top of the Advantage survey, which is an independent survey of suppliers on their relationship with the retailers for the sixth year running. And that gives me the confidence that we are behaving appropriately in the market that we are seen by the industry as best-in-class in terms of the way we lead those relationships. We have many deep and long-lasting partnerships, and they have been absolutely essential in maintaining our best-in-class service levels right the way through the pandemic and actually even now where we see challenges to availability depending on the category. And so that's a competitive differentiator for us. There is no doubt that tensions are rising because every P&L is under pressure from these inflationary moments. And that's likely to continue. I think the key for us is to maintain an objectivity and always look past it to the consumer and the customer and say, what are we doing together to minimize the impact on the customer. That's our philosophy. We're very clear with the suppliers about that, but we're very rational and respectful in the way we work with them on it.

So I'll take the question on input costs overall. So maybe if I break them down for you, OpEx and how I'm seeing that as the year has progressed. So look at this early stage, what I'd say to you is everything that we talked about in April is happening. And I wouldn't have anything material to call out, right? So you'll remember we talked about the energy cost inflation. We talked about the payroll inflation, the distribution inflation. All of those things are there, and they've played out. I would say no surprises thus far. I mean, critical to that, of course, is how much savings can we apply. And as you know, on a full year, we had an original plan of around 300, and we were -- I said at the time, we would have continued to accelerate and figure out how much more can we save without impacting the customer shop, and that's what we're working on. I wouldn't want to give you an update today because that's work in progress. And then on the COG side, the cost of goods side, you can imagine that the pressures are continuing on a regular basis. It's a tough trading environment out there. There's no doubt about that when I look at cost. But clearly, I wouldn't give you a number of recent and you wouldn't expect me to, given the sensitivity on that subject.

Our next question comes from the line of Rob Joyce at Goldman Sachs.

First one is just on the top line. I think previously, in April, you talked about sort of small positive like-for-like you're looking at this year. And then we’ve seen Asda come out and say they're talking about material sales declines. I was just wondering if you're still happy with that sort of small positive like-for-like for the year as we stand today? And can you maybe give us a feel on the exit rate. My sense is you may already be in that positive territory. That's the first 1 in the U.K. And the second one is just on Booker's Catering business, just historically, that's been quite a high-margin business, definitely, I'd say, higher than the U.K. ROI sort of headline number. Can you confirm that's still the case here?

Yes. So I'll take the 2 in reverse order. The Booker catering margins are indeed the more accretive ones within the Booker environment. So that's good. And when we see growth in Booker is part of the plan to be fair, but it's good to see that the plan is coming through. On the -- on your first question in terms of broadline -- top line growth, what I'd say to you is the first quarter having played out, lapping the big sort of lockdown that we had last quarter, it's not a real surprise to me that we're in negative territory. I mean it's -- as I said, it's tough, but the reality also is the uncertainties that we talked about 9 weeks ago, whether that's the inflationary environment and how that plays out, whether it's customer behavior and how that really plays out as we lap the lockdown as we really try to understand what customers are thinking and doing all still have to come. And my view is, let's see how that actually happens as we get the first clean quarters ahead and then see where we land. So broad-brush speaking, I would expect that still to be a possibility that we should be able to do that. But it's very much in an uncertain environment. What I feel comfortable is what we are doing is working for us, but obviously, the environment is something that we need to deal with as it happens.

And our final question comes from the line of Nick Coulter at Citi.

I get to close the show. So 2 quick questions for me, please. Firstly, could I ask what you're seeing in the most recent switching data, I guess, all else being equal, that should be positive. And secondly, could you comment specifically on the U.K. labor market as you see it, whether it's still tight and how you're mitigating the risks across the year?

Nick. So look, the switching data, you will have same access as everybody else in terms of what Cantor is showing. And what that shows is net-net through the first quarter, we had switching gains. We saw -- because we were lapping a lockdown last year for quarter 1, what you're seeing is some normalization in the market. So the discounters clearly saw switching gains. Hard to tell how much of that is due to just normalization because they didn't have a dotcom proposition last year. How much of it is due to the new space they're putting down and how much of it is due to just customer switching. But as you rightly say, we are seeing switching gains from the rest of the market. And that's been consistent. We've been really pleased that we've maintained that through the quarter. And in terms of the U.K. labor market, we're faring really well in the market. We've got good colleague availability. We've worked very hard obviously, to put a very competitive reward package together for colleagues, which we were able to announce in April. We've made a number of enhancements to our reward model, including increasing our colleague discount and also increasing minimum-hour contracts to 16 hours. We've got an app launching this month, which will allow colleagues to get additional hours in different stores. So we're doing an awful lot of work. And we're also increasing the number of training modules, and that's working really well for us. I mean, of course, we were also 1 of the big, big supporters of the Kickstart program, putting over 2,000 young people through that program. And so we have a number of different ways of accessing talent in the market. And for now, we're doing very well. Thank you.

But as you move through the summer and into peak, you don't see any risks or you have that in hand?

We believe we have it in hand. We don't see any risks at this stage.

And as there are no further questions in the queue at this time, I'll hand back to our speakers for the closing comments.

So look, I'd just like to wrap up by saying an enormous thank you for taking the time to join us and for all the questions. As we said, it's been a good start in a very challenging environment. We feel very proud to be part of the Tesco team. We think they're doing a magnificent job for customers and we will continue to do so for the rest of this year. So listen, I'd just like to wish you all a great weekend. I hope you get a little bit of sunshine today by maybe a little bit more Prosecco and a few strawberries, and we will look forward to seeing you again in a few months. Thank you.