Tesco PLC (TSCO) Earnings Call Transcript & Summary

Good morning, everyone, and a Happy New Year to you all. Imran is here with me in Welwyn as usual. First of all, I'll give a little color on our performance, and then we'll hand over to questions and answers. I'm hoping you've had a chance to read the release, and so you'll have seen that customers responded really positively to our Christmas offer. In fact, the work we have done to invest in value, create high-quality products, deliver market-leading availability and customer service has resulted in our best-ever Christmas offer. We're delighted that so many customers voted with their feet and chose Tesco this Christmas, leading to a really strong performance. We've been relentless on value because we know just how important it is for everyone. And for over 14 months now, we've been the cheapest full-line grocer in the U.K. due to our investment in value. This Christmas, we were proud to offer a full festive dinner for just over GBP 2 per head, including a fresh turkey. Those key festive lines are really important for customers, but so too is great value across the rest of the basket. And that's why we've lowered the price of nearly 2,700 products on average by about 10% during the 19-week period. This week, we've been helping customers manage their budgets for the new year too, with another round of price cuts on more than 150 products and a double Clubcard points event. It's the first time we've run a double points event like this for more than a decade, and we expect to give out around 10 billion Clubcard points over the next 7 weeks. Quality is also particularly key at Christmas as customers look to trade up and treat themselves. We spend a lot of time on innovation and product development, and our new Finest range really stood out from the crowd as a result. We invested in over 550 new and improved products, almost 1/3 of which were Finest, including the launch of Finest Chef's Collection, restaurant-quality products designed by our expert chefs. It was a record Christmas for Tesco Finest, with sales up 17% and with more than 18 million customers buying from our Finest range over the period. We continue to win customers from premium retailers, and we've done this now for 17 consecutive periods. In a return to tradition this year, it was all about the big Christmas shop for customers, and they really came out in force for our busiest day on the 22nd of December. We invested more in colleague hours, and our colleagues really stepped up to serve a record number of customers on Christmas Eve. And we did nearly 820,000 transactions in just 1 hour. So I'm really products of the -- proud of the products and the range we had this Christmas. But what really makes the biggest difference to our customers' experience is the service from our brilliant team of Tesco colleagues. It's been a proper team effort, and we've had some real heroes behind the scenes, working right across our business to make sure everything comes together, from the technology and online teams to product, supply chain, and a particular highlight for us was our Whoosh rapid delivery service, which delivered nearly 500,000 orders in the run-up to Christmas, which is pretty good going when you consider this is really quite a new business for us. All of this great work has culminated in us delivering market share gains and continuing to win customers from our competitors. Booker has also had a really great Christmas, driven by our exceptional service and availability. In Ireland, we reached our highest levels of market share in almost a decade with strong growth right across food. And we also opened our first store in Kilkenny, which now means there is a Tesco in every county in the Republic of Ireland. Our Central European business has delivered a really resilient performance against what continues to be a challenging backdrop. So in summary, we've got the right strategic priorities, and we're making really great progress on them. And we go into the new calendar year with great momentum. You'll have seen that we've upgraded our guidance for adjusted operating profit and cash for the current year as customers recognize the progress we are making. So we've got the right plans and a great team delivering them. And with that, we'd like to move on to your questions. Thank you.

[Operator Instructions] And our first question today comes from Andrew Gwynn from BNP Paribas.

Two questions, if I can. So obviously, a very good Christmas. Well done to yourselves and the team. But what's the setup feel like for the next financial year? I appreciate it's just a trading statement, but thoughts there would be very welcome. And then second, just into the detail actually and looking at Best Food Logistics, obviously quite a soft sales performance based on unprofitable sales. Can you help us understand that a bit better? Is it something we should [indiscernible] of into the coming year?

Thank you very much. I think the key thing to take away from this trading update is that we have really great momentum in the business across every aspect of the business model. So we lead as the cheapest full-line grocer in the market. We've had a great uptick in our product innovation with over 550 new products, one of the highest number of new products in the market, and a very strong growth, particularly in our trade-up categories in Finest. We've invested very strongly in the store experience and the shopping trip. We continue to invest in our technology capability. And so we feel really good about our readiness for whatever 2024 brings. We think the consumer is in a cautiously optimistic mood. That said, it's a battle for every basket. We're in a highly competitive market with 11 strong national players, and so we continue to expect it to be a really competitive and tough environment, but we think we're really well placed. In terms of Best Food, I'll hand over to Imran just to talk you through the factors there.

Look, I mean, Best Foods, we called it out. As you know, originally, we acquired that business to basically give us sort of core infrastructure for the catering side of the business. The business gave us, at the time when we took it, GBP 1 billion of sales. It was in a loss-making position. Glad to say today it's in a profitable place, which is great. And also what we decided to do is, as you know, it's important to have contracts that make money. So we took the opportunity to prune out basically loss-making contracts, which will cycle through maybe another quarter or 2, but then it should be out of that, but feeling very good. I think as you can tell, the growth in book catering has been phenomenal, especially over Christmas. And the Best Foods Logistics was a bit of an offset there but was actually not a big profit contributor.

Okay. All very clear. Just I suppose the key question would be market, as far as you can see, is remaining very rational. Competitive, but very rational.

Yes. I mean, look, I think when you look at just the market dynamics over the last -- since the half year, we spoke about how does it feel. And what you've seen is a very rational backdrop. And I think as we look into next year, clearly commodities will do what they will do, but all the industry players and, frankly, the supply base will deal with the national wages increases as well. So I expect a continued rational market to persist.

And up next, we have Izabel Dobreva from Morgan Stanley.

I had two questions, please. So firstly, a question on your guidance, which you have upgraded. So it still sounds like you are building an element of conservatism in there. So I just wanted to talk through your assumptions for the back half and specifically how you're thinking about price investments in the context of the recent price cuts and price match schemes we have seen announced. Is that just a normal post-Christmas belt tightening in your view? And how are you thinking about the competitive environment when giving us that guidance? And my second question was on promotions and supplier income. What are you seeing here? And do you see further room for supplier-funded promotions to continue to grow over the next 12 months? And at what stage would you be concerned that this becomes disruptive to the overall price image?

Look, I mean -- let me take the guidance question. I mean, look, as you say, look, you remember in half 1, so 4 months ago, we upgraded for the first time after having a really strong first half. We delivered around GBP 1.4 billion. Now 3 months later, we're upgrading a second time, where we're taking -- as opposed to the GBP 2.6 billion to GBP 2.7 billion, we're saying GBP 2.75 billion. If you step back, given our size, that's broadly a 50-50 split. I feel really good about we've gotten there, because we've gotten there by being the cheapest full-line grocer, by investing in colleagues, by investing in promotions and, frankly, working with our suppliers. So the way we've gotten there is very, very solid. And stepping back, given our scale, that's broadly a 50-50 split. Now both ends of the halves have certain investments in. Clearly, we want to continue as we head into next year, be front-footed with our status versus customers. And therefore we will continue to invest. As you've seen in our Clubcard double points or our 150 price cuts, that will continue to cement our position. And I feel good as we enter next year with that momentum. So I don't see it as conservative. I see it as, broadly speaking, a 50-50 split, first half, second half, and that sets us up well to go into the next half. On the second question on promotions.

Izabel, it's a really good question. It's something we watch very closely because we are quite protective of our price file and making sure that we have as much simplicity and clarity as possible to be able to maintain, a, our level of everyday low pricing, because that's a really important of our overall value proposition; and b, as you say, to kind of avoid this sense of back margin and lack of transparency. So that's a real key tenet. That said, inevitably, there has been a drift up across the industry over the last 12 months of volume on deal. And that really is a consequence of what you saw in the previous year, which was a really strong switching into own brand proposition. And now what you're seeing is suppliers -- branded suppliers trying to win share back through deeper deals and more frequent deals. And that, I think, is a feature of today's landscape and the reality. But we'll work really, really closely and strongly with them to make sure we kind of maintain that integrity of the price file.

And we're now moving on to Clive Black from Shore Capital Markets.

I'm sure the people of Kilkenny are particularly happy this morning. A couple of questions, if I may. Firstly, given your comments, Imran, about the National Living Wage, I just wonder if you could give us your expectation for the continuation of food inflation into 2024. And in that respect, maybe just give us a little bit more color about the price/volume mix that you've experienced over the last 19 weeks. And then just secondly, maybe give a little bit more color too as to some of the dynamics in Central Europe and your hopes and aspirations for that region as well.

Okay, sure. So let me take them. On the food inflation side, as you know well, I mean, just Kantar reported, what was it, 6.5% or so in the last read. We're meaningfully below that and continue to inflate less than our competitors. That's something we'll continue to do. In our internal assumptions, our perspective hasn't changed. We continue to expect this disinflation trajectory that we're on to continue. As I look ahead into next year, now clearly commodities will do what they do, but I do think that we do expect to see some levels of inflation, albeit at a much lower level, to continue next year, driven by the fact that labor costs are a headwind, so to speak, for everyone and have to be dealt with. Your second question was on Central Europe. Now clearly it hasn't -- in terms of the dynamics, you'll remember we spoke about Hungary being especially challenged. And the way I'm looking at it is that is driven by government actions and by the very high levels of inflation. Clearly, we have invested more in Europe. I think that is right, given the pressures that our customers are facing out there when you think about 2-year inflation of over 30% or so. We will continue to invest. And you're right, given that the environment is challenged, our focus was on protecting the market share, protecting the franchise. And I'm confident that as conditions sort of get back to normality, which we're starting to see, that the business will gain back on to growth, and we saw that already at Christmas.

And just some color on market share in Central Europe, please.

Look, I mean, I think it's -- we're starting to recover some of the -- from the discounters and from all the other players, so I think overall in a good place when I look at the amalgamation of the 3 countries, a special strength in Slovakia to call out, and the rest are fairly broadly flat.

Up next, we have Sreedhar Mahamkali from UBS.

Three hopefully quick questions, please. Maybe just to build on Clive's point, how do you characterize volume growth through the year? You referred to volume, I think, in Q2, and now you're more vocal about it. And do you see this volume growth continuing to build, Imran, to your point about continued disinflation? Does that spur on a bit more volume growth over the coming quarters? That's the first one. Secondly, it will be super helpful if you could at all give some sort of color around the puts and takes in terms of profit growth for the year ahead. I think people are modeling GBP 50 million, GBP 60 million. Just talk us through your thoughts. I know you've already referred to living wages, one of those. Anything else we should keep in mind? Third one, any comments at all -- I'm going to try, but on the bank process that seems to be going on behind the scenes to the extent you can share something with us.

Thank you. Look, we'll take the last question first, which is a pretty short answer, is we never comment on any speculation in the market, and you wouldn't expect us to, I'm sure. In terms of volume, I think the shape of volume over the last 12 months has been trending from volume -- kind of negative volumes through to positive volumes from the first half through to the second half. And that trend is just continuing and continues to strengthen. We can't really legislate for what will happen in the coming 12 months. But what we are planning for is modest volume growth in our assumptions. In terms of profitability, I'll kick it off and maybe hand over to Imran to give you the kind of the main drivers, but clearly we're expecting some headwinds from wages and some tailwinds from energy.

Look, I mean, clearly, we're going to talk in April more as to how we see the year pan out. I mean just to give you a sense of how we think about it, we always go back to our framework on performance that we laid out, right? Every year is a fresh year, and our aim is to hold and grow market share, to translate that into profit growth and then, frankly, deliver the cash so we can continue the returns that we have started. That's the philosophy we start every year, and every year's going to have its puts and takes, as you call them. And Ken is right, the big known known is going to be -- there's going to be headwinds from energy. We do know that we're very confident in our -- sorry, from wages. We know that we're going to have some benefits from energy, but still, there's open positions still to be concluded there. So that's an ongoing program. And then, clearly, we know that we will continue to invest into the customer at the same time. And the aim is to continue to hold and win market share.

[Operator Instructions] And we're now moving on to Nick Coulter from Citi.

Three quick ones, if I may, please. Imran, I think you commented, but could you confirm you don't see deflation this year, please, as far as it's in your scope? And then a follow-up on promos, if I may, please. Could you talk to whether branded is back into volume growth or -- and if its growth is still lagging own label? Obviously there's nuance given the tiers in own label are probably behaving quite differently over peak. And then lastly, could you talk to your nonfood performance across peak, please, from a sales and profit perspective, if possible?

Okay. So I'll start. I'll kick off on deflation, you're talking about the year ahead, right, '24, '25. I mean the way I'm thinking about it, and then in a rational market, with the headwinds on labor, my perspective is, obviously, commodities is always hard to call is that we would be in a disinflation mode rather than in a deflation mode. That's my current base assumption.

And would deflation trouble you, Imran, if that came into [indiscernible]? And would you see that as transitory?