Tesco PLC (TSCO) Earnings Call Transcript & Summary

Good morning, everyone, and thank you for joining us. And a very, very happy new year to you all. I'm here in Welwyn, with Imran. And I'll give you a brief update on our performance before we start Q&A. As you will have seen in our release this morning, customers responded well to our Christmas offer; and we're very pleased with our performance as a result. We delivered our biggest Christmas ever. And 23rd of December was a record day of sales in the U.K. We continued to invest in service, including in colleague hours, recruiting over 28,000 festive in-store colleagues. I'd like to personally thank all of our colleagues for delivering a really great Christmas experience for all customers. Our commitment to offering the best possible value, quality and service continues to resonate with customers and resulted in strong market share gains, with switching from all corners of the market and further improvements in customer satisfaction. At 28.5%, our market share in the U.K. is now the highest it has been since 2016. For more than 2 years, we've been the cheapest full-line grocer. And we're proud to have invested once again to offer great value, including a traditional Christmas dinner for GBP 1.84 per person, which is down 12% versus last year, which is helping customers celebrate regardless of budget. Great quality is always important to customers, especially at Christmas. And we have continued to innovate, with over half our festive products this year new or improved. Customers have recognized this, and as a result, our quality perception has grown ahead of the market. Tesco Finest continues to be a valued brand for customers, with sales growth of 15.5% year-on-year. Over 20 million customers shopped Finest in the period, which is up 6%. Our Finest champagne premier cru won best champagne in Which?'s taste test. And we sold over 1.4 million bottles of our Finest prosecco, which was the top-selling Finest tipple over Christmas. Online saw strong growth, with sales up 11% over 19 weeks, including our biggest-ever week in the run-up to Christmas. And we were also pleased that our Whoosh rapid delivery service played an important role for customers, helping them shop whenever and however they wanted as they got ready for those important festive celebrations. We have now also rolled out Whoosh to 32 large stores in addition to over 1,400 Express stores, offering even more choice to customers. Marketplace continues to scale, with over 300,000 products now available on the platform. It's still very early days, and we're learning a lot as we expand the business. Our customers continue to benefit from increasing personalization and great value with Clubcard. Customers collected over 0.5 billion extra Clubcard points over the period through Clubcard Challenges; and across the year, saved up to GBP 393 on their grocery bill through Clubcard Prices. This week, the majority of our 23 million Clubcard households received Clubcard Unpacked, showing them how they shopped and how much they saved last year. We also revealed the U.K.'s most popular meal deal combination, featuring our chicken club sandwich as the favorite main. In the Republic of Ireland, our strong performance continued, driven by ongoing investment in quality and innovation, reflected in some great accolades at the "Taste of Ireland" awards. In a challenging year and despite ongoing headwinds from the decline in tobacco sales, Booker continues to deliver outstanding value and service for customers, reflected in great customer satisfaction scores. I'm pleased with the strength of our core retail and catering businesses, both of which continued to grow across the 19-week period. Our Central European business has also made good progress as we invest in the customer offer, with strong customer satisfaction improvements in all 3 countries, driven by value perception. You will have seen in the release this morning that we've reiterated our guidance for adjusted operating profit and cash for the current year. We're happy with our progress and continue to focus relentlessly on customers and building our proposition to drive long-term growth and value for all stakeholders. We carry strong momentum into the new year, with the right strategy and the right people in place to deliver it. We'd be really happy now to take your questions. Thank you very much for listening.

[Operator Instructions] And up first, we have Izabel Dobreva of Morgan Stanley.

I noticed that there was no change to your profit guidance. Could you help us understand whether you have seen any change in the competitive environment which means that you're stepping-up price investments or promotional activity? Has anything changed since the last update you gave last quarter in terms of how you're thinking about the margin development into year-end? So that we can contextualize the lack of profit upgrade given the very strong sales and market share momentum. That's my first question. And then my second question is could you share your thoughts around the volume outlook for the industry for the year ahead given the evolving U.K. consumer backdrop?

Let me take the first one. Look. The -- as you might remember, at the half year, you will see, we had upgraded from at least GBP 2.8 billion to around GBP 2.9 billion. And at that time, we had said, look, as part of this upgrade, if we see opportunities in the second half to make investments where that can help us win further, differentiate ourselves from our competitors and gain market share, we would make those investments. And the truth is, with the investments we made, whether it was in availability and really backing our range, store payroll hours, value, they've really had a great payback, right? I mean you've seen our market share performance, 80 bps essentially and the biggest market share since 2016 for us. That's sound, and I feel good and really happy. And I take that any day between an upgrade versus the market share performance. The way I think about it is the environment that we're in is essentially as competitive at -- in October as it is today. So it hasn't really dramatically moved. This was much more Tesco on the front foot, making sure it takes advantage of its position, its advantage of visibility and advantage of its capability to continue to win. And I think that's no bad thing when you think about the long term as opposed to just the short term. In terms of next year, I mean, look. It's early days obviously, right? We are, as you might imagine, working through all the different building blocks of how we think about next year. And we'll obviously give you a lot of color when we speak in April. So it's really hard for us to comment on the volume outlook. What I would say to you is, over the Christmas period as well as over the 19-week period, we saw really solid volume performance. And in fact, over both Christmas and Q3, the volume was the majority driver of the sales growth that we've seen. And you also saw the fact that quite a few of our customers ended up trading up into Finest, and you saw the 15% growth. So at least on the evidence of the last 19 weeks that we're reporting on today, volume growth continued to do well. And we're very pleased to see that performance.

And we're moving on to a question from Rob Joyce from BNP Paribas.

So first one, just following on from Izabel's there on the guidance. It seems like you're saying that the investments have been made at your discretion. I guess, taking a step back, it suggests profit growth for the year of around 5% to 6%. It seems like you'd be happy with that. Is that something we should think about as a kind of longer-term EBIT growth aspiration for the business, reinvesting to hit that mid-single-digit EBIT growth? And then the second one is just on the overall sort of food inflation, a couple of -- I mean, are you seeing food inflation? Do you think it's tracking ahead of input costs at the moment? Is there any evidence of OpEx from wages last year being recovered? And just to follow on from that: In terms of what the suppliers are looking at for next year, do you have any early indication of what your suppliers -- what the inflation implied from [ what there are in store into ] next year?

Thanks, Rob. I mean I'd start off by saying, look, that we really use our kind of performance framework to guide how we think about those things. So the first thing we said is we'd be the cheapest full-line grocer in the market, and so pricing has been very important. And as Imran said, we spotted an opportunity in the run into Christmas to really lean in, in pricing and to build volume momentum, win new customers, win new missions. And that's what we've achieved. And pretty much every bet we made in terms of investment has paid back in terms of market share growth. And that gives us real momentum because that builds scale. And as Imran said, most of that volume increase -- or sorry. Most of the sales increase came through volume, so that's been really pleasing for our supplier base. It allows us build economies of scale, put more volume through our operating model and our fixed-cost base. And so that's kind of the kind of momentum we're looking to build as we go into next year. That said, clearly there's lots of variables out there. There are a lot of challenges out there from a macroeconomic point of view. I would say that, from a headline inflation point of view, Tesco's inflation number is materially lower than the number that was quoted on Kantar. And that's a little bit also the policy. If you think back to the last 3 or 4 years, we've always tried to be a little bit less and a little bit behind the market in terms of inflation. And that speaks to the work we've done on efficiency, cost savings and optimization of our model. It's allowed us actually to invest more on pricing, more in colleagues and actually more in automation and capital expenditure, which we've been able to increase progressively over time. And that framework will continue to evolve as we look forward, using volume scale to further enhance our position, further reduce our costs and ultimately give a good return for shareholders.

Okay, Ken, just to follow -- I guess the question is sort of it implied 0 profit growth in the second half versus 10% in the first half. I'm just wondering how we think about how those investments you're thinking about -- is it longer term, this is much more profit longer term?

I think...

Ultimately the way I think about it, Rob, is I go back to the framework that Ken laid out at the last statement and the one that we just referred to. Our goal is to continue to drive market share gains. Now when we set that out, we truthfully were thinking more like tens of bps rather than 80 bps in one go. And that's obviously nice to see, that it worked as well as it did. And as long as that translates into annual profit growth and into cash, we're in a good place. The trade-off now between do you want to drop a bit more, a few tens of millions on to the bottom line versus actually making an impact that will create value for the long term, I think, is an easy one for us to make. And you'd expect to make -- us to make that any day and that's the one we'll make, so next year, I think we continue to do the same way. Wherever there are opportunities, we will make those investments.

And up next now, we have Sreedhar Mahamkali from UBS.

Maybe just to build on a couple of the themes already. I fully understand it's a Christmas trading statement; and you won't be drawn to a debate on sort of next year's outlook, let alone this year's. Maybe you can talk through the puts and takes as you see them. And that's the first one. Secondly, I guess, on the consumer, we are seeing sort of fairly mixed pictures and contradictory sort of indications from different channels. How do you see the consumer's sort of willingness, intent and ability to spend in the year ahead, from your kind of Tesco lens and detailed insights that you have on the consumer? And a third one. You referred to marketplace, 300,000-plus items now on it. We see some really interesting customer perception metrics on it from our side, but are there any numbers you can share with us on customer engagement or how it is tracking versus your expectations? So -- and that will be very helpful for us.

Thanks, Sreedhar. So let me start with the overall consumer sentiment. I think that the sense we've gotten from our data and what we've seen is a gradually improving customer sentiment over the last 12 months. And I think that is really on the back of a moderating inflation number. So if you think about we were over 7% inflation this time last year: We are much, much lower than that, largely within the kind of normal inflationary tram rails that you would expect. So that has helped the customer a lot, a kind of a stabilization in terms of pricing. I think the second thing then is that their willingness to spend and treat themselves in food and food-related missions has been very robust. We saw not only a very strong performance in volume through Tesco U.K. but also through Booker's catering business, which means that they also eat out and enjoy themselves out socially as well. That said, there definitely is a moderation of their behavior. So over the 12-month period, they have been eating out less and they have been buying less in terms of discretionary purchases. And you see that in some of the big ticket item retailers and some of the clothing retailers. It's been a lot more challenging. We've been very lucky because we're only 7% nonfood. And actually our nonfood business has had a strong growth over the Christmas period because it's great value for money. So we feel that, regardless of the fact that consumer sentiment is probably subdued coming into the new year, with all the volatility politically and geopolitically, et cetera, the actual core behaviors of looking for great value for money, great-quality product, really convenient isn't going to change. And that's something we're focusing all our energy on. In terms of then the marketplace. Clearly, we're on a sharp learning curve, Sreedhar, on that. We have increased the number of SKUs. We're learning tons from it, but for us, we don't really have any concrete insights right now that we think we could share with you as an indicator that you'd want to build into your models. You'll have to bear with us on that one. And then clearly, on the longer-term outlook around the puts and calls, we'll be happy to get into more detail with you in April on that.

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

Well done, gentlemen. A couple of questions, if I may, from me. You've touched on the investments in the period, and you mentioned the 28,000 people. I just wonder if you could give us a little bit more color as to where you prioritized your investment across the business, [ though ]; and an expectation or otherwise as to will that continue. And then just some of the dynamics of your business: I'd just be interested to gain a feel for how private label did versus proprietary brands given the dynamics around that over last 2 or 3 years. You touched on Finest doing well, but were you seeing trading up across the board, or was it just very Finest focused?

Thanks very much, Clive, yes. So what I would say to you is we had a balanced approach to investments. We invested quite heavily in value. We also invested more in colleague availability. And we invested in product availability, so supply chain. And it was the balance of those 3 that really gave us the breakout performance. We also did a bit more marketing, and that was also very helpful. So it was those 4 areas with the principal sources of investment. And in a combined way and a targeted way, they really gave us the kind of standout performance that we achieved over Christmas.

Then in terms of own label versus brands. I mean it was a very similar picture over Christmas as it was over the first half that we had reported to you. So we saw strong performance across own label; and actually even very, very strong performance as well with the brands, so -- and then clearly the standout performance was from Finest. So a very balanced picture.

Yes. Our fresh food was a particularly strong performer, Clive, which of course is predominantly own brand; and also particularly important for us because it's [ central place ] meal occasions, which means that we get the halo from that. And that's -- so that was really quite important to us.

And then just a very quick follow-up. You talked, Ken, about Clubcard in your opening comments there. It was very fleetingly mentioned in the statement. I just wondered, in general, how you would characterize Clubcard given the power of the Clubcard Prices in recent times, please.

Well, look. It continues to be a real bedrock of our performance. It's a very important driver of choice for consumers. They see the benefits of it, and they really like it. I think what we've done and what we alluded to over the Christmas period is clearly we introduced a little bit of personalization and a little bit of gamification through Clubcard Challenges to over 10 million customers. And that had a great effect. There was a really, really strong response to that. And that was just another example or iteration of our continuous move towards greater personalization through the Clubcard.

And from Jefferies, we now have Freddie Wild with our next question.

First of all, you at half 1 characterized the consumer sentiment as stable to positive. I think, since then, you've seen an acceleration in Finest sales into Christmas. Would you still characterize consumer sentiment in that way, or has there been any change there? And secondly, again at half 1, you referred to in relation to retail free cash flow as being your ambition to deliver at the top end or even above guidance there. Is that still the case? Can we still think about retail free cash flow for this year, I mean, right at the top end of that GBP 1.4 billion to GBP 1.8 billion range?