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07 October 2020

Tesco Powers Ahead with Online Sales

Ben Staniforth, Investment Research Analyst          
 
Tesco took a huge hit from Coronavirus-related costs to the value of £533m. However, this did not stop the supermarket giant turning over a pre-tax profit of £551m, 28.7% up on 2019.
This performance is derived from the rise in food purchases during the pandemic and with online orders doubling. With more customers utilising online shopping, Tesco has doubled its delivery capacity to 1.5m slots per week during the first half of the year. While food sales increased 9.2% during the period, other divisions fared less well, including Tesco Banking and clothing.
 
Operating profit figures did not look so positive, falling by 15.6%, with Banking being a major laggard for the group, generating a loss of £155m. Clothing also failed to perform despite increased footfall as customers looked for essential items and shunned discretionary spending, lowering sales by 17.2% for the period.
 
Luckily for the group, it still managed to perform very well in such an undesirable economic environment. The combination of Coronavirus, economic downturn and leaving the EU is not ideal for most sectors. Add in the effect of growing competition from challenger supermarkets such as Aldi bringing in click-and-collect services, the M&S partnership with Ocado and the tech giant that is Amazon wishing to dominate the grocery sector and the picture becomes still more challenging. The Ocado partnership is a substantial concern, with the online-only grocer recently taking the crown as the most valuable UK grocery retailer from Tesco. Despite the significant difficulties that the COVID-19 pandemic has brought, Tesco has managed to weather the storm relatively well, owing to increased demand for essential goods and its strong online delivery system. Investors have therefore been rewarded with a resilient share price and a 21% increase to the dividend, which now pays 3.2p per share.
 
Fortunately for the group, it received business rate relief of £249m during the first half of the year, which has offset over half of the costs incurred from the pandemic. The group is also in the processes of winding down its operations in Thailand, Malaysia, and Poland, which will no doubt lower some expenses associated with attempting to gain market share in these regions.
 
Please note that investments and income arising from them can fall as well as rise in value. This communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned.
 
Tesco Powers Ahead with Online Sales
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