Market news and results from Tesco.

Market News

Global stocks slumped with Treasuries after strong US jobs data backed the case for the Fed to keep rates elevated. The 10-year Treasury moved up to 4.86%, the highest level since 2007. In Europe, the bund yield has risen to over 3% for the first time since 2011, while Japan’s 5-year yield hit 0.8%, a level not seen since 2013.

The decline in US equities – S&P 500 (-1.4%); Nasdaq (-1.9%) – continued this morning in Asia: Nikkei 225 (-2.3%); Hang Seng (-1.3%); Shanghai Composite (closed). The FTSE 100 is currently little changed at 7,467. The dollar rallied, while gold slipped back again and currently trades at $1,822 an ounce. Sterling trades at $1.2078 and €1.1522. Ahead of an OPEC+ market review, Brent Crude is $90 a barrel as US stockpiles fell.

Raphael Bostic said just one rate cut will be appropriate in 2024, toward the end of the year, adding that rates need to stay elevated “for a long time.” However, Janet Yellen said the higher for longer mantra is “by no means a given” despite the surprisingly resilient US economy. Jeffrey Gundlach warned of a recession if the unemployment rate ticks up just a couple of tenths of a percent.

Kevin McCarthy’s ouster as House speaker plunged Congress into an internal power struggle as it faces deadlines on avoiding a government shutdown and approving aid for Ukraine. McCarthy lost his leadership post — the first such removal in US history — after Republican hardliners revolted over his compromise with Democrats.

Ray Dalio said US-China relations are “on the brink of red lines.” He likened US restrictions on advanced semiconductor exports to China to the oil ban imposed against Japan prior to the outbreak of war in 1941. He said Taiwan is at the centre of the many irreconcilable issues between the two countries.

Source: Bloomberg

Company News

Tesco has today released its interim results for the six months to 26 August 2023 and raised its guidance for the financial year to end-February 2024. In response, the shares are up 3% in early trading.

Group sales grew by 8.9% at actual exchange rates to £30.7bn. Retail Like-for-like (LFL) sales were up 7.8%. Inflation fell across the half, with volume and sales mix trends ahead of management expectations.

In the UK & Ireland, LFL sales business grew 8.4%, including UK up 8.7%, ROI up 6.9%, and Booker up 7.5%. The group enjoyed market share gains in store and online – the UK was up 30bps to 27.2%, while Ireland grew by 70bps. In the UK, food sales grew 10.6%, whereas more discretionary categories such as Home & Clothing declined by 4.8% as the group exited some products. Outside of the UK, Central Europe generated LFL sales growth of 0.9%, reflecting market volume contraction due to sustained high inflation.

The group’s Save to Invest programme generated significant cost reductions of £290m, helping the business manage inflationary pressures in its cost base. Retail operating profit grew by 14.5% to £1,417m. The UK & Ireland was up 17.2% to £1,371m, with accelerated cost savings and a resilient volume performance offsetting significant cost pressure. The UK & Ireland margin was up 47 basis points to 4.4%. Central Europe profit fell 42% to £46m, due to a significant decline in Hungary driven by the impact of currency devaluation on input costs and regulatory actions. Slovakia and Czech Republic are performing well.

Tesco Bank made an operating profit of £65m, up 25%, primarily driven by strong income growth. A £250m special dividend was returned to the group reflecting the strength of Bank’s balance sheet. As a result, overall group operating profit grew by 14% to £1,842m.

The group’s financial position remains robust, with net debt little changed at £9.9bn (2.3x net debt to EBITDA). The interim dividend was maintained at 3.85p, amounting to 35% of last year’s payout and in line with the group’s policy. In April this year, Tesco announced a commitment to buy back £750m of its shares by April 2024, of which £503m were purchased in the first half.

Looking forward, Tesco now expects to deliver between £2.6bn and £2.7bn retail adjusted operating profit for the 2023/24 financial year, versus the previous guidance for a flat result of £2.63bn.  The company also expects to generate retail free cash flow of between £1.8bn and £2.0bn this year, ahead of its medium-term guidance range of £1.4bn to £1.8bn.

Source: Bloomberg