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Investing.com — Tesco (OTC:TSCDY) shares plunged to their lowest in six months on Wednesday after the U.K. grocery giant said operating profit will fall in the next 12 months as it battles to contain the effects of runaway inflation.
By 4:54 AM ET (0854 GMT), Tesco stock in London was down 5.6%, the second-worst performer in the benchmark FTSE 100 index, as the market fretted about its ability to offset higher input costs.
The company said it expects adjusted operating earnings, its preferred metric of profitability, to fall to as little as 2.4 billion pounds ($3.12 billion) over the 12 months through next March, due to an acceleration of investments to cut operating costs. Tesco’s ability to raise prices is constrained by intense competition, notably from German discounters Aldi and Lidl, and the company has stuck by its commitment to match Aldi’s prices on a list of 650 items.
“Clearly, the external environment has become more challenging in recent months,” Tesco chief executive Ken Murphy said in a statement. “Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check – working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs.”
Adjusted operating profit for the year ended in March rose 58% to 2.83 billion pounds, supported by a strong economic rebound as the pandemic receded. That enabled Tesco to raise its full-year dividend by 19% to 10.9 pence. The supermarket chain now faces headwinds from the normalization of consumer spending in the coming year, as a population no longer locked down diverts more of its spending back to services.
Tesco’s results come on the same day that consumer inflation in the U.K. surged to a 30-year high of 7%, with prices rising 1.1% on the month alone, well ahead of expectations.
“Tesco has already pledged to increase staff wages in its efforts to retain service levels, raising salaries by 6%, while rising fuel prices are likely to increase the costs of maintaining its delivery and logistics operations,” CMC Markets analyst Michael Hewson said in a flash note.
