Sometimes the market moves in mysterious ways. If its reaction to Tesco’s prelims were anything to go by, you would have thought profits had nosedived.
Because that’s exactly what happened to the grocer’s share price in the immediate aftermath of its full-year results.
Although profits dropped 28.2% in statutory terms – driven by a £235m exceptional charge following Tesco’s deal with the Serious Fraud Office and Financial Conduct Authority in the wake of the accounting scandal – other key metrics moved encouragingly in the right direction.
Group operating profit before exceptionals – Tesco’s preferred measure of performance – jumped 29.9% to £1.28bn.
And the improvement was even more impressive at its core UK and Irish business, which registered a 60% surge to £803m, underpinned by its first rise in full-year UK like-for-likes since 2009/10.
Yet, somewhat paradoxically, its share price fell off the proverbial cliff.
In fact, Tesco was the single biggest faller in the FTSE100 on Wednesday, the day of its results.
By the time the markets closed, the retailer’s share price had tumbled 5.2% to 184.9p, wiping many millions of pounds off its market cap.
But what caused the drop?
Perhaps it was boss Dave Lewis’s verdict on a cloudy outlook for Tesco – and its grocery rivals – as weaker sterling pushes food prices up.
Lewis revealed that, while Tesco’s grocery prices fell 1.8% over the course of its financial year to February 25, food price inflation of 0.6% crept in during its fourth quarter.
“Perhaps it was the market revealing a sense of unease over the proposed £3.7bn Booker deal, having not received the hoped for reassurances on the morning of the results”
“We don’t welcome inflation and, when we do see it, we will have conversations with our supplier base to mitigate it as much as we can,” Lewis said.
Presumably that effort to keep prices as low as possible, amid a backdrop of rising sourcing costs, will hamper its efforts to build group margins to 4% by 2019/20, which might have spooked investors.
Perhaps it was the market revealing a sense of unease over the proposed £3.7bn Booker deal, having not received the hoped for reassurances on the morning of the results.
Lewis insisted the deal is “the right thing to do” for Tesco.
But he admitted: “Predicting how the market reacts is notoriously difficult. The critical thing for us is that we have focused on the right thing.
“Have we got a clear point of view about how we create value for Tesco? We have.”
Ups and downs
Perhaps the most likely answer, then, to the share price drop, is that this was simply a case of the market stabilising.
Tesco’s stock had rallied in the week ahead of the results, climbing 5.9% from 184.7p on April 4 to 195.6p on April 11, the eve of the announcement.
Wednesday’s stock market drop was, seemingly, little more than the comedown from that high.
Lewis was not fazed when quizzed about the dip – and neither should he be.
Tesco’s full-year results proved that he has got Tesco moving briskly in the right direction, even if its share price isn’t.