Tesco reported full-year retail sales of £63.6bn, up 4.0% ignoring exchange rate impacts. This was driven by growth across all regions at its Tesco stores, which helped to offset a 1.8% decline at Booker, its wholesaler business.
Underlying operating profit rose 10.9% to £3.1bn, helped by volume growth and cost efficiencies.
Free cash flow fell 15.2% to £1.8bn, largely due to less favourable timing of stock and customer payments. Net debt improved by £0.2bn to £9.5bn at year-end.
For the new financial year, Tesco expects underlying operating profit to land in the £2.7-3.0bn range, below market expectations. Free cash flow is expected to remain within medium-term guidance of £1.4-£1.8bn.
A final dividend of 9.45p per share takes the full-year total to 13.70p, up 13.2%. A new £1.45bn share buyback programme has been announced, to be completed by April 2026.
The shares fell 4.2% in early trading.
Our view
Tesco sales and profits motored higher last year. But it was weak profit guidance for the current year that grabbed the market’s attention, causing the shares to fall on the day.
The soft profit outlook comes amid fears of a potential price war between grocers. We’re not convinced that’s the case just yet. Even if it does materialise, Tesco reckons it’s in the most competitive position it's been in for many years, helped by the ALDI price match and Clubcard prices keeping customers loyal. And despite recent headlines, ASDA doesn’t appear to have the financial firepower to disrupt this dynamic.
Tesco's enormous scale and the mature, deeply rooted nature of its relationships are its key tools in keeping prices down. Tesco’s strategy relies on offering better all-around pricing than the competition, and it continues to deliver remarkably well. Further sharpening of its proposition helped the group record its highest market share (28.3%) in nearly a decade.
An expanded Tesco Finest range is helping it poach customers from more premium supermarkets. And those who already shop at Tesco are treating themselves at home rather than going out, boosting Finest volumes. We view both of these shifts as potentially long-term in nature, meaning there's more juice to be squeezed.
But for all the positives, there are things to keep in mind. Tesco isn't just a retailer, it also owns the wholesaler Booker, which offers a different route to growth across the key business streams of catering and retail. Booker contributes around 14% of total group revenue, but declines in tobacco sales are more than offsetting progress elsewhere in this unit. Given the long-running decline of the tobacco market, it’s likely to be a drag on performance for the foreseeable.
There’s also plenty of free cash flow pumping around the business. That underpins the group's ability to invest in keeping prices competitive, as well as sustain the attractive 4.3% prospective dividend yield and share buyback programme. No dividend is ever guaranteed.
While we applaud the caution, this year's profit guidance looks a bit too conservative to us, potentially leaving room for positive surprises later in the year. And with operations focussed on this side of the Atlantic, President Trump’s tariffs pose little threat to disrupt operations directly.
Tesco's more reliable revenue streams, market-leading proposition, and income potential shouldn't be overlooked. That could offer a relatively insulated space from some of the US-led volatility. But these strengths are reflected in a valuation towards to top end of its peer group. This means there’s pressure to stay ahead of the competition, which increases the risks of ups and downs if any slip-ups occur.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Tesco’s management of ESG risk is strong.
The group has a corporate responsibility committee overseeing the group’s social and environmental obligations. It also discloses a substantial amount of ESG-related information in its annual report. However, it has ongoing involvement in controversies related to human rights in supply chains.
Tesco key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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