* Targets operating margin of 3.5-4 pct by 2019-20
* First half operating profit rises 60 pct
* On track to make full year profit of 1.2 bln pounds
* No plans to resume dividend
* Shares rise up to 14 percent to 13-month high
(Adds CEO, CFO comments from media briefing, shares)
By James Davey and Paul Sandle
LONDON, Oct 5 Tesco, Britain's biggest
retailer, reported strong first half results and showed
confidence it could build on its recovery by setting tougher
profitability targets, sending its shares as much as 14 percent
Chief Executive Dave Lewis, who took charge two years ago
when the supermarket group was mired in crisis, said on
Wednesday he wanted to pick up the pace despite falling food
prices and intense competition.
"We feel extremely stable and now is a time for us to move
on, to step it up," he told reporters.
Lewis plans to cut costs further and plough the savings back
into the business to boost profit over the next three years.
He is targeting a group operating margin of between 3.5
percent and 4.0 percent by the 2019-20 financial year. That is
well ahead of a figure of 2.18 percent for the first half of the
current 2016-17 year.
Shares in the group hit a 13-month high, while rivals
Sainsbury's and Morrisons also advanced. Tesco
stock traded 10.8 percent higher at 209.10 pence at 1440 GMT.
They were 230 pence when Lewis joined in Sept. 2014.
Lewis said his confidence was based on the group now being
competitive after having cut prices by an average 6 percent over
two years and achieving seven straight quarters of volume growth
He also pointed to the success of the major investment in
"Farm Brands" - a range of own label fresh produce, poultry and
meat -- and by data showing shoppers were now abandoning
competitors to return to Tesco.
"Perhaps there is a glimmer of light at the end of the
tunnel after all," said Richard Hunter, head of research at
Wilson King Investment Management
"The generally upbeat feel to these numbers is capped off by
an ambitious operating margin target, which...would be
particularly hard won in such a fiercely competitive industry,"
said Hunter, whose firm is not an investor in Tesco.
Hopes are rising among investors that Britain's established
supermarkets can succeed in fighting back against the privately
owned German discounters Aldi and Lidl, who have rapidly built
up market share in recent years.
Tesco, which remains clear leader with a 28 percent share of
the British grocery market, reported first half profit at the
top end of analysts' expectations.
Lewis has been leading a recovery after sales, profit and
asset values were hammered by changing shopping habits, the rise
of the discounters and an accounting scandal that remains the
subject of a criminal investigation by Britain's Serious Fraud
Lewis did, however, note the UK market remained "tough and
uncertain", with deflation persisting.
"Despite that toughness we're confident that at Tesco we're
competitive and we ought to be able to deal with those
conditions at least as well, if not better, than many others in
the market," he said.
Tesco plans to reduce its operating costs by a further 1.5
billion pounds ($1.9 billion) over three years through
efficiencies in its distribution network and stores and from
procurement savings. It would step up capital expenditure to 1.4
billion pounds a year to support the programme.
Chief Financial Officer Alan Stewart said it was too early
to talk about the resumption of a dividend, which has not been
paid since the second half of the 2014-15 year.
Tesco, however, said it would not increase the size of its
annual 270 million pound pension top-up payments agreed with
trustees last year, despite its deficit jumping to 5.9 billion
pounds, from 2.6 billion pounds in February, due to the collapse
in bond yields in the wake of Britain's vote to leave the
Though Tesco faces a triennial pension valuation exercise
next March, Stewart played down concerns, noting several options
in the agreement with trustees, including changing the number
of years it is due to make annual payments.
Tesco reported a 60 percent rise in operating profit before
one off items of 596 million pounds for the six months to Aug.
27. It said it was on track for profit of 1.2 billion pounds for
the full year, broadly in line with market expectations.
($1 = 0.7868 pounds)
(Additional reporting by Sarah Young, Kate Holton and Emma
Thomasson, editing by Keith Weir)