LONDON (Reuters) - Tesco’s annual results on Wednesday are likely to show the recovery at Britain’s biggest retailer is picking up steam, potentially giving a boost to its stuttering campaign to win investor backing for a takeover of wholesaler Booker.
Tesco is forecast to report a 33 percent rise in its key profit measure for its 2016-17 financial year, with a strong performance in its home market slightly offset by weakness abroad, partly reflecting tough trading conditions in Thailand.
The supermarket group needs the results to impress to get on the front foot after two of its biggest shareholders last month urged it to drop a 3.7 billion pound ($4.6 billion) agreed cash and shares offer for Booker. They argue Tesco is overpaying and the deal is a distraction from its turnaround plan.
Tesco, whose shares have fallen 6 percent this year, remains committed to a deal it believes will provide a new avenue of growth when its recovery is secured.
“Tesco needs to show that its volume-based recovery is on track and that progress is being made towards its margin aspiration of 3.5 to 4 percent by 2019-20,” said HSBC analyst David McCarthy, who has a “buy” rating on the stock.
That plan is predicated on sales rising and operating costs being cut by 1.5 billion pounds through efficiencies in Tesco’s stores and distribution network, as well as from procurement savings.
For the year ending Feb. 25, 2017, analysts are on average forecasting group operating profit before exceptional items of 1.26 billion pounds, according to Reuters data, up from 944 million pounds in 2015-16.
Tesco itself has forecast “at least” 1.2 billion pounds.
Analysts also expect progress on Tesco’s net debt, which is seen falling to about 4.3 billion pounds.
After Tesco’s sales, profit and asset values were hammered by changing shopping habits, the rise of German discounters Aldi and Lidl and an accounting scandal, the firm has been fighting back under Chief Executive Dave Lewis.
He took charge in September 2014 shortly before the uncovering of accounting mis-steps plunged the group into the worst crisis in its near 100-year history.
Lewis stabilised the business and then got it growing again with a focus on lower prices, new and streamlined product ranges and better customer service. He has also sought to improve relationships with suppliers.
On Monday, a court approved a deal between Tesco and Britain’s Serious Fraud Office (SFO) to settle a probe over the accounting scandal.
Tesco will take a one-off charge of 235 million pounds in its 2016-17 results to cover fines and investor compensation.
While no dividend is anticipated, Tesco has said it will resume payments in 2017-18. It has not paid a dividend since the second half of its 2014-15 year.
Tesco and Booker are currently engaging with Britain’s Competition and Markets Authority (CMA), which has yet to formally confirm the start of an investigation into their deal.
($1 = 0.8045 pounds)
Editing by Mark Potter