Tesco, Britain’s biggest retailer, said it would increase investment in its stores and distribution network to boost profitability over the next three years after reporting strong first-half results that sent its shares soaring.
Shares in the group, which is recovering from the toughest downturn in its history, rose 9 percent to a 13-month high, while supermarket rivals Sainsbury’s and Morrisons also gained on the news.
“Today, we are sharing our ambition to deliver a group operating margin of between 3.5 percent and 4.0 percent by our 2019/20 financial year,” it said on Wednesday. That compares with a figure of 2.18 percent in the first half of the current year.
Tesco Chief Executive Dave Lewis is leading a recovery at the retailer after its sales, profit and asset values took a hammering from an accounting scandal, changing shopping habits and the rise of German discounters Aldi and Lidl.
Falling food prices and a ballooning pension deficit have not helped, but Lewis has stabilised the business and started to get it growing again with a focus on lower prices, streamlined ranges, better quality products and improved customer service.
Tesco said it would cut its operating costs by 1.5 billion pounds by improving its distribution network and simplifying its store operations.
Capital expenditure to support the changes will be 1.4 billion pounds a year on average, it said, up from the 1 billion pounds it spent last year.
Tesco, however, said it would not increase the size of the annual 270 million pound pension top-up payments agreed last year, despite its pension deficit ballooning to 5.9 billion pounds, from 2.6 billion pounds in February, due to the collapse in bond yields.
The company, which still has more than 28 percent share of the British grocery market, reported a 60 percent rise in operating profit before one off items of 596 million pounds for the six months to Aug. 27, at the top end of analysts’ forecasts.
It said it was on track to deliver profit of 1.2 billion pounds for the full year, broadly in line with market expectations, after the recovery in its sales at British stores strengthened in the second quarter.