Tesco results to reveal profits up

Supermarket giant Tesco is expected to shrug off tough UK retail conditions with another set of record results when it reports figures tomorrow.

Chief executive Philip Clarke is likely to reveal a £3.8 billion underlying profits haul in what will mark his inaugural set of full-year results since taking the top job on March 1.

But the improvement - up from £3.4 billion the year before - comes against increasingly difficult conditions for Britain's retailers.

As well as having a tough act to follow in predecessor Sir Terry Leahy, Mr Clarke is faced with a tough trading climate as spending slows and cost pressures mount.

Consumers are tightening their belts as the Government's austerity measures start to bite, which is hitting supermarkets hard.

Rival Sainsbury's recently shocked the market with fourth quarter like-for-like growth of 1% excluding fuel, implying an underlying fall of up to 1% when VAT is stripped out and an even bigger decline after inflation.

The sector has been slashing prices to lure in cost-conscious consumers.

Official inflation figures this month revealed that food prices declined by 1.4% in March - the biggest month-on-month drop since between June and July 2007 - as supermarkets rolled out heavy discounts. This helped the overall rate of UK inflation to ease back to 4% from 4.4% in February.

Tesco recently upped the ante, launching a £200 million price war with Asda after a poor Christmas left it trailing behind its closest rival.

Tesco posted a sales rise of 0.6% for its six-week festive period, against a 2.6% hike in like-for-like sales at Asda for the final quarter of 2010.

Analysts believe Tesco was badly hit by the weather over Christmas, but the recent Sainsbury's disappointment has highlighted that trading has remained hard since then.

Clive Black at Shore Capital is forecasting zero growth in like-for-like sales during Tesco's final quarter to February 26, excluding VAT.

He believes non-food sales will have acted as a drag on the overall performance during the quarter as consumers cut back on non-essentials.

But a more resilient performance elsewhere is expected to have fuelled annual profits growth, with Tesco's Asian operations helping offset any UK weakness.

Kate Calvert, retail analyst at Seymour Pierce, said: "We expect a solid set of results from Phil Clarke's first solo full-year results although all eyes will be on the UK to see how a lack of innovation and competitive pressure has impacted the mighty tanker.

"International is expected to deliver a strong result with Asia likely to be the highlight."

She believes there will be positive news on its US chain Fresh & Easy, which suffered a rocky start after an ill-timed launch on the cusp of the recent US recession.

But it is still set to remain in the red, with Tesco saying at the half-year stage the division would not reach profitability for two years.