The Investment Column : Tesco explodes price war myth

Tesco has been on a roll in the supermarket battle for such a long time now that all its rivals, apart from the evergreen Asda, have looked pretty pedestrian by comparison. Yesterday's figures continued the story with figures some of its rivals - particularly Sainsbury - would kill for.

It is hard to argue with a 14.5 per cent increase in profits to pounds 681m and like-for-like sale increases of almost 9 per cent for the year to 24 February. Even with a petrol price war, a BSE scare in beef and a silly season on baked beans, like-for-like sales are up 7 per cent in the five weeks to Easter.

Though the petrol battle will cost Tesco pounds 30m this year and may yet prove a larger problem if it drags on, Tesco has still held its operating margin at 6.2 per cent. This indicates that in spite of all the well-publicised "price wars", on everything from bananas to turkeys, prices are simply being increased elsewhere to offset the damage.

In addition to a variety of customer service schemes Tesco is scoring points by continuing to invest in back-office technology which releases staff who can then be deployed where it really counts - out on the shop floor.

The Tesco bulls say that the company's innovative management will continue to dream up fresh wheezes whenever the going gets tough and therefore keep itself one step ahead. The UK business looks particularly strong, with operating profits up by 18 per cent. The drag on profits is the expansion in to central Europe, where seven new stores will open in the current year. In the UK, sales densities in new store openings are at record levels, which appears to disprove the market saturation theory - and a further 24 new stores will open this year.

But amid all the hullabaloo there are concerns, which were reflected in a share price down another 3p yesterday to 287p.

Some analysts are concerned about Tesco's future earnings growth prospects and a change in the dividend policy announced yesterday which links the payment to earnings rather than rising progressively, as before. The City is also nervous about the possibility of an acquisition, though management says its focus is on organic growth.

What is clear is that this is going to prove another interesting year for the supermarkets. While Tesco and Asda remain the darlings of the sector, all eyes are on Sainsbury to see if it can recapture past glories.

While NatWest Securities is forecasting pounds 721m for the current year, BZW has upgraded to pounds 735m and foresees further upgrades if the petrol spat abates. This puts the shares on a forward rating of 13. Though Tesco is an impressive management story, the shares are unlikely to perform any spectacular tricks in the short term. Hold.

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