Good morning, and welcome to the TESSCO First Quarter Trading Statement Call. Throughout the call, all participants will be in a listen only mode and afterwards, a question and answer call is being recorded. I'll now hand over to Mr. Kevin Murphy, CEO. Please go ahead.
Many thanks, Richard. Good morning, everyone, And thank you for joining us today. I'm delighted to also welcome to the call Imran Nawaz, who joined us as CFO I'll let him say a few words to introduce himself in a moment. Hopefully, you've all had a chance to read the statement, so I won't go back over the numbers here. Instead, let me take a few moments to give you my reflections on the quarter.
Overall, I'm pleased with our performance in the quarter. We have maintained top line momentum even as we lapped the stockpiling peak of last year. Online continues to perform well with order numbers remaining high similar to levels we were seeing in the second half of Next year at around $1,300,000 a week. Basket sizes remain strong, customer satisfaction has gone from strength strength and we have gained online share. Across the group, there is an unusual shape of trade within the quarter, reflecting the changing behavior of customers in relation to differing restrictions in both the current and prior year.
Just taking Fresh Foods in the UK as an example. In March, sales grew by 2% as last year customers were mainly shopping for covered By May, we saw a decline of 4% as restrictions eased and more restaurants reopened. Containing the strength of our customer relationships through value, loyalty and convenience. Whatever made The way the market turns and whatever way habits evolve, we will continue to serve customers however they want to We are maintaining our commitment to value for customers and to making it more attractive to shop at Tesco. Express stores, we are rewarding the customers who shop most often.
I believe the combination of Aldi price match and Clubcard prices is a powerful This is evident in our value perception, which stepped forward again on top of last year's strong improvement. In online, sales grew 82% on a 2 year basis. And our 1 year growth of 22% reflects that we have started to lap Our West Bromwich urban fulfillment center is now operating at capacity. And last month, we opened our And UFC in Lakeside. The combination of strong online coverage, extensive reach Through our store infrastructure and a flexible business model means we have the fundamentals in place that will in time I'm confident that we'll continue to do well against the market by maintaining our relentless focus on customer satisfaction.
Finally, I am proud of our ongoing efforts to drive sustainability in the business, including the launch of our ambitious new health commitments across the UK, Central Europe and Booker. As Part of our ongoing strategy to address the impact of plastic packaging, we have also started rolling out the UK's biggest network of soft plastic In summary, I'm pleased with the strong To be precise given the great deal of uncertainty that exists more broadly and so our best estimate remains for retail profit to recover to similar levels at 19, 20. We will maintain our focus on value, loyalty and convenience for customers and I continue to be excited about the many opportunities we have to create value for shareholders and all of our key stakeholders over the long term. I'd now like to welcome Imran Nawaz, Before we get to Q and A, I know he wanted to say a few words
to introduce himself. Thank you, Ken. I'm really excited to be here. I've always been in the food and beverage industry and I've admired Tesco from afar for quite some time. Clearly, this has been always from a supplier perspective, first From Kraft, then Mondelez and most recently as CFO at Tate and Lyle.
I've been really impressed by Tesco's strength in the market and our ability to execute and Build on that strength. It's clear I've joined a winning company. I've had the pleasure of meeting some of you in my previous role and I can't wait We'll see more of you very soon and hopefully face to face. Thank you for your time. And I'll hand back to Ken.
Thanks, Imran. Now just before we hand over to Q and A, while we're super happy to answer as many questions as you have, a number of people have asked us if We can limit questions to 1 per person in the first instance. That should mean everyone gets the chance to ask what's on their mind. And then of course, If you have another question and haven't that hasn't already been asked, please feel free to join the queue again and to ask another question. Thank you very much.
And our first question comes from Andrew Gwyn from Exane BNP Paribas. Please go ahead. Your line is now open.
Yes, just a question on inflation really, I suppose the obvious one, but clearly we're seeing quite significant So when would we expect to see that at the shelf edge? And how confident are you that the market is prepared, keen, happy to pass it through.
Thanks very much.
Thank you, Andrew. I'll give you my Initial thoughts and then I'll pass on to Imran as well. Look, we have seen definitely some commodity inflation Starting to work its way through the supply chain. Interestingly enough, we've also seen a couple of elements of deflation. And while there's no doubt And so at this point, we don't anticipate it impacting pricing.
We think we're working hard to mitigate any potential inflation that may come through. But it's clearly a watching brief and it's something that we watch Really closely, we keep an eye on, and we respond to as and when we need to. Imran, what are your thoughts?
Yes. Look, when you see our quarter, we actually had a bit of deflation in the Q1 and that goes to show you our strategy to provide value to our customers central and we will hold and stick with that. At the same time, we need to manage our P and L. And clearly, as Ken said, that is something We're going to watch like a hawk and manage via cost, via mitigating productivity initiatives and ensure we get But ultimately inflation or deflation is something that you deal with every day in this industry and it's just something we need to manage
Okay, great. Thank you.
Thank you. Our next Question comes from Andrew Porteous from HSBC. Please go ahead. Your line is now open.
Yes. Hi, team and welcome Imran. I guess Another one on inflation to an extent. I mean, you obviously talked about deflating relative to the market. It seems like your relative volume growth Must be better than some of the data suggests.
I'm just wondering, do you think you have any sort of relative advantages in dealing with any cost inflation that comes through? Does your absolute sales growth delivered over the past year, which is obviously well ahead of any competitors. Does that give you a bit of an advantage when you're going into those negotiations?
Clearly, it helps, Andrew. Thank you for the question. I mean, it's always good to grow And your suppliers appreciate it when you grow their volume and that allows both you and them to work efficiencies into the model. And then we work to pass through those savings to customers by the way of better pricing. So it's definitely helpful.
Imran, have you any thoughts on it?
Yes. Look, I mean, clearly as and when you look at the scale and size of Tesco, it's always something that It's not unhelpful when thinking about the power of the group. And for sure, it's something we need to keep in mind and leverage.
Our next question comes from Fabienne Caron from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes. Good morning, everyone. Can you comment over the quarter the performance of your large store versus the convenience store please?
Thanks for the question, Fabienne. Yes, our large store performance was stronger than our convenience stores over the quarter. And we saw a modest growth, I would say, in our large stores and a kind of modest fall like for Like in our convenience stores, I'll ask Imran to give you a little bit more precision around that.
Yes. I mean, when you look Overall for if I give you sort of the numbers on a 2 year like for like basis, our large stores after 2 years are still in growth of around 5 Convenience is flattish and then online is the 82% that you see which gets you to the 9.3% overall.
Okay. Thank you very
much. Thanks, Fabienne.
Thank you. Our next question comes from Shreedhar Mahamkali from UBS. Please go ahead. Your line is now open.
Yes. Hi, good morning and welcome, Imran. Maybe I'll just pick up on the online bid and urban fulfillment centers. Can I think you back in April, you talked about the first one hitting productivity metrics and stuff like that? Is there an update?
Can you give us a sense of perhaps what those metrics are looking like now? And can take a slightly longer term view in a few years, 2, 3 years perhaps. What does that UFC footprint look like, please? I think you previously, I think your predecessors at least talked about having 25 operational EOCs and things. Do you have a view on how that it looks like.
Thank
you. No, thank you. So if you remember last October we when it was about 2 months in The West Bromwich UFC was doing about 200 orders a day. When we talked in April, it had risen to about 500 orders a day and now it's up at about 6 50, which is close to its capacity. The UFC and Lakeside, which we just opened up in the last week or 2, Has a target of 1,000 orders a day.
So it's materially bigger than the West Bromwich And really what we're trying to get to is what's the optimum configuration in terms of a UFC from a productivity and cost perspective. And also our busiest stores are picking 1,000 orders a day on average. And therefore, we want to make sure we can deal with our most productive stores. So pending the success of The Lakeside UFC, which we're feeling very confident about because we've learned a huge amount from West Bromwich. Then the plan is to open we've already committed to open a third in Bradford later in the year and then we hope to Open another 3 before the end before the year is out.
And really if we get to a place That we think that the UFC, particularly in Lakeside hits all of its metrics, Then the plan would be to be putting down at least 10 a year thereafter. But that number is subject to change because if we're getting to even higher productivity and cost saving numbers, We may go for an accelerated program. The challenge is always with things like UFCs, which are highly automated and which have suppliers that are global suppliers. And as you can imagine, there's demand for these all over the world. It's just making sure that there's availability from a supplier So that's they're the kind of the balls we have to juggle really in terms of just how many we'll be able to actually put into the network over the next 3 years.
And from a return on investment point of view, I know these are not particularly capital intensive. Are you happy with what you're seeing? Is there much Great to go from where you are now.
Yes. So I mean if we take an average cost of somewhere between EUR 5,000,000, EUR 5,500,000 per USD, We think that gives us an attractive payback based on the productivity metrics we've seen. And as you say, they're not therefore, they're not massively capital intensive. And they give us Double benefit of not only substantially reducing picking costs, but also reducing the order Time between order capture and order pick, which we also see as an important Thank you.
Thank you.
Thank you. Our next question comes from Rob Joyce from Goldman Sachs.
So just in terms of the guidance, I think a couple of your major U. K. Competitors have guided that they're expecting their profits This year to be ahead of the pre COVID level sort of 2 years ago, while you're still talking to an unchanged profit level. Outside of Booker, are there any obvious differences and reasons for the difference in your expectations there, do you think? Thanks.
Well, again, I'll start the conversation and then I'll ask Imran to comment. I think that a lot of it's got to do with Your perspective on what the next 9 months hold. We are feeling really good about Tesco's position in the market. We think that TESSCO is performing really strongly. All the customer metrics, brand health, market share and underlying performance indicators are positive for Tesco.
So that's something we feel good about. Where we see a lot of uncertainty is just How big the Eats in market will be in 3 months, 6 months 9 months? Just how Customers are going to respond to the final level of restrictions being lifted, whether or not they'll be able to travel, What the economic forecast looks like from a kind of a jobs perspective, what inflation will do, etcetera. So We see a lot of environmental volatility. And therefore, we felt that the right thing to do is maintain guidance at this point.
Imran, what do you think?
Yes. I think that's spot on. We've delivered a strong quarter. And in reality, that quarter was in line with our internal expectations. So the team has done what it said it would do and that feels good.
Now having said that, to Ken's point, there are 3 quarters still to go. And The guidance that what it's really about is the uncertainty in the market in the second half and COVID reopening of the Economy are critical to that. And frankly, none of that uncertainty has changed in the last 6 weeks since we last spoke to the market. So it just felt the Right thing to keep guidance as to where it was for now.
Okay. So it's not reflecting anticipation. I think you touched on inflation earlier. It's not reflecting Difficulties passing through inflation to consumers or anything
like that? The guidance is correct. That's absolutely right. The guidance is purely a reflection of Market uncertainty for the second half.
Thank you very much.
Thanks, Rob. Thank Our
next question comes from Clive Black from Shaw Capital. Please go ahead. Your line is now open.
Hi, Clive.
Good morning, Ken. Welcome, Imran. Nice single question from me. I realize it's a trading statement. Could you make a comment please on maybe mix, the profile of COVID costs and working capital given that they were so distorted this time Last year please.
Thank you.
I'll let Imran handle that one. Thank you. So let
me take them in order. In terms of COVID costs, The anticipation for the full year is unchanged. So I would still assume between $200,000,000 $220,000,000 for the year. In terms of mix, what Actually, the mix has been quite positive for us in the Q1. So what we saw obviously was a nice recovery on general merchandise, a nice recovery on clothing, Fresh foods was broadly flat and packaged food was in slight decline, but that would not be a surprise to you when you consider the fact that we're I think the big stockpiling from last year same time.
When you then look at your last question was on working capital. I mean, obviously in the Q1, working capital would be impacted by the nice rebound on the catering sales that we've seen. That would be a net positive by and large everything else is in a good place.
Congratulations on getting 3 questions into one cloud.
Well, good luck to try.
Thank you very much guys and all the best.
Our
next question comes from James Grisney from Jefferies. Please go ahead. Your line is now open.
Yes. Good morning, Ken and Imran. My one question is around balance sheet. Can you perhaps say how you both feel about the 2.5 times adjusted The leverage ratio as a desired optimal capital structure for the group that you both have inherited?
Thank you. I'll start off and then obviously Imran will comment. As you say, this This is the guidance we have out there at the moment in terms of our capital structure. And clearly, the debt ratio we ended the year Ian is not the one we anticipated at the start of the year. I think it's something that given that it is our stated guidance we think is appropriate for the moment.
It's something that we continuously monitor. And clearly, we monitor in the context of not only our performance, but market conditions and the volatility in that market, the level of uncertainty around inflation, interest rates, etcetera, Because they all materially impact how we think about risk and how we think about the balance sheet, what's the appropriate balance We think it's the appropriate guidance for now. We will continue to keep an eye on it. Imran, what would you feel about it?
Yes. Look, I mean, I understand the importance of the question and coming in now 6 weeks in, it is certainly one of my top priorities to review and test every element the existing framework and see whether any changes are appropriate. I mean, what's very clear to me is, as a company, our commitment to focus on cash is paramount and And returning excess cash to our shareholders is also something that I believe makes a lot of sense and it's the right thing to do. We'll give you an update in October once You've done
the work.
Thank you. Thank you.
Thank you. Our next question comes from James Anzerg from Barclays. Please go ahead. Your line is now open.
Yes. Good morning. Ken, Limran. Just a question a bit less field. There's a lot of focus at the moment on these immediacy grocers that are popping up, particularly in London and getting Very nice valuations put on them.
Clearly, it's very early days, and I appreciate that there's an awful
lot of
other factors seeing the sales of your, let's say, your London convenience estate. But are you seeing any signs yet that they're having any impact on your sales?
No, thanks. Yes, James. And you're right that it's really, really difficult to tell given the amount of Volatility in urban Express formats due to COVID. So you're right that it's not an easy It is something though it's an area where we've got a lot of curiosity about. And as you know, we launched our own trial in Wolverhampton with Wush, Which is software we developed internally.
As well as that we obviously operate as well in a number of our 1 stop stores with Deliveroo. So it's something that we're curious about. We're always How we can solve customer problems and if a new customer need arises, we're very keen to figure out the right solution. And we're also agnostic about how we get there in terms of whether we do it ourselves or we do it with a I think what's really important for us though is we maintain a customer relationship and that the quality of the service to the customer is what you'd expect
That's very helpful. Thank you.
Thank you.
Our next question comes from Maria Laura Arjuna from Morgan Stanley. Please go ahead. Your line is now open.
Thank you very much for taking my questions. So going back to And at the same time, input costs that are actually rising, where do you stand in terms of cost savings measures? Is this something that you're working thoroughly? And if so any examples you can provide? Thank you.
Thanks very much. So look the short answer to that question is cost savings are Very, very much a part of the ongoing way we run the business. So it's something that we look at religiously. It's something that we feel is never finished. So we don't necessarily talk in terms of 1 big cost saving program, but more in kind of a continuous Saving challenge.
Our ambition is to offset any inflationary cost As a minimum from our cost saving initiatives. So
Our next question comes from Nick Coulter from Citi. Please go ahead. Your line is now open.
And whether you've seen any early signs increased Clubcard sign up. I guess it's a slightly different audience, but I'd be interested to know if you're kind of pulling people into the digital ecosystem or what your expectations
Short answer is yes. It is very early days. So I don't want to give you any numbers because We're in the foothills of this, but we've seen very positive signs since we launched the program. Customers And we are seeing an increase in digital sign ups from our Express customers since we launched the program.
Our next question comes from Javier Limon from Bank of America. Please go ahead. Your line is now open.
Yes. Good morning, gentlemen. So one question. We start to hear a lot about availability issue you were in stores due to shortage of AGV drivers. So increase going forward?
And I'm not just talking about driver, but also Increase going forward and I'm not just talking about driver but lever costs overall?
So we're really happy with The availability we've been able to maintain since these issues started. So we work hand in glove with our supplier To maintain the availability and we're also working exceptionally hard in terms of our driver numbers and making sure that we can keep that availability very high. Imran, do you want to comment at all on the wage inflation risks, etcetera?
So clearly whenever You have a supply demand issue, you have a clear risk of inflationary pressure coming on you. That's something we need to manage. And I just reiterate what Ken said earlier about the way to Think about productivity at Tesco, the goal is to more to at a minimum offset inflation. And if you have inflationary pressures coming through from freight industry. It's something we need to manage via mix, via price and via
Thank you.
Thank you. And a follow-up question from Andrew Porteous from HSBC. Please go ahead. Your line is now open.
Yes. Thanks, Guy. I guess one for Imran really. I mean, obviously, you talked about your admiration for the Tesco brand from outside. But obviously, you've made the leap joining Tesco.
I just wondered what you saw as the big opportunities in joining Tesco at this point and what investors and the market can expect from you in the future?
Yes, I mean, it's a good question. I mean, clearly, Having been on the supplier side, I've seen the journey that Tesco has gone through. And when I look at the scale of the company today, The focus it has, the market share position it has online and in store, it just gives you a lot of runway for driving growth. And at the same time for creating value, making the right choices on investments and looking at the opportunities ahead, it just feels Like a place to be. And I have to say, having visited a lot of stores, having visited distribution centers, the UFCs, Spending a lot of time with our colleagues in stores talking about customers.
This is an organization that's uber focused on customers and being And there is a real sort of, I'd say, passion to win. And that's really to me the ingredients you need to create value. So it It made a lot of sense when the opportunity came along to take it.
Thanks.
Thank you. Our next question comes from Fabienne Quirons from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes. Just a quick follow-up. So on the Urban Fulfillment Center, you quoted CapEx of €5,000,000 to €5,500,000 I wanted to make sure What is in it? Is it land building and automation? And are you still using the Dematic shuttle system?
Or are you working with other automation? Thank you.
Of the building, but the building itself is already owned effectively. We it fits inside our large
Okay. Thank you.
Thank you.
Thank you. Our next question comes from Shreedhar Mahamirajalli from UBS. Please go ahead. Your line is
now open. Yes.
Hi. Just a quick follow-up please on ALDI price match. Sorry, actually not on Aldi Price Match. I do understand Aldi Price Match, in particular, how you target versus Aldi. But can you perhaps Elaborate a little bit on how you deal with other disruptively priced non food operators who are also now of quite substantial players in grocery please?
Well, in the same way as we think about Aldine Liddell really. Our plan is to make sure that no customer feels like that value is a reason why they wouldn't shop at Tesco. And so it's the same logic in many ways. And we try and supplement that with great range and great quality and a great Experience, but clearly, you have to be competitive on value. So From a philosophical perspective, there is no difference really.
Our sense of it is that If you can compete effectively with the person perceived to be the price leader in the market, which is Ali, then that Effectively sweeps up the rest of the competitors set in that hard discounter sector. And then you use the other aspects of your
Got it. I was more thinking in terms of the choice of assortment. Clearly, the other non food operators who are like Yes. Players that we all know very well. They tend to be much more branded as opposed to private label.
So clearly, Clubcard,
You're absolutely right. You're absolutely right. And we operate a 3rd Value tier in addition to club card prices and an Audi price match called low everyday prices, Which is really designed to compete against those other discounters on branded lines.
Thank
you. Next question comes from Alisa Gamori from ING. Please go ahead. Your line is now open.
Thank you very much for your time. I had a question about online demand. I see that it remains high. But I was wondering if now that the U. K.
Is opening up, if the online shopping behavior is changing already in terms of basket size and value, etcetera. If you can give some color there.
Yes. Again, I'll kick off and then I'll ask Imran To jump in. So the really pleasing thing is that in terms of the volume of orders that we are Processing at about 1,300,000 a week is more or less in line with what we've been doing throughout last This year during the pandemic from when we increased the capacity to the end of the year. And therefore, It's been incredibly resilient even with easing of the restrictions. What we're probably seeing is that the people that have become most comfortable with the online experience.
They're shopping a little bit more often with us. And we've seen some customers drop off because they're now shopping more locally or they're physically shopping either in Tesco or in another store. So you're seeing a bit of a mixed behavior, Not a substantial decline in baskets. The baskets are holding very well. So it's a pleasing trend.
Imran, any thoughts
Yes, I think as you point out, over a 2 year period, the fact that we grew around 80 tells you that we're holding on to the gains in a nice solid way. What I personally also like was that the participation of Click and Collect has stayed constant at around 20% of the stayed constant at around 20% of the total online business, which is obviously pleasing to see. And overall, Still to be on growth year on year by 22% or so is a good result. And
Thank you very much.
Thank you. Next question comes from Javier Lemony from Bank of America. Please go ahead. Your line is now open.
Yes. Thank you for taking my second question So just you gave already a bit of commerce about your UK performance about food, non food and online. But More specifically, can you give us a bit more color about your food sales in store, maybe under 2 years back if you I don't want to comment Q1, but just to see how you're doing with the stores on the 2 year stack?
Sure. Imran, would you like to respond to that one?
So question goes on mix essentially. I mean, so when I look at food overall In the quarter, year on year, it's slightly down. Within that, fresh is relatively flat And the package is down a few percentage points more. The way I think about that is that tells us as you lap the stockpiling When I look at it over 2 years, what I see is packaged food is still up around 11%, fresh is up 7% and overall food is up 9%, Just quite a resilient performance overall.
Thank you. That's helpful.
Sure.
Thank you.
And as there appear to be no further questions, I will turn the conference to the speakers for closing remarks.
Wonderful. Thank you very much, Richard. Thanks very much for all your great questions. I really appreciate the time you take to talk to us. As you've seen, it's been a really strong first quarter performance.
But I'm most proud of the way we continue to strengthen our confident that Tesco is really well positioned to deal whatever comes our way. And we really look forward to seeing you all in October, if not before.