Tesco raised its annual profit forecast on Wednesday as food inflation eased and shoppers snapped up Britain's biggest supermarket's basic and premium ranges, adding to momentum ahead of its key Christmas trading period.
After reporting better-than expected first half results, Tesco (TSCO.L) Chief Executive Ken Murphy said he anticipated food inflation, which hit its highest level since 1977 in March at more than 19%, would continue to fall in the second half.
He told reporters that the British consumer was in "reasonable health", given near full employment.
"Our sense is that our customers are broadly a little more optimistic than they were this time last year," he said.
"People are determined to enjoy Christmas this year," he added, noting that Tesco, which has a 27% share of Britain's grocery market, was buying in more turkeys this year in anticipation of more festive gatherings.
The annual rate of food price inflation fell for a fifth month in a row to 9.9% in September, according to industry data, with food prices down for the first time in more than two years in month-on-month terms.
Tesco cut the prices on 2,500 products in the first half, while its overall inflation was "behind the market".
To better compete with discount retailers Aldi and Lidl, Tesco took out 290 million pounds ($350 million) of costs in the period. It is also matching Aldi's prices on hundreds of key items and providing offers through its Clubcard loyalty scheme.
It has also benefited from consumers looking to save money by cooking and entertaining at home rather than dining out, boosting sales of its "Finest" premium range.
Shares in Tesco, which are already up 16% this year, rose 2.3% in morning trading, after it said it now expects 2023/24 retail adjusted operating profit to be between 2.6 billion pounds ($3.14 billion) and 2.7 billion pounds, up from a previous forecast of about 2.5 billion pounds.
In the first half, Tesco's retail adjusted operating profit was 1.42 billion pounds, ahead of analysts' average forecast of 1.35 billion pounds. UK like-for-like sales were up 8.4% in the second quarter, after rising 9% in the first quarter.
It also raised its guidance for annual free cash flow, maintained its interim dividend and said it bought back 503 million pounds of shares in the first half.
One top 40 investor said Tesco's defensive attributes - strong cash generation and a dividend yield above 4% - made it an attractive stock despite not having the most exciting growth story.
($1 = 0.8276 pounds)
