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Tesco reports higher FY'20 EPS, warns of up to £925 million in virus costs

Tesco PLC on April 8 reported higher EPS for its latest fiscal year and proposed a significantly increased dividend but warned that it would be hit with virus-related costs of up to £925 million as the COVID-19 outbreak continues to unfold.

"We know that we're incurring significant additional costs, particularly in payroll," said CEO Dave Lewis on a conference call with analysts. "The precise impacts, I hope you appreciate, are hard to predict." As a result, Lewis added, "it's not prudent to provide profit guidance for 2020-21."

In early morning trading on the London Stock Exchange, Tesco's shares were down 9.7 pence, or 4.3%, to 214.5 pence.

On the basis of 52 weeks and continuing operations for the period until February 29, diluted EPS before exceptional and other items rose 27.9% to 17.92 pence from 14.01 pence reported in the 2018-19 year. Tesco was expected to report normalized EPS of 17 pence, according to consensus analyst estimates compiled by S&P Global Market Intelligence. Group sales fell 0.7% to £56.52 billion from £56.88 billion.

On a 53-week basis, operating profit fell 4.9% to £2.52 billion from £2.65 billion, while diluted EPS on a 53-week basis fell 26.8% to 9.54 pence from 13.04 pence. Statutory revenue, including fuel, rose 1.3% to £64.76 billion from £63.91 billion, beating the Market Intelligence mean consensus estimate of £64.32 billion.

Britain's largest supermarket chain also proposed a full-year dividend of 9.15 pence per share, up 59% on the year before.

The company estimated that it would incur additional coronavirus-related costs of between £650 million and £925 million in the 2020-2021 fiscal year, reflecting higher staffing levels and higher cost expenses in payroll, distribution and store expenses. However, "if customer behavior were to return to normal by August it is likely that the additional cost headwinds incurred in our retail operations would be largely offset by the benefits of food volume increases, 12 months' business rates relief in the UK and prudent operations management," Tesco said in a statement.

The company said panic buying in the first few weeks of the crisis had provided a roughly 30% sales volume uplift in the U.K. and cleared the supply chain of certain items. But that situation has now stabilized and the sales volume was now at normal levels. Tesco said it has 50,000 employees absent from work but that it had hired more than 45,000 people to offset that temporary loss.

Lockdown measures adopted in the U.K. have kept many shoppers away from supermarkets. Tesco said that while it had increased its grocery home shopping capacity by more than 20% in the last two weeks, "there is simply not enough capacity to supply the whole market."

Tesco Bank, which operates as a stand-alone regulated entity, is expected to see a reduction in income from all its activities, including credit cards, loans and travel money, according to the company. That expected decrease, as well as provisions for potential bad debts, would likely result in a loss for the bank for year ending February 2021.