The Motley Fool

Is Tesco plc on track to meet its ambitious profit targets?

Tesco (LSE: TSCO) recently announced that hourly pay rates for its store staff will rise by 10.5% over the next two years. Rising wages sound like good news for the supermarket’s employees, but what about for its shareholders?

Inflation

To some extent, growing wage costs are to be expected. Although wage growth in the UK has been sluggish in recent years, inflation has been growing at a steady pace and rival supermarkets have announced similar pay rises. As such, Tesco needs to do more to attract (and keep) the talent it needs to stay competitive. And what’s more, despite the proposed pay increases, its staff will still be paid less that those at Aldi and Lidl, its two German low-cost (but higher-pay) rivals.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Nevertheless, wages are one of the largest single expenses for Tesco, with the total employee pay bill totalling £7.4bn last year. That’s equivalent to almost six times the group’s annual operating profit, which means even a modest increase in pay would be a serious drag on margins and profits.

Margins

By 2019/20, Tesco expects to deliver group operating margins of 3.5% to 4%. That’s almost double today’s margin of around 2%, but still significantly below the 6.5% it enjoyed in its glory days.

To lift its margins, the company has undertaken big steps to simplify its product range and improve its store operating model to increase customer satisfaction while also cutting costs. The supermarket giant has conducted a thorough review of its entire cost base and has plans to remove another £1.5bn from its annual operating cost base. But is the company still on track to meet its ambitious profit targets?

I reckon it’s too early to say as the group has recently shown some mixed results. Although it reported its strongest quarterly like-for-like sales growth in the UK, international sales have weakened dramatically. In addition, City analysts are divided over whether Tesco can keep a lid on costs as inflation rises and as real household incomes come under pressure.

Capita

Tesco is not the only company looking to turn its profits around. Outsourcing outfit Capita (LSE: CPI) is similarly looking to bounce back from tough times.

The company announced a series of profit warnings last year as clients delayed making big investment decisions amid the Brexit uncertainty. As a result, underlying pre-tax profits for 2016 fell by 19% to £589m.

Lately though, things appear to be turning a corner as the business process manager is seeing activity in the private sector return to good levels and has secured multiple contract wins. 

Capita’s balance sheet is also set improve as it recently announced the sale of its asset management services arm to Australian firm Link Administration Holdings, which would net the outsourcing firm £888m. This would help to ease its debt position, which currently stands at just over £1.7bn.

As such, I have more confidence that Capita will be able to maintain its dividends at current levels. And although its shares have recovered in value by 34% since the start of the year, I reckon they still represent reasonable value, with Capita trading at just 13.5 times expected earnings this year and yielding 4.6%.

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Jack Tang has a position in Capita plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.