TESCO has declared commitment to keep the “cost of the weekly shop in check” as it reported profits of more than £2 billion alongside a warning that inflation could impact earnings this year.

Shares in the grocer fell sharply after grocer provided City with wider range on profit guidance than usual in light of “significant uncertainties in the external environment”.

Tesco is guiding on adjusted operating profit of between £2.4bn and £2.6bn for the current year.

It revealed annual profits more than tripled, but warned retail earnings will come under pressure this year from soaring inflation and as shoppers return to pre-pandemic shopping habits.

The supermarket giant saw group pre-tax profits jump to £2bn in the year to February 26, up from £636 million the previous year, thanks to rising sales and lower costs related to coronavirus.

It posted a 58% jump in underlying operating profits to £2.8bn, with retail earnings up 34.9% at £2.6bn.

The Herald:

The group said sales excluding fuel rose by 2.5% to £54.8bn, with UK like-for-like growth of 0.4%, which was up 8.2% on a pre-pandemic two-year comparison.

Profits were helped as it saw Covid-19 costs fall to £220m from £892m the previous year.

It is also said customer behaviour is also returning to more normal patterns as shoppers rely less on supermarket trips as the UK emerges from the pandemic.

Ken Murphy, Tesco chief executive said: "Clearly, the external environment has become more challenging in recent months.

"Against a tough backdrop for our customers and with household budgets under pressure, we are laser-focused on keeping the cost of the weekly shop in check - working in close partnership with our suppliers, as well as doing everything we can to reduce our own costs."

Tesco said up to 290,000 shop staff, call centre and warehouse workers are being awarded a bonus as a thank you for their efforts over the past year.

It said it will pay out nearly £50m in bonuses to employees across its stores, customer fulfilment and customer engagement centres, worth 1.25% of their annual salaries, at the end of May.

The group said the payout "recognises the way colleagues really stepped 

up to the industry challenges of the last year".

Zoe Gillespie, investment manager at Brewin Dolphin, said: “Tesco has delivered another strong set of results, with each part of the business performing well.

"The core supermarket continues to grow, its wholesale operation Booker has seen a strong recovery, its share of the online groceries market has improved, and even the bank has swung back to profit.

Ms Gillespie also said: "Shareholders can also look forward to a substantial dividend increase and a buyback programme that should have a positive impact on the share price. The big uncertainty for Tesco, however, is inflation – which is the main reason behind the shares losing momentum since the start of the year.

"On that front, the supermarket has a tricky balancing act ahead between mitigating cost increases and protecting its customer base. Despite a 36% jump in annual profits last year, management expects profits to fall in 2022/23 given the uncertain outlook. But, Tesco has proven its ability to adeptly navigate tricky periods and few would be against it doing so again.”

The group does not have any operations in Ukraine or Russia, and is not directly affected by trading restrictions or sanctions.

It does have operations in Hungary and Slovakia, which border Ukraine, and "could be affected in future by possible wider macroeconomic consequences should the situation develop further".

It said: "This could include an increase in domestic inflation from supply chain disruption, commodity shortages or commodity price increases affecting cash flows, or changes in market discount rates and valuations."

Mr Murphy said: "I want to thank all of our colleagues who did a brilliant job navigating the ongoing pandemic, dealing with the supply chain challenges in the industry and tackling the onset of increasing inflation."

Tesco shares closed down 2%, or 5.4p, at 265.2p.