Tesco recovery gains momentum as profit jumps

LONDON (Reuters) - Tesco, Britain's biggest retailer, beat forecasts for full-year profit, showing its recovery is gaining pace and boosting Chief Executive Dave Lewis as he seeks investor backing for his plan to buy wholesaler Booker.

Annual like-for-like sales in its core UK market rose 0.9 percent - the first increase in seven years, the supermarket group said on Wednesday, underlining its turnaround.

"We are confident that we can build on this strong performance in the year ahead," Lewis said.

Lewis, who took charge in Sept. 2014, stabilised the business with a focus on lower prices, streamlined product ranges, including new "farms" brands for fresh food, and better customer service. He has also sought to improve relationships with suppliers.

Tesco needed its latest results to impress to help it persuade shareholders that it can also make a success of its attempt to buy Booker.

Two of Tesco's biggest shareholders last month urged it to drop the 3.7 billion pound ($4.6 billion) bid, saying it was overpaying and the deal was a distraction from its turnaround plan.

Lewis said the proposed merger would drive additional value for shareholders from substantial synergies, and would enable Tesco to access the faster growing market for dining out.

Despite the strong results, shares in Tesco slipped 1.8 percent by 0741 GMT, but are up 4.2 percent over the last week.

BOLD MOVE

The Booker deal is Lewis' boldest move since joining shortly before an accounting scandal plunged Tesco into the worst crisis in its near 100-year history.

When he took over the company's sales, profit and asset values were also being hammered by changing shopping habits and the rise of German discounters Aldi and Lidl, while its products failed to stand out.

Lewis has made progress on reviving the business. Tesco said on Wednesday it made an operating profit before exceptional items of 1.28 billion pounds in the year to Feb. 25 2017.

That was ahead of analysts' average forecast of 1.26 billion pounds, according to Reuters data, and an increase of 30 percent on the 944 million pounds made in 2015-16.

UK sales at stores open over a year rose 0.7 percent in the 13 weeks to Feb. 25, its fiscal fourth quarter - a fifth straight quarter of underlying growth.

By 2020, Lewis wants Tesco to earn between 3.5 pence and 4 pence of operating profit for every 1 pound spent by shoppers, up from 2.3 pence in 2016-17 as sales rise and 1.5 billion pounds of costs are taken out of the business.

On Monday, a court approved a deal between Tesco and Britain's Serious Fraud Office (SFO) to settle a probe over the accounting scandal.

Tesco took a one-off charge of 235 million pounds in the 2016-17 results to cover fines and investor compensation.

($1 = 0.8004 pounds)

(Reporting by James Davey, Editing by Paul Sandle)