June 26, 2020 / 6:42 AM / 17 days ago

UPDATE 2-Britain's lockdown drives Tesco's sales and costs higher

* UK first quarter underlying sales up 8.7%

* Online sales up 48.5%, convenience up 9.5%

* Reiterates flat retail profit outlook for 2020-21

* Sees full year loss at bank of up to 200 mln stg

* Shares up 1% (Adds detail, CEO comment, shares)

By James Davey and Alistair Smout

LONDON, June 26 (Reuters) - Tesco, Britain’s biggest retailer, saw underlying UK sales rise 8.7% in its first quarter to May 30, boosted by the coronavirus lockdown, but reiterated a flat profit outlook due to the costs of the crisis.

The supermarket group cautioned costs would be at the upper end of previous guidance and also said it had increased Tesco Bank’s provision for potential bad debts, forecasting the division would make a loss of up to 200 million pounds ($248 million) in 2020-21.

Shares in Tesco, which has a 27% share of Britain’s grocery market, were up 1% at 0800 GMT, paring 2020 losses to 11%.

Prime Minister Boris Johnson announced England’s lockdown on March 23, with grocery stores among the only shops allowed to remain open. That has since been eased, with all non-essential stores able to open from last week.

All of Britain’s big four grocers - Tesco, Sainsbury’s , Morrisons and Asda - have seen sales boosted by the lockdown.

Tesco and Sainsbury’s have particularly benefited, with their networks of superstores complemented by strong online and local convenience store businesses playing well with the changing shopping habits of the crisis.

Tesco’s online sales in the UK and Ireland soared 48.5% in the quarter, while convenience store sales rose 9.5%.

“The results ... clearly show the impact of the pandemic and the unique competitive advantage of the Tesco business model,” CEO Dave Lewis told reporters, noting Tesco saw net customer switching gains from discounter Aldi for the first time in a decade.

Growth in the UK was driven by a 12% increase in food sales, offset by discretionary categories such as clothing, which fell by around 20%.

But the boost in Tesco’s sales has been counteracted by the increased costs of operating during the pandemic, and based on an assumption of a continued easing of lockdown restrictions it said 2020-21 retail operating profit was likely to be similar to the 2019-20 outcome.

Tesco’s latest estimate of incremental costs from the crisis was 840 million pounds, partly offset by business rates relief and increased sales.

Lewis is due to leave Tesco on Oct. 1 after a six-year tenure, handing over to Ken Murphy. ($1 = 0.8057 pounds) (Reporting by James Davey and Alistair Smout, editing by Sarah Young and Nick Macfie)

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