COVID wipes out 20% of Tesco's pretax profit despite sales surge

* Sales up, profit hit by pandemic costs

* Online sales jump

* Pandemic cost Tesco 892 mln stg in UK

* Shares fall 3%

By Paul Sandle

LONDON, April 14 (Reuters) - Tesco TSCO.L , Britain's biggest retailer, reported a 20% drop in full-year pretax profit as the cost of adapting the business for the pandemic wiped out the benefit of "exceptionally strong" sales.

With restaurants and cafes shut for large parts of 2020, supermarkets in Britain saw a surge in demand online and in stores as shoppers stocked up on food to eat at home during lockdown.

"Everything about this last year has been exceptional," Chief Executive Ken Murphy told reporters. "Customers shopped, on average, a third less frequently, but when they did shop, their baskets were about 50% bigger."

Online sales in the UK surged 77% to 6.3 billion pounds ($8.7 billion) as it doubled capacity to 1.5 million delivery slots a week.

But the retailer had to take on more staff to cope with higher demand and cover self-isolating workers, adapt its stores and online picking for social distancing, and rapidly ramp up online services.

The changes cost 892 million pounds in Britain alone, hitting its bottom line, with around a quarter of the extra cost expected to continue this year.

Profit before tax came in at 825 million pounds, down 19.7% on the year before. At an operating profit retail level it did however come in above forecasts.

Shares in Tesco were trading down 3% in early deals, the worst performer on the FTSE 100 .FTSE as the retailer said uncertainty around a recovery made it difficult to predict the year ahead.

It said its best estimate was for retail operating profit to recover to a similar level as in the 2019/20 financial year, the year before the pandemic.

Murphy, however, said Tesco had shown incredible strength and agility, and was well placed to build on the momentum in the business.

"We have doubled the size of our online business and through (the loyalty) Clubcard, we're building a digital customer platform," he said.

The retailer reported a 6.3% rise in group like-for-like sales, including a 7.7% lift in its core British market.

It said that while some of the additional sales volumes would fall away as COVID-19 restrictions ease, it expected a strong recovery in profitability and retail free cash flow as the majority of the pandemic costs would not be repeated.

It proposed a full-year dividend in line with last year.

Tesco's three major UK rivals - Sainsbury's SBRY.L , Asda and Morrisons MRW.L - have all enjoyed strong sales over the last year, with coronavirus restrictions forcing many people to work from home.

($1 = 0.7257 pounds)
Reporting by Paul Sandle; Editing by Kate Holton, Guy Faulconbridge and Hugh Lawson

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