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Tesco - full-year guidance on track

Tesco's first-quarter sales grew 8.8% to £15.2bn, excluding fuel and ignoring the impact of exchange rates.

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Tesco's first-quarter sales grew 8.8% to £15.2bn, excluding fuel and ignoring the impact of exchange rates. In the group's largest market, the UK, like-for-like sales rose 9.0%, with large stores leading the growth.

Bank sales were up 13.9%, reflecting new customers in both lending and insurance, as well as higher credit card spending.

Tesco CEO, Ken Murphy, said that "There are encouraging signs that inflation is starting to ease across the market".

Full-year guidance has been reiterated, with the group expecting a broadly flat underlying operating profit of around £2.6bn. Retail free cash flow is expected to land within the target range of £1.4bn-£1.8bn.

The shares were broadly flat following the announcement.

View the latest Tesco share price and how to deal

Our view

Tesco is managing the weakening consumer landscape about as well as possible.

That's being helped by Tesco's enormous scale. Large stores performed particularly well in the first quarter, with like-for-like sales up 9.9%. The mature, deeply rooted, nature of its relationships has been a key tool in allowing Tesco to keep its prices down. The group's strategy relies on being able to offer better all-round pricing than the competition, and Tesco's delivered remarkably well on that in the past couple of years.

Expanding promotions like Aldi Price Match, Low Everyday Prices and Clubcard Prices are helping Tesco to retain market share, despite discount retailers increasing the scale of their operations.

Tesco's online offering is noteworthy too. At the last count, 1.1m orders were being filled a week and last year's sales were up 60% compared to pre-pandemic levels. Positive momentum has continued into the first quarter as the group grew its online market share in the UK.

There are some other things to keep in mind though.

Inflation remains arguably the biggest headwind, though it's certainly not one that Tesco faces alone. There's been encouraging signs in the first quarter that inflation's beginning to ease across the market, but it's too early to tell how much of a relief this will provide to margins.

From the customers' perspective, increased living costs mean wallets feel tight. Tesco's been hard at work cutting prices on everyday essential items to try and shelter customers from cost-of-living pressures. But that requires higher levels of investment and a further shift toward more own-brand products. An acceleration of the cost-saving programme, now set to deliver £1bn in savings over 2 years rather than 3, is already helping to mitigate rising costs.

We admire Tesco's continued focus on value. It certainly makes sense in the current climate, but it will be important to map demand from here. To prevent a meaningful number of shoppers from swapping to discount chains, Tesco could see itself damaging margins for longer than thought. That's led to broadly flat full-year profit expectations, despite the higher level of sales.

Tesco's dividend is of significant interest. A reinforced balance sheet and impressive cash conversion helps underpin a 4.2% prospective yield and buyback scheme. Remember yields are variable and not guaranteed.

For investors willing to accept the risks, Tesco looks like one of the stronger options in the grocery sector with an attractive income potential. Keep in mind, there's no escaping the reality that conditions are challenging, and likely to remain so in the short term.

Tesco key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 16th June 2023