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Tesco - inflation starting to hit consumers

First quarter group retail sales, excluding fuel, grew 2.0% on a like-for-like (LFL) basis, to £13.6bn.

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First quarter group retail sales, excluding fuel, grew 2.0% on a like-for-like (LFL) basis, to £13.6bn. Compared to pre-pandemic levels that reflects LFL growth of 9.9%. Year-on-year, Central Europe saw the largest LFL growth where the group continues to grow market share.

Ken Murphy, CEO, said: ''we are seeing some early indications of changing customer behaviour as a result of the inflationary environment.''. Despite which, guidance on profit and cash remains unchanged.

The shares were flat following the announcement.

View the latest Tesco share price and how to deal

Our View

With pressures mounting on consumers in the face of a cost-of-living crisis, Tesco managed to deliver a strong first quarter and kept guidance intact. Comparing to last year is tricky, given heightened demand we saw over lockdowns, so keeping retail sales within a couple of percent is a win.

Performance is being helped by Tesco's enormous scale. The mature, deeply rooted, nature of its relationships have been a key tool in allowing Tesco to keep its prices down. The 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. Promotions like Aldi Price Match, Low Everyday Prices and Clubcard Prices have helped drive market share gains across the board.

Tesco's online offering is also noteworthy, with sales up 55% over the last two years. The mammoth growth is retracting, as customers return to stores. But an elevated level of online demand looks sticky, and Tesco's market leading position means its well positioned to hold onto that.

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. From the customers' perspective, increased living costs mean wallets are going to feel tight. That should play into Tesco's value focused hands, but it does mean higher investment in keeping prices low. An acceleration of the cost saving programme, set to deliver £1bn in savings over the next 3 years, should help mitigate rising costs to some extent.

Ultimately, these challenges can't be avoided but what's pleasing is a continued focus on delivering value for shoppers, which is what's set the group in good stead over the next few years.

Tesco's dividend is of significant interest. A reinforced balance sheet currently helps underpin a 4.4% prospective yield, which is well covered by free cash flow. Remember no dividend is ever guaranteed, and yields are variable and not a reliable indicator of future income.

The strong year just gone gave management confidence to up the share buyback, which is a deviation from Tesco's traditional dividend plans. It gives management the ability to capitalise on a valuation that's taken a hit considering wider conditions.

Ultimately, we think Tesco is well placed with a clear and focused proposition. Annual free cashflows expected to be between £1.4bn-£1.8bn, a reliable revenue stream and market leading position are all serious benefits. Remember though, ups and downs are to be expected given the uncertain broader landscape.

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.

First Quarter Trading Statement (sales growth on a like-for-like basis)

Retail sales in the UK & Republic of Ireland grew 1.5% to £12.6bn, 9.7% ahead of pre-pandemic levels. Year-on-year, both the UK and Republic of Ireland saw sales fall low single digits as they lapped last years inflated lockdown demand. Both regions continued to grow market share, with distribution of value product lines such as Aldi Price Match up 19% in the UK.

Booker was the standout performer, benefiting from an easier comparable period, catering sales grew 57.4%.

Central Europe saw retail sales growth of 9.0% to £976m, up 11.3% on pre-pandemic levels. The division continues to grow market share, with higher prices contributing to sales growth. Over the period, the group completed the sale of 17 malls and 1 retail park generating c.£200m.

Tesco Bank posted sales of £261m, up 38.8%. That was largely driven by the acquisition of Tesco Underwriting, plus a recovery in card sales and travel money.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 17th June 2022