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Tesco - strong Christmas and full year guidance confirmed

Tesco's retail sales rose 6.4% in the 19 weeks to 7 January.

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Tesco's retail sales rose 6.4% in the 19 weeks to 7 January. This included 7.9% growth over the Christmas period. There was growth in all regions. The UK benefitted from "strong" market share of 27.5%, and fresh food performed especially well. The group also had a number of promotions, including Aldi Price Match, which boosted performance.

The group's wholesale business, Booker, saw sales rise 10%. This reflected double digit growth in catering, which was partly driven by price freezes for customers. Tesco bank saw an increase in credit card spending, ATM and travel money activity as behaviour normalised compared to last year. That helped sales rise 14.6%.

Tesco continues to expect underlying retail operating profit of £2.4bn - £2.5bn for the full year.

The shares were broadly flat following the announcement.

View the latest Tesco share price and how to deal

Our View

Tesco has put in a strong performance over its third quarter and crucial Christmas trading period. This is an especially impressive feat given the enormous pressure facing the sector. Inflation is biting and consumer sentiment is weakening.

Tesco is managing these pressures about as well as possible.

That's 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 Tesco retain market share over the past three years, despite discount retailers increasing the scale of their operations.

Tesco's online offering is also noteworthy, with 1.1m orders being filled a week and sales up 52% over the last three years. As spending habits continue to normalise, customers are returning to stores and online growth is coming down. But an elevated level of online demand looks sticky, and Tesco's market leading position means it's 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. Tesco's value focus should mean it can retain customers, but it does mean higher investment in keeping prices low 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. A meaningful number of shoppers are swapping to the discount chains and to stem this outflow, Tesco could see itself damaging the margins it worked so hard to restore after the last all-out price war.

Tesco's dividend is of significant interest. A reinforced balance sheet and impressive cash conversion helps underpin a 4.3% prospective yield and buyback scheme. Remember yields are variable and not guaranteed.

There's no escaping the reality that conditions are challenging, and likely to remain so in the short term. The group's valuation, now below the longer-term average reflects those challenges. But for investors willing to accept the risks, Tesco looks like one of the stronger options in the grocery sector with an attractive income potential.

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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 12th January 2023