Tesco’s group sales increased by 5.1% in the first half to £33.1bn reflecting increased volumes and market share gains.
Underlying operating profit growth was slower, rising just 1.6% to £1.7bn, reflecting cost inflation and efforts to keep prices competitive.
Free cash flow was up 2.9% at £1.3bn. Net debt came in 3.8% lower at £9.9bn.
The full-year guidance range for underlying operating profit has been raised to £2.9-£3.1bn, an increase of 5% at the mid-point.
The interim dividend was upped by 12.9% to 4.8p per share.
The shares were up 1.7% early trading.
Our view
Tesco’s first half results have once again shown it to be a formidable force in a competitive environment, and for now, there’s no sign that the feared all-out price war is materialising. While the small upgrade was widely anticipated, the validation gave sentiment a further boost on the day.
The potential for the November budget to bring higher taxes on both businesses and consumers is the main near-term risk we see for the sector. Still, we think there’s a good chance the full-year numbers will be towards the top end of guidance.
Tesco’s in a better position than most. Its enormous scale and the mature, deeply rooted nature of its relationships are its key tools in keeping prices down. The strategy relies on offering better all-around pricing than the competition, and it has delivered remarkably well. Further sharpening of its proposition means that monthly market share gains have become the new normal.
That doesn’t happen by itself. New store openings, a relentless program of product launches and highly successful launch of the Whoosh rapid delivery service all bring confidence that there could be more to come.
An expanded Tesco Finest range is helping it poach customers from more premium supermarkets. And those who already shop at Tesco are treating themselves at home rather than going out, boosting Finest volumes. We view both of these shifts as potentially long-term in nature, meaning there's more juice to be squeezed.
Tesco isn't just a retailer, it also owns the wholesaler Booker, which offers a different route to growth across the key business streams of catering and retail. We’re less enthusiastic on the growth prospects for this part of the business, but at around 10% of the group’s underlying operating profit we’re not too concerned.
There’s also plenty of free cash flow pumping around the business. That underpins the group's ability to invest in keeping prices competitive, as well as sustain the attractive 3.5% prospective dividend yield and share buyback programme. No dividend is ever guaranteed.
Tesco's more reliable revenue streams, market-leading proposition, and income potential shouldn't be overlooked. But these strengths are reflected in a valuation towards to top end of its peer group. This means there’s pressure to stay ahead of the competition, which increases the risks of ups and downs if any slip-ups occur.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Tesco’s management of ESG risk is strong.
The group has a corporate responsibility committee overseeing the group’s social and environmental obligations. It also discloses a substantial amount of ESG-related information in its annual report. However, it has ongoing involvement in controversies related to human rights in supply chains.
Tesco CCL key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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 LSEG. 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.