Tesco’s like-for-like sales rose 2.9% over the 19 weeks to 3 January, excluding fuel. This was slightly below market forecasts largely due to double-digit declines in tobacco sales at its wholesale business Booker, as well as weak sales in Central Europe.
In the UK, market share rose to its highest level in over a decade, helping volume growth outpace the broader market.
Full-year underlying operating profit guidance has been moved to the upper end of its previous £2.9-3.1bn guidance. Free cash flow guidance remains unchanged at £1.4-1.8bn.
The shares fell 4.7% in early trading.
Our view
Tesco’s trading over the festive period fell slightly short of market expectations, causing the shares to drop on the day. Weakness in Central Europe is something we’ll be keeping an eye on, but performance in the UK was better, recording its highest market share in over a decade. That was enough to see February’s full-year profit expectations nudged to the top end of its previous guidance.
Tesco’s in a better position than most of the competition when it comes to weathering the macroeconomic headwinds. Its enormous scale and strong relationships with suppliers are its key tools in keeping prices down for customers, giving them little reason to look elsewhere. 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 the 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. Lately, declining tobacco sales here have been weighing on the businesses’ performance. We expect that trend to continue as the general population becomes more health-conscious. 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 3.4% 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. We like the long-term outlook for Tesco, and see room for the nation’s largest supermarket to potentially beat full-year guidance. But with its valuation sitting towards the top end of its peer group, the near-term upside looks limited. It also 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 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.