Interactive Investor

Christmas cracker Tesco issues profit upgrade

13th January 2022 08:17

Richard Hunter from interactive investor

Concerns about inflation have taken the shine off what are a great set of numbers from the country's biggest supermarket.

Tesco (LSE:TSCO) has again cemented its reputation as the UK’s flagship supermarket, boosted by a dominant Christmas performance.

In terms of market share, Tesco was the winner over the festive period, and the accelerating trend towards online shopping vindicated its previous decision to ramp up capacity.

Fulfilling around 1.2 million orders per week online, the figure represents growth of almost 60% compared to pre-pandemic levels. It is also a clear indication that the array of alternatives which Tesco is offering, in combination with both its large and convenience stores, is one which the competition is finding hard to emulate.

Not only did like-for-like sales outstrip levels seen prior to the pandemic, they also rose meaningfully against tougher comparatives from last year. Overall, group retail sales improved by 2.6% for the combined third quarter and Christmas period, underpinned by strength in the core UK business and another outstanding contribution from the Booker business.

This performance came amid fears of a festive shortage of goods which was mitigated by the scale and strength of Tesco’s relationship with its suppliers. Despite general supply chain blockages and inflationary cost pressures, Tesco was able to navigate this challenging environment relatively smoothly.

Having previously reinforced its balance sheet with the sale of the Asian business, Tesco remains in rude financial health. The initiation of a share buyback programme complements the current dividend yield of around 3.5%, with the realistic possibility for further shareholder returns.

Meanwhile, the company remains a cash generating behemoth, and the success of trading during the period has enabled a further profit upgrade to the one previously announced in October. Retail operating profit is now expected slightly to exceed the range previously guided of £2.5 to £2.6 billion, with a meaningful contribution also coming from Tesco Bank.

The ferocity of competition within the sector is well established, and will continue to be heightened given the presence of the discounters and the perennial possibility of all out price wars. At the same time, some of the sheen will be taken from the overall profit numbers given the scale of the investment which Tesco has made in maintaining its pre-eminent position.

However, the company remains the one which the pack continue to chase, and in investment terms remains the comfortably preferred play in the sector.

The shares have mirrored Tesco’s trading strength, having added 21% over the last year, as compared to a 12% hike for the wider FTSE100 index. While the weight of market expectation is a potential downside to the price, boosted by another Christmas cracker the market consensus of the shares as a "strong buy" is unlikely to be troubled.

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