ii view: a positive start for Tesco but can it last?

Shares for this retail giant are down 13% year-to-date compared to a fall of under 4% for the FTSE 100. Buy, sell, or hold?

First-quarter trading update to 28 May

• Like-for-like sales up 2% 
• No change in full-year guidance

Chief Executive Ken Murphy said:

"Whilst the market environment remains incredibly challenging, our laser focus on value, as well as the daily dedication and hard work of our colleagues, has helped us to outperform the market.  Our material and ongoing investment in the powerful combination of Aldi Price Match, Low Everyday Prices and Clubcard Prices is removing the need for customers to shop elsewhere. 

“Although difficult to separate from the significant impact of lapping last year's lockdowns, we are seeing some early indications of changing customer behaviour as a result of the inflationary environment.  Customers are facing unprecedented increases in the cost of living and it is therefore even more important that we work with our supplier partners to mitigate as much inflation as possible."

ii round-up:

Founded in 1919, Tesco (LSE:TSCO) today employs more than 340,000 people across its stores and distribution centres in both the UK, Ireland and Central Europe. 

Headquartered in Welwyn Garden City, Hertfordshire, it also owns wholesaling business Booker, along with Tesco Bank

For a round-up of this latest trading update, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a value of over £18 billion. Primark owner Associated British Foods (LSE:ABF) comes in at over £12 billion, followed by Next (LSE:NXT) at £7.6 billion, Ocado Group (LSE:OCDO) at around £7 billion and Sainsbury (J) (LSE:SBRY) at under £5 billion.

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Its UK and Republic of Ireland business is Tesco’s biggest, operating over 3,800 stores. It also operates under 200 stores in each of the Central European countries of Hungary, Slovakia and the Czech Republic. It purchased the UK’s leading food wholesaling business Booker back in 2017.  Current strategic priorities for former Walgreens executive Ken Murphy include a strong value offering, building on its Clubcard, making shopping more convenience for customers and generating cost savings to invest in the business.

For investors, accompanying management comments flagging changing consumer behaviour given elevated inflation warrant consideration. May’s retail sales data pointed to a 1.6% fall in food sales volumes. Higher product prices from suppliers and demand from customers to keep shelf prices contained could see Tesco profit margins pressured. Raising shelf prices could result in customer defections to rivals such as the discounters Aldi and Lidl.   

On the upside, Tesco’s size and scale potentially give it significant negotiating strength with suppliers, helping it to battle rising costs. A three-year cost saving programme of £1 billion is being pursued, offering opportunity to reinvest in price savings, while similar challenges now persist for rivals such as Morrisons and Asda. On balance, and given both its strong market position and an estimated future dividend yield of over 4%, Tesco looks likely to remain a favourite for the long term.

Positives

• Gaining UK market share
• Attractive dividend payment (not guaranteed)

Negatives

• Industry competition remains intense
• Uncertain economic outlook

The average rating of stock market analysts:

Buy