ii view: sales and costs rise at Tesco

Covid has generated mixed news, but a reset strategy and decent dividend yield offer clear positives. 

First quarter trading update

• UK & Rep Ireland like-for-like sales up 8.2%
• Total group sales up 8%
• Tesco Bank sales fell by 26.5%

Guidance:

• UK Covid-19 full-year (FY) cost estimate of £840 million
• Tesco Bank expecting a FY loss of between £175 and £200 million

Chief executive Dave Lewis said:

"Through a very challenging period for everyone, Tesco colleagues have gone above and beyond, and I'm extremely proud of what they've achieved.  Their selfless efforts, combined with our embedded strategic advantages in stores and online, have helped to ensure that everyone can get the food they need in a safe environment.

“In just five weeks, we doubled our online capacity to help support our most vulnerable customers and transformed our stores with extensive social distancing measures so that everyone who was able to shop in store could do so safely. 

“The costs of doing this have been significant and only partly offset by business rates relief and increased volume.  We see the balance as an investment in supporting our customers at a time when they need it most."

ii round-up:

Tesco (LSE:TSCO) employs over 400,000 people across stores and distribution centres in both the UK, Ireland and overseas. 

In 2019, it generated revenue of over £60 billion and operating profit of more than £2.5 billion. 

In early 2017, it merged with wholesaling business Booker. Its banking business previously stopped offering new mortgages to customers, selling its book of outstanding loans to Lloyds Banking Group (LSE:LLOY) for £3.8 billion. 

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

ii view:

Having restructured Tesco since 2014 following an accounting scandal, chief executive Dave Lewis will soon be replaced by former Walgreens executive Ken Murphy. Under Mr Lewis, Tesco's once vast product ranges have been pared down to aid buying power and competitiveness with the discounters. Its 'Aldi Price Match' initiative is now being extended to nearly 500 products.

Expansion overseas has also been reversed. Having previously withdrawn from China, sales of Tesco's Polish, Malaysian and Thailand businesses are all currently being processed. Reported overseas sales in this latest quarterly update equalled less than 8% of the overall total, down from around 18% this time last year. Tesco Bank accounts for less than 2% of overall revenues. The relatively recent Booker deal also looks to be a success. Booker’s full-year 2019 sales, before Covid-19 hit business to the catering trade, rose by 5%. 

For investors, rising costs relating to Covid-19 measures, such as extra staff, offset some of the additional sales generated as a result of the pandemic. Closed travel money outlets contributing to falling bank sales, and increased expected bad debt provisions under Covid-19, also add to difficulties at Tesco Bank. But the food retailer’s defensive qualities in an uncertain pandemic world cannot be overlooked, enhanced by an historic and estimated forward dividend yield of over 3%. For now, and with its strategy firmly reset under the departing CEO, Tesco remains deserving of shareholder support. 

Positives

• Defensive qualities 
• Attractive dividend (not guaranteed)

Negatives

• Tesco Bank hit by rising Covid-19 bad debt provisions
• Industry competition is intense - both Aldi and Lidl continue to target new stores

The average rating of stock market analysts:

Buy