ii view: Tesco better equipped to face changing landscape

A reset strategy and an income yield of over 4%. Buy, sell or hold?

First-quarter trading update to 29 May

Chief executive Ken Murphy said:

"We delivered a strong performance in the first quarter, even as we lapped the high demand of last year due to the pandemic.  We have further strengthened our commitment to delivering consistent, reliable value and to rewarding loyalty, as we extended Clubcard Prices to all Express stores.

“Our profit guidance from April remains unchanged.  While the market outlook remains uncertain, I'm pleased with the strong start we've made to the year and continue to be excited about the many opportunities we have to create value over the longer term."

ii round-up:

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

The Hertfordshire headquartered company generated revenue of over £57 billion and operating profit of more than £1.7 billion in its last full financial year to the end of February 2021. 

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 has been undergoing a period of significant change. Product ranges have been scaled down to aid buying power and competitiveness with the discounters Aldi and Lidl. Its previous expansion overseas has been largely reversed, with its Asian operations recently sold. Former Walgreens (NASDAQ:WBA) executive Ken Murphy is now building on the reset strategy.

Sales during this latest trading quarter broadly exceeded forecasts. UK same store, or like-for-like sales were up 0.5% from this time last year compared with expectations for a 1% fall. An expanded online offering and a concentration on value continue to help underpin performance. Now, a private equity bid for Morrisons (LSE:MRW) follows the acquisition of ASDA from its US owner Walmart (NYSE:WMT). 

• Supermarket Morrisons receives £5.5bn bid approach from US

For investors, a potential return to more normal shopping habits following the pandemic cannot be ignored. Reducing online deliveries and stocking up the kitchen cupboards on a 'buy as you need' basis could now follow. Its banking operations offer room for improvement, while changes of owners at rivals might give scope for increased efficiencies at those competitors. 

That said, private equity involvement at rivals may help to shine a light on sector valuations. Its Clubcard platform continues to give it vital insights into its customers habits and a historic and forecast dividend yield of over 4% is not to be overlooked in the current ultra-low interest rate environment. In all, and with a more focused Tesco now better positioned to battle rivals, the retailing giant remains deserving of ongoing shareholder support. 

Positives

• Growing online sales 
• Attractive dividend payment (not guaranteed)

Negatives

• Industry competition remains intense
• Tesco bank lost £175 million during its last financial year

The average rating of stock market analysts:

Strong buy