ii view: Tesco stays confident given laser focus on value

Growing sales across its operations and offering forecast dividend yield of over 4%. Buy, sell, or hold?

First-quarter trading update to 27 May

• Total revenue up 9.4% to £15.17 billion

Guidance:

• Continues to expect broadly flat retail adjusted operating profit for the full-year ahead

Chief Executive Ken Murphy said:

“We are pleased with our performance in the first quarter, underpinned by our relentless focus on value. Customers continue to recognise our leading combination of great value and quality in every part of their basket - from essentials covered by our Aldi Price Match, through to our growing Finest range. We are very conscious that many of our customers continue to face significant cost-of-living pressures and we have led the way in cutting prices on everyday essential items. There are encouraging early signs that inflation is starting to ease across the market and we will keep working tirelessly to ensure customers receive the best possible value at Tesco.

By focusing on our customers we have delivered a strong start to the year. We are well-positioned for the months ahead and are reiterating our guidance for the full year.”

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ii round-up:

Starting out as a market stall in 1919, Tesco (LSE:TSCO) today employs over 330,000 people across its stores and distribution centres in both the UK, Ireland and Central Europe. 

In 2017, it purchased UK food wholesaling business Booker, giving it exposure to both restaurants and other food convenience stores and businesses.

Headquartered in Welwyn Garden City, Hertfordshire, it also owns Tesco Bank.

For a round-up of this latest trading update announced on 16 June, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market, with a stock market value of over £17 billion. Rival retailers include Sainsbury (J) (LSE:SBRY) with a value at around £6.1 billion, B&M European Value Retail SA (LSE:BME) at around £5.7 billion and Ocado Group (LSE:OCDO) at £4.3 billion. During its last financial year, UK retailing generated its biggest slug of sales at around 62%, followed by Booker at around 13%, fuel at 12% and Central European sales at just over 6%. Irish sales accounted for a further 4% and banking the balance.

For investors, the economic backdrop for Tesco customers remains challenging, with many suffering hikes in mortgage and rental outgoings. Elevated costs for businesses generally persist, intense competition across the sector including discounters Aldi and Lidi is ongoing, while the total dividend over its last financial year was left unchanged at 10.9p per share. 

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More favourably, Tesco’s UK market share remains robust at 27.1%, helped by its highly competitive customer offering. Geographic and business type diversity exists given its wholesale Booker business, UK online sales are growing and cost savings continue to be funnelled into competitive shelf prices. Shareholder returns also remain a focus, with share buybacks boosted by a previously announced £750 million scheme over the current full year.

For now, and while some caution looks sensible given pressured consumer spending, an analyst consensus estimate of fair value at around 300p per share implies optimism for the long term. 

Positives

• Robust UK market share
• Diversity of both business type and geographical region

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy