Must read weekly preview: much expected of Tesco's results

Tesco half-year – Thursday 8 October

Expectations ahead of Tesco (LSE:TSCO)'s half-year results will, as ever, be high, even though the first-quarter update in June fell slightly short of the supermarket chain's own exacting standards.

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Strong comparatives from the previous year and some early effects from the Middle East conflict shaved some strength from the numbers, but growth nonetheless remained intact. Some weakening had been expected by the market, although revenues rose by 2.3% in the 13 weeks ended 30 May to £16.83 billion, with like-for-like sales (LFL) posting a 1% increase.

By far the largest unit, the UK, saw Q1 sales growth of 2.6% but the range of the group’s offering is not limited to the more cost-conscious consumer. More recently, Tesco has honed its upper end offering, and the Finest range saw growth of 9%, and 29% over two years, reflecting a unit going from strength to strength. The wholesale unit Booker remained a slight blot on the landscape, where LFL sales fell by 3.2%, hurt by the loss of a contract. In addition, tobacco sales fell away sharply and look unlikely to recover, having dropped by 9.7% over the last year and by 17.2% over the last two. Nonetheless, the unit contributes 13% of overall sales, which enables Tesco comfortably to pick up this slack elsewhere.

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In any given part of the business, there are tweaks and improvements which contribute to Tesco’s overall dominance. These range from clothing to delivery options such as Whoosh, to a broader offering at the higher end, and online growth to food prices. Much of this has been made possible by the group’s “Save to Invest” programme, which has delivered more than £2.2 billion of cost savings over the last four years. That includes around £535 million last year, with a further £500 million planned for the forthcoming period.

The effect of this streamlining is twofold. It allows cost inflation to be offset, which could prove particularly important over the coming year if the inflationary effects of the US/Iran conflict wash through, as well as keeping prices low for consumers. The group’s sheer scale feeds its appetite for lowering prices for customers through the likes of Aldi Price Match, Low Everyday Prices and Clubcard Prices, such that the significant cost reduction creates something of a virtuous circle. As such, the ongoing battle is still for Tesco to lose rather than its rivals to win.

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Moreover, in the recent past and try as they may, other supermarkets have tended to take market share from each other rather than from Tesco, and its share was not only greater than its nearest two rivals combined (Sainsbury (J) (LSE:SBRY) and Asda) but it was also its highest in over a decade. Of course, any such progress comes alongside not only ferocious competition but also pressure on increased costs, while maintaining lower prices also comes with an inevitable impact on margins and revenues.

Investors will be keen to learn of any comments on guidance, where Tesco previously maintained its outlook for the full year of adjusted operating profit in a range of £3-3.3 billion and free cash flow of £1.5-2 billion. The £750 million share buyback programme is ongoing, while a dividend yield of 3.1% lends further support to both investors as well as the underlying share price. Tesco’s advances inevitably lead to progressively higher expectations, which in turn lessens the likelihood of positive shocks for investors.

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Even so, the share price has reflected the group’s relentless progress, having risen by 10% over the last year. The shares have also spiked by 32% over the last two years and by 80% over the last three, which is a considerable achievement given the traditional ferocity of sector competition. It appears that the Tesco juggernaut rumbles on, asserting its dominance of the British aisles and maintaining the yawning gap between its fortunes and those of its nearest rivals.