Tesco Q1 results reflect sector domination 

The Tesco (LSE:TSCO) juggernaut powers on, maintaining the light between the group and its nearest rivals.

The prospect that supermarkets may be about to embark on a trade war of their own is not one which Tesco is taking lightly, and is mindful of a renewed attack from Asda let alone the notoriously competitive pricing which the sector attracts.

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The group is maintaining its conservative guidance – a source of some disappointment when announced at the full-year results - of adjusted operating profit in a range of between £2.7 billion and £3 billion, slightly shy of the previous £3.13 billion. 

It is also sticking with guidance in free cash flow between £1.4 billion and £1.8 billion. Alongside its focus on reducing internal costs, this leaves Tesco able to keep its powder dry in the face of any assault and it already has plans in place to stifle the competition further. It also enables investment in the business, especially in keeping prices competitive, payment of a dividend whose yield of 3.6% is attractive and an ongoing share buyback programme of £1.5 billion which is supportive to the share price.

Especially in the recent past, and try as they may, other supermarkets have tended to take share from each other rather than from Tesco, whose dominance in the British aisles is undiminished. Its current share of 28% is more than that of its two nearest rivals, Sainsbury (15%) and Asda (12%) combined.

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, while a strong focus on significant cost reduction creates something of a virtuous circle. As such, any upcoming battle is for Tesco to lose rather than Asda to win. 

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For the first quarter, revenues grew by 4.6% on a like-for-like basis to £16.38 billion, with the main UK business continuing to flex its muscles. Market share growth of 0.44% led to the 28% number, while food sales rose by 5.9% and non-food by 6.2%, the latter propelled by a strong showing from Home and Clothing. Online sales also spiked by 11.5% in the 13 weeks ended 24 May, and in doing so increased that part of its market share by 1.6%, while 350 new products were introduced in the period to keep its offering fresh.

Indeed, the range of the group’s offering is not limited to the more cost-conscious consumer, and more recently Tesco has honed its upper end offering. A further rise of 18% in Finest sales, which totalled £2.5 billion at the full-year results in April, shows a unit going from strength to strength. The Booker unit, which accounts for 14% of overall revenues, also enjoyed overall growth of 2% for the period to £2.31 billion, propelled by rises of 7.3% and 5.4% in core catering and core retail respectively.

The progress comes alongside not only ferocious competition but also pressure on increased costs, given the Budget measures which have now been implemented on the likes of the minimum wage and National Insurance contributions. In addition, 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, this has done little to constrain a share price which has risen by 28% over the last year, as compared to a gain of 7.9% for the wider FTSE100, and by 54% over the last three years. Despite this rally, the shares remain below the longer-term historic valuation, which suggests room for further appreciation. In the meantime, the longstanding market consensus of the shares as a buy and the preferred play in the sector is unlikely to waver.