Tesco's merry Christmas and a strategic 'triumph'

An awful second half of 2018 has been followed with a rapid rebound over the past few weeks. Richard Hunter, head of markets at interactive investor, brings us up to speed. 

Tesco (LSE:TSCO) has defied the retail gloom and delivered a pick of the bunch performance.

The supermarket behemoth has staged a strong recovery over several years, having previously admitted that it had taken its eye off the ball in its core UK market. There is a fair amount of light between then and now, with like-for-like sales both in terms of the third quarter but also the Christmas period showing continuing growth. 

The Booker acquisition is fast becoming a strategic triumph, with quarterly like-for-like sales having grown 11% and almost 7% in the festive run-up. Meanwhile, total sales are generally better, online sales are also improving and the company remains on track to give the European and Asian businesses the shot in the arm they require. 

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As such, the group's guidance is upbeat and the previously announced ambitions, such as the cost savings targets, seem to be within comfortable reach.

Source: TradingView (*)  Past performance is not a guide to future performance

However, Tesco is not yet quite the finished article. Pockets of the business still require attention, margins will remain under pressure given the brutally competitive nature of the sector, let alone the potential threats from the likes of Amazon (NASDAQ:AMZN) and a merged Asda and Sainsbury (LSE:SBRY). 

In addition, prospects for the UK economic environment remain nebulous, with a nervous consumer potentially looking to shop on price alone. From an investment perspective, the dividend yield of 1.7% means that shareholders are relying on capital growth rather than income for the moment.

In line with much of the market, Tesco has had a difficult six months where the share price has given up 17%. Over the last year, however, the decline of 1.2% compares to a 10.8% dip for the wider FTSE 100 index, while today's initially positive reaction to the trading statement provides some solace. 

Tesco is setting its own bar high and will need to continue to do so to maintain its market consensus rating, which comes in at a 'strong buy'.

*Horizontal lines on charts represent levels of previous technical support and resistance. Trendlines are marked in red.