A resilient performance from Tesco

Tesco (TSCO) stuck with its full-year profit guidance, although at the lower end of the range, as it battles a challenging environment for consumer spending. The immediate market reaction to these results was a nervy one, with the shares down by a couple of percentage points after the retailer said that it now expects a full-year retail adjusted operating profit of £2.4bn to £2.5bn (a haircut from the £2.4bn to £2.6bn previously trailed) and revealed a fall in half-year statutory profits on the back of lower retail volumes, moves to keep prices competitive, and a chunky £626mn impairment charge on non-current assets due to higher discount rates. But given that the full-year retail free cash flow forecast was bumped up to an attractive £1.8bn and there was a strong market share performance, Tesco remains a solid sector option.  

Supermarkets such as Tesco are in the crosshairs of the cost of living crisis as consumers trade down to cheaper product alternatives or move over to the discounters. Chief executive Ken Murphy said that customers are looking to Tesco’s “own brand ranges as they work to make their money go further, whether they are switching from branded products, between categories or cutting back on eating out”. 

In this context, the top line put in a good shift despite the post-Covid normalisation of food volumes in the key UK market, runaway cost inflation, and the company putting up prices “behind the market to protect prices for customers”. Volumes in Tesco's smaller central Europe market were helped by government food price caps on essential items. 

On a like-for-like basis, total retail sales were up by 3 per cent to £27.6bn and fuel sales boomed (unsurprisingly, given the market backdrop) by 38 per cent to £4.3bn. Tesco Bank revenue, meanwhile, was up by a quarter to £540mn. And an online market share of 36 per cent, with both online sales and orders up by more than 50 per cent on pre-pandemic levels, looks robust. 

IG Group chief market analyst Chris Beauchamp said that “sales up and profits down is a refrain that we should expect from the supermarkets in the weeks and months to come” but “Tesco’s dominance of the space is something that should give it a cushion of support for the time being”. The shares are trading on a consensus 10 times forward earnings, below the five-year average of 14 times, according to FactSet. And an ongoing £750mn share buyback programme should cheer investors. We remain bullish despite headwinds. Buy.

Last IC View: Buy, 262p, 13 Apr 2022