- Market share gains
- Strong wholesale performance
Tesco’s (TSCO) Christmas trading update continued the festive cheer for the grocers, as the supermarket chain revealed a resilient performance in a challenging consumer demand and cost environment.
The company reaffirmed its full-year guidance, for a retail operating profit of £2.4bn-£2.5bn and free cash flow of over £1.8bn, as it enjoyed market share gains even as rivals struggled in the face of the German discount grocers.
Total like-for-like retail sales were up by 7.9 per cent for the six weeks to 7 January. This was in line with rival Sainsbury’s (SBRY) performance over the same period. The strongest growth was posted by Booker, the wholesaler side of the business, with Tesco offering price freezes on important catering lines. Central Europe sales rose by 8.7 per cent, with the UK and Republic of Ireland bringing up the rear with growth of 7.8 per cent.
Sales rose by 6.4 per cent to £21.4bn for the entire 19-week period covered by the update, which includes the company’s third quarter. With sales growth sitting below the rate of inflation, the company has focused on a value-driven pricing approach.
As with Sainsbury’s, Tesco is under pressure from key discounters such as Aldi and Lidl. The latter have been gaining market share and look well-placed to take on more customers as the cost of living crisis continues to worsen. Shoppers’ understandable focus on prices was evident in Tesco’s statement that its Clubcard discount loyalty card is aiding competitiveness and “helped customers spend less on festive lines”.
Chief executive Ken Murphy said on an analyst call that “we have seen customers continuing to trade down, but that has taken a number of different forms, and we are seeing growth at both ends of our offer”. He pointed to price matching against Aldi and customers moving from national brands to value Tesco products, but also noted there had been growth in Tesco’s more expensive Finest range.
The shares trade at a consensus 12 times forward earnings, according to FactSet. This is below the five-year average of 13 times. We think this is an attractive rating given the company’s market position and competitive pricing, despite discounter challenges. Tesco, which takes around 28 per cent of UK supermarket sales, is the only full-line grocer to have grown share against pre-pandemic levels, and it enjoyed net switching gains in December. And City analysts think there are gains to be made on the shares – FactSet’ consensus target price is 275p, a 12 per cent uplift on the current price. Buy.
Last IC View: Buy, 204p, 5 Oct 2022
