Over the 19 weeks to 4 January, Tesco’s retail sales rose 3.1% on a like-for-like basis (LFL). This was driven by growth in the UK and Europe, which more than offset a 1.3% decline at Booker, its wholesaler business.
In the UK, the group managed to gain market share over the period, which helped volumes grow at a faster pace than the sector average.
Full-year guidance remains on track, with the group expecting underlying retail operating profits of around £1.9bn. Retail free cash flow is also expected to land in line with medium-term guidance of between £1.4-1.8bn.
The shares fell 1.6% in early trading.
Our view
Tesco’s third quarter and Christmas trading update gave investors plenty to be festive about. After sharpening its proposition further, the UK’s largest supermarket recorded its highest market share since 2016.
Tesco's enormous scale and the mature, deeply rooted nature of its relationships have been key tools in keeping its prices down. The group's strategy relies on offering better all-around pricing than the competition, and Tesco has delivered remarkably well on that.
The group's expanded Tesco Finest range is helping it poach customers from more premium supermarkets. And those who already shop at Tesco are treating themselves at home rather than going out, boosting Finest volumes. We view both of these shifts as potentially long-term in nature, meaning there's more juice to be squeezed.
And Tesco isn't just a retailer, although that's the bulk of the story. The wholesaler, Booker, offers another route to growth across the key business streams of catering and retail. Most of the banking division was sold to Barclays for £700mn, but Tesco has kept the most profitable bits. This portion is set to grow steadily and further diversifies the group's income streams.
There’s plenty of free cash flow pumping around the business. That underpins the group's ability to invest in keeping prices low and competitive, as well as sustain the attractive 3.9% prospective dividend yield. No dividend is ever guaranteed.
But for all the positives, there are things to keep in mind. Aldi and Lidl may not be an existential threat, but they are nabbing shoppers from bigger names. The wider pivot to value offerings, including in Europe where Tesco has a substantial footprint, means it’s exposed to consumers who are feeling the pinch economically.
So far this has been managed well. Growing volumes by appealing to both cost-conscious customers and those shopping the Finest range is a big ask. Keeping this up and at the right price points is even harder and could have implications for margins.
We're also keeping an eye on Clothing & Home sales. These aren't the main story, but they do count. Excluding toys, sales growth was promising and reflects the group’s much-improved style and value credentials.
Tesco's more reliable revenue streams, market-leading proposition, and income potential shouldn't be overlooked. But these strengths are reflected in a valuation towards to top end of its peer group. This means there’s pressure to stay ahead of the competition, which increases the risks of ups and downs if any slip-ups occur.
The Non-Executive Chair of Hargreaves Lansdown plc is also a Non-Executive Director of Tesco plc.
Environmental, social and governance (ESG) risk
The retail industry is low/medium in terms of ESG risk but varies by subsector. Online retailers are the most exposed, as are companies based in the Asia-Pacific region. The growing demand for transparency and accountability means human rights and environmental risks within supply chains have become a key risk driver. The quality and safety of products as well as their impact on society and the environment are also important considerations.
According to Sustainalytics, Tesco’s management of ESG risk is strong.
The group has a corporate responsibility committee overseeing the group’s social and environmental obligations. It also discloses a substantial amount of ESG-related information in its annual report. However, it has ongoing involvement in controversies related to human rights in supply chains.
Tesco key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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