ii view: grocery giant Tesco continues to purr

Third-quarter trading update to 28 November

• Total Like-for-Like (LFL) sales up 2.8%
• UK LFL up 3.8%
• Republic of Ireland LFL up 4.2%
• Central European LFL up 2.8%
• Booker LFL down 2.6%

Guidance:

• Continues to expect full-year retail adjusted operating profit of around £2.9 billion, potentially up from last year’s £2.8 billion

Chief Executive Ken Murphy said:

“We invested to bring the best value, quality and service to everyone, no matter how or where they shopped with us.  As a result, we delivered our biggest ever Christmas, with continued market share growth and switching gains.

“As we start 2025, we look forward to continuing to offer our customers the very best products and experience at Tesco."

• Invest with ii: What is a Managed ISA? | Open a Managed ISA | Transfer an ISA

ii round-up:

Starting out as a market stall in 1919, Tesco (LSE:TSCO) today employs over 330,000 people across more than 4,000 stores in the UK, Ireland, and Central Europe.

In 2017, it purchased UK food wholesaling business Booker, giving it exposure to both restaurants and other food convenience stores and businesses.

Headquartered in Welwyn Garden City, Hertfordshire, it previously agreed a part sale of its Tesco Banking business to Barclays. 

For a round-up of this this latest trading update announced on 9 January, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market with a stock market value of over £24 billion. Rivals include Marks & Spencer Group (LSE:MKS), valued at around £6.6 billion, Sainsbury (J) (LSE:SBRY) worth just under £6 billion and Ocado Group (LSE:OCDO) at £2.7 billion. Management drives include providing value to customers, creating a competitive advantage via its Clubcard knowledge and cutting costs to re-invest back into the business. During the first half to 24 August, UK and Irish retail generated most profits at 86%, followed by banking at 11% and Central Europe the balance of 3%.  

For investors, the difficult UK economic outlook is likely to be underpinning management’s cautious outlook estimates. Revenues for the Booker wholesale business again fell, retreating 2.6%, potentially hindered by exposure to tobacco sales and consumer caution towards expensive restaurant dining. Intense competition across the industry persists, while an estimated price-to-net asset value of around 2.2 times compares to around 0.9 times at Sainsbury's, suggesting possibly better value elsewhere. 

• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis
• 19 UK stocks on list of conviction ‘buy’ ideas for 2025
• ii view: Sainsbury's is battling hard on all fronts

More favourably, a market share of 28.5%, its highest since 2016, suggests ongoing customer satisfaction. A reduced banking operation provides an increased focus on retailing. Cost savings and continued investment are being made. Group net debt at the end of August was down 2% to £9.7 billion, while an ongoing share buyback of £1 billion and a forecast dividend yield of around 3.6% underline a focus on shareholder returns. 

For now, and with the consensus analyst estimate of fair value at over 400p per share, this retailing success continues to justify its place in many investor portfolios. 

Positives

• Robust UK market share
• Ongoing growth in online sales

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy