ii view: juggernaut Tesco - still the one to beat

First-half results to 24 August

• Revenue up 2.9% to £34.77 billion
• Adjusted operating profit up 15.6% to £1.65 billion
• Interim dividend up 10.4% to 4.25p per share
• Ongoing £1 billion share buyback programme
• Net debt down 2% to £9.7 billion

Guidance:

• Now expects full-year retail adjusted operating profit of around £2.9 billion, up from at least £2.8 billion previously

Chief Executive Ken Murphy said:

“We have lowered prices on thousands of lines, launched or improved over 860 products in partnership with our suppliers and growers, and our customer satisfaction scores continue to improve across a broad range of measures.  

“Our strong UK and ROI market share gains across the last year demonstrate our continued momentum. We are in good shape, with volume growth delivering strong financial performance.”

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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 both 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 (LSE:BARC). 

For a round-up of this these latest results announced on 3 October, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market, worth over £24 billion. Rival retailers include Sainsbury (J) (LSE:SBRY) with a value at around £6.5 billion and Ocado Group (LSE:OCDO) at £3 billion. Group strategic focuses include providing value to customers, creating a competitive advantage via its Clubcard knowledge and reducing costs to invest back into the business. Retail operations in the UK & Ireland generated its biggest slug of profits during this latest period at 86%, with Central European stores 3% and banking the balance of 11%. 

For investors, a pressured consumer given high borrowing and home rental costs cannot be forgotten. Revenues for the Booker wholesale business retreated 1.9%, hindered by exposure to tobacco sales. Intense competition across the industry persists, possible tax increases at the UK Budget could impact demand, while a forecast price-to-net asset value of just over 2x compares to around 1x at rival Sainsbury's, suggesting potentially better value elsewhere.

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To the upside, a market share of 27.8% for its core UK and Irish retail business is impressive. A move to reduce its banking operations offers management an increased focus on its retailing business. Costs savings are being pursed, group net debt fell during this latest period, while £2.4 billion of share buybacks since October 2021 plus a forecast dividend yield of 3.7% underline a focus on shareholder returns. 

For now, this well managed retailing icon looks to remain deserving of its place in diversified investor portfolios. 

Positives

• Robust UK market share
• A £1 billion share buyback programme this financial year

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy