ii view: Tesco reassures with positive start to 2024

First-quarter trading update to 25 May

• Like-for-like sales excluding VAT and fuel up 3.4% to £15.3 billion

Guidance:

• Continues to expect full-year retail adjusted operating profit of at least £2.8 billion, potentially up from last year’s £2.76 billion

Chief Executive Ken Murphy said:

"We've continued to build momentum in the business, with strong volume growth across the UK, Republic of Ireland and Central Europe supported by easing inflation.  We continue to be the cheapest full-line grocer and are the most competitive we've ever been, with our value, product quality and service driving better brand perception and customer satisfaction.  

"Our market share reflects this, growing more than at any other time in the past two years, with customers switching to us from other retailers, shopping with us more often and with more in their baskets.

"Following another strong quarter, we're pleased to reiterate our guidance for the full year, with sales trends in line with our expectations and the business well-positioned for the months ahead."

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

ii round-up:

The retailer’s first own-branded product was tea. The name Tesco comes from the initials of TE Stockwell, a partner in the firm of tea suppliers, and CO from founder Jack Cohen’s surname.

Today, 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 latest trading update announced on 14 June, please click here. 

ii view:

Tesco is the largest retailer listed on the UK stock market, valued at over £21 billion. Rivals include Sainsbury (J) (LSE:SBRY) with a value at around £6.2 billion and Ocado Group (LSE:OCDO) worth around £2.6 billion. Group strategic focuses include providing value to customers, creating a competitive advantage via its Clubcard knowledge and reducing costs which are then reinvested into the business. Retail operations in the UK & Ireland generated its biggest slug of profits during its last financial year at 88%, with Central Europe accounting for just under 7% and banking the balance of 5%. 

For investors, elevated borrowing and housing rental costs continue to squeeze consumer spending and taxes could possibly rise under a new government. Costs pressures regarding wage demands persist, sales at Booker have recently suffered given its exposure to tobacco and convenience stores, while an estimated price-to-net asset value of almost two compares to less than one at Sainsbury's, suggesting potentially better value elsewhere. 

• Sign up to our free newsletter for share, fund and trust ideas, and the latest news and analysis
• Stockwatch: this 9% dividend yield may not be available for long
• Sector Screener: don’t chase exciting stocks, buy these instead

On the plus side, market share at its core UK retail business is a highly robust 27.6%, and store growth at discount retailers Aldi and Lidi is now at a seven-year low. A move to reduce its banking operations offers management an increased focus on its retailing business, cost savings are being pursed, net debt fell in its last financial year, while rising capital expenditure for the current year to £1.4 billion from £1.3 billion in 2023 is expected to help develop AI solutions to boost productivity.

In all, and while some caution looks sensible, a consensus analyst estimate of fair value above 335p per share and forecast dividend yield of around 4% will likely guarantee loyalty among fans of this retailing giant. 

Positives

• Robust UK market share
• Planning £1 billion of share buybacks this financial year

Negatives

• Intense industry competition
• Uncertain economic outlook

The average rating of stock market analysts:

Buy