Online sales boost Tesco, though Covid-19 takes its toll

Supermarket chain enjoyed a Christmas boom, and investors are keeping the faith.

Tesco (LSE:TSCO) has joined its rival supermarkets which enjoyed the festive break, partly driven by a further spike in online sales.

Total sales for the group rose 7% and 5.6% on a like-for-like basis, according to its 19-week and Christmas trading update today. Within these numbers was a strong showing from the UK business, where sales over the Christmas period rose by 8.1% like-for-like, and where cash and carry arm Booker continued its contribution with a 12.4% increase in total sales. General merchandise sales also grew by 4%, driven by the popularity of toys, home and electrical.

The trend towards online purchases by consumers is one which is likely to be maintained post-pandemic, and Tesco has shown that it is ready for the onslaught. Over the Christmas period, more than seven million orders were delivered, containing more than 400 million items, with online sales growth of 80% representing further strong momentum.

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The additional volumes, coupled with new lockdown restrictions, have come at an inevitable cost. Tesco has upped its estimate for full-year Covid-19 costs to £810 million from a previous £725 million, although still within the initially guided range of between £650 million to £925 million.

Tesco Bank has also suffered from the pandemic environment, with a sales decline of 27.7% meaning that the previously guided operational loss for the year of between £175 million and £200 million remains intact. Although unchanged, it will nonetheless punch a hole in the full-year numbers.

The proceeds from the sale of the Thailand and Malaysia business is also being put to use. Around £2.5 billion has already gone to the pension scheme, with around £5 billion on its way to shareholders in the form of a special dividend followed by a share consolidation, the finer details of which are due to be announced within a couple of weeks.

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In the meantime, a dividend yield of 4% on the shares, propelled by the previous 20% increase, has been helpful to the overall return to shareholders, particular income-seekers.

The share price has also had to roll with the punches.

Leading into the second lockdown at the end of October, the price suffered another decline, since which time it has risen by 19%. Even so, over the last year the net result is that the shares have drifted by 3%, as compared to a decline of 11.5% for the wider FTSE 100.

More broadly, investors are anticipating a brighter future in the short-term as the strength of the pandemic wanes. For the likes of Tesco, this would both remove some of the additional costs while also benefiting those companies able to flit effortlessly between online and physical. Tesco is in that camp, with the market consensus of the shares as a ‘buy’ continuing to cement its position as the preferred play in the sector.