Tesco still preferred play in sector after these Q1 results

Tesco (LSE:TSCO)’s seemingly unassailable position as the largest UK grocer has once more been confirmed as it continues to display its dominance.

The group’s overall market share of 27.6% is equivalent to that of its two nearest rivals (Sainsbury's and Asda) put together. As such, it is keeping the competition at arm’s length in what is a notoriously ruthless environment.

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Indeed, its ability to lower prices for customers is enabled by its sheer scale and strength, helped along by falling food inflation and significant cost reductions. In turn, this creates something of a virtuous circle, with more customers attracted by the likes of the group’s Aldi Price Match, Low Everyday Prices and Clubcard Prices while at the same time it has also honed its upper end offering, with its Finest range continuing to take market share from its rivals, with sales growing by 12.5% in the quarter.

Meanwhile, the hub of the business continues to flex its muscles in this highly competitive sector. Retail like-for-like sales grew by 3.4%, including an increase of 4.6% in the UK, where food sales jumped by 5%, online by 8.9% and there was also strong growth in clothing.  

Some of the investment in lowering grocery prices was previously enabled by a parallel concentration on cost reduction announced at the full-year results in April, where £640 million of savings was delivered against a target of £600 million.

Following the sale of the majority of Tesco Bank to Barclays which includes a strategic 10-year partnership, there was an additional special dividend of £250 million, leading to a current yield of 4% and retail free cash flow of almost £2.1 billion enabled further moves to be made in strengthening the financial position. While not referred to in this release, there is also a £1 billion share buyback plan which should add further support to the share price.

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Such progress has resulted in Tesco reiterating its previous guidance for the full year. It continues to expect adjusted operating profit of at least £2.8 billion, with retail cash flow remaining in its previously guided range of between £1.4 billion and £1.8 billion.

It will also continue to invest heavily in improvements to its offerings in terms of price and technology, with some of its flagship cards enabling further volume increases to be encouraged by lower and aggressive product pricing. In addition, it expects some £80 million of income from the smaller parts of Tesco Bank which it has retained.

One minor fly in the ointment came from the performance of Booker, where sales fell by 1.3% given a decline in its tobacco market alongside previously strong comparatives. However, Booker represents only 14.5% of overall sales, so this loss is comfortably containable in the overall scheme of things.

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It is fair to say that given its dominance, it can be progressively difficult for Tesco to exceed expectations. Even so, the group is showing few signs of fatigue as its presence weighs heavily on competitors as it continues to hone its focus on value, quality and service.

The share price has increased by 15% over the last year compared to a gain of 7.4% for the wider FTSE100 and, for the moment, the group’s longstanding position as the preferred play in the sector seems assured, with the market consensus of the shares as a 'strong buy' highly likely to remain intact.