Tesco still supermarket to beat after sharing good news on inflation

Reaction to first-quarter results has been underwhelming, but there are some important inflation indicators here for both investors and shoppers alike. Our head of markets runs through the results and rounds up action overseas.

Tesco (LSE:TSCO) continues to keep the competition at bay, which is no mean feat given the current challenging landscape.

The opening quarter for the group's financial year saw a strong increase in both sales and revenues, which grew by 8.2% and 9.4% respectively in the 13 weeks ended 27 May.

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Tesco’s continued laser focus on value has enabled market share to be maintained at 27.1%, with its sheer scale adding to its ability to shave prices, better the supply chain and pull the various group levers to maximise growth. Value offerings such as Aldi Price Match, Low Everyday Prices and Clubcard prices all contribute to an appeal which continues to draw in the cost-conscious consumer.

The various channel offerings are also playing into the group’s hands. In particular, large store sales grew by 9.9% as the consumer returns to the previous physical shopping habits, although online sales are also picking up any slack with sales growth of 8.2% and a market share of 37.5%.

The group’s Booker arm is also steaming ahead, with retail sales up by 15.6%, while Tesco Bank has also seen growth of 13.9%, propelled by more lending and insurance activity and an increase in credit card spending. Full-year guidance has been maintained, which would also be a notable achievement given the pressures which abound from every direction.

Inflation remains a central theme in the extremely competitive sector, while the cost of living issues are here to stay for some time. Tesco, under pressure from government to tackle rising food prices, has noted some "encouraging early signs that inflation is starting to ease" and, in the meantime, the group remains the one to beat.

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A dividend yield of 4.1% is an additional bonus, although the share price increase of late has reflected more of a canter than a gallop. Despite a bounce of 18% over the last six months, the shares are up by a more modest 5% over the last year, as compared to a gain of 8% for the wider FTSE100. Even so, appetite for the group’s offerings remains undiminished, with the market consensus of the shares as a 'strong buy' reflective of the group’s longstanding position as the preferred play in the sector.

Market snapshot

US markets snapped back strongly as the dust settled from a Federal Reserve announcement which paused rate rises, but cautioned on the possibility of more to come. The market is still insisting on the glass half-full approach, anticipating only one more rate rise in July as opposed to the two hikes which the Fed implied earlier in the week. The slew of economic data over recent days could just lead additional weight to that view.

As jobless claims ticked higher, and although one data point cannot be taken in isolation, there remains the chance that the labour market is finally beginning to crack. At the same time, previously easing inflation data were joined by the latest release which showed that import prices fell in May, while retail sales unexpectedly rose with the vital consumer spending on all number of goods including vehicles.

As such, the current backdrop could be set fair for the Fed’s preferred dual goals of reigning in inflation and achieving a soft landing. Sentiment rose, propelling markets to further gains, with the Dow Jones now ahead by 3.8%, the S&P500 by 15% and the Nasdaq by 32% in the year to date as investors mull the possibility of an ultimately positive outcome.

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The reaction to the Wall Street performance and a generally positive session across Asia also pushed the FTSE100 ahead in opening trade, albeit on a more pedestrian basis. Further strength in sterling acted as something of a headwind given a majority constituent exposure to overseas earnings. Increasing investor confidence elsewhere could also be responsible for new money being invested in other more obvious growth markets at the expense of the domestic index.

Even so, the FTSE100 remains ahead by 2.6% in the year to date, although some way off earlier year record highs. In opening exchanges, this uncertainty resulted in differing performances in the same sector, with the likes of Persimmon (LSE:PSN) and Barratt Developments (LSE:BDEV) moving in opposite directions, with Ocado Group (LSE:OCDO) continuing its death-defying performance. The stock narrowly avoided relegation from the FTSE100 and the share price has now added 24% this month, which has eased some of the pain, although not enough to stem a decline of 45% over the last year.