Tesco a target for income seekers, but sales growth slows

The shares have always enjoyed plenty of support from investors, but will they be rewarded?

It is no mean feat to have nudged first-quarter sales higher than at the height of the pandemic last year, and significantly ahead of two years ago.

This could suggest that Tesco (LSE:TSCO) is holding on to some of the market share it gained over the last year, which bodes well for prospects. The latest lockdown during the period was also a factor, with meals at home remaining in force, such that UK sales peaked in March at 14.6% ahead of two years ago. 

Like-for-like sales excluding VAT and fuel were up 0.5% in the 13 weeks ended 29 May 2021. That’s better than expected but down sharply on the previous quarter.

There was a notable uptick in General Merchandise and clothing sales over the period, growing by 10.3% and 52.1%, while fuel sales also grew by 68% as restrictions began to ease. In addition, the gradual reopening of the hospitality sector boosted catering sales at Booker by 68%.

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Online sales have been a particular success story, as the group has ramped up its capacity. Currently fulfilling 1.3 million orders per week, its sales are up by 22% over the last year and 82% over the last two years. There may be some wastage as customers partly return to physical shopping, but Tesco has clearly shown its ability to fulfil orders in whichever format the customer prefers.

At the same time, the significant costs incurred at the height of the pandemic, reported as nearly £900 million at the full-year results, published in April, will fall away on a comparative basis, immediately turbocharging cash flow and profitability.

This lends strong insurance to the dividend payment, and with the shares currently yielding 4.3% there is a clear invitation for income-seekers to consider the shares.

Less positively, there is a continuing blot on the landscape with Tesco Bank, where sales declined over the first quarter by 10%, adding to the previously reported loss of £175 million. That said, sales began to pick up towards the end of the quarter as the numbers lapped the draining effects of the pandemic.

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Guidance, which had previously provided little excitement for investors, remains unchanged, although it is possible that the company is being particularly conservative in its estimates. The next few months will see the real picture emerging, and for holders of the stock, any positive surprises would be both welcome and overdue. 

The shares have risen just 2% over the last year, as compared to a hike of 15% for the wider FTSE 100 index, with a similar picture over the last two years and with the shares actually down 9% over the last three. Despite this tepid price performance, Tesco retains a raft of support across the market generally, with the consensus of the shares still coming in at a ‘strong buy’.