UK’s best supermarket stock named as price war looms

A rollback for Tesco (LSE:TSCO) shares to their cheapest price since August was today viewed as a bargain too good to miss as interactive investor customers piled into the retail giant today.

The shares were among the most bought on the ii platform for a second successive session, having fallen by about 13% since Asda pledged to restore its 5-10% price gap to rivals.

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

At 322.8p by lunchtime today, Tesco offered a chunky discount to the 410p price target of UBS.

The bank’s recent preview of annual results due for release on 10 April named the supermarket its sector top pick, describing Tesco as a “defensive and high quality compounder”.

It said last month that Tesco could potentially deliver 16% total shareholder return (TSR) this year, with earnings per share growth of 12% amplified by £1.5 billion in buybacks and 4% dividend yield.

Over the mid-term it said double digit earnings per share growth and a 4% dividend led to 14-15% TSR and a “very attractive” multiple of 12.4 times forecast 2025/26 earnings.

The note highlighted three key areas of focus heading into the results, including January’s launch of a new price campaign by Asda. With an average reduction of 25% across 4,000 popular products, Rollback has since been expanded to roughly a quarter of the entire range.

UBS said it did not expect this to be a major headwind for Tesco, particularly given that Leeds-based Asda may be restrained by its net debt position.

Even at half the run-rate of current market share gains of 60-80 basis points, the bank sees upside risk to market expectations for Tesco to deliver UK like-for-like sales growth of 3.4% in the 2025/2026 financial year.

• ii view: grocery giant Tesco continues to purr
• How to invest like the best: Warren Buffett
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Cost inflation has been another factor weighing on the Tesco share price in recent weeks, but UBS believes that the grocery chain should be able to offset an estimated £450 million of wage and national insurance headwinds through cost savings of £500 million.

With rising costs in both the food supply chain and the retail environment set to mean higher inflation in the second quarter, UBS also believes this should underpin a rational environment that favours Tesco given that it outperforms the market on volumes.

Source: TradingView. Past performance is not a guide to future performance.

Tesco and Sainsbury (J) (LSE:SBRY) have been major beneficiaries of market share gains from Asda, with two-year advances of 105 and 60 basis points respectively in the latest Kantar research.

However, new executive chair Allan Leighton has vowed to restore Asda as the number one choice for “busy hard-working families who demand value”.

In Friday’s annual results, he said Asda will add thousands more products to Rollback at regular intervals during the year as part of its strategic shift to move its entire product range to a new low ‘Asda Price’ by the end of 2026.

The company, which has stabilised its market share at 12.6%, delivered £600 million of free cash flow in the last financial year as net leverage improved to 2.9 times.

Citi analysts warned on Friday that Asda’s price investment will likely place pressure on competitive dynamics in the UK grocery market.

It said Asda's willingness to accept a material reduction in earnings in the midterm in order to recoup some of its recent market share losses may require the listed grocers to respond in order to defend their recent share gains.

The shares of Sainsbury’s and Marks & Spencer Group (LSE:MKS) have also come under pressure since Friday, although to a lesser extent than Tesco.

US bank Jefferies said in a note yesterday: “While Tesco has the greater overlap with Asda given its national presence, we think any pain from a resurgent Asda will be shared across the industry.”

It said this would especially be the case if Tesco refuses to let Asda steal a march on pricing.

Jefferies added: “We believe that maintaining relative price positioning would probably be the correct strategic response to these actions, with short-term margin pain in exchange for more limited Asda volume recovery.

“We would be more sceptical of any grocer found to be flat-footed in this changing environment.”

• Stockwatch: time to buy the drop after Qinetiq’s plunge?
• Daily Trading Flash: 10 most-traded shares
• Stock picking pays off, but discount mars share price gains

Shore Capital warns of the risk of contagion if Asda’s actions lead to secondary movements on pricing and promotions that threaten the rationality of the market and the gross margin environment.

However, it points out that Tesco and Sainsbury’s have much stronger value propositions in 2025 compared to previous years.

It said this is augmented by powerful loyalty programmes, better assortments, meaningful price matching to Aldi and “much stronger execution capability” than Asda at the present time.

Shore added: “Time will tell what the outcome is, but we do not see the need to change our earnings forecasts for the listed UK grocers at this time.”